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, 2005                  Commission File
number 1-6659

AQUA AMERICA, INC.
------------------------------------------------------
(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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes  x  No
---    ---

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.  Yes     No  x
---    ---

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  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 amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12(b)-2 of the Exchange Act: Large
accelerated filer    x     Accelerated filer       Non-accelerated filer
----------                 ------                      -------

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2005: $2,837,883,767

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, 2005, 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, 2006: 129,205,090

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of registrant's 2005 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 17, 2006
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.

TABLE OF CONTENTS

Part I
Page
----

Item 1.    Business                                                                      4

Item 1A.   Risk Factors                                                                 14

Item 1B.   Unresolved Staff Comments                                                    17

Item 2.    Properties                                                                   17

Item 3.    Legal Proceedings                                                            17

Item 4.    Submission of Matters to a Vote of Security Holders                          17

Part II

Item 5.    Market for the Registrant's Common Stock, Related Stockholder Matters
and Purchases of Equity Securities                                           18

Item 6.    Selected Financial Data                                                      19

Item 7.    Management's Discussion and Analysis of Financial Conditions and
Results of Operations                                                        19

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk                   20

Item 8.    Financial Statements and Supplementary Data                                  20

Item 9.    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure                                                         20

Item 9A.   Controls and Procedures                                                      20

Item 9B.   Other Information                                                            21

Part III

Item 10.   Directors and Executive Officers of the Registrant                           21

Item 11.   Executive Compensation                                                       23

Item 12.   Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters                                              23

Item 13.   Certain Relationships and Related Transactions                               23

Item 14.   Principal Accountant Fees and Services                                       24

Part IV

Item 15.  Exhibits and Financial Statement Schedules                                    24

Signatures                                                                    25
Exhibit Index                                                                 27

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K ("10-K"), or incorporated
by reference into 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 that are 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," "probably"
or the negative of such terms or similar expressions. Forward-looking statements
in this 10-K, or incorporated by reference into this 10-K, include, but are not
limited to, statements regarding:

o   projected capital expenditures and related funding requirements;

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

o   dividend payment projections;

o   opportunities for future acquisitions, the success of pending
acquisitions and the impact of future acquisitions;

o   the capacity of our water supplies, water facilities and wastewater
facilities;

o   the impact of geographic diversity on our exposure to unusual
weather;

o   our capability to pursue timely rate increase requests;

o   our authority to carry on our business without unduly burdensome
restrictions;

o   our ability to obtain fair market value for condemned assets;

o   the impact of fines and penalties;

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

o   the availability of qualified personnel;

o   the condition of our assets;

o   the impact of legal proceedings;

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 2005 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;

2

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

o   abnormal weather conditions;

o   changes in, or unanticipated, 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   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   labor disputes;

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

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

o   increases in the costs of goods and services;

o   civil disturbance or terroristic threats or acts; and

o   changes in accounting policies.

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 into 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. For further information or other factors which could affect our
financial results and such forward-looking statements, see "Risk Factors." We
qualify all of our forward-looking statements by these cautionary statements.

3

PART I

Item 1. Business

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, North Carolina,
Illinois, Texas, New Jersey, Florida, Indiana, Virginia, Maine, Missouri, New
York and South Carolina. Our largest operating subsidiary, Aqua Pennsylvania,
Inc., accounts for approximately 56% of our operating revenues for 2005 and as
of December 31, 2005, provides water or wastewater services to approximately
one-half of the total number of people we serve, located in the suburban areas
north and west of the City of Philadelphia and in 22 other counties in
Pennsylvania. Our other subsidiaries provide similar services in 12 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 following table reports our operating revenues by principal state for the
year ended December 31, 2005:

Operating
Revenues
(000's)
---------

Pennsylvania          $279,691
Ohio                    39,839
Texas                   37,953
Illinois                35,300
North Carolina          29,840
New Jersey              22,588
Indiana                 16,867
Florida                 15,286
Maine                    9,418
Virginia                 8,337
Other states             1,660
--------
$496,779
========

4

The following table indicates by customer class our operating revenues for the
year ended December 31, 2005:

Operating
Revenues
Customer class                              (000's)
---------

Residential water                           $295,473
Commercial water                              73,455
Fire protection                               21,861
Industrial water                              18,364
Other water                                   28,966
--------
Water                                        438,119
Wastewater                                    42,176
Water and wastewater
operating contracts and other            16,484
--------
$496,779
========

Our customer base is diversified among residential, commercial, fire protection,
industrial, other water, wastewater customers and operating contracts and other
customers. Residential customers make up the largest component of our customer
base, with these customers representing 67% 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, Water
Facilities and Wastewater 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.

Our growth in revenues over the past three years is a result of increases in our
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
3.3%. The customer growth rate in 2003 was 23.8%, and reflects the additional
customers obtained in the AquaSource acquisition on July 31, 2003. In 2004, the
customer growth rate was 11.5% and reflects the additional customers added
through the Heater and Florida Water Services acquisitions. In 2005, the
customer growth rate was 3.5%. Overall, for the five-year period of 2001 through
2005, our customer base increased at an annual compound rate of 8.9%.

Acquisitions and Water Sale Agreements

With approximately 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.

5

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
6,600 wastewater facilities in operation or planned in the 13 states where we
operate. In 2005, we acquired a business providing on-site septic tank pumping
and other services. This business presently serves approximately 2,000 customers
in southeastern Pennsylvania and northern Delaware.

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 opportunities to expand our utility operations through
acquisitions or other growth ventures. During the five-year period ended
December 31, 2005, we completed 123 acquisitions or other growth ventures.

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 prospective sellers, performing analyses and investigations
of acquisition candidates, making preliminary acquisition proposals and
negotiating the terms of potential acquisitions.

Water Supplies, Water Facilities and Wastewater 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 by principal service area are as follows:

o  Pennsylvania - The principal supply of water is surface water from rural
streams, rivers and reservoirs. Wells and interconnections with adjacent
municipal authorities supplement these surface supplies. There are 11 surface
water treatment plants.
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 obtained through an
interconnection with an adjacent water utility. 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  North Carolina - Water supply in 747 non-contiguous divisions is obtained
principally from wells, with several divisions purchasing water from
neighboring municipalities.
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. In some areas, water supply is
supplemented with purchased water obtained through interconnections with
adjacent water utilities.
o  Texas - Water supply in 295 non-contiguous water systems is obtained
principally from wells, supplemented in some cases by purchased water from
adjacent surface water systems.

6

o  Florida - Water supply in the majority of the 70 non-contiguous divisions is
obtained principally from wells, supplemented in some cases by purchased
water from adjacent surface water systems.
o  New Jersey - Water supply is obtained principally from wells and the supply
is supplemented with purchased water obtained through interconnections with
adjacent water utilities.
o  Indiana - Water supply in three water systems is obtained principally from
wells.
o  Virginia - Water supply in 127 non-contiguous divisions is obtained from
wells, one division's supply is from surface water, and four divisions
supplement their supply with purchased water from a nearby water system.
o  Maine - Eleven non-contiguous water systems obtain their water supply as
follows: six systems use groundwater, four 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 under normal conditions. We plan
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.

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.

We believe that our wastewater treatment facilities are generally adequate to
meet the present requirements of our customers. In addition, we own several
sewer collection systems where the wastewater is treated at a municipally-owned
facility. Capital funds are included in our capital plans to address inflow and
infiltration in the collection systems, and wet weather flows at our lift
stations and treatment plants, and other conditions and requirements that can
affect compliance. Changes in regulatory requirements may be reflected in
revised permit limits and conditions when National Pollution Discharge
Elimination System ("NPDES") permits are renewed, typically on a five-year
cycle. Capital improvements are planned and budgeted to meet anticipated changes
in regulations and needs for increased capacity related to projected growth. The
various state public utility commissions have generally recognized the operating
and capital costs associated with these improvements in setting wastewater rates
for current customers and capacity charges for new customers.

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. 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 other financings,
and the franchise areas that we serve. A small number of our operations are
subject to rate regulation by county or city governments. The profitability of
our utility operations is influenced to a great extent by the timeliness and
adequacy of rate allowances we are granted by the respective regulatory
commissions or authorities in the various states in which we operate.

7

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. We file rate increase requests to
recover the capital investments that we make in improving or replacing our
facilities and to recover expenses. In the states in which we operate, we are
subject to economic regulation by the following state regulatory commissions:

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

Some of the states in which we acquired operations in 2004 and 2003 require
separate rate filings for each of our local systems, as compared to a single
state-wide rate filing. Between August 2003 and December 2005, we filed or were
preparing to file rate filings in over 25 jurisdictions. Due to the length of
time since the last rate increase for some acquired systems and the large amount
of capital improvements relative to the number of customers in some smaller
systems, the proposed rate increase in some of these systems may be substantial.
While each of these rate filings will proceed through the applicable regulatory
process, we can provide no assurance that the rate increases will be granted in
a timely or sufficient manner to cover the investments and expenses for which we
initially sought the rate increases. Further, there remains 116 divisions within
these recently acquired operations where we have not yet filed a rate request.

We are currently consolidating our customer service locations into three
principal call centers, implementing a common customer information system, and
upgrading our financial information systems. We expect to complete our primary
customer service initiatives by the end of 2006. Consistent with prior practice,
we have capitalized costs and services associated with the projects and expect
to recover these costs in future rates. Although we believe it is probable that
the applicable public utility commissions will allow recovery of these costs, we
can provide no assurances as to their full recoverability until the conclusion
of the applicable rate proceeding.

Five 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 changes in certain costs, such as
changes in state tax rates, until such time as the costs are incorporated into
base rates.

Currently, Pennsylvania, Illinois, Ohio, Indiana and Missouri 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 at a percentage of base rates, generally at 5% to 9% 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 $10,186,000 in
2005, $7,817,000 in 2004 and $8,147,000 in 2003.

8

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 regulated 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. 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.

In December 2004, as a result of the settlement of a condemnation action, our
Ohio operating subsidiary sold its water utility assets within the municipal
boundaries of the City of Geneva in Ashtabula County, Ohio for net proceeds of
approximately $4,716,000, which was in excess of the book value for these
assets. The sale resulted in the recognition in the fourth quarter of 2004 of a
pre-tax gain on the sale of these assets, net of expenses, of $2,342,000. We
continue to operate this water system for the City of Geneva under an operating
contract that began upon the closing of the sale for a period through December
2006. These water utility assets represent less than 1% of Aqua America's total
assets, and the total number of customers included in the water system sold
represents less than 1% of our total customer base. The increase in earnings
associated with reinvesting the sale's proceeds and the operating income
generated by the operating contract has offset the loss of this water system's
historic contribution to income.

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
2003. We have challenged whether the City is following the correct legal
procedures in connection with the City's attempted condemnation and we have
challenged the City's valuation of this portion of our system. 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.

Despite the sales and possible condemnation referred to above, 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.

9

Environmental, Health and Safety 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.

Environmental compliance issues remain at various water and wastewater
facilities associated with acquired systems, including facilities acquired in
connection with the AquaSource acquisition that was completed in 2003, the
Heater and Florida Water Service acquisitions completed in 2004 and the
acquisitions of small utilities in Northeastern Pennsylvania. We believe that
the capital expenditures required to address these compliance issues have been
budgeted in our capital program and represent less than 10% of our expected
total capital expenditures over the next five years. We are parties to
agreements with regulatory agencies in Texas, Florida, Indiana, Virginia and
North Carolina under which we have committed to make certain improvements for
environmental compliance. These agreements are intended to provide the
regulators with assurance that problems covered by these agreements will be
addressed, and the agreements generally provide protection to us from fines,
penalties and other actions while corrective measures are being implemented. We
are actively working directly with state environmental officials to implement or
amend these agreements as necessary.

