UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003                     Commission File 
number 1-6659

AQUA AMERICA, INC. (formerly Philadelphia Suburban Corporation)
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Pennsylvania                                 23-1702594
-------------------------------             ----------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania           19010-3489
------------------------------------------------         ---------------
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including
area code:                                               (610)-527-8000
--------------------------

Securities registered pursuant to Section
12(b) of the Act:
Name of each exchange on
Title of each class                             which registered
-------------------                      ------------------------------
Common stock, par value $.50 per share          New York Stock Exchange, Inc.
Philadelphia Stock Exchange Inc.
Securities registered pursuant to Section
12(g) of the Act:  None

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 filing requirements
for the past 90 days.

Yes    x          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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Section 12(b)-2 of the Securities Exchange Act of 1934). Yes X No .

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2003.       $1,687,501,659

For purposes of determining this amount only, registrant has defined
affiliates as including (a) the executive officers named in Part I of
this 10-K report, (b) all directors of registrant, and (c) each
shareholder that has informed registrant by June 30, 2003, that it has
sole or shared voting power of 5% or more of the outstanding common
stock of registrant.

The number of shares  outstanding of each of the registrant's  classes of common
stock as of February 17, 2004. 
92,674,480

Documents incorporated by reference

(1) Portions of registrant's 2003 Annual Report to Shareholders have
been incorporated by reference into Parts I and II of this Form 10-K
Report.

(2) Portions of the Proxy Statement, relative to the May 20, 2004
annual meeting of shareholders of registrant, to be filed within 120
days after the end of the fiscal year covered by this Form 10-K Report,
have been incorporated by reference into Part III of this Form 10-K
Report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
-------------------------------------------------

Certain statements in this Annual Report on Form 10-K ("10-K"), or
incorporated by reference in this 10-K, are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 made based upon, among other things, our current
assumptions, expectations and beliefs concerning future developments and their
potential effect on us. These forward-looking statements involve risks,
uncertainties and other factors, many of which are outside our control, that may
cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
these forward-looking statements. In some cases you can identify forward-looking
statements where statements are preceded by, followed by or include the words
"believes," "expects," "anticipates," "plans," "future," "potential" or the
negative of such terms or similar expressions. Forward-looking statements in
this 10-K, or incorporated by reference in this 10-K, include, but are not
limited to, statements regarding:

o   projected capital expenditures and related funding requirements;

o   developments and trends in the water and wastewater utility industries;

o   dividend payment projections;

o   opportunities for future acquisitions and success of pending
acquisitions;

o   the capacity of our water supplies and facilities;

o   the development of new services and technologies by us or our
competitors;

o   the availability of qualified personnel;

o   general economic conditions;

o   acquisition-related costs and synergies; and

o   the forward-looking statements contained under the heading
"Forward-Looking Statements" in the section entitled "Management's
Discussion and Analysis" from the portion of our 2003 Annual Report to
Shareholders incorporated by reference herein and made a part hereof.

Because forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including but
not limited to:

o   changes in general economic, business and financial market conditions;

o   changes in government regulations and policies, including environmental
and public utility regulations and policies;

o   changes in environmental conditions, including those that result in
water use restrictions;

o   abnormal weather conditions;

o   changes in capital requirements;

o   changes in our credit rating;

o   our ability to integrate businesses, technologies or services which we
may acquire;

o   our ability to manage the expansion of our business;

o   the extent to which we are able to develop and market new and improved
services;

2

o   the effect of the loss of major customers;

o   our ability to retain the services of key personnel and to hire
qualified personnel as we expand;

o   unanticipated capital requirements;

o   increasing difficulties in obtaining insurance and increased cost of
insurance;

o   cost overruns relating to improvements or the expansion of our
operations; and

o   civil disturbance or terroristic threats or acts.

Given these uncertainties, you should not place undue reliance on these
forward-looking statements. You should read this 10-K and the documents that we
incorporate by reference in this 10-K completely and with the understanding that
our actual future results may be materially different from what we expect. These
forward-looking statements represent our estimates and assumptions only as of
the date of this 10-K. Except for our ongoing obligations to disclose material
information under the federal securities laws, we are not obligated to update
these forward-looking statements, even though our situation may change in the
future. We qualify all of our forward-looking statements by these cautionary
statements.

3

PART I
------

Item 1.         Business

Name Change

On January 16, 2004, Philadelphia Suburban Corporation changed its
corporate name to Aqua America, Inc. to reflect our position as the largest
U.S.-based publicly-traded water utility. In addition, we have changed our
ticker symbol from PSC to WTR on the New York Stock Exchange and Philadelphia
Stock Exchange effective as of the opening of trading on January 20, 2004.

The Company

Aqua America, Inc. (referred to as "Aqua America", "we" or "us") is the
holding company for regulated utilities providing water or wastewater services
to approximately 2.5 million people in Pennsylvania, Ohio, Illinois, Texas, New
Jersey, Indiana, Virginia, Florida, North Carolina, Maine, Missouri, New York,
South Carolina and Kentucky. Our largest operating subsidiary, Aqua
Pennsylvania, Inc. - formerly Pennsylvania Suburban Water Company, accounts for
approximately 60% of our operating revenues and provides water or wastewater
services to approximately 1.3 million residents in the suburban areas north and
west of the City of Philadelphia and in 19 other counties in Pennsylvania. Our
other subsidiaries provide similar services in 13 other states. In addition, we
provide water and wastewater service through operating and maintenance contracts
with municipal authorities and other parties close to our operating companies'
service territories. We are the largest U.S.-based publicly-traded water utility
based on number of people served.

On July 31, 2003, we completed the acquisition of four operating water
and wastewater subsidiaries of AquaSource, Inc. (a subsidiary of DQE, Inc.),
including selected, integrated operating and maintenance contracts and related
assets, for approximately $190.7 million in cash, as adjusted pursuant to the
purchase agreement for the completion of a closing balance sheet and the
finalization of working capital ($195.5 million was paid at closing and refunds
were subsequently received totaling $4.8 million). There remains approximately
$12 million of the above purchase price in dispute, which is subject to an
arbitration process under the terms of the purchase agreement. Accordingly, the
final purchase price is expected to be within the range of $178.7 to $190.7
million. We expect the arbitration process to conclude by mid-year 2004. The
acquired operations of AquaSource serve over 130,000 water and wastewater
customer accounts in 11 states (including the Connecticut operations which we
sold in October 2003).

4

Item 1, Continued

The following table reports our operating revenues, in thousands of
dollars, by principal state for the year ended December 31, 2003:

Supplemental
Pro forma
Results           Information
as                for Full
Reported           Fiscal Year
---------            ---------
Pennsylvania                     $ 240,628            $ 240,628 
Ohio                                36,584               36,584
Illinois                            30,007               30,007
Texas                               12,289 *             26,237
New Jersey                          18,078 *             18,954
Maine                                9,279                9,279
Indiana                              6,292 *             15,524
Florida                              4,282 *             10,584
North Carolina                       3,769 *              4,777
Virginia                             3,096 *              7,853
Other states                         2,929 *              7,201
---------            ---------
$ 367,233            $ 407,628
=========            =========

*Operating revenues of AquaSource have been included in our consolidated
financial statements beginning August 1, 2003. 
Note: Supplemental Pro forma information is presented to illustrate the effects
of the AquaSource acquisition, which was completed on July 31, 2003, on the
operating revenues for 2003 as if the acquisition had occurred on January 1,
2003. The supplemental information is not necessarily representative of the
actual results that may have occurred for these periods or of the results that
may occur in the future. This information is based upon the historical operating
results of AquaSource for periods prior to the acquisition date of July 31, 2003
as provided to us by AquaSource, Inc. and DQE, Inc. management. In October 2003,
we sold the Connecticut operations that we acquired with the AquaSource
acquisition and the annual operating revenues of this unit approximated $4,000.
Supplemental Pro forma information does not reflect adjustment for this
transaction.

The following table indicates by customer class our operating revenues, in
thousands of dollars, for the year ended December 31, 2003:

Operating                
Customer class                           Revenues       Percent
--------------                          ---------       -------
Residential water                       $ 218,487           59% 
Commercial water                           61,343           17%
Fire protection                            20,294            6%
Industrial water                           17,675            5%
Other water                                19,754            5%
Wastewater                                 17,874            5%
Operating contracts and other              11,806            3%
---------       -------
$ 367,233          100%
=========       =======

Our customer base is diversified among residential, commercial, industrial,
other and wastewater customers. Residential customers make up the largest
component of our customer base, with these 

5

Item 1, Continued

customers representing 59% of our total water revenues. Substantially all of our
water customers are metered, which allows us to measure and bill for our
customers' water consumption. Water consumption per customer is affected by
local weather conditions during the year, especially during the late spring and
early summer in our northern U.S. service territories. In general, during these
seasons, an extended period of dry weather increases consumption, while above
average rainfall decreases water consumption. Also, an increase in the average
temperature generally causes an increase in water consumption. On occasion,
abnormally dry weather in our service areas can result in governmental
authorities declaring drought warnings and water use restrictions in the
affected areas, which could reduce water consumption. See "Water Supplies and
Water Facilities" for a discussion of water use restrictions that may impact
water consumption during abnormally dry weather. The geographic diversity of our
customer base reduces our exposure to extreme or unusual weather conditions in
any one area of our service territory.

The growth in revenues over the past three years is a result of
increases in the customer base and in water rates. The majority of the increase
in customer base is due to customers added through acquisitions. During the
three year period of 2000 through 2002, our customer base increased at an annual
compound rate of 9.9%. The customer growth rate in 2003 was 23.8%, and reflects
the additional customers obtained in the AquaSource acquisition on July 31,
2003.

Available Information

We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. You may
also obtain our SEC filings from the SEC's website at http://www.sec.gov.

Our internet website address is http://www.aquaamerica.com. We make
available free of charge through our internet website's Investor Relations page
all of our filings with the SEC, including our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and other
information. These reports and information are available as soon as reasonably
practicable after such material is electronically filed or furnished to the SEC.

Our Board of Directors has various committees including an audit
committee, an executive compensation and employee benefits committee and a
corporate governance committee. Each of the three committees named above has a
formal charter. We also have Corporate Governance Guidelines and a Code of
Ethical Business Conduct. Copies of these charters, guidelines and codes, and
any waivers or amendments to such codes which are applicable to our executive
officers, senior financial officers or directors, can be obtained free of charge
from our website, www.aquaamerica.com.

In addition, you may request a copy of the foregoing filings (excluding
exhibits), charters, guidelines and codes, and any waivers or amendments to such
codes which are applicable to our executive officers, senior financial officers
or directors, at no cost by writing or telephoning us at the following address
or telephone number:
Shareholder Relations Department
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Telephone: 610-527-8000

6

Item 1, Continued

Acquisitions and Water Sale Agreements

With more than 50,000 community water systems in the U.S. (84% of which
serve less than 3,300 customers), the water industry is the most fragmented of
the major utility industries (telephone, natural gas, electric, water and
wastewater). The nation's water systems range in size from large
municipally-owned systems, such as the New York City water system that serves
approximately 9 million people, to small systems, where a few customers share a
common well. In the states where we operate, we believe there are over 22,000
public water systems of widely varying size, with the majority of the population
being served by government-owned water systems.

Although not as fragmented as the water industry, the wastewater
industry in the U.S. also presents opportunities for consolidation. According to
the U.S Environmental Protection Agency's ("EPA") most recent survey of
publicly-owned wastewater treatment facilities in 2000, there are approximately
16,000 such facilities in the nation serving approximately 72% of the U.S.
population. The remaining population represents individual homeowners with their
own treatment facilities; for example, community on-lot disposal systems and
septic tank systems. The vast majority of wastewater facilities are
government-owned rather than privately-owned. The EPA survey also indicated that
there are approximately 6,800 wastewater facilities in operation or planned in
the 14 states where we operate.

Because of the fragmented nature of the water and wastewater utility
industries, we believe that there are many potential water and wastewater system
acquisition candidates throughout the United States. We believe the factors
driving consolidation of these systems are:

o  the benefits of economies of scale;
o  increasingly stringent environmental regulations;
o  the need for capital investment; and
o  the need for technological and managerial expertise.

We are actively exploring other opportunities to expand our utility
operations through acquisitions or otherwise. As of December 31, 2003, exclusive
of the Consumers Water Company merger in 1999 and the AquaSource acquisition in
2003, we had completed 97 acquisitions or other growth ventures during the past
five years.

We believe that acquisitions will continue to be an important source of
growth for us. We intend to continue to pursue acquisitions of municipally-owned
and investor-owned water and wastewater systems of all sizes that provide
services in areas adjacent to our existing service territories or in new service
areas. We engage in continuing activities with respect to potential
acquisitions, including calling on perspective sellers, performing analyses and
investigations of acquisition candidates, making preliminary acquisition
proposals and negotiating the terms of potential acquisitions.

7

Item 1, Continued

Water Supplies and Water Facilities

Our water utility operations obtain their water supplies from surface
water sources such as reservoirs, lakes, ponds, rivers and streams, in addition
to obtaining water from wells and purchasing water from other water suppliers.
Less than 10% of our water sales are purchased from other suppliers. It is our
policy to obtain and maintain the permits necessary to obtain the water we
distribute. Our supplies are sufficient for anticipated daily demand and normal
peak demand under normal weather conditions. Our supplies by principal service
area are as follows:

o Suburban Philadelphia - The principal supply of water is surface water from
eight rural streams, two rivers (Schuylkill River and Delaware River), and
the Upper Merion Reservoir, a former quarry now impounding groundwater.
Wells and interconnections with adjacent municipal authorities supplement
these surface supplies.
o Pennsylvania (other than suburban Philadelphia) - The Roaring Creek
Division draws its water from a man-made lake within a 12,000 acre
watershed and two wells also located in the watershed. The Susquehanna
Division obtains its water supply from wells. The Shenango Division draws
its water from the Shenango River. The Waymart and Whitehaven Divisions'
water supply is obtained from wells.
o Ohio - Water supply is obtained for customers in Lake County from Lake
Erie. Customers in Mahoning County obtain their water from man-made lakes
and the Ashtabula division is supplied by purchased water. Water supply is
obtained for customers in Stark and Summit Counties from wells. In Trumbull
County, customers are served through an interconnection from our
Pennsylvania division.
o Illinois - Water supply is obtained for customers in Kankakee County from
the Kankakee River and satellite wells, while customers in Vermilion County
are supplied from Lake Vermilion. In Will, Lee, Boone, Lake and Knox
counties, our customers are served from wells.
o Texas - Water supply in 272 non-contiguous water systems is obtained
principally from wells, supplemented in some cases by purchased water from
adjacent surface water systems.
o New Jersey - Water supply in our three non-contiguous divisions is obtained
principally from wells and is supplemented with purchased water in two
divisions.
o Indiana - Water supply in three water systems is obtained principally from
wells. 
o Virginia - Water supply in 124 non-contiguous divisions is obtained
from
wells, one division's supply is from surface water, and one division
supplements its supply with purchased water from a nearby water system.
o Florida - Water supply in 46 water systems is obtained principally from
wells, supplemented in some cases by purchased water from adjacent surface
water systems.
o North Carolina - Water supply in 183 non-contiguous divisions is obtained
principally from wells, with six divisions purchasing water from
neighboring municipalities.
o Maine - Eleven non-contiguous water systems obtain their water supply as
follows: five systems use groundwater, five systems use surface water and
one system purchases water from a neighboring municipal district.

We believe that the capacities of our sources of supply, and our water
treatment, pumping and distribution facilities are generally sufficient to meet
the present requirements of our customers. We make system improvements and
additions to capacity in response to changing regulatory standards, changing
patterns of consumption and increased demand from a growing number of customers.
The various state public utility commissions have generally recognized the
operating and capital costs associated with these improvements in setting water
rates.

8

Item 1, Continued

On occasion, drought warnings and water use restrictions are issued by
governmental authorities for portions of our service territories in response to
extended periods of dry weather conditions. The timing and duration of the
warnings and restrictions can have an impact on our water revenues and net
income. In general, water consumption in the summer months is affected by
drought warnings and restrictions to a higher degree because nonessential and
recreational use of water is at its highest during the summer months. At other
times of the year, warnings and restrictions generally have less of an effect on
water consumption.

In November 2001, a drought warning was declared in nine counties in
Pennsylvania, including one of the five counties we serve in southeastern
Pennsylvania. A drought warning calls for a 10 to 15 percent voluntary reduction
of water use, particularly non-essential uses of water. In February 2002, a
drought emergency was declared in 24 counties in Pennsylvania, including all
five of the counties we serve in southeastern Pennsylvania. A drought emergency
imposes a ban on nonessential water use. In June and July 2002, drought
restrictions were relaxed in three of the five counties we serve in southeastern
Pennsylvania where approximately 275,000 of our customers are located, moving
from drought emergency mandatory restrictions to a drought warning voluntary
restrictions. However, by early September 2002, the Commonwealth of Pennsylvania
had reinstated the drought emergency in the three counties where restrictions
had been relaxed because of hot, dry weather in August. In November and December
2002, the Commonwealth of Pennsylvania removed the drought restrictions in the
counties we serve in Pennsylvania. Water use restrictions were also imposed and
relaxed at various times during 2002 in our service territories in New Jersey.

Economic Regulation

Most of our water and wastewater utility operations are subject to
regulation by their respective state regulatory commissions, which have broad
administrative power and authority to regulate rates and charges, determine
franchise areas and conditions of service and authorize the issuance of
securities. The regulatory commissions also establish uniform systems of
accounts and approve the terms of contracts with affiliates and customers,
business combinations with other utility systems, loans and the sales of
property. Some of our operations are subject to rate regulation by county or
city government. The profitability of our utility operations is influenced a
great extent by the timeliness and adequacy of rate allowances in the various
states in which we operate. Accordingly, we maintain a rate case management
capability to provide that the tariffs of our utility operations reflect, to the
extent practicable, the timely recovery of increases in costs of operations,
capital, taxes, energy, materials and compliance with environmental regulations.
In the states in which we operate, we are subject to regulation by the following
state regulatory commissions:

State                      Regulatory Commission
-----                      ---------------------
Pennsylvania               Pennsylvania Public Utility Commission
Ohio                       The Public Utilities Commission of Ohio
Illinois                   Illinois Commerce Commission
Texas                      Texas Commission on Environmental Quality
New Jersey                 New Jersey Board of Public Utilities
Indiana                    Indiana Utility Regulatory Commission
Virginia                   Virginia State Corporation Commission
Florida                    Florida Public Service Commission
North Carolina             North Carolina Utilities Commission
Maine                      Maine Public Utilities Commission
Missouri                   Missouri Public Service Commission
New York                   New York Public Service Commission
South Carolina             South Carolina Public Service Commission
Kentucky                   Kentucky Public Service Commission

9

Item 1, Continued

Four states in which we operate permit water utilities, and in some
states wastewater utilities, to add a surcharge to their water or wastewater
bills to offset the additional depreciation and capital costs associated with
certain capital expenditures related to replacing and rehabilitating
infrastructure systems. Prior to these mechanisms being approved, water and
wastewater utilities absorbed all of the depreciation and capital costs of these
projects between base rate increases without the benefit of additional revenues.
The gap between the time that a capital project is completed and the recovery of
its costs in rates is known as regulatory lag. The infrastructure rehabilitation
surcharge mechanism is intended to substantially reduce regulatory lag which
often acted as a disincentive to water and wastewater utilities to rehabilitate
their infrastructure. In addition, our subsidiaries in certain states use a
surcharge or credit on their bill to reflect certain changes in costs until such
time as the costs are incorporated in base rates.

Currently, Pennsylvania, Illinois, Ohio and Indiana allow for the use
of infrastructure rehabilitation surcharges. These mechanisms typically adjust
periodically based on additional qualified capital expenditures completed or
anticipated in a future period. The infrastructure rehabilitation surcharge is
capped as a percentage of base rates, generally 5% of base rates, and is reset
to zero when new base rates that reflect the costs of those additions become
effective or when a utility's earnings exceed a regulatory benchmark.
Infrastructure rehabilitation surcharges provided revenues of $8,147,000 in
2003, $5,518,000 in 2002 and $6,672,000 in 2001. We are currently working to
establish similar mechanisms in the other states in which we operate.

In general, we believe that Aqua America, Inc. and its subsidiaries
have valid authority, free from unduly burdensome restrictions, to enable us to
carry on our business as presently conducted in the franchised or contracted
areas we now serve. The rights to provide water or wastewater service to a
particular franchised service territory are generally non-exclusive, although
the applicable regulatory commissions usually allow only one utility to provide
service to a given area. In some instances, another water utility provides
service to a separate area within the same political subdivision served by one
of our subsidiaries. In the states where our subsidiaries operate, it is
possible that portions of our subsidiaries' operations could be acquired by
municipal governments by one or more of the following methods:

o  eminent domain;
o  the right of purchase given or reserved by a municipality or political 
subdivision when the original franchise was granted; and
o  the right of purchase given or reserved under the law of the state in which
the subsidiary was incorporated or from which it received its permit.

The price to be paid upon such an acquisition by the municipal
government is usually determined in accordance with applicable law governing the
taking of lands and other property under eminent domain. In other instances, the
price may be negotiated, fixed by appraisers selected by the parties or computed
in accordance with a formula prescribed in the law of the state or in the
particular franchise or charter.

In December 2002, as a result of the settlement of a condemnation
action, our Ohio operating subsidiary sold its water utility assets in the
unincorporated areas of Ashtabula County and the area within the Village of
Geneva on the Lake to Ashtabula County, Ohio for approximately $12,118,000,
which was in excess of the book value for these assets. The sale resulted in the
recognition in the fourth quarter of 2002 of a gain on the sale of these assets,
net of expenses, of $5,676,000 or an after-tax gain of $3,690,000 (or $.04 per
share). We continue to operate this water system for Ashtabula County under a

10

Item 1, Continued

multi-year operating contract, that was recently renewed, that began upon the
closing of the sale and is expected to provide us with over $300,000 in
operating revenues annually. The water utility assets sold represent less than
1% of our total assets, and the total number of customers included in the water
system sold represents less than 1% of our total customer base. The interest
savings associated with paying off debt with the sale's proceeds and the
operating income generated by the operating contract will offset the loss of
this water system's normal contribution to income.

As part of the Ashtabula County condemnation, the adjacent City of
Geneva in Ashtabula County, Ohio, passed an ordinance seeking authorization to
condemn the assets of our Ohio operating subsidiary that are located in Geneva.
The issue was submitted to a referendum in 2000, whereby voters affirmed the
ordinance by a margin of 16 votes. The City engaged a consulting firm to assist
it in valuing the assets that may be condemned. In December 2002, the City of
Geneva filed a condemnation action. The number of customers included in the
Geneva system represents approximately 0.3% of our total customer base.

The City of Fort Wayne, Indiana has authorized the acquisition, by
eminent domain or otherwise, of a portion of the utility assets of one of the
operating subsidiaries that we acquired in connection with the AquaSource
acquisition in July 2003. The portion of the system under consideration
represents approximately 1% of our total customer base. While we continue to
discuss this matter with officials from the City of Fort Wayne, we continue to
protect our interests in this proceeding.

We believe that our operating subsidiaries will be entitled to fair
market value for any assets that are condemned, and we believe the fair market
value will be in excess of the book value for such assets and may approximate
the multiple to book value of other recent industry business combinations.
Despite these events, our strategy continues to be to acquire additional water
and wastewater systems, maintain our existing systems, and actively oppose
efforts by municipal governments to acquire any of our operations, particularly
for less than the fair market value of our operations or where the municipal
government seeks to acquire more than it is entitled to under the applicable law
or agreement.

Environmental Regulation

Provision of water and wastewater services is subject to regulation
under the federal Safe Drinking Water Act, the Clean Water Act and related state
laws, and under federal and state regulations issued under these laws. These
laws and regulations establish criteria and standards for drinking water and for
wastewater discharges. In addition, we are subject to federal and state laws and
other regulations relating to solid waste disposal, dam safety and other
operations. Capital expenditures and operating costs required as a result of
water quality standards and environmental requirements have been traditionally
recognized by state public utility commissions as appropriate for inclusion in
establishing rates.

There are some environmental compliance issues at various water and
wastewater facilities associated with the AquaSource acquisition that was
completed on July 31, 2003. We estimate that the capital expenditures required
to address these AquaSource compliance issues will be approximately $65,000,000
over the next five years. As a comparison, during the next five years, our
future utility construction is estimated to require aggregate expenditures of
$779,000,000 (representing all of our on-going construction programs). Various
operating subsidiaries that were acquired in the AquaSource acquisition are
parties to agreements with regulatory agencies regarding environmental
compliance. These agreements are intended to provide the regulators with
assurance that problems will be addressed, and they generally provide some
protection to us from fines, penalties and other actions while corrective
measures are being implemented. For the most part, the agreements were
negotiated by AquaSource

11

Item 1, Continued

prior to the acquisition being completed, and we have willingly assumed the
obligations under these agreements. In several cases, we have re-negotiated a
compliance agreement to address conditions that developed prior to completion of
the AquaSource acquisition. We are actively working directly with state
environmental officials to implement or amend these agreements as necessary. The
regulatory agencies may impose some fines and penalties, with respect to
existing compliance issues at the operations acquired from AquaSource, which are
not expected to be material. To the extent such fines and penalties arise from
incidents that occurred prior to our purchase of the AquaSource operations, we
may make an indemnity claim for such amounts against AquaSource, Inc. and its
parent company DQE, Inc. under the purchase agreement.

Safe Drinking Water Act - The Safe Drinking Water Act establishes criteria and
procedures for the U.S. Environmental Protection Agency to develop national
quality standards for drinking water. Regulations issued pursuant to the Safe
Drinking Water Act and its amendments set standards on the amount of certain
microbial and chemical contaminants and radionuclides allowable in drinking
water. Current requirements under the Safe Drinking Water Act are not expected
to have a material impact on our operations or financial condition as we have
already made investments to meet existing water quality standards. We may, in
the future, be required to change our method of treating drinking water at
certain sources of supply if additional regulations become effective.

EPA's issuance of a rule regulating radon in tap water has been
postponed repeatedly since 1991. Limits for radon would probably become
effective 4 or 5 years after issuance of any such rule. We anticipate this rule
may establish a radon level that would require treatment at a few of our wells.
If the states in which we operate elect not to implement general radon reduction
programs (Multi-Media Mitigation), then a more stringent limit for radon may
apply and a larger number of wells would be affected. We anticipate that states
will adopt Multi-Media Mitigation programs. The capital costs to comply with the
anticipated limit are expected to total approximately $2,000,000 or less than 2%
of our typical annual capital expenditures.

The Safe Drinking Water Act provides for the regulation of
radionuclides other than radon, such as radium and uranium. In December 2000,
the EPA issued a final rule regulating certain radionuclides other than radon.
The rule became effective in December 2003, and requires additional testing. It
may require additional treatment at some of our groundwater facilities. The cost
of compliance is expected to be less than $1,000,000. The impact of the new
rulemaking is not expected to have a material impact on our results from
operations or financial condition.

In order to eliminate or inactivate microbial organisms, the Surface
Water Treatment Rule and the Interim Enhanced Surface Water Treatment Rule were
issued by the EPA to improve disinfection or filtration of potable water. The
EPA developed the Stage 1 Disinfectants-Disinfection By-Products Rule to reduce
consumers' exposure to disinfectants and by-products of the disinfection
process. Beginning January 1, 2004, groundwater and smaller surface water
systems had to comply with the Stage 1 Disinfectants-Disinfection By-Products
Rule. In the future, we may be required to install filtration or other treatment
for one surface water supply. The cost of this treatment, should it be required,
is not expected to exceed $5,000,000. Certain small groundwater systems could be
reclassified as being influenced by surface water. This may require additional
treatment or the development of replacement sources of supply over time, the
cost for which is not expected to exceed $3,000,000.

In January 2001, the EPA issued a final rule for arsenic that lowers
the limit on arsenic in potable water to a more stringent level effective in
2006, with a provision for further time extensions for small systems. Currently,
several small well systems slightly exceed the new arsenic levels and may
require additional treatment. The cost of compliance with this new rulemaking is
not expected to exceed $1,000,000.

12

Item 1, Continued

In April 2000, the gasoline additive Methyl tert-Butyl Ether ("MtBE")
was discovered in a production well in one of our operating subsidiaries at
levels exceeding the state drinking water standard. The well was immediately
taken out of service and alternate water supplies were obtained. We have
commenced legal action against the company we believed to be responsible for the
contamination and have reached a settlement in principle subject to certain
conditions being satisfied, pursuant to which we expect to receive an amount
sufficient to cover our estimated costs to purchase alternative water on an
interim basis and to develop a permanent replacement well.

Clean Water Act - The Clean Water Act regulates discharges from drinking water
and wastewater treatment facilities into lakes, rivers, streams, and
groundwater. We operate approximately 200 facilities with such discharges in
twelve states. It is our policy to obtain and maintain all required permits and
approvals for the discharge from these water and wastewater facilities, and to
comply with all conditions of those permits and other regulatory requirements. A
program is in place to monitor facilities for compliance with permitting,
monitoring and reporting for wastewater discharges. From time to time,
violations may occur which may result in fines. As described above, various
operating subsidiaries that were acquired in the AquaSource acquisition had
entered into agreements, prior to the acquisition being completed, to address
compliance issues. Based on AquaSource's previous experience with these
agreements, penalties or fines that may be imposed under these agreements are
not expected to have a material impact on our results of operations or financial
condition.

Solid Waste Disposal - The handling and disposal of residuals and solid waste
generated from water and wastewater treatment facilities is governed by federal
and state laws and regulations. A program is in place to monitor our facilities
for compliance with regulatory requirements, and we do not currently anticipate
any major expenditures in connection with the handling and disposal of waste
material from our water and wastewater operations.

Dam Safety - Our subsidiaries own seventeen major dams that are subject to the
requirements of the Federal and state regulations related to dam safety. All
major dams undergo an annual engineering inspection. We believe that all
seventeen dams are structurally sound and well-maintained.

In Pennsylvania, the Department of Environmental Protection has
recently adopted the use of a new formula for determining the magnitude of the
Probable Maximum Flood. We are studying our dams to determine what improvements
may be needed to our dams as a result of this new calculation. As a result of
the initial results of the studies, we have identified three dams that could
require capital improvements of approximately $7 million in aggregate. We
believe that these capital expenditures that could be required by the new
formulas would be recoverable in our rates. Similarly, in Ohio, the Department
of Natural Resources has adopted the use of the new formula. We have studied our
dams in Ohio and it has been determined that some of the dams will require
improvements. Based on the preliminary results, we believe that capital
expenditures of approximately $4.2 million in aggregate will be required on
three dams in Ohio over the next four years.

Employee Relations

As of December 31, 2003, we employed a total of 1,260 full-time
employees. Our subsidiaries are parties to 10 agreements with labor unions
covering 445 employees that expire at various times between May 2004 and
December 2007. Based on the number of employees covered by each agreement, a
substantial portion of the agreements expire in 2006.

13

Item 1, Continued

Risk Factors

Our business requires significant capital expenditures and the rates we charge
our customers are subject to regulation. If we are unable to obtain government
approval of our requests for rate increases, or if approved rate increases are
untimely or inadequate to cover our investments, our profitability may suffer.

The water utility business is capital intensive. On an annual basis, we
spend significant sums for additions to or replacement of property, plant and
equipment. Our ability to maintain and meet our financial objectives is
dependent upon the rates we charge our customers. These rates are subject to
approval by the public utility commissions or similar regulatory bodies in the
states in which we operate. We file rate increase requests, from time to time,
to recover our investments in utility plant and expenses. Once a rate increase
petition is filed with a public utility commission, the ensuing administrative
and hearing process may be lengthy and costly. The timing of our rate increase
requests are therefore partially dependent upon the estimated cost of the
administrative process in relation to the investments and expenses that we hope
to recover through the rate increase to the extent approved. We can provide no
assurances that any future rate increase request will be approved by the
appropriate state public utility commission; and, if approved, we cannot
guarantee that these rate increases will be granted in a timely or sufficient
manner to cover the investments and expenses for which we initially sought the
rate increase.

Our operating costs could be significantly increased in order to comply with new
or stricter regulatory standards imposed by federal and state environmental
agencies.

Our water and wastewater services are governed by various federal and
state environmental protection and health and safety laws and regulations,
including the federal Safe Drinking Water Act, the Clean Water Act and similar
state laws, and state and federal regulations issued under these laws by the
United States Environmental Protection Agency and state environmental regulatory
agencies. These laws and regulations establish, among other things, criteria and
standards for drinking water and for discharges into the waters of the United
States and states. Pursuant to these laws, we are required to obtain various
environmental permits from environmental regulatory agencies for our operations.
We cannot assure you that we have been or will be at all times in total
compliance with these laws, regulations and permits. If we violate or fail to
comply with these laws, regulations or permits, we could be fined or otherwise
sanctioned by regulators. Environmental laws and regulations are complex and
change frequently. These laws, and the enforcement thereof, have tended to
become more stringent over time. While we have budgeted for future capital and
operating expenditures to maintain compliance with these laws and our permits,
it is possible that new or stricter standards could be imposed that will raise
our operating costs. Although these costs may be recovered in the form of higher
rates, there can be no assurance that the various state public utility
commissions or similar regulatory bodies that govern our business would approve
rate increases to enable us to recover such costs. In summary, we cannot assure
you that our costs of complying with, or discharging liability under, current
and future environmental and health and safety laws will not adversely affect
our business, results of operations or financial condition.

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

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

14

Item 1, Continued

Drought conditions may impact our ability to serve our current and future
customers, and may impact our customers' use of our water, which may adversely
affect our financial condition and results of operations.

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

An important element of our growth strategy is the acquisition of water and
wastewater systems. Any future acquisitions we decide to undertake may involve
risks.

An important element of our growth strategy is the acquisition and
integration of water and wastewater systems in order to broaden our current, and
move into new, service areas. We will not be able to acquire other businesses if
we cannot identify suitable acquisition opportunities or reach mutually
agreeable terms with acquisition candidates. It is our intent, when practical,
to integrate any businesses we acquire with our existing operations. The
negotiation of potential acquisitions as well as the integration of acquired
businesses could require us to incur significant costs and cause diversion of
our management's time and resources. Future acquisitions by us could result in:

o  dilutive issuances of our equity securities;
o  incurrence of debt and contingent liabilities;
o  fluctuations in quarterly results; and
o  other acquisition-related expenses.

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

Contamination to our water supply may result in disruption in our services and
litigation which could adversely affect our business, operating results and
financial condition.

Our water supplies are subject to contamination, including
contamination from the development of naturally-occurring compounds, chemicals
in groundwater systems, pollution resulting from man-made sources and possible
terrorist attacks. In the event that our water supply is contaminated, we may
have to interrupt the use of that water supply until we are able to substitute
the flow of water from an uncontaminated water source. In addition, we may incur
significant costs in order to treat the contaminated source through expansion of
our current treatment facilities, or development of new treatment methods. If we
are unable to substitute water supply from an uncontaminated water source, or to
adequately treat the contaminated water source in a cost-effective manner, there
may be an adverse effect on our revenues, operating results and financial
condition. The costs we incur to decontaminate a water source or an underground
water system could be significant and could adversely affect our business,

15

Item 1, Continued

operating results and financial condition and may be recoverable in rates. We
could also be held liable for consequences arising out of human exposure to
hazardous substances in our water supplies or other environmental damage. For
example, private plaintiffs have the right to bring personal injury or other
toxic tort claims arising from the presence of hazardous substances in our
drinking water supplies. Our insurance policies may not be sufficient to cover
the costs of these claims.

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

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. The loss of the services
of any member of our senior management or the inability to hire and retain
experienced management personnel could harm our operating results.

16

Item 2.  Properties.

Our properties consist of transmission and distribution mains and
conduits, water and wastewater treatment plants, pumping facilities, wells,
tanks, meters, supply lines, dams, reservoirs, buildings, vehicles, land,
easements, rights and other facilities and equipment used for the operation of
our systems, including the collection, treatment, storage and distribution of
water. Substantially all of our properties are owned by our subsidiaries and are
subject to liens of mortgage or indentures. These liens secure bonds, notes and
other evidences of long-term indebtedness of our subsidiaries. For certain
properties that we acquired through the exercise of the power of eminent domain
and certain other properties we purchased, we hold title for water supply
purposes only. We own, operate and maintain several thousand miles of
transmission and distribution mains, 20 water treatment plants and many
wastewater treatment plants. Some properties are leased under long-term leases.
The following table indicates our net utility plant, in thousands of dollars, as
of December 31, 2003 in the principal states where we operate:

Net Property,
Plant and
Equipment
----------
Pennsylvania                                        $1,138,338
Ohio                                                   162,489
Illinois                                               154,752
Texas                                                  136,407
New Jersey                                              97,715
Indiana                                                 76,052
Maine                                                   38,518
Florida                                                 30,948
North Carolina                                          21,551
Virginia                                                20,423
Missouri                                                 3,016
Inter-company eliminations and other states            (55,918)
----------
$1,824,291
==========

We believe that our properties are generally maintained in good
condition and in accordance with current standards of good waterworks industry
practice. We believe that the facilities used in the operation of our business
are in good condition in terms of suitability, adequacy and utilization.

Our corporate offices are leased from Aqua Pennsylvania, Inc. and
located in Bryn Mawr, Pennsylvania.

Item 3.  Legal Proceedings

There are various legal proceedings in which we are involved. Although
the results of legal proceedings cannot be predicted with certainty, there are
no pending legal proceedings to which we or any of our subsidiaries is a party
or to which any of our properties is the subject that are expected to have a
material effect on our financial position, results of operations or cash flows.

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the
fourth quarter of 2003.

17

PART II

Item 5.  Market for the Registrant's Common Stock and Related Security
Holder Matters

Our common stock is traded on the New York Stock Exchange and the
Philadelphia Stock Exchange under the ticker symbol WTR. As of February 17,
2004, there were approximately 22,973 holders of record of our common stock.

The following table shows the high and low intraday sales prices for
our common stock as reported on the New York Stock Exchange composite
transactions reporting system and the cash dividends paid per share for the
periods indicated (all per share data as presented has been adjusted for the
2003 5-for-4 common stock split effected in the form of a stock distribution):

First       Second        Third       Fourth
Quarter      Quarter      Quarter      Quarter        Year
-----------------------------------------------------------------
2003
---------------------------------------------------------------------------------------------------------------

Dividend paid per common share                     $ 0.112      $ 0.112      $ 0.112      $ 0.120      $ 0.456
Price range of common stock
- high                                             17.83        19.85        20.07        22.40        22.40
- low                                              15.77        17.22        18.28        18.71        15.77

2002
---------------------------------------------------------------------------------------------------------------
Dividend paid per common share                     $ 0.106      $ 0.106      $ 0.106      $ 0.112      $ 0.430
Price range of common stock
- high                                             19.69        20.00        16.24        17.50        20.00
- low                                              16.88        14.79        12.82        15.44        12.82

We have paid common dividends consecutively for 59 years. Effective
December 1, 2003, our Board of Directors authorized an increase of 7.1% in the
dividend rate over the amount Aqua America, Inc. paid in the previous quarter.
As a result of this authorization, beginning with the dividend payment in
December 2003, the annualized dividend rate increased to $0.48 per share. We
presently intend to pay quarterly cash dividends in the future, on March 1, June
1, September 1 and December 1, subject to our earnings and financial condition,
regulatory requirements and such other factors as our Board of Directors may
deem relevant. During the past five years, our common dividends paid have
averaged 59.4% of net income.

In August 2003, our Board of Directors declared a 5-for-4 common stock
split effected in the form of a 25% stock distribution for all common shares
outstanding, to shareholders of record on November 14, 2003. The new shares were
distributed on December 1, 2003. Aqua America's par value of $0.50 per share
remained unchanged and $9,244,000 was transferred from Capital in Excess of Par
Value to Common Stock to record the split. All share and per share data for all
periods presented have been restated to give effect to the stock split.

Item 6.  Selected Financial Data

The information appearing in the section captioned "Summary of Selected
Financial Data" from the portions of our 2003 Annual Report to Shareholders
filed as Exhibit 13.1 to this Form 10-K Report is incorporated by reference
herein.

Item 7.   Management's Discussion and Analysis of Financial Condition and \
Results of Operations

The information appearing in the section captioned "Management's
Discussion and Analysis" from the portions of our 2003 Annual Report to
Shareholders filed as Exhibit 13.1 to this Form 10-K Report is incorporated by
reference herein.

18

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks in the normal course of business,
including changes in interest rates and equity prices. The exposure to changes
in interest rates is a result of financings through the issuance of fixed-rate,
long-term debt. Such exposure is typically related to financings between utility
rate increases, since generally our rate increases include a revenue level to
allow recovery of our current cost of capital. Interest rate risk is managed
through the use of a combination of long-term debt, which is at fixed interest
rates and short-term debt, which is at floating interest rates. As of December
31, 2003, the debt maturities by period, in thousands of dollars, and the
weighted average interest rate for fixed-rate, long-term debt are as follows:

Fair
2004       2005       2006       2007       2008  Thereafter       Total       Value
--------------------------------------------------------------------------------------------------------------------

Long-term
debt (fixed rate)        $39,386    $40,418    $16,088    $14,395    $19,438    $606,327    $736,052    $781,502
Weighted average
interest rate               6.39%      7.26%      7.25%      6.94%      7.38%       6.02%       6.19%

From time to time, we make investments in marketable equity securities.
As a result, we are exposed to the risk of changes in equity prices for the
"available-for-sale" marketable equity securities. As of December 31, 2003, our
carrying value of marketable equity securities was $1,019,000, which reflects
the market value of such securities and is in excess of our original cost. The
market risks that we are exposed to are consistent with the risks that we were
exposed to in the prior year.

Item 8.  Financial Statements and Supplementary Data

Information appearing under the captions "Consolidated Statements of
Income and Comprehensive Income", "Consolidated Balance Sheets", "Consolidated
Cash Flow Statements" "Consolidated Statements of Capitalization" and "Notes to
Consolidated Financial Statements" from the portions of our 2003 Annual Report
to Shareholders filed as Exhibit 13.1 to this Form 10-K Report is incorporated
by reference herein. Also, the information appearing in the section captioned
"Reports on Financial Statements" from the portions of our 2003 Annual Report to
Shareholders filed as Exhibit 13.1 to this Form 10-K Report is incorporated by
reference herein.

Item 9.  Changes in and Disagreements with Accountants on Accounting and 
Financial Disclosure

None.

Item 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures - Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. A controls system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.

Changes in Internal Control over Financial Reporting - No change in our internal
control over financial reporting occurred during our most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

19

PART III

Item 10.  Directors and Executive Officers of the Registrant

We make available free of charge within the Investor Relations /
Corporate Governance section of our internet website, at www.aquaamerica.com,
and in print to any shareholder who requests, our Corporate Governance
Guidelines, the Charters of each Committee of our Board of Directors, and our
Code of Ethical Business Conduct. Requests for copies may be directed to
Shareholder Relations Department, Aqua America, Inc., 762 W. Lancaster Avenue,
Bryn Mawr, PA 19010-3489. Amendments to the Code, and any grant of waiver from a
provision of the Code requiring disclosure under applicable SEC rules will be
disclosed on the Company's website. The information contained on our Internet
website is not incorporated by reference into this Form 10-K and should not be
considered part of this or any other report that we file with or furnish to the
SEC.

Directors of the Registrant

The information appearing in the section captioned "Information
Regarding Nominees and Directors" of the Proxy Statement relating to our May 20,
2004, annual meeting of shareholders, to be filed within 120 days after the end
of the fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.

Executive Officers of the Registrant

The following table and the notes thereto set forth information with
respect to our executive officers, including their names, ages, positions with
Aqua America, Inc. and business experience during the last five years:

Position with
Name                       Age      Aqua America, Inc. (1)
----                       ---      ----------------------

Nicholas DeBenedictis      58       President and Chairman (May 1993 to
present); President and Chief Executive
Officer (July 1992 to May 1993); Chairman
and Chief Executive Officer, Aqua
Pennsylvania, Inc. (July 1992 to present);
President, Philadelphia Suburban Water
Company (February 1995 to January 1999) (2)

Roy H. Stahl               51       Executive Vice President and General Counsel
(May 2000 to present); Secretary (June 2001
to present); Senior Vice President and
General Counsel (April 1991 to May 2000) (3)

David P. Smeltzer          45       Senior Vice President - Finance and Chief
Financial Officer (December 1999 to
present); Vice President - Finance and Chief
Financial Officer (May 1999 to December
1999); Vice President - Rates and Regulatory
Relations, Philadelphia Suburban Water
Company (March 1991 to May 1999) (4)

Richard R. Riegler         57       Senior Vice President - Engineering and
Environmental Affairs (January 1999 to
present); Senior Vice President -
Operations, Philadelphia Suburban Water
Company (April 1989 to January 1999) (5)

Richard D. Hugus           54       President, Southern Operations (August 2003
to present); Vice President - Corporate
Development, Pennsylvania Suburban Water
Company (March 1991 to August 2003) (6)

20

Item 10, Continued

(1)      In addition to the capacities indicated, the individuals named in the
above table hold other offices or directorships with subsidiaries of
the Registrant. Officers serve at the discretion of the Board of
Directors.

(2)      Mr. DeBenedictis was Secretary of the Pennsylvania Department of
Environmental Resources from 1983 to 1986. From December 1986 to April
1989, he was President of the Greater Philadelphia Chamber of Commerce.
Mr. DeBenedictis was Senior Vice President for Corporate and Public
Affairs of Philadelphia Electric Company from April 1989 to June 1992.

(3)      From January 1984 to August 1985, Mr. Stahl was Corporate Counsel, from
August 1985 to May 1988 he was Vice President - Administration and
Corporate Counsel of Aqua America, Inc., and from May 1988 to April
1991 he was Vice President and General Counsel of Aqua America, Inc..

(4)      Mr. Smeltzer was Vice President - Controller of Philadelphia Suburban 
Water Company from March, 1986 to March 1991.

(5)      Mr. Riegler was Chief Engineer of Philadelphia Suburban Water Company
from 1982 to 1984. He then served as Vice President and Chief Engineer
from 1984 to 1986 and Vice President of Operations from 1986 to 1989.

(6)      Mr. Hugus was Vice President and Treasurer of Philadelphia Suburban 
Water Company from December 1988 to March 1991.

Item 11.  Executive Compensation

The information appearing in the sections captioned "Executive
Compensation" of the Proxy Statement relating to our May 20, 2004, annual
meeting of shareholders, to be filed within 120 days after the end of the fiscal
year covered by this Form 10-K Report, is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and 
related Stockholder matters 

Ownership of Common Stock - The information appearing in the section captioned
"Ownership of Common Stock" of the Proxy Statement relating to our May 20, 2004,
annual meeting of shareholders, to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.

21

Item 12, Continued

Securities Authorized for Issuance under Equity Compensation Plans - The
following table provides information for our equity compensation plan as of
December 31, 2003:

EQUITY COMPENSATION PLAN INFORMATION
--------------------------------------------------------------------------------------------------
Number of Securities 
Number of Securities                           remaining available for
to be issued upon        Weighted-average      future issuance under
exercise of              exercise price of     equity compensation plans
outstanding options,     outstanding options,  (excluding securities
Plan Category            warrants and rights      warrants and rights   reflected in column
--------------------------------------------------------------------------------------------------

Equity compensation
plans approved
by security holders         2,993,421                 $13.31                  4,984,151
--------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders             0                       0                         0
--------------------------------------------------------------------------------------------------
Total                       2,993,421                 $13.31                  4,984,151
--------------------------------------------------------------------------------------------------

Item 13.  Certain Relationships and Related Transactions

The information appearing in the sections captioned "Certain
Relationships and Related Transactions" of the Proxy Statement relating to our
May 20, 2004, annual meeting of shareholders, to be filed within 120 days after
the end of the fiscal year covered by this Form 10-K Report, is incorporated
herein by reference.