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
made and are making 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.

The EPA's issuance of a rule regulating radon in tap water has been postponed
repeatedly since 1991. Limits for radon in tap water, if promulgated, would
probably become effective 4 or 5 years after promulgation and would likely
contain two standards to recognize cost-effective alternative approaches to
dealing with radon in indoor air. We anticipate that the higher level
established by such a rule might require treatment at a small percentage of our
wells, primarily in North Carolina, Pennsylvania and Virginia. If the states in
which we operate elect not to implement general radon reduction (Multi-Media
Mitigation) programs, then a more stringent limit for radon could apply and a
larger number of wells would be affected. We anticipate that states will adopt
Multi-Media Mitigation programs, and the capital costs to comply with this
future regulation could approximate $4,000,000 over a five year period.

The Safe Drinking Water Act provides for the regulation of radionuclides other
than radon, such as radium and uranium. The Radionuclides Rule that became
effective in December 2003 left unchanged the existing standards for gross alpha
and radium, but changed the monitoring protocol. The rule also added a maximum
contaminant level for uranium. Under the new testing protocols, some of our
smaller groundwater facilities have exceeded one or more of the radionuclide
standards and require treatment by January 2008. Treatment processes have
already been installed at twelve facilities, and approximately twenty additional
facilities will require the installation of a treatment process, replacement or
modification of a well, or other remedy. The future capital cost of compliance
is expected to be less than $5,000,000. The impact of the rulemaking is not
expected to have a material impact on our results of operations or financial
condition.

10

In order to remove or inactivate microbial organisms, rules were issued by the
EPA to improve disinfection and filtration of potable water and reduce
consumers' exposure to disinfectants and by-products of the disinfection
process. In the future, we may be required to install filtration or other
treatment, for one currently unfiltered 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 a
total of $1,000,000. In addition, ten small systems in Florida were recently
found to have trihalomethanes above the current maximum contaminant level.
Treatment modifications are being planned that may require capital costs of
approximately $1,500,000 over the next two years.

The EPA promulgated the Long Term 2 Enhanced Surface Water Treatment Rule and a
Stage 2 Disinfection/Disinfection By-product Rule in January 2006. These rules
will result in additional one-time special monitoring costs of approximately
$600,000 over a four-year period from 2006 to 2010. The results of the
monitoring might require modification of treatment, including capital
improvements, in year 2008 and beyond. It is not possible at this time to
reasonably project the potential impact on the capital budget, if any, from
these rules, but the impact is not expected to have a material impact on our
results of operations or financial condition.

A rule lowering the limit on arsenic was promulgated in 2001 and becomes
effective in January 2006, with a provision for further time extensions for
small systems. The rule will require installation of treatment or development of
alternative supplies at a very limited number of our groundwater sources. The
largest of these, in Pennsylvania, was equipped with treatment in 2004. A small
system in Maine was equipped with treatment in 2005. One system each in Texas
and Ohio will require treatment in 2006, and one system in North Carolina will
require treatment or replacement of a currently unused back-up well. The cost of
these remaining capital improvements to fully achieve compliance with this
regulation is not expected to exceed $500,000.

In 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. A legal settlement was reached in
2004 with the company believed to be responsible for the contamination and we
received a settlement amount of $2,000,000 to cover the cost of a permanent
replacement well, which was completed and placed in service in 2004, and to
cover our interim purchased water costs incurred. Traces of MtBE may be found
throughout the environment as the result of extensive use of MtBE as a gasoline
additive.

Clean Water Act - The Clean Water Act regulates discharges from drinking water
and wastewater treatment facilities into lakes, rivers, streams, and
groundwater. It is our policy to obtain and maintain all required permits and
approvals for the discharges from our 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, discharge
violations may occur which may result in fines. We are also parties to
compliance agreements with regulatory agencies in several states where we
operate while improvements are being made to address wastewater discharge
compliance issues. These fines and penalties, if any, are not expected to have a
material impact on our results of operations or financial condition. The
required costs to comply with the agreements previously cited are included in
our capital program, are not expected to be significant, and are expected to be
recoverable in rates.

Recent changes in wastewater regulations in the state of Missouri will require
improvements at certain of the 52 small wastewater systems we operate in that
state. We presently estimate the cost of these improvements to be approximately
$1,500,000 over the next three years.

11

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 adopted the use
of a revised formula for determining the magnitude of a probable maximum flood.
We have studied our dams to determine what improvements may be needed as a
result of this new calculation. Our initial studies identified three dams in
Pennsylvania that could require capital improvements; however, further study
reduced this to two dams needing improvements of approximately $6,000,000 in the
aggregate. Our findings have been accepted by the Department of Environmental
Protection, and design is underway for both dam improvement projects.
Construction is anticipated to be completed over the next three years, and we
believe that these capital expenditures will be recoverable in our rates.
Similarly, in Ohio, the Department of Natural Resources has adopted the use of a
revised formula. We have studied our dams in Ohio and determined that three of
the dams will require improvements. Construction began in 2005 on one of these
dams, and we believe that capital expenditures of approximately $4,600,000 in
the aggregate will be required on these dams over the next four years.

Safety Standards - Our facilities and operations may be subject to inspections
by representatives of the Occupational Safety and Health Administration from
time to time. We maintain safety policies and procedures to comply with the
Occupational Safety and Health Administration's rules and regulations, but
violations may occur from time to time, which may result in fines and penalties,
which are not expected to be material. We endeavor to correct such violations
promptly after they are brought to our attention.

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 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 of operations or financial
condition.

Employee Relations

As of December 31, 2005, we employed a total of 1,489 full-time employees. Our
subsidiaries are parties to 10 agreements with labor unions covering 428
employees that expire at various times between March 2006 and May 2009. One of
the agreements, representing 275 employees, expires in December 2006 and five
additional contracts, representing 91 employees, expire at various other times
in 2006.

12

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 with the SEC at the SEC's public reference room at
100 F. Street, N.E., 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 Web site at www.sec.gov.

Our Internet Web site address is http://www.aquaamerica.com. We make available
free of charge through our Web site'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 Web site, www.aquaamerica.com.

In addition, you may request a copy of the foregoing filings, 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:
Investor Relations Department
Aqua America, Inc.
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Telephone:  610-527-8000

13

Item 1A. Risk Factors

In addition to the other information included in this Report, the following
factors should be considered in evaluating our business and future prospects.
Any of the following risks, either alone or taken together, could materially and
adversely affect our business, financial position or results of operations. If
one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, our actual results may vary
materially from what we projected. There may be additional risks that we do not
presently know or that we currently believe are immaterial which could also
impair our business or financial position.

OUR BUSINESS REQUIRES SIGNIFICANT CAPITAL EXPENDITURES AND THE RATES WE CHARGE
OUR CUSTOMERS ARE SUBJECT TO REGULATION. IF WE ARE UNABLE TO OBTAIN SUFFICIENT
CAPITAL ON REASONABLE TERMS OR OBTAIN GOVERNMENT APPROVAL OF OUR REQUESTS FOR
RATE INCREASES, OR IF APPROVED RATE INCREASES ARE UNTIMELY OR INADEQUATE TO
COVER OUR CAPITAL INVESTMENTS AND TO RECOVER EXPENSES, OUR PROFITABILITY MAY
SUFFER.

The water utility business is capital intensive. In addition to the capital
required to fund our growth through acquisition strategy, 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 availability of adequate capital and the recovery of our
capital investments through the rates we charge our customers. There is no
guarantee that we will be able to obtain sufficient capital in the future on
reasonable terms and conditions for expansion, construction and maintenance. In
the event we are unable to obtain sufficient capital, our expansion efforts
could be curtailed, which may affect our growth and may affect our future
results of operations. The rates we charge our customers 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 federal and state 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.

14

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.

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  failure to have effective internal control over financial reporting;
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 and comply with regulatory requirements.
The businesses we acquire in the future may not achieve sales and profitability
that would justify our investment, and any difficulties we encounter in the
integration process, including in the integration of controls necessary for
internal control and financial reporting, could interfere with our operations,
reduce our operating margins and adversely affect our internal controls. 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.

15

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, such as MtBE, 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,
operating results and financial condition and may not 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. Despite
these tightened security measures, we may not be in a position to control the
outcome of terrorist events should they occur.

WASTEWATER OPERATIONS MAY ENTAIL SIGNIFICANT RISKS.

Wastewater collection and treatment involve many risks associated with damage to
the surrounding environment. If collection or treatment systems fail or do not
operate properly, untreated or partially treated wastewater could discharge onto
property or into nearby streams and rivers, causing property damage or injury to
aquatic life, or even human life. Liabilities resulting from such damage could
materially and adversely affect the Company's results of operations and
financial condition.

WORK STOPPAGES AND OTHER LABOR RELATIONS MATTERS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.

Approximately 33% of our workforce, are unionized under ten labor contracts (or
contracts under negotiation) with labor unions, which expire over several years.
We believe our labor relations are good, but in light of rising costs for
healthcare and pensions, contract negotiations in the future may be difficult.
We are subject to a risk of work stoppages and other labor relations matters as
we negotiate with the unions to address these issues, which could affect the
Company's results of operations and financial condition. We cannot assure you
that issues with our labor forces will be resolved favorably to us in the future
or that we will not experience work stoppages.

WE DEPEND SIGNIFICANTLY ON THE SERVICES OF THE MEMBERS OF OUR 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 management team. The loss of the services of any member of
our management team or the inability to hire and retain experienced management
personnel could harm our operating results.

16

Item 1B. Unresolved Staff Comments.

None.

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 and the collection
and treatment of wastewater. Substantially all of our properties are owned by
our subsidiaries, and a substantial portion of our property is 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, 23 water treatment plants, and many well treatment stations and
wastewater treatment plants. Some properties are leased under long-term leases.
The following table indicates our net property, plant and equipment, in
thousands of dollars, as of December 31, 2005 in the principal states where we
operate:

Net Property,
Plant and
Equipment
----------

Pennsylvania                         $1,337,190
Illinois                                179,391
Ohio                                    176,296
Texas                                   160,880
North Carolina                          140,126
New Jersey                              117,999
Indiana                                  95,025
Florida                                  56,371
Maine                                    40,452
Virginia                                 37,850
Missouri                                  4,755
Inter-company eliminations
and other states                   (66,385)
----------
$2,279,950
==========

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 material or 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 2005.

17

PART II

Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters
and Purchases of Equity Securities

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, 2006, there were
approximately 27,457 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 2005 4-for-3 common
stock split effected in the form of a stock distribution):

First       Second       Third        Fourth
Quarter      Quarter      Quarter      Quarter       Year
-----------------------------------------------------------------
2005
---------------------------------------------------------------------------------------------------------------

Dividend paid per common share                     $0.0975      $0.0975      $0.0975      $0.1069      $0.3994
Dividend declared per common share                  0.0975       0.0975       0.2044            -      $0.3994
Price range of common stock
- high                                             19.37        23.24        29.15        29.22        29.22
- low                                              17.49        18.03        21.61        22.88        17.49

2004
---------------------------------------------------------------------------------------------------------------
Dividend paid per common share                      $ 0.09       $ 0.09       $ 0.09      $0.0975      $0.3675
Dividend declared per common share                    0.09         0.09       0.1875            -       0.3675
Price range of common stock
- high                                             17.14        16.47        16.67        18.48        18.48
- low                                              15.00        14.24        14.18        15.58        14.18

We have paid common dividends consecutively for 61 years. Effective December 1,
2005, our Board of Directors authorized an increase of 9.6% 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 2005, the
annualized dividend rate increased to $0.4276 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 56.3% of net
income.

In August 2005, our Board of Directors declared a 4-for-3 common stock split
effected in the form of a 33 1/3 % stock distribution for all common shares
outstanding, to shareholders of record on November 17, 2005. The new shares were
distributed on December 1, 2005. All share and per share data for all periods
presented have been restated to give effect to the stock split.

18

The following table summarizes the Company's purchases of its common stock for
the quarter ending December 31, 2005:

Issuer Purchases of Equity Securities

Total             Maximum
Number of           Number of
Shares              Shares
Purchased            that May
as Part of              Yet be
Total                        Publicly           Purchased
Number        Average        Announced           Under the
of Shares     Price Paid         Plans or             Plan or
Period                          Purchased (1)     per Share         Programs         Programs (2)
------                          ------------     ----------       ----------         -----------

October 1-31, 2005                     1,579        $ 27.55                -             548,278
November 1-30, 2005                      720        $ 25.49                -             548,278
December 1-31, 2005                   12,952        $ 26.71                -             548,278
------------     ----------       ----------         -----------
Total                                 15,251        $ 26.74                -             548,278
============     ==========       ==========         ===========

(1) These amounts consist of 10,656 shares we purchased from shareholders for
the fractional shares that would otherwise be issued in connection with the
December 1, 2005 stock split, and shares we purchased from our employees who
elected to pay the exercise price of their stock options (and then hold shares
of the stock) upon exercise by delivering to us (and, thus, selling) shares of
Aqua America common stock in accordance with the terms of our equity
compensation plans that were previously approved by our shareholders and
disclosed in our proxy statements. This feature of our equity compensation plan
is available to all employees who receive option grants under the plan and these
shares are purchased at their fair market value, as determined by reference to
the closing price of our common stock on the day prior to the option exercise.

(2) On August 5, 1997, our Board of Directors authorized a common stock
repurchase program that was publicly announced on August 7, 1997, for up to
1,007,351 shares. No repurchases have been made under this program since 2000.
The program has no fixed expiration date. The number of shares authorized for
purchase was adjusted as a result of the stock splits effected in the form of
stock distributions since the authorization date.

Item 6. Selected Financial Data

The information appearing in the section captioned "Summary of Selected
Financial Data" from the portions of our 2005 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 2005 Annual Report to Shareholders filed as
Exhibit 13.1 to this Form 10-K Report is incorporated by reference herein.

19

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, 2005,
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
2006       2007       2008       2009       2010    Thereafter       Total      Value
---------------------------------------------------------------------------------------------------------------------

Long-term
debt (fixed rate)        $24,645    $30,959    $23,651    $ 6,672    $53,884     $ 763,272    $903,083   $950,479
Weighted average
interest rate              5.74%      5.64%      5.63%      5.72%      5.44%         5.35%       5.74%

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, 2005, we
owned no marketable equity securities as we sold the balance of our securities
during 2004.

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", "Consolidated
Statements of Common Stockholders' Equity" and "Notes to Consolidated Financial
Statements" from the portions of our 2005 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 sections captioned "Management's Report on
Internal Control Over Financial Reporting" and "Report of Independent Registered
Public Accounting Firm" from the portions of our 2005 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

(a) 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
effective to provide reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) accumulated and communicated to
our management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding disclosure. A
controls system cannot provide absolute assurance, however, 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.

(b) Management's Report on Internal Control Over Financial Reporting - The
information appearing in the section captioned "Management's Report on Internal
Control Over Financial Reporting" from the portions of our 2005 Annual Report to
Shareholders filed as Exhibit 13.1 to this Form 10-K Report is incorporated by
reference herein.

20

(c) 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.

Item 9B. Other Information

None.

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 Web site, 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 Investor Relations
Department, Aqua America, Inc., 762 W. Lancaster Avenue, Bryn Mawr, PA
19010-3489. Amendments to the Code, and any grant of a waiver from a provision
of the Code requiring disclosure under applicable SEC rules will be disclosed on
the Company's Web site. The information contained on our Web site 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, Audit Committee, Audit Committee Financial Expert
and Filings under Section 16(a)

The information appearing in the sections captioned "Information Regarding
Nominees and Directors", "Corporate Governance" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Proxy Statement relating to our May 17,
2006, 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

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                         60         Chairman, President and Chief Executive Officer (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                                  53         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                             47         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                            59         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                              56         President, Southern Operations (August 2003 to present); Vice
President - Corporate Development, Pennsylvania Suburban Water
Company (March 1991 to August 2003) (6)

Karl M. Kyriss                                55         President - Aqua Pennsylvania (March 2003 to present) (7)

Robert G. Liptak, Jr.                         58         President, Northern Operations (March 1999 to present); President,
Consumers Pennsylvania Water Company (1980 to March 1999) (8)

Robert A. Rubin                               43         Vice President, Controller and Chief Accounting Officer (May 2005
to present); Controller and Chief Accounting Officer (March 2004 to
May 2005); Controller (March 1999 to March 2004) (9)

(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.

22

(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.

(7) Mr. Kyriss was Vice President - Northeast Region of American Water Works
Services Company from 1997 to 2003.

(8) Mr. Liptak was President of Consumers Pennsylvania Water Company from 1980
to March 1999.

(9) Mr. Rubin was Accounting Manager with Aqua America, Inc. from June 1989 to
June 1994. He then served from June 1994 to March 1999 as Assistant
Controller of Philadelphia Suburban Water Company.

Item 11. Executive Compensation

The information appearing in the sections captioned "Executive Compensation" of
the Proxy Statement relating to our May 17, 2006, 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 17, 2006,
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.

Securities Authorized for Issuance under Equity Compensation Plans - The
following table provides information for our equity compensation plan as of
December 31, 2005:

---------------------------------------------------------------------------------------------------------------
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 (a)      warrants and rights (b)   reflected in column (a))
---------------------------------------------------------------------------------------------------------------

Equity compensation
plans approved
by security holders                 3,492,363                   $13.70                     4,093,297
---------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders                     0                         0                           0
---------------------------------------------------------------------------------------------------------------
Total                               3,492,363                   $13.70                     4,093,297
---------------------------------------------------------------------------------------------------------------

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 17, 2006,
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.

23

Item 14. Principal Accountant Fees and Services

The information appearing in the section captioned "Independent Registered
Public Accounting Firm - Services and Fees" of the Proxy Statement relating to
our May 17, 2006, 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.

PART IV

Item 15.  Exhibits and Financial Statement Schedules

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

Management's Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets - December 31, 2005 and 2004

Consolidated Statements of Income and Comprehensive Income - 2005, 2004
and 2003

Consolidated Cash Flow Statements - 2005, 2004 and 2003

Consolidated Statements of Capitalization - December 31, 2005 and 2004

Consolidated Statements of Common Stockholders' Equity - December 31,
2005, 2004 and 2003

Notes to Consolidated Financial Statements

Financial Statement Schedules. All schedules to our consolidated financial
statements 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.

Exhibits, Including Those Incorporated by Reference. A list of exhibits filed as
part of this annual report on Form 10-K is set forth in the Exhibit Index hereto
which is incorporated herein by reference. 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.

24

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
Chairman, President and Chief Executive Officer

Date:  March 13, 2006

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roy H. Stahl, Executive Vice President and
General Counsel, and David P. Smeltzer, Senior Vice President -- Finance and
Chief Financial Officer, as true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities to sign this Report filed
herewith and any or all amendments to said Report, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents the full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the foregoing, as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or his
or her substitute, may lawfully do or cause to be done by virtue hereof.

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.

25

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

ROBERT A. RUBIN                                                  MARY C. CARROLL
--------------------------------------------                     -----------------------------------
Robert A. Rubin                                                  Mary C. Carroll
Principal Accounting Officer                                     Director

RICHARD H. GLANTON                                               LON R. GREENBERG
--------------------------------------------                     -----------------------------------
Richard H. Glanton                                               Lon R. Greenberg
Director                                                         Director

WILLIAM P. HANKOWSKY                                             JOHN F. MCCAUGHAN
--------------------------------------------                     -----------------------------------
William P. Hankowsky                                             John F. McCaughan
Director                                                         Director

JOHN E. MENARIO                                                  DR. CONSTANTINE PAPADAKIS
--------------------------------------------                     -----------------------------------
John E. Menario                                                  Dr. Constantine Papadakis
Director                                                         Director

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

26

EXHIBIT INDEX

Exhibit No.   Description
-----------   -----------
3.1       Restated Articles of Incorporation (as of December 9, 2004) (20)
(Exhibit 3.1)

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. (22) (Exhibit 4.10)

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) (Exhibit 4.20)

27

EXHIBIT INDEX

Exhibit No.   Description
-----------   -----------
4.16      Thirty-fourth Supplemental Indenture, dated as of October 15,
2001. (15) (Exhibit 4.21)

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

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

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

4.20      Credit Agreement dated as of October 25, 2002, between
Philadelphia Suburban Corporation and PNC Bank, National
Association. (18) (Exhibit 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) (Exhibit
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) (Exhibit 4.26)

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

4.24      Credit Agreement dated as of July 31, 2003, between Philadelphia
Suburban Corporation and PNC Bank, National Association (19)
(Exhibit 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. (22) (Exhibit 4.25)

4.26      Credit Agreement dated as of May 28, 2004, between Aqua America,
Inc. and PNC Bank, National Association (21) (Exhibit 4.26)

4.27      Sixth Amendment to Revolving Credit Agreement dated as of December
12, 2004 between Aqua Pennsylvania, Inc. (formerly known as
Pennsylvania Suburban Water Company, successor by merger to
Philadelphia Suburban Water Company) and PNC Bank, National
Association, Citizens Bank of Pennsylvania, Fleet National
Bank, National City Bank dated as of December 22, 1999. (25)
(Exhibit 4.27)

4.28      Thirty-eighth Supplemental Indenture, dated as of November 15,
2004. (25) (Exhibit 4.28)

4.29      Thirty-ninth Supplemental Indenture, dated as of May 1, 2005. (24)
(Exhibit 4.29)

4.30      Seventh Amendment to Revolving Credit Agreement dated as of
December 6, 2005 between Aqua Pennsylvania, Inc. (formerly
known as Pennsylvania Suburban Water Company, successor by
merger to Philadelphia Suburban Water Company) and PNC Bank,
National Association, Citizens Bank of Pennsylvania, Bank of
America, N.A. (formerly Fleet National Bank), National City
Bank dated as of December 22, 1999.

4.31      Fortieth Supplemental Indenture, dated as of December 15, 2005.

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, dated
May 20, 1992* (1) (Exhibit 10.8)

28

EXHIBIT INDEX

Exhibit No.   Description
-----------   -----------
10.5       1994 Equity Compensation Plan, as amended by Amendment effective
August 5, 2003* (22) (Exhibit 10.5)

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, Incorporated 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)

10.9       Philadelphia Suburban Corporation Amended and Restated Executive
Deferral Plan* (22) (Exhibit 10.9)

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* (22) (Exhibit 10.13)

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) (Exhibit
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) (Exhibit
10.36)

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

29

EXHIBIT INDEX

Exhibit No.   Description
-----------   -----------
10.20      Agreement among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Roy H. Stahl, dated August 7, 2001*
(15) (Exhibit 10.38)

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

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

10.23      Agreement among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Richard D. Hugus, dated August 7,
2001* (22) (Exhibit 10.23)

10.24      2004 Annual Cash Incentive Compensation Plan* (22) (Exhibit 10.30)

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      2005 Annual Cash Incentive Compensation Plan* (25) (Exhibit 10.29)

10.30      2006 Annual Cash Incentive Compensation Plan*

10.31      Bond Purchase Agreement among the Northumberland County Industrial
Development Authority, Aqua Pennsylvania, Inc., and Sovereign
Securities Corporation, LLC, dated November 16, 2004. (25)
(Exhibit 10.31)

10.32      Aqua America, Inc. 2004 Equity Compensation Plan* (23)

10.33      2005 Executive Deferral Plan* (25) (Exhibit 10.33)

10.34      2005 Director Deferral Plan* (25) (Exhibit 10.34)

10.35      Non-Employee Directors' Compensation for 2006* (26) (Exhibit 10.1)

10.36      Bond Purchase Agreement among the Delaware County Industrial
Development Authority, Aqua Pennsylvania, Inc. and Sovereign
Securities Corporation, LLC, dated May 10, 2005. (24) (Exhibit
10.36)

10.37      Bond Purchase Agreement among the Delaware County Industrial
Development Authority, Aqua Pennsylvania, Inc. and Sovereign
Securities Corporation, LLC, dated December 21, 2005.