Item 14.  Principal Accounting Fees and Services

The information appearing in the section captioned "Independent
Accountants - Services and Fees" of the Proxy Statement relating to our May 20,
2004, annual meeting of shareholders, to be filed within 120 days after the end
of the fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.

22

PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

Financial Statements. The following is a list of our consolidated financial
statements and supplementary data incorporated by reference in Item 8 hereof:

Report of Management

Independent Auditors' Report of PricewaterhouseCoopers LLP

Consolidated Balance Sheets - December 31, 2003 and 2002

Consolidated Statements of Income and Comprehensive Income - 2003, 2002
and 2001

Consolidated Cash Flow Statements - 2003, 2002, and 2001

Consolidated Statements of Capitalization - December 31, 2003 and 2002

Notes to Consolidated Financial Statements

Financial Statement Schedules. The financial statement schedules, or
supplemental schedules, filed as part of this annual report on Form 10-K are
omitted because they are not applicable or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.

Reports on Form 8-K.

Current Report on Form 8-K furnished on November 5, 2003, responding to Item 9,
Regulation FD Disclosure. (Related to the Company's issuance of a press release
on November 5, 2003 announcing its third quarter 2003 earnings).

Current Report on Form 8-K filed on November 26, 2003, responding to Item 5,
Other Events. (Related to the Company entering into a purchase agreement with
ALLETE Water Services, Inc., a subsidiary of ALLETE, Inc., to acquire the
capital stock of Heater Utilities, Inc., which owns water and wastewater systems
located in North Carolina).

Exhibits, Including Those Incorporated by Reference. The following is a list of
exhibits filed as part of this annual report on Form 10-K. Where so indicated by
footnote, exhibits which were previously filed are incorporated by reference.
For exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses. The page numbers listed refer to
page numbers where such exhibits are located using the sequential numbering
system specified by Rules 0-3 and 403.

23

EXHIBIT INDEX

Exhibit No.
-----------

3.1    Restated Articles of Incorporation (as of May 17, 2001) (15)
(Exhibit 3.11)

3.2    By-Laws, as amended (9) (Exhibit 3.2)

3.3    Amendment to Section 3.03 and addition of Section 3.17 
to Bylaws (11) (Exhibits 1 and 2)

3.4    Amendment to Section 3.03 of the Bylaws (13) (Exhibit 3.8)

3.5    Amendments to Sections 2.01(a), 2.02 and 3.08(b) of the Bylaws
(14) (Exhibit 3.10)

4.1    Indenture of Mortgage dated as of January 1, 1941 
between Philadelphia Suburban Water Company and The
Pennsylvania Company for Insurance on Lives and Granting
Annuities(now First Pennsylvania Bank, N.A.), as Trustee, with
supplements thereto through the Twentieth Supplemental
Indenture dated as of August 1, 1983 (2) (Exhibits 4.1 through
4.16)

4.2    Agreement to furnish copies of other long-term debt
instruments (1) (Exhibit 4.7)

4.3    Twenty-fourth Supplemental Indenture dated as of June 1,
1988  (3) (Exhibit 4.5)

4.4    Twenty-fifth Supplemental Indenture dated as of
January 1, 1990 (4) (Exhibit 4.6)

4.5    Twenty-sixth Supplemental Indenture dated as of November
1, 1991  (5) (Exhibit 4.12)

4.6    Twenty-eighth Supplemental Indenture dated as of April 1,
1993 (6) (Exhibit 4.15)

4.7    Twenty-ninth Supplemental Indenture dated as of March 30,
1995 (7) (Exhibit 4.17)

4.8    Thirtieth Supplemental Indenture dated as of August 15,
1995 (8) (Exhibit 4.18)

4.9    Thirty-first Supplemental Indenture dated as of July 1,
1997 (10) (Exhibit 4.22)

4.10   First Amended and Restated Rights Agreement, dated as of
February 20, 2004 between Aqua America, Inc. and
Equiserve Trust Company, N.A., as Rights Agent

4.11   Thirty-second Supplement Indenture, dated as of October 1, 1999 (12)
(Exhibit 4.26)

4.12   Thirty-third Supplemental Indenture, dated as of November 15, 1999.
(13) (Exhibit 4.27)

4.13   Revolving Credit Agreement between Philadelphia Suburban Water
Company and PNC Bank National Association, First Union National
Bank, N.A., Mellon Bank, N.A. dated as of December 22, 1999 (13)
(Exhibit 4.27)

4.14   First Amendment to Revolving Credit Agreement dated as of 
November 28, 2000, between Philadelphia Suburban Water Company
and PNC Bank, National Association, First Union National Bank,
N.A., Mellon Bank, N.A. dated as of December 22, 1999 (14)
(Exhibit 4.19)

4.15   Second Amendment to Revolving Credit Agreement dated as of
December 18, 2001, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
First Union National Bank, N.A., Fleet National Bank dated as
of December 22, 1999 (15) (4.20)

24

EXHIBIT INDEX

Exhibit No.
-----------

4.16   Thirty-fourth Supplemental Indenture, dated as of October 15, 2001. 
(15) (4.21)

4.17   Thirty-fifth Supplemental Indenture, dated as of January 1, 2002. 
(15) (4.22)

4.18   Thirty-sixth Supplemental Indenture, dated as of June 1, 2002. (17) 
(4.23)

4.19   Thirty-seventh Supplemental Indenture, dated as of December 15, 2002.
(18) (4.23)

4.20   Credit Agreement dated as of October 25, 2002, between Philadelphia
Suburban Corporation and PNC Bank, National Association. (18) 
(4.24)

4.21   Third Amendment to Revolving Credit Agreement dated as of
December 16, 2002, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
Fleet National Bank dated as of December 22, 1999. (18) (4.25)

4.22   Fourth Amendment to Revolving Credit Agreement dated as of
December 24, 2002, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
Fleet National Bank, National City Bank dated as of December
22, 1999. (18) (4.26)

4.23   Note Purchase Agreement among the note purchasers and Philadelphia
Suburban Corporation, dated July 31, 2003 (19) (4.27)

4.24   Credit Agreement dated as of July 31, 2003, between Philadelphia
Suburban Corporation and PNC Bank, National Association (19) 
(4.28)

4.25   Fifth Amendment to Revolving Credit Agreement dated as of
December 14, 2003, between Philadelphia Suburban Water Company
(and its successor Pennsylvania Suburban Water Company) and
PNC Bank, National Association, Citizens Bank of Pennsylvania,
Fleet National Bank, National City Bank dated as of December
22, 1999.

10.1   Excess Benefit Plan for Salaried Employees, effective
December 1, 1989*  (4) (Exhibit 10.4)

10.2   Supplemental Executive Retirement Plan, effective
December 1, 1989*  (4) (Exhibit 10.5)

10.3   Supplemental Executive Retirement Plan, effective March
15, 1992* (1) (Exhibit 10.6)

10.4   Employment letter agreement with Mr. Nicholas
DeBenedictis* (1) (Exhibit 10.8)

10.5   1994 Equity Compensation Plan, as amended by Amendment
effective August 5, 2003*

10.6   Placement Agency Agreement between Philadelphia
Suburban Water Company and PaineWebber Incorporated
dated as of March 30, 1995 (7) (Exhibit 10.12)

10.7   Bond Purchase Agreement among the Delaware County
Industrial Development Authority, Philadelphia Suburban Water
Company and Legg Mason Wood Walker, ncorporated dated August 24,
1995 (8) (Exhibit 10.13)

10.8    Construction and Financing Agreement between the Delaware County 
Industrial Development Authority and Philadelphia Suburban Water
Company dated as of August 15, 1995 (8) (Exhibit 10.14)

25

EXHIBIT INDEX

Exhibit No.
-----------

10.9    Philadelphia Suburban Corporation Amended and Restated Executive 
Deferral Plan*

10.10   Philadelphia Suburban Corporation Deferred Compensation Plan Master 
Trust Agreement with PNC Bank, National Association, dated as of
December 31, 1996* (9) (Exhibit 10.24)

10.11   First Amendment to Supplemental Executive Retirement Plan* (9) 
(Exhibit 10.25)

10.12   Placement Agency Agreement between Philadelphia Suburban Water 
Company and A.G. Edwards and Sons, Inc., Janney Montgomery Scott
Inc., HSBC Securities, Inc., and PaineWebber Incorporated (10)
(Exhibit 10.26)

10.13   The Director Deferral Plan*
(as amended and restated effective January 1, 2003)

10.14   Bond Purchase Agreement among the Delaware County Industrial
Development Authority, Philadelphia Suburban Water Company and
Commerce Capital Markets dated September 29, 1999 (12) 
(Exhibit 10.37)

10.15   Construction and Financing Agreement between the Delaware County 
Industrial Development Authority and Philadelphia Suburban Water
Company dated as of October 1, 1999 (12) (Exhibit 10.38)

10.16   Placement Agency Agreement between Philadelphia Suburban Water 
Company and Merrill Lynch & Co., PaineWebber Incorporated, A.G.
Edwards & Sons, Inc., First Union Securities, Inc., PNC Capital
Markets, Inc. and Janney Montgomery Scott, Inc., dated as of
November 15, 1999 (13) (Exhibit 10.41)

10.17   Bond Purchase Agreement among the Delaware County Industrial 
Development Authority, Philadelphia Suburban Water Company and
The GMS Group, L.L.C., dated October 23, 2001 (15) (10.35)

10.18   Construction and Financing Agreement between the Delaware County 
Industrial Development Authority and Philadelphia Suburban Water
Company dated as of October 15, 2001 (15) (10.36)

10.19   Agreement among Philadelphia Suburban Corporation, Philadelphia 
Suburban Water Company and Nicholas DeBenedictis, dated August 7,
2001* (15) (10.37)

10.20   Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Roy H. Stahl,
dated August 7, 2001* (15) (10.38)

10.21   Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Richard R. Riegler,
dated August 7, 2001* (15) (10.39)

10.22   Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and David P. Smeltzer,
dated August 7, 2001* (15) (10.40)

10.23   Agreement among Philadelphia Suburban Corporation,
Philadelphia Suburban Water Company and Richard D. Hugus,
dated August 7, 2001*

26

EXHIBIT INDEX

Exhibit No.
-----------

10.24   2002 Annual Cash Incentive Compensation Plan* (16) (Exhibit 10.41)

10.25   Bond Purchase Agreement among the Bucks County Industrial
Development Authority, Pennsylvania Suburban Water Company
and Janney Montgomery Scott LLC, dated May 21, 2002
(17) (Exhibit 10.42)

10.26   Construction and Financing Agreement between the Bucks County
Industrial Development Authority and Pennsylvania Suburban
Water Company dated as of June 1, 2002  (17) (Exhibit 10.43)

10.27   Bond Purchase Agreement among the Delaware County Industrial
Development Authority, Pennsylvania Suburban Water Company,
and The GMS Group, L.L.C., dated December 19, 2002 (18) 
(Exhibit 10.44)

10.28   Construction and Financing Agreement between the Delaware County
Industrial Development Authority and Pennsylvania Suburban Water
Company dated as of December 15, 2002 (18) (Exhibit 10.45)

10.29   2003 Annual Cash Incentive Compensation Plan* (18) (Exhibit 10.46)

10.30   2004 Annual Cash Incentive Compensation Plan*

13.1    Selected portions of Annual Report to Shareholders for the year ended
December 31, 2003 incorporated by reference in Annual Report on
Form 10-K for the year ended December 31, 2003

21.     Subsidiaries of Aqua America, Inc.

23.1    Consent of Independent Accountants - PricewaterhouseCoopers LLP

24.     Power of Attorney (set forth as a part of this report)

31.1    Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)
under the Securities and Exchange Act of 1934

31.2    Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) 
under the Securities and Exchange Act of 1934

32.1    Certification of Chief Executive Officer, pursuant to 18 U.S.C. 
Section 1350

32.2    Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350

27

Notes -
Documents Incorporated by Reference

(1)   Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1992.

(2)   Indenture of Mortgage dated as of January 1, 1941 with supplements thereto
through the Twentieth Supplemental Indenture dated as of August 1, 1983
were filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1983.

(3)   Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1988.

(4)   Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1989.

(5)   Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991.

(6)   Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1993.

(7)   Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.

(8)   Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.

(9)   Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1996.

(10)  Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.

(11)  Filed as an Exhibit to Form 8-K filed August 7, 1997.

(12)  Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.

(13)  Filed as Exhibit to Annual Report on Form 10-K for the year ended December
31, 1999.

(14)  Filed as Exhibit to Annual Report on Form 10-K for the year ended December
31, 2000.

(15)  Filed as Exhibit to Annual Report on Form 10-K for the year ended December
31, 2001.

(16)  Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002.

(17)  Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002.

(18)  Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 2002.

(19)  Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003

*Indicates management contract or compensatory plan or arrangement.

28

SIGNATURES

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

AQUA AMERICA, INC.

By   NICHOLAS DEBENEDICTIS
--------------------------
Nicholas DeBenedictis
President and Chairman

Date:  March 12, 2004

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 and on the dates indicated.

Each person in so signing also makes, constitutes and appoints Nicholas
DeBenedictis, President and Chairman of Aqua America, Inc., David P. Smeltzer,
Senior Vice President - Finance and Chief Financial Officer of Aqua America,
Inc., and each of them, his or her true and lawful attorneys-in-fact, in his or
her name, place and stead to execute and cause to be filed with the Securities
and Exchange Commission any and all amendments to this report.

29

NICHOLAS DEBENEDICTIS                    DAVID P. SMELTZER
----------------------------------       --------------------------------------
Nicholas DeBenedictis                    David P. Smeltzer
President and Chairman                   Senior Vice President - Finance and
(principal executive officer)            Chief Financial Officer
and Director

MARY C. CARROLL                          G. FRED DIBONA, JR.
----------------------------------       --------------------------------------
Mary C. Carroll                          G. Fred DiBona, Jr.
Director                                 Director

RICHARD H. GLANTON                       ALAN HIRSIG
----------------------------------       --------------------------------------
Richard H. Glanton                       Alan Hirsig
Director                                 Director

JOHN F. MCCAUGHAN                        JOHN E. MENARIO
----------------------------------       --------------------------------------
John F. McCaughan                        John E. Menario
Director                                 Director

RICHARD L. SMOOT
---------------------------------- 
Richard L. Smoot
Director

Exhibit 4.10
AQUA AMERICA, INC.

and

EQUISERVE TRUST COMPANY, N.A.

as Rights Agent

FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

Dated as of February 20, 2004

Table of Contents

SECTION 1.  CERTAIN DEFINITIONS............................................................................2

SECTION 2.  APPOINTMENT OF RIGHTS AGENT....................................................................4

SECTION 3.  ISSUE OF RIGHTS CERTIFICATES...................................................................5

SECTION 4.  FORM OF RIGHTS CERTIFICATES....................................................................6

SECTION 5.  COUNTERSIGNATURE AND REGISTRATION..............................................................7

SECTION 6.  TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; 
MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.......................................8

SECTION 7.  EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS..................................9

SECTION 8.  CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES...........................................10

SECTION 9.  RESERVATION AND AVAILABILITY OF CAPITAL STOCK; REGISTRATION OF SECURITIES.....................11

SECTION 10. CAPITAL STOCK RECORD DATE.....................................................................12

SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR NUMBER OF RIGHTS...................13

SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES....................................21

SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER..........................21

SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.......................................................24

SECTION 15. RIGHTS OF ACTION..............................................................................25

SECTION 16. AGREEMENT OF RIGHTS HOLDERS...................................................................26

SECTION 17. RIGHTS CERTIFICATE

HOLDER NOT DEEMED A SHAREHOLDER............................................26

SECTION 18. CONCERNING THE RIGHTS AGENT...................................................................27

SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.....................................27

SECTION 20. DUTIES OF RIGHTS AGENT........................................................................27

SECTION 21. CHANGE OF RIGHTS AGENT........................................................................29

SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES...........................................................30

SECTION 23. REDEMPTION AND TERMINATION....................................................................31

SECTION 24. EXCHANGE......................................................................................32

SECTION 25. NOTICE OF CERTAIN EVENTS......................................................................33

i

SECTION 26. NOTICES.......................................................................................33

SECTION 27. SUPPLEMENTS AND AMENDMENTS....................................................................34

SECTION 28. SUCCESSORS....................................................................................34

SECTION 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC.....................................35

SECTION 30. BENEFITS OF THIS AGREEMENT....................................................................35

SECTION 31. SEVERABILITY..................................................................................35

SECTION 32. GOVERNING LAW.................................................................................35

SECTION 33. COUNTERPARTS..................................................................................36

SECTION 34. DESCRIPTIVE HEADINGS..........................................................................36

EXHIBIT A   RESOLUTION OF THE BOARD OF DIRECTORS OF AQUA AMERICA, INC. 
(formerly known as PHILADELPHIA SUBURBAN CORPORATION) 
ESTABLISHING AND DESIGNATING SERIES A JUNIOR PARTICIPATING 
PREFERRED SHARES AS A SERIES OF THE PREFERRED STOCK..........................................A-1

EXHIBIT B   FORM OF RIGHTS CERTIFICATE...................................................................B-1

ii

FIRST AMENDED AND RESTATED RIGHTS AGREEMENT

FIRST AMENDED AND RESTATED RIGHTS AGREEMENT, dated as of February 20,
2004 (the "Agreement"), between AQUA AMERICA, INC., a Pennsylvania corporation
(the "Company"), and EQUISERVE TRUST COMPANY, N.A. (the "Rights Agent").

W I T N E S S E T H

WHEREAS, the Company and the Rights Agent entered into a Rights
Agreement, dated as of March 1, 1998 (the "Original Rights Agreement");

WHEREAS, on February 3, 1998 (the "Rights Dividend Declaration Date"),
the Board of Directors of the Company authorized and declared a dividend
distribution of one Right for each Common Share (as hereinafter defined) of the
Company outstanding at the close of business on March 1, 1998 (the "Record
Date") (which for these purposes included all Common Shares then entitled to
receive dividends) and authorized the issuance of one Right (as such number may
hereafter be adjusted pursuant to the provisions of Section 11(i) hereof) for
each Common Share of the Company issued between the Record Date (whether
originally issued or delivered from the Company's treasury) and the Distribution
Date (as hereinafter defined), each Right initially representing the right to
purchase one one-thousandth of a Preferred Share (as hereinafter defined) of the
Company having the rights, powers and preferences set forth in the form of the
Resolution of the Board of Directors attached hereto as Exhibit A, upon the
terms and subject to the conditions hereinafter set forth (the "Rights");

WHEREAS, on March 1, 1998, the Rights were distributed to the holders
of record of shares of Common Stock on the Record Date;

WHEREAS, the Company and the Rights Agent desire to amend and restate
the Original Rights Agreement to provide, among other things, that a majority of
the Board of Directors of the Company can redeem the Rights hereunder and, in
certain circumstances, amend this Agreement;

WHEREAS, the Rights are held by the Rights Agent as trustee for the
shareholders of the Company until the Distribution Date;

WHEREAS, the Board of Directors of the Company has considered whether
approval of this Agreement and the distribution of the Rights is in the best
interests of the Company and all other pertinent factors; and

WHEREAS, the Board of Directors of the Company has concluded that
approval of this Agreement and the distribution of the Rights is in the best
interests of the Company because the existence of the Rights will help (i)
reduce the risk of coercive two-tiered, front-end loaded or partial offers that
may not offer fair value to all shareholders, (ii) mitigate against market
accumulators who through open market and/or private purchases may achieve a
position of substantial influence or control without paying to selling or
remaining shareholders a fair control premium, (iii) deter market accumulators
who are simply interested in putting the Company into "play," (iv) restrict
self-dealing by a substantial shareholder, and (v) preserve the Board of
Directors' bargaining power and flexibility to deal with third-party acquirors,
to pursue the business strategies of the Company and to otherwise seek to
maximize values for all shareholders.

NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, and intending to be legally bound hereby, the
parties hereby agree as follows:

Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:

(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the Common Shares then outstanding, but shall
not include the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company, or any Person or entity
organized, appointed or established by the Company for or pursuant to the terms
of any such plan. Notwithstanding the foregoing, no Person shall become an
"Acquiring Person" as the result of an acquisition of Common Shares by the
Company which, by reducing the number of Common Shares outstanding, increases
the proportionate number of Common Shares beneficially owned by such Person to
20% or more of the Common Shares then outstanding; provided, however, that if a
Person shall become the Beneficial Owner of 20% or more of the then outstanding
Common Shares by reason of Common Shares purchased by the Company and shall,
after such share purchases by the Company, become the Beneficial Owner of any
additional Common Shares, then such Person shall be deemed to be an "Acquiring
Person." Notwithstanding the foregoing, if a majority of the Board of Directors
of the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently, and such Person divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an Acquiring Person, as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be an
"Acquiring Person" for purposes of this Agreement.

(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended and in effect
on the date hereof (the "Exchange Act").

(c) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:

(i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the "Beneficial
Owner" of, or to "beneficially own," (A) securities tendered pursuant to a
tender or exchange offer made by such Person or any of such Person's Affiliates
or Associates until such tendered securities are accepted for payment, purchase
or exchange, or (B) securities issuable upon exercise of Rights at any time
prior to the occurrence of a Triggering Event, or (C) securities issuable upon
exercise of Rights from and after the occurrence of a Triggering Event which
Rights were acquired by such Person or any of such Person's Affiliates or
Associates prior to the Distribution Date or pursuant to Section 3(a) or Section
22 hereof (the "Original Rights") or pursuant to Section 11(i) hereof in
connection with an adjustment made with respect to any Original Rights;

2

(ii) that such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), including without
limitation pursuant to any agreement, arrangement or understanding (whether or
not in writing); provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," any security under this
subparagraph (ii) as a result of an oral or written agreement, arrangement or
understanding to vote such security if such agreement, arrangement or
understanding: (A) arises solely from a revocable proxy given in response to a
public proxy or consent solicitation made pursuant to, and in accordance with,
the applicable provisions of the General Rules and Regulations under the
Exchange Act, and (B) is not also then reportable by such Person on Schedule 13D
under the Exchange Act (or any comparable or successor report); or

(iii) that are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which such
Person (or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for the purpose of
acquiring, holding, voting (except pursuant to a revocable proxy as described in
the proviso to subparagraph (ii) of this paragraph (c)) or disposing of any
voting securities of the Company,

provided, however, that nothing in this paragraph (c) shall cause a person
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.

(d) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of New Jersey or the
Commonwealth of Pennsylvania are authorized or obligated by law or executive
order to close.

(e) "Close of Business" on any given date shall mean 5:00
P.M., Philadelphia time, on such date; provided, however, that if such date is
not a Business Day it shall mean 5:00 P.M., Philadelphia time, on the next
succeeding Business Day.

(f) "Common Share" shall mean, when used with reference to the
Company, a share of common stock, par value $.50 per share, of the Company and,
to the extent that there are not a sufficient number of Common Shares authorized
to permit the full exercise of the Rights, shares of any other class or series
of the Company designated for such purpose containing terms substantially
similar to the terms of the Common Shares, except that "Common Share" when used
with reference to any Person other than the Company shall mean the shares of
common stock of such Person with the greatest voting power, or the equity
securities or other equity interest having power to control or direct the
management, of such Person.

3

(g) "Distribution Date" shall have the meaning set forth in
Section 3 hereof.

(h) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.

(i) "Person" shall mean any individual, firm, corporation,
partnership, limited liability company or other entity.

(j) "Preferred Share" shall mean a share of Series A Junior
Participating Preferred Shares, par value $1.00 per share, of the Company and,
to the extent that there are not a sufficient number of shares of Series A
Junior Participating Preferred Shares authorized to permit the full exercise of
the Rights, shares of any other series of Series Preferred Stock of the Company
designated for such purpose containing terms substantially similar to the terms
of the Series A Junior Participating Preferred Shares.

(k) "Preferred Share Fraction" shall mean one one-thousandth
of a Preferred Share.

(l) "Section 11(a)(ii) Event" shall mean any event described
in Section 11(a)(ii) (A), (B) or (C) hereof.

(m) "Section 13 Event" shall mean any event described in
clauses (x), (y) or (z) of Section 13(a) hereof.

(n) "Stock Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) under the Exchange
Act) by the Company or an Acquiring Person that an Acquiring Person has become
such.

(o) "Subsidiary" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.

(p) "Trading Day" shall have the meaning set forth in Section
11(d)(i) hereof.

(q) "Triggering Event" shall mean any Section 11(a)(ii) Event
or any Section 13 Event.

Unless otherwise specified, where reference is made in
this Agreement to sections of, and the General Rules and Regulations under, the
Exchange Act, such reference shall mean such sections and rules as amended from
time to time and any successor provisions thereto.

Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable, upon ten (10) days' prior written notice to the Rights
Agent. The Rights Agent shall have no duty to supervise, and in no event be
liable for, the acts or omissions of any such co-Rights Agent.

4

Section 3. Issue of Rights Certificates.

(a) Until the earlier of (i) the Close of Business on the
tenth Business Day after a Stock Acquisition Date involving an Acquiring Person
that has become such in a transaction as to which the Board of Directors has not
made the determination referred to in Section 11(a)(ii)(B) hereof, or (ii)
within ten (10) Business Days (or such later date as may be determined by action
of the Board of Directors prior to such time any Person becomes an Acquiring
Person) after the date that a tender or exchange offer by any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
plan) is first published or sent or given within the meaning of Rule 14d-2(a) of
the General Rules and Regulations under the Exchange Act, if upon consummation
thereof, such Person would be the Beneficial Owner of 20% or more of the Common
Shares then outstanding (the earlier of (i) and (ii) being herein referred to as
the "Distribution Date"), (x) beneficial interests in the Rights will be
evidenced (subject to the provisions of paragraph (b) of this Section 3) by the
certificates for the Common Shares registered in the names of the holders of the
Common Shares (which certificates for Common Shares shall be deemed also to be
certificates for beneficial interests in the Rights) and not by separate
certificates, and (y) the Rights and beneficial interests therein will be
transferable only in connection with the transfer of the underlying Common
Shares (including a transfer to the Company). The Company must promptly notify
the Rights Agent of such Distribution Date and request that its transfer agent
provide the Rights Agent with a list of the record holders of the Company's
Common Shares as of the close of business on the Distribution Date. As soon as
practicable after the Rights Agent receives such notice and list, the Rights
Agent will send by first-class, postage prepaid mail, to each record holder of
the Common Shares as of the close of business on the Distribution Date, at the
address of such holder shown on the records of the Company, one or more rights
certificates, in substantially the form of Exhibit B hereto (the "Rights
Certificates"), evidencing one Right for each Common Share so held, subject to
adjustment as provided herein. In the event that an adjustment in the number of
Rights per Common Share has been made pursuant to Section 11(p) hereof, at the
time of distribution of the Rights Certificates, the Company shall make the
necessary and appropriate rounding adjustments (in accordance with Section 14(a)
hereof) so that Rights Certificates representing only whole numbers of Rights
are distributed and cash is paid in lieu of any fractional Rights. As of and
after the Distribution Date, the Rights will be evidenced solely by such Rights
Certificates.

(b) With respect to certificates for the Common Shares
outstanding as of the Record Date, until the Distribution Date, the registered
holders of the Common Shares shall also be the registered holders of the
beneficial interests in the associated Rights. Until the earlier of the
Distribution Date or the Expiration Date (as such term is defined in Section 7
hereof), the transfer of any certificates representing Common Shares in respect
of which Rights have been issued shall also constitute the transfer of the
Rights associated with such Common Shares. Certificates issued after the Record
Date upon the transfer of Common Shares outstanding on the Record Date shall
bear the legend set forth in subsection (c).

(c) Except as provided in Section 22 hereof, Rights shall be
issued in respect of all Common Shares that are issued (whether originally
issued or delivered from the Company's treasury) after the Record Date but prior
to the earlier of the Distribution Date or the Expiration Date. Certificates
representing such Common Shares shall also be deemed to be certificates for
beneficial interests in the associated Rights, and shall bear the following
legend:

5

"This certificate also evidences a beneficial interest in and
entitles the holder hereof to certain Rights as set forth in
the First Amended and Restated Rights Agreement between Aqua
America, Inc. (the "Company") and Equiserve Trust Company,
N.A. (the "Rights Agent") dated as of February 20, 2004 (the
"Rights Agreement"), and as the same may be amended from time
to time, the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal
offices of the Company. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced
by separate certificates and beneficial interests therein will
no longer be evidenced by this certificate. The Company will
mail to the holder of this certificate a copy of the Rights
Agreement, as in effect on the date of mailing, without charge
promptly after receipt of a written request therefor. Under
certain circumstances set forth in the Rights Agreement,
Rights issued to, or held by, any Person who is, was or
becomes an Acquiring Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement),
whether currently held by or on behalf of such Person or by
any subsequent holder, may become null and void."

With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, beneficial
interests in the Rights associated with the Common Shares represented by such
certificates shall be evidenced by such certificates alone and registered
holders of Common Shares shall also be the registered holders of beneficial
interests in the associated Rights, and the transfer of any of such certificates
shall also constitute the transfer of beneficial interests in the Rights
associated with the Common Shares represented by such certificates.

Section 4. Form of Rights Certificates.

(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit B hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate (which do not affect the
duties or responsibilities of the Rights Agent) and as are not inconsistent with
the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange or the Nasdaq Stock Market on which the
Rights may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 11 and Section 22 hereof, the Rights Certificates,
whenever distributed, shall entitle the holders thereof to purchase such number
of Preferred Share Fractions as shall be set forth therein at the price set
forth therein (such exercise price per Preferred Share Fraction, the "Purchase
Price"), but the amount and type of securities purchasable upon the exercise of
each Right and the Purchase Price thereof shall be subject to adjustment as
provided herein.

6

(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights that the Company knows are beneficially
owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing oral or written plan, agreement, arrangement
or understanding regarding the transferred Rights or (B) a transfer that the
Board of Directors of the Company has determined is part of an oral or written
plan, agreement, arrangement or understanding that has as a primary purpose or
effect avoidance of Section 7(e) hereof, and provided that the Company shall
have notified the Rights Agent that this Section 4(b) applies, any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:

"The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement). Accordingly,
this Rights Certificate and the Rights represented hereby may
become null and void in the circumstances specified in Section
7(e) of such Agreement."

Section 5. Countersignature and Registration.

(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be manually countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned. In case
any officer of the Company who shall have signed any of the Rights Certificates
shall cease to be such officer of the Company before countersignature by the
Rights Agent and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the Person who signed
such Rights Certificates had not ceased to be such officer of the Company; and
any Rights Certificates may be signed on behalf of the Company by any Person
who, at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Agreement any such Person was not such an officer.

(b) Following the Distribution Date and upon receipt by the
Rights Agent of the notice and list of recordholders of the Rights referred to
in Section 3(a), the Rights Agent will keep or cause to be kept, at its office
or offices designated pursuant to Section 25 hereof, books for registration and
transfer of the Rights Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Rights Certificates, the
number of Rights evidenced on its face by each of the Rights Certificates, the
Certificate number and the date of each of the Rights Certificates.

7

Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.

(a) Subject to the provisions of Section 4(b), Section 7(e)
and Section 14 hereof, at any time after the Close of Business on the
Distribution Date, and at or prior to the Close of Business on the Expiration
Date, any Rights Certificate or Certificates may be transferred, split up,
combined or exchanged for another Rights Certificate or Certificates, entitling
the registered holder to purchase a like number of Preferred Share Fractions
(or, following a Triggering Event, Common Shares or other securities, cash or
other assets, as the case may be), as the Rights Certificate or Certificates
surrendered then entitled such holder or former holder in the case of a transfer
to purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Rights Certificate or Certificates shall make such request in
writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Certificates to be transferred, split up, combined or exchanged
at the office of the Rights Agent designated for such purpose. Neither the
Rights Agent nor the Company shall be obligated to take any action whatsoever
with respect to the transfer of any such surrendered Rights Certificate or
Certificates until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company or the Rights Agent shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and
Section 14 hereof, countersign and deliver to the Person entitled thereto a
Rights Certificate or Rights Certificates, as the case may be, as so requested.
The Rights Agent shall not be obligated to process the transaction until it has
received evidence that all taxes and charges arising from the transaction have
been paid. The Company may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Rights Certificates.

(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.

Section 7. Exercise of Rights; Purchase Price; Expiration Date of 
Rights.

(a) Subject to subsection (e), the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the office of the Rights Agent designated for such purpose, together with

8

payment of the aggregate Purchase Price (except as provided in Section 11(q)
hereof) with respect to the total number of Preferred Share Fractions (or Common
Shares, other securities, cash or other assets, as the case may be) as to which
such surrendered Rights are then exercisable (except as provided in Section
11(q) hereof), at or prior to the earliest of (i) the Close of Business on March
1, 2008 (the "Final Expiration Date"), (ii) the consummation of a transaction
contemplated by Section 13(d) hereof, or (iii) the time at which the Rights are
redeemed or terminated as provided in Section 23 hereof (the earliest of (i),
(ii) and (iii) being herein referred to as the "Expiration Date").

(b) The "Purchase Price" for each Preferred Share Fraction
pursuant to the exercise of a Right shall initially be $46.08 (which amount
represents the purchase price of $90 set forth in the Original Rights Agreement,
adjusted for stock splits occurring between the date of the Original Rights
Agreement and the date hereof), and shall be subject to adjustment from time to
time as provided in Sections 11 and 13(a) hereof and shall be payable in
accordance with subsection (c).

(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per Preferred Share Fraction (or Common Shares, other
securities, cash or other assets, as the case may be) to be purchased as set
forth below and an amount equal to any applicable tax or governmental charge,
the Rights Agent shall, subject to Section 20(k) and Section 14(b) hereof,
thereupon promptly (i) (A) requisition from any transfer agent of the Preferred
Shares (or make available, if the Rights Agent is the transfer agent for the
Common Shares) certificates for the total number of Preferred Shares to be
purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) if the Company shall have elected to
deposit some or all of the total number of Preferred Shares issuable upon
exercise of the Rights hereunder with a depositary agent, requisition from the
depositary agent depositary receipts representing such number of Preferred Share
Fractions as are to be purchased (in which case certificates for the Preferred
Shares represented by such receipts shall be deposited by the transfer agent
with the depositary agent) and the Company will direct the depositary agent to
comply with such request, (ii) requisition from the Company the amount of cash,
if any, to be paid in lieu of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder, and (iv) after receipt thereof, deliver such cash, if any, to or
upon the order of the registered holder of such Rights Certificate. The payment
of the Purchase Price (as such amount may be reduced pursuant to Section
11(a)(iii) hereof) may be made, at the election of the holder of the Rights
Certificate, (x) in cash or by certified bank check or money order payable to
the order of the Company or (y) by delivery of Rights if and to the extent
authorized by Section 11(q) hereof. In the event that the Company is obligated
to issue other securities of the Company (including Common Shares) pay cash
and/or distribute other property pursuant to Section 11(a) hereof, the Company
will make all arrangements necessary so that such other securities, cash and/or
other property are available for distribution by the Rights Agent, if and when
necessary to comply with this agreement.

9

(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of Section 6 and
Section 14 hereof.

(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such, or (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person becoming such and receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person to holders of equity interests in such Acquiring Person or to any Person
with whom the Acquiring Person has any continuing oral or written plan,
agreement, arrangement or understanding regarding the transferred Rights or (B)
a transfer which the Board of Directors of the Company has determined is part of
an oral or written plan, agreement, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise; provided, however, that the Rights held by an
Acquiring Person, an Affiliate or Associate of an Acquiring Person or the
transferees of such persons referred to above shall not be voided unless the
Acquiring Person in question or an Affiliate or Associate of such Acquiring
Person shall be involved in the transaction giving rise to the Section 11(a)(ii)
Event. The Company shall notify the Rights Agent when this Section 7(e) applies
and shall use all reasonable efforts to insure that the provisions of this
Section 7(e) and Section 4(b) hereof are complied with, but neither the Company
nor the Rights Agent shall have any liability to any holder of Rights
Certificates or other Person as a result of the Company's failure to make any
determinations with respect to an Acquiring Person or its Affiliates, Associates
or transferees hereunder.

(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) properly completed and signed the certificate contained in
the form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall or the Rights Agent
reasonably request.

Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Rights Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.

10

Section 9. Reservation and Availability of Capital Stock; Registration
of Securities.

(a) The Company covenants and agrees that it will cause to be
reserved and kept available for issuance upon the exercise of outstanding Rights
as many of its authorized and unissued Preferred Shares (and, following the
occurrence of a Triggering Event, out of its authorized and unissued or treasury
Common Shares and/or other securities) or out of its authorized and issued
shares held in its treasury, which together, shall at all times after the
Distribution Date be sufficient to permit the exercise in full of all
outstanding Rights.

(b) So long as the Preferred Shares (and, following the
occurrence of a Triggering Event, Common Shares or other securities) issuable
and deliverable upon the exercise of the Rights may be listed on any stock
exchange, or quoted on the Nasdaq Stock Market, the Company shall use its best
efforts to cause, from and after such time as the Rights become exercisable, all
shares and other securities reserved for such issuance to be listed on such
exchange upon official notice of issuance upon such exercise.

(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as is required by law following the
Distribution Date, as the case may be, a registration statement or statements
under the Securities Act of 1933, as amended (the "Act"), with respect to the
securities purchasable upon exercise of the Rights on an appropriate form or
forms, (ii) cause such registration statement or statements to become effective
as soon as practicable after such filing, and (iii) cause such registration
statement or statements to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the
Expiration Date. The Company will also take such action as may be appropriate
under, or to ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the Rights. The Company
may temporarily suspend, for a period of time not to exceed ninety (90) days
after the date set forth in clause (i) of the first sentence of this subsection
(c), the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. In addition,
if the Company shall determine that a registration statement is required
following the Distribution Date, the Company may, by issuing a public
announcement, temporarily suspend the exercisability of the Rights until such
time as a registration statement has been declared effective. The Company shall
notify the Rights Agent whenever it makes a public announcement pursuant to this
subsection (c) and give the Rights Agent a copy of the announcement.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained, nor shall the Rights be
exercisable if the exercise thereof shall not be permitted under applicable law
or a registration statement shall not have been declared effective.

11

(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all Preferred Shares (and,
following a Triggering Event, Common Shares or other securities) delivered upon
exercise of Rights shall, at the time of delivery of the certificates for such
shares or other securities (subject to payment of the Purchase Price), be duly
and validly authorized and issued and, with respect to Preferred Shares, Common
Shares or other shares of capital stock, fully paid and nonassessable.

(e) The Company further covenants and agrees that it will pay
when due and payable any and all taxes and governmental charges that may be
payable in respect of the issuance or delivery of the Rights Certificates and of
any certificates for a number of Preferred Share Fractions (or Common Shares or
other securities, as the case may be) upon the exercise of Rights. The Company
shall not, however, be required to pay any transfer tax that may be payable in
respect of any transfer or delivery of Rights Certificates to a Person other
than, or the issuance or delivery of a number of Preferred Share Fractions (or
Common Shares or other securities, as the case may be) in respect of a name
other than that of the registered holder of the Rights Certificates evidencing
Rights surrendered for exercise or to issue or deliver any certificates for a
number of Preferred Share Fractions (or Common Shares or other securities, as
the case may be) in a name other than that of the registered holder upon the
exercise of any Rights until such tax shall have been paid (any such tax being
payable by the holder of such Rights Certificate at the time of surrender) or
until it has been established to the Company's satisfaction that no such tax is
due.

Section 10. Capital Stock Record Date. Each Person in whose name any
certificate for a number of Preferred Share Fractions (or Common Shares or other
securities, as the case may be) is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of such Preferred
Share Fractions (or Common Shares or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of the Purchase Price (and all applicable taxes and governmental charges) was
made; provided, however, that if the date of such surrender and payment is a
date upon which the applicable transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such shares
(fractional or otherwise) on, and such certificate shall be dated, the next
succeeding Business Day on which the applicable transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate shall not be entitled to any rights of a shareholder of the
Company with respect to shares for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.

Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares and other
securities covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.

12

(a) (i) In the event the Company shall at any time after the date of 
this Agreement (A) declare a dividend on any security of the Company payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of shares, or (D) issue
any shares of its capital stock in a reclassification of the Preferred Shares
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), except
as otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and the
number and kind of Preferred Shares or capital stock, as the case may be,
issuable on such date, shall be proportionately adjusted so that the holder of
any Right exercised after such time shall be entitled to receive, upon payment
of the adjusted Purchase Price, the aggregate number and kind of Preferred
Shares or capital stock, as the case may be, that, if such Right had been
exercised immediately prior to such date and at a time when the Preferred Share
transfer books were open, such holder would have owned upon such exercise and
been entitled to receive by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would require an adjustment under
both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided
for in this Section 11(a)(i) shall be in addition to, and shall be made prior
to, any adjustment required pursuant to Section 11(a)(ii) hereof.

(ii) In the event:

(A) any Acquiring Person or any Associate or Affiliate of any
Acquiring Person, at any time after the Stock Acquisition Date, directly or
indirectly, (1) shall merge into the Company or otherwise combine with the
Company and the Company shall be the continuing or surviving corporation of such
merger or combination and the Common Shares of the Company or other equity
securities of the Company shall remain outstanding, (2) shall, in one
transaction or a series of transactions, transfer any assets to the Company or
to any of its Subsidiaries in exchange (in whole or in part) for Common Shares,
for shares of other equity securities of the Company, or for securities
exercisable for or convertible into shares of equity securities of the Company
(Common Shares or otherwise) or otherwise obtain from the Company, with or
without consideration, any additional shares of such equity securities or
securities exercisable for or convertible into shares of such equity securities
(other than pursuant to a pro rata distribution to all holders of Common
Shares), (3) shall sell, purchase, lease, exchange, mortgage, pledge, transfer
or otherwise acquire or dispose of assets in one transaction or a series of
transactions, to, from or with (as the case may be) the Company or any of its
Subsidiaries, on terms and conditions less favorable to the Company than the
Company would be able to obtain in arm's-length negotiation with an unaffiliated
third party, other than pursuant to a Section 13 Event, (4) shall sell,
purchase, lease, exchange, mortgage, pledge, transfer or otherwise dispose of
assets having an aggregate fair market value of more than $5,000,000 in one
transaction or a series of transactions, to, from or with (as the case may be)
the Company or any of the Company's Subsidiaries (other than incidental to the
lines of business, if any, engaged in as of the date hereof between the Company
and such Acquiring Person or Associate or Affiliate), other than pursuant to a
Section 13 Event, (5) shall receive any compensation from the Company or any of
the Company's Subsidiaries other than compensation for full-time employment as a
regular employee at rates in accordance with the Company's (or its
Subsidiaries') past practices, or (6) shall receive the benefit, directly or
indirectly (except proportionately as a shareholder and except if resulting from
a requirement of law or governmental regulation), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or other
tax advantages provided by the Company or any of its Subsidiaries; or

13

(B) any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, or any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan), alone or together with
its Affiliates and Associates, shall, at any time after the Rights Dividend
Declaration Date, become the Beneficial Owner of 20% or more of the Common
Shares then outstanding, unless the event causing the 20% threshold to be
crossed is a Section 13 Event, or is an acquisition of Common Shares pursuant to
a tender offer or an exchange offer for all outstanding Common Shares at a price
and on terms determined by at least a majority of the Board of Directors of the
Company, after receiving advice from one or more nationally recognized
investment banking firms, to be in the best interests of the Company and its
shareholders (a "Qualifying Offer"), after taking into consideration all factors
that such members of the Board of Directors deem relevant, including, without
limitation, the long-term prospects and value of the Company and the prices and
terms that such members of the Board of Directors believe, in good faith, could
reasonably be achieved if the Company or its assets were sold on an orderly
basis designed to realize maximum value, or

(C) during such time as there is an Acquiring Person, there
shall be any reclassification of securities (including any reverse stock split),
or recapitalization of the Company, or any merger or consolidation of the
Company with any of its Subsidiaries or any other transaction or series of
transactions involving the Company or any of its Subsidiaries, other than a
Section 13 Event or series of such Section 13 Events (whether or not with or
into or otherwise involving an Acquiring Person) that has the effect, directly
or indirectly, of increasing by more than 1% the proportionate share of the
outstanding shares of any class of equity securities of the Company or any of
its Subsidiaries that is directly or indirectly beneficially owned by any
Acquiring Person or any Associate or Affiliate of any Acquiring Person,

then, promptly following the first occurrence of a Section 11(a)(ii) Event,
proper provision shall be made so that each holder of a Right (except as
provided below and in Section 7(e) hereof) shall thereafter have the right to
receive, upon exercise thereof at the then current Purchase Price in accordance
with the terms of this Agreement, in lieu of a number of Preferred Share
Fractions, such number of Common Shares of the Company as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the then number
of Preferred Share Fractions for which a Right was exercisable immediately prior
to the first occurrence of a Section 11(a)(ii) Event, and (y) dividing that
product (which, following such first occurrence, shall thereafter be referred to
as the "Purchase Price" for each Right and for all purposes of this Agreement)
by 50% of the current market price (as defined in and determined pursuant to
Section 11(d) hereof) per Common Share on the date of such first occurrence
(such number of shares, the "Adjustment Shares").

14

(iii) In the event that the number of Common Shares that are 
authorized by the Company's Articles of Incorporation but not outstanding or
reserved for issuance for purposes other than upon exercise of the Rights are
not sufficient to permit the exercise in full of the Rights in accordance with
the foregoing subparagraph (ii) of this Section 11(a), the Company shall: (A)
determine the excess of the value of the Adjustment Shares issuable upon the
exercise of a Right (the "Current Value") over the Purchase Price (such excess,
the "Spread"), and (B) with respect to each Right, make adequate provision to
substitute for the Adjustment Shares, upon payment of the applicable Purchase
Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares of the
same or a different class or other equity securities of the Company (including,
without limitation, preferred shares or units of preferred shares that a
majority of the Board of Directors of the Company has deemed (based, among other
things, on the dividend and liquidation rights of such preferred shares) to have
substantially the same economic value as Common Shares (such preferred shares,
hereinafter referred to as "common share equivalents")), (4) debt securities of
the Company, (5) other assets, or (6) any combination of the foregoing, having
an aggregate value equal to the Current Value, where such aggregate value has
been determined by a majority of the Board of Directors of the Company after
considering the advice of a nationally recognized investment banking firm
selected by the Board of Directors of the Company; provided, however, if the
Company shall not have made adequate provision to deliver value pursuant to
clause (B) above within thirty (30) days following the later of (x) the first
occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company's
right of redemption pursuant to Section 23(a) expires (the later of (x) and (y)
being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise of a
Right and without requiring payment of the Purchase Price, Common Shares (to the
extent available) and then, if necessary, cash, which shares and/or cash have an
aggregate value equal to the Spread. If the Board of Directors of the Company
shall determine in good faith that it is likely that sufficient additional
Common Shares could be authorized for issuance upon exercise in full of the
Rights, the thirty (30) day period set forth above may be extended to the extent
necessary, but not more than ninety (90) days after the Section 11(a)(ii)
Trigger Date, in order that the Company may seek shareholder approval for the
authorization of such additional shares (such period, as it may be extended, the
"Substitution Period"). To the extent that the Company determines that some
action need be taken pursuant to the first and/or second sentences of this
Section 11(a)(iii), the Company shall provide, subject to Section 7(e) hereof,
that such action shall apply uniformly to all outstanding Rights, and may
suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares
and/or to decide the appropriate form of distribution to be made pursuant to
such first sentence and to determine the value thereof. The Company shall make a
public announcement when the exercisability of the Rights has been temporarily
suspended, and again when such suspension is no longer in effect. The Company
shall notify the Rights Agent of the suspension of the exercisability of the
Rights, and provide the Rights Agent with a copy of such public announcement.
For purposes of this Section 11(a)(iii), the value of the Common Shares shall be
the current market price (as determined pursuant to Section 11(d) hereof) per
Common Share on the Section 11(a)(ii) Trigger Date and the value of any "common
share equivalent" shall be deemed to have the same value as the Common Shares on
such date.