10.38      Aqua America, Inc. Dividend Reinvestment and Direct Stock Purchase
Plan* (29)

10.39      Aqua America, Inc. Amended and Restated Employee Stock Purchase
Plan*

10.40      Form of Stock Option Agreement*

10.41      2005 Salaries; Annual Incentive Compensation Earned in 2004* (27)
(Exhibit 10.1)

30

EXHIBIT INDEX

Exhibit No.   Description
-----------   -----------
10.42      Acceleration of Payout of 2003 and 2004 Dividend Equivalent
Awards; Grants of 2005 Dividend Equivalent Awards; Performance
Criteria for Acceleration of Payout of Dividend Equivalent
Awards* (27) (Exhibit 10.2)

10.43      Vesting of Restricted Stock Granted in 2004; Grants of Restricted
Stock* (27) (Exhibit 10.3)

10.44      2006 Salaries; Annual Incentive Compensation Earned in 2005* (28)
(Exhibit 10.1)

10.45      Acceleration of Payout of 2004 and 2005 Dividend Equivalent
Awards; Grants of 2006 Dividend Equivalent Awards; Performance
Criteria for Acceleration of Payout of Dividend Equivalent
Awards* (28) (Exhibit 10.2)

10.46      Vesting of Restricted Stock Granted in 2005; Grants of Restricted
Stock* (28) (Exhibit 10.3)

13.1       Selected portions of Annual Report to Shareholders for the year
ended December 31, 2005 incorporated by reference in Annual
Report on Form 10-K for the year ended December 31, 2005.

21.1       Subsidiaries of Aqua America, Inc.

23.1       Consent of Independent Registered Public Accounting Firm -
PricewaterhouseCoopers LLP

24.1       Power of Attorney (included on signature page)

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

31

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 an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1999.

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

(15)  Filed as an 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

(20)  Filed as an Exhibit to Form 8-K filed December 9, 2004.

(21)  Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004.

(22)  Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 2003.

(23)  Filed as Appendix C to definitive Proxy Statement dated April 2, 2004.

(24)  Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005.

(25)  Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 2004.

(26)  Filed as an Exhibit to Form 8-K filed December 12, 2005.

(27)  Filed as an Exhibit to Form 8-K filed March 7, 2005.

(28)  Filed as an Exhibit to Form 8-K filed March 13, 2006.

(29)  Filed as a Registration Statement on Form S-3 on February 18, 2005.

*Indicates management contract or compensatory plan or arrangement.

32

Exhibit 4.30

SEVENTH AMENDMENT TO CREDIT AGREEMENT

THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT is made as of this 6th day
of December, 2005, by and among AQUA PENNSYLVANIA, INC., a Pennsylvania
corporation (formerly known as Pennsylvania Suburban Water Company, 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, a Fourth Amendment dated as of December 24, 2002, a Fifth Amendment to
Credit Agreement dated as of December 14, 2003 and a Sixth Amendment to Credit
Agreement dated as of December 12, 2004 (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 10, 2005 (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 8, 2006 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.

AQUA PENNSYLVANIA, INC.

By:  /s/  Kathy L. Pape
-------------------------------------------------
Title:  Vice President, Treasurer

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

By:   /s/  Forrest B. Patterson Jr.
-------------------------------------------------
Title:  Senior Vice President

CITIZENS BANK OF PENNSYLVANIA

By:  /s/  Leslie Broderick
-------------------------------------------------
Title:  Senior Vice President

BANK OF AMERICA, N.A. (formerly Fleet National Bank)

By:  /s/  Richard R. Powell
-------------------------------------------------
Title:  Vice President

NATIONAL CITY BANK

By:   /s/  David P. Dobstaff
-------------------------------------------------
Title:  David P. Dobstaff, Senior Vice President

Prepared by and Return to:                                          Exhibit 4.31
Mary T. Tomich, Esq.
Dilworth Paxson LLP
1735 Market Street
Philadelphia, PA 19103
215-575-7000

--------------------------------------------------------------------------------

FORTIETH SUPPLEMENTAL

INDENTURE

DATED AS OF DECEMBER 15, 2005

TO

INDENTURE OF MORTGAGE

DATED AS OF JANUARY 1, 1941

__________

AQUA PENNSYLVANIA, INC.

TO

J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION

__________

THIS FORTIETH SUPPLEMENTAL INDENTURE dated as of December 15, 2005, by
and between AQUA PENNSYLVANIA, INC. (f/k/a Pennsylvania Suburban Water Company),
a corporation duly organized and existing under the laws of the Commonwealth of
Pennsylvania (the "Company") as successor by merger to the Philadelphia Suburban
Water Company (the "Original Company"), party of the first part, and J.P. MORGAN
TRUST COMPANY, NATIONAL ASSOCIATION, a national banking association (the
"Trustee"), party of the second part.

WHEREAS, the Original Company heretofore duly executed and delivered to
The Pennsylvania Company for Insurances on Lives and Granting Annuities, as
trustee, an Indenture of Mortgage dated as of January 1, 1941 (the "Original
Indenture"), which by reference is hereby made a part hereof, and in and by the
Original Indenture the Original Company conveyed and mortgaged to such trustee
certain property therein described, to secure the payment of its bonds to be
generally known as its "First Mortgage Bonds" and to be issued under the
Original Indenture in one or more series as therein provided; and

WHEREAS, through a series of mergers, changes of names and successions,
J.P. Morgan Trust Company, National Association, became the successor trustee;
such mergers, changes of name and successions not involving any change in the
title, powers, rights or duties of the trustee, as trustee under the Original
Indenture as supplemented at the respective dates thereof; and

WHEREAS, the Original Company duly executed and delivered to the
Trustee thirty-four supplemental indentures supplemental to the Original
Indenture, and the Company duly executed and delivered to the Trustee five
supplemental indentures to the Original Indenture so as to subject certain
additional property to the lien of the Original Indenture and to provide for the
creation of additional series of bonds; and

WHEREAS, pursuant to an Agreement and Plan of Merger and Reorganization
dated December 20, 2001, and effective on January 1, 2002, the Original Company
agreed to merge, in conjunction with its affiliated corporations, Consumers
Pennsylvania Water Company - Shenango Valley Division, Consumers Pennsylvania
Water Company - Roaring Creek Division, Consumers Pennsylvania Water Company -
Susquehanna Division, Waymart Water Company, Fawn Lake Forrest Water Company,
Western Utilities, Inc., and Northeastern Utilities, Inc. (such affiliates
referred to hereinafter as the "Merging Entities") with and into the Company;
and

WHEREAS, pursuant to the Thirty-Fifth Supplemental Indenture dated as
of January 1, 2002 (the "Thirty-Fifth Supplemental Indenture"), the Company
agreed to assume the obligations of the Original Company under the Original
Indenture and all supplements thereto; and

WHEREAS, the Company and its predecessor have issued under the Original
Indenture, as supplemented at the respective dates of issue, forty-seven series
of First Mortgage Bonds designated, respectively, as set forth in the following
table, the Original or Supplemental Indenture creating each series and the
principal amount of bonds thereof issued being indicated opposite the
designation of such series:

1

DESIGNATION                                    INDENTURE                            AMOUNT

3 1/4% Series due 1971                      Original                                                   $16,375,000
9 5/8% Series due 1975                      Thirteenth Supplemental                                     10,000,000
9.15% Series due 1977                       Fourteenth Supplemental                                     10,000,000
3% Series due 1978                          First Supplemental                                           2,000,000
3 3/8% Series due 1982                      Second Supplemental                                          4,000,000
3.90% Series due 1983                       Third Supplemental                                           5,000,000
3 1/2% Series due 1986                      Fourth Supplemental                                          6,000,000
4 1/2% Series due 1987                      Fifth Supplemental                                           4,000,000
4 1/8% Series due 1988                      Sixth Supplemental                                           4,000,000
5% Series due 1989                          Seventh Supplemental                                         4,000,000
4 5/8% Series due 1991                      Eighth Supplemental                                          3,000,000
4.70% Series due 1992                       Ninth Supplemental                                           3,000,000
6 7/8% Series due 1993                      Twelfth Supplemental                                         4,500,000
4.55% Series due 1994                       Tenth Supplemental                                           4,000,000
10 1/8% Series due 1995                     Sixteenth Supplemental                                      10,000,000
5 1/2% Series due 1996                      Eleventh Supplemental                                        4,000,000
7 7/8% Series due 1997                      Fifteenth Supplemental                                       5,000,000
8.44% Series due 1997                       Twenty-Third Supplemental                                   12,000,000
9.20% Series due 2001                       Seventeenth Supplemental                                     7,000,000
8.40% Series due 2002                       Eighteenth Supplemental                                     10,000,000
5.95% Series due 2002                       Twenty-Seventh Supplemental                                  4,000,000
12.45% Series due 2003                      Twentieth Supplemental                                      10,000,000
13% Series due 2005                         Twenty-First Supplemental                                    8,000,000
10.65% Series due 2006                      Twenty-Second Supplemental                                  10,000,000
9.89% Series due 2008                       Twenty-Fourth Supplemental                                   5,000,000
7.15% Series due 2008                       Twenty-Eighth Supplemental                                  22,000,000
9.12% Series due 2010                       Twenty-Fifth Supplemental                                   20,000,000
8 7/8% Series due 2010                      Nineteenth Supplemental                                      8,000,000
6.50% Series due 2010                       Twenty-Seventh Supplemental                                  3,200,000
9.17% Series due 2011                       Twenty-Sixth Supplemental                                    5,000,000
9.93% Series due 2013                       Twenty-Fourth Supplemental                                   5,000,000
9.97% Series due 2018                       Twenty-Fourth Supplemental                                   5,000,000
9.17% Series due 2021                       Twenty-Sixth Supplemental                                    8,000,000
9.29% Series due 2026                       Twenty-Sixth Supplemental                                   12,000,000
1995 Medium Term Note                       Twenty-Ninth Supplemental                                   77,000,000
Series
6.35% Series due 2025                       Thirtieth Supplemental                                      22,000,000
1997 Medium Term Note                       Thirty-First Supplemental                                   65,000,000
Series
6.75% Subseries A due 2007                         10,000,000
6.30% Subseries B due 2002                         10,000,000
6.14% Subseries C due 2008                         10,000,000
5.80% Subseries D due 2003                         10,000,000
5.85% Subseries E due 2004                         10,000,000

2

DESIGNATION                                    INDENTURE                            AMOUNT

6.00% Subseries F due 2004                         15,000,000
6.00% Series due 2029                       Thirty-Second Supplemental                                $ 25,000,000
1999 Medium Term Note                       Thirty-Third Supplemental                                  222,334,480
Series                                                                                  
7.40% Subseries A due 2005                         15,000,000
7.40% Subseries B due 2005                         11,000,000
6.21% Subseries C due 2011                         15,000,000
9.53% Subseries D due 2019                          4,000,000
6.375% Subseries E due 2023                        14,000,000
8.26% Subseries F due 2022                          1,500,000
9.50% Subseries G due 2006                          1,440,000
9.22% Subseries H due 2019                          2,534,480
8.32% Subseries I due 2022                          3,500,000
8.14% Subseries J due 2025                          4,000,000
6.00% Subseries K due 2030                         18,360,000
5.93% Subseries L due 2012                         25,000,000
2.65% Subseries M due 2006                          5,000,000
3.461% Subseries N due 2007                        12,000,000
5.08% Subseries O due 2015                         20,000,000
5.17% Subseries P due 2017                          7,000,000
5.751% Subseries Q due 2019                        15,000,000
5.751% Subseries R due 2019                         5,000,000
6.06% Subseries S due 2027                         15,000,000
6.06% Subseries T due 2027                          5,000,000
5.98% Subseries U due 2028                          3,000,000
5.35% Series due 2031                        Thirty-Fourth Supplemental                                 30,000,000
5.55% Series due 2032                        Thirty-Sixth Supplemental                                  25,000,000
3.75% Series due 2010                        Thirty-Seventh Supplemental                                 3,200,000
5.15% Series due 2032                        Thirty Seventh Supplemental                                25,000,000
5.05% Series due 2039                        Thirty-Eighth Supplemental                                 14,000,000
5.00% Series due 2036                        Thirty-Ninth Supplemental                                  21,770,000
5.00% Series due 2037                        Thirty-Ninth Supplemental                                  24,165,000
5.00% Series due 2038                        Thirty-Ninth Supplemental                                  25,375,000

WHEREAS, the bonds of each of said series that are presently
outstanding are listed on Exhibit A attached hereto and made a part hereof; and

WHEREAS, the Original Indenture and the first thirty-nine supplemental
indentures supplemental to the Original Indenture were duly recorded in the
Commonwealth of Pennsylvania on the dates and in the office for the Recording of
Deeds for the counties and in the Mortgage Books at the pages indicated in
Exhibit B hereto; and

WHEREAS, in order to secure the lien of the Original Indenture on the
properties of the Original Company and the Company, the Original Indenture and
the thirty-nine indentures supplemental thereto were recorded in the
Commonwealth of Pennsylvania on the dates and in the office for the Recording of
Deeds for the counties and in the Mortgage Books at the pages indicated on
Exhibit B hereto;

3

WHEREAS, the lien of the Original Indenture, as supplemented, has been
perfected as a security interest under the Pennsylvania Uniform Commercial Code
by filing a financing statement in the office of the Secretary of the
Commonwealth; and

WHEREAS, the Company proposes to create under the Original Indenture,
as supplemented by this Fortieth Supplemental Indenture, a series of bonds to be
designated "First Mortgage Bonds, 5.00% Series due 2035" (herein referred to as
the "5.00% Series due 2035") to be limited in aggregate principal amount to
$24,675,000, to bear interest at the rate of 5.00% per annum, and to mature on
February 1, 2035, to be issued only as registered bonds without coupons and to
be dated the date of delivery thereof; and

WHEREAS, in order to finance the costs of numerous acquisitions,
constructions, modifications, expansions, installations and replacements of the
Company's water distribution, treatment and related operating systems located in
the Counties of Chester, Delaware and Montgomery in Pennsylvania and that are
part of the Company's system for the distribution of water to its customers and
related financing costs, which are to be financed under a Financing Agreement
dated as of December 15, 2005 (the "Financing Agreement") between the Company
and the Delaware County Industrial Development Authority, a Pennsylvania body
politic and corporate (the "Authority"), and which are described in Exhibit A
thereto (which facilities, less any deletions therefore and together with any
additions, improvements and modifications thereto and substitutions therefore
made in accordance with the provisions of the Financing Agreement are referred
to as the "Facilities"), the Company has requested the Authority to issue a new
series of bonds to be known as the Authority's Water Facilities Revenue Bonds
(Aqua Pennsylvania, Inc. Project), Series C of 2005 in the aggregate principal
amount of $24,675,000 (the "Authority Bonds"); and

WHEREAS, the Company proposes to issue the Bonds under the provisions
of Article IV of the Original Indenture, and will comply with the provisions
thereof as well as with other provisions of the Original Indenture and
indentures supplemental thereto in connection with the issuance of additional
bonds so that it will be entitled to procure the authentication and delivery of
the Bonds; and

WHEREAS, the Authority Bonds are to be issued under a Trust Indenture,
dated as of December 15, 2005 (the "Authority Indenture"), between the Authority
and Wachovia Bank, National Association, as trustee (the "Authority Trustee");
and

WHEREAS, the proceeds of the Authority Bonds are to be loaned to the
Company pursuant to the terms of the Financing Agreement and the Bonds are to be
issued by the Company to secure the obligation of the Company to pay to or for
the account of the Authority an amount equal to the principal of, redemption
premium, if any, and interest on the Authority Bonds pursuant to the Financing
Agreement; and

WHEREAS, the right, title and interest of the Authority in and to the
Financing Agreement and the payments thereunder and the security for such
payments are to be assigned by the Authority to the Authority Trustee, and the
Bonds are to be delivered by the Company on behalf of the Authority directly to
the Authority Trustee, as assignee of the Authority, as security for the payment
of the principal of, redemption premium, if any, and interest on, the Authority
Bonds; and

4

WHEREAS, Article XVIII of the Original Indenture provides that the
Company, when authorized by resolution of its Board of Directors, may with the
Trustee enter into an indenture supplemental to the Original Indenture, which
thereafter shall form a part of the Original Indenture, for the purposes, inter
alia, of subjecting to the lien of the Original Indenture additional property,
of defining the covenants and provisions applicable to any bonds of any series
other than the 3 1/4% Series due 1971, of adding to the covenants and agreements
of the Company contained in the Original Indenture other covenants and
agreements thereafter to be observed by the Company, of surrendering any right
or power in the Original Indenture reserved to or conferred upon the Company,
and of making such provisions in regard to matters or questions arising under
the Original Indenture as may be necessary or desirable and not inconsistent
therewith; and

WHEREAS, the Company, by proper corporate action, has duly authorized
the creation of the 5.00% Series due 2035 (to be issued in accordance with the
terms and provisions of the Original Indenture and indentures supplemental
thereto, including this Fortieth Supplemental Indenture, and to be secured by
said Original Indenture and indentures supplemental thereto, including this
Fortieth Supplemental Indenture) and has further duly authorized the execution,
delivery and recording of this Fortieth Supplemental Indenture setting forth the
terms and provisions of the 5.00% Series due 2035 insofar as said terms and
provisions are not set forth in said Original Indenture; and

WHEREAS, the Bonds and the Trustee's certificate upon said Bonds are to
be substantially in the following form, the proper amount, names of registered
owners and numbers to be inserted therein, and such appropriate insertions,
omissions and changes to be made therein as may be required or permitted by this
Indenture to conform to any pertinent law or usage:

[Form of 5.00% Series due 2035]

No. R-1                                                              $24,675,000

AQUA PENNSYLVANIA, INC.

(Incorporated under the Laws of the Commonwealth

of Pennsylvania)

First Mortgage Bond, 5.00% Series Due 2035

Aqua Pennsylvania, Inc. (f/k/a known as Pennsylvania Suburban Water
Company, successor by merger to Philadelphia Suburban Water Company), a
corporation organized and existing under the laws of the Commonwealth of
Pennsylvania (hereinafter called the "Company", which term shall include any
successor corporation as defined in the Indenture hereinafter referred to), for
value received, hereby promises to pay to Delaware County Industrial Development
Authority or its registered assigns, on the 1st day of February, 2035, at the
designated office of J.P. Morgan Trust Company, National Association
(hereinafter called the "Trustee") in Philadelphia, Pennsylvania, the sum of
Twenty-Four Million Six Hundred Seventy-Five Thousand Dollars in such coin or
currency of the United States of America as at the time of payment is legal
tender for the payment of public and private debts and to pay interest thereon
to the registered owner hereof by draft or check of the Trustee mailed to such
registered owner from the interest payment date next preceding the date of the
authentication of this Bond (or if this Bond is authenticated after a Record
Date as defined below and on or before the succeeding interest payment date,
from such succeeding interest payment date, or if this Bond is authenticated on
or prior to January 15, 2006, from the date hereof) until the principal hereof
shall become due and payable, at the rate of 5.00 percent (5.00%) per annum,
payable semiannually in like coin or currency on the first day of February and
the first day of August in each year, commencing February 1, 2006 and to pay
interest on overdue principal (including any overdue required or optional
prepayment of principal) and premium, if any, and, to the extent legally
enforceable, on any overdue installment of interest at a rate of 5.00% per annum
after maturity whether by acceleration or otherwise until paid.

5

The interest so payable will (except as otherwise provided in the
Fortieth Supplemental Indenture referred to herein) be calculated on the basis
of a 360-day year of twelve 30-day months and be paid to the person in whose
name this Bond (or a Bond or Bonds in exchange for which this Bond was issued)
is registered at the close of business on the fifteenth day of the calendar
month next preceding the month in which the interest payment date occurs whether
or not such day is a business day (a "Record Date") and principal, premium, if
any, and interest on this Bond shall be paid in accordance with written payment
instructions of the registered owner delivered to the Trustee on or before such
record date.

This Bond is one of a duly authorized issue of bonds of the Company
known as its First Mortgage Bonds, issued and to be issued without limitation as
to aggregate principal amount except as set forth in the Indenture hereinafter
mentioned in one or more series and equally secured (except insofar as a sinking
fund or other similar fund established in accordance with the provisions of the
Indenture may afford additional security for the bonds of any specific series)
by an Indenture of Mortgage (herein called the "Indenture") dated as of January
1, 1941, executed by the Philadelphia Suburban Water Company (now Aqua
Pennsylvania, Inc., f/k/a Pennsylvania Suburban Water Company, as successor by
merger) to The Pennsylvania Company for Insurances on Lives and Granting
Annuities (succeeded as trustee by J.P. Morgan Trust Company, National
Association), as Trustee (the "Trustee"), to which Indenture and all indentures
supplemental thereto reference is hereby made for a description of the property
mortgaged and pledged, the nature and extent of the security, the rights of the
holders and registered owners of the bonds and of the Trustee in respect of such
security, and the terms and conditions under which the bonds are and are to be
secured and may be issued under the Indenture; but neither the foregoing
reference to the Indenture nor any provision of this Bond or of the Indenture or
of any indenture supplemental thereto shall affect or impair the obligation of
the Company, which is absolute and unconditional, to pay at the stated or
accelerated maturity herein and in the Indenture provided, the principal of and
premium, if any, and interest on this Bond as herein provided. As provided in
the Indenture, the bonds may be issued in series for various principal amounts,
may bear different dates and mature at different times, may bear interest at
different rates and may otherwise vary as in the Indenture provided or
permitted. This Bond is one of the Bonds described in an indenture supplemental
to said Indenture known as the "Fortieth Supplemental Indenture" dated as of
December 15, 2005, and designated therein as "First Mortgage Bonds, 5.00% Series
due 2035" (the "Bonds").