(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to holders of any security of the
Company entitling them to subscribe for or purchase (for a period expiring
within forty-five (45) calendar days after such record date) Preferred Shares
(or shares having the same rights, privileges and preferences as the Preferred
Shares ("equivalent preferred shares")) or securities convertible into Preferred
Shares or equivalent preferred shares at a price per Preferred Share or per

15

equivalent preferred share (or having a conversion price per share, if a
security convertible into Preferred Shares or equivalent preferred shares) less
than the current market price (as determined pursuant to Section 11(d) hereof)
per Preferred Share on such record date, the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of Preferred Shares outstanding on such record date,
plus the number of Preferred Shares that the aggregate offering price of the
total number of Preferred Shares and/or equivalent preferred shares so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and
the denominator of which shall be the number of Preferred Shares outstanding on
such record date, plus the number of additional Preferred Shares and/or
equivalent preferred shares to be offered for subscription or purchase (or into
which the convertible securities so to be offered are initially convertible). In
case such subscription price may be paid by delivery of consideration part or
all of which may be in a form other than cash, the value of such consideration
shall be as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent and shall be binding on the Company, the Rights Agent and the holders of
the Rights. Preferred Shares owned by or held for the account of the Company
shall not be deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is fixed, and
in the event that such rights or warrants are not so issued, the Purchase Price
shall be adjusted to be the Purchase Price that would then be in effect if such
record date had not been fixed.

(c) In case the Company shall fix a record date for a
distribution to all holders of Preferred Shares (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness, cash (other than a regular
quarterly dividend out of the earnings or retained earnings of the Company),
assets (other than a regular quarterly dividend referred to above or dividend
payable in Preferred Shares, but including any dividend payable in stock other
than Preferred Shares) or subscription rights or warrants (excluding those
referred to in Section 11(b) hereof), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the current market price (as determined pursuant to Section 11(d)
hereof) per Preferred Share on such record date, less the then fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes) of the portion of the cash, assets or
evidences of indebtedness so to be distributed or of such subscription rights or
warrants applicable to a Preferred Share and the denominator of which shall be
such current market price (as determined pursuant to Section 11(d) hereof) per
Preferred Share. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall be adjusted to be the Purchase Price which would have
been in effect if such record date had not been fixed.

16

(d) (i) For the purpose of any computation hereunder, other
than computations made pursuant to Section 11(a)(iii) hereof, the "current
market price" per Common Share on any date shall be deemed to be the average of
the daily closing prices per Common Share for the thirty (30) consecutive
Trading Days (as such term is hereinafter defined) immediately prior to and not
including such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "current market price" per Common Share on any date shall
be deemed to be the average of the daily closing prices per Common Share for the
ten (10) consecutive Trading Days immediately following and not including such
date; provided, however, that in the event that the current market price per
Common Share is determined during a period following the announcement by the
issuer of such Common Share of (A) a dividend or distribution on such Common
Share payable in Common Shares or securities convertible into Common Shares
(other than the Rights), or (B) any subdivision, combination or reclassification
of such Common Shares, and prior to the expiration of the requisite thirty (30)
Trading Day or ten (10) Trading Day period, as set forth above, after the
ex-dividend date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such case, the
"current market price" shall be properly adjusted to take into account
ex-dividend trading. The closing price for each Trading Day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Shares are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Common Shares are listed or admitted to trading or, if the Common
Shares are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("Nasdaq") or such other system then in use, or, if on any such date the Common
Shares are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Common Shares selected by the Board of Directors of the Company. If on any
such date no market maker is making a market in the Common Shares, the fair
value of such shares on such date as determined in good faith by the Board of
Directors of the Company shall be used. The term "Trading Day" shall mean a day
on which the principal national securities exchange on which the Common Shares
are listed or admitted to trading is open for the transaction of business or, if
the Common Shares are not listed or admitted to trading on any national
securities exchange, a Business Day. If the Common Shares are not publicly held
or not so listed or traded, "current market price" per share shall mean the fair
value per share as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes.

(ii) For the purpose of any computation hereunder, the
"current market price" per Preferred Share shall be determined in the same
manner as set forth above for the Common Shares in clause (i) of this Section
11(d) (other than the last sentence thereof). If the current market price per
Preferred Share cannot be determined in the manner provided above or if the
Preferred Shares are not publicly held or listed or traded in a manner described
in clause (i) of this Section 11(d), the "current market price" per Preferred
Share shall be conclusively deemed to be an amount equal to one hundred (as such
number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalizations with respect to the Common Shares occurring
after the date of this Agreement) multiplied by the current market price per
Common Share. If neither the Common Shares nor the Preferred Shares are publicly
held or so listed or traded, "current market price" per Preferred Share shall
mean the fair value per share as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes. For all
purposes of this Agreement, the "current market price" of a Preferred Share
Fraction shall be equal to the "current market price" of one Preferred Share
divided by 1000.

17

(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest ten-thousandth of a Common
Share or one millionth of a Preferred Share, as the case may be. Notwithstanding
the first sentence of this subsection (e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three (3) years from
the date of the transaction that mandates such adjustment, or (ii) the
Expiration Date.

(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock other than
Preferred Shares, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Shares contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k), (m) and (q), and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Shares shall apply on like terms to any such other shares.

(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Preferred Share
Fractions purchasable from time to time hereunder upon exercise of the Rights,
all subject to further adjustment as provided herein.

(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in subsections (b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
Preferred Share Fractions (calculated to the nearest one-one millionth of a
Preferred Share) obtained by (i) multiplying (x) the number of Preferred Share
Fractions covered by a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.

(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of Preferred Share Fractions purchasable upon the
exercise of a Right. Each of the Rights outstanding after the adjustment in the
number of Rights shall be exercisable for the number of Preferred Share
Fractions for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest one-one
millionth of a Preferred Share) obtained by dividing the Purchase Price in
effect immediately prior to adjustment of the Purchase Price by the Purchase
Price in effect immediately after adjustment of the Purchase Price. The Company
shall make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. The Company shall forward a copy of such
public announcement to the Rights Agent. The record date for the adjustment may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Rights Certificates have been issued, shall be at least ten (10) days
later than the date of the public announcement. If Rights Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.

18

(j) Irrespective of any adjustment or change in the Purchase
Price or the number of Preferred Share Fractions issuable upon the exercise of
the Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per Preferred Share Fraction and the
number of Preferred Share Fractions that were expressed in the initial Rights
Certificates issued hereunder.

(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then stated or par value, if any, of the
number of Preferred Share Fractions issuable upon exercise of the Rights, the
Company shall take any corporate action that may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue such number
of fully paid and nonassessable Preferred Share Fractions at such adjusted
Purchase Price.

(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of Preferred Share Fractions and other capital stock or securities of
the Company, if any, issuable upon such exercise over and above the number of
Preferred Share Fractions and other capital stock or securities of the Company,
if any, issuable upon such exercise on the basis of the Purchase Price in effect
prior to such adjustment; provided, however, that the Company shall deliver to
such holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares (fractional or otherwise) or securities
upon the occurrence of the event requiring such adjustment, and the Company
shall also deliver a copy of such bill or instrument to the Rights Agent.

(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any (i)
consolidation or subdivision of the Preferred Shares, (ii) issuance wholly for
cash of any Preferred Shares at less than the current market price, (iii)
issuance wholly for cash for Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, (iv) stock dividends
or (v) issuance of rights, options or warrants referred to in this Section 11,
hereafter made by the Company to holders of its Preferred Shares shall not be
taxable to such shareholders.

19

(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof), or
(iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other person or persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect that would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the shareholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.

(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 27
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by the
Rights.

(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after the
Rights Dividend Declaration Date and prior to the Distribution Date (i) declare
a dividend on the outstanding Common Shares payable in Common Shares, (ii)
subdivide the outstanding Common Shares, or (iii) combine the outstanding Common
Shares into a smaller number of shares, the number of Rights associated with
each Common Share then outstanding, or issued or delivered thereafter but prior
to the Distribution Date, shall be proportionately adjusted so that the number
of Rights thereafter associated with each Common Share following any such event
shall equal the result obtained by multiplying the number of Rights associated
with each Common Share immediately prior to such event by a fraction the
numerator of which shall be the total number of Common Shares outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of Common Shares outstanding immediately following the
occurrence of such event.

(q) In the event that the Rights become exercisable following
a Section 11(a)(ii) Event, the Company, by action of a majority of the Board of
Directors of the Company, may authorize that the Rights, subject to Section 7(e)
hereof, either (i) will only be, or (ii) may, at the option of the holder
entitled to exercise the Rights be, exercisable for, in either case 50% of the
Common Shares (or cash or other securities or assets to be substituted for the
Adjustment Shares pursuant to subsection (a)(iii)) that would otherwise be
purchasable under subsection (a), in consideration of the surrender to the
Company of the Rights so exercised and without other payment of the Purchase
Price. Rights exercised under this subsection (q) shall be deemed to have been
exercised in full and shall be canceled.

20

Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief, reasonably detailed statement of the facts and
computations accounting for such adjustment, (b) promptly file with the Rights
Agent, and with each transfer agent for the Preferred Shares and the Common
Shares, a copy of such certificate, and (c) mail a brief summary thereof to each
holder of a Rights Certificate (or, if prior to the Distribution Date, to each
holder of a certificate representing Common Shares) in accordance with Section
25 hereof. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained and shall have no duty with
respect to and shall not be deemed to have knowledge of any such adjustment
unless and until it shall have received such a certificate.

Section 13. Consolidation, Merger or Sale or Transfer of Assets or 
Earning Power.

(a) In the event that, following the Stock Acquisition Date,
directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), and the Company shall not
be the continuing or surviving corporation of such consolidation or merger, (y)
any person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof) shall consolidate with, or merge with or
into, the Company, and the Company shall be the continuing or surviving
corporation of such consolidation or merger and, in connection with such
consolidation or merger, all or part of the outstanding Common Shares shall be
changed into or exchanged for stock or other securities of any other Person or
cash or any other property, or (z) the Company shall sell or otherwise transfer
(or one or more of its Subsidiaries shall sell or otherwise transfer), in one
transaction or a series of related transactions, assets or earning power
aggregating more than 50% of the assets, operating income, cash flow or earning
power of the Company and its Subsidiaries (taken as a whole) to any Person or
Persons (other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof), then, and in
each such case and except as contemplated by subsection (d), proper provision
shall be made so that:

(i) each holder of a Right, except as provided in Section 7(e)
hereof or subsection (e), shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, such number of validly authorized and issued, fully paid, non
assessable and freely tradeable Common Shares of the Principal Party (as such
term is hereinafter defined), not subject to any liens, encumbrances, rights of
first refusal or other adverse claims, as shall be equal to the result obtained
by (1) multiplying the then current Purchase Price by the number of Preferred
Share Fractions for which a Right is exercisable immediately prior to the first
occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred
prior to the first occurrence of a Section 13 Event, multiplying the number of
such shares for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect
immediately prior to such first occurrence), and (2) dividing that product
(which, following the first occurrence of a Section 13 Event, shall be referred
to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to Section
11(d)(i) hereof) per Common Share of such Principal Party on the date of
consummation of such Section 13 Event;

21

(ii) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such Section 13 Event, all the obligations and duties
of the Company pursuant to this Agreement;

(iii) the term "Company" shall thereafter be deemed to refer
to such Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event;

(iv) such Principal Party shall take such steps (including,
but not limited to, the reservation of a sufficient number of its Common Shares)
in connection with the consummation of any such transaction as may be necessary
to assure that the provisions hereof shall thereafter be applicable, as nearly
as reasonably may be, in relation to its Common Shares thereafter deliverable
upon the exercise of the Rights; and

(v) the provisions of Section 11(a)(ii) hereof shall be of no
effect following the first occurrence of any Section 13 Event.

(b) "Principal Party" shall mean

(i) in the case of any transaction described in clause (x) or
(y) of the first sentence of subsection (a), the Person that is the issuer of
any securities into which Common Shares of the Company are converted in such
merger or consolidation, and if no securities are so issued, the Person that is
the other party to such merger or consolidation; and

(ii) in the case of any transaction described in clause (z) of
the first sentence of subsection (a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions;

provided, however, that in the case of either (i) or (ii) above, (1) if the
Common Shares of such Person are not at such time and have not been continuously
over the preceding twelve (12) month period registered under Section 12 of the
Exchange Act, and such Person is a direct or indirect Subsidiary of another
Person the Common Shares of which are and have been so registered, "Principal
Party" shall refer to such other Person, and (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common Shares
of two or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Shares having the
greatest aggregate market value.

(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Shares that have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior thereto the Company and such Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 and further providing that, as soon as practicable after the date of
any Section 13 event, the Principal Party will

22

(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon exercise of the
Rights on an appropriate form, and will use its best efforts to cause such
registration statement to (A) become effective as soon as practicable after such
filing and (B) remain effective (with a prospectus at all times meeting the
requirements of the Act) until the Expiration Date;

(ii) use its best efforts to qualify or register the Rights
and the securities purchasable upon exercise of the Rights under blue sky laws
of such jurisdiction, as may be necessary or appropriate; and

(iii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates that comply in all
respects with the requirements for registration on Form 10 under the Exchange
Act. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. In the event that a
Section 13 Event shall occur at any time after the occurrence of a Section
11(a)(ii) Event, the Rights that have not theretofore been exercised shall
thereafter become exercisable solely in the manner described in Section 13(a).

(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 (other than this subsection (d)) shall not be applicable
to, and the term "Section 13 Event" shall not include, a transaction described
in subparagraphs (x) and (y) of Section 13(a) if (i) such transaction is
consummated with a Person, or Persons who acquired Common Shares pursuant to a
Qualifying Offer (or a wholly owned Subsidiary of any such Person or Persons),
(ii) the price per Common Share offered in such transaction is not less than the
price per Common Share paid to all holders of Common Shares whose shares were
purchased pursuant to such tender offer or exchange offer and (iii) the form of
consideration being offered to the remaining holders of Common Shares pursuant
to such transaction is the same as the form of consideration paid pursuant to
such tender or exchange offer. Upon consummation of any such transaction
contemplated by this subsection (d), all Rights hereunder shall expire.

(e) In the event that the Rights become exercisable under
subsection (a) (except as provided in subsection (d)), the Company, by action of
a majority of the Board of Directors of the Company, may authorize that the
Rights either (i) will only be or (ii) may, at the option of the Principal Party
be, exercisable for, 50% of the Common Shares of the Principal Party that would
otherwise be purchasable under subsection (a), in consideration of the surrender
to the Principal Party, as the successor to the Company under subsection (a)
(ii), of the Rights so exercised and without other payment of the Purchase
Price. Rights exercised under this subsection (e) shall be deemed to have been
exercised in full and shall be canceled.

23

Section 14. Fractional Rights and Fractional Shares.

(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates that evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders of
the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For purposes of this subsection (a), the
current market value of a whole Right shall be the closing price of the Rights
for the Trading Day immediately prior to the date on which such fractional
Rights would have been otherwise issuable. The closing price of the Rights for
any day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading, or if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by Nasdaq or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights the fair value of the
Rights on such date as determined in good faith by the Board of Directors of the
Company shall be used.

(b) The Company shall not be required to issue fractions of
Preferred Shares upon exercise of the Rights or to distribute certificates which
evidence fractional Preferred Shares, except in each case for fractions which
are integral multiples of Preferred Shares. In lieu of fractional Preferred
Shares that are not integral multiples of Preferred Shares, the Company may pay
to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of a Preferred Share. For purposes of this subsection (b),
the current market value of one Preferred Share shall be the closing price of a
Preferred Share (as determined pursuant to Section 11(d)(ii) hereof) for the
Trading Day immediately prior to the date of such exercise.

(c) Following the occurrence of a Triggering Event, the
Company shall not be required to issue fractions of Common Shares upon exercise
of the Rights or to distribute certificates that evidence fractional Common
Shares. In lieu of fractional Common Shares, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one Common Share. For purposes of this subsection (c), the
current market value of one Common Share shall be the closing price of one
Common Share (as determined pursuant to Section 11(d)(i) hereof) for the Trading
Day immediately prior to the date of such exercise.

(d) Whenever a payment for fractional Rights or fractional
shares is to be made by the Rights Agent, the Company shall (i) promptly prepare
and deliver to the Rights Agent a certificate setting forth in reasonable detail
the facts related to such payment and the process and/or formulas utilized in
calculating such payments, and (ii) provide sufficient monies to the Rights
Agent in the form of fully collected funds to make such payments. The Rights
Agent shall be fully protected in relying on such certificate and shall have no
duty with respect to and shall not be deemed to have knowledge of any payment
for fractional Rights or fractional shares under this Section 4 unless and until
it shall have received such a certificate and sufficient monies.

24

(e) The holder of a Right or a beneficial interest in a Right
by the acceptance thereof expressly waives his right to receive any fractional
Rights or any fractional Common Shares upon exercise of a Right, except as
permitted by this Section 14.

Section 15. Rights of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights or beneficial interests
therein, it is specifically acknowledged that the holders of Rights or
beneficial interests therein would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.

Section 16. Agreement of Rights Holders. Every holder of a Right or a
beneficial interest in a Right by accepting the same consents and agrees with
the Company and the Rights Agent and with every other such holder that:

(a) prior to the Distribution Date, beneficial interests in
the Rights will be transferable only in connection with the transfer of Common
Shares;

(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purposes, duly endorsed or
accompanied by a proper instrument of transfer and with the appropriate forms
and certificates fully executed;

(c) subject to Section 6(a) and Section 7(f) hereof, the
Company and the Rights Agent may deem and treat the Person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated Common
Share certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Share certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent shall be required to be affected by any
notice to the contrary; and

25

(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or a beneficial interest in a Right or other Person as a
result of its inability to perform any of its obligations under this Agreement
by reason of any preliminary or permanent injunction or other order, decree,
judgment or ruling (whether interlocutory or final) issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree, judgment or ruling lifted or otherwise
overturned as soon as possible.

Section 17. Rights Certificate Holder Not Deemed a Shareholder. No 
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of Preferred
Share Fractions or any other securities of the Company (including the Common
Shares) that may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in any Rights
Certificate be construed to confer upon the holder of any Rights Certificate, as
such, any of the rights of a shareholder of the Company or any right to vote for
the election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in Section 24 hereof), or to receive dividends or subscription rights,
or otherwise, until the Right or Rights evidenced by such Rights Certificate
shall have been exercised in accordance with the provisions hereof.

Section 18. Concerning the Rights Agent.

(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the preparation, execution,
delivery, amendment, administration and execution of this Agreement and the
exercise and performance of its duties hereunder. The Company also agrees to
indemnify the Rights Agent and its directors, officers, employees and agents,
for and to hold each of them harmless against, any loss, liability, damage,
judgment, fine, penalty, claim, demand, settlement, cost or expense, incurred
without gross negligence, bad faith or willful misconduct on the part of the
Rights Agent or any such indemnified party, for any action taken, suffered or
omitted by the Rights Agent in connection with the acceptance or administration
of this Agreement or the exercise of its duties hereunder, including without
limitation the costs and expenses of defending against any claim of liability in
the premises.

(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with the acceptance and administration of this Agreement or in the
exercise of its duties hereunder in reliance upon any Rights Certificate or
certificate for Common Shares or for other securities of the Company, instrument
of assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons.

26

Section 19. Merger or Consolidation or Change of Name of Rights Agent.

(a) Any Person into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any Person
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any Person succeeding to the
shareholder services or stock transfer business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto; provided, however, that such Person would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof.

(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.

Section 20. Duties of Rights Agent. The Rights Agent undertakes the 
duties and obligations, and only the duties and obligations, expressly imposed
by this Agreement (and no implied duties or obligations) upon the following
terms and conditions, by all of which the Company and the holders of Rights
Certificates or beneficial interests in the Rights, by their acceptance thereof,
shall be bound:

(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the advice or written opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent, and the Rights Agent shall incur no liability for or in respect of, any
action taken, suffered or omitted by it in good faith and in accordance with
such advice or opinion.

(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "current market price") be proved or established by the
Company prior to taking, suffering or omitting any action hereunder, such fact
or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the Chairman of the Board, the President, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization and protection to the Rights Agent and
the Rights Agent shall incur no liability for or in respect of any action taken,
suffered or omitted in good faith by it under the provisions of this Agreement
in reliance upon such certificate.

(c) The Rights Agent shall be liable hereunder only for its
own gross negligence, bad faith or willful misconduct; provided, however that
the Rights Agent shall not be liable for special, indirect, incidental or
consequential loss or damage of any kind whatsoever, even if the Rights Agent
has been advised of the likelihood of such loss or damage.

27

(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.

(e) The Rights Agent shall not be under any liability or
responsibility in respect of the validity of any provision of this Agreement or
the execution and delivery hereof (except the due execution hereof by the Rights
Agent) or in respect of the validity or execution of any Rights Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Rights Certificate; nor shall it be responsible for any adjustment
required under the provisions of this Agreement or responsible for the manner,
method or amount of any such adjustment or the ascertaining of the existence of
facts that would require any such adjustment (except with respect to the
exercise of Rights evidenced by Rights Certificates after actual notice of any
such adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Common
Shares to be issued pursuant to this Agreement or any Rights Certificate or as
to whether any Common Shares or Preferred Shares will, when so issued, be
validly authorized and issued, fully paid and nonassessable.

(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.

(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the President, any Vice President, the
Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and such instructions shall be full authorization
and protection for the Rights Agent and the Rights Agent shall incur no
liability for or in respect of any action taken, suffered or omitted to be taken
by it in good faith in accordance with instructions of any such officer. The
Rights Agent may conclusively rely on the most recent instructions provided to
it by any such officer.

(h) The Rights Agent and any shareholder, affiliate, director,
officer or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
the Rights Agent under this Agreement and none of such actions shall constitute
a breach of trust. Nothing herein shall preclude the Rights Agent from acting in
any other capacity for the Company or for any other Person or legal entity.

(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company or any other Person
resulting from any such act, default, neglect or misconduct, absent gross
negligence, bad faith or willful misconduct in the selection and continued
employment thereof.

28

(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if it believes that repayment of such funds or adequate indemnification
against such risk or liability is not reasonably assured to it.

(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.

Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' prior written notice mailed to the Company and to each
transfer agent of the Common Shares and Preferred Shares by registered or
certified mail, and to the holders of the Rights Certificates by first- class
mail. In the event the transfer agency relationship in effect between the
Company and the Rights Agent terminates, the Rights Agent will be deemed to
resign automatically on the effective date of such termination; and any required
notice will be sent by the Company.The Company may remove the Rights Agent or
any successor Rights Agent upon thirty (30) days' prior written notice mailed to
the Rights Agent or successor Rights Agent, as the case may be, and to each
transfer agent of the Common Shares and Preferred Shares, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent.
If the Company shall fail to make such appointment within a period of thirty
(30) days after giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Rights Agent or by the holder of a Rights Certificate (who shall, with such
notice, submit his Rights Certificate for inspection by the Company), then any
registered holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be (a) a
Person organized, doing business and in good standing under the laws of the
United States or of any state, having a principal office in the State of New
York or the Commonwealth of Pennsylvania, that is authorized by law to exercise
shareholder services and stock transfer powers and is subject to supervision or
examination by federal or state authority and that has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$50,000,000 or (b) an Affiliate of any such Person. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares and Preferred Shares and mail a
notice thereof in writing to the registered holders of the Rights Certificates
or, prior to the Distribution Date, to the registered holders of the Common
Shares. In case at the time such successor Rights Agent shall succeed to the
agency and trust created by this Agreement, any of the Rights Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of the successor
Rights Agent, as the case may be.

29

Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance, sale or delivery of Common Shares following the Distribution
Date and prior to the redemption or expiration of the Rights, the Company (a)
shall, with respect to Common Shares so issued, sold or delivered pursuant to
the exercise of stock options, stock appreciation rights, grants or awards
outstanding on the Distribution Date under any benefit plan or arrangement for
employees or directors, or upon the exercise, conversion or exchange of
securities outstanding on the Record Date or hereinafter issued by the Company,
and (b) may, in any other case, if deemed necessary or appropriate by the Board
of Directors of the Company, issue Rights Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided,
however, that (i) no such Rights Certificate shall be issued if, and to the
extent that, the Company shall be advised by counsel that such issuance would
create a significant risk of material adverse tax consequences to the Company or
the Person to whom such Rights Certificate would be issued, and (ii) no such
Rights Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.

Section 23. Redemption and Termination.

(a) The Board of Directors of the Company may, at its option,
at any time prior to the earlier of (i) the Close of Business on the tenth day
following a Stock Acquisition Date (or, if the Stock Acquisition Date shall have
occurred prior to the Record Date, the Close of Business on the tenth day
following the Record Date), or (ii) the Close of Business on the Final
Expiration Date, redeem all but not less than all the then outstanding Rights at
a redemption price of $.00512 per Right (which amount represents the redemption
price of $.01 set forth in the Original Rights Agreement, adjusted for stock
splits occurring between the date of the Original Rights Agreement and the date
hereof), as such amount may be appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption Price")
and the Company may, at its option, pay the Redemption Price either in Common
Shares (based on the "current market price", as defined in Section 11(d)(i)
hereof, of the Common Shares at the time of redemption) or cash; provided,
however, that if, following the occurrence of a Stock Acquisition Date and
following the expiration of the right of redemption hereunder but prior to any
Triggering Event, (i) an Acquiring Person shall have transferred or otherwise
disposed of a number of Common Shares in one transaction or series of
transactions, not directly or indirectly involving the Company or any of its
Subsidiaries, which did not result in the occurrence of a Triggering Event or
the Company shall have issued additional equity securities, in either instance
such that such Person is thereafter a Beneficial Owner of 10% or less of the
outstanding Common Shares, and (ii) there is no other Acquiring Person
immediately following the occurrence of the event described in clause (i), then
the right of redemption shall be reinstated thereafter be subject to the
provisions of this Section 23. Notwithstanding anything contained in this
Agreement to the contrary, the Rights shall not be exercisable after the first
occurrence of a Section 11(a)(ii) Event until such time as the Company's right
of redemption hereunder has expired.

30

(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights, without any notice, or
further action, the right to exercise the Rights will terminate and the only
right thereafter of the holders of Rights shall be to receive the Redemption
Price for each Right so held. Promptly after the action of the Board of
Directors ordering the redemption of the Rights, the Company shall give notice
of such redemption to the Rights Agent and the holders of the then outstanding
Rights by, in the case of notice to holders, mailing such notice to all such
holders at each holder's last address as it appears upon the registry books of
the Rights Agent or, prior to the Distribution Date, on the registry books of
the Transfer Agent for the Common Shares. Any notice that is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.

Section 24. Exchange.

(a) The Board of Directors of the Company may, at its option,
at any time after any Person becomes an Acquiring Person, exchange all or part
of the then outstanding and exercisable Rights (which shall not include Rights
that have become null and void pursuant to the provisions of Section 7(e)
hereof) for Common Shares at an exchange ratio of one Common Share per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing,
the Company's Board of Directors shall not be empowered to effect such exchange
at any time after any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or any such Subsidiary, or any
Person organized, appointed or established by the Company for or pursuant to the
terms of any such plan), together with all Affiliates and Associates of such
Person, becomes the Beneficial Owner of fifty percent (50%) or more of the
Common Shares then outstanding.

(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of the
holders of such Rights shall be to receive that number of Common Shares equal to
the number of such Rights held by such holder multiplied by the Exchange Ratio.
The Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company shall promptly notify the
Rights Agent of any such exchange. The Company promptly shall mail a notice of
any such exchange to all of the holders of such Rights at their last addresses
as they appear upon the registry books of the Rights Agent. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of exchange will state the method
by which the exchange of the Common Shares for Rights will be effected and, in
the event of any partial exchange, the number of Rights which will be exchanged.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to the provisions of Section
7(e) hereof) held by each holder of Rights.

31

(c) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but issued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
Common Shares for issuance upon exchange of the Rights.

(d) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, there shall be paid to the
registered holders of the Rights Certificates with regard to which such
fractional Common Shares would otherwise be issuable, an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this subsection (d), the current market value of a whole Common
Share shall be the closing price of a Common Share (as determined pursuant to
the second sentence of Section 11(d) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.

Section 25. Notice of Certain Events.

(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Shares or to make any other distribution to the holders of
Preferred Shares (other than a regular quarterly dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Shares rights or warrants to subscribe for or to purchase any additional
Preferred Shares or shares of stock of any class or any other securities, rights
or options, or (iii) to effect any reclassification of its Preferred Shares
(other than a reclassification involving only the subdivision of outstanding
Preferred Shares), or (iv) to effect any consolidation or merger into or with
any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), or to effect any sale or other transfer (or
to permit one or more of its Subsidiaries to effect any sale or other transfer),
in one transaction or a series of related transactions, of more than 50% of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section
11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of
the Company, then, in each such case, the Company shall give to the Rights Agent
and to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of Preferred Shares, if any
such date is to be fixed, and such notice shall be so given in the case of any
action covered by clause (i) or (ii) above at least twenty (20) days prior to
the record date for determining holders of Preferred Shares for purposes of such
action, and in the case of any such other action, at least twenty (20) days
prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Preferred Shares, whichever shall be the
earlier.

32

(b) Upon the occurrence of a Section 11(a)(ii) Event, (i) the
Company shall as soon as practicable thereafter give to each holder of a Rights
Certificate, to the extent feasible and in accordance with Section 26 hereof, a
notice of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof,
and (ii) all references in the preceding paragraph to Preferred Shares shall be
deemed thereafter to refer to Common Shares and/or, if appropriate, other
securities.

Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:

Aqua America, Inc.
762 Lancaster Avenue
Bryn Mawr, Pennsylvania  19010
Attention: Corporate Secretary

Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:

Equiserve Trust Company, N.A.
150 Royall Street
Canton, Massachusetts 02021
Attn: Client Administration

Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date to the holder of certificates representing Common
Shares) shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.

Section 27. Supplements and Amendments. Prior to the Distribution Date,
the Company may and the Rights Agent shall, if the Company so directs,
supplement or amend any provision of this Agreement without the approval of any
holders of certificates representing Common Shares. From and after the
Distribution Date, the Company may and the Rights Agent shall, if the Company so
directs, supplement or amend this Agreement without the approval of any holders
of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provisions herein, (iii) to shorten or lengthen any time period

33

hereunder, or (iv) to change or supplement the provisions hereunder in any
manner that the Company may deem necessary or desirable and that shall not
adversely affect the interests of the holders of Rights Certificates; provided,
this Agreement may not be supplemented or amended to lengthen, pursuant to
clause (iii) of this sentence, (A) a time period relating to when the Rights may
be redeemed at such time as the Rights are not then redeemable, or (B) any other
time period unless such lengthening is for the purpose of protecting, enhancing
or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon
the delivery of a certificate from an appropriate officer of the Company that
states that the proposed supplement or amendment is in compliance with the terms
of this Section 27, and if requested by the Rights Agent, an opinion of counsel,
the Rights Agent shall execute such supplement or amendment. Notwithstanding
anything contained in this Agreement to the contrary, (i) no supplement or
amendment shall be made that changes the Redemption Price, the Final Expiration
Date, the Purchase Price or the number of Preferred Share Fractions for which a
Right is exercisable, and (ii) no supplement or amendment that changes or
increases the obligations and duties of the Rights Agent under this Agreement
shall be effective without the consent of the Rights Agent. Prior to the
Distribution Date, the interests of the beneficial owners of Rights shall be
deemed coincident with the interests of the holders of Common Shares. Prior to
the Distribution Date, the interests of the beneficial owners of Rights shall be
deemed coincident with the interests of the holders of Common Shares.

Section 28. Successors. All the covenants and provisions of this 
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.

Section 29. Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of Common
Shares outstanding at any particular time, including for purposes of determining
the particular percentage of such outstanding Common Shares of which any Person
is the Beneficial Owner, shall be made in accordance with the last sentence of
Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act.
The Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board of Directors of the Company or to the Company,
or as may be necessary or advisable in the administration of this Agreement,
including, without limitation, the right and power to (i) interpret the
provisions of this Agreement, and (ii) make all determinations deemed necessary
or advisable for the administration of this Agreement (including a determination
to redeem or not redeem the Rights or to amend or supplement the Agreement). All
such actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) that
are done or made by the Board of Directors of the Company in good faith, shall
(x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights and all other Persons, and (y) not subject the Board of
Directors of the Company to any liability to the holders of the Rights. For
purposes of this Agreement, the Rights Agent shall be allowed to assume that all
such actions, calculations, interpretations and determinations have been done or
made by the Board of Directors of the Company in good faith.

Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Shares) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Shares).

34

Section 31. Severability. If any term, provision, covenant or 
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable for any purpose or under
any set of circumstances or as applied to any Person, such invalid, void or
unenforceable term, provision, covenant or restriction shall continue in effect
to the maximum extent possible for all other purposes, under all other
circumstances and as applied to all other Persons; and the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the Close of Business on the
tenth day following the date of such determination by the Board of Directors.

Section 32. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the Commonwealth of Pennsylvania and for all purposes shall be governed
by and construed in accordance with the laws of such jurisdiction applicable to
contracts made and to be performed entirely within such jurisdiction; except
that all provisions regarding the rights, duties and obligations of the Rights
Agent shall by governed by and construed in accordance with the laws of the
State of New York applicable to contracts made and to be performed entirely
within such jurisdiction.

Section 33. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.

Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.

Section 35. Force Majeure. Notwithstanding anything to the contrary
contained herein, Rights Agent shall not be liable for any delays or failures in
performance resulting from acts beyond its reasonable control including, without
limitation, acts of God, terrorist acts, shortage of supply, breakdowns or
malfunctions, interruptions or malfunction of computer facilities, or loss of
data due to power failures or mechanical difficulties with information storage
or retrieval systems, labor difficulties, war, or civil unrest.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.

AQUA AMERICA, INC.

By           /s/ Roy H. Stahl
------------------------
Name:      Roy H. Stahl
Title:     Executive Vice President

EQUISERVE TRUST COMPANY, N.A.

By          /s/ Joshua P. McGinn
------------------------
Name:      Joshua P. McGinn
Title:     Senior Account Manager

35

EXHIBIT A

RESOLUTION OF THE BOARD OF DIRECTORS OF
PHILADELPHIA SUBURBAN CORPORATION
ESTABLISHING AND DESIGNATING
SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
AS A SERIES OF THE PREFERRED STOCK

RESOLVED, that pursuant to the authority expressly vested in the Board of
Directors of Philadelphia Suburban Corporation (the "Corporation") by Article
FIFTH of the Articles of Incorporation of the Corporation, the Board of
Directors hereby fixes and determines the voting rights, designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights and other special or relative rights of the first series of
the Series Preferred Stock, par value $1.00 per share, which shall consist of
100,000 shares and shall be designated as Series A Junior Participating
Preferred Shares (the "Series A Preferred Shares").

Special Terms of the Series A Preferred Shares

Section 1. Dividends and Distributions.

(a) The rate of dividends payable per share of Series A
Preferred Shares on the first day of January, April, July and October in each
year or such other quarterly payment date as shall be specified by the Board of
Directors (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of the Series A Preferred
Shares, shall be (rounded to the nearest cent) equal to the greater of (i)
$10.00 or (ii) subject to the provision for adjustment hereinafter set forth,
1,000 times the aggregate per share amount of all cash dividends, and 1,000
times the aggregate per share amount (payable in cash, based upon the fair
market value at the time the non-cash dividend or other distribution is declared
or paid as determined in good faith by the Board of Directors) of all non-cash
dividends or other distributions other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, $.50 par value per
share, of the Corporation since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of the Series A
Preferred Shares. Dividends on the Series A Preferred Shares shall be paid out
of funds legally available for such purpose. In the event the Corporation shall
at any time after March 1, 1998 (the "Rights Declaration Date") (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amounts
to which holders of Series A Preferred Shares were entitled immediately prior to
such event under clause (ii) of the preceding sentence shall be adjusted by
multiplying each such amount by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

A-1

(b) Dividends shall begin to accrue and be cumulative on
outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date
next preceding the date of issue of such Series A Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Preferred Shares entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series A Preferred Shares in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding.

Section 2. Voting Rights. In addition to any other voting rights 
required by law, the holders of Series A Preferred Shares shall have the
following voting rights:

(a) Subject to the provision for adjustment hereinafter set
forth, each Series A Preferred Share shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the shareholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of Series A Preferred
Shares were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

(b) In the event that dividends upon the Series A Preferred
Shares shall be in arrears to an amount equal to six full quarterly dividends
thereon, the holders of such Series A Preferred Shares shall become entitled to
the extent hereinafter provided to vote noncumulatively at all elections of
directors of the Corporation, and to receive notice of all shareholders'
meetings to be held for such purpose. At such meetings, to the extent that
directors are being elected, the holders of such Series A Preferred Shares
voting as a class shall be entitled solely to elect two members of the Board of
Directors of the Corporation; and all other directors of the Corporation shall
be elected by the other shareholders of the Corporation entitled to vote in the
election of directors. Such voting rights of the holders of such Series A
Preferred Shares shall continue until all accumulated and unpaid dividends
thereon shall have been paid or funds sufficient therefor set aside, whereupon
all such voting rights of the holders of shares of such series shall cease,
subject to being again revived from time to time upon the reoccurrence of the
conditions above described as giving rise thereto.

A-2

At any time when such right to elect directors separately as a
class shall have so vested, the Corporation may, and upon the written request of
the holders of record of not less than 20% of the then outstanding total number
of shares of all the Series A Preferred Shares having the right to elect
directors in such circumstances shall, call a special meeting of holders of such
Series A Preferred Shares for the election of directors. In the case of such a
written request, such special meeting shall be held within 90 days after the
delivery of such request, and, in either case, at the place and upon the notice
provided by law and in the By-laws of the Corporation; provided, that the
Corporation shall not be required to call such a special meeting if such request
is received less than 120 days before the date fixed for the next ensuing annual
or special meeting of shareholders of the Corporation. Upon the mailing of the
notice of such special meeting to the holders of such Series A Preferred Shares,
or, if no such meeting be held, then upon the mailing of the notice of the next
annual or special meeting of shareholders for the election of directors, the
number of directors of the Corporation shall, ipso facto, be increased to the
extent, but only to the extent, necessary to provide sufficient vacancies to
enable the holders of such Series A Preferred Shares to elect the two directors
hereinabove provided for, and all such vacancies shall be filled only by vote of
the holders of such Series A Preferred Shares as hereinabove provided. Whenever
the number of directors of the Corporation shall have been increased, the number
as so increased may thereafter be further increased or decreased in such manner
as may be permitted by the By-laws and without the vote of the holders of Series
A Preferred Shares, provided that no such action shall impair the right of the
holders of Series A Preferred Shares to elect and to be represented by two
directors as herein provided.

So long as the holders of Series A Preferred Shares are
entitled hereunder to voting rights, any vacancy in the Board of Directors
caused by the death or resignation of any director elected by the holders of
Series A Preferred Shares, shall, until the next meeting of shareholders for the
election of directors, in each case be filled by the remaining director elected
by the holders of Series A Preferred Shares having the right to elect directors
in such circumstances.

Upon termination of the voting rights of the holders of any
series of Series A Preferred Shares the terms of office of all persons who shall
have been elected directors of the Corporation by vote of the holders of Series
A Preferred Shares or by a director elected by such holders shall forthwith
terminate.

(c) Except as otherwise provided herein, in the Articles of
Incorporation of the Corporation or by law, the holders of Series A Preferred
Shares and the holders of Common Stock (and the holders of shares of any other
series or class entitled to vote thereon) shall vote together as one class on
all matters submitted to a vote of shareholders of the Corporation.

Section 3. Reacquired Shares. Any Series A Preferred Shares purchased 
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued Series Preferred
Stock and may be reissued as part of a new series of Series Preferred Stock to
be created by resolution or resolutions of the Board of Directors.

Section 4. Liquidation, Dissolution or Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $100.00 per share, plus accrued dividends to the date
of distribution, whether or not earned or declared, or (b) an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1,000
times the aggregate amount to be distributed per share to holders of Common
Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event pursuant to clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.

A-3

Section 5. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the Series A
Preferred Shares shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
shares of Common Stock, or (iii) combine the outstanding shares of Common Stock
into a smaller number of shares, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of shares of
Series A Preferred Shares shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.

Section 6. No Redemption.  The Series A Preferred Shares shall not be 
redeemable.

Section 7. Ranking. The Series A Preferred Shares shall rank junior to
all other series of the Corporation's Series Preferred Stock as to the payment
of dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.

Section 8. Fractional Shares. Series A Preferred Shares may be issued 
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Shares.

A-4

EXHIBIT B

[Form of Rights Certificate]

Certificate No. R-                                          ___________ Rights

NOT EXERCISABLE AFTER MARCH 1, 2008 OR AFTER EARLIER
REDEMPTION BY THE COMPANY. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT ON
THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING
PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
[THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING
PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY,
THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION
7(e) OF SUCH AGREEMENT.]*

---------------
* The bracketed portion of the legend shall be inserted only if applicable and
shall replace the preceding sentence.

B-1

AQUA AMERICA, INC.

RIGHTS CERTIFICATE

This certifies that ___________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the First
Amended and Restated Rights Agreement, dated as of _________ __, 2004, (the
"Rights Agreement"), between Aqua America, Inc., a Pennsylvania corporation (the
"Company"), and Equiserve Trust Company, N.A. (the "Rights Agent"), to purchase
from the Company at any time prior to 5:00 P.M. (Philadelphia time) on March 1,
2008 at the office or offices of the Rights Agent designated for such purpose,
or its successors as Rights Agent, one one-thousandth of a fully paid,
nonassessable share of Series A Junior Participating Preferred Stock (the
"Preferred Share") of the Company, at a purchase price (the "Purchase Price") of
$46.08 per one one-thousandth of a Preferred Share (such fraction, a "Preferred
Share Fraction"), upon presentation and surrender of this Rights Certificate
with the Form of Election to Purchase and related Certificate duly executed.
Except as provided in Sections 11(q) and 13(e) of the Rights Agreement, the
Purchase Price shall be paid, at the option of the Company, in cash or Common
Stock, of the Company (the "Common Shares") having an equivalent value. The
number of Rights evidenced by this Rights Certificate (and the number of
Preferred Share Fractions that may be purchased upon exercise thereof) set forth
above, and the Purchase Price per Preferred Share Fraction set forth above, are
the number and Purchase Price as of March 1, 1998, based on the Preferred Shares
as constituted at such date.

Except as otherwise provided in the Rights Agreement, upon the
occurrence of any Section 11(a)(ii) Event (as such term is defined in the Rights
Agreement), if the Rights evidenced by this Rights Certificate are beneficially
owned by (i) an Acquiring Person or Associate or Affiliate or Associate of any
Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a
transferee of any Acquiring Person (of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such, or (iii) under
certain circumstances specified in the Rights Agreement, a transferee of a
person who, after such transfer, became an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of any such Section 11(a)(ii) Event.

As provided in the Rights Agreement, the Purchase Price and the number
and kind of Preferred Shares or other securities that may be purchased upon the
exercise of the Rights evidenced by this Rights Certificate are subject to
modification and adjustment upon the happening of certain events, including
Triggering Events and a Section 11 (a) (ii) Event.

This Rights Certificate is subject to all of the terms, covenants and
restrictions of the Rights Agreement, which terms, covenants and restrictions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Company.

B-2

This Rights Certificate, with or without other Rights Certificates,
upon surrender at the office of the Rights Agent designated for such purpose,
may be exchanged for another Rights Certificate or Rights Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of Preferred Share Fractions as the Rights evidenced by the
Rights Certificate or Rights Certificates surrendered shall have entitled such
holder to purchase. If this Rights Certificate shall be exercised in part, the
holder shall be entitled to receive upon surrender hereof another Rights
Certificate or Rights Certificates for the number of whole Rights not exercised.

Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company at its option at a redemption
price of $.00512 per Right at any time prior to the earlier of the Close of
Business (as such term is defined in the Rights Agreement) on (i) the tenth day
following the Stock Acquisition Date (as such time period may be extended
pursuant to the Rights Agreement), and (ii) the Final Expiration Date.

No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of a Preferred Share, which may, as the election of the Company, be
evidenced by depositary receipts), but in lieu thereof a cash payment will be
made, as provided in the Rights Agreement.

No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of Preferred Shares or
of any other securities of the Company (including Common Shares) that may at any
time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a shareholder of the Company or any right to vote for
the election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.

This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.

B-3

WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.

Dated as of  ____________, 19__

ATTEST                                        AQUA AMERICA, INC.

By   
---------------------------------             --------------------------------
Secretary                                     Title:

Countersigned

EQUISERVE TRUST COMPANY, N.A.

By 
-----------------------------
Authorized Signature

B-4

[Form of Reverse Side of Rights Certificate]

FORM OF ASSIGNMENT
------------------

(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)

FOR VALUE RECEIVED ________________________________________ hereby sells, 
assigns and transfers unto_____________________________________________________
(Please print name and address of transferee)

___________________________________________________________ this Rights
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ___________________ Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.

Dated: _________________, 20 __

---------------------------
Signature
Signature Guaranteed:

Certificate
-----------

The undersigned hereby certifies by checking the appropriate boxes
that:

(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);

(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person.

Dated:  ________________, 20__

---------------------------
Signature
Signature Guaranteed:

NOTICE

The signatures to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.

B-5

FORM OF ELECTION TO PURCHASE

(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)

To:      AQUA AMERICA, INC.:

The undersigned hereby irrevocably elects to exercise ________ Rights
represented by this Rights Certificate to purchase the Preferred Shares issuable
upon the exercise of the Rights (or Common Shares or such other securities of
the Company or of any other person that may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of
and delivered to:

Please insert social security
or other identifying number

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Please print name and address)

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:

Please insert social security
or other identifying number

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Please print name and address)

Dated:  ________________, 20__

---------------------------
Signature
Signature Guaranteed:

B-6

Certificate

The undersigned hereby certifies by checking the appropriate boxes that

(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);

(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.

Dated:  ________________, 20__

---------------------------
Signature
Signature Guaranteed:

NOTICE

The signatures to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change whatsoever.

B-7

Exhibit 4.25

FIFTH AMENDMENT TO CREDIT AGREEMENT
-----------------------------------

THIS FIFTH AMENDMENT TO CREDIT AGREEMENT is made as of this 14th day of
December, 2003, by and among PENNSYLVANIA SUBURBAN WATER COMPANY, a Pennsylvania
corporation and successor by merger to Philadelphia Suburban Water Company
("Borrower"), the several banks which are parties to this Agreement (each a
"Bank" and collectively, "Banks") and PNC BANK, NATIONAL ASSOCIATION in its
capacity as agent for Banks (in such capacity, "Agent").

BACKGROUND

A.  Borrower, Agent and Banks are parties to a Credit Agreement, dated
as of December 22, 1999, as amended by a First Amendment to Credit Agreement
dated as of November 28, 2000, a Second Amendment to Credit Agreement dated as
of December 18, 2001, a Third Amendment to Credit Agreement dated as of December
16, 2002 and a Fourth Amendment dated as of December 24, 2002 (as so amended,
the "Credit Agreement"), pursuant to which Banks agreed to make revolving credit
loans to Borrower in an aggregate outstanding amount of up to $70,000,000 (the
"Loans"). The Loans are evidenced by Borrower's Revolving Credit Notes in the
aggregate principal face amount of $70,000,000.

B.  Borrower, Agent and Banks desire to extend the Termination Date of
the facility, all on the terms and subject to the conditions herein set forth.

NOW THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:

AGREEMENT

1. Terms. Capitalized terms used herein and not otherwise defined
herein shall have the meanings given to such terms in the Credit Agreement.