6

To the extent permitted by and as provided in the Indenture,
modifications or alterations of the Indenture, or of any indenture supplemental
thereto, and of the rights and obligations of the Company and of the holders and
registered owners of bonds issued and to be issued thereunder may be made with
the consent of the Company by an affirmative vote of the holders and registered
owners of not less than 75% in principal amount of bonds then outstanding under
the Indenture and entitled to vote, at a meeting of the bondholders called and
held as provided in the Indenture, and, in case one or more but less than all of
the series of bonds then outstanding under the Indenture are so affected, by an
affirmative vote of the holders and registered owners of not less than 75% in
principal amount of bonds of any series then outstanding under the Indenture and
entitled to vote on and affected by such modification or alteration, or by the
written consent of the holders and registered owners of such percentages of
bonds; provided, however, that no such modification or alteration shall be made
which shall reduce the percentage of bonds the consent of the holders or
registered owners of which is required for any such modification or alteration
or which shall affect the terms of payment of the principal of or interest on
the bonds, or permit the creation by the Company of any lien prior to or on a
parity with the lien of the Indenture with respect to any property subject to
the lien of the Indenture as a first mortgage lien thereon, or which shall
affect the rights of the holders or registered owners of less than all of the
bonds of any series affected thereby.

The 2005 Bonds have been issued by the Company to secure the obligation
of the Company to pay to or for the account of the Authority (defined below) an
amount equal to the principal, premium, if any, of, and interest on, the
Authority Bonds (defined below) pursuant to the Financing Agreement (the
"Financing Agreement") dated as of December 15, 2005, between the Delaware
County Industrial Development Authority, a Pennsylvania body politic and
corporate (the "Authority"), and the Company, which Authority Bonds are being
issued to finance the costs of numerous acquisitions, constructions,
modifications, expansions, installations and replacements of the Company's water
distribution, treatment and related operating systems located in the Counties of
Chester, Delaware and Montgomery in Pennsylvania and that are part of the
Company's system for the distribution of water to its customers and related
financing costs which are to be financed under the Financing Agreement and which
are described in Exhibit A thereto (which facilities, less any deletions
therefrom and together with any additions, improvements and modifications
thereto and substitutions therefor made in accordance with the provisions of the
Financing Agreement are referred to as the "Facilities"). The Facilities are to
be financed through the sale of the Authority's Water Facilities Revenue Bonds
(Aqua Pennsylvania, Inc. Project), Series C of 2005, in the aggregate principal
amount of $24,675,000 (the "Authority Bonds").

The Authority Bonds are to be issued under a Trust Indenture, dated as
of December 15, 2005 (the "Authority Indenture") between the Authority and
Wachovia Bank, National Association, as trustee (the "Authority Trustee"). The
right, title and interest of the Authority in and to the Financing Agreement and
the payments thereunder and the security for such payments have been assigned by
the Authority to the Authority Trustee, and the Bonds have been delivered by the
Company on behalf of the Authority directly to the Authority Trustee, as
assignee, as security for the payment of the principal of, and premium, if any,
and interest on, the Authority Bonds. The Authority Trustee may not sell, assign
or otherwise transfer the Bonds except for a transfer of the entire outstanding
principal amount thereof to its successor as trustee under the Authority
Indenture, which successor and each subsequent successor shall hold such
Authority Bonds subject to the same restriction on transfer.

7

In the event any Authority Bonds shall be purchased by the Company and
cancelled pursuant to the Authority Indenture, Bonds corresponding in principal
amount to the Authority Bonds so purchased and cancelled shall be deemed to be
paid in full, and in the event and to the extent the principal of, and premium,
if any, or interest on, any Authority Bonds is paid out of funds held by the
Authority Trustee other than payments on Bonds, the corresponding payment of the
principal of and premium, if any, or interest on, an aggregate principal amount
of Bonds shall be deemed to have been satisfied.

In the event this Bond shall be deemed to have been paid in full, this
Bond shall be surrendered to the Trustee for cancellation. In the event this
Bond shall be deemed to have been paid in part, this Bond shall be presented to
the Trustee for notation hereon of the payment of the portion of the principal
hereof so deemed to have been paid.

The Bonds are redeemable only as follows:

(a) The Bonds are subject to redemption prior to maturity, at the
option of the Company, on or after February 1, 2015, in whole or in part, at a
redemption price of 100% of the principal amount of the Bonds to be redeemed,
plus interest accrued thereon to the date fixed for redemption.

(b) The Bonds are also subject to redemption at the direction of the
Company, in whole, at any time prior to maturity, at a redemption price of 100%
of the principal amount of the bonds to be redeemed, plus interest accrued
thereon to the date fixed for redemption, at any time the Authority Bonds are
subject to extraordinary optional redemption pursuant to Section 7.01(a)(ii) of
the Authority Indenture.

(c) The Bonds are also subject to special mandatory redemption at the
direction of the Company, in part, prior to maturity, at a redemption price of
100% of the principal amount of the bonds to be redeemed, plus interest accrued
thereon to the date fixed for redemption, at such time and in such amount as the
Authority Bonds are subject to special mandatory redemption pursuant to Section
7.01(a)(iii) of the Authority Indenture.

(d) The Bonds are also subject to mandatory redemption by the Company
in whole if the Trustee shall receive a written demand from the Authority
Trustee for redemption of all such Bonds held by the Authority Trustee stating
that an "Event of Default" as defined in Section 9.01(a) of the Authority
Indenture has occurred and is continuing and that payment of the principal of
the Authority Bonds has been accelerated pursuant to Section 9.01(b) of the
Authority Indenture, provided that at the time of notice of such redemption as
provided in Section 2 of Article V of the Original Indenture (i) said written
demand shall not have been withdrawn by the Authority Trustee, and (ii) no event
of default under Section 1 of Article XI of the Original Indenture shall have
occurred and be continuing.

8

If this Bond or any portion hereof is called for redemption and payment
thereof is duly provided for as specified in the Indenture, interest shall cease
to accrue hereon or on such portion, as the case may be, from and after the date
fixed for redemption.

The principal hereof may be declared or may become due prior to its
maturity date on the conditions, in the manner and with the effect set forth in
the Indenture upon the happening of an event of default, as in the Indenture
provided; subject, however, to the right, under certain circumstances, of the
registered owners of a majority in principal amount of Bonds outstanding to
annul such declaration.

This Bond is transferable by the registered owner hereof in person or
by attorney duly authorized in writing, on books of the Company to be kept for
that purpose at the designated office of the Trustee in Philadelphia,
Pennsylvania upon surrender hereof for cancellation at such office and upon
presentation of a written instrument of transfer duly executed, and thereupon
the Company shall issue in the name of the transferee or transferees, and the
Trustee shall authenticate and deliver, a new Bond or Bonds in authorized
denominations, of equal aggregate unpaid principal amount. Any such transfer or
exchange shall be subject to the terms and conditions and to the payment of the
charges specified in the Indenture.

The Company and the Trustee may deem and treat the registered owner of
this Bond as the absolute owner hereof for the purpose of receiving payment of
or on account of the principal hereof and the interest hereon, and for all other
purposes, and shall not be affected by any notice to the contrary.

No recourse shall be had for the payment of the principal of or
interest on this Bond or for any claim based hereon or otherwise in respect
hereof or of the Indenture or of any indenture supplemental thereto against any
incorporator or any past, present or future stockholder, officer or director of
the Company or of any predecessor or successor corporation, as such, either
directly or through the Company or through any such predecessor or successor
corporation or through any receiver or trustee in bankruptcy, by virtue of any
constitutional provision, statute or rule of law or equity, or by the
enforcement of any assessment or penalty or otherwise; all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released by every holder or registered owner hereof, as
more fully provided in the Indenture.

This Bond shall not be entitled to any benefit under the Indenture or
any indenture supplemental thereto, or become valid or obligatory for any
purpose, until J.P. Morgan Trust Company, National Association, as Trustee under
the Indenture, or a successor trustee thereunder, shall have signed the
certificate of authentication endorsed hereon.

IN WITNESS WHEREOF, Aqua Pennsylvania, Inc. has caused this Bond to be
signed by its President or a Vice President and its corporate seal to be hereto
affixed and attested by its Secretary or an Assistant Secretary, and this Bond
to be dated ________, 2005.

Attest:                                             AQUA PENNSYLVANIA, INC.

By:
(Assistant) Secretary                               Vice President and Treasurer

9

(Form of Trustee's Certificate)

This Bond is one of the Bonds, of the series designated therein,
referred to in the within-mentioned Fortieth Supplemental Indenture.

J.P. MORGAN TRUST COMPANY, 
NATIONAL ASSOCIATION

By:__________________________
Authorized Signer
and;

WHEREAS, all acts and things necessary to make the Bonds, when executed
by the Company and authenticated and delivered by the Trustee as in this
Fortieth Supplemental Indenture provided and issued by the Company, valid,
binding and legal obligations of the Company, and this Fortieth Supplemental
Indenture a valid and enforceable supplement to said Original Indenture, have
been done, performed and fulfilled, and the execution of this Fortieth
Supplemental Indenture has been in all respects duly authorized; and

NOW, THEREFORE, THIS FORTIETH SUPPLEMENTAL INDENTURE WITNESSETH: That,
in order to secure the payment of the principal and interest of all bonds issued
under the Original Indenture and all indentures supplemental thereto, according
to their tenor and effect, and according to the terms of the Original Indenture
and of any indenture supplemental thereto, and to secure the performance of the
covenants and obligations in said bonds and in the Original Indenture and any
indenture supplemental thereto respectively contained, and to provide for the
proper issuing, conveying and confirming unto the Trustee, its successors in
said trust and its and their assigns forever, upon the trusts and for the
purposes expressed in the Original Indenture and in any indenture supplemental
thereto, all and singular the estates, property and franchises of the Company
thereby mortgaged or intended so to be, the Company, for and in consideration of
the premises and of the sum of One Dollar ($1.00) in hand paid by the Trustee to
the Company upon the execution and delivery of this Fortieth Supplemental
Indenture, receipt whereof is hereby acknowledged, and of other good and
valuable consideration, and intending to be legally bound, has granted,
bargained, sold, aliened, enfeoffed, released and confirmed and by these
presents does grant, bargain, sell, alien, enfeoff, release and confirm unto
J.P. Morgan Trust Company, National Association, as Trustee, and to its
successors in said trust and its and their assigns forever:

All and singular the premises, property, assets, rights and franchises
of the Company, whether now or hereafter owned, constructed or acquired, of
whatever character and wherever situated (except as herein expressly excepted),
including among other things the following, but reference to or enumeration of
any particular kinds, classes, or items of property shall not be deemed to
exclude from the operation and effect of the Original Indenture or any indenture
supplemental thereto any kind, class or item not so referred to or enumerated:

10

I.

REAL ESTATE AND WATER RIGHTS.

The real estate described in the deeds from the grantors named in
Exhibit C hereto, dated and recorded as therein set forth, and any other real
estate and water rights acquired since the date of the Thirty-Ninth Supplemental
Indenture.

II.

BUILDINGS AND EQUIPMENT.

All mains, pipes, pipe lines, service pipes, buildings, improvements,
standpipes, reservoirs, wells, flumes, sluices, canals, basins, cribs,
machinery, conduits, hydrants, water works, plants and systems, tanks, shops,
structures, purification systems, pumping stations, fixtures, engines, boilers,
pumps, meters and equipment which are now owned or may hereafter be acquired by
the Company (except as herein expressly excepted), including all improvements,
additions and extensions appurtenant to any real or fixed property now or
hereafter subject to the lien of the Original Indenture or any indenture
supplemental thereto which are used or useful in connection with the business of
the Company as a water company or as a water utility, whether any of the
foregoing property is now owned or may hereafter be acquired by the Company.

It is hereby declared by the Company that all property of the kinds
described in the next preceding paragraph, whether now owned or hereafter
acquired, has been or is or will be owned or acquired with the intention of
using the same in carrying on the business or branches of the business of the
Company, and it is hereby declared that it is the intention of the Company that
all thereof (except property hereinafter specifically excepted) shall be subject
to the lien of the Original Indenture.

It is agreed by the Company that so far as may be permitted by law,
tangible personal property now owned or hereafter acquired by the Company,
except such as is hereafter expressly excepted from the lien hereof, shall be
deemed to be and construed as fixtures and appurtenances to the real property of
the Company.

III.

FRANCHISES AND RIGHTS OF WAY.

All the corporate and other franchises of the Company, all water and
flowage rights, riparian rights, easements and rights of way, and all permits,
licenses, rights, grants, privileges and immunities, and all renewals,
extensions, additions or modifications of any of the foregoing, whether the same
or any thereof, or any renewals, extensions, additions or modifications thereof,
are now owned or may hereafter be acquired, owned, held, or enjoyed by the
Company.

11

IV.

AFTER ACQUIRED PROPERTY.

All real and fixed property and all other property of the character
hereinabove described which the Company may hereafter acquire.

TOGETHER WITH all and singular the tenements, hereditaments and
appurtenances belonging or in any way appertaining to the aforesaid property or
any part thereof, with the reversion and reversions, remainder and remainders,
tolls, rents, revenues, issues, income, product and profits thereof, and all the
estate, right, title, interest and claim whatsoever, at law as well as in
equity, which the Company now has or may hereafter acquire in and to the
aforesaid premises, property, rights and franchises and every part and parcel
thereof.

EXCEPTING AND RESERVING, HOWEVER, certain premises, not used or useful
in the supplying of water by the Company, expressly excepted and reserved from
the lien of the Original Indenture and not subject to the terms thereof.

AND ALSO SAVING AND EXCEPTING from the property hereby mortgaged and
pledged, all of the following property (whether now owned by the Company or
hereafter acquired by it): All bills, notes and accounts receivable, cash on
hand and in banks, contracts, choses in action and leases to others (as distinct
from the property leased and without limiting any rights of the Trustee with
respect thereto under any of the provisions of the Original Indenture or of any
indenture supplemental thereto), all bonds, obligations, evidences of
indebtedness, shares of stock and other securities, and certificates or
evidences of interest therein, all automobiles, motor trucks, and other like
automobile equipment and all furniture, and all equipment, materials, goods,
merchandise and supplies acquired for the purpose of sale in the ordinary course
of business or for consumption in the operation of any properties of the Company
other than any of the foregoing which may be specifically transferred or
assigned to or pledged or deposited with the Trustee hereunder or required by
the provisions of the Original Indenture or any indenture supplemental thereto
so to be; provided, however, that if, upon the happening of a completed default,
as specified in Section 1 of Article XI of the Original Indenture, the Trustee
or any receiver appointed hereunder shall enter upon and take possession of the
mortgaged property, the Trustee or any such receiver may, to the extent
permitted by law, at the same time likewise take possession of any and all of
the property described in this paragraph then on hand and any and all other
property of the Company then on hand, not described or referred to in the
foregoing granting clauses, which is used or useful in connection with the
business of the Company as a water company or as a water utility, and use and
administer the same to the same extent as if such property were part of the
mortgaged property, unless and until such completed default shall be remedied or
waived and possession of the mortgaged property restored to the Company, its
successors or assigns.

SUBJECT, HOWEVER, to the exceptions, reservations and matters
hereinabove and in the Original Indenture recited, to releases executed since
the date of the Original Indenture in accordance with the provisions thereof, to
existing leases, to easements and rights of way for pole lines and electric
transmission lines and other similar encumbrances and restrictions which the
Company hereby certifies, in its judgment, do not impair the use of said
property by the Company in its business, to liens existing on or claims against,
and rights in and relating to, real estate acquired for right-of-way purposes,
to taxes and assessments not delinquent, to alleys, streets and highways that
may run across or encroach upon said lands, to liens, if any, incidental to
construction, and to Permitted Liens, as defined in the Original Indenture; and,
with respect to any property which the Company may hereafter acquire, to all
terms, conditions, agreements, covenants, exceptions and reservations expressed
or provided in such deeds and other instruments, respectively, under and by
virtue of which the Company shall hereafter acquire the same and to any and all
liens existing thereon at the time of such acquisition.

12

TO HAVE AND TO HOLD, all and singular the property, rights, privileges
and franchises hereby conveyed, transferred or pledged or intended so to be unto
the Trustee and its successors in the trust heretofore and hereby created, and
its and their assigns forever.

IN TRUST NEVERTHELESS, for the equal pro rata benefit and security of
each and every entity who may be or become the holders of bonds and coupons
secured by the Original Indenture or by any indenture supplemental thereto, or
both, without preference, priority or distinction as to lien or otherwise of any
bond or coupon over or from any other bond or coupon, so that each and every of
said bonds and coupons issued or to be issued, of whatsoever series, shall have
the same right, lien and privilege under the Original Indenture and all
indentures supplemental thereto and shall be equally secured hereby and thereby,
with the same effect as if said bonds and coupons had all been made, issued and
negotiated simultaneously on the date thereof; subject, however, to the
provisions with reference to extended, transferred or pledged coupons and claims
for interest contained in the Original Indenture and subject to any sinking or
improvement fund or maintenance deposit provisions, or both, for the benefit of
any particular series of bonds.

IT IS HEREBY COVENANTED, DECLARED AND AGREED, by and between the
parties hereto, that all such bonds and coupons are to be authenticated,
delivered and issued, and that all property subject or to become subject hereto
is to be held subject to the further covenants, conditions, uses and trusts
hereinafter set forth, and the Company, for itself and its successors and
assigns, does hereby covenant and agree to and with the Trustee and its
successor or successors in said trust, for the benefit of those who shall hold
said bonds and coupons, or any of them, issued under this Indenture or any
indenture supplemental hereto, or both, as follows:

ARTICLE I.

Form, Authentication and Delivery of the Bonds; Redemption Provisions

SECTION 1. There shall be a forty-eighth series of bonds, limited in
aggregate principal amount to $24,675,000 designated as "Aqua Pennsylvania,
Inc., First Mortgage Bonds, 5.00% Series due 2035".

Interest on the Bonds shall be payable semiannually on February 1 and
August 1 of each year (each an "interest payment date"), commencing February 1,
2006. Each Bond shall be dated the date of its authentication and shall bear
interest from the interest payment date next preceding the date of the
authentication of such Bond (or if such Bond is authenticated after a Record
Date as defined below and on or before the succeeding interest payment date,
from such succeeding interest payment date, or if such Bond is authenticated on
or prior to the record date for the first interest payment date for the Bonds,
in which case it shall bear interest from the date of original issuance of the
Bonds); provided, however, that, if at the time of authentication of any Bond,
interest on the predecessor Bond of such Bond is in default, such Bond shall
bear interest from the date to which interest has been paid, or, if no interest
has been paid, from the date of original issuance thereof. The 5.00% Series due
2035 shall be stated to mature (subject to the right of earlier redemption at
the prices and dates and upon the terms and conditions hereinafter set forth) on
February 1, 2035 and shall bear interest at the rate of 5.00%.

13

The 5.00% Series due 2035 shall be issuable only as registered bonds
without coupons, shall be in the form hereinabove recited, in the denomination
of Five Thousand Dollars ($5,000) or any integral multiple thereof, shall be
lettered "R-1" and shall bear such numbers as the Company may reasonably
require.

The principal of, and interest on the Bonds shall be payable at the
designated office of the trustee in Philadelphia, Pennsylvania, and shall be
payable, along with interest on the Bonds, in such coin or currency of the
United States of America as at the time of payment is legal tender for the
payment of public and private debts; each installment of interest shall be paid
by check to the order of the person entitled thereto, mailed to such person's
address as the same appears on the books maintained for such purpose by or on
behalf of the Company, or by bank wire transfer of immediately available funds
pursuant to instructions and conditions incorporated in an agreement between
such person and the Trustee or the Company.

The person in whose name any Bond is registered at the close of
business on any Record Date (as hereinafter defined) with respect to any
interest payment date shall be entitled to receive the interest payable on such
interest payment date notwithstanding the cancellation of such Bond upon any
transfer or exchange subsequent to the Record Date and prior to such interest
payment date; provided, however, that if and to the extent the Company shall
default in the payment of the interest due on such interest payment date, such
defaulted interest shall be paid to the persons in whose names outstanding Bonds
are registered at the close of business on a subsequent Record Date established
by notice given by mail by or on behalf of the Company to the holders of Bonds
not less than fifteen days preceding such subsequent Record Date, such Record
Date to be not less than ten days preceding the date of payment of such
defaulted interest. The term "Record Date" with respect to any regular interest
payment date shall mean the fifteenth day of the calendar month next preceding
the month in which such interest payment date occurs.

The Bonds are being issued by the Company to secure the obligation of
the Company to pay to or for the account of the Authority an amount equal to the
principal of, at maturity or earlier redemption, and interest on, the Authority
Bonds pursuant to the Financing Agreement. The Authority Bonds are being sold to
finance the Facilities.

The Authority Bonds are to be issued under the Authority Indenture and
the right, title and interest of the Authority in and to the Financing Agreement
and the payments thereunder and the security for such payments have been
assigned by the Authority to the Authority Trustee, and the Bonds are to be
delivered by the Company on behalf of the Authority directly to the Authority
Trustee, as assignee, as security for the payment of the principal of, at
maturity or earlier redemption, and premium, if any, and interest on, the
Authority Bonds. The Authority Trustee may not sell, assign or otherwise
transfer the Bonds except for a transfer of the entire outstanding principal
amount thereof to its successor as Trustee under the Authority Indenture, which
successor and each subsequent successor shall hold the Bonds subject to the same
restriction on transfer. 

14

The text of the Bonds and of the certificate of the Trustee upon such
Bonds shall be, respectively, substantially of the tenor and effect hereinbefore
recited.

Exchange of any Bonds shall be effected in accordance with the
applicable provisions of Sections 7, 8 and 9 of Article II of the Original
Indenture.

SECTION 2. The Bonds are redeemable only as follows:

(a) The 5.00% Series due 2035 are subject to redemption prior to
maturity on or after February 1, 2015 by the Company, to the extent that the
Authority Bonds are called for redemption under Section 7.01(a)(i) of the
Authority Indenture, and then out of moneys deposited with or held by the
Trustee for such purpose, as a whole or in part, at any time in the manner
described below, at the redemption price of one hundred percent (100%) of the
principal amount to be redeemed, plus interest accrued thereon to the date fixed
for redemption;

(b) The 5.00% Series due 2035 are subject to redemption at the
direction of the Company, in whole, at any time prior to maturity, at a
redemption price of 100% of the principal amount to be redeemed, plus interest
accrued thereon to the date fixed for redemption, at any time the Authority
Bonds maturing February 1, 2035 are subject to extraordinary optional redemption
pursuant to Section 7.01(a)(ii) of the Authority Indenture;

(c) The 5.00% Series due 2035 are also subject to special mandatory
redemption at the direction of the Company, in part, prior to maturity, at a
redemption price of 100% of the principal amount of the bonds to be redeemed,
plus interest accrued thereon to the date fixed for redemption, at such time and
in such amount as the Authority Bonds maturing February 1, 2035 are subject to
special mandatory redemption pursuant to Section 7.01(a)(iii) of the Authority
Indenture.

(d) The 5.00% Series due 2035 are also subject to mandatory redemption
by the Company in whole if the Trustee shall receive a written demand from the
Authority Trustee for redemption of all such Bonds held by the Authority Trustee
stating that an "Event of Default" as defined in Section 9.01(a) of the
Authority Indenture has occurred and is continuing and that payment of the
principal of the Authority Bonds has been accelerated pursuant to Section
9.01(b) of the Authority Indenture, provided that at the time of notice of such
redemption as provided in Section 2 of Article V of the Original Indenture (i)
said written demand shall not have been withdrawn by the Authority Trustee, and
(ii) no event of default under Section 1 of Article XI of the Original Indenture
shall have occurred and be continuing.