2.  Amendments to Credit Agreement. Effective on December 14, 2003 (the
"Effective Date") the Credit Agreement is hereby amended as follows:

(a)     The definition of Termination Date in Section 1.1 is hereby
amended and restated to read in full as follows:

" "Termination Date": the earlier of (a) December 12, 2004 or
any later date to which the Termination Date shall have been
extended pursuant to subsection 2.8(d) hereof and (b) the date
the Commitments are terminated as provided herein."

3.  Loan Documents. Except where the context clearly requires 
otherwise, all references to the Credit Agreement in any of the Loan Documents
or any other document delivered to Banks or Agent in connection therewith shall
be to the Credit Agreement as amended by this Agreement.

4.  Borrower's Ratification. Borrower agrees that it has no defenses or
set-offs against Banks or Agent or their respective officers, directors,
employees, agents or attorneys, with respect to the Loan Documents, all of which
are in full force and effect, and that all of the terms and conditions of the
Loan Documents not inconsistent herewith shall remain in full force and effect
unless and until modified or amended in writing in accordance with their terms.
Borrower hereby ratifies and confirms its obligations under the Loan Documents
as amended hereby and agrees that the execution and delivery of this Agreement
does not in any way diminish or invalidate any of its obligations thereunder.

5.  Representations and Warranties. Borrower hereby represents and
warrants to Agent and Banks that:

(a)     Except as otherwise previously disclosed to Agent and 
Banks, the representations and warranties made in the Credit Agreement, as
amended by this Agreement, are true and correct as of the date hereof;

(b)     No Default or Event of Default under the Credit Agreement
exists on the date hereof; and

(c)     This Agreement has been duly authorized, executed and 
delivered so as to constitute the legal, valid and binding obligations of
Borrower, enforceable in accordance with its terms.

All of the above representations and warranties shall survive the
making of this Agreement.

6.  Conditions Precedent. The effectiveness of the amendments set forth
herein is subject to the fulfillment, to the satisfaction of Agent and its
counsel, of the following conditions precedent on or before the Effective Date:

(a)     Borrower shall have delivered to Agent, with copies or
counterparts for each Bank as appropriate, the following, all of which shall be
in form and substance satisfactory to Agent and shall be duly completed and
executed:

(i)     This Agreement;

(ii)    Copies, certified by the Secretary or an Assistant
Secretary of Borrower as of a recent date, of resolutions
of the board of directors of Borrower in effect on the date
hereof authorizing the execution, delivery and performance
of this Agreement and the other documents and transactions
contemplated hereby;

(iii)   Copies, certified by its corporate secretary as of a recent
date, of the articles of incorporation, certificate of
formation, and by-laws of Borrower as in effect, or a
certificate stating that there have been no changes to any
such documents since the most recent date, true and correct
copies thereof were delivered to Agent; and

(iv)    Such additional documents, certificates and information as
Agent or Banks may require pursuant to the terms hereof or
otherwise reasonably request.

(b)     The representations and warranties set forth in the Credit
Agreement shall be true and correct on and as of the date hereof.

(c)     No Default or Event of Default shall have occurred and be
continuing as of the date hereof.

(d)     Borrower shall have paid to Agent for the benefit of Banks
an extension fee of $84,000 to be distributed pro rata to Banks.

7.  Miscellaneous.

(a) All terms, conditions, provisions and covenants in the Loan
Documents and all other documents delivered to Agent and Banks in connection
therewith shall remain unaltered and in full force and effect except as modified
or amended hereby. To the extent that any term or provision of this Agreement is
or may be deemed expressly inconsistent with any term or provision in any Loan
Document or any other document executed in connection therewith, the terms and
provisions hereof shall control.

(b) The execution, delivery and effectiveness of this Agreement
shall neither operate as a waiver of any right, power or remedy of Agent or
Banks under any of the Loan Documents nor constitute a waiver of any Default or
Event of Default or default thereunder.

(c) In consideration of Agent's and Banks' agreement to amend the
existing credit facility, Borrower hereby waives and releases Agent and Banks
and their respective officers, attorneys, agents and employees from any
liability, suit, damage, claim, loss or expense of any kind or failure
whatsoever and howsoever arising that it ever had up until, or has as of, the
date of this Agreement.

(d) This Agreement constitutes the entire agreement of the parties
with respect to the subject matter hereof and supersedes all prior and
contemporaneous understandings and agreements.

(e) In the event any provisions of this Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provision hereof.

(f) This Agreement shall be governed by and construed according to
the laws of the Commonwealth of Pennsylvania.

(g) This Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their respective successors and assigns and may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.

(h) The headings used in this Agreement are for convenience of
reference only, do not form a part of this Agreement and shall not affect in any
way the meaning or interpretation of this Agreement.

IN WITNESS WHEREOF, Borrower, Agent and Banks have caused this
Agreement to be executed by their duly authorized officers as of the date first
above written.

PENNSYLVANIA SUBURBAN
WATER COMPANY

By:  KATHY L. PAPE
------------------------------------
Title:  Vice President and Treasurer

PNC BANK, NATIONAL ASSOCIATION, as a 
Bank and as Agent

By:  FORREST B. PATTERSON, JR.           
------------------------------------
Title:  Senior Vice President

CITIZENS BANK OF PENNSYLVANIA

By:  MARK W. TORIE                       
------------------------------------
Title:  Senior Vice President

FLEET NATIONAL BANK

By:  WILLIAM B. WILLIAMSON               
------------------------------------
Title:  Senior Vice President

NATIONAL CITY BANK

By:  DAVID P. DOBSTAFF
------------------------------------
Title:  Senior Vice President

Exhibit 10.5

THE AQUA AMERICA, INC. 1994 EQUITY COMPENSATION PLAN
(as Amended Effective August 5, 2003)

1.       Purpose

The purpose of this plan (the "Plan") is to provide an incentive, in
the form of a proprietary interest in Aqua America, Inc. (the "Corporation"), to
officers, other key employees and Non-employee Directors, as defined below, of
the Corporation and its subsidiaries and key consultants who are in a position
to contribute materially to the successful operation of the business of the
Corporation, to increase their interest in the Corporation's welfare, and to
provide a means through which the Corporation can attract and retain officers,
other key employees and Non-employee Directors and key consultants of
significant abilities.

2.       Administration

This Plan shall be administered by a Committee (the "Committee") of the
Board of Directors of the Corporation. The Committee shall consist of three or
more of those members of the Board of Directors, each of whom may be an "outside
director" as defined under section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"), and related Treasury regulations and each of whom shall
also be a "non-employee director" as defined under Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, the
Board of Directors may ratify or approve any grants made by the Committee if the
Committee deems it appropriate in a particular circumstance.

From time to time the Committee may make grants, subject to the terms
of the Plan, with respect to such number of shares of Common Stock of the
Corporation as the Committee, acting in its sole discretion, may determine. All
references to the Committee hereunder shall also mean the Board of Directors to
the extent that the Board of Directors is acting pursuant to its authority to
ratify or approve grants under the Plan. Non-employee Directors, as defined
below, may only receive stock grants pursuant to the provisions of Section 7(f).

Subject to the provisions of the Plan, the Committee shall be
authorized to interpret the Plan and the grants made under the Plan, to
establish, amend and rescind any rules and regulations relating to the Plan, to
determine the terms and provisions of the agreement related to grants described
in Section 9 hereof, and to make all other determinations, including factual
determinations, necessary or advisable for the administration of the Plan. The
Committee may correct any defect, supply any omission and reconcile any
inconsistency in the Plan or in any option or grant in the manner and to the
extent it shall be deemed desirable to carry it into effect. The determinations
of the Committee in the administration of the Plan, as described herein, shall
be final and conclusive. The Committee may adopt such rules and regulations as
it deems necessary for governing its affairs. All powers of the Committee shall
be executed in its sole discretion, in the best interest of the Corporation, not
as a fiduciary, and in keeping with the objectives of the Plan and need not be
uniform as to similarly situated individuals. An Agreement, as defined below,
shall be executed by each grantee and shall constitute that grantee's
acknowledgement and acceptance of the terms of the Plan and the Committee's
authority and discretion.

3.       Grants

Pursuant to the terms of the Plan, the Committee shall have the
authority to grant stock options to officers and other key employees and key
consultants and restricted stock and dividend equivalents to officers and other
key employees; provided, however, that Non-employee Directors, as defined below,
may receive stock grants in accordance with Section 7(f) (hereinafter
collectively referred to as the "Grants"). All Grants shall be subject to the
terms and conditions set forth herein and to those other terms and conditions
consistent with this Plan as the Committee deems appropriate and as are
specified in writing by the Committee in the agreement described in Section 9 of
the Plan (the "Agreement"). Grants under a particular Section of the Plan need
not be uniform as among the grantees and Grants under two or more Sections of
the Plan may be combined in one instrument.

4.       Shares Subject to the Plan

Subject to adjustment as provided in Section 15, the maximum aggregate
number of shares of the Common Stock of the Corporation that may be issued or
transferred under the Plan shall be 6,405,692 shares; provided, however, that no
more than 50% of these shares shall be available for issuance as restricted
stock. The maximum number of shares of Common Stock that may be subject to
Grants made under the Plan to any individual during any calendar year shall be
150,000 shares. Shares deliverable under the Plan may be authorized and unissued
shares or treasury shares, as the Committee may from time to time determine.
Shares of Common Stock related to the unexercised or undistributed portion of
any terminated, expired or forfeited Grant also may be made available for
distribution in connection with future Grants under the Plan."

5.       Eligibility

Only officers, key employees, members of the Board of Directors who are
not employed in any capacity by the Corporation (hereinafter referred to as
"Non-employee Directors") and key consultants of the Corporation and its
subsidiaries shall be eligible for Grants under the Plan; provided, however,
that Grants to Non-employee Directors shall be made only in accordance with
Section 7(f). The term "subsidiaries" shall mean any corporation in an unbroken
chain of corporations beginning with the Corporation, if at the time of the
Grant, each of the corporations other than the last corporation in the unbroken
chain owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.

6.       Granting of Options

The Committee may, from time to time, grant stock options to eligible
officers and other key employees and shall designate options at the time of
grant as either "incentive stock options" intended to qualify as such under
section 422 of the Internal Revenue Code of 1986, as from time to time amended
or any successor statute of similar purpose (the "Code"), or "nonqualified stock
options", which options are not intended to so qualify. The Committee may, from
time to time, grant nonqualified stock options to key consultants. Except as
hereinafter provided, options granted pursuant to the Plan shall be subject to
the following terms and conditions:

(a)    Price. The purchase price per share of stock deliverable upon 
the issuance of shares pursuant to the exercise of each option shall be
not less than 100% of the fair market value of the Corporation's Common
Stock on the date the option is granted. The fair market value shall be
the mean of the high and low sale prices of the Corporation's Common
Stock on the New York Stock Exchange - Composite Transactions or other
recognized market source, as determined by the Committee, on the date
the option is granted, or if there is no sale on such date, then the
mean of such high and low sale prices on the last previous day on which
a sale is reported. In any event, in case of the grant of an incentive
stock option, the fair market value shall be determined in a manner
consistent with section 422 of the Code.

Shares may be purchased only by delivering a notice of exercise to the
Committee with payment of the purchase price therefore to be paid in
full prior to the issuance of the shares. Such notice may instruct the
Corporation to deliver shares of Common Stock due upon the exercise of
the option to any registered broker or dealer in lieu of delivery to
the grantee. Such instructions must designate the account into which
the shares are to be deposited. The grantee may tender this notice of
exercise, which has been properly executed by the grantee, and the
aforementioned delivery instructions to any broker or dealer. With the
consent of the Committee, payment of the purchase price may be made, in
whole or in part, through the surrender of shares of the Common Stock
of the Corporation (including without limitation shares of Common Stock
acquired pursuant to the option then being exercised) at the fair
market value of such shares determined as of the last trading day prior
to the date on which the option is exercised, in the same manner set
forth in the above paragraph.

(b)    Terms of Options. The term during which each incentive stock 
option may be exercised shall be determined by the Committee, but in no
event shall an incentive stock option be exercisable in whole or in
part more than 10 years from the date it is granted and in no event
shall a nonqualified stock option be exercisable in whole or in part
more than 10 years and one day from the date it is granted. All rights
to purchase pursuant to an option shall, unless sooner terminated,
expire at the date designated by the Committee. The Committee shall
determine the date on which each option shall become exercisable and
may provide that an option shall become exercisable in installments.
The shares comprising each installment may be purchased in whole or in
part at any time after such installment becomes exercisable. The
Committee may, in its sole discretion, accelerate the time at which any
option may be exercised in whole or in part. Notwithstanding any
determinations by the Committee regarding the exercise period of any
option, all outstanding options shall become immediately exercisable
upon a Change of Control of the Corporation (as defined herein).

(c)    Termination of Employment. Upon the termination of a grantee's
employment for any reason (except as a result of retirement, disability
or death), the options held by such grantee shall terminate.
Notwithstanding the fact that, in all cases, a grantee's employment
shall be deemed to have terminated upon the sale of a "subsidiary" of
the Corporation (an entity in which the Corporation has at least a 50%
ownership of the entity's total voting power) that employs such
grantee, the Committee, in its sole discretion, may extend the period
during which any option held by such a grantee may be exercised after
such sale to the earliest of (i) a date which is not more than three
years from the date of the sale of the subsidiary, (ii) the date of the
grantee's termination of employment with the subsidiary (or successor
employer) following such sale for reasons other than retirement,
disability or death, (iii) the date which is one year from the date of
the grantee's termination of employment with the subsidiary on account
of the grantee's total disability (as defined in section 22(e)(3) of
the Code), or three months from the date of such termination if on
account of death, retirement or a disability other than a total
disability, or (iv) the expiration of the original term of the option
as established at the time of grant. The Committee, in its sole
discretion, may similarly extend the period of exercise of any option
held by a grantee employed by the Corporation whose employment with the
Corporation is terminated in connection with the sale of a subsidiary
of the Corporation. To the extent that any option is not otherwise
exercisable as of the date on which the grantee ceases to be employed
by the subsidiary or the Corporation, as applicable, such unexercisable
portion of the option shall terminate as of such date.

Upon termination of a grantee's employment as a result of retirement,
disability or death, the period during which the options may be
exercised shall not exceed: (i) one year from the date of such
termination of employment in the case of death; (ii) two years from the
date of such termination in the case of permanent and total disability
(within the meaning of section 22(e)(3) of the Code) or retirement; and
(iii) three months from the date of such termination of employment in
the case of other disability; provided, however, that in no event shall
the period extend beyond the expiration of the option term. To the
extent that any option is not otherwise exercisable as of the date on
which the grantee ceases to be employed by the Corporation or any
subsidiary, as applicable, such unexercisable portion of the option
shall terminate as of such date.

Subject to the foregoing, in the event of death, such options may be
exercised by a grantee's legal representative or beneficiary, but only
to the extent that an option has become exercisable as of the date of
death. Notwithstanding the foregoing, the Committee, in its sole
discretion, may determine that any portion of an option that has not
become exercisable as of the date of the grantee's death, termination
of employment on account of permanent and total disability (within the
meaning of section 22(e)(3) of the Code) or other termination of
employment may also be exercised by a grantee, or in the case of death,
a grantee's legal representative or beneficiary. Transfer from the
Corporation to a subsidiary, from a subsidiary to the Corporation, or
from one subsidiary to another, shall not be deemed to be a termination
of employment. All references in this Section 6(c) to the termination
of a grantee's employment shall include the termination of a
consultant's relationship with the Corporation or any subsidiary.

(d)    Limits on Incentive Stock Options. Each Grant of an incentive 
stock option shall provide that it (i) is not transferable by the
grantee otherwise than by will or the laws of descent and distribution
and (ii) is exercisable, during the grantee's lifetime, only by the
grantee and that the aggregate fair market value of the Common Stock on
the date of the Grant with respect to which incentive stock options are
exercisable for the first time by a grantee during any calendar year
under the Plan and under any other stock option plan of the Corporation
shall not exceed the limitation set forth in section 422(d) of the
Code.

An incentive stock option shall not be granted to any grantee who, at
the time of grant, owns stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Corporation
or subsidiary of the Corporation, unless the exercise price of the
incentive stock option is no less than 110% of the fair market value
per share on the date of grant and the term of the incentive stock
option is not more than five years. Unless a grantee could otherwise
transfer Common Stock issued pursuant to an incentive stock option
granted hereunder without incurring liability under section 16(b) of
the Exchange Act , at least six months must elapse from the date of
acquisition of an incentive stock option to the date of disposition of
the Common Stock issued upon exercise of such option.

7.       Restricted Stock Grants

The Committee may issue or transfer shares of Common Stock of the
Corporation to an eligible officer or other key employee. The following
provisions are applicable to restricted stock grants:

(a)    General Requirements. Shares of Common Stock of the Corporation
issued pursuant to restricted stock grants may be issued for
consideration or for no consideration. Subject to any other
restrictions by the Committee as provided pursuant to Section 7(e),
restrictions on the transfer of shares of Common Stock set forth in
Section 7(c) shall lapse on such date or dates as the Committee may
approve until the restrictions have lapsed on 100% of the shares;
provided, however, that upon a Change of Control of the Corporation,
all restrictions on the transfer of the shares which have not, prior to
such date, been forfeited shall immediately lapse. The period of years
during which the restricted stock grant will remain subject to
restrictions will be designated in the Agreement (the "Restriction
Period"). Prior to the lapse of the Restriction Period the shares of
Common Stock granted to any grantee shall be held by the Corporation,
subject to the provisions of Section 15 with respect to voting and
dividends.

(b)    Number of Shares. The Committee may grant to each grantee a 
number of shares of Common Stock of the Corporation determined in its
sole discretion.

(c)    Requirement of Employment. If the grantee's employment 
terminates during the Restriction Period, the restricted stock grant
terminates as to all shares covered by the Grant as to which
restrictions on transfer have not lapsed, and those shares of Common
Stock must be immediately returned to the Corporation. The Committee
may, however, provide for complete or partial exceptions to this
requirement as it deems equitable.

(d)    Restrictions on Transfer and Legend on Stock Certificate. During
the Restriction Period, a grantee may not sell, assign, transfer,
pledge, or otherwise dispose of the shares of Common Stock to which
such Restriction Period applies except to a Successor Grantee (as
defined in Section 10 of the Plan). Each certificate for a share issued
or transferred under a restricted stock grant shall contain a legend
giving appropriate notice of the restrictions in the Grant. The grantee
shall be entitled to have the legend removed from the stock certificate
or certificates covering any of the shares subject to restrictions when
all restrictions on such shares have lapsed.

(e)    Lapse of Restrictions. All restrictions imposed under the
restricted stock grant shall lapse upon the expiration of the
applicable Restriction Period; provided, however, that upon the death
of the grantee or a Change of Control of the Corporation, all
restrictions on the transfer of shares which have not, prior to such
date, been forfeited shall immediately lapse. In addition, the
Committee may determine as to any or all restricted stock grants, that
all the restrictions shall lapse, without regard to any Restriction
Period, under such circumstances as it deems equitable.

(f)    Stock grants to Non-employee Directors. As of the first day of 
the month following the Corporation's annual meeting of shareholders,
each Non-employee Director shall receive a grant of 875 shares of
Common Stock. Such shares shall not be sold for 6 months following the
date of grant. No other restrictions shall apply to such shares.
Notwithstanding any other provision of the Plan, this Section 7(f) may
not be amended more than once every 12 months, except for amendments
necessary to conform the Plan to changes of the provisions of, or the
regulations relating to, the Code.

8.       Dividend Equivalents

The Committee may grant dividend equivalents to eligible officers and
other key employees either alone or in conjunction with all or part of any
option granted under the Plan. A dividend equivalent shall be equal to the
dividend payable on a share of Common Stock of the Corporation. The amount of
dividend equivalents for any grantee (the "Dividend Equivalent Amount") is
determined by multiplying the number of dividend equivalents subject to the
Grant by the per-share cash dividend, or the per-share fair market value (as
determined by the Committee) of any dividend in other than cash, paid by the
Corporation on each record date for the payment of a dividend during the period
described in Section 8(a).

(a)    Amount of Dividend Equivalent Credited. The Corporation shall
credit to an account for each grantee maintained by the Corporation in
its books and records on each record date, from the date of grant until
the earlier of the date of (i) the end of the applicable accumulation
period designated by the Committee at the time of grant, (ii) the date
of the termination of employment for any reason (including retirement),
other than total disability (as defined in section 22(e)(3) of the
Code) or death of the grantee, or as otherwise determined by the
Committee, in its sole discretion, at the time of a grantee's
termination of employment or (iii) the end of a period of four years
from the date of grant, that portion of the Dividend Equivalent Amount
for each such grantee attributable to each record date. The Corporation
shall maintain in its books and records separate accounts which
identify each Grantee's Dividend Equivalent Amount. Except as set forth
in Section 8(e) below, no interest shall be credited to any such
account.

(b)    Payment of Credited Dividend Equivalents. The Committee, at the
time of grant, shall designate the percentage of each grantee's
Dividend Equivalent Amount that shall be paid to the grantee at the end
of an applicable performance period (the "Performance Period"),
generally being four years from the date of grant (the Committee, in
its sole discretion, shall retain the right to designate a longer or
shorter Performance Period at the time of grant); provided, however,
that such Performance Period shall be:

(i) reduced by one year for each calendar year during the
applicable Performance Period ending after the date of grant
in which the measurable performance criteria established by
the Committee at the time of grant for the applicable
Performance Period exceeds the targets for such criteria
established by the Committee at the time of grant.

(ii) increased by one year for each calendar year during the
applicable Performance Period ending after the date of grant
in which the measurable performance criteria established by
the Committee at the time of grant for the applicable
Performance Period is less than the targets for such criteria
established by the Committee at the time of grant.

(iii) In no event shall the Performance Period be reduced to
less than two years or increased to more than eight years from
the date of grant.

(iv) In the event that the Performance Period is shorter than
the period described in Section 8(a), a grantee shall receive
the payment of the amount credited to his account at the end
of the applicable Performance Period and any portion of the
Dividend Equivalent Amount not yet so credited to his account
shall be paid on the Corporation's normal dividend payment
dates until the grantee's Dividend Equivalent Amount for the
period described in Section 8(a) is fully paid to the grantee.

(c)    Timing of Payment of Dividend Equivalents. Except as otherwise
determined by the Committee in the event of a grantee's termination
from employment prior to the end of the applicable Performance Period,
no payments of the Dividend Equivalent Amount shall be made until the
end of the applicable Performance Period and no payments shall be made
to any grantee whose employment by the Corporation or a subsidiary
terminates prior to the end of the applicable Performance Period for
any reason other than retirement under the Corporation's or a
subsidiary's retirement plan, death or total disability (as defined in
section 22(e)(3) of the Code). Subject to Section 8(b)(iv), as soon as
practicable after the end of such Performance Period, unless a grantee
shall have made an election under Section 8(f) to defer receipt of any
portion of such amount, a grantee shall receive 100% of the Dividend
Equivalent Amount payable to him. Notwithstanding the foregoing, upon a
Change of Control of the Corporation, any Dividend Equivalent Amount or
portion thereof, which has not, prior to such date, been paid to the
grantee or forfeited shall immediately become payable to the grantee
without regard to whether the applicable Performance Period has ended.

(d)    Form of Payment. The Committee shall have the sole discretion to
determine whether the Corporation's obligation in respect of the
payment of a Dividend Equivalent Amount shall be paid solely in credits
to be applied toward payment of the option price under then exercisable
options, solely in cash or partly in such credits and partly in cash.

(e)    Interest on Dividend Equivalents. From a date which is 45 days
after the end of the applicable Performance Period until the date that
the Dividend Equivalent Amount payable to the grantee is paid to such
grantee, the account maintained by the Corporation in its books and
records with respect to such dividend equivalents shall be credited
with interest at a market rate determined by the Committee.

(f)    Deferral of Dividend Equivalents. A grantee shall have the right
to defer receipt of any Dividend Equivalent Amount payments if he shall
elect to do so on or prior to December 31 of the year preceding the
beginning of the last full year of the applicable Performance Period
(or such other time as the Committee shall determine is appropriate to
make such deferral effective under the applicable requirements of
federal tax laws). The terms and conditions of any such deferral
(including the period of time thereof and any earnings on the deferral)
shall be subject to approval by the Committee and all deferrals shall
be made on a form provided a grantee for this purpose.

9.       Agreement with Grantees

Each grantee who receives a Grant under the Plan shall enter into an
agreement with the Corporation which shall contain such provisions, consistent
with the provisions of the Plan, as may be established from time to time by the
Committee and shall constitute that grantee's acknowledgement and acceptance of
the terms of the Plan and the Committee's authority and discretion.

10.      Transferability of Grants

(a)    Nontransferability of Grants. Only a grantee or his or her
authorized legal representative may exercise rights under a Grant. Such
persons may not transfer those rights except by will or by the laws of
descent and distribution or, with respect to Grants other then
incentive stock options, if permitted in any specific case by the
Committee in their sole discretion, pursuant to a domestic relations
order as defined under the Code or Title I of ERISA or the rules
thereunder. When a grantee dies, the personal representative or other
person entitled to succeed to the rights of the grantee ("Successor
Grantee") may exercise such rights. A Successor Grantee must furnish
proof satisfactory to the Corporation of his or her right to receive
the Grant under the grantee's will or under the applicable laws of
descent and distribution.

(b)    Transfer of Nonqualified Stock Options. Notwithstanding the
foregoing, the Committee may provide, in the Agreement, that a grantee
may transfer nonqualified stock options to family members, one or more
trusts for the benefit of family members, or one or more partnerships
of which family members are the only partners, according to such terms
as the Committee may determine; provided that the grantee receives no
consideration for the transfer of an option and the transferred option
shall continue to be subject to the same terms and conditions as were
applicable to the option immediately before the transfer.

11.      Funding of the Plan

This Plan shall be unfunded. The Corporation shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. Subject to Section
8(e), in no event shall interest be paid or accrued on any Grant, including
unpaid installments of Grants.

12.      Rights of Grantees

Nothing in this Plan shall entitle any grantee or other person to any
claim or right to receive a Grant under this Plan or to any of the rights and
privileges of, a shareholder of the Corporation in respect of any shares related
to any Grant or purchasable upon the exercise of any option, in whole or in
part, unless and until certificates for such shares have been issued.
Notwithstanding the foregoing, a grantee who receives a grant of restricted
stock shall have all rights of a shareholder, except as set forth in Section
7(d), during the Restriction Period, including the right to vote and receive
dividends. Neither this Plan nor any action taken hereunder shall be construed
as giving any grantee any rights to be retained in the employ of the
Corporation, to be retained as a consultant by the Corporation or to be retained
as a Non-employee Director by the Corporation.

13.      Withholding of Taxes

The Corporation shall have the right to deduct from all Grants paid in
cash any federal, state or local taxes required by law to be withheld with
respect to such cash awards. The grantee or other person receiving such shares
shall be required to pay to the Corporation the amount of any such taxes which
the Corporation is required to withhold with respect to such Grants. With
respect to Grants of restricted stock or nonqualified stock options, the
Corporation shall have the right to require that the grantee make such
provision, or furnish the Corporation such authorization as may be necessary or
desirable so that the Corporation may satisfy its obligation, under applicable
income tax laws, to withhold for income or other taxes due upon or incident to
such restricted stock or the exercise of such nonqualified stock options.

The Committee may adopt such rules, forms and procedures as it
considers necessary or desirable to implement such withholding procedures, which
rules, forms and procedures shall be binding upon all grantees, and which shall
be applied uniformly to all grantees similarly situated.

14.      Listing and Registration

Each Grant shall be subject to the requirement that, if at any time the
Committee shall determine in its discretion that the listing, registration or
qualification of the Grant or the shares subject to the Grant upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, such Grant or the issue or purchase of
shares thereunder, no such Grant may be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Committee.

15.      Adjustment of and Changes in Common Stock of the Corporation.

In the event of a reorganization, recapitalization, change of shares,
stock split, spin-off, stock dividend, reclassification, subdivision or
combination of shares, merger, consolidation, rights offering, or any other
change in the corporate structure or shares of the Corporation, the Committee
may make such adjustment as it deems appropriate in the number and kind of
shares authorized by the Plan, in the number and kind of shares covered by
Grants made under the Plan, in the purchase prices of outstanding options or the
terms and conditions applicable to dividend equivalents. Any adjustment
determined by the Committee shall be final, binding and conclusive.

16.      Change of Control of the Corporation

As used herein, the following defined terms shall have the meanings
described in this Section:

(a) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").

(b) A Person shall be deemed the "Beneficial Owner" of any securities:
(i) that such Person or any of such Person's Affiliates or Associates, directly
or indirectly, has the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the "Beneficial Owner" of
securities tendered pursuant to a tender or exchange offer made by such Person
or any of such Person's Affiliates or Associates until such tendered securities
are accepted for payment, purchase or exchange; (ii) that such Person or any of
such Person's Affiliates or Associates, directly or indirectly, has the right to
vote or dispose of or has "beneficial ownership" of (as determined pursuant to
Rule 13d-3 of the General Rules and Regulations under the Exchange Act),
including without limitation pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that a Person shall
not be deemed the "Beneficial Owner" of any security under this clause (ii) as a
result of an oral or written agreement, arrangement or understanding to vote
such security if such agreement, arrangement or understanding (A) arises solely
from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable provisions
of the General Rules and Regulations under the Exchange Act, and (B) is not then
reportable by such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or (iii) that are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate or Associate thereof) with
which such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing) for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in the proviso to clause (ii) above) or disposing of any voting
securities of the Corporation; provided, however, that nothing in this
subsection (b) shall cause a Person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of any securities acquired through such
Person's participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.

(c) "Change of Control" shall mean:

(i) any Person (including any individual, firm, corporation,
partnership or other entity except the Corporation, any subsidiary of the
Corporation, any employee benefit plan of the Corporation or of any subsidiary,
or any Person or entity organized, appointed or established by the Corporation
for or pursuant to the terms of any such employee benefit plan), together with
all Affiliates and Associates of such Person, shall become the Beneficial Owner
in the aggregate of 20% or more of the Common Stock of the Corporation then
outstanding;

(ii) during any twenty-four month period, individuals who at
the beginning of such period constitute the Board cease for any reason to
constitute a majority thereof, unless the election, or the nomination for
election by the Corporation's shareholders, of at least seventy-five percent of
the directors who were not directors at the beginning of such period was
approved by a vote of at least seventy-five percent of the directors in office
at the time of such election or nomination who were directors at the beginning
of such period; or

(iii) there occurs a sale of 50% or more of the aggregate
assets or earning power of the Corporation and its subsidiaries, or its
liquidation is approved by a majority of its shareholders or the Corporation is
merged into or is merged with an unrelated entity such that following the merger
the shareholders of the Corporation no longer own more than 50% of the resultant
entity.

Notwithstanding anything in this subsection (c) to the contrary, a Change of
Control shall not be deemed to have taken place under clause (c)(i) above if (i)
such Person becomes the beneficial owner in the aggregate of 20% or more of the
Common Stock of the Corporation then outstanding as a result, in the
determination of a majority of those members of the Board of Directors of the
Corporation in office prior to the acquisition, of an inadvertent acquisition by
such Person if such Person, as soon as practicable, divests itself of a
sufficient amount of its Common Stock so that it no longer owns 20% or more of
the Common Stock then outstanding, or (ii) such Person becomes the beneficial
owner in the aggregate of 20% or more of the common stock of Corporation
outstanding as a result of an acquisition of common stock by the Corporation
which, by reducing the number of common stock outstanding, increases the
proportionate number of shares of common stock beneficially owned by such Person
to 20% or more of the shares of common stock then outstanding; provided, however
that if a Person shall become the beneficial owner of 20% or more of the shares
of common stock then outstanding by reason of common stock purchased by the
Corporation and shall, after such share purchases by the Corporation become the
beneficial owner of any additional shares of common stock, then the exemption
set forth in this clause shall be inapplicable.

17.      Amendment and Termination

(a) The Plan may be amended by the Board of Directors of the
Corporation as it shall deem advisable to ensure such qualification and
conform to any change in the law or regulations applicable thereto,
including such new regulations as may be enacted pertaining to the tax
treatment of incentive stock options to be granted under this Plan, or
in any other respect that the Board may deem to be in the best interest
of the Corporation; provided, however, that the Board may not amend the
Plan, without the authorization and approval of the shareholders of
this Corporation, if such approval is required by section 422 of the
Code or section 162(m) of the Code.

The Board of Directors shall not amend the Plan if the amendment would
cause the Plan or the Grant or exercise of an incentive stock option
under the Plan to fail to comply with the requirements of section 422
of the Code including, without limitation, a reduction of the option
price set forth in Section 6(a) or an extension of the period during
which an incentive stock option may be exercised as set forth in
Section 6(b).

(b) The Board of Directors of the Corporation may, in its discretion,
terminate, or fix a date for the termination of, the Plan. Unless
previously terminated, the Plan shall terminate on May 15, 2014 and no
Grants shall be made under the Plan after such date.

(c) A termination or amendment of the Plan that occurs after a Grant is
made shall not result in the termination or amendment of the Grant
unless the grantee consents or unless the Committee acts under Section
18. The termination of the Plan shall not impair the power and
authority of the Committee with respect to an outstanding Grant.
Whether or not the Plan has terminated, an outstanding Grant may be
terminated or amended under this Section 17 or may be amended by
agreement of the Corporation and the grantee consistent with the Plan.

18.      Compliance with Law

The Plan, the exercise of Grants and the obligations of the Corporation
to issue or transfer shares of Common Stock under Grants shall be subject to all
applicable laws, including any applicable federal or Pennsylvania state law, and
to approvals by a governmental or regulatory agency as may be required. With
respect to persons subject to Section 16 of the Exchange Act, it is the intent
of the Corporation that the Plan and all transactions under the Plan comply with
all applicable conditions of Rule 16b-3 or its successors under the Exchange
Act. In addition, it is the intent of the Corporation that the Plan and
applicable Grants of stock options under the Plan comply with the applicable
provisions of sections 162(m) and 422 of the Code. The Committee may revoke any
Grant if it is contrary to law or modify a Grant to bring it into compliance
with any valid and mandatory government regulation. The Committee may also adopt
rules regarding the withholding of taxes on payments to grantees. The Committee
may, in its sole discretion, agree to limit its authority under this Section.

19.      Effective Date of the Plan

The Plan was effective as of March 1, 1994. The Plan is now amended as
of May 15, 2003.

EXHIBIT 10.9

PHILADELPHIA SUBURBAN CORPORATION

AMENDED AND RESTATED
EXECUTIVE DEFERRAL PLAN

In recognition of the services provided by certain key employees, the
Board of Directors of Philadelphia Suburban Corporation adopted the Plan to make
additional retirement benefits available to those individuals.

ARTICLE 1

Definitions

1.1      "Account" means a bookkeeping account established pursuant to Section
3.1 which reflects the amount standing to the credit of the Participant
under the Plan.

1.2      "Affiliated Company" means any affiliate or subsidiary of the Company.

1.3      "Base Salary" means the annual amount of base salary and wages paid by
the Employer to an Employee for any calendar year of employment, but
excluding all Employer contributions to benefit plans and all other
forms of compensation.

1.4      "Beneficiary" means the person(s) designated by a Participant to
receive any benefits payable under this Plan subsequent to the
Participant's death. The Committee shall provide a form for this
purpose. In the event a Participant has not filed a Beneficiary
designation with the Company, the Beneficiary shall be the
Participant's estate.

1.5      "Board" means the Board of Directors of the Company.

1.6      "Bonus" shall mean bonus compensation due to the Employee, if any,
under the Company's Incentive Compensation Plan.

1.7      "Code" means the Internal Revenue Code of 1986, as amended.

1.8      "Committee" means the Compensation Committee of the Board which shall
act for the Company in making decisions and performing specified duties
with respect to the Plan.

1.9      "Company" means Philadelphia Suburban Corporation and its successors.

1.10     "Effective Date" means January 1, 1995.

1.11     "Employee" means any individual employed by the Employer as an officer,
senior manager or other highly compensated employee, as designated by
the Committee, on a regular, full-time basis (in accordance with the
personnel policies and practices of the Employer).

1.12     "Employer" means the Company and/or any Participating Employer, either
collectively or individually, as the context requires.

1.13     "Participant" means any Employee who satisfies the eligibility
requirements set forth in Article 2. In the event of the death or
incompetency of a Participant, the term shall mean his personal
representative or guardian. An individual shall remain a Participant
until that individual has received full distribution of any amount
credited to the Participant's Account.

1.14     "Participating Employer" means any Affiliated Company which is
designated by the Board as a Participating Employer under the Plan and
whose designation as such has become effective upon acceptance of such
status by the board of directors of the Affiliated Company. A
Participating Employer may revoke its acceptance of such designation at
any time, but until such acceptance has been revoked, all the
provisions of the Plan and amendments thereto shall apply to the
Employees of the Participating Employer. In the event the designation
as a Participating Employer is revoked by the board of directors of an
Affiliated Company, the Plan shall be deemed terminated only with
respect to such Participating Employer.

1.15     "Plan" means the Philadelphia Suburban Corporation Amended and Restated
Executive Deferral Plan as the same is set forth herein, and as it may
be amended from time to time.

1.16     "Plan Year" means the calendar year.

1.17     "Separates from Employment" means the Employee's termination of
employment from the Employer for any reason. Except as otherwise
provided herein, a Separation from Employment shall be deemed to have
occurred on the last day of the Employee's service to the Employer and
shall be determined without reference to any compensation continuation
arrangement or severance benefit arrangement that may be applicable.

1.18     "Thrift Plan" means the Philadelphia Suburban Corporation Thrift Plan,
as it may be amended from time to time.

ARTICLE 2

Eligibility

2.1      Each Employee shall be eligible to participate in the Plan on such date
as is specified by the Committee. A list of the individuals
participating in the Plan on the Effective Date is attached hereto as
Exhibit A; such list may be modified from time to time by the
Committee.

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ARTICLE 3

Benefits

3.1      The Employer shall create and maintain on its books an Account for each
Participant to which it shall credit amounts contributed to the Plan
pursuant to this Article 3. The Employer shall also credit each
Participant's Account with deemed earnings for each Plan Year in
accordance with the provisions of Article 8 hereof.

3.2      Prior to the end of the first quarter of any Plan Year, or within 30
days after first being eligible to participate hereunder, a Participant
may elect to have the Employer credit to the Participant's Account (as
a result of payroll reduction) an amount equal to any whole percentage
or dollar amount of the Participant's Bonus, if any, to be earned for
such Plan Year. Prior to the first day of any calendar month in a Plan
Year, a Participant may also elect to have the Employer contribute to
the Participant's Account (as a result of payroll reduction) an amount
equal to any whole percentage or dollar amount of the Participant's
Base Salary for services to be rendered during the balance of such Plan
Year. If an election is made to have a contribution credited to the
Participant's Account for a Plan Year, the credit shall be made at the
time that such amount would otherwise have been paid and shall reduce
the Participant's Bonus or Base Salary, as applicable with respect to
that Plan Year by a corresponding amount. The Committee may establish
minimum or maximum amounts that may be deferred under this Section and
may change such standards from time to time. Any such limits shall be
communicated by the Committee to the Participants prior to the
commencement of a Plan Year.

3.3      Any elections under this Article shall be made in writing on such form
and at such time as the Committee shall specify consistent with the
provisions of Section 3.2. Any election by a Participant pursuant to
this Section 3.3 shall be irrevocable as to any credits made to a
Participant's Account in a Plan Year and may not be modified in any
respect.

3.4      For each Plan Year, the Employer shall also credit to the Participant's
Account an amount equal to the excess of the contribution that would
have been made by the Employer under the Thrift Plan on behalf of the
Participant if it were not for the limitations imposed by the Code over
the amount actually contributed by the Employer to the Thrift Plan on
behalf of the Participant. In addition, the Employer may make an
additional credit to each Participant's Account for any Plan Year in
such amount as shall be approved by the Committee. Such credits shall
be deemed to have occurred at the time such amounts would otherwise
have been contributed to the Thrift Plan or at such other time as is
specified by the Employer.

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ARTICLE 4

Distributions to Participants

4.1      A Participant's benefit under the Plan shall be distributed in one lump
sum, or, if at least $25,000 is credited to a Participant's Account, in
12 annual installments (with the balance to be distributed continuing
to be credited with deemed earnings for each subsequent Plan Year in
accordance with the provisions of Article 8 hereof) equal to 1\12,
1\11, 1\10\, 1\9, 1\8, 1\7, 1\6, 1\5, 1\4, 1\3, 1\2, and 1\1 of the
balance then credited to the Participant's Account, and shall be paid,
or commence, as soon as practicable following the completion of the
valuation of the Participant's Account for the last day of the month in
which the Participant Separates from Employment; provided however, that
each Participant shall make an election, in the form and manner
specified by the Committee, as to the form of payment on or before the
end of the year preceding the year of payment. If no such election has
been made by the first day of the year in which the Participant
Separates from Employment then distribution shall be delayed and shall
be made, or commence, as soon as practicable after the first day of the
year following the year in which the Participant Separates from
Employment. Notwithstanding anything herein to the contrary, in the
event that such a Participant fails to make an election, distribution
shall be in the form of one lump sum payment paid as soon as
practicable after the first day of the year following the date the
Participant Separates from Employment.

4.2      In the event that a Participant incurs a "significant financial
hardship" while employed by the Employer, as determined by the
Committee, the Participant may apply, in writing, for a withdrawal of
all or a portion of the balance credited to the Participant's Account
in the form of a lump sum in cash. All determinations by the Committee
regarding the existence of a financial hardship shall be made in
accordance with the provisions of the Company's Thrift Plan dealing
with whether a financial hardship exists for purposes of permitting
withdrawals thereunder. The Committee shall determine whether to permit
such a withdrawal and, based upon the Participant's application, the
amount necessary to satisfy that hardship, which shall be distributed
in a single sum as soon as practicable after the Committee's
determination.

ARTICLE 5

Death Benefit

5.1      In the event of the death of a Participant prior to the payment of the
full benefit due pursuant to Article 4, the Participant's Beneficiary
shall receive a lump sum distribution equal to the balance of the
Participant's Account on the date of death. The benefit payment to the
Beneficiary will be made as soon as practicable following the
completion of the valuation of the deceased Participant's Account. In
the event of the death of a Participant after payment of a benefit has
commenced in installments, pursuant to Section 4.1 hereof, the
Participant's Beneficiary shall receive the payments due following the
Participant's death; provided, however, that prior to receiving the
next annual installment, the Beneficiary may elect to receive, on the
next payment date, in full satisfaction of the Beneficiary's
entitlement under the Plan, a lump sum distribution equal to the
remaining balance then credited to the Participant's Account.

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ARTICLE 6

Vesting

6.1      The balance credited to a Participant's Account attributable to Section
3.2 shall be fully vested at all times. Credits attributable to Section
3.4 shall vest at the same time as the Participant's accrued benefit
under the terms of the Retirement Plan for Employees of Philadelphia
Suburban Corporation and Subsidiaries.

ARTICLE 7

Funding

7.1      The Board may, but shall not be required to, authorize the
establishment of a trust by the Employer to serve as the funding
vehicle for the benefits described in Article 3 hereof. In any event,
the Employer's obligation hereunder shall constitute a general,
unsecured obligation, payable solely out of its general assets, and no
Participant shall have any right to any specific assets of the
Employer. In addition, it is the intention of the Employer that the
Plan be unfunded for tax purposes and for purposes of Title I of the
Employee Retirement Income Security Act of 1974, as amended.

ARTICLE 8

Investments

8.1      Except as provided otherwise below, the balance credited to a
Participant's Account shall be deemed to be invested in an interest
bearing instrument which shall provide for interest to be credited and
compounded monthly at an effective rate equal to 100 basis points in
excess of the prime commercial lending rate established by Mellon Bank
N.A., or such other bank determined by the Committee to be the
Company's primary bank as of the beginning of any Plan Year, as in
effect on the 15th day of each month (or if such day is a non-business
day, on the first business day thereafter) during which there is a
positive balance in a Participant's Account. Interest shall be applied
to the average balance of each Participant's Account during the prior
30-day period. For any Plan Year, the Committee may determine to make
available, and announce to the Participants the procedure to elect,
other deemed forms of investment for the amounts credited to the
Accounts. Notwithstanding anything herein to the contrary, the Company
may, but shall not be required to, actually invest any funds in the
forms of investment made available hereunder and, in any event, any
such investments shall at all times remain the property of the Company.
Any such other deemed forms of investment shall be described on Exhibit
A hereto, as in effect and amended from time to time, and shall be
incorporated herein by reference.

-5-

ARTICLE 9

Administration

9.1      The Committee shall have full power and authority to interpret the
Plan, to prescribe, amend and rescind any rules, forms and procedures
as it deems necessary or appropriate for the proper administration of
the Plan and to make any other determinations and to take any other
such actions as it deems necessary or advisable in carrying out its
duties under the Plan. All action taken by the Committee arising out of
or in connection with, the administration of the Plan or any rules
adopted thereunder, shall in each case, lie within its sole discretion,
and shall be final, conclusive and binding upon the Employer, the
Board, all Employees, all beneficiaries of Employees and all persons
and entities having an interest therein.

9.2      Members of the Committee shall serve without compensation for their
services unless otherwise determined by the Board. All expenses of
administering the Plan shall be paid by the Employer.

9.3      The Company shall indemnify and hold harmless each member of the
Committee from any and all claims, losses, damages, expenses (including
counsel fees) and liability (including any amounts paid in settlement
of any claim or any other matter with the consent of the Board) arising
from any act or omission of such member, except when the same is due to
gross negligence or willful misconduct.

9.4      Any decisions, actions or interpretations to be made under the Plan by
the Company, Employer or the Committee (other than in the
administration of the Plan) shall be made in its sole discretion, not
in any fiduciary capacity and need not be uniformly applied to
similarly situated individuals and shall be final, binding and
conclusive on all persons interested in the Plan.

ARTICLE 10

Amendment

10.1     The Plan may be amended by the Committee at any time and from time to
time all without prior notice to any person or entity; provided,
however, that no such amendment shall have the effect of divesting a
Participant of the benefit which the Participant would otherwise
receive hereunder at the time the amendment is adopted.

ARTICLE 11

Termination

11.1     Continuance of the Plan is completely voluntary and is not assumed as a
contractual obligation of the Employer. The Committee, acting on behalf
of the Employer, shall have the right to terminate the Plan in whole or
in part at any time all without prior notice to any person or entity;
provided, however, that such termination shall not have the effect of
divesting a Participant of the benefit which the Participant would
otherwise receive hereunder at the time of the termination.

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ARTICLE 12

Miscellaneous

12.1     Nothing contained herein (a) shall be deemed to exclude a Participant
from any compensation, bonus, pension, insurance, severance pay or
other benefit to which he otherwise is or might become entitled as an
Employee or (b) shall be construed as conferring upon an Employee the
right to continue in the employ of the Employer.

12.2     Any amounts payable hereunder shall not be deemed salary or other
compensation to a Participant for the purposes of computing benefits to
which the Participant may be entitled under any other arrangement
established by the Employer for the benefit of its employees.

12.3     The rights and obligations created hereunder shall be binding on a
Participant's heirs, executors and administrators and on the successors
and assigns of the Employer.

12.4     The masculine pronoun whenever used shall include the feminine and the
singular shall be construed as the plural, where applicable.

12.5     The provisions of the Plan shall be construed and applied under the
laws of the Commonwealth of Pennsylvania.

12.6     The rights of any Participant under this Plan are personal and may not
be assigned, transferred, pledged or encumbered. Any attempt to do so
shall be void. In addition, a Participant's rights hereunder are not
subject, in any manner, to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment or garnishment by creditors
of the Participant or the Participant's Beneficiary.

12.7     If any provision of the Plan shall be held invalid or unenforceable,
such invalidity or unenforceability shall not effect any other
provisions hereof and the Plan shall be construed and enforced as if
such provisions had not been included.

12.8     The headings and captions herein are provided for convenience only, and
shall not be construed as part of the Plan, and shall not be employed
in the construction of the Plan.

12.9     Any benefit payable to or for the benefit of a payee who is a minor, an
incompetent person, or is otherwise incapable of receipting therefore
shall be deemed paid when paid to such person's guardian or to the
party providing, or a reasonably appearing to provide, the care for
such person, and such payment shall fully discharge the Employer, the
Committee, the Board and all other parties with respect thereto.

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EXHIBIT A

Effective February 1, 1995, the following additional deemed investments may be
elected by a Participant:

1. Company Stock - A Participant may elect, at the time and in the
manner specified by the Committee, to direct that any portion or all of the
amounts elected to be deferred under Section 3.2 of the Plan be deemed invested
in common shares of Philadelphia Suburban Corporation. The purchase price for
shares deemed purchased or sold under the Plan shall, except as otherwise
provided in the next sentence, be the sum of (a) 90% of the average of the high
and the low price for common shares of the Company as reported on the New York
Stock Exchange for the date an amount to be invested in such shares is credited
to the Participant's Account under Article 3 (or, if no such price is reported
for that date, as of the next preceding date) and (b) any transfer, excise or
similar tax that would be imposed on the transaction pursuant to which a share
would be purchased. The purchase price for shares deemed purchased with
dividends credited to shares shall be an amount equal to 95% of the average of
the high and low sales price for such shares as reported in the NYSE-Composite
Transactions for each of the five trading days immediately preceding the date
that an amount to be invested in such shares is credited to the Participant's
Account under Article 3. The sale price for shares deemed sold under the Plan
shall be 100% of the average of the high and low price for the common stock of
the Company as reported on the New York Stock Exchange for the date the shares
are deemed sold (or, if no price is reported for that date, as of the next
preceding date), less any transfer, excise or similar tax that would be imposed
on the transaction pursuant to which a share would be sold.

2. Life Insurance - A Participant (who is insurable) may elect, at
the time and in the manner specified by the Committee, to direct that any
portion or all of the amounts elected to be deferred under Section 3.2 of the
Plan be deemed invested in a life insurance contract on the Participant's life
with the amount of the death benefit determined by the Committee (taking into
account, among other things the Participant's insurability) and permitting the
Participant to direct the investment of any funds deemed invested under the
insurance contract in excess of that necessary to keep the death benefit in
force. Upon a distribution event under Article 4, and notwithstanding anything
in the Plan to the contrary, the Committee may determine to distribute an
insurance contract to the Participant in the event that the Company had
determined to purchase such a life insurance contract in light of the
Participant's election hereunder. If the Company determines to purchase a
contract hereunder, it may permit the Participant to designate a beneficiary
under the contract to receive the death benefit in the event of the
Participant's death prior to a distribution event under Article 4, which shall
be taken into account in determining whether any additional sums are owed under
Article 5.

Exhibit 10.13

PHILADELPHIA SUBURBAN CORPORATION
DIRECTOR DEFERRAL PLAN
(as amended and restated effective January 1, 2003)

In recognition of the services provided by non-employee directors,
Philadelphia Suburban Corporation wishes to make a vehicle available to them
that will facilitate the provision of additional retirement benefits to those
individuals under the terms and conditions hereinafter set forth. The provisions
of this Plan reflect the effect of the merger of the Consumers Water Company
1992 Deferred Compensation Plan for Directors Plan B (the "Consumers Directors'
Plan") with and into the Philadelphia Suburban Corporation Director Deferral
Plan effective as of January 1, 2003.

ARTICLE 1
Definitions

1.1 "Account" means a bookkeeping account established pursuant to
Section 3.1 which reflects the amount standing to the credit of the Participant
under the Plan.

1.2 "Affiliated Company" means any affiliate or subsidiary of the
Company.

1.3 "Base Retainer" means the annual amount of retainer paid by the
Company to a Director for any calendar year including meeting fees, committee
fees and fees for committee chairs.

1.4 "Beneficiary" means the person(s) designated by a Participant to
receive any benefits payable under this Plan subsequent to the Participant's
death. The Committee shall provide a form for this purpose. In the event a
Participant has not filed a Beneficiary designation with the Company, the
Beneficiary shall be the Participant's estate.

1.5 "Board" means the PSC Board or the board of directors of an
Employer. "PSC Board" means the Board of Directors of the Company.

1.6 "Committee" means the Compensation Committee of the PSC Board which
shall act for the Company in making decisions and performing specified duties
with respect to the Plan.

1.7 "Company" means Philadelphia Suburban Corporation and its
successors.

1.8 "Director" means each individual who serves as a non-employee
member of the Board. "Former Director" means an individual who was a participant
in the Consumers Directors' Plan and who is eligible to participate in the Plan
as a result of the merger of the Consumers Directors' Plan into the Plan as of
the Amendment Effective Date. In the event of the death or incompetence of a
Participant, the term shall mean the Participant's personal representative or
guardian.

1.9 "Effective Date" means January 1, 1995. "Amendment Effective Date"
means January 1, 2003.

1.10 "Employer" means the Company and/or any Participating Employer,
either collectively or individually, as the context requires.

1.11 "Participant" means (a) any Director and (b) any Former Director.

1.12 "Participating Employer" means any Affiliated Company which is
designated by the PSC Board as a Participating Employer under the Plan and whose
designation as such has become effective upon acceptance of such status by the
board of directors of the Affiliated Company. A Participating Employer may
revoke its acceptance of such designation at any time, but until such acceptance
has been revoked, all the provisions of the Plan and amendments thereto shall
apply to each Director of the Participating Employer. In the event the
designation as a Participating Employer is revoked by the board of directors of
an Affiliated Company, the Plan shall be deemed terminated only with respect to
such Participating Employer.

1.13 "Plan" means the Philadelphia Suburban Corporation Director
Deferral Plan as the same is set forth herein, and as it may be amended from
time to time.

1.14 "Plan Year" means the calendar year.

1.15 "Termination from Service" means the Director's resignation or
other termination from service as a member of the Board for any reason. Except
as otherwise provided herein, a Termination from Service shall be deemed to have
occurred on the last day of the Director's service as a member of the Board.
With respect to the Participants who were participants in the Consumers
Directors' Plan, "Termination from Service" means the later of (i) the
Participant's resignation from service as a member of the Board of Consumers
Water Company or termination from service as a member of the Board for any
reason, if later and (ii) the Participant's attainment of age 65.

ARTICLE 2
Eligibility

2.1 Each Director shall be eligible to participate in the Plan on the
first day of the calendar quarter following election as a Director. Former
Directors shall be eligible to participate in the Plan as of the Amendment
Effective Date.

ARTICLE 3
Benefits

3.1 The Employer shall create and maintain on its books an Account for
each Participant to which it shall credit amounts contributed to the Plan
pursuant to this Article 3. The Employer shall also credit each Participant's
Account with deemed earnings for each Plan Year in accordance with the
provisions of Article 8 hereof.

2

3.2 At least 30 days prior to the commencement of any calendar quarter
in a Plan Year, a Director may elect to have the Employer credit to the
Director's Account an amount equal to any whole percentage or dollar amount (or
shares of stock of the Employer ("Shares") to the extent that the Base Retainer
would otherwise be paid in Shares) of the Director's Base Retainer, if any, to
be earned for the balance of such Plan Year. If an election is made to have a
contribution credited to the Director's Account for a Plan Year, the credit
shall be made at the time that such amount would otherwise have been paid (or
Shares distributed) and shall reduce the Director's Base Retainer with respect
to that Plan Year by a corresponding amount. The Committee may establish minimum
or maximum amounts that may be deferred under this Section and may change such
standards from time to time. Any such limits shall be communicated by the
Committee to the Directors prior to the commencement of a Plan Year.

3.3 Any elections under this Article shall be made in writing on such
form as the Committee shall specify. Any election by a Director pursuant to this
Section 3.3 shall be irrevocable and may not be modified in any respect.

ARTICLE 4
Distributions to Participants

4.1 A Participant's benefit under the Plan shall be distributed in one
lump sum (including Shares to the extent the Director elected to defer the
receipt of such Shares pursuant to Section 3.2), or, if the value of the
Participant's Account is at least $25,000, in 12 annual installments (with the
balance to be distributed, including Shares, if applicable, continuing to be
credited with deemed earnings for each subsequent Plan Year in accordance with
the provisions of Article 8 hereof) equal to 1\12, 1\11, 1\10\, 1\9, 1\8, 1\7,
1\6, 1\5, 1\4, 1\3, 1\2, and 1\1 of the balance then credited to the
Participant's Account, and shall be paid, or commence, as soon as practicable
following the completion of the valuation of the Participant's Account for the
last day of the month in which the Participant has a Termination from Service;
provided however, that each Participant shall make an election, in the form and
manner specified by the Committee, as to the form of payment on or before the
end of the year preceding the year of payment. If no such election has been made
by the first day of the year in which the Participant has a Termination from
Service then distribution shall be delayed and shall be made, or commence, as
soon as practicable after the first day of the year following the year in which
the Participant has a Termination from Service. Notwithstanding anything herein
to the contrary, (i) in the event that such a Participant fails to make an
election, distribution shall be in the form of one lump sum payment, including
Shares, paid as soon as practicable after the first day of the year following
the date the Participant has a Termination from Service and (ii) payments of the
amount credited to a Former Director's Account (or portion of the Account
attributable to the Consumers Directors' Plan, in the case of a Former Director
who is also a Director) shall be made in equal monthly installments over a
period of 120 months, beginning on January 1 of the Plan Year following the
Former Director's Termination of Service. Interest credited in accordance with
Article 8 during the period in which periodic installments are paid pursuant to
this Section 4.1 shall be distributed currently.

3

4.2 In the event that a Participant incurs a "significant financial
hardship" while a Participant, as determined by the Committee, the Participant
may apply, in writing, for a withdrawal of all or a portion of the balance
credited to the Participant's Account (including Shares, if elected by the
Participant) in the form of a lump sum. All determinations by the Committee
regarding the existence of a financial hardship shall be made in accordance with
the provisions of the Company's Thrift Plan dealing with whether a financial
hardship exists for purposes of permitting withdrawals thereunder. The Committee
shall determine whether to permit a such a withdrawal and, based upon the
Participant's application, the amount necessary to satisfy that hardship, which
shall be distributed in a single sum (including any Shares, as elected by the
Director) as soon as practicable after the Committee's determination.

4.3 Upon the request of a Former Director, the Committee may, in its
sole discretion, approve payments of the amount credited to his or her Account
(or portion of the Account attributable to the Consumers Directors' Plan, in the
case of a Former Director who is also a Director), (i) beginning on a date prior
to that specified in Section 4.1, (ii) in installments over a shorter period
than that specified in Section 4.1, and (iii) in a single lump sum, in each case
to be made or commence being made in the Plan Year following the Plan Year in
which such request is made to the Committee.

ARTICLE 5
Death Benefit

5.1 In the event of the death of a Participant prior to the payment of
the full benefit due pursuant to Article 4, or in the event of the death of a
Former Director receiving any form of distribution, the Participant's
Beneficiary shall receive a lump sum distribution equal to the balance of the
Participant's Account on the date of death. The benefit payment to the
Beneficiary will be made as soon as practicable following the completion of the
valuation of the deceased Participant's Account. In the event of the death of a
Participant who was a Director, after payment of a benefit has commenced in
installments, pursuant to Section 4.1 hereof, the Participant's Beneficiary
shall receive the payments due following the Participant's death; provided,
however, that prior to receiving the next annual installment, the Beneficiary
may elect to receive, on the next payment date, in full satisfaction of the
Beneficiary's entitlement under the Plan, a lump sum distribution (including any
Shares then credited to the Director's Account) equal to the remaining balance
then credited to the Participant's Account.

ARTICLE 6
Vesting

6.1 The balance credited to a Participant's Account attributable to
Section 3.2 shall be fully vested at all times.

ARTICLE 7
Funding

7.1 The PSC Board may, but shall not be required to, authorize the
establishment of a trust by the Employer to serve as the funding vehicle for the
benefits described in Article 3 hereof. In any event, the Employer's obligation
hereunder shall constitute a general, unsecured obligation, payable solely out
of its general assets, and no Participant shall have any right to any specific
assets of the Employer. In addition, it is the intention of the Employer that
the Plan be unfunded for tax purposes and for purposes of Title I of the
Employee Retirement Income Security Act of 1974, as amended.

4

ARTICLE 8
Investments

8.1 The balance credited to a Participant's Account (other than Shares)
shall be deemed to be invested in an interest bearing instrument which shall
provide for interest to be credited and compounded monthly at an effective rate
equal to 100 basis points in excess of the prime commercial lending rate
established by Mellon Bank N.A., or such other bank determined by the Committee
to be the Company's primary bank as of the beginning of any Plan Year, as in
effect on the 15th day of each month (or if such day is a non-business day, on
the first business day thereafter) during which there is a positive balance in a
Participant's Account. Interest shall be applied to the average balance of each
Participant's Account during the prior 30-day period. For Participants who are
Former Directors, the interest rate stated in the foregoing sentence shall be
the only form of interest or earnings credited to such Participants' Account (or
portion of the Account attributable to the Consumers Directors' Plan, in the
case of a Former Director who is also a Director) from and after the Amendment
Effective Date. The Committee may determine to make available for Directors, and
announce to those Directors the procedure to elect, other deemed forms of
investment for the amounts credited to the Accounts. Such other forms of
investment shall be set forth in Exhibit A attached to this Plan. A Director's
Account, to the extent credited with any Shares, shall be deemed to earn any
dividends paid with respect to such Shares and the accumulated dividends, as and
when sufficient in amount, shall be deemed invested in additional whole Shares.

ARTICLE 9
Administration

9.1 The Committee shall have full power and authority to interpret the
Plan, to prescribe, amend and rescind any rules, forms and procedures as it
deems necessary or appropriate for the proper administration of the Plan and to
make any other determinations and to take any other such actions as it deems
necessary or advisable in carrying out its duties under the Plan. All action
taken by the Committee arising out of, or in connection with, the administration
of the Plan or any rules adopted thereunder, shall, in each case, lie within its
sole discretion, and shall be final, conclusive and binding upon the Employer,
the Board, all Employees, all beneficiaries of Employees and all persons and
entities having an interest therein.

9.2 Members of the Committee shall serve without compensation for their
services unless otherwise determined by the PSC Board. All expenses of
administering the Plan shall be paid by the Employer.

9.3 The Company shall indemnify and hold harmless each member of the
Committee from any and all claims, losses, damages, expenses (including counsel
fees) and liability (including any amounts paid in settlement of any claim or
any other matter with the consent of the PSC Board) arising from any act or
omission of such member, except when the same is due to gross negligence or
willful misconduct.

5

9.4 Any decisions, actions or interpretations to be made under the Plan
by the Company, the Employer or the Committee (other than in the administration
of the Plan) shall be made in its sole discretion, not in any fiduciary capacity
and need not be uniformly applied to similarly situated individuals and shall be
final, binding and conclusive on all persons interested in the Plan.

ARTICLE 10
Amendment

10.1 The Plan may be amended by the Committee at any time and from time
to time all without prior notice to any person or entity; provided, however,
that no such amendment shall have the effect of divesting a Participant of the
benefit which the Participant would otherwise receive hereunder at the time the
amendment is adopted.

ARTICLE 11
Termination

11.1 Continuance of the Plan is completely voluntary and is not assumed
as a contractual obligation of the Employer. The Committee, acting on behalf of
the Employer, shall have the right to terminate the Plan in whole or in part at
any time all without prior notice to any person or entity; provided, however,
that such termination shall not have the effect of divesting a Participant of
the benefit which the Participant would otherwise receive hereunder at the time
of the termination.

ARTICLE 12
Miscellaneous

12.1 Nothing contained herein shall be construed as conferring upon a
Director the right to continue in such capacity.

12.2 The rights and obligations created hereunder shall be binding on a
Participant's heirs, executors and administrators and on the successors and
assigns of the Employer.

12.3 The provisions of the Plan shall be construed and applied under
the laws of the Commonwealth of Pennsylvania.

12.4 The rights of any Participant under this Plan are personal and may
not be assigned, transferred, pledged or encumbered. Any attempt to do so shall
be void. In addition, a Participant's rights hereunder are not subject, in any
manner, to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment or garnishment by creditors of the Participant or the
Participant's Beneficiary.

6

12.5 If any provision of the Plan shall be held invalid or
unenforceable, such invalidity or unenforceability shall not effect any other
provisions hereof and the Plan shall be construed and enforced as if such
provisions had not been included.

12.6 The headings and captions herein are provided for convenience
only, and shall not be construed as part of the Plan, and shall not be employed
in the construction of the Plan.

12.7 Any benefit payable to or for the benefit of a payee who is a
minor, an incompetent person, or is otherwise incapable of receipting therefore
shall be deemed paid when paid to such person's guardian or to the party
providing, or a reasonably appearing to provide, the care for such person, and
such payment shall fully discharge the Employer, the Committee, the Board and
all other parties with respect thereto.

7

EXHIBIT A

Effective January 1, 1999, the following additional deemed investments
may be elected by a Director.

1. Company Stock - A Director may elect, at the time and in the manner
specified by the Committee, to direct that any portion or all of the amounts
elected to be deferred under Section 3.2 of the Plan be deemed invested in
common shares of Philadelphia Suburban Corporation. The purchase price for
shares deemed purchased under the Plan shall, except as otherwise provided in
the next sentence, be the sum of (a) 95% of the average of the high and the low
price for common shares of the Company as reported on the New York Stock
Exchange for the date an amount to be invested in such shares is credited to the
Director's Account under Article 3 (or, if no such price is reported for that
date, as of the next preceding date) and (b) any transfer, excise or similar tax
that would be imposed on the transaction pursuant to which a share would be
purchased. The purchase price for shares deemed purchased with dividends
credited to shares shall be an amount equal to 95% of the average of the high
and low sales price for such shares as reported in the NYSE-Composite
Transactions for each of the five trading days immediately preceding the date
that an amount to be invested in such shares is credited to the Director's
Account under Article 3. The sale price for shares deemed sold under the Plan
shall be 100% of the average of the high and low price for common shares of the
Company as reported on the New York Stock Exchange for the date the shares are
deemed sold (or, if no price is reported for that date, as of the next preceding
date), less any transfer, excise or similar tax that would be imposed on the
transaction pursuant to which a share would be sold.

8

EXHIBIT 10.23

AMENDED AGREEMENT

THIS Amended Agreement made as of the 7th day of August, 2001,
by and among Philadelphia Suburban Water Company, a Pennsylvania corporation
(the "Company"), Philadelphia Suburban Corporation, a Pennsylvania corporation
("PSC"), and Richard D. Hugus (the "Executive").

WHEREAS, the Executive is presently employed by the Company,
as its Vice President - Corporate Development; and

WHEREAS, the Company considers it essential to foster the
employment of well-qualified, key management personnel, and, in this regard, the
boards of directors of the Company and PSC recognize that, as is the case with
many publicly-held corporations such as PSC, the possibility of a change of
control of PSC may exist and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of key management personnel to the detriment of the Company;
WHEREAS, the boards of directors of the Company and PSC have
determined that appropriate steps should be taken to reinforce and encourage the
continued attention and dedication of key members of the Company's management to
their assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change of control of PSC,
although no such change is now contemplated;

WHEREAS, in order to induce the Executive to remain in the
employ of the Company, the Company and PSC, for which certain of the employees
of the Company, such as the Executive, provide key executive services, entered
into an Agreement, effective as of January 1, 1997, to provide that the
Executive would receive certain compensation in the event his employment with
the Company is terminated subsequent to a "Change of Control" (as defined in
Section 1 hereof) of PSC as a cushion against the financial and career impact on
the Executive of any such Change of Control; and

WHEREAS, the agreement was amended effective as of November
30, 1998 and as of February 1, 1999, to clarify the term of the Agreement; and

WHEREAS, the Company wishes to amend and restate the Agreement
at this time to clarify certain rights of the Executive, incorporate the
amendment that was made to the Agreement effective as of February 1, 1999, and
to make other desirable changes; and

-1-

WHEREAS, PSC is willing to guarantee that such compensation is
paid to the Executive in light of his role in the management of the affairs of
PSC or its subsidiaries;

NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements hereinafter set forth and intending to be
legally bound hereby, the parties hereto agree that the Agreement shall be
amended and restated to read as follows:

1. Definitions. For all purposes of this Agreement, the
following terms shall have the meanings specified in this Section unless the
context clearly otherwise requires:

(a) "Affiliate" and "Associate" shall have the
respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").

(b) "Base Compensation" shall mean the average of the
total of cash base salary and annual bonus paid to, and dividend equivalents
under the Equity Compensation Plan accrued for, the Executive in each calendar
year in all capacities with the Company, and its Subsidiaries or Affiliates, as
would be reported for Federal income tax purposes on Form W-2 if currently
subject to tax, together with (i) any amounts the payment of which has been
deferred by the Executive under any deferred compensation plan of the Company,
and its Subsidiaries or Affiliates, or otherwise, (ii) any and all salary
reduction authorized amounts under any of the benefit plans or programs of the
Company, and its Subsidiaries or Affiliates, (iii) the value, as shown in PSC's
Proxy, for each calendar year in which a grant was made, of the stock option
grants made to the Executive under the Equity Compensation Plan, but excluding
any amounts attributable to the exercise of stock options, and (iv) the value,
based on the average value of shares vesting in each year, of any grants of
Restricted Stock made to the Executive under the Equity Compensation Plan, for
the three calendar years (or such number of actual full calendar years of
employment, if less than three) immediately preceding the calendar year in which
occurs a Change of Control or the Executive's Termination Date, whichever period
produces the higher amount.

-2-

(c) A Person shall be deemed the "Beneficial Owner"
of any securities: (i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the "Beneficial
Owner" of securities tendered pursuant to a tender or exchange offer made by
such Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for payment, purchase or exchange; (ii) that such Person
or any of such Person's Affiliates or Associates, directly or indirectly, has
the right to vote or dispose of or has "beneficial ownership" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange
Act), including without limitation pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that a Person shall
not be deemed the "Beneficial Owner" of any security under this clause (ii) as a
result of an oral or written agreement, arrangement or understanding to vote
such security if such agreement, arrangement or understanding (A) arises solely
from a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable provisions
of the General Rules and Regulations under the Exchange Act, and (B) is not then
reportable by such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or (iii) that are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate or Associate thereof) with
which such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing) for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy as
described in the proviso to clause (ii) above) or disposing of any voting
securities of PSC; provided, however, that nothing in this Section 1(c) shall
cause a Person engaged in business as an underwriter of securities to be the
"Beneficial Owner" of any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.

(d) "Board" shall mean the board of directors of PSC.

(e) "Change of Control" shall mean:

(i) any Person (including any individual,
firm, corporation, partnership or other entity except PSC or the Company or any
employee benefit plan of the PSC or the Company or of any Affiliate or
Associate, any Person or entity organized, appointed or established by PSC or
the Company for or pursuant to the terms of any such employee benefit plan),
together with all Affiliates and Associates of such Person, shall become the
Beneficial Owner in the aggregate of 20% or more of the Common Stock of PSC then
outstanding;

(ii) during any twenty-four month period,
individuals who at the beginning of such period constitute the Board cease for
any reason to constitute a majority thereof, unless the election, or the
nomination for election by PSC's shareholders, of at least seventy-five percent
of the directors who were not directors at the beginning of such period was
approved by a vote of at least seventy-five percent of the directors in office
at the time of such election or nomination who were directors at the beginning
of such period; or

-3-

(iii) there occurs a sale of substantially
all of the assets of PSC or its liquidation is approved by a majority of its
shareholders or PSC is merged into or is merged with an unrelated entity such
that following the merger the shareholders of PSC no longer own more than 51% of
the resultant entity. 

Notwithstanding anything in this Section 1(e) to the contrary, a Change of
Control shall not be deemed to have taken place under clause (e)(i) above if (a)
such Person becomes the beneficial owner in the aggregate of 20% or more of the
Common Stock of PSC then outstanding as a result of an inadvertent acquisition
by such Person if such Person, as soon as practicable, divests itself of a
sufficient amount of its Common Stock so that it no longer owns 20% or more of
the Common Stock then outstanding, as determined by the Board of Directors of
PSC, or (ii) the shares of Common Stock required to be counted in order to meet
the 20% minimum threshold described under such clause (i) include any of the
shares described in subsections (i) through (iv) of section 2543(b) of the
Pennsylvania Business Corporation Law of 1988 (15 Pa.C.S.A. '2543(b)) as in
effect on the date of adoption of the Plan. 

(f) "Cause" shall mean 1) misappropriation of funds,
2) habitual insobriety or substance abuse, 3) conviction of a crime involving
moral turpitude, or 4) gross negligence in the performance of duties, which
gross negligence has had a material adverse effect on the business, operations,
assets, properties or financial condition of the Company.

(g) "Equity Compensation Plan" shall mean PSC's 1994
Equity Compensation Plan, and its predecessors and successors.

(h) "Good Reason Termination" shall mean a
Termination of Employment initiated by the Executive upon one or more of the
following occurrences:

(i) any failure of the Company or its
successor(s) to comply with and satisfy any of the terms of this the Agreement;

(ii) any significant involuntary reduction
of the authority, duties, responsibilities or reporting relationships held by
the Executive immediately prior to the Change of Control;

-4-

(iii) any involuntary removal of the
Executive from the employment grade, compensation level or officer positions
which the Executive holds with the Company or, if the Executive is employed by a
Subsidiary, with a Subsidiary, held by him immediately prior to the Change of
Control, except in connection with promotions to higher office;

(iv) any involuntary reduction in the
Executive's target level of annual and long-term compensation as in effect
immediately prior to the Change of Control;

(v) any transfer of the Executive, without
his express written consent, to a location which is outside the Bryn Mawr,
Pennsylvania area by more than 50 miles, other than on a temporary basis (less
than 6 months); or

(vi) the Executive being required to
undertake business travel to an extent substantially greater than the
Executive's business travel obligations immediately prior to the Change of
Control.

(i) "Normal Retirement Date" shall mean the first day
of the calendar month coincident with or next following the Executive's 65th
birthday.

(j) "Subsidiary" shall mean any corporation in which
PSC, directly or indirectly, owns at least a 50% interest or an unincorporated
entity of which PSC, directly or indirectly, owns at least 50% of the profits or
capital interests.

(k) "Termination Date" shall mean the date of receipt
of the Notice of Termination described in Section 2 hereof or any later date
specified therein, as the case may be.

(l) "Termination of Employment" shall mean the
termination of the Executive's actual employment relationship with the Company
and any of it Subsidiaries that actually employs the Executive.

2. Notice of Termination. Any Termination of Employment
following a Change of Control shall be communicated by a Notice of Termination
to the other party hereto given in accordance with Section 14 hereof. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific provision in this Agreement relied upon, (ii)
briefly summarizes the facts and circumstances deemed to provide a basis for the
Executive's Termination of Employment under the provision so indicated, and
(iii) if the Termination Date is other than the date of receipt of such notice,
specifies the Termination Date (which date shall not be more than 15 days after
the giving of such notice).

-5-

3. Severance Compensation upon Termination.

(a) Subject to the provisions of Section 11 hereof,
in the event of the Executive's involuntary Termination of Employment for any
reason other than Cause or in the event of a Good Reason Termination, in either
event within two years after a Change of Control, the Company shall pay to the
Executive, upon the execution of a release in the form required by the Company
of its terminating executives prior to the Change of Control, within 15 days
after the Termination Date (or as soon as possible thereafter in the event that
the procedures set forth in Section 11(b) hereof cannot be completed within 15
days), an amount in cash equal to two times the Executive's Base Compensation,
subject to required employment taxes and deductions. PSC hereby guarantees the
obligations of the Company and, in the event that the Company does not satisfy
its obligation hereunder within the required time period, PSC shall pay or cause
to be paid all compensation, benefits and other amounts remaining due to the
Executive upon prompt written notice to PSC that the Company has not satisfied
its obligation (or a portion thereof) to the Executive.

(b) In the event the Executive's Normal Retirement
Date would occur prior to 12 months after the Termination Date, the aggregate
cash amount determined as set forth in (a) above shall be reduced by multiplying
it by a fraction, the numerator of which shall be the number of days from the
Termination Date to the Executive's Normal Retirement Date and the denominator
of which shall be 365 days. In the event the Termination Date occurs after the
Executive's Normal Retirement Date, no payments shall be made under this Section
3.

4. Other Payments and Benefits. The payment due under Section
3 hereof shall be in addition to and not in lieu of any payments or benefits due
to the Executive under any other plan, policy or program of the Company, and its
Subsidiaries or Affiliates. In addition, the Executive shall be entitled to (i)
a continuation of health, dental, life and welfare benefits, excluding
disability benefits, otherwise provided to senior level executives or employees
generally, as the same may be amended for all such individuals from time to
time, for the period of two years, (ii) continued use of the automobile
furnished to the Executive for the lesser of (1) two years after the Termination
Date or (2) the balance of the applicable lease term, if any, in either case to
the same extent as was provided to the Executive in the calendar year
immediately preceding the Change of Control and the ability to purchase such
automobile from the Company at its book value at the completion of such period,
and (iii) fully-paid executive level outplacement services from the provider of
the Executive's choice for 6 months following the Termination Date.

-6-

5. Trust Fund. PSC sponsors an irrevocable trust fund pursuant
to a trust agreement to hold assets to satisfy its obligations to the Executive
under this Agreement. Funding of such trust fund shall be subject to the
discretion of PSC's President, as set forth in the agreement pursuant to which
the fund has been established.

6. Enforcement.

(a) In the event that the Company (or PSC, as
appropriate) shall fail or refuse to make payment of any amounts due the
Executive under Sections 3 and 4 hereof within the respective time periods
provided therein, the Company shall pay to the Executive, in addition to the
payment of any other sums provided in this Agreement, interest, compounded
daily, on any amount remaining unpaid from the date payment is required under
Section 3 or 4, as appropriate, until paid to the Executive, at the rate from
time to time announced by PNC Bank as its "prime rate" plus 1%, each change in
such rate to take effect on the effective date of the change in such prime rate.

(b) It is the intent of the parties that the
Executive not be required to incur any expenses associated with the enforcement
of his rights under this Agreement by arbitration, litigation or other legal
action because the cost and expense thereof would substantially detract from the
benefits intended to be extended to the Executive hereunder. Accordingly, the
Company shall pay the Executive on demand the amount necessary to reimburse the
Executive in full for all reasonable expenses (including all attorneys' fees and
legal expenses) incurred by the Executive in enforcing any of the obligations of
the Company under this Agreement.

7. No Mitigation. The Executive shall not be required to
mitigate the amount of any payment or benefit provided for in this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for herein be reduced by any compensation earned by other
employment or otherwise.

8. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in or rights
under any benefit, bonus, incentive or other plan or program provided by the
Company, or any of its Subsidiaries or Affiliates, and for which the Executive
may qualify.

9. No Set-Off. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others.

-7-

10. Taxes. Any payment required under this Agreement shall be
subject to all requirements of the law with regard to the withholding of taxes,
filing, making of reports and the like, and the Company shall use its best
efforts to satisfy promptly all such requirements.

-8-

11. Certain Reduction of Payments.

(a) Anything in this Agreement to the contrary
notwithstanding, in the event that it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise (a "Payment"), would constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), the aggregate present value of amounts payable or
distributable to or for the benefit of the Executive pursuant to this Agreement
(such payments or distributions pursuant to this Agreement are hereinafter
referred to as "Agreement Payments") shall be reduced (but not below zero) to
the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present
value, which maximizes the aggregate present value of Agreement Payments without
causing any Payment to be subject to the loss of deduction under Section 280G of
the Code. For purposes of this Section 11, present value shall be determined in
accordance with Section 280G(d)(4) of the Code.

(b) All determinations to be made under this Section
11 shall be made by PSC's independent public accountant immediately prior to the
Change of Control (the "Accounting Firm"), which firm shall provide its
determinations and any supporting calculations both to the Company and the
Executive within 10 days of the Termination Date. Any such determination by the
Accounting Firm shall be binding upon the Company and the Executive. The
Executive shall then have the right to determine which of the Agreement Payments
shall be eliminated or reduced in order to produce the Reduced Amount in
accordance with the requirements of this Section. Within five days after this
determination, the Company shall pay (or cause to be paid) or distribute (or
cause to be distributed) to or for the benefit of the Executive such amounts as
are then due to the Executive under this Agreement.

(c) As a result of the uncertainty in the application
of Section 280G of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Agreement Payments, as the case
may be, will have been made by the Company which should not have been made
("Overpayment") or that additional Agreement Payments which have not been made
by the Company could have been made ("Underpayment"), in each case, consistent
with the calculations required to be made hereunder. Within two years after the
Termination of Employment, the Accounting Firm shall review the determination
made by it pursuant to the preceding paragraph and the Company shall cooperate
and provide all information necessary for such review. In the event that the
Accounting Firm determines that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to the Executive which
the Executive shall repay to the Company together with interest from the date of
payment under this Agreement at the applicable Federal rate provided for in
Section 7872(f)(2) of the Code (the "Federal Rate"); provided, however, that no
amount shall be payable by the Executive to the Company if and to the extent
such payment would not reduce the limit on the amount that is deductible under
Section 280G of the Code. In the event that the Accounting Firm determines that
an Underpayment has occurred, any such Underpayment shall be promptly paid by
the Company to or for the benefit of the Executive together with interest from
the date of payment under this Agreement at the Federal Rate.

-9-

(d) All of the fees and expenses of the Accounting
Firm in performing the determinations referred to in subsections (b) and (c)
above shall be borne solely by the Company. The Company agrees to indemnify and
hold harmless the Accounting Firm of and from any and all claims, damages and
expenses resulting from or relating to its determinations pursuant to
subsections (b) and (c) above, except for claims, damages or expenses resulting
from the gross negligence or willful misconduct of the Accounting Firm.

12. Term of Agreement. The term of this Agreement shall be
indefinite until the Company notifies the Executive in writing that this
Agreement will not be renewed at least sixty days prior to the proposed
termination; provided, however, that (i) after a Change of Control during the
term of this Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired, and (ii)
this Agreement shall terminate if, prior to a Change of Control, the employment
of the Executive with the Company and its Subsidiaries, as the case may be,
shall terminate for any reason; provided, however, that if a Change of Control
occurs within 18 months after (a) the Executive's termination incurred for any
reason other than a voluntary resignation or retirement (a Good Reason
Termination shall not be deemed voluntary) or termination for Cause or (b) the
termination of this Agreement, the Executive shall be entitled to all of the
terms and conditions of this Agreement as if the Executive's termination had
occurred on the date of the Change of Control.

13. Successor Company. PSC shall require any successor or
successors (whether direct or indirect, by purchase, merger or otherwise) to all
or substantially all of the business and/or assets of PSC or the Company, or of
any of their Subsidiaries that actually employ the Executive, by agreement in
form and substance satisfactory to the Executive, to acknowledge expressly that
this Agreement is binding upon and enforceable against the successor or
successors, in accordance with the terms hereof, and to become jointly and
severally obligated with PSC and the Company to perform this Agreement in the
same manner and to the same extent that PSC and the Company would be required to
perform if no such succession or successions had taken place. Failure of PSC or
the Company to notify the Executive in writing as to such successorship, to
provide the Executive the opportunity to review and agree to the successor's
assumption of this Agreement or to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement. As
used in this Agreement, PSC and the Company shall mean PSC and the Company,
respectively, and their Subsidiaries as hereinbefore defined and any such
successor or successors to their business and/or assets, jointly and severally.

-10-

14. Notice. All notices and other communications required or
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be delivered personally or mailed by registered or
certified mail, return receipt requested, or by overnight express courier
service, as follows:

If to PSC or to the Company, to:

Philadelphia Suburban Corporation
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Attention:       Chairman, Executive Compensation
and Employee Benefits Committee

If to the Executive, to:

Mr. Richard D. Hugus
1350 Julieanna Drive
West Chester, PA 193801

or to such other names or addresses as the Company or the Executive, as the case
may be, shall designate by notice to the other party hereto in the manner
specified in this Section; provided, however, that if no such notice is given by
the Company following a Change of Control, notice at the last address of the
Company or to any successor pursuant to Section 13 hereof shall be deemed
sufficient for the purposes hereof. Any such notice shall be deemed delivered
and effective when received in the case of personal delivery, five days after
deposit, postage prepaid, with the U.S. Postal Service in the case of registered
or certified mail, or on the next business day in the case of overnight express
courier service.

-11-

15 Governing Law. This Agreement shall be governed by and
interpreted under the laws of the Commonwealth of Pennsylvania without giving
effect to any conflict of laws provisions.

16. Contents of Agreement, Amendment and Assignment. This
Agreement supersedes all prior agreements, sets forth the entire understanding
between the parties hereto with respect to the subject matter hereof and cannot
be changed, modified, extended or terminated except upon written amendment
executed by the Executive and the Company's Chairman of the Company's Executive
Compensation and Employee Benefits Committee, or its successor. The provisions
of this Agreement may require a variance from the terms and conditions of
certain compensation or bonus plans under circumstances where such plans would
not provide for payment thereof in order to obtain the maximum benefits for the
Executive. It is the specific intention of the parties that the provisions of
this Agreement shall supersede any provisions to the contrary in such plans, and
such plans shall be deemed to have been amended to correspond with this
Agreement without further action by the Company or the Board.

17. No Right to Continued Employment. Nothing in this
Agreement shall be construed as giving the Executive any right to be retained in
the employ of the Company.

18. Successors and Assigns. All of the terms and provisions of
this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, representatives, successors and assigns of
the parties hereto, except that the duties and responsibilities of PSC and the
Company hereunder shall not be assignable in whole or in part.

19. Severability. If any provision of this Agreement or
application thereof to anyone or under any circumstances shall be determined to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions or applications of this Agreement which can be given
effect without the invalid or unenforceable provision or application.

20. Remedies Cumulative; No Waiver. No right conferred upon
the Executive by this Agreement is intended to be exclusive of any other right
or remedy, and each and every such right or remedy shall be cumulative and shall
be in addition to any other right or remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by the Executive in
exercising any right, remedy or power hereunder or existing at law or in equity
shall be construed as a waiver thereof.

-12-

21. Miscellaneous. All section headings are for convenience
only. This Agreement may be executed in several counterparts, each of which is
an original. It shall not be necessary in making proof of this Agreement or any
counterpart hereof to produce or account for any of the other counterparts.

22. Arbitration. In the event of any dispute under the
provisions of this Agreement other than a dispute in which the sole relief
sought is an equitable remedy such as an injunction, the parties shall be
required to have the dispute, controversy or claim settled by arbitration in
Bryn Mawr, Pennsylvania, in accordance with the National Rules for the
Settlement of Employment Disputes of the American Arbitration Association,
before one arbitrator who shall be an executive officer or former executive
officer of a publicly traded corporation, selected by the parties. Any award
entered by the arbitrator shall be final, binding and nonappealable and judgment
may be entered thereon by either party in accordance with applicable law in any
court of competent jurisdiction. This arbitration provision shall be
specifically enforceable. The arbitrator shall have no authority to modify any
provision of this Agreement or to award a remedy for a dispute involving this
Agreement other than a benefit specifically provided under or by virtue of the
Agreement. The Company shall be responsible for all of the fees of the American
Arbitration Association and the arbitrator and any expenses relating to the
conduct of the arbitration (including reasonable attorneys' fees and expenses).

IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, have executed this Agreement as of the date first above written.

ATTEST:                                     PHILADELPHIA SUBURBAN CORPORATION

/s/Suzanne Falcone                         By /s/ Roy H. Stahl
------------------                            ---------------------------------
Ass't Secretary

ATTEST:                                     PHILADELPHIA SUBURBAN WATER COMPANY

/s/ Suzanne Falcone                        By /s/ Roy H. Stahl
------------------                            ---------------------------------
Ass't  Secretary

EXECUTIVE

/s/ Patricia K. Hugus                         /s/ Richard D. Hugus
------------------                            ---------------------------------
Witness

-13-

Exhibit 10.30

AQUA AMERICA, INC.
and SUBSIDIARIES
2004 ANNUAL CASH INCENTIVE COMPENSATION PLAN

BACKGROUND

o        In 1989, the Company and its compensation consultant conducted a
feasibility study to determine whether the Company should implement an
incentive compensation plan. The study was prompted by the positive
experience of other investor-owned water companies with incentive
compensation.

o        The study included interviews with executives and an analysis of
competitive compensation levels. Based on the results, the compensation
consultant recommended that the Company's objectives and competitive
practice supported the adoption of an annual incentive plan (the
"Plan"). The Company has had a cash incentive compensation plan in
place since 1990 and management and the Board of Directors believe it
has had a positive effect on the Company's operations, aiding
employees, shareholders (higher earnings) and customers (better service
and controlling expenses).

o        The Plan has two components - a Management Incentive Program and an
Employee Recognition ("Chairman's Award") Program.

o        The Plan is designed to provide an appropriate incentive to the
officers, managers and certain other key employees of the Company. The
2004 Management Incentive Program will cover officers, managers and
certain key employees of Aqua America, Inc., and its subsidiaries that
adopt the Plan.

o        The plan is periodically reviewed by the Company's outside compensation
consultant and the target bonus percentages are reviewed and approved
each year as part of the compensation consultant's annual review of the
Company's total compensation plan.

MANAGEMENT INCENTIVE PROGRAM

o        Performance Measures

--       Annual incentive bonus awards are calculated by multiplying an
individual's Target Bonus by a Company Rating Factor based on
the applicable company's performance and an Individual Rating
Factor based on the individual employee's performance.

The approach of having a plan tied to the applicable company's
income performance is appropriate as the participants' assume
some of the same risks and rewards as the shareholders who are
investing in the company and making its capital construction
and acquisition programs possible. Customers also benefit from
the participants' ?individual objectives being met, as
improvements in performance are accomplished by controlling
costs, improving efficiencies and enhancing customer service.
For these reasons, future rate relief should be lessened and
less frequent, which directly benefits all customers.

--       The applicable company's actual after-tax net income from
continuing operations or earnings before interest, taxes and
depreciation ("EBITD") relative to its annual budget will be
the primary measure for the company's performance. The
measurement to be used as the Company Factor for each
participant will be proposed by the Chairman of the Company
and approved by the Executive Compensation Committee. Each
year a "Target Net Income or EBITD" level will be established.
Starting in 2000, portions of the Company Rating Factor may be
tied to the financial targets of more than one company for
some participants. For purposes of the Plan, the Target Net
Income or EBITD may differ from the budgeted net income or
EBITD level. For 2004, the Target Net Income or EBITD will
exclude the impact of any unbudgeted extraordinary gains or
losses as a result of changes in accounting principles.

--       Based on a review of historic performance, the minimum or
threshold level of performance is set at 90 percent of the
Target Net Income or EBITD. That is, no bonus awards will be
made if actual net income is less than 90 percent of the
Target or EBITD for the year. No additional bonus will be
earned for results exceeding 110 percent of the Target Net
Income or EBITD.

--       Each individual's performance and achievement of his or her
objectives will also be evaluated and factored into the bonus
calculation (the "Individual Factor"). Performance objectives
for each participant are established at the beginning of the
year and are primarily directed toward controlling costs,
improving efficiencies and productivity, enhancing customer
service and growing the company's customer base. Each
objective has specific performance measures that are used to
determine the level of achievement for each objective. A
participant's target Individual Factor should be no more than
90 points, with the possibility of additional points being
awarded for measurable performance above the participant's
targeted performance level. Participants must achieve at least
70 points for their Individual Factor to be eligible for a
bonus award under the Plan.

o        Participation

--       Eligible participants consist of officers, managers and 
certain key employees.

--       Participation in the Management Incentive Program will be
determined each year. Each participant will be assigned a
"Target Bonus Percentage" ranging from 5 to 60 percent
depending on duties and responsibilities.

--       For each company, the Target Bonus Percentage for all the
participants within that company will be applied to either
their base salary or their salary grade midpoint as designated
by the Company's chairman, subject to the approval of the
Executive Compensation and Employee Benefits Committee.

--       Actual bonuses may range from 0, if the company's financial
results fall below the minimum threshold or the participant
does not make sufficient progress toward achieving his or her
objectives (i.e. performance measure points totaling less than
70 points), to 187.5 percent if performance -- both Company
and individual -- is rated at the maximum.

--       New employees who are hired into a position that is eligible
to participate in the Management Incentive Plan, will normally
be eligible to receive a portion of the bonus calculated in
accordance with this Plan that is pro-rated based on the
number of full calendar months between the new employee's hire
date and the end of the calendar year.

--       Employees who would otherwise be eligible to participate in
this Management Incentive Plan, but who leave employment with
the company either voluntarily, involuntarily or as a result
of retirement, will not receive a bonus for the year in which
their employment terminates. If an employee who would
otherwise be eligible to participate in this Management
Incentive Plan dies, the company will pay the deceased
employee's estate a portion of the bonus the deceased employee
would otherwise have been entitled to assuming a 100%
Individual Rating Factor, but pro-rated for the number of full
calendar months the employee completed before his or her
death.

o        Company Performance

-- Company performance will be measured on the following schedule:

Percent of     Company
Target        Rating 
------        ------

Threshold..............             90%            0%
90             50
92             65
95             80
96             85
97             90
98             94
99             97
Plan...................            100            100
105            110
110            125

--       The actual Company Factor should be calculated by
interpolation between the points shown in the table above.

--       Regardless of the Company rating resulting from this Schedule,
the Executive Compensation and Employee Benefits Committee
retains the authority to determine the final Company Rating
for purposes of this Plan.

o        Individual Performance

--       Individual performance will be measured on the following 
scale:

Performance Measure                        Individual
Points                              Rating Factor
------                              -------------

0 - 69                                     0%
70                                      70%
80                                      80%
90                                      90%
100                                     100%
110                                     110%

--       In addition, up to 40 additional points and additional
percentage points may be awarded to a participant at the
discretion of the Chief Executive Officer for exemplary
performance. Individual performance points for the Chief
Executive Officer are determined by the Executive Compensation
and Employee Benefits Committee.

Sample Calculations

o        Example 1

Salary or midpoint         $70,000
Target Bonus               10 percent ($7,000)
Company Rating             100 percent
Individual Rating          90 percent

Calculation:

Company     Individual
Target Bonus  x  Rating   x   Rating   =  Bonus Earned
------------     ------       ------      ------------

$7,000  x    100%   x     90%    =   $6,300
======

o        Example 2

--       Using the same salary and target bonus, but assuming Company
performance was less than 90 percent of Target EBITD, there
would be no bonus earned.

Calculation:

$7,000  x   0   x   90%  =   0

o        Example 3

--       Similarly, if the Individual Factor is rated below 70 points, 
no bonus would be earned regardless of the Company Factor.

Calculation:

$7,000  x  100% x   0   =   0

o        Example 4

--       If the Company Rating Factor is allocated between two
companies, the bonus will be calculated separately based on
the allocation.

Calculation:

Company          Company           Individual
Target Bonus x            Rating x         Allocation x      Rating             = Bonus Earned
-------------             ------           ----------        ------

$7,000   x        100%     x          20%    x       90%               = $1,260

$7,000   x        110%     x          80%    x       90%               = $5,544
------

Total Bonus                                                            = $6,804

o        Example 5

--       It is also possible that one portion of the applicable Company
Rating Factor is zero, for which there would be no bonus,
regardless of the participant's Individual Rating Factor.

Calculation:

Company          Company           Individual
Target Bonus x            Rating x         Allocation x      Rating             = Bonus Earned
-------------             ------           ----------        ------

$7,000   x         0%      x          20%    x       90%               = $0

$7,000   x        110%     x          80%    x       90%               = $5,544
------

Total Bonus                                                            = $5,544

EMPLOYEE RECOGNITION ("CHAIRMAN'S AWARD") PROGRAM

1.       In addition to the Management Incentive Program, the Company maintains
an Employee Recognition Program known as the Chairman's Award program
to reward non-union employees not eligible for the management bonus
plan for superior performance that contains costs, improves efficiency
and productivity of the workforce and better serves our customers.
Awards may also be made for a special action or heroic deed, or for a
project that positively impacts the performance or image of the
Company.

2.       Awards will be made from an annual pool designated by the Chairman of
Aqua America with the approval of the Executive Compensation and
Employee Benefits Committee. Unused funds will not be carried over to
the next year. If financial performance warrants, management may
request permission from the Executive Compensation and Employee
Benefits Committee for special awards under the program.

3.       In general, Chairman's Awards will not be made to employees of a
company that does not achieve at least 90% of its net income objective
for the year.

4.       Awards may be made throughout the year, however, no more than one-third
of a company's Chairman's Award pool may be awarded until the company's
final net income for the year is determined.

5.       Nominations for employees to receive Chairman's Awards will be made to
the applicable officer and should include documentation on the reasons
for the recommendations. The applicable officer will review the
nominations and forward their recommendations to the Chairman of Aqua
America.

6.       The Chairman will determine the individuals to actually receive a bonus
and the amount. The maximum award to any one employee is $5,000.

Exhibit 13.1

Aqua America, Inc.

Selected Portions of Annual Report to Shareholders for the
Year ended December 31, 2003

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)

FORWARD-LOOKING STATEMENTS

This report by Aqua America, Inc. ("Aqua America," "we" or "us")
contains, in addition to historical information, forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks, uncertainties and other factors,
many of which are outside our control, that may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. In some cases you can identify forward-looking statements where
statements are preceded by, followed by or include the words "believes,"
"expects," "anticipates," "plans," "future," "potential" or the negative of such
terms or similar expressions. Forward-looking statements in this report,
include, but are not limited to, statements regarding:

o   recovery of capital expenditures and expenses in rates;

o   projected capital expenditures and related funding requirements;

o   dividend payment projections;

o   future financing plans;

o   future pension contributions;

o   opportunities for future acquisitions and success of pending acquisitions;

o   acquisition-related costs and synergies;

o   the capacity of our water supplies and facilities; and

o   general economic conditions.

Because forward-looking statements involve risks and uncertainties,
there are important factors that could cause actual results to differ materially
from those expressed or implied by these forward-looking statements, including
but not limited to:

o   changes in general economic, business and financial market conditions;

o   changes in government regulations and policies, including public utility
regulations and policies;

o   changes in environmental conditions, including those that result in water
use restrictions;

o   abnormal weather conditions;

o   changes in capital requirements;

o   changes in our credit rating;

o   our ability to integrate businesses, technologies or services which we may
acquire;

o   our ability to manage the expansion of our business;

o   the extent to which we are able to develop and market new and improved
services;

o   unanticipated capital requirements;

o   increasing difficulties in obtaining insurance and increased cost of
insurance;

1

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

o   cost overruns relating to improvements or the expansion of our operations;
and

o   civil disturbance or terroristic threats or acts.

Given these uncertainties, you should not place undue reliance on these
forward-looking statements. You should read this report with the understanding
that our actual future results may be materially different from what we expect.
These forward-looking statements represent our estimates and assumptions only as
of the date of this report. Except for our ongoing obligations to disclose
material information under the federal securities laws, we are not obligated to
update these forward-looking statements, even though our situation may change in
the future. We qualify all of our forward-looking statements by these cautionary
statements.

GENERAL INFORMATION
Name Change

On January 16, 2004, we changed our name from Philadelphia Suburban
Corporation to Aqua America, Inc. The new name better represents our expanded
service territory and reflects our position as the largest U.S.-based
publicly-traded water utility. In addition, we have changed our ticker symbol
from PSC to WTR on the New York Stock Exchange and Philadelphia Stock Exchange
effective as of the opening of trading on January 20, 2004.

Overview

Aqua America, Inc. is the holding company for regulated utilities
providing water or wastewater services to approximately 2.5 million people in
Pennsylvania, Ohio, Illinois, Texas, New Jersey, Indiana, Virginia, Florida,
North Carolina, Maine, Missouri, New York, South Carolina and Kentucky. Our
largest operating subsidiary, Aqua Pennsylvania, Inc. - formerly Pennsylvania
Suburban Water Company, accounts for approximately 60% of our operating revenues
and provides water or wastewater services to approximately 1.3 million residents
in the suburban areas north and west of the City of Philadelphia and in 19 other
counties in Pennsylvania. Our other subsidiaries provide similar services in 13
other states. In addition, we provide water and wastewater service through
operating and maintenance contracts with municipal authorities and other parties
close to our operating companies' service territories. We are the largest
U.S.-based publicly-traded water utility based on number of people served.

The mission of the investor-owned water utility industry is to provide
quality and reliable water service at an affordable price for the customer, and
provide a fair return to its shareholders. A number of challenges face the
industry, including:

o   strict environmental, health and safety standards;
o   the need for substantial capital investment;
o   economic regulation by local and/or state government; and
o   the impact of weather and drought conditions on water sales demand.

Aqua America, Inc. strives to achieve the industry mission by effective
planning and efficient use of its resources to meet the industry challenges. We
maintain a rate case management capability to provide timely and adequate
returns on the capital investments that we make in improving or replacing water
mains, treatment plants and other infrastructure. This factor is important in
our continued profitability and in providing a fair return to our shareholders,
and thus providing access to capital markets to help fund these investments.
Often these utility investments are required by a changed federal or state
environmental standard, to improve our ability to deliver quality customer
service, or to assist in our ability to supply water in sufficient quantities
for future demand or when experiencing drought conditions. A strategy to meet
the above challenges is to actively explore opportunities to expand our utility
operations through acquisitions of water and wastewater utilities either in
areas adjacent to our existing service areas or in new service areas. This
growth-through-acquisition strategy allows us to operate more efficiently and
provides an important source of growth. The ability to successfully execute
these strategies and meet the industry challenges is largely due to our
qualified and trained workforce, which we strive to retain by treating employees
fairly and providing our employees with development and growth opportunities.

2

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

We believe that acquisitions will continue to be an important source of
growth for us. With more than 50,000 community water systems in the U.S., 84% of
which serve less than 3,300 customers, the water industry is the most fragmented
of the major utility industries (telephone, natural gas, electric, water and
wastewater). In the states were we operate, we believe there are over 22,000
public water systems of widely varying size, with the majority of the population
being served by government-owned water systems.

Although not as fragmented as the water industry, the wastewater
industry in the U.S. also presents opportunities for consolidation. According to
the U.S. Environmental Protection Agency's (EPA) most recent survey of
publicly-owned wastewater treatment facilities in 2000, there are approximately
16,000 such facilities in the nation serving approximately 72% of the U.S.
population. The remaining population represents individual homeowners with their
own treatment facilities; for example, community on-lot disposal systems and
septic tank systems. The vast majority of wastewater facilities are
government-owned rather than privately-owned. The EPA survey also indicated that
there are approximately 6,800 wastewater facilities in operation or planned in
the 14 states where we operate.

Because of the fragmented nature of the water and wastewater utility
industries, we believe that there are many potential water and wastewater system
acquisition candidates throughout the United States. We believe the factors
driving the consolidation of these systems are:

o   the benefits of economies of scale;
o   increasingly stringent environmental regulations;
o   the need for capital investment; and
o   the need for technological and managerial expertise.

On July 31, 2003, we completed the acquisition of four operating water
and wastewater subsidiaries of AquaSource, Inc., a subsidiary of DQE, Inc.,
including selected, integrated operating and maintenance contracts and related
assets, for $190,717 in cash, as adjusted and subject to further adjustment
pursuant to the purchase agreement. The acquired operations of AquaSource serve
over 130,000 water and wastewater customer accounts in 11 states; including the
Connecticut operations which we sold in October 2003. The operating results of
AquaSource have been included in our consolidated financial statements beginning
August 1, 2003.

On November 21, 2003, we entered into a purchase agreement with ALLETE
Water Services, Inc., a subsidiary of ALLETE, Inc., to acquire the capital stock
of Heater Utilities, Inc., which owns water and wastewater systems located in
North Carolina. The purchase agreement provides for a cash purchase price of
$48,000 and the assumption of approximately $28,000 in debt, reflecting an
acquisition premium of approximately $18,000. We intend to seek the ability to
recover a portion of this premium through customer rates via the North Carolina
Utilities Commission approval process. The acquisition, which is subject to
regulatory approval, is expected to close in mid-2004. This acquisition will add
approximately 50,000 customers in the areas of suburban Raleigh, Charlotte,
Gastonia and Fayetteville, North Carolina.

3

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

We are actively exploring other opportunities to expand our water and
wastewater utility operations through acquisitions or otherwise. We intend to
continue to pursue acquisitions of municipally-owned and investor-owned water
and wastewater systems of all sizes that provide services in areas adjacent to
our existing service territories or in new service areas.

Following are our selected five-year financial statistics:

Years ended December 31,                       2003 (a)       2002         2001         2000         1999
------------------------------------------------------------------------------------------------------------

Operating revenues                            $ 367,233     $322,028     $307,280     $274,014     $256,546
------------------------------------------------------------------------------------------------------------
Net income available to
common stock                                $70,785      $67,154      $60,005      $52,784      $36,275
------------------------------------------------------------------------------------------------------------
Income from operations before
non-recurring items (b)                     $70,785      $63,464      $60,005      $50,548      $44,871
------------------------------------------------------------------------------------------------------------
Operating Statistics
Selected operating results as a
percentage of operating revenues:
Operations and maintenance                     38.3%        36.6%        36.4%        37.1%        38.5%
Depreciation and amortization                  14.0%        13.8%        13.1%        12.4%        12.4%
Taxes other than income taxes                   5.9%         6.0%         6.8%         8.2%         8.5%
Interest expense, net                          12.2%        12.5%        11.9%        12.9%        12.9%
Allowance for funds used during
construction                               (0.6)%       (0.4)%       (0.4)%       (1.0)%       (0.8)%
Net income available to
common stock                               19.3%        20.9%        19.5%        19.3%        14.1%
============================================================================================================
Effective tax rates                                39.3%        38.5%        39.3%        39.2%        42.2%
============================================================================================================

Income from operations before non-recurring items is a measure that is not
determined in accordance with generally accepted accounting principles (GAAP)
and may not be comparable to similarly titled measures reported by other
companies. This Non-GAAP measure should not be considered as an alternative to
net income as determined in accordance with GAAP. We believe that this is useful
as an indicator of operating performance, as we measure it for management
purposes, because it provides a better understanding of our results of
operations by highlighting our ongoing operations and the underlying
profitability of our core business.
(a) 2003 includes five months of financial results for the operations acquired
in the AquaSource acquisition.
(b) Non-recurring items represent the 2002 gain of $3,690 ($5,676 pre-tax)
realized on the sale of a portion of our Ashtabula, Ohio water system, the 2000
gain of $2,236 ($4,041 pre-tax) for the partial recovery of the merger costs
related to the 1999 merger with Consumers Water Company, and the 1999 charges of
$8,596 ($10,121 pre-tax) for transaction costs and restructuring costs related
to the merger with Consumers Water Company.

4

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

We consider the following nonfinancial measure and financial measures
to be the fundamental basis by which we evaluate our performance: number of
customers, operating revenues, net income and our dividend rate on common stock.
In addition, we consider other key financial measures in evaluating our
operating results: the ratio of operations and maintenance expense compared to
operating revenues (this percentage is termed "operating expense ratio"); return
on revenues (net income divided by operating revenues); and earnings before
interest, taxes, depreciation and amortization. These measurements are reviewed
regularly and compared to historical periods as well as our operating budget as
approved by the Aqua America, Inc. Board of Directors.

Our operating expense ratio is one measure that we use to evaluate our
operating efficiency and management effectiveness. As reported in the above
table and as anticipated, our operating expense ratio increased for 2003 as
compared to 2002 as a result of the additional operating costs associated with
the AquaSource acquisition which closed on July 31, 2003. The business model of
the acquired AquaSource operations is different from the rest of the Aqua
America operations. The AquaSource operations are comprised of approximately 600
small systems, which are generally clustered in regions to achieve some level of
operating efficiency. However, the fragmented nature of the AquaSource
operations results in the additional operating revenues generated by the
AquaSource operations being accompanied by a higher ratio of operations and
maintenance expenses than the level Aqua America experiences in the rest of the
Aqua America operations. The AquaSource operations can be characterized as
having relatively-higher fixed operating costs in contrast to the rest of the
Aqua America operations which generally have fewer, but larger, interconnected
systems resulting in higher fixed capital costs (utility plant investment) per
customer. For the twelve-month period ending June 30, 2003, the last reporting
period before the July 31, 2003 closing of AquaSource, our operating expense
ratio declined to 36.5%, from 36.6% for the year ended December 31, 2002. The
operating results of AquaSource have been included in our consolidated financial
statements beginning August 1, 2003. We are implementing management systems over
time that will allow us to further control costs and improve efficiencies, but
the effect of this acquisition will be to increase our overall operating expense
ratio in 2004 from the levels experienced during the past five years.
Consequently, we anticipate our return on revenues, net income divided by
operating revenues, to be lower in 2004 than in the past four years as a result
of the impact of the AquaSource operations.

Following are our selected five-year operating and sales statistics:

Years ended December 31,                          2003           2002         2001           2000          1999
-----------------------------------------------------------------------------------------------------------------

Customers          Residential water            624,355        535,506       526,776        512,442       497,937

Commercial water              33,015         30,355        29,745         29,317        29,241

Industrial water               1,397          1,423         1,454          1,446         1,430

Other water                   20,483         16,466         9,947          9,500         9,067

Wastewater                    70,241         21,724        19,615         12,441        11,262
----------------------------------------------------------------------------------------------
Total                        749,491        605,474       587,537        565,146       548,937
==============================================================================================
Operating          Residential water           $218,487       $197,190      $188,303       $170,597      $154,881
Revenues (a)
Commercial water              61,343         55,962        53,103         47,109        45,192

Industrial water              17,675         17,221        16,141         14,943        13,944

Other water                   40,048         36,255        35,681         29,582        31,999

Wastewater                    17,874          8,210         6,960          5,414         5,235

Other                         11,806          7,190         7,092          6,369         5,295
----------------------------------------------------------------------------------------------
Total                       $367,233       $322,028      $307,280       $274,014      $256,546
==============================================================================================

(a) 2003 includes five months of financial results for the operations acquired
in the AquaSource acquisition.

5

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

RESULTS OF OPERATIONS

Our net income has grown at an annual compound rate of approximately
9.6% during the five-year period ended December 31, 2003. During this same
period, operating revenues grew at a compound rate of 7.9% and total expenses,
exclusive of income taxes, grew at a compound rate of 7.0%.

Operating Revenues

The growth in revenues over the past five years is a result of
increases in both the customer base and in water rates. The number of customers
increased at an annual compound rate of 7.3% in the past five years primarily as
a result of acquisitions of water and wastewater systems, including the
AquaSource acquisition completed July 31, 2003. Acquisitions made during the
five-year period ended December 31, 2003 have provided water and wastewater
revenues of approximately $41,368 in 2003, $14,246 in 2002 and $11,157 in 2001.
Excluding the effect of acquisitions, our customer base increased at a five-year
annual compound rate of 0.9%. Rate increases implemented during the past three
years have provided additional operating revenues of approximately $19,900 in
2003, $14,700 in 2002 and $13,100 in 2001. In addition to water and wastewater
operating revenues, we had other non-regulated revenues that were primarily
associated with operating and maintenance contracts, and data processing service
fees of $11,806 in 2003, $7,190 in 2002 and $7,092 in 2001. The increase in 2003
resulted from the additional revenues for contract operations of $3,743, for
five months, associated with the July 31, 2003 acquisition of AquaSource.

Economic Regulation - Most of our water and wastewater utility operations are
subject to regulation by their respective state regulatory commissions, which
have broad administrative power and authority to regulate rates and charges,
determine franchise areas and conditions of service, approve acquisitions and
authorize the issuance of securities. Some of our operations are subject to rate
regulation by county or city government. The profitability of our utility
operations is influenced a great extent by the timeliness and adequacy of rate
allowances in the various states in which we operate. Accordingly, we maintain a
rate case management capability to provide that the tariffs of the utility
operations reflect, to the extent practicable, the timely recovery of increases
in costs of operations, capital, taxes, energy, materials and compliance with
environmental regulations. In assessing our rate case strategy, we consider the
amount of utility plant additions and replacements made since the previous rate
decision, the changes in the cost of capital, changes in the capital structure
and changes in other costs. Based on these assessments, our utility operations
periodically file rate increase requests with their respective state regulatory
commissions.

In November 2003, our Pennsylvania operating subsidiary filed an
application with the Pennsylvania Public Utility Commission (PAPUC) requesting a
$25,300 or 10.2% increase in annual revenues. The application is currently
pending before the PAPUC and a final determination is anticipated by August
2004. On August 1, 2002, the PAPUC granted our Pennsylvania operating subsidiary
a $21,226 or 10.2% rate increase. The rates in effect at the time of the filing
included $9,400 in Distribution System Improvement Charges (DSIC) at 5.0%.
Consequently, the total base rates increased by $30,626 and the DSIC was reset
to zero.

Operating subsidiaries located in other states were allowed annual rate
increases of $1,275 in 2003 resulting from eight rate decisions, $3,024 in 2002
resulting from thirteen rate decisions and $4,799 in 2001 resulting from nine
rate decisions. Revenues from these increases realized in the year of grant were
approximately $839 in 2003, $1,403 in 2002 and $4,200 in 2001. These operating
subsidiaries currently have eight rate requests in process requesting a $7,803
increase in annual revenues. These requests are currently under review by the
respective state regulatory commission. During 2004, we intend to file 16 rate
requests requesting an aggregate of approximately $17,700 of increased annual
revenues.

6

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Revenue Surcharges - Four states in which we operate permit water utilities, and
in some states wastewater utilities, to add a surcharge to their water or
wastewater bills to offset the additional depreciation and capital costs
associated with certain capital expenditures related to replacing and
rehabilitating infrastructure systems. Prior to these mechanisms being approved,
water and wastewater utilities absorbed all of the depreciation and capital
costs of these projects between base rate increases without the benefit of
additional revenues. The gap between the time that a capital project is
completed and the recovery of its costs in rates is known as regulatory lag. The
infrastructure rehabilitation surcharge mechanism is intended to substantially
reduce regulatory lag which often acted as a disincentive to water and
wastewater utilities to rehabilitate their infrastructure. In addition, our
subsidiaries in certain states use a surcharge or credit on their bill to
reflect certain changes in costs until such time as the costs are incorporated
in base rates.

Currently, Pennsylvania, Illinois, Ohio and Indiana allow for the use
of infrastructure rehabilitation surcharges. In Pennsylvania, this mechanism is
referred to as a DSIC. These mechanisms typically adjust periodically based on
additional qualified capital expenditures completed or anticipated in a future
period. The infrastructure rehabilitation surcharge is capped as a percentage of
base rates, generally 5% of base rates, and is reset to zero when new base rates
that reflect the costs of those additions become effective or when a utility's
earnings exceed a regulatory benchmark. Infrastructure rehabilitation surcharges
provided revenues of $8,147 in 2003, $5,518 in 2002 and $6,671 in 2001.

Sendout - "Sendout" represents the quantity of treated water delivered to our
distribution systems. We use sendout as an indicator of customer demand. Weather
conditions tend to impact water consumption, particularly in our northern
service territories during the late spring and summer months when nonessential
and recreational use of water is at its highest. Consequently, a higher
proportion of annual operating revenues is realized in the second and third
quarters. In general during this period, an extended period of dry weather
increases water consumption, while above average rainfall decreases water
consumption. Also, an increase in the average temperature generally causes an
increase in water consumption. Conservation efforts, construction codes which
require the use of low flow plumbing fixtures, as well as mandated water use
restrictions in response to drought conditions, also affect water consumption.

The geographic diversity of our customer base reduces our exposure to
extreme or unusual weather conditions in any one area of our service territory.
Our geographic diversity has continued to widen as a result of the AquaSource
acquisition which closed on July 31, 2003. During the quarter ended December 31,
2003, which was the first quarter containing three months of AquaSource
operating results, our operating revenues were derived principally from the
following states: 60% in Pennsylvania, 9% in Ohio, 7% in Illinois, 7% in Texas,
5% in New Jersey, 4% in Indiana, and 3% in Florida.

On occasion, drought warnings and water use restrictions are issued by
governmental authorities for portions of our service territories in response to
extended periods of dry weather conditions. The timing and duration of the
warnings and restrictions can have an impact on our water revenues and net
income. In general, water consumption in the summer months is affected by
drought warnings and restrictions to a higher degree because nonessential and
recreational use of water is highest during the summer months, particularly in
our northern service territories. At other times of the year, warnings and
restrictions generally have less of an effect on water consumption. In November
2001, a drought warning was declared in nine counties in Pennsylvania, including
one of the five counties we serve in southeastern Pennsylvania. A drought
warning calls for a 10 to 15 percent voluntary reduction of water use,
particularly non-essential uses of water. In February 2002, a drought emergency
was declared in 24 counties in Pennsylvania, including all five of the counties
we serve in southeastern Pennsylvania where approximately 275,000 of our
customers are located. A drought emergency imposes a ban on nonessential water
use. In mid-2002, drought restrictions were relaxed in three of the five
counties we serve in southeastern Pennsylvania, moving from the mandatory
drought emergency to a voluntary drought warning. However, by early September
2002, the Commonwealth of Pennsylvania reinstated the drought emergency in the
three counties where restrictions had been relaxed because of hot, dry weather
in August. In November and December 2002, the Commonwealth of Pennsylvania
removed the drought restrictions in the counties we serve in Pennsylvania. Water
use restrictions were also imposed and relaxed at various times during 2002 in
our service territories in New Jersey. Currently there are no drought warnings
or restrictions in any of the areas we serve. 

7

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Operations and Maintenance Expenses

Operations and maintenance expenses totaled $140,602 in 2003, $117,735
in 2002 and $111,885 in 2001. Most elements of operating costs are subject to
the effects of inflation, as well as the effects of changes in the number of
customers served, in water consumption and the degree of water treatment
required due to variations in the quality of the raw water. The principal
elements of operating costs are labor and employee benefits, electricity,
chemicals, maintenance expenses and insurance costs. Electricity and chemical
expenses vary in relationship to water consumption, raw water quality, and to a
lesser extent the competitive electric market in some of the states in which we
operate. Maintenance expenses are sensitive to extremely cold weather, which can
cause water mains to rupture. Operations and maintenance expenses increased in
2003 as compared to 2002 by $22,867 or 19.4% due to additional operating costs
associated with acquisitions of $18,526, primarily from AquaSource, higher
postretirement costs, and additional maintenance costs, offset in part by
reduced bad debt expense. The postretirement benefits expense increase resulted
principally from higher pension costs and increased retiree medical costs. The
increased maintenance expenses are primarily a result of additional main break
repairs resulting from the relatively harsh winter weather experienced in early
2003 in our northern service territory.

Operations and maintenance expenses increased in 2002 as compared to
2001 by $5,850 or 5.2% due to additional operating costs associated with
acquisitions, transaction costs related to planned and completed acquisitions,
increased insurance expense, higher bad debt expense and increased wages as a
result of normal wage rate increases.

Depreciation and Amortization Expenses

Depreciation expense was $48,522 in 2003, $41,424 in 2002 and $37,979
in 2001, and has increased principally as a result of the significant capital
expenditures made to expand and improve the utility facilities, and as a result
of acquisitions of water systems.

Amortization expense was $2,941 in 2003, $2,898 in 2002 and $2,189 in
2001. The increase in 2003 and 2002 is due to the amortization of the costs
associated with, and other costs being recovered in, various rate filings.
Expenses associated with filing rate cases are deferred and amortized over
periods that generally range from one to three years.

Taxes Other than Income Taxes

Taxes other than income taxes increased by $2,140 or 11.0% in 2003 as
compared to 2002, and decreased by $1,420 or 6.8% in 2002 as compared to 2001.
The increase in 2003 is due to additional taxes associated with the AquaSource
acquisition and additional state taxes. The decrease in 2002 is due to a
reduction in state taxes and a decrease in the Pennsylvania Capital Stock Tax.
The decrease in state taxes is a result of a reduction in assessments and the
Capital Stock Tax declined due to a reduction in the base on which the tax is
applied and a legislated decrease in the tax rate.

Interest Expense, net

Net interest expense was $44,662 in 2003, $40,396 in 2002 and $39,859
in 2001. Interest income of $395 in 2003, $287 in 2002 and $367 in 2001 was
netted against interest expense. Interest expense increased in 2003 and in 2002
primarily as a result of higher levels of borrowings, offset partially by the
effects of decreased interest rates on borrowings. The higher level of
borrowings in 2003 was used to finance the acquisition of AquaSource and capital
expenditures. 2002 borrowing levels increased principally to fund capital
expenditures. Interest expense during 2003 was favorably impacted by a reduction
in the weighted cost of long-term debt from 6.56% at December 31, 2002 to 6.19%
at December 31, 2003.

8

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Allowance for Funds Used During Construction

The allowance for funds used during construction (AFUDC) was $2,127 in
2003, $1,389 in 2002 and $1,222 in 2001 and has varied over the years as a
result of changes in the average balance of utility plant construction work in
progress (CWIP), to which AFUDC is applied, and to changes in the AFUDC rate.
The increase in 2003 is due to an increase in the AFUDC rate as a result of
tax-exempt borrowings for our multi-year infrastructure rehabilitation plan and
an increase in the average balance of CWIP. The increase in 2002 is a result of
an increase in the average balance of CWIP to which AFUDC is applied, offset in
part by a decrease in the AFUDC rate which is based on short-term interest
rates.

Gain on Sale of Water System

Gain on sale of water system represents the gain realized on the
December 2002 sale of a portion of the Ashtabula, Ohio water system to the
county government. The sale provided $12,118 of net proceeds and resulted in a
fourth quarter 2002 pre-tax gain of $5,676.

Gain on Sale of Other Assets

Gain on sale of other assets totaled $5,692 in 2003, $2,079 in 2002 and
$3,384 in 2001 and consisted of gains on land and marketable securities sales.
Gain on sale of land totaled $5,153 in 2003, $900 in 2002 and $3,018 in 2001.
Gain on sale of marketable securities totaled $539 in 2003, $1,179 in 2002 and
$366 in 2001.

Income Taxes

Our effective income tax rate was 39.3% in 2003, 38.5% in 2002 and
39.3% in 2001. The changes in the effective tax rates in 2003 and 2002 are due
to differences between tax deductible expenses and book expenses.

Summary

Operating income was $153,561 in 2003, $140,504 in 2002 and $134,340 in
2001 and net income available to common stock was $70,785 in 2003, $67,154 in
2002 and $60,005 in 2001. Our operating results were affected by a non-recurring
item in 2002. Net income for 2002 includes a gain of $5,676 ($3,690 after-tax or
$0.04 per share) on the sale of a portion of our Ashtabula, Ohio water system.
Diluted net income per share was $0.79 in 2003, $0.78 in 2002 and $.70 in 2001.
Diluted income per share exclusive of the aforementioned non-recurring items
(for 2002, $0.04 per share from the gain on the sale of water system), was $0.79
in 2003, $0.73 in 2002 and $0.70 in 2001. Diluted income per share exclusive of
non-recurring items is a measure that is not determined in accordance with GAAP
and may not be comparable to similarly titled measures reported by other
companies. This Non-GAAP measure should not be considered as an alternative to
net income per share as determined in accordance with GAAP. We believe that this
is useful as an indicator of operating performance, as we measure it for
management purposes, because it provides a better understanding of our results
of operations by highlighting our ongoing operations and the underlying
profitability of our core business. The changes in the per share income in 2003
and 2002 over the previous years were due to the aforementioned changes in
income and impacted by a 3.1% increase in the average number of common shares
outstanding during 2003 and a 0.7% increase in the average number of shares
outstanding during 2002, respectively. The increase in the number of shares
outstanding in 2003 is primarily a result of the additional shares issued in
common share offerings and through our dividend reinvestment plan and employee
stock and incentive plan during 2003.

Although we have experienced increased income in the recent past,
continued adequate rate increases reflecting increased operating costs and new
capital investments are important to the future realization of improved
profitability.

9

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Fourth Quarter Results

Net income available to common stock was $18,606 in the fourth quarter
of 2003 and $18,646 in the same period of 2002. The fourth quarter results of
2002 include a net gain of $3,690 ($5,676 pre-tax) or $0.04 per share on the
sale of a portion of our Ashtabula, Ohio water system. The change in net income
is due to a $19,386 increase in operating revenues, a gain on the sale of other
assets of $1,278 realized in the fourth quarter of 2003, and an increase in
AFUDC, offset by increased operations and maintenance expense of $11,740,
depreciation expense of $2,134, and the absence in 2003 of the aforementioned
gain on the sale of water system of $5,676 realized in 2002. The increase in
operating revenues was a result of the additional revenues from the AquaSource
acquisition and an increase in water rates. The gain on sale of other assets is
a result of the sale of marketable securities. The increased AFUDC resulted from
a higher AFUDC rate. The higher operations and maintenance expense is due
primarily to the additional operating costs associated with acquisitions.
Depreciation expense increased due to acquisitions and utility plant additions
made since the fourth quarter of 2002.

Effects of Inflation

As a regulated enterprise, our rates are established to provide
recovery of costs and a return on our investment. Recovery of the effects of
inflation through higher water rates is dependent upon receiving adequate and
timely rate increases. However, rate increases are not retroactive and often lag
increases in costs caused by inflation. During periods of moderate to low
inflation, as has been experienced for the past several years, the effects of
inflation on our operating results are not significant.

Security

In light of concerns regarding security in the wake of the September
11, 2001 terrorist attacks, we have increased security measures at our
facilities. These increased security measures were not made in response to any
specific threat. We are in contact with federal, state and local authorities and
industry trade associations regarding current information on possible threats
and security measures for water utility operations. The cost of the increased
security measures, including capital expenditures, is expected to be recoverable
in water rates and is not expected to have a material impact on our results from
operations or financial condition.

FINANCIAL CONDITION

Cash Flow and Capital Expenditures

Net operating cash flow, dividends paid on common stock, capital
expenditures, including allowances for funds used during construction, and
expenditures for acquiring water and wastewater systems for the five years ended
December 31, 2003 were as follows:

Net Operating         Common            Capital          Acquisitions of
Cash Flow          Dividends        Expenditures       Utility Systems
------------------------------------------------------------------------------------------------

1999          $ 74,103          $  29,217          $  96,383            $  39,164
2000            86,972             30,406            129,740                3,546
2001           102,165             34,234            124,088                9,517
2002           121,560             36,789            136,164                8,914
2003           143,373             39,917            163,320              192,331
------------------------------------------------------------------------------------------------
$ 528,173          $ 170,563          $ 649,695            $ 253,472
================================================================================================

10

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Included in capital expenditures for the five-year period are:
expenditures for the modernization and replacement of existing treatment plants,
new water mains and customer service lines, rehabilitation of existing water
mains and hydrants, and water meters. During this five-year period, we received
$36,570 of customer advances and contributions in aid of construction to finance
new water mains and related facilities which are not included in the capital
expenditures presented in the above table. In addition, during this period, we
have made sinking fund contributions and retired debt in the amount of $110,799,
retired $3,220 of preferred stock, and have refunded $22,697 of customer
advances for construction. Common dividends increased during the past five years
as a result of an annual increase in the common dividends declared and paid and
an increase in the shares outstanding during the period.

Our planned 2004 capital program, exclusive of the costs of new mains
financed by advances and contributions in aid of construction, is estimated to
be $178,900 of which $49,345 is for infrastructure rehabilitation
surcharge-qualified projects. We have increased our capital spending for
infrastructure rehabilitation in response to the infrastructure rehabilitation
surcharge mechanisms, and should these mechanisms be discontinued for any
reason, which is not anticipated, we would re-evaluate the magnitude our capital
program. Our 2004 capital program, along with $39,386 of sinking fund
obligations and debt maturities, and $28,007 of other contractual cash
obligations, as reported in the section captioned "Contractual Obligations", is
expected to be financed through internally-generated funds, our revolving credit
facilities, the issuance of equity and the issuance of new long-term debt.

Future utility construction in the period 2005 through 2008, including
recurring programs, such as the ongoing replacement of water meters, water
treatment plant upgrades, storage facility renovations, the rehabilitation of
water mains and additional transmission mains to meet customer demands,
exclusive of the costs of new mains financed by advances and contributions in
aid of construction, is estimated to require aggregate expenditures of
approximately $600,000. We anticipate that less than one-halfr of these
expenditures will require external financing of debt and the additional issuance
of common stock through our dividend reinvestment plan and possible future
public equity offerings. We expect to refinance $90,339 of sinking fund
obligations and debt maturities during this period as they become due with new
issues of long-term debt. The estimates discussed above do not include any
amounts for possible future acquisitions of water systems or the financing
necessary to support them, including the planned Heater acquisition described
below.

Our primary source of liquidity is cash flows from operations,
borrowings under various short-term lines of credit and other credit facilities,
and advances and contributions in aid of construction. Our cash flow from
operations, or internally-generated funds, is impacted by the timing of rate
relief and water consumption. We fund our capital and acquisition programs
through internally-generated funds, supplemented by short-term borrowings. Over
time, we refinance our short-term borrowings with long-term debt and proceeds
from the issuance of common stock. The ability to finance our future
construction programs, as well as our acquisition activities, depends on our
ability to attract the necessary external financing and maintain
internally-generated funds. Rate orders permitting compensatory rates of return
on invested capital and timely rate adjustments will be required by our
operating subsidiaries to achieve an adequate level of earnings to enable them
to secure the capital they will need and to maintain satisfactory debt coverage
ratios.

Acquisitions

During the past five years, we have expended cash of $253,472 and
issued 1,317,017 shares of common stock, valued at $16,400 at the time of the
acquisition, related to the acquisitions of utility systems, primarily water
utilities and some wastewater utilities. On July 31, 2003, we completed the
acquisition of four operating water and wastewater subsidiaries of AquaSource,
Inc., a subsidiary of DQE, Inc., including selected, integrated operating and
maintenance contracts and related assets (individually and collectively the
acquisition is referred to as "AquaSource") for $190,717 in cash, as adjusted
pursuant to the purchase agreement and subject to further adjustment. The
acquisition was initially funded by a portion of the proceeds from the July 2003
issuance of $135,000 of unsecured notes due 2023, with an interest rate of
4.87%, and the issuance of a $90,000 unsecured note by Aqua America. In August
2003, the $90,000 unsecured note was repaid with the proceeds from the issuance
of 5,000,000 shares of common stock through a shelf registration. Please refer
to the section captioned "AquaSource Acquisition" which follows. These
acquisitions were accounted for as purchases. In March 1999, we completed a
merger with Consumers Water Company (CWC). On the date of the merger, we issued
25,417,998 shares of Common Stock in exchange for all of the outstanding shares
of CWC and CWC became our wholly-owned subsidiary. The CWC merger has been
accounted for as a pooling-of-interests.

11

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

On November 21, 2003, we entered into a purchase agreement with ALLETE
Water Services, Inc., a subsidiary of ALLETE, Inc., to acquire the capital stock
of Heater Utilities, Inc., which owns water and wastewater systems located in
North Carolina. The purchase agreement provides for a cash purchase price of
$48,000 and the assumption of approximately $28,000 in debt, reflecting an
acquisition premium of approximately $18,000. We intend to seek the ability to
recover a portion of this premium through customer rates via the North Carolina
Utilities Commission approval process. The acquisition, which is subject to
regulatory approval, is expected to close in mid-2004. This acquisition will add
approximately 50,000 customers in the areas of suburban Raleigh, Charlotte,
Gastonia and Fayetteville, North Carolina. It is our intention to fund the
acquisition at closing with cash from a combination short-term debt, long-term
debt and/or the issuance of our common stock.

We continue to hold acquisition discussions with several water systems.
In general, acquisitions are expected to be financed through the issuance of
equity (for the acquisition of some investor-owned systems) or funded initially
with short-term debt with subsequent repayment from the proceeds of long-term
debt or proceeds from equity offerings.

Dispositions

In May 2003, we announced agreements for the sale of the AquaSource
regulated and nonregulated operations located in Connecticut and New York to a
New England-based water company for an aggregate purchase price of $5,000 and
the assumption of approximately $800 of debt. The sale of the Conneticut
operations closed on October 31, 2003 and provided proceeds of $4,000. The sale
of the New York operations is expected to occur in mid-2004. The combined
operations in New York and Connecticut represented approximately 2% of the
operations acquired from AquaSource, Inc. We intend to sell other minor
divisions of the acquired AquaSource operations as we will continue to review
and evaluate our areas of business and operating divisions.

In December 2002, as a result of the settlement of a condemnation
action, our Ohio operating subsidiary sold to Ashtabula County, Ohio the water
utility assets in the unincorporated areas of Ashtabula County and the area
within the Village of Geneva on the Lake for net proceeds of $12,118, which was
in excess of the book value for these assets. The proceeds were used to pay down
short-term debt, and the sale resulted in the recognition in the fourth quarter
of 2002 of a gain on the sale of these assets of $5,676, or an after-tax gain of
$3,690 and $0.04 per share. We continue to operate this water system for
Ashtabula County, beginning after the closing of the sale, under a multi-year
operating contract that was recently renewed and is expected to provide us with
over $300 in operating revenues annually. The water utility assets sold
represented less than 1% of our total assets, and the total number of customers
included in the water system sold represented less than 1% of our total customer
base.

Despite these transactions, our strategy continues to be to acquire
additional water and wastewater systems, maintain our existing systems, and
actively oppose efforts by municipal governments to acquire any of our
operations.

12

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Sources of Capital

Since net operating cash flow plus advances and contributions in aid of
construction have not been sufficient to fully fund cash requirements, we issued
approximately $462,500 of long-term debt and obtained other short-term
borrowings during the past five years. At December 31, 2003, we had short-term
lines of credit and other credit facilities of $178,000, of which $81,541 was
available. Our short-term lines of credit and other credit facilities are either
payable on demand or have a 364-day term.

In April 2003, we filed a universal shelf registration with the SEC to
allow for the sale, over time, of up to $250,000 of various debt and equity
securities, including common stock. To date, we have completed two issuances
under the universal shelf registration:

o    In May 2003, we sold 1,868,750 shares of common stock in a public
offering for proceeds of $33,100, net of expenses. The net
proceeds were used to repay short-term debt, including the
repayment of $22,000 of indebtedness incurred in connection with
our repurchase of 1,513,275 shares of our common stock from
affiliates of Veolia Environnement, S.A., formerly Vivendi
Enivironnement, S.A., in October 2002.
o    In August 2003, we sold 5,000,000 shares of common stock in a
public offering for proceeds of $90,100, net of expenses. The net
proceeds were used to repay an unsecured note of $90,000. The
indebtedness was incurred by Aqua America in connection with the
acquisition of the operations that were purchased from AquaSource,
Inc.

The balance remaining available for use under the universal shelf
registration as of December 31, 2003 is $121,895. In addition, we have a shelf
registration statement filed with the SEC to permit the offering from time to
time of shares of common stock and shares of preferred stock for acquisitions.
During 2003, no shares were issued from the acquisition shelf registration.
During 2002 and 2001, 178,664 and 414,638 shares of common stock totaling $2,745
and $5,361, were issued to acquire water and wastewater systems. The balance
remaining available for use under the acquisition shelf registration as of
December 31, 2003 is 2,218,947 shares. The form and terms of such securities
shall be determined when and if these securities are issued under these shelf
registrations.

In September 2000, we sold 2,583,008 shares of common stock in a public
offering for net proceeds of $29,689. The proceeds of this offering were used to
make an equity contribution to our Pennsylvania operating subsidiary.

We offer a Dividend Reinvestment and Direct Stock Purchase Plan (Plan)
that provides a convenient and economical way to purchase shares of Aqua
America, Inc. Under the direct stock purchase portion of the Plan, shares are
sold throughout the year and the shares are obtained by our transfer agent in
the open market. The dividend reinvestment portion of the Plan offers a 5%
discount on the purchase of original issue shares of common stock with
reinvested dividends. As of the December 2003 dividend payment, holders of 17.0%
of the common shares outstanding participated in the dividend reinvestment
portion of the Plan. During the past five years, we have sold 2,150,474 original
issue shares of common stock for net proceeds of $29,913 through the dividend
reinvestment portion of the Plan and the proceeds were used to invest in our
operating subsidiaries, to repay short-term debt, and for general corporate
purposes.

13

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Other Capital Transactions

In May 2002, Veolia Environnement, S.A., formerly Vivendi
Environnement, S.A., which through its affiliates (collectively "VE") owned
approximately 16.8% of our outstanding common stock, advised us of its decision
to sell its investment in Aqua America. VE announced that its decision was part
of its overall strategy to divest non-core assets and focus on other business
strategies. In September 2002, in order to facilitate the orderly
re-distribution of the shares held by VE into the market, we completed a
secondary offering of 12,356,570 shares of Aqua America common stock held by VE.
The number of outstanding shares of common stock was not changed and we did not
receive any proceeds as a result of this secondary offering. In addition, in
October 2002 we repurchased 1,513,275 shares of Aqua America common stock
representing the remainder of the shares of Aqua America common stock held by
VE. The repurchase of shares was funded with proceeds of $22,000 from a
short-term credit facility. In May 2003, this $22,000 short-term credit facility
was repaid with funds from the issuance of 1,868,750 shares of common stock
through a shelf registration, providing proceeds of approximately $33,100, net
of expenses. The balance of the net proceeds were used to repay other short-term
debt.

The Board of Directors has authorized us to purchase our common stock,
from time to time, in the open market or through privately negotiated
transactions. We have not purchased any shares under this authorization since
2000. As of December 31, 2003, 411,209 shares remain available for repurchase.
Funding for future stock purchases, if any, is not expected to have a material
impact on our financial position.

Contractual Obligations

The following table summarizes our contractual cash obligations as of
December 31, 2003:

Payments Due By Period
--------------------------------------------------------------------------------------------------------------
2004        2005         2006        2007        2008   Thereafter       Total
--------------------------------------------------------------------------------------------------------------

Long-term debt (a)          $ 39,386    $ 40,418     $ 16,088    $ 14,395    $ 19,438     $606,327    $736,052
Operating leases (b)           2,558       2,110        1,352       1,081       1,016       16,420      24,537
Unconditional purchase
obligations (c)             7,573       7,403        7,403       7,403       7,238       68,485     105,505
Other purchase
obligations (d)             7,400          --           --          --          --           --       7,400
Defined benefit plan
obligations (e)             5,371          --           --          --          --           --       5,371
Other obligations (f)          5,105         200          200         200         200           --       5,905
-------------------------------------------------------------------------------------
Total                       $ 67,393    $ 50,131     $ 25,043    $ 23,079    $ 27,892     $691,232    $884,770
=====================================================================================

--------------------------------------------------------------------------------
(a)      Represents sinking fund obligations and debt maturities.
(b)      Represents operating leases that are noncancelable, before expiration,
for the lease of motor vehicles, buildings, land and other equipment.
(c)      Represents our commitment to purchase minimum quantities of water as
stipulated in agreements with other water purveyors. We use purchased
water to supplement our water supply, particularly during periods of
peak customer demand.
(d)      Represents an approximation of the open purchase orders as of the
period end for goods and services purchased in the ordinary course of
business.
(e)      Represents contributions expected to be made to qualified defined
benefit plan. The amount of required contributions in 2005 and
thereafter is not determinable.
(f)      Represents capital expenditures estimated to be required under legal
and binding contractual obligations.

14

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

In addition to these obligations, we make refunds on Customers'
Advances for Construction over a specific period of time based on operating
revenues related to developer-installed water mains or as new customers are
connected to and take service from such mains. After all refunds are made, any
remaining balance is transferred to Contributions in Aid of Construction. The
refund amounts are not included in the above table because the refund amounts
and timing cannot be accurately estimated because future refund payments depend
on several variables, including new customer connections, customer consumption
levels and future rate increases. Portions of these refund amounts are payable
annually through 2017 and amounts not paid by the contract expiration dates
become non-refundable.

These contractual obligations will be funded from cash flows from
operations and liquidity sources held by or available to Aqua America.

AquaSource Acquisition

Pursuant to our strategy to grow through acquisitions, on July 31,
2003, we completed the acquisition of four operating water and wastewater
subsidiaries of AquaSource, Inc. (a subsidiary of DQE, Inc.), including
selected, integrated operating and maintenance contracts and related assets
(individually and collectively the acquisition is referred to as "AquaSource")
for $190,717 in cash, as adjusted pursuant to the purchase agreement for the
completion of a closing balance sheet and the finalization of working capital
($195,533 was paid at closing and refunds were subsequently received totaling
$4,816). There remains approximately $12,000 of the above purchase price subject
to an agreed-upon arbitration process. Accordingly, the final purchase price is
expected to be within the range of $178,700 to $190,717. We expect the
arbitration process to conclude by mid-year 2004. The results of AquaSource have
been included in our consolidated financial statements beginning August 1, 2003.
The acquired operations of AquaSource serve over 130,000 water and wastewater
customer accounts in 11 states (including the Connecticut operations which we
sold in October 2003). Please refer to the section captioned "Dispositions" for
a discussion of the sale of the AquaSource operations located in Connecticut and
the planned sale of the New York operations.

The AquaSource acquisition was initially funded by a portion of the
proceeds from the July 2003 issuance of $135,000 of unsecured notes due 2023,
with an interest rate of 4.87%, and the issuance of a $90,000 unsecured note by
Aqua America. In August 2003, the $90,000 unsecured note was repaid with the
proceeds from the issuance of 5,000,000 shares of common stock through a shelf
registration.

The acquired operations of AquaSource serve over 130,000 water and
wastewater customer accounts in 11 states (including the Connecticut operations
which we sold in October 2003). The acquisition provides an expanded platform
from which to extend our growth-through-acquisition strategy of acquiring water
and wastewater utility systems that are near or adjacent to our existing service
territories. The AquaSource operations are comprised of approximately 600 small
systems, which are generally clustered in regions to achieve some level of
operating efficiency.

15

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Market Risk

We are subject to market risks in the normal course of business,
including changes in interest rates and equity prices. The exposure to changes
in interest rates is a result of financings through the issuance of fixed-rate,
long-term debt. Such exposure is typically related to financings between utility
rate increases, because generally our rate increases provide a revenue level to
allow recovery of our current cost of capital. Interest rate risk is managed
through the use of a combination of long-term debt, which is at fixed interest
rates and short-term debt, which is at floating interest rates. As of December
31, 2003, the debt maturities by period and the weighted average interest rate
for fixed-rate, long-term debt are as follows:

Fair
2004       2005         2006         2007          2008     Thereafter         Total       Value
-----------------------------------------------------------------------------------------------------------------------------

Long-term
debt (fixed rate)     $ 39,386   $ 40,418     $ 16,088     $ 14,395      $ 19,438      $ 606,327     $ 736,052   $ 781,502
Weighted average
interest rate             6.39%      7.26%        7.25%        6.94%         7.38%          6.02%         6.19%

From time to time, we make investments in marketable equity securities.
As a result, we are exposed to the risk of changes in equity prices for the
"available for sale" marketable equity securities. As of December 31, 2003, our
carrying value of marketable equity securities was $1,019, which reflects the
market value of such securities and is in excess of our original cost. The
market risks to which we are exposed are consistent with the risks to which we
were exposed in the prior year.

Capitalization

The following table summarizes our capitalization during the past five
years:

December 31,                                2003       2002         2001        2000         1999
-------------------------------------------------------------------------------------------------

Long-term debt*                            52.8%      55.6%        52.9%       52.4%        53.8%
Preferred stock*                            0.0%       0.0%         0.1%        0.2%         0.2%
Common stockholders' equity                47.2%      44.4%        47.0%       47.4%        46.0%
-------------------------------------------------------------------------------------------------
100.0%     100.0%       100.0%      100.0%       100.0%
=================================================================================================

*Includes current portion.

The changes in the capitalization ratios primarily result from the
issuance of common stock over the past five years, and the issuance of debt to
finance our acquisitions and capital program and the previously mentioned
repurchase of common stock from Veolia Environnement (formerly Vivendi, S.A.) in
2002. It is our goal to maintain an equity ratio adequate to support our current
Standard and Poors corporate credit rating of "A+" and its senior secured debt
rating of "AA-" for Aqua Pennsylvania, our largest operating subsidiary.

Dividends on Common Stock

We have paid common dividends consecutively for 59 years. Effective
December 1, 2003, our Board of Directors authorized an increase of 7.1% in the
dividend rate over the amount we paid in the previous quarter. As a result of
this authorization, beginning with the dividend payment in December 2003, the
annual dividend rate increased to $0.48 per share. We presently intend to pay
quarterly cash dividends in the future, on March 1, June 1, September 1 and
December 1, subject to our earnings and financial condition, regulatory
requirements and such other factors as our Board of Directors may deem relevant.
During the past five years, our common dividends paid have averaged 59.4% of net
income.

16

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial condition and results of operations are impacted by the
methods, assumptions, and estimates used in the application of critical
accounting policies. The following accounting policies are particularly
important to our financial condition or results of operations, and require
estimates or other judgements of matters of uncertainty. Changes in the
estimates or other judgements included within these accounting policies could
result in a significant change to the financial statements. We believe our most
critical accounting policies include revenue recognition, the use 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," the review for impairment of our long-lived assets which consist
primarily of Utility Plant in Service and regulatory assets, and our accounting
for pensions and other postretirement benefits.

Our utility revenues recognized in an accounting period include amounts
billed to customers on a cycle basis and unbilled amounts based on estimated
usage from the last billing to the end of the accounting period. The estimated
usage is based on our judgement and assumptions; our actual results could differ
from these estimates which would result in operating revenues being adjusted in
the period that the revision to our estimates are determined.

SFAS No. 71 stipulates generally accepted accounting principles for
companies whose rates are established by or are subject to approval by an
independent third-party regulator. In accordance with SFAS No. 71, we defer
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
rate-making process in a period different from when the costs and credits were
incurred. These deferred amounts, both assets and liabilities, are then
recognized in the income statement in the same period that they are reflected in
our rates charged for water and wastewater service. In the event that our
assessment as to the probability of the inclusion in the rate-making process is
incorrect, the associated regulatory asset or liability would be adjusted to
reflect the change in our assessment or change in regulatory approval.

In accordance with the requirements of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", we review for impairment of
our long-lived assets, including Utility Plant in Service. We also review
regulatory assets for the continued application of SFAS No. 71. Our review
determines whether there have been changes in circumstances or events that have
occurred that require adjustments to the carrying value of these assets. In
accordance with SFAS No. 71, adjustments to the carrying value of these assets
would be made in instances where the inclusion in the rate-making process is
unlikely.

We maintain a qualified defined benefit pension plan and plans that
provide for certain postretirement benefits other than pensions. Accounting for
pensions and other postretirement benefits requires an extensive use of
assumptions about the discount rate, expected return on plan assets, the rate of
future compensation increases received by our employees, mortality, turnover and
medical costs. Each assumption is reviewed annually with assistance from our
actuarial consultant who provides guidance in establishing the assumptions. The
assumptions are selected to represent the average expected experience over time
and may differ in any one year from actual experience due to changes in capital
markets and the overall economy. These differences will impact the amount of
pension and other postretirement benefit expense that we recognize.

Our discount rate is based on a market rate for a recognized-rating
agency's high-quality long-term bond portfolio with durations matching the
expected payouts under our retirement plans. Our pension expense and liability
(benefit obligations) increases as the discount rate is reduced. A 25
basis-point reduction in this assumption would have increased 2003 pension
expense by $500 and the pension liabilities by $5,500. The present values of
Aqua America's future pension and other postretirement obligations were
determined using discount rates of 6.25% at December 31, 2003 and 6.75% at
December 31, 2002. Our expense under these plans is determined using the
discount rate as of the beginning of the year, which was 6.75% for 2003, and
will be 6.25% for 2004.

17

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

Our expected return on assets is determined by evaluating the asset
class return expectations with our advisors as well as actual, long-term,
historical results of our asset returns. Our pension expense increases as the
expected return on assets decreases. A 25 basis-point reduction in this
assumption would have increased 2003 pension expense by $230. For 2003, we used
an 8.5% expected return on assets assumption which will remain unchanged for
2004. The expected return on assets is based on a targeted allocation of 65%
equities and 35% fixed income. We believe that our actual long-term asset
allocation on average will approximate the targeted allocation. Our targeted
allocation is driven by the investment strategy to earn a reasonable rate of
return while maintaining risk at acceptable levels through the diversification
of investments across and with various asset categories.

As of December 31, 2003, we have an additional minimum liability of $41
associated with our defined benefit pension plan. The additional minimum
liability is a result of the accumulated benefit obligation exceeding the fair
value of plan assets and results in the establishment of a regulatory asset, as
we anticipate recovery of the future, increased pension expense through customer
rates. An additional minimum liability of $4,731 was initially recorded on
December 31, 2002 as a result of the following events during 2002:

o    pension plan assets declined due to negative equity market
performance, and
o    assumed discount rate decreased resulting in an increase in
pension liabilities.

The change in the additional minimum liability from December 31, 2002 to
December 31, 2003 resulted from an increase in the pension plan assets during
2003 due to positive equity market performance, offset partially by the effect
of a decreased discount rate. Although additional minimum liability does not
directly impact net income or cash flow, in future years, our pension expense
and cash funding requirements are anticipated to increase as a result of the
decline in plan assets and the discount rate. Funding requirements for qualified
defined benefit pension plans are determined by government regulations and not
by accounting pronouncements. In accordance with funding rules, during 2004 our
required pension contribution is expected to be approximately $5,371. We expect
future changes in the amount of contributions and expense recognized will be
properly included in customer rates.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB")
approved Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred. When the liability is initially recognized,
the carrying amount of the related long-lived asset is increased by the same
amount. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, we may settle the obligation for its
recorded amount, or an alternative amount, thereby incurring a gain or loss upon
settlement. We've adopted this statement as required on January 1, 2003 and it
did not have an impact on our results of operations. We recover, through
customer rates, retirement costs which do not meet the definition of an asset
retirement obligation under SFAS No. 143. Our Pennsylvania operating subsidiary
recovers retirement costs through an amortization process in customer rates
after the costs are incurred. Generally, these costs are recovered over a
five-year period. As a result, $13,699 as of December 31, 2003 and $11,089 as of
December 31, 2002 has been reclassified and reported as a regulatory asset.
Certain other of our operating subsidiaries recover retirement costs through the
depreciation component of customer rates during the life of the associated
asset. As a result, $7,484 as of December 31, 2003 and $6,951 as of December 31,
2002 has been reclassified and is reported as a regulatory liability. Prior to
the adoption of this statement, these amounts were embedded within accumulated
depreciation. All prior year amounts have been restated to remove the regulatory
asset and liability from accumulated depreciation.

18

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

In April 2002, the FASB approved SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. We adopted
this statement in the first quarter of 2003 and it did not have a material
impact on our results of operations or financial position.

In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement replaces the previous accounting guidance provided in Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. We adopted this
standard in the first quarter of 2003 and it did not have a material impact on
our results of operations and financial position.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5,
57 and 107 and rescission of SFAS No. 34. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies" relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The disclosure provisions of the interpretation are effective for
financial statements of periods ending after December 15, 2002. The provisions
for initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002. We adopted the
accounting provisions of this standard in the first quarter of 2003 and it did
not have a material impact on our results of operations or financial position.

In April 2003, the FASB approved SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The adoption of this standard had no effect on our results
of operations or financial position. As of December 31, 2003, we had no
derivative instruments or hedging activities.

In May 2003, the FASB approved SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying and measuring as liabilities
certain financial instruments with characteristics of both liabilities and
equity. The standard is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective July 1, 2003. This
statement did not have a material impact on our results of operations or
financial position.

In December 2003, the FASB approved SFAS No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 amends SFAS No. 87 "Employers' Accounting for Pensions," SFAS No. 88
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This new statement
does not change the recognition and measurement requirements of those amended
statements, and retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
it replaces and requires additional disclosure. We adopted the provisions of
this statement as required as of December 31, 2003.

19

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)

In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP 106-1, which is effective
for our consolidated financial statements for the year ended December 31, 2003,
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the "Act"). The Act was signed into law in December 2003 and
establishes a prescription drug benefit under Medicare (Medicare Part D) and a
federal subsidy to sponsors of postretirement health care plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. Under FSP
No. 106-1, sponsors must consider the two new features in measuring the
accumulated postretirement benefit obligation ("APBO") and net periodic
postretirement benefit costs. In accordance with FSP 106-1, we made a one-time
election to defer the recognition of the impact on FSP No. 106 accounting. Any
measures of APBO and net periodic postretirement benefit cost in the
consolidated financial statements and footnotes for the year ended December 31,
2003 do not reflect the effects of the Act. Currently, specific authoritative
accounting guidance for the federal subsidy is pending and that guidance when
issued may require us to change previously reported information. We are
currently investigating the impacts of the adoption of FSP 106-1's initial
recognition, measurement and disclosure provisions on our consolidated financial
statements.

20

AQUA AMERICA, INC. AND SUBSIDIARIES

Report of Management

The consolidated financial statements and related information for the
years ended December 31, 2003, 2002 and 2001 were prepared by management in
accordance with accounting principles generally accepted in the United States of
America and include management's best estimates and judgments, as required.
Financial information included in other sections of this annual report is
consistent with that in the consolidated financial statements.

The Company has an internal accounting control structure designed to
provide reasonable assurance that assets are safeguarded and that transactions
are properly authorized and recorded in accordance with established policies and
procedures. The internal control structure is supported by the selection and
training of qualified personnel, the delegation of management authority and
responsibility, dissemination of policies and procedures and periodic reviews by
our internal audit director.

The Company's independent accountants, PricewaterhouseCoopers LLP,
provide an independent review of management's reporting of results of operations
and financial condition. PricewaterhouseCoopers LLP has audited the financial
statements by conducting tests as they deemed appropriate and their report
follows.

The Audit Committee of the Board of Directors selects and evaluates the
Company's independent accountants and reviews the scope and results of their
audits. The Audit Committee also reviews the integrity of the Company's
financial reporting process, system of internal controls and other significant
financial matters. The Audit Committee meets regularly with management, our
internal audit director and the independent accountants. The Audit Committee
held six meetings in 2003.

NICHOLAS DEBENEDICTIS                                   DAVID P. SMELTZER

Nicholas DeBenedictis                                   David P. Smeltzer
Chairman &                                   Senior Vice President - Finance
President

21

Report of Independent Auditors

To the Board of Directors and Stockholders of
Aqua America, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of capitalization
and of cash flow present fairly, in all material respects, the financial
position of Aqua America, Inc. (formerly Philadelphia Suburban Corporation) and
its subsidiaries at December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Philadelphia, PA
January 28, 2004

22

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Years ended December 31, 2003, 2002 and 2001

2003            2002             2001
------------------------------------------

Operating revenues                                                     $ 367,233      $ 322,028         $ 307,280
Costs and expenses:                                                                               
Operations and maintenance                                           140,602        117,735           111,885
Depreciation                                                          48,522         41,424            37,979
Amortization                                                           2,941          2,898             2,189
Taxes other than income taxes                                         21,607         19,467            20,887
------------------------------------------
213,672        181,524           172,940

Operating income                                                         153,561        140,504           134,340
Other expense (income):                                                            
Interest expense, net                                                 44,662         40,396            39,859
Allowance for funds used during construction                          (2,127)        (1,389)           (1,222)
Gain on sale of water system                                              --         (5,676)               --
Gain on sale of other assets                                          (5,692)        (2,079)           (3,384)
------------------------------------------
Income before income taxes                                               116,718        109,252            99,087
Provision for income taxes                                                45,923         42,046            38,976
------------------------------------------
Net income                                                                70,795         67,206            60,111
Dividends on preferred stock                                                  10             52               106
------------------------------------------
Net income available to common stock                                   $  70,785      $  67,154         $  60,005
==========================================

Net income                                                             $  70,795      $  67,206         $  60,111
Other comprehensive income (loss), net of tax:                                                    
Unrealized gains on securities                                           455            104                39
Reclassification adjustment for gains reported in net income            (347)          (767)             (239)
------------------------------------------
108           (663)             (200)

------------------------------------------
Comprehensive income                                                   $  70,903      $  66,543         $  59,911
==========================================

Net income per common share:
Basic                                                              $    0.80      $    0.78         $    0.71
==========================================
Diluted                                                            $    0.79      $    0.78         $    0.70
==========================================
Average common shares outstanding during the period:
Basic                                                                 88,275         85,674            84,841
==========================================
Diluted                                                               89,244         86,538            85,943
==========================================

See accompanying notes to consolidated financial statements.

23

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 2003 and 2002

2003           2002
-------------------------

Assets
Property, plant and equipment, at cost                                               $ 2,302,304   $ 1,836,892
Less accumulated depreciation                                                            478,013       350,189
-------------------------
Net property, plant and equipment                                                  1,824,291     1,486,703
-------------------------

Current assets:
Cash and cash equivalents                                                             10,757         5,915
Accounts receivable and unbilled revenues, net                                        62,320        57,680
Inventory, materials and supplies                                                      5,841         4,555
Prepayments and other current assets                                                   5,051         2,758
-------------------------
Total current assets                                                                  83,969        70,908
-------------------------

Regulatory assets                                                                         98,761        92,313
Deferred charges and other assets, net                                                    34,277        23,391
Funds restricted for construction activity                                                28,438        43,754
-------------------------
$ 2,069,736   $ 1,717,069
=========================
Liabilities and Stockholders' Equity
Stockholders' equity:
Common stock at $.50 par value, authorized 100,000,000 shares,
issued 93,270,424 and 87,046,893 in 2003 and 2002                              $ 46,635      $ 35,034
Capital in excess of par value                                                       413,008       317,871
Retained earnings                                                                    210,915       180,047
Minority interest                                                                        912           503
Treasury stock, at cost, 681,384 and 2,151,350 shares in 2003 and 2002               (12,611)      (40,421)
Accumulated other comprehensive income                                                   171            63
-------------------------
Total stockholders' equity                                                           659,030       493,097
-------------------------

6.05% Series B cumulative preferred stock                                                     --           172
Long-term debt, excluding current portion                                                696,666       582,910
Commitments                                                                                   --            --

Current liabilities:
Current portion of long-term debt                                                     39,386        34,265
Loans payable                                                                         96,459       115,113
Accounts payable                                                                      32,321        31,058
Accrued interest                                                                      11,126         9,269
Accrued taxes                                                                         16,779        14,500
Other accrued liabilities                                                             35,930        22,326
-------------------------
Total current liabilities                                                            232,001       226,531
-------------------------

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits                                     190,395       187,300
Customers' advances for construction                                                  72,500        69,790
Other                                                                                  9,419        13,330
-------------------------
Total deferred credits and other liabilities                                         272,314       270,420
-------------------------

Contributions in aid of construction                                                     209,725       143,939
-------------------------
$ 2,069,736   $ 1,717,069
=========================

See accompanying notes to consolidated financial statements.

24

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 2003 and 2002

2003         2002
-------------------------

Stockholders' equity:                                                                    
Common stock, $.50 par value                                            $    46,635   $    35,034
Capital in excess of par value                                              413,008       317,871
Retained earnings                                                           210,915       180,047
Minority interest                                                               912           503
Treasury stock, at cost                                                     (12,611)      (40,421)
Accumulated other comprehensive income                                          171            63
-------------------------
Total stockholders' equity                                                       659,030       493,097
-------------------------

6.05% Series B cumulative preferred stock                                             --           172

Long-term debt:                                                                          
Long-term debt of subsidiaries (substantially secured by utility plant):
Interest Rate Range                                                                               
0.00% to  2.49%                                                           16,868        18,009
2.50% to  2.99%                                                           18,913        14,052
3.00% to  3.49%                                                            5,618         4,733
3.50% to  3.99%                                                            2,800         3,200
4.00% to  4.99%                                                            8,135         8,135
5.00% to  5.49%                                                          110,875        90,955
5.50% to  5.99%                                                           76,260        86,260
6.00% to  6.49%                                                          119,360       126,360
6.50% to  6.99%                                                           42,000        52,000
7.00% to  7.49%                                                           46,716        58,000
7.50% to  7.99%                                                           23,000        23,000
8.00% to  8.49%                                                           17,500        17,497
8.50% to  8.99%                                                            9,000         9,000
9.00% to  9.49%                                                           53,805        54,359
9.50% to  9.99%                                                           43,242        44,637
10.00% to 10.50%                                                            6,000         6,000
-------------------------
600,092       616,197

Note payable, 6.05%, due 2006                                                        960           978
Unsecured notes payable, 4.87%, due 2023                                         135,000            --
-------------------------
736,052       617,175
Current portion of long-term debt                                                 39,386        34,265
-------------------------
Long-term debt, excluding current portion                                        696,666       582,910
-------------------------
Total capitalization                                                         $ 1,355,696   $ 1,076,179
=========================

See accompanying notes to consolidated financial statements.

25

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(In thousands of dollars)
Years ended December 31, 2003, 2002 and 2001

2003          2002             2001
------------------------------------------

Cash flows from operating activities:
Net income                                                               $    70,795    $   67,206      $    60,111
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization                                             51,463        44,322           40,168
Deferred income taxes                                                     26,741        18,470           14,935
Gain on sale of water system                                                  --        (5,676)              --
Gain on sale of other assets                                              (5,692)       (2,079)          (3,384)
Net increase in receivables, inventory and prepayments                      (314)         (742)          (5,295)
Net increase in payables, accrued interest, accrued taxes
and other accrued liabilities                                           7,777         1,346            7,045
Payment of Competitive Transition Charge                                      --            --          (11,465)
Other                                                                     (7,397)       (1,287)              50
------------------------------------------
Net cash flows from operating activities                                         143,373       121,560          102,165
------------------------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance for
funds used during construction of $2,127 $1,389 and $1,222              (163,320)     (136,164)        (124,088)
Acquisitions of water and wastewater systems                                (192,331)       (8,914)          (9,517)
Net decrease (increase) in funds restricted for construction activity         15,314       (23,986)         (15,806)
Net proceeds from the sale of water systems                                    4,000        12,118               --
Net proceeds from the sale of other assets                                     6,496         6,258            5,211
Other                                                                           (312)         (362)            (173)
------------------------------------------
Net cash flows used in investing activities                                     (330,153)     (151,050)        (144,373)
------------------------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction                   8,181        10,266            5,175
Repayments of customers' advances                                             (4,257)       (5,070)          (4,652)
Net proceeds (repayments) of short-term debt                                 (18,654)        5,445            8,385
Proceeds from long-term debt                                                 154,537       119,350           64,024
Repayments of long-term debt                                                 (44,204)      (43,279)          (8,498)
Redemption of preferred stock                                                   (172)         (944)            (644)
Proceeds from issuing common stock                                           134,826        10,611           13,522
Repurchase of common stock                                                    (1,353)      (24,109)          (2,493)
Dividends paid on preferred stock                                                (10)          (52)            (106)
Dividends paid on common stock                                               (39,917)      (36,789)         (34,234)
Other                                                                          2,645        (1,034)          (1,348)
------------------------------------------
Net cash flows from financing activities                                         191,622        34,395           39,131
------------------------------------------

Net increase (decrease) in cash and cash equivalents                               4,842         4,905           (3,077)
Cash and cash equivalents at beginning of year                                     5,915         1,010            4,087
------------------------------------------
Cash and cash equivalents at end of year                                     $    10,757    $    5,915      $     1,010
==========================================
Cash paid during the year for:
Interest, net of amounts capitalized                                     $    40,572    $   38,040      $    38,637
==========================================
Income taxes                                                             $    19,168    $   24,165      $    19,388
==========================================

See Summary of Significant Accounting Policies-Customers' Advances for
Construction, Acquisitions and Employee Stock and Incentive Plans footnotes 
for description of non-cash activities.
See accompanying notes to consolidated financial statements.

26

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(In thousands of dollars, except per share amounts)

Summary of Significant Accounting Policies

Name Change - On January 16, 2004, Philadelphia Suburban Corporation changed its
corporate name to Aqua America, Inc. In addition, we have changed our ticker
symbol from PSC to WTR on the New York Stock Exchange and Philadelphia Stock
Exchange effective as of the opening of trading on January 20, 2004.

Nature of Operations - Aqua America, Inc. ("Aqua America" or the "Company") is
the holding company for regulated utilities providing water or wastewater
services in Pennsylvania, Ohio, Illinois, Texas, New Jersey, Indiana, Virginia,
Florida, North Carolina, Maine, Missouri, New York, South Carolina and Kentucky.
Our largest operating subsidiary, Aqua Pennsylvania, Inc. - formerly
Pennsylvania Suburban Water Company, accounts for approximately 60% of our
operating revenues and provides water or wastewater service to customers in the
suburban areas north and west of the City of Philadelphia and in 19 other
counties in Pennsylvania. The Company's other subsidiaries provide similar
services in 13 other states. In addition, the Company provides water and
wastewater service through operating and maintenance contracts with municipal
authorities and other parties close to our operating companies' service
territories.

Regulation - Most of the operating companies that are regulated public utilities
are subject to regulation by the public utility commissions of the states in
which they operate. The respective public utility commissions have jurisdiction
with respect to rates, service, accounting procedures, issuance of securities,
acquisitions and other matters. Some of the operating companies that are
regulated public utilities are subject to rate regulation by county or city
government. Regulated public utilities follow Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." SFAS No. 71 provides for the recognition of regulatory assets and
liabilities as allowed by regulators for costs or credits that are reflected in
current rates or are considered probable of being included in future rates. The
regulatory assets or liabilities are then relieved as the cost or credit is
reflected in rates.

Consolidation - The consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated where appropriate.

Recognition of Revenues - Revenues include amounts billed to customers on a
cycle basis and unbilled amounts based on estimated usage from the
latest billing to the end of the accounting period. Nonregulated revenues are
recognized when services are performed and are primarily associated with
operating and maintenance contracts and data processing service fees.
Nonregulated revenues totaled $11,806 in 2003, $7,190 in 2002 and $7,092 in
2001.

Property, Plant and Equipment and Depreciation - Property, plant and equipment
consist primarily of utility plant. The cost of additions includes contracted
cost, direct labor and fringe benefits, materials, overheads and, for certain
utility plant, allowance for funds used during construction. Water systems
acquired are recorded at estimated original cost of utility plant when first
devoted to utility service and the applicable depreciation is recorded to
accumulated depreciation. The difference between the estimated original cost,
less applicable accumulated depreciation, and the purchase price is recorded as
an acquisition adjustment within utility plant. At December 31, 2003, utility
plant includes a net credit acquisition adjustment of $48,054, which is
generally being amortized from 0 to 20 years. Amortization of the acquisition
adjustments totaled $1,649 during 2003, $633 during 2002 and $545 during 2001.

Utility expenditures for maintenance and repairs, including major
maintenance projects and minor renewals and betterments, are charged to
operating expenses when incurred in accordance with the system of accounts
prescribed by the public utility commissions of the states in which the company
operates. The cost of new units of property and betterments are capitalized.

When units of utility property are replaced, retired or abandoned, the
recorded value thereof is credited to the asset account and such value, together
with the net cost of removal, is charged to accumulated depreciation. To the
extent the Company recovers cost of removal or other retirement costs through
rates after the retirement costs are incurred, a regulatory asset is recorded.
In some cases, the Company recovers retirement costs through rates during the
life of the associated asset and before the costs are incurred. These amounts
result in a regulatory liability being reported based on the amounts previously
recovered through customer rates. All prior year amounts have been restated to
remove the regulatory asset and liability from accumulated depreciation where it
had been previously reported. 

The straight-line remaining life method is used to compute depreciation
on utility plant. Generally, the straight-line method is used with respect to
transportation and mechanical equipment, office equipment and laboratory
equipment.

27

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

In accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the long-lived assets of the Company, which
consist primarily of Utility Plant in Service and regulatory assets, are
reviewed for impairment when changes in circumstances or events occur.
There has been no change in circumstances or events that have occurred that
require adjustments to the carrying values of these assets.

Allowance for Funds Used During Construction - The allowance for funds used
during construction ("AFUDC") is a non-cash credit which represents the
estimated cost of funds used to finance the construction of utility plant. In
general, AFUDC is applied to construction projects requiring more than one month
to complete. No AFUDC is applied to projects funded by customer advances for
construction or contributions in aid of construction. AFUDC includes the net
cost of borrowed funds and a rate of return on other funds when used, and is
recovered through water rates as the utility plant is depreciated. The amount of
AFUDC related to equity funds in 2003, 2002 and 2001 was $0, $9 and $0
respectively. No interest was capitalized by our nonregulated businesses.

Cash and Cash Equivalents - The Company considers all highly liquid investments
with an original maturity of three months or less, which are not restricted for
construction activity, to be cash equivalents.

Deferred Charges and Other Assets - Deferred charges and other assets consist of
financing expenses, other costs and marketable securities. Deferred bond
issuance expenses are amortized by the straight-line method over the life of the
related issues. Call premiums related to the early redemption of long-term debt,
along with the unamortized balance of the related issuance
expense, are deferred and amortized over the life of the long-term debt used to
fund the redemption. Other costs, for which the Company has received or expects
to receive prospective rate recovery, are deferred and amortized over the period
of rate recovery in accordance with SFAS No. 71.

Marketable securities are considered "available-for-sale" and
accordingly, are carried on the balance sheet at fair market value. Unrecognized
gains are included in other comprehensive income.

Income Taxes - The Company accounts for certain income and expense items in
different time periods for financial reporting than for tax reporting purposes.
Deferred income taxes are provided on the temporary differences between the tax
basis of the assets and liabilities, and the amounts at which they are carried
in the consolidated financial statements. The income tax effect of temporary
differences not allowed currently in rates is recorded as deferred taxes with an
offsetting regulatory asset or liability. These deferred income taxes are based
on the enacted tax rates expected to be in effect when such temporary
differences are projected to reverse. Investment tax credits are deferred and
amortized over the estimated useful lives of the related properties.

Customers' Advances for Construction - Water mains or, in some instances, cash
advances to reimburse the Company for its costs to construct water mains, are
contributed to the Company by customers, real estate developers and builders in
order to extend water service to their properties. The value of these
contributions is recorded as Customers' Advances for Construction. The Company
makes refunds on these advances over a specific period of time based on
operating revenues related to the main or as new customers are connected to and
take service from the main. After all refunds are made, any remaining balance is
transferred to Contributions in Aid of Construction. Non-cash property, in the
form of water mains, has been received, generally from developers, as advances
or contributions of $9,991, 17,271 and $10,196 in 2003, 2002 and 2001,
respectively.

28

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Contributions in Aid of Construction - Contributions in aid of construction
include direct non-refundable contributions and the portion of customers'
advances for construction that become non-refundable.

Inventories, Materials and Supplies - Inventories are stated at cost. Cost is
principally determined using the first-in, first-out method.

Stock-Based Compensation - The Company accounts for stock-based compensation
using the intrinsic value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no compensation expense
related to granting of stock options has been recognized in the financial
statements for stock options that have been granted. Pursuant to the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, pro forma net income available to common stock and
earnings per share are presented in the following table as if compensation cost
for stock options was determined as of the grant date under the fair value
method:

Years Ended
December 31,
--------------------------------------
2003         2002          2001
--------------------------------------

Net income available to common stock, as reported         $   70,785   $   67,154   $   60,005
Add:  stock-based employee compensation expense
included in reported net income, net of tax                  224          473          194
Less: pro forma expense related to stock options
granted, net of tax effects                               (1,793)      (1,741)      (1,125)
--------------------------------------
Pro forma                                             $   69,216   $   65,886   $   59,074
======================================
Basic net income per share:
As reported                                           $     0.80   $     0.78   $     0.71
Pro forma                                                   0.78         0.77         0.70
Diluted net income per share:
As reported                                           $     0.79   $     0.78   $     0.70
Pro forma                                                   0.78         0.76         0.69

The per share weighted-average fair value at the date of grant for
stock options granted during 2003, 2002 and 2001 was $4.67, $5.15 and $4.47 per
option, respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:

2003        2002          2001
-------------------------------
Expected life (years)             5.6          5.5           5.2
Interest rate                     3.7%         4.9%          5.0%
Volatility                       32.4%        34.2%         32.7%
Dividend yield                    2.6%         2.6%          2.6%

Use of Estimates in Preparation of Consolidated Financial Statements - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Reclassifications - Certain prior year amounts have been reclassified to conform
with current year's presentation.

29

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Recent Accounting Pronouncements -In July 2001, the Financial Accounting
Standards Board ("FASB") approved Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred. When the liability is
initially recognized, the carrying amount of the related long-lived asset is
increased by the same amount. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, the Company
may settle the obligation for its recorded amount, or an alternative amount,
thereby incurring a gain or loss upon settlement. The Company adopted this
statement as required on January 1, 2003 and it did not have an impact on the
Company's results of operations. The Company recovers, through customer rates,
retirement costs which do not meet the definition of an asset retirement
obligation under SFAS No. 143. The Company's Pennsylvania operating subsidiary
recovers retirement costs through an amortization process in customer rates
after the costs are incurred. Generally, these costs are recovered over a
five-year period. As a result, $13,699 and $11,089 have been reclassified and
reported as a regulatory asset as of December 31, 2003 and 2002. Certain other
of the Company's operating subsidiaries recover retirement costs through the
depreciation component of customer rates during the life of the associated
asset. As a result, $7,484 and $6,951 have been reclassified as of December 31,
2003 and 2002, and is reported as a regulatory liability. Prior to the adoption
of this statement, these amounts were embedded within accumulated depreciation.
All prior year amounts have been restated to remove the regulatory asset and
liability from accumulated depreciation.

In April 2002, the FASB approved SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The Company
adopted this statement in the first quarter of 2003 and it did not have a
material impact on the Company's results of operations or financial position.

In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement replaces the previous accounting guidance provided in Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
adopted this standard in the first quarter of 2003 and it did not have a
material impact on the Company's results of operations or financial position.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5,
57 and 107 and rescission of SFAS No. 34. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies" relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The disclosure provisions of the interpretation are effective for
financial statements of periods ending after December 15, 2002. The provisions
for initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002. The Company
adopted the accounting provisions of this standard in the first quarter of 2003
and it did not have a material impact on the Company's results of operations or
financial position.

In April 2003, the FASB approved SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The adoption of this standard had no effect on the Company's
results of operations or financial position. As of December 31, 2003, the
Company had no derivative instruments or hedging activities.

30

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

In May 2003, the FASB approved SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying and measuring as liabilities
certain financial instruments with characteristics of both liabilities and
equity. The standard is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective July 1, 2003. This
statement did not have a material impact on the Company's results of operations
or financial position.

In December 2003, the FASB approved SFAS No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 amends SFAS No. 87 "Employers' Accounting for Pensions," SFAS No. 88
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This new statement
does not change the recognition and measurement requirements of those amended
statements, and retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
it replaces and requires additional disclosure. The Company adopted the
provisions of this statement as required as of December 31, 2003.

In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP 106-1, which is effective
for the Company's consolidated financial statements for the year ended December
31, 2003, permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 (the "Act"). The Act was signed into law in December 2003 and
establishes a prescription drug benefit under Medicare (Medicare Part D) and a
federal subsidy to sponsors of postretirement health care plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. Under FSP
No. 106-1, sponsors must consider the two new features in measuring the
accumulated postretirement benefit obligation ("APBO") and net periodic
postretirement benefit costs. In accordance with FSP 106-1, the Company made a
one-time election to defer the recognition of the impact on FSP No. 106
accounting. Any measures of APBO and net periodic postretirement benefit cost in
the consolidated financial statements and footnotes for the year ended December
31, 2003 do not reflect the effects of the Act. Currently, specific
authoritative accounting guidance for the federal subsidy is pending and that
guidance when issued may require the Company to change previously reported
information. The Company is currently investigating the impacts of the adoption
of FSP 106-1's initial recognition, measurement and disclosure provisions on its
consolidated financial statements.

Acquisitions

AquaSource Acquisition - Pursuant to our strategy to grow through acquisitions,
on July 31, 2003, the Company completed its acquisition of four operating water
and wastewater subsidiaries of AquaSource, Inc. (a subsidiary of DQE, Inc.),
including selected, integrated operating and maintenance contracts and related
assets (individually and collectively the acquisition is referred to as
"AquaSource") for $190,717 in cash, as adjusted pursuant to the purchase
agreement for the completion of a closing balance sheet and the finalization of
working capital ($195,533 was paid at closing and refunds were subsequently
received totaling $4,816). There remains approximately $12,000 of the above
purchase price in dispute subject to an arbitration process under the terms of
the purchase agreement. Accordingly, the final purchase price is expected to be
within the range of $178,700 to $190,717. We expect the arbitration process to
conclude by mid-2004.

The results of AquaSource have been included in the Company's
consolidated financial statements beginning August 1, 2003. The acquired
operations of AquaSource serve over 130,000 water and wastewater customer
accounts in 11 states (including the Connecticut operations which were sold in
October 2003). Please refer to the Dispositions footnote for a discussion of the
sale of the AquaSource operations located in Connecticut and the planned sale of
the New York operations. The AquaSource acquisition was initially funded by a
portion of the proceeds from the July 2003 issuance of $135,000 of unsecured
notes due 2023, with an interest rate of 4.87%, and the issuance of a $90,000
unsecured note by Aqua America. In August 2003, the $90,000 unsecured note was
repaid with the proceeds from the issuance of 5,000,000 shares of common stock
through a shelf registration.

31

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Under the purchase method of accounting, the purchase price is
allocated to AquaSource's net tangible and intangible assets based upon their
estimated fair values at the date of the acquisition. The preliminary purchase
price allocation, which does not reflect the effects of the purchase price
arbitration proceeding, is as follows:

July 31,
2003
----------
Property, plant and equipment, net          $  210,008
Current assets                                   9,687
Other long-term assets                          14,204
Assets held for sale, net                        4,096
----------
Total assets acquired                          237,995
----------

Current liabilities                              8,214
Long-term debt                                   7,170
Other long-term liabilities                     31,894
----------
Total liabilities assumed                       47,278
----------

Net assets acquired                         $  190,717
==========

The net property, plant and equipment balance includes accumulated
depreciation of $91,296. The following supplemental pro forma information is
presented to illustrate the effects of the AquaSource acquisition, which was
completed on July 31, 2003, on the historical operating results for the year
ended December 31, 2003 and 2002 as if the acquisition had occurred at the
beginning of the respective periods (unaudited):

Years Ended
December 31,
---------------------------
2003            2002
---------------------------

Operating revenues                  $ 407,628        $ 391,569
Net income                          $  74,436        $  72,420
Net income per common share:
Basic                             $    0.81        $    0.80
Diluted                           $    0.81        $    0.79

The supplemental information is not necessarily representative of the
actual results that may have occurred for these periods or of the results that
may occur in the future. This information does not reflect the effects of recent
rate increases or cost savings that may result from the acquisition, such as the
effects of a reduction in administrative costs. This information is based upon
the historical operating results of AquaSource for periods prior to the
acquisition date of July 31, 2003 as provided to the Company by AquaSource, Inc.
and DQE, Inc. management.

Other Acquisitions - On November 21, 2003, Aqua America entered into a purchase
agreement with ALLETE Water Services, Inc., a subsidiary of ALLETE, Inc., to
acquire the capital stock of Heater Utilities, Inc., which owns water and
wastewater systems located in North Carolina. The purchase agreement provides
for a cash purchase price of $48,000 and the assumption of approximately $28,000
in debt, reflecting an acquisition premium of approximately $18,000. The Company
intends to seek the ability to recover a portion of this premium through
customer rates via the North Carolina Utilities Commission approval process. The
acquisition, which is subject to regulatory approval, is expected to close in
mid-2004. This acquisition will add approximately 50,000 customers in the areas
of suburban Raleigh, Charlotte, Gastonia and Fayetteville, North Carolina.

32

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

During 2003, in addition to the AquaSource acquisition, the Company
completed 17 acquisitions or other growth ventures in the various states in
which the Company operates for an aggregate purchase price of $1,614 in cash.
The operating revenues included in the consolidated financial statements during
the period owned by the Company was $312.

During 2002, the Company completed 25 acquisitions or other growth
ventures in various states. The total purchase price of $11,659 for the systems
acquired in 2002 consisted of $8,914 in cash and the issuance of 178,864 shares
of the Company's common stock. Operating revenues included in the consolidated
financial statements related to the systems acquired in 2002 were $2,920 in 2003
and $1,341 in 2002.

During 2001, the Company completed 20 acquisitions or other growth
ventures including the Company's entry into North Carolina. The total purchase
price of $14,878 for the systems acquired in 2001 consisted of $9,517 in cash
and the issuance of 414,638 shares of the Company's common stock. Operating
revenues included in the consolidated financial statements related to the
systems acquired in 2001 were $4,647 in 2003, $4,736 in 2002 and $3,432 in 2001.

On February 4, 2003, the Company entered into a mutual termination
agreement with Pennichuck Corporation terminating Aqua America's planned
acquisition of Pennichuck Corporation, which was originally announced in April
2002. The mutual decision to terminate the merger agreement was primarily in
response to a referendum of the City of Nashua, New Hampshire, authorizing
Nashua to pursue the acquisition, by an eminent domain proceeding or otherwise,
of all or a portion of Pennichuck Corporation's water works system, and was
considered to be in the best interests of both companies.

Dispositions 

In May 2003, the Company announced agreements for the sale of the
AquaSource regulated and nonregulated operations located in Connecticut and New
York to a New England-based water company for an aggregate purchase price of
$5,000 and the assumption of approximately $800 of debt. The sale of the
Conneticut operations closed on October 31, 2003 and provided proceeds of
$4,000. The sale of the New York operations is expected to occur in mid-2004.
The combined operations in New York and Connecticut represented approximately 2%
of the operations acquired from AquaSource, Inc.

In December 2002, as a result of the settlement of a condemnation
action, the Company's Ohio operating subsidiary sold to Ashtabula County, Ohio
the water utility assets in the unincorporated areas of Ashtabula County and the
area within the Village of Geneva on the Lake for $12,118, net of certain
closing costs. The sale was in excess of the book value for these assets and the
sale generated a gain of $5,676 (or an after-tax gain of $3,690 and $0.04 per
share) recorded in the fourth quarter of 2002. We continue to operate this water
system for Ashtabula County, beginning after the closing of the sale, under a
multi-year operating contract that was recently renewed. The water utility
assets sold represent less than 1% of our total assets, and the total number of
customers included in the water system sold represents less than 1% of our total
customer base.

33

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Property, Plant and Equipment

December 31,          
--------------------------    Approximate range
2003           2002        of remaining lives
--------------------------    ------------------

Utility plant and equipment:                                              
Mains and accessories                   $   962,439    $   815,066      33 to 85 years
Services, hydrants, treatment                                        
plants and reservoirs                  547,622        432,564       5 to 68 years
Operations structures and water tanks       175,663        140,796      18 to 61 years
Miscellaneous pumping and                                            
purification equipment                 259,468        182,415      12 to 50 years
Meters, data processing, transportation
and operating equipment                251,721        194,073       5 to 50 years
Land and other non-depreciable assets        58,223         51,317            --
--------------------------
Utility Plant and equipment                    2,255,136      1,816,231
Utility construction work in progress             92,106         23,964            --
Net utility plant acquisition adjustment         (48,054)       (6,210)       0 to 20 years
Non-utility plant and equipment                    3,116          2,907       2 to 40 years
--------------------------
Total property, plant and equipment          $ 2,302,304    $ 1,836,892            
==========================

Accounts Receivable 
December 31,
--------------------------
2003          2002
--------------------------
Billed utility revenue                       $    41,843    $    34,733
Unbilled utility revenue                          23,876         26,007
Other                                              2,452            520
--------------------------
68,171         61,260
Less allowance for doubtful accounts               5,851          3,580
--------------------------
Net accounts receivable                      $    62,320    $    57,680
==========================

The Company's customers are located principally in the following
states: 54% in Pennsylvania, 11% in Ohio, 8% in Illinois, 7% in Texas, 6% in New
Jersey and 4% in Indiana. No single customer accounted for more than one percent
of the Company's operating revenues during the years ended December 31, 2003,
2002 or 2001. The following table summarizes the changes in the Company's
allowance for doubtful accounts:

2003         2002         2001
-----------------------------------

Balance at January 1,                      $   3,580     $   2,482   $   1,907
Amounts charged to expense                     2,643         3,182       2,557
Accounts written off                          (2,715)       (2,375)     (2,179)
Recoveries of accounts written off               253           291         197
Allowance acquired through acquisitions        2,090            --          --
-----------------------------------
Balance at December 31,                    $   5,851     $   3,580   $   2,482
===================================

34

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Regulatory Assets and Liabilities

The regulatory assets represent costs that are expected to be fully
recovered from customers in future rates while regulatory liabilities represent
amounts that are expected to be refunded to customers in future rates or amounts
recovered from customers in advance of incurring the costs. Except for income
taxes and the competitive transition charge payment, regulatory assets and
regulatory liabilities are excluded from the Company's rate base and do not earn
a return. The components of regulatory assets and (liabilities) are as follows:

December 31,
-------------------------
2003         2002
-------------------------
Income taxes, asset                                   $    68,917   $    67,658
Income taxes, liability                                    (3,434)       (3,574)
CTC payment                                                 8,026         9,172
Postretirement benefits                                     6,698         8,334
Merger Costs                                                2,700         3,229
Water tank painting                                         3,240         2,114
Utility plant retirement costs, asset                      13,699        11,089
Utility plant retirement costs, liability                  (7,484)       (6,951)
Rate case filing expenses & other                           6,399         1,242
-------------------------
$    98,761   $    92,313
=========================

Items giving rise to deferred state income taxes, as well as a portion
of deferred Federal income taxes related to certain differences between tax and
book depreciation expense, are recognized in the rate setting process on a cash
or flow-through basis and will be recovered as they reverse. The regulatory
asset associated with the Competitive Transition Charge ("CTC") payment
represents the full payoff in 2001, net of amortization, of the allocable share
of a CTC as negotiated by Aqua Pennsylvania, Inc. from its electric distribution
company, PECO Energy Company. The Pennsylvania Electricity Generation Customer
Choice and Competition Act permitted electric distribution utilities to recover
their stranded costs from its customers in the form of a CTC. Rate recovery of
the $11,465 CTC payment began in 2000 and is expected to conclude in 2010.

Postretirement benefits include pension and other postretirement
benefits. The pension costs include deferred net pension expense in excess of
amounts funded which the Company believes will be recoverable in future years as
pension funding is required, and in addition includes an additional minimum
liability for pensions as a result of a decline in the fair market value of plan
assets and a decline in the discount rate assumed for pension obligations. The
additional minimum liability equals the excess of the accumulated benefit
obligation over the fair value of plan assets. The regulatory asset related to
postretirement benefits other than pensions represents costs that were deferred
between the time that the accrual method of accounting for these benefits was
adopted in 1993 and the recognition of the accrual method in the Company's rates
as prescribed in subsequent rate filings. Amortization of the amount deferred
for postretirement benefits other than pensions began in 1994 and is currently
being recovered in rates.

The regulatory asset related to the recovery of merger costs represents
the portion of the Consumers Water Company merger costs that will be recovered
in rates as a result of a rate settlement in 2000 and is being amortized over
the recovery period. Expenses associated with water tank painting are deferred
and amortized over a period of time as approved in the regulatory process. The
regulatory asset for utility plant retirement costs, including cost of removal,
represents costs already incurred that are expected to be recovered in future
rates over a five year recovery period. The regulatory liability for utility
plant retirement costs represents amounts recovered through rates during the
life of the associated asset and before the costs are incurred. The regulatory
asset related to rate case filing expenses represents the costs associated with
filing for rate increases that are deferred and amortized over periods that
generally range from one to three years.

35

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Income Taxes

The provision for income taxes consists of:

Years Ended December 31,
------------------------------------
2003         2002        2001
------------------------------------
Current:                                                   
Federal                      $   11,933   $   16,619   $   18,935
State                             7,249        6,647        5,106
------------------------------------
19,182       23,266       24,041
------------------------------------
Deferred:
Federal                          25,521       17,921       13,048
State                             1,220          859        1,887
------------------------------------
26,741       18,780       14,935
------------------------------------
Total tax expense              $   45,923   $   42,046   $   38,976
====================================

The statutory Federal tax rate is 35% and for states with a corporate
net income tax, the state corporate net income tax rates range from 5.50% to
9.99% for all years presented. The Company's Federal income tax returns for all
years through 1999 have been closed.

The reasons for the differences between amounts computed by applying
the statutory Federal income tax rate to income before income tax expense are as
follows:

Years Ended December 31,
--------------------------------
2003       2002       2001
--------------------------------

Computed Federal tax expense at statutory rate             $  40,852  $  38,238   $  34,680
Increase in tax expense for depreciation expense
to be recovered in future rates                             1,125        558         452
Merger transaction costs                                         (96)      (680)         --
Charitable contribution                                         (424)       (98)         --
Deduction for Aqua America common dividends
paid under employee benefit plan                             (241)      (207)         --
Amortization of deferred investment tax credits                 (285)      (283)       (276)
Prior year rate reductions                                      (431)      (315)       (322)
State income taxes, net of federal tax benefit                 5,505      4,879       4,545
Other, net                                                       (82)       (46)       (103)
--------------------------------
Actual income tax expense                                  $  45,923  $  42,046   $  38,976
================================

36

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

The tax effects of temporary differences between book and tax
accounting that give rise to the deferred tax assets and deferred tax
liabilities are as follows:

December 31,
------------------------
2003           2002
------------------------
Deferred tax assets:                                                      
Customers' advances for construction           $  17,133      $  17,787
Costs expensed for book not deducted                       
for tax, principally accrued expenses            6,525          4,015
Utility plant acquisition adjustment                       
basis differences                               21,784             --
------------------------
Total gross deferred tax assets                     45,442         21,802
------------------------

Deferred tax liabilities:                                    
Utility plant, principally due to                          
depreciation and differences in the basis                
of fixed assets due to variation in tax                  
and book accounting                            203,706        177,620
Deferred taxes associated with the gross-up                
of revenues necessary to recover, in rates,              
the effect of temporary differences             24,634         23,972
Deferred investment tax credit                     6,618          6,903
Unrealized gain on marketable securities             141             83 
Other                                                738            524
------------------------
Total gross deferred tax liabilities               235,837        209,102
------------------------
Net deferred tax liability                       $ 190,395      $ 187,300
=========================
Commitments

The Company maintains agreements with other water purveyors for the
purchase of water to supplement its water supply, particularly during periods of
peak demand. The agreements stipulate purchases of minimum quantities of water
to the year 2026. The estimated annual commitments related to such purchases are
expected to approximate $7,404 through 2008. The Company purchased approximately
$8,014, $7,079 and $5,807 of water under these agreements during the years ended
December 31, 2003, 2002 and 2001, respectively.

The Company leases motor vehicles, buildings and other equipment under
operating leases that are noncancelable. During the next five years, $5,797 of
future minimum lease payments are due: $2,098 in 2004, $1,647 in 2005, $888 in
2006, $615 in 2007 and $549 in 2008. The Company leases parcels of land on which
treatment plants and other facilities are situated and adjacent parcels that are
used for watershed protection. The operating leases are noncancelable, expire
between 2012 and 2052 and contain certain renewal provisions. Certain leases are
subject to an adjustment every five years based on changes in the Consumer Price
Index. During each of the next five years, approximately $464 of lease payments
for land, subject to the aforesaid adjustment, are due. The Company leases
treatment plants to other parties under lease agreements that require payments
to the Company of $567 in 2004, $567 in 2005, $567 in 2006, $267 in 2007 and
$308 in 2008.

Rent expense was $2,993, $2,182 and $2,281 for the years ended December
31, 2003, 2002 and 2001, respectively.

37

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Long-term Debt and Loans Payable

The Consolidated Statements of Capitalization provides a summary of
long-term debt and loans outstanding as of December 31, 2003 and 2002. The
supplemental indentures with respect to certain issues of the First Mortgage
Bonds restrict the ability of Aqua Pennsylvania, Inc. and certain other
operating subsidiaries of the Company to declare dividends, in cash or property,
or repurchase or otherwise acquire the stock of these companies. As of December
31, 2003, approximately $245,000 of Aqua Pennsylvania's retained earnings and
$52,000 of the retained earnings of certain other subsidiaries were free of
these restrictions. Certain supplemental indentures also prohibit Aqua
Pennsylvania and certain other subsidiaries of the Company from making loans to,
or purchasing the stock of, the Company.

Annual sinking fund payments are required for certain issues of First
Mortgage Bonds by the supplemental indentures. The future sinking fund payments
and debt maturities of the Company's long-term debt are as follows:

Interest Rate Range                2004        2005        2006         2007         2008     Thereafter
-------------------------------------------------------------------------

0.00% to  2.49%              $    147    $    164    $    136      $   135      $   135      $  16,151
2.50% to  2.99%                    13          21          22           22           22         18,813
3.00% to  3.49%                    --          --          --           --           --          5,618
3.50% to  3.99%                   400         400         400          400          400            800
4.00% to  4.99%                    --          --          --           --           --        143,135
5.00% to  5.49%                    70          70          75           75           80        110,505
5.50% to  5.99%                10,000          --          --           --           --         66,260
6.00% to  6.49%                15,000          --         644          144       10,172         94,360
6.50% to  6.99%                    --      10,000      10,000       10,000           --         12,000
7.00% to  7.49%                12,040      28,040       2,040        2,040        2,040            516
7.50% to  7.99%                    --          --          --           --           --         23,000
8.00% to  8.49%                    --          --          --           --           --         17,500
8.50% to  8.99%                    --          --          --           --           --          9,000
9.00% to  9.49%                   561         568         576          584          594         50,922
9.50% to  9.99%                 1,155       1,155       2,195          995        5,995         31,747
10.00% to 10.50%                    --          --          --           --           --          6,000
----------------------------------------------------------------------------
Total                          $ 39,386    $ 40,418    $ 16,088      $14,395      $19,438      $ 606,327
============================================================================

Aqua Pennsylvania has a five-year $300,000 medium-term note program
through December 2004 that provides for the issuance of long-term debt with
maturities ranging between one and 35 years at fixed rates of interest, as
determined at the time of issuance. The notes issued under this program are
secured by the Thirty-Third Supplement to the trust indenture relating to Aqua
Pennsylvania's First Mortgage Bonds. In June 2002, Aqua Pennsylvania issued
First Mortgage Bonds through the program of $25,000 5.93% Series due 2012. The
proceeds from this issuance was used to fund acquisitions, to reduce the balance
of Aqua Pennsylvania's short-term debt and for Aqua Pennsylvania's ongoing
capital program.

In July 2003, the Company issued $135,000 of unsecured notes due 2023
and with an interest rate of 4.87%. The proceeds of this financing was used to
fund the acquisition of the AquaSource operations and to refinance existing
debt. In July 2003, the Company also issued a $90,000 unsecured note payable and
the proceeds were also used to fund the acquisition of the AquaSource
operations. In August 2003, the $90,000 note payable was repaid with the
proceeds from an equity offering. At various times during 2003, Aqua
Pennsylvania, other operating subsidiaries and the Company issued other notes
payable, first mortgage bonds and tax-exempt bonds in aggregate of $27,894 at a
weighted average interest rate of 4.50% due at various times ranging from 2013
to 2032. The proceeds from these issuances were used to reduce a portion of the
balance of the short-term debt at each of the respective operating subsidiaries,
to redeem $7,000 of first mortgage bonds of operating subsidiaries with a
weighted average interest rate of 6.35% and redeem the Company's preferred stock
of $172. As of December 31, 2003, the Trustees for four issues held $28,438
pending completion of the projects financed with the issues and are reported in
the consolidated balance sheet as funds restricted for construction activity. In
connection with the acquisition of the AquaSource operations in July 2003, the
Company assumed $8,131 of long-term debt of which $7,415 was retired during
2003.

38

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

In June 2002, Aqua Pennsylvania issued $25,000 tax-exempt bonds due in
2032 at a rate of 5.55%. In December 2002, Aqua Pennsylvania issued $25,000
tax-exempt bonds due in 2032 at a rate of 5.15%. The proceeds from the bonds
issued are restricted to funding the costs of certain capital projects. At
various times during 2002, Aqua Pennsylvania and other operating subsidiaries
issued notes payable and tax-exempt bonds in aggregate of $47,765 at a weighted
average interest rate of 4.32% due at various times ranging from 2007 to 2032.
The proceeds from these issuances were used to reduce a portion of the balance
of the short-term debt at each of the respective operating subsidiaries, to
redeem $26,835 of First Mortgage Bonds of operating subsidiaries ranging from
3.75% to 5.6% and redeem Aqua America preferred stock of $944. In connection
with acquisitions completed in 2002, $6,313 of long-term debt was assumed as a
result of acquisitions at an interest rate of 1% due in various years. The
weighted average cost of long-term debt at December 31, 2003 and 2002 was 6.19%
and 6.56%, respectively.

In October 2002, a 364-day note payable of $22,000 was issued by the
Company, the proceeds of which were used to repurchase shares of Aqua America
common stock from Veolia Environnement, S.A. (formerly Vivendi Environnement,
S.A.) Interest under this facility was based, at the borrower's option, on
either a defined base rate or an adjusted London Interbank Offered Rate
corresponding to the interest period selected. This note payable was redeemed in
May 2003 with a portion of the proceeds from a common stock offering.

Aqua Pennsylvania has a $70,000 364-day revolving credit facility with
four banks and the Company has a $20,000 364-day bank revolving credit facility.
Funds borrowed under these agreements are classified as loans payable and are
used to provide working capital. As of December 31, 2003 and 2002, funds
borrowed under the Aqua Pennsylvania revolving credit agreements were $52,068
and $35,664, respectively, and $19,801 and $12,902 were borrowed under the
Company's revolving credit agreement, respectively. Interest under these
facilities is based, at the borrower's option, on the prime rate, an adjusted
federal funds rate, an adjusted London Interbank Offered Rate corresponding to
the interest period selected, an adjusted Euro-Rate corresponding to the
interest period selected or at rates offered by the banks. These agreements
restrict the total amount of short-term borrowings of Aqua Pennsylvania and the
Company. A commitment fee ranging from 1/4 to 1/10 of 1% is charged on the
unused portion of the revolving credit agreements. The average cost of borrowing
under these facilities was 1.6% and 2.3%, and the average borrowing was $62,528
and $63,529, during 2003 and 2002, respectively. The maximum amount outstanding
at the end of any one month was $73,079 in 2003 and $83,836 in 2002.

At December 31, 2003 and 2002, the Company had combined short-term
lines of credit of $88,000 and $90,000, respectively. Funds borrowed under these
lines are classified as loans payable and are used to provide working capital.
The average borrowing under the lines was $50,353 and $48,527 during 2003 and
2002, respectively. The maximum amount outstanding at the end of any one month
was $73,700 in 2003 and $75,575 in 2002. Interest under the lines is based at
the Company's option, depending on the line, on the prime rate, an adjusted
Euro-Rate, an adjusted federal funds rate or at rates offered by the banks. The
average cost of borrowings under all lines during 2003 and 2002 was 2.4% and
2.8%, respectively.

Interest income of $395, $287 and $367 was netted against interest
expense on the consolidated statements of income for the years ended December
31, 2003, 2002 and 2001, respectively. The total interest cost was $45,057,
$40,683 and $40,226 in 2003, 2002 and 2001, including amounts capitalized of
$2,127, $1,389 and $1,222, respectively.

39

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Fair Value of Financial Instruments

The carrying amount of current assets and liabilities that are
considered financial instruments approximates their fair value as of the dates
presented. The carrying amount and estimated fair value of the Company's
long-term debt are as follows:

December 31,
-----------------------
2003         2002
-----------------------
Carrying amount                       $736,052     $617,175
Estimated fair value                   781,502      660,436

The fair value of long-term debt has been determined by discounting the
future cash flows using current market interest rates for similar financial
instruments of the same duration. The Company's customers' advances for
construction and related tax deposits have a carrying value of $72,500 and
$69,790 at December 31, 2003 and 2002, respectively. Their relative fair values
cannot be accurately estimated because future refund payments depend on several
variables, including new customer connections, customer consumption levels and
future rate increases. Portions of these non-interest bearing instruments are
payable annually through 2017 and amounts not paid by the contract expiration
dates become non-refundable. The fair value of these amounts would, however, be
less than their carrying value due to the non-interest bearing feature.

Preferred Stock

At December 31, 2003, the Company had 1,770,819 shares of Series
Preferred Stock with a $1.00 par value authorized, of which 100,000 shares are
designated as Series A Preferred Stock. During 1996, the Company designated and
issued in connection with an acquisition 32,200 shares as Series B Preferred
Stock, $1.00 par value. The Series A Preferred Stock, as well as the
undesignated shares of Series Preferred Stock, remains unissued. The Series B
Preferred Stock was recorded on the consolidated balance sheet at its
liquidation value of $100 per share. All but 172 shares were liquidated during
2002, and in December 2003, the remaining 172 shares of Series B Preferred Stock
were redeemed as provided under the provisions of the issue through the issuance
of debt with a five-year maturity at an interest rate of 6.05% per annum. As of
December 31, 2003, the Company did not have any preferred stock outstanding and
has provided for all dividends accrued on the Series B Preferred Stock.

Stockholders' Equity

At December 31, 2003, the Company had 100,000,000 shares of common
stock authorized; par value $0.50. Shares outstanding at December 31, 2003, 2002
and 2001 were 92,589,040, 84,895,543 and 85,483,086, respectively. Treasury
shares held at December 31, 2003, 2002 and 2001 were 681,384, 2,151,350 and
913,877, respectively.

40

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

The following table summarizes the activity of common stockholders'
equity:

Accumulated
Capital in                       Other
Common       Treasury    excess of      Retained      Comprehensive
stock        stock      par value      earnings          Income          Total
----------------------------------------------------------------------------------

Balance at December 31, 2000           $ 27,260    $ (15,346)     $291,013      $123,911          $ 926          $427,764
Net income                                   --           --            --        60,005             --            60,005
Other comprehensive income,
net of income tax of $19                  --           --            --            --             39                39
Reclassification adjustment for
gains reported in net income,
net of income tax of $127                 --           --            --            --           (239)             (239)
Dividends                                    --           --            --       (34,234)            --           (34,234)
Stock split                               6,829           --        (6,829)           --             --                --
Stock issued for acquisitions               133           --         5,228            --             --             5,361
Sale of stock                               128          672         5,783            --             --             6,583
Repurchase of stock                          --       (2,493)           --            --             --            (2,493)
Equity Compensation Plan                      3           --           141            --             --               144
Exercise of stock options                   297           --         6,642            --             --             6,939
Employee stock plans tax benefits            --           --         2,061            --             --             2,061
----------------------------------------------------------------------------------
Balance at December 31, 2001             34,650      (17,167)      304,039       149,682            726           471,930
----------------------------------------------------------------------------------
Net income                                   --           --            --        67,154             --            67,154          
Other comprehensive income,
net of income tax of $56                  --           --            --            --            104               104
Reclassification adjustment for
gains reported in net income,
net of income tax of $412                 --           --            --            --           (767)             (767)
Dividends                                    --           --            --       (36,789)            --           (36,789)
Stock issued for acquisitions                71           --         2,674            --             --             2,745
Sale of stock                               161          855         6,220            --             --             7,236
Repurchase of stock                          --      (24,109)           --            --             --           (24,109)
Equity Compensation Plan                     15           --           598            --             --               613
Exercise of stock options                   137           --         3,237            --             --             3,374
Employee stock plans tax benefits            --           --         1,103            --             --             1,103
----------------------------------------------------------------------------------
Balance at December 31, 2002             35,034      (40,421)      317,871       180,047             63           492,594
----------------------------------------------------------------------------------
Net income                                   --           --            --        70,785             --            70,785
Other comprehensive income,
net of income tax of $244                 --           --            --            --            455               455
Reclassification adjustment for
gains reported in net income,
net of income tax of $186                 --           --            --            --           (347)             (347)
Dividends                                    --           --            --       (39,917)            --           (39,917)
Stock split                               9,244           --        (9,244)           --             --                --
Sale of stock                             2,168       29,163        99,031            --             --           130,362
Repurchase of stock                          --       (1,353)           --            --             --            (1,353)
Equity Compensation Plan                      8           --           344            --             --               352
Exercise of stock options                   181           --         4,283            --             --             4,464
Employee stock plans tax benefits            --           --           723            --             --               723
----------------------------------------------------------------------------------

Balance at December 31, 2003           $ 46,635    $ (12,611)     $413,008      $210,915          $ 171          $658,118
==================================================================================

41

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

In August 2003, the Company's Board of Directors declared a 5-for-4
common stock split to be effected in the form of a 25% stock distribution for
all common shares outstanding, to shareholders of record on November 14, 2003.
Common shares outstanding do not include shares held by the Company in treasury.
The new shares were distributed on December 1, 2003. The Company's par value of
$0.50 per share remained unchanged and $9,244 was transferred from Capital in
Excess of Par Value to Common Stock to record the split. All share and per share
data for all periods presented have been restated to give effect to the stock
split.

In April 2003, the Company filed a universal shelf registration with
the Securities and Exchange Commission to allow for the sale, over time, of up
to $250,000 of various debt and equity securities, including common stock. To
date, the Company has issued common stock in two transactions under the
universal shelf registration:

o    In May 2003, the Company issued 1,868,750 shares of common stock
in a public offering for proceeds of $33,100, net of expenses. The
net proceeds were used to repay short-term debt, including the
repayment of $22,000 of indebtedness incurred in connection with
the Company's repurchase of 1,513,275 shares of common stock from
affiliates of Veolia Environnement, S.A. (formerly Vivendi
Environnement, S.A.) in October 2002.

o    In August 2003, the Company issued 5,000,000 shares of common
stock in a public offering for proceeds of $90,100, net of
expenses. The net proceeds were used to repay an unsecured note of
$90,000. The indebtedness was incurred by Aqua America in
connection with the acquisition of the operations that were
purchased from AquaSource, Inc.

The balance remaining available for use under the universal shelf
registration as of December 31, 2003 is $121,895. In addition, the Company has a
shelf registration statement filed with the Securities and Exchange Commission
to permit the offering from time to time of shares of common stock and shares of
preferred stock for acquisitions. During 2002 and 2001, 178,664 and 414,638
shares of common stock totaling $2,745 and $5,361, respectively, were issued by
the Company to acquire water and wastewater systems. The balance remaining
available for use under the acquisition shelf registration as of December 31,
2003 is 2,218,947 shares. The form and terms of such securities shall be
determined when and if these securities are issued under these shelf
registrations.

In May 2002, Veolia Environnement, S.A. which through its affiliates
(collectively "VE") owned approximately 16.8% of our outstanding common stock,
advised the Company of their decision to sell its investment in Aqua America,
Inc. VE announced that its decision was part of its overall strategy to divest
non-core assets and focus on other business strategies. In September 2002, in
order to facilitate the orderly re-distribution of the shares held by VE into
the market, the Company completed a secondary offering of 12,356,570 shares of
Aqua America common stock held by VE. The number of outstanding shares of common
stock was not changed and the Company did not receive any proceeds as a result
of this secondary offering. In addition, in October 2002 the Company repurchased
1,513,275 shares of Aqua America, Inc. common stock representing the remainder
of the shares of Aqua America, Inc. common stock held by VE. The repurchase of
shares was funded with proceeds of $22,000 from a short-term credit facility. In
May 2003, this $22,000 short-term credit facility was repaid with a portion of
the funds from the issuance of 1,868,750 shares of common stock through a shelf
registration as described above.

In addition, the Board of Directors has authorized the Company to
purchase its common stock, from time to time, in the open market or through
privately negotiated transactions. The Company has not repurchased any shares
under this authorization since 2000. As of December 31, 2003, 411,209 shares
remain available for purchase by the Company.

42

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

The Company has a Dividend Reinvestment and Direct Stock Purchase Plan
("Plan") that allows reinvested dividends to be used to purchase original issue
shares of common stock at a five percent discount from the current market value.
Under the direct stock purchase program, shares are purchased by investors at
market price and the shares are purchased by the Company's transfer agent in the
open-market at least weekly. During 2003, 2002 and 2001, under the dividend
reinvestment portion of the Plan, 395,605, 402,084 and 379,883 original issue
shares of common stock were sold providing the Company with proceeds of $7,000,
$6,407 and $5,980, respectively.

The Company reports comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income." Accordingly, the Company's accumulated
other comprehensive income for unrealized gains on securities is reported in the
Stockholders' Equity section of the Consolidated Balance Sheets and the related
other comprehensive income is reported in the Consolidated Statements of Income
and Comprehensive Income.

Net Income per Common Share and Equity per Common Share

Basic net income per share is based on the weighted average number of
common shares outstanding. Diluted net income per share is based on the weighted
average number of common shares outstanding and potentially dilutive shares. The
dilutive effect of employee stock options is included in the computation of
Diluted net income per share. The following table summarizes the shares, in
thousands, used in computing Basic and Diluted net income per share:

Years ended December 31,
------------------------------
2003        2002        2001
------------------------------
Average common shares outstanding during
the period for Basic computation           88,275      85,674      84,841
Dilutive effect of employee stock options        969         864       1,102
------------------------------
Average common shares outstanding during
the period for Diluted computation         89,244      86,538      85,943
==============================

Equity per common share was $7.11 and $5.80 at December 31, 2003 and
2002, respectively. These amounts were computed by dividing common stockholders'
equity by the number of shares of common stock outstanding at the end of each
year.

Shareholder Rights Plan

The Company has a Shareholder Rights Plan designed to protect the
Company's shareholders in the event of an unsolicited unfair offer to acquire
the Company. Each outstanding common share is entitled to one Right which is
evidenced by the common share certificate. In the event that any person acquires
20% or more of the outstanding common shares or commences a tender or exchange
offer which, if consummated, would result in a person or corporation owning at
least 20% of the outstanding common shares of the Company, the Rights will begin
to trade independently from the common shares and, if certain circumstances
occur, including the acquisition by a person of 20% or more of the outstanding
common shares, each Right would then entitle its holder to purchase a number of
common shares of the Company at a substantial discount. If the Company is
involved in a merger or other business combination at any time after the Rights
become exercisable, the Rights will entitle the holder to acquire a certain
number of shares of common stock of the acquiring company at a substantial
discount. The Rights are redeemable by the Company at a redemption price of $.01
per Right at any time before the Rights become exercisable. The Rights will
expire on March 1, 2008, unless previously redeemed.

43

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Employee Stock and Incentive Plan

Under the 1994 Equity Compensation Plan ("Plan"), the Company may grant
qualified and non-qualified stock options to officers, key employees and
consultants. Officers and key employees may also be granted dividend equivalents
and restricted stock. Restricted stock may also be granted to non-employee
members of the Board of Directors ("Board"). In May 2003, the Shareholders
authorized a 3,500,000 share increase in the shares available for issuance under
the Plan. The maximum number of shares that may be subject to grants under the
Plan to any one individual in any one year is 150,000. Awards under this plan
are made by a committee of the Board of Directors.

Options under the plan were issued at the market price of the stock on
the day of the grant. Options are exercisable in installments of 33% annually,
starting one year from the date of the grant and expire 10 years from the date
of the grant. The following table summarizes stock option transactions for the
plan:

As of or For the Years Ended December 31,
---------------------------------------------------------------------------
2003                      2002                     2001
-----------------------    ----------------------    ----------------------
Weighted                  Weighted                  Weighted
Average                    Average                   Average
Exercise                  Exercise                  Exercise
Shares        Price        Shares        Price       Shares        Price
-----------------------    ----------------------    ----------------------

Options:
Outstanding, beginning of year    2,830,133     $ 12.06       2,559,763     $ 10.66     2,829,754    $   8.55
Granted                             613,654       16.98         617,813       16.64       669,599       15.28
Terminated                          (15,533)      14.78          (8,265)      12.99       (22,729)       9.70
Exercised                          (434,833)      10.28        (339,178)       9.82      (916,861)       7.51
---------------------      ----------------------    ----------------------
Outstanding, end of year          2,993,421     $ 13.31       2,830,133     $ 12.06     2,559,763     $ 10.66
=====================      ======================    ======================
Exercisable, end of year          1,756,300     $ 11.01       1,555,483     $  9.70     1,269,635     $  8.63
=====================      ======================    ======================

Options exercised during 2003 ranged in price from $4.38 per share to
$16.65 per share. At December 31, 2003, 4,984,151 options under the Plan were
still available for grant. The following table summarizes the price ranges of
the options outstanding and options exercisable as of December 31, 2003:

Options                               Options                 
Outstanding                           Exercisable
-----------------------------------       -----------------------------
Weighted     Weighted                            Weighted
Average      Average                            Average
Remaining    Exercise                            Exercise
Shares    Life (years)     Price           Shares             Price
-----------------------------------       -----------------------------

Range of prices:          
$ 4.56 - 7.99             419,291       2.3        $  6.18          419,291          $   6.18
$ 8.00 - 9.99             320,558       6.3           9.39          320,558              9.39
$10.00 - 12.99            489,839       4.9          11.10          489,839             11.10
$13.00 - 15.99            556,918       7.3          15.28          338,294             15.28
$16.00 - 16.99          1,084,944       8.8          16.65          188,318             16.65
$17.00 - 18.34            121,871       9.4          18.32               --                --
----------------------------------        ---------------------------
2,993,421       6.7        $ 13.31        1,756,300          $  11.01
==================================        ===========================

Under SFAS No. 123 "Accounting for Stock-Based Compensation" and SFAS
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure",
the Company elects to continue to apply the provisions of APB Opinion No. 25 and
to provide the pro forma disclosure provisions of this statement. Accordingly,
no compensation cost has been recognized in the financial statements for stock
options that have been granted. Pursuant to the disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
pro forma net income available to common stock and earnings per share are
presented in the Summary of Significant Accounting Policies - Stock-Based
Compensation as if compensation cost for stock options was determined as of the
grant date under the fair value method.

44

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

Restricted stock awards provide the grantee with the rights of a
shareholder, including the right to receive dividends and to vote such shares,
but not the right to sell or otherwise transfer the shares during the
restriction period. During 2003, 2002 and 2001, 20,156, 37,031 and 9,844 shares
of restricted stock were granted with a restriction period ranging from six to
36 months. The value of restricted stock awards, which are "compensatory", is
equal to the fair market value of the stock on the date of the grant and is
amortized ratably over the restriction period.

Pension Plans and Other Postretirement Benefits

The Company maintains a qualified, defined benefit pension plan that
covers a majority of its full-time employees who were hired prior to April 1,
2003. Retirement benefits under the plan are generally based on the employee's
total years of service and compensation during the last five years of
employment. The Company's policy is to fund the plan annually at a level which
is deductible for income tax purposes and which provides assets sufficient to
meet its pension obligations. To offset certain limitations imposed by the
Internal Revenue Code with respect to payments under qualified plans, the
Company has a non-qualified Excess Benefit Plan for Salaried Employees in order
to prevent certain employees from being penalized by these limitations. The
Company also has non-qualified Supplemental Executive Retirement Plans for
certain current and retired employees. The net pension costs and obligations of
the qualified and non-qualified plans are included in the tables which follow.
Employees hired after April 1, 2003 may participate in a defined contribution
plan that provides a Company matching contribution on amounts contributed by
participants and an annual profit-sharing contribution based upon a percentage
of the eligible participants' compensation.

In addition to providing pension benefits, the Company offers certain
Postretirement Benefits other than Pensions ("PBOPs") to employees hired before
April 1, 2003 and retiring with a minimum level of service. These PBOPs include
continuation of medical and prescription drug benefits for eligible retirees and
life insurance benefits for certain eligible retirees. The Company funds its
gross PBOP cost through various trust accounts. The benefits of retired officers
and certain other retirees are paid by the Company and not from plan assets due
to limitations imposed by the Internal Revenue Code.

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law which would provide
plan sponsors a federal subsidy for certain qualifying prescription drug
benefits covered under the sponsor's postretirement health care plans. The
Company is currently reviewing the impact of the Act and has elected to defer
recognition of the benefit to its postretirement health care plans in accordance
with FASB Staff Position No. 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003." Any measures of accumulated postretirement benefit obligation and net
periodic PBOP cost for the year ended December 31, 2003 do not reflect the
effects of the Act. Currently, specific authoritative accounting guidance for
the federal subsidy is pending and that guidance when issued may require the
Company to change previously reported information.

45

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

The changes in the benefit obligation and fair value of plan assets,
the funded status of the plans and the assumptions used in the measurement of
the company's benefit obligation are as follows:

Other
Pension Benefits          Postretirement Benefits
-----------------------      ------------------------
2003           2002          2003           2002
--------       --------      ---------      ---------

Change in benefit obligation:
Benefit obligation at January 1,                 $131,059       $119,667      $  25,436      $  22,317
Service cost                                        3,627          3,205            987            840
Interest cost                                       8,999          8,501          1,703          1,620
Plan amendments                                        --            170             --             --
Actuarial loss                                     12,222          5,104          1,978          1,574
Plan participants' contributions                       --             --            513            342
Benefits paid                                      (5,809)        (5,588)        (1,483)        (1,257)
--------       --------      ---------      ---------
Benefit obligation at December 31,                150,098        131,059         29,134         25,436
--------       --------      ---------      ---------

Change in plan assets:
Fair value of plan assets at January 1,            94,438        113,330         12,200         12,216
Actual return on plan assets                       20,021        (13,369)           816         (1,168)
Employer contributions                                 81             65          2,345          2,067
Benefits paid                                      (5,809)        (5,588)          (970)          (915)
--------       --------      ---------      ---------
Fair value of plan assets at December 31,         108,731         94,438         14,391         12,200
--------       --------      ---------      ---------

Funded status of plan:
Funded status at December 31,                      41,367         36,621         14,743         13,236
Unrecognized actuarial loss                       (29,164)       (30,471)        (4,857)        (2,839)
Unrecognized prior service cost                    (1,942)        (2,337)           590            647
Unrecognized net transition obligation              1,227          1,436         (7,231)        (8,034)
--------       --------      ---------      ---------
Accrued benefit costs                            $ 11,488       $  5,249      $   3,245      $   3,010
========       ========      =========      =========

The Company's pension plans had an accumulated benefit obligation of
$121,521 and $106,053 at December 31, 2003 and 2002, respectively. The following
table provides the net liability recognized on the Consolidated Balance Sheets
at December 31,:

Other
Pension Benefits      Postretirement Benefits
----------------------    -----------------------
2003         2002        2003         2002
----------------------    -----------------------
Prepaid benefits cost          $      --     $  1,919    $    937     $  1,225
Accrued benefit cost             (11,488)      (7,168)     (4,182)      (4,235)
Additional minimum liability      (2,003)      (5,989)         --           --
Intangible assets                  1,962        1,258          --           --
Accumulated other
comprehensive income             41        4,731          --           --
----------------------    ---------------------
Net liability recognized       $ (11,488)    $ (5,249)   $ (3,245)    $ (3,010)
======================    =====================

46

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

At December 31, 2003 and 2002, the Company's pension plans had benefit
obligations in excess of its plan assets. The following tables provide the
projected benefit obligation, the accumulated benefit obligation and fair market
value of the plan assets as of December, 31:

Projected Benefit
Obligation Exceeds
the Fair Value of
Plan Assets
---------------------------
2003            2002
---------------------------
Projected benefit obligation        $ 150,098        $ 131,059
Fair value of plan assets             108,731           94,438

Accumulated Benefit
Obligation Exceeds
the Fair Value of
Plan Assets
---------------------------
2003            2002
---------------------------
Accumulated benefit obligation      $ 121,521        $  84,756
Fair value of plan assets             108,731           72,551

*2002 data in this table excludes pension plan with plan assets in excess of
accumulated benefit obligation.

The following table provides the components of net periodic benefit
costs for the years ended December 31,:

Other
Pension Benefits                         Postretirement Benefits
----------------------------------      ----------------------------------------
2003          2002          2001        2003             2002            2001
----------------------------------      ----------------------------------------

Service cost                             $ 3,627      $ 3,205       $ 2,986      $   987          $   840         $   705
Interest cost                              8,999        8,501         8,261        1,703            1,620           1,427
Expected return on plan assets            (7,775)      (9,945)      (10,891)        (917)            (953)           (947)
Amortization of transition
obligation (asset)                     (209)        (209)         (110)         803              803             803
Amortization of prior service cost           395          414           432          (57)             (57)            (57)
Amortization of actuarial (gain) loss      1,282          (2)          (528)          62               (5)           (179)
Amortization of regulatory asset              --           --             -          136              136             136
Capitalized costs                           (205)         (66)          (49)        (598)            (520)           (475)
Rate-regulated adjustment                     --           --          (553)          --               --              --
----------------------------------      ----------------------------------------
Net periodic benefit cost                $ 6,114      $ 1,898       $  (452)     $ 2,119          $ 1,864         $ 1,413
==================================      ========================================

The rate-regulated adjustment set forth above is required for 2001 in
order to reflect pension expense (credit) for the Company in accordance with the
method used in establishing water rates.

Accounting for pensions and other postretirement benefits requires an
extensive use of assumptions about the discount rate, expected return on plan
assets, the rate of future compensation increases received by the Company's
employees, mortality, turnover and medical costs. Each assumption is reviewed
annually with assistance from the Company's actuarial consultant who provides
guidance in establishing the assumptions. The assumptions are selected to
represent the average expected experience over time and may differ in any one
year from actual experience due to changes in capital markets and the overall
economy. These differences will impact the amount of pension and other
postretirement benefit expense that the Company recognizes.

47

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

The significant assumptions related to the Company's pension and other
postretirement benefit plans are as follows:

Other
Pension Benefits           Postretirement Benefits
-----------------------       -------------------------       
2003           2002           2003             2002
--------       --------       --------         --------  

Weighted-average Assumptions Used
to Determine Benefit Obligations
as of December 31,
Discount rate                                                 6.25%          6.75%          6.25%            6.75%
Rate of compensation increase                              4.0-5.0%       4.0-5.0%           4.0%             4.0%

Assumed Health Care Cost Trend
Rates Used to Determine Benefit
Obligations as of December 31,
Health care cost trend rate                                     n/a            n/a            10%              10%
Rate to which the cost trend is assumed
to decline (the ultimate trend rate)                          n/a            n/a             5%               5%
Year that the rate reaches the ultimate
trend rate                                                    n/a            n/a           2009             2006

Weighted-average Assumptions Used
to Determine Net Periodic Benefit
Costs for Years Ended December 31,
Discount rate                                                 6.75%          7.25%          6.75%            7.25%
Expected return on plan assets                                8.50%          9.00%       6.0-9.0%         6.0-9.0%
Rate of compensation increase                              4.0-5.0%       4.0-5.0%           4.0%             4.0%

Assumed Health Care Cost Trend
Rates Used to Determine Net Periodic
Benefit Costs for Years Ended December 31,
Health care cost trend rate                                     n/a            n/a            10%              12%
Rate to which the cost trend is assumed
to decline (the ultimate trend rate)                          n/a            n/a             5%               5%
Year that the rate reaches the ultimate
trend rate                                                    n/a            n/a           2006             2006
n/a - Assumption is not applicable to pension benefits.

Assumed health-care trend rates have a significant effect on the
expense and liabilities for other postretirement benefit plans. The health care
trend rate is based on historical rates and expected market conditions. A
one-percentage point change in the expected health-care cost trend rates would
have the following effects:

1-Percentage-    1-Percentage-
Point            Point
Increase         Decrease
---------------  ---------------
Effect on the health-care component of the
accrued other postretirement benefit
obligation                                       $  949         $  (860)
======         =======

Effect on total service and interest cost
components of net periodic postretirement
health-care benefit cost                         $  103         $   (95)
======         =======

48

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

The discount rate is based on a market rate for a recognized-rating
agency's high-quality long-term bond portfolio with durations matching the
expected payouts under our retirement plans. The Company's pension expense and
liability (benefit obligations) increases as the discount rate is reduced.

The Company's expected return on assets is determined by evaluating the
asset class return expectations with its advisors as well as actual, long-term,
historical results of our asset returns. The Company's pension expense increases
as the expected return on assets decreases. The Company believes its actual
long-term asset allocation on average will approximate the targeted allocation.
The Company's investment strategy is to earn a reasonable rate of return while
maintaining risk at acceptable levels through the diversification of investments
across and within various asset categories. Investment returns are compared to
benchmarks that include the S&P 500 Index, the Lehman Brothers Intermediate
Government/Credit Index, and a combination of the two indices. The Pension
Committee of the Board of Directors meets semi-annually to review plan
investments and management monitors investment performance quarterly through a
performance report prepared by an external consulting firm.

The Company's pension plan asset allocation and the target allocation
by asset category are as follows:

Percentage of Plan  
2004            Assets at December 31,        
Target           -----------------------        
Allocation             2003          2002
----------            ------        ------
Asset Category:
Equity securities               65%              66%           63%
Debt securities                 35%              32%           35%
Cash                             0%               2%            2%
----------            -----         -----
Total                          100%             100%          100%
==========            =====         =====

Equity securities include Aqua America, Inc. common stock in the
amounts of $6,469 or 5.9% of total plan assets and $4,701 or 5.0% of total plan
assets as of December 31, 2003 and 2002, respectively.

The asset allocation for the Company's other postretirement benefit
plans and the target allocation by asset category are as follows:

Percentage of Plan  
2004            Assets at December 31,        
Target           -----------------------        
Allocation             2003          2002
----------            ------        ------
Asset Category:
Cash                            65%              64%           64%
Equity securities               35%              36%           36%
----------            -----         -----
Total                          100%             100%          100%
==========            =====         =====

Funding requirements for qualified defined benefit pension plans are
determined by government regulations and not by accounting pronouncements. In
accordance with funding rules, during 2004 our pension contribution is expected
to be $5,371.

As of December 31, 2003, the Company has an additional minimum
liability of $41 associated with our defined benefit plan. The additional
minimum liability is a result of the accumulated benefit obligation exceeding
the fair value of plan assets and results in the establishment of a regulatory
asset, as the Company anticipates recovery of the future, increased pension
expense through customer rates. An additional minimum liability of $4,731 was
initially recorded on December 31, 2002 as a result of a decline in pension plan
assets and a decrease in the assumed discount rate which resulted in an increase
in pension liabilities. The change in the additional minimum liability from
December 31, 2002 to December 31, 2003 resulted from an increase in the pension
plan assets during 2003 due to positive equity market performance, offset
partially by the effect of a decreased discount rate.

49

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued
(In thousands of dollars, except per share amounts)

The Company has 401(k) savings plans that cover substantially all
employees. The Company makes matching contributions that are invested in Aqua
America, Inc. common stock based on a percentage of an employee's contribution,
subject to certain limitations. The Company's matching contribution, recorded as
compensation expense, was $921, $859 and $798 for the years ended December 31,
2003, 2002 and 2001, respectively.

Water and Wastewater Rates

In November 2003, the Company's Pennsylvania operating subsidiary, Aqua
Pennsylvania, Inc., filed an application with the Pennsylvania Public Utility
Commission ("PAPUC") requesting a $25,300 or 10.2% increase in annual revenues.
The application is currently pending before the PAPUC and a final determination
is anticipated by August 2004.

On August 1, 2002, the PAPUC granted Aqua Pennsylvania, Inc. a $21,226
or 10.2% base rate increase. The rates in effect at the time of the filing
included $9,400 in Distribution System Improvement Charges ("DSIC") at 5.0%.
Consequently, the total base rates increased by $30,626 and the DSIC was reset
to zero.

The Company's other operating subsidiaries were allowed annual rate
increases of $1,275 in 2003, $3,024 in 2002 and $4,799 in 2001, represented by
eight, thirteen and nine rate decisions, respectively. Revenues from these
increases realized in the year of grant were approximately $839, $1,403 and
$4,200 in 2003, 2002 and 2001, respectively.

Four states in which the Company operates permit water utilities, and
in some states wastewater utilities, to add a surcharge to their water or
wastewater bills to offset the additional depreciation and capital costs related
to infrastructure system replacement and rehabilitation projects completed and
placed into service between base rate filings. Currently, Pennsylvania,
Illinois, Ohio and Indiana allow for the use of infrastructure rehabilitation
surcharges. These mechanisms typically adjust periodically based on additional
qualified capital expenditures completed or anticipated in a future period. The
infrastructure rehabilitation surcharge is capped as a percentage of base rates,
generally 5% of base rates, and is reset to zero when new base rates that
reflect the costs of those additions become effective or when a utility's
earnings exceed a regulatory benchmark. Infrastructure rehabilitation surcharges
provided revenues in 2003, 2002 and 2001 of $8,147, $5,518 and $6,672,
respectively.

50

Selected Quarterly Financial Data (Unaudited)                           Aqua America, Inc. and Subsidiaries
---------------------------------------------
(in thousands of dollars, except per share amounts)

First       Second       Third       Fourth
Quarter      Quarter     Quarter      Quarter       Year
------------------------------------------------------------
2003                                                                                               
-----------------------------------------------------------------------------------------------------------

Operating revenues                              $  80,489    $  83,379    $102,153    $101,212     $367,233
Operations and maintenance expense                 30,664       31,029      36,777      42,132      140,602
Net income available to common
stock                                            13,324       15,235      23,620      18,606       70,785
Basic net income per common share                    0.16         0.18        0.26        0.20         0.80
Diluted net income per common share                  0.16         0.18        0.26        0.20         0.79
Dividend paid per common share                      0.112        0.112       0.112       0.120        0.456
Dividend declared per common share                  0.112        0.112       0.232          --        0.456
Price range of common stock                                                               
- high                                            17.83        19.85       20.07       22.40        22.40
- low                                             15.77        17.22       18.28       18.71        15.77

2002                                                                                               
-----------------------------------------------------------------------------------------------------------
Operating revenues                              $  71,669    $  76,615    $ 91,918    $ 81,826     $322,028
Operations and maintenance expense                 27,285       28,915      31,143      30,392      117,735
Net income available to common
stock                                            11,875       14,818      21,815      18,646       67,154
Basic net income per common share                    0.14         0.17        0.25        0.22         0.78
Diluted net income per common share                  0.14         0.17        0.25        0.22         0.78
Dividend paid per common share                      0.106        0.106       0.106       0.112        0.430
Dividend declared per common share                  0.106        0.106       0.218          --        0.430
Price range of common stock                                       
- high                                            19.69        20.00       16.24       17.50        20.00
- low                                             16.88        14.79       12.82       15.44        12.82

All per share data as presented has been adjusted for the 2003 5-for-4
common stock split effected in the form of a 25% stock distribution. High and
low prices of the Company's common stock are as reported on the New York Stock
Exchange Composite Tape. The cash dividends paid in December 2003 of $0.12 and
December 2002 of $0.112 were declared in August 2003 and August 2002,
respectively.

Beginning August 1, 2003, the financial results for the operations
acquired in the AquaSource acquisition have been included in the Company's
consolidated financial statements.

Net income available to common stock and net income per share for the
fourth quarter of 2002 includes a net gain of $3,690 ($5,676 pre-tax) or $0.04
per share on the sale of a portion of our Ashtabula, Ohio water system.

51

Summary of Selected Financial Data                                                     Aqua America, Inc. and Subsidiaries 
----------------------------------
(in thousands of dollars, except per share amounts)

--------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                    2003 (a)         2002*        2001*        2000*         1999*
--------------------------------------------------------------------------------------------------------------------------

PER COMMON SHARE:
Income from operations before
non-recurring items:  (b)
Basic                                                    $0.80         $0.74        $0.71        $0.62         $0.56
Diluted                                                   0.79          0.73         0.70         0.62          0.56
Net income (b)
Basic                                                     0.80          0.78         0.71         0.65          0.45
Diluted                                                   0.79          0.78         0.70         0.65          0.45
Cash dividends paid                                            0.46          0.43         0.40         0.38          0.36
Cash dividends declared                                        0.46          0.43         0.40         0.38          0.36
Return on average stockholders' equity (b)                    12.3%         13.9%        13.3%        13.2%         10.1%
Book value at year end                                        $7.11         $5.80        $5.52        $5.10         $4.55
Market value at year end                                      22.10         16.48        18.04        15.68         10.59
---------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT HIGHLIGHTS:
Operating revenues                                         $367,233      $322,028     $307,280     $274,014      $256,546
Depreciation and amortization                                51,463        44,322       40,168       34,100        31,903
Interest expense, net (c)                                    42,535        39,007       38,637       37,775        31,796
Income before income taxes                                  116,718       109,252       99,087       86,995        62,915
Provision for income taxes                                   45,923        42,046       38,976       34,105        26,531
Net income available to common stock (b)                     70,785        67,154       60,005       52,784        36,275
---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS:
Total assets                                             $2,069,736    $1,717,069   $1,555,108   $1,413,723    $1,280,805
Property, plant and equipment, net                        1,824,291     1,486,703    1,364,282    1,249,652     1,135,230
Stockholders' equity                                        659,030       493,097      472,717      430,587       367,141
Long-term debt, including current portion                   736,052       617,175      531,455      472,712       425,946
Total debt                                                  832,511       732,288      641,123      573,706       529,015
---------------------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION:
Net cash flows from operating activities                   $143,373      $121,560     $102,165      $86,972       $74,103
Capital additions                                           163,320       136,164      124,088      129,740        96,383
Cash expended for acquisitions of utility systems           192,331         8,914        9,517        3,546        39,164
Dividends on common stock                                    39,917        36,789       34,234       30,406        29,217
Number of customers served                                  749,491       605,474      587,537      565,146       548,937
Number of shareholders of common stock                       22,726        21,389       20,920       20,978        21,187
Common shares outstanding (000)                              92,589        84,896       85,483       83,869        80,103
Employees (full-time)                                         1,260           971          951          943           945
---------------------------------------------------------------------------------------------------------------------------

*Share and per share data has been restated for the 2003 5-for-4 stock split.
(a) Beginning August 1, 2003, the financial results for the operations acquired
in the AquaSource acquisition have been included in Aqua America's
consolidated financial statements.
(b) Income per share from operations before non-recurring items is a measure
that is not determined in accordance with GAAP and may not be comparable
to similarly titled measures reported by other companies. This Non-GAAP
measure should not be considered as an alternative to net income per share
as determined in accordance with GAAP. We believe that this is useful as an
indicator of operating performance, as we measure if for management
purposes, because it provides a better understanding of our results of
operations by highlighting our ongoing operations and the underlying
profitability of our core business. Non-recurring items include the
following: the 2002 amounts include a net gain of $3,690 ($5,676 pre-tax) or
$0.04 per share on the sale of a portion of our Ashtabula, Ohio water
system; the 2000 amounts include a net gain of $2,236 ($4,041 pre-tax) or
$0.03 per share for the partial recovery of the merger costs related to the
merger with Consumers Water Company; and the 1999 amounts include a net
charge of $8,596 ($10,121 pre-tax) or $0.11 per share for the merger
transaction costs and related restructuring costs.
(c) Includes dividends on preferred stock of subsidiary and minority interest;
net of allowance for funds used during construction.

52

Exhibit 21
----------

AQUA AMERICA, INC. AND SUBSIDIARIES

The following table lists the significant subsidiaries and other active
subsidiaries of Aqua America, Inc. at December 31, 2003:

Aqua Pennsylvania, Inc.  (Pennsylvania)
Aqua Resources, Inc. (Pennsylvania)
Aqua Services, Inc.  (Delaware)
Consumers Oho Water Company (Ohio)
Aqua Illinois, Inc. (Illinois)
Aqua New Jersey, Inc. (New Jersey)
Aqua Maine, Inc. (Maine)
Aqua North Carolina, Inc. (North Carolina)
Aqua Texas, Inc. (Texas)
Aqua Indiana, Inc. (Indiana)
Aqua Utilities, Inc. (Texas)
Aqua Virginia, Inc. (Virginia)
Aqua Utilities Florida, Inc. (Florida)
Aqua Missouri, Inc. (Missouri)
Aqua South Carolina, Inc. (South Carolina)

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-61772, 333-42275 and 333-104290), on Form S-4
(No. 333-93243), and on Form S-8 (Nos. 333-61768, 333-70859, 033-52557,
33-27032, 2-81757, 333-81085, 333-107673 and 333-113502) of Aqua America, Inc. 
of our report dated January 28, 2004 relating to the consolidated financial 
statements, which appears in the Annual Report to Shareholders, which is 
incorporated in this Annual Report on Form 10-K.

PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
March 12, 2004

Exhibit 31.1

CERTIFICATION

I, Nicholas DeBenedictis, Chairman, President and Chief Executive Officer of
Aqua America, Inc., certify that:

1.   I have reviewed this annual report on Form 10-K of Aqua America, Inc.;

2.   Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3.   Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:

a)   Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b)   [Paragraph omitted in accordance with SEC transition instructions contained
in SEC Release 34-47986.]

c)   Evaluated the effectiveness of the registrant's disclosure controls and
procedures, and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting, and

5.   The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):

a)   All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.

Date: March 12, 2004
NICHOLAS DEBENEDICTIS 
------------------------    
Nicholas DeBenedictis
Chairman, President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, David P. Smeltzer, Senior Vice President - Finance and Chief Financial
Officer of Aqua America, Inc., certify that:

1.   I have reviewed this annual report on Form 10-K of Aqua America, Inc.;

2.   Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3.   Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:

a)   Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b)   [Paragraph omitted in accordance with SEC transition instructions contained
in SEC Release 34-47986.]

c)   Evaluated the effectiveness of the registrant's disclosure controls and
procedures, and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation; and

d)   Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting, and

5.   The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):

a)   All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.

Date: March 12, 2004
DAVID P. SMELTZER                
-----------------------------------------
David P. Smeltzer
Senior Vice President - Finance and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350

In connection with the Annual Report on Form 10-K for the year ended December
31, 2003 of Aqua America, Inc. (the "Company") as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Nicholas DeBenedictis,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to my knowledge:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m(a) or Section
78o(d)); and

(2)  The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

NICHOLAS DEBENEDICTIS                   
-----------------------------------------------
Nicholas DeBenedictis
Chairman, President and Chief Executive Officer
March 12, 2004

The foregoing certification shall not be deemed to be filed for purposes of
Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to
liability under that section. This certification shall not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or
the Exchange Act except to the extent this Exhibit 32.1 is expressly and
specifically incorporated by reference in any such filing.

A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to Aqua America, Inc. and will be retained by Aqua America,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350

In connection with the Annual Report on Form 10-K for the year ended December
31, 2003 of Aqua America, Inc. (the "Company") as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, David P. Smeltzer,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to my knowledge:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m(a) or Section
78o(d)); and

(2)  The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

DAVID P. SMELTZER                            
--------------------------------------------------
David P. Smeltzer
Senior Vice President - Finance and Chief Financial Officer
March 12, 2004

The foregoing certification shall not be deemed to be filed for purposes of
Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to
liability under that section. This certification shall not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or
the Exchange Act except to the extent this Exhibit 32.2 is expressly and
specifically incorporated by reference in any such filing.

A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to Aqua America, Inc. and will be retained by Aqua America,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.