SECTION 3. Any redemption of the Bonds shall be effected in accordance
with the provisions of Article V of the Original Indenture.

SECTION 4. In the event any Authority Bonds shall be purchased by the
Company, surrendered by the Company to the Authority Trustee for cancellation
and cancelled by the Authority Trustee, Bonds corresponding in principal amount
to the Authority Bonds so purchased, surrendered and cancelled shall be deemed
to have been paid in full.

15

SECTION 5. In the event and to the extent the principal of and premium,
if any, or interest on, any Authority Bonds is paid out of funds held by the
Authority Trustee other than payments of Bonds, the corresponding payment of the
principal of, and premium, if any, or interest on, an aggregate principal amount
of Bonds equal to the aggregate principal amount of such Authority Bonds shall
be deemed to have been satisfied.

SECTION 6. All Bonds deemed to have been paid in full as provided in
Section 4 and 5 of this Article I of this Fortieth Supplemental Indenture shall
be surrendered to the Trustee for cancellation, and the Trustee shall forthwith
cancel the same and, in accordance with applicable laws and regulations and the
Trustee's policies and procedures, and on the written request of the Company,
deliver the same to the Company. In case part of an outstanding Bond shall be
deemed to have been partially paid as provided in said Section 4 or Section 5,
upon presentation of such Bond at the designated office of the Trustee, the
Trustee shall make a notation thereon of the payment of the portion of the
principal amount of such Bond so deemed to have been paid unless the registered
owner shall elect to surrender such Bond to the Trustee, in which case the
Company shall execute and the Trustee shall authenticate and deliver, without
charge to the registered owner, Bonds in such authorized denominations as shall
be specified by the registered owner for the unpaid balance of the principal
amount of such outstanding Bond.

SECTION 7. The 5.00% Series due 2035 in the aggregate principal amount
of $24,675,000 may be issued under the provisions of Article IV of the Original
Indenture and may forthwith be executed by the Company and delivered to the
Trustee and shall be authenticated by the Trustee and delivered to or upon the
order of the Company, upon receipt by the Trustee of the resolutions,
certificates, opinions or other instruments or all of the foregoing required to
be delivered upon the issue of bonds pursuant to the provisions of the Original
Indenture.

ARTICLE II.
Maintenance or Improvement Deposit.

SECTION 1. The Company covenants that it will deposit with the Trustee
on or before the March 1 next occurring after the bonds of the 9.89% Series due
2008 cease to be outstanding, or on or before the March 1 next occurring after
the bonds of the 9.93% Series due 2013 cease to be outstanding, or on or before
the next March 1 next occurring after the bonds of the 9.97% Series due 2018
cease to be outstanding, or on or before the March 1 next occurring after the
bonds of the 9.12% Series due 2010 cease to be outstanding, or on or before the
March 1 next occurring after the bonds of the 9.29% Series due 2026 cease to be
outstanding, or on or before the March 1 next occurring after the bonds of the
9.17% Series due 2021 cease to be outstanding, or on or before the next March 1
next occurring after the bonds of the 9.17% Series due 2011 cease to be
outstanding, or on or before the March 1 next occurring after the bonds of the
7.15% Series due 2008 cease to be outstanding, or on or before the March 1 next
occurring after the bonds of any of the Subseries of the 1995 Medium Term Note
Series issued under the Twenty-Ninth Supplemental Indenture (consisting of the
7.72% Subseries A due 2025, the 6.89% Subseries C due 2015, and the 6.99%
Subseries D due 2006) shall cease to be outstanding, or on or before the March 1
next occurring after the bonds of any of the Subseries of 

16

the 1997 Medium Term Note Series issued under the Thirty-First Supplemental
Indenture (consisting of the 6.75% Subseries A due 2007 and the 6.14% Subseries
C due 2008) cease to be outstanding, or on or before March 1 next occurring
after the bonds of 6.00% Series due 2029 cease to be outstanding, or on or
before March 1 next occurring after the bonds of any of the Subseries of the
1999 Medium Term Note Series issued under the Thirty-Third Supplemental
Indenture (consisting of the 9.53% Subseries D due 2019, the 8.26% Subseries F
due 2022, the 9.50% Subseries G due 2006, the 9.22% Subseries H due 2019, the
8.32% Subseries I due 2022, the 8.14% Subseries J due 2025, the 6.00% Subseries
K due 2030, the 5.93% Subseries L due 2012, the 2.65% Subseries M due 2006, the
3.461% Subseries N due 2007, the 5.08% Subseries O due 2015, the 5.17% Subseries
P due 2017, the 5.751% Subseries Q due 2019, the 5.751% Subseries R due 2019,
the 6.06% Subseries S due 2027, the 6.06% Subseries T due 2027 and the 5.98%
Subseries U due 2028) cease to be outstanding, or on or before March 1 next
occurring after the bonds of the 5.35% Series due 2031 cease to be outstanding,
or on or before March 1 next occurring after the bonds of the 5.55% Series due
2032 cease to be outstanding, or on or before March 1 next occurring after the
bonds of the 3.75% Series due 2010 cease to be outstanding, or on or before
March 1 next occurring after the bonds of the 5.15% Series due 2032 cease to be
outstanding, or on or before March 1 next occurring after the bonds of the 5.05%
Series due 2039 cease to be outstanding, or on or before March 1 next occurring
after the bonds of the 5.00% Series due 2036 cease to be outstanding, or on or
before March 1 next occurring after the bonds of the 5.00% Series due 2037 cease
to be outstanding, or on or before March 1 next occurring after the bonds of the
5.00% Series due 2038 cease to be outstanding, whichever is latest, an amount in
cash (the "Maintenance or Improvement Deposit") equal to 9% of the Gross
Operating Revenues of the Company during the preceding calendar year less, to
the extent that the Company desires to take such credits, the following:

(a) the amount actually expended for maintenance during such calendar
year; and

(b) the Cost or Fair Value, whichever is less, of Permanent Additions
acquired during such calendar year which at the time of taking such credit
constitute Available Permanent Additions; and

(c) the unapplied balance, or any part thereof, of the Cost or Fair
Value, whichever is less, of Available Permanent Additions acquired by the
Company during the five calendar years preceding such calendar year and
specified in the Officers' Certificates delivered to the Trustee pursuant to
Section 2 of this Article, but only to the extent that the Permanent Additions
with respect to which such Cost or Fair Value was determined shall at the time
of taking such credit constitute Available Permanent Additions.

SECTION 2. The Company covenants that it will on or before March 1 in
each year, beginning with the first deposit made with the Trustee under the
provisions of Section 1 of this Article, as long as any of the Bonds are
outstanding, deliver to the Trustee the following:

(a) An Officers' Certificate, which shall state:

(i) The amount of the Gross Operating Revenues for the
preceding calendar year;

17

(ii) 9% of such Gross Operating Revenues;

(iii) The amount actually expended by the Company for
maintenance during such calendar year;

(iv) The amount set forth in subparagraph (xii) of each
Officers' Certificate delivered to the Trustee pursuant to the
provisions of this Section during the preceding five calendar years
(specifying each such Officers' Certificate), after deducting from each
such amount the aggregate of (a) the Cost or Fair Value, whichever is
less, of all Permanent Additions represented by such amount which have
ceased to be Available Permanent Additions; and (b) any part of such
amount for which the Company has previously taken credit against any
Maintenance or Improvement Deposit (specifying the Officers'
Certificate in which such credit was taken); and (c) any part of such
amount for which the Company then desires to take credit against the
Maintenance or Improvement Deposit;

(v) An amount which shall be the aggregate of all amounts set
forth pursuant to the provisions of clause (c) of the foregoing
subparagraph (iv);

(vi) The Cost or Fair Value, whichever is less, of Available
Permanent Additions acquired by the Company during the preceding
calendar year;

(vii) That part of the amount set forth in subparagraph (vi)
which the Company desires to use as a credit against the Maintenance or
Improvement Deposit;

(viii) The amount of cash payable to the Trustee under the
provisions of Section 1 of this Article, which shall be the amount by
which the amount set forth in subparagraph (ii) hereof exceeds the sum
of the amounts set forth in subparagraphs (iii), (v) and (vii) hereof;

(ix) The sum of all amounts charged on the books of the
Company against any reserve for retirement or depreciation during the
preceding calendar year representing the aggregate of the Cost when
acquired of any part of the Company's plants and property of the
character described in the granting clauses hereof which has been
permanently retired or abandoned;

(x) The aggregate of the amounts set forth in subparagraphs
(v) and (vii) hereof;

(xi) The amount by which the amount set forth in subparagraph
(x) exceeds the amount set forth in subparagraph (ix), being the amount
required to be deducted from the Cost or Fair Value of Available
Permanent Additions in order to determine a Net Amount of Available
Permanent Additions pursuant to the provisions of Section 9 of Article
I of the Original Indenture;

(xii) The amount set forth in subparagraph (vi) after
deducting the amount, if any, set forth in subparagraph (vii); and

18

(xiii) That all conditions precedent to the taking of the
credit or credits so requested by the Company have been complied with.

(b) In the event that the Officers' Certificate delivered to the
Trustee pursuant to the provisions of paragraph (a) of this Section shall state,
pursuant to the requirements of subparagraph (vi), the Cost or Fair Value of
Available Permanent Additions acquired by the Company during the preceding
calendar year, the documents specified in paragraphs 2, 3, 5, 6 and 7 of
subdivision (B) of Section 3 of Article IV of the Original Indenture.

(c) An amount in cash equal to the sum set forth in subparagraph (viii)
of the Officers' Certificate provided for in paragraph (a) hereof.

SECTION 3. All cash deposited with the Trustee as part of any
Maintenance or Improvement Deposit provided for in Section 1 of this Article,
may, at the option of the Company, be applied to the purchase of bonds under the
provisions of Section 2 of Article X of the Original Indenture or to the
redemption of bonds under the provisions of Section 3 of Article X of the
Original Indenture or may be withdrawn by the Company at any time to reimburse
the Company for the cost of a Net Amount of Available Permanent Additions
(excluding, however, from any such Available Permanent Additions all Permanent
Additions included in any certificate delivered to the Trustee for the purpose
of obtaining a credit against any Maintenance or Improvement Deposit provided
for in Section 1 of this Article to the extent that such Permanent Additions
have been used for any such credit). The Trustee shall pay to or upon the
written order of the Company all or any part of such cash upon the receipt by
the Trustee of:

(a) A Resolution requesting such payment; and

(b) The documents specified in paragraphs 2, 5, 6 and 7 of subdivision
(B) of Section 3 of Article IV of the Original Indenture, with such
modifications, additions and omissions as may be appropriate in the light of the
purposes for which they are used.

ARTICLE III.
Covenants of the Company.

SECTION 1. The Company hereby covenants and agrees with the Trustee,
for the benefit of the Trustee and all the present and future holders of the
Bonds, that the Company will pay the principal of, and premium, if any, and
interest on, all bonds issued or to be issued as aforesaid under and secured by
the Original Indenture as hereby supplemented, as well as all bonds which may be
hereafter issued in exchange or substitution therefor, and will perform and
fulfill all of the terms, covenants and conditions of the Original Indenture and
of this Fortieth Supplemental Indenture with respect to the additional bonds to
be issued under the Original Indenture as hereby supplemented.

SECTION 2. The Company covenants and agrees that so long as any of the
Bonds are outstanding (a) the Company will not make any Stock Payment if, after
giving effect thereto, its retained earnings, computed in accordance with
generally accepted accounting principles consistently applied, will be less than
the sum of (i) Excluded Earnings, if any, since December 31, 2004, and (ii)
$20,000,000; (b) Stock Payments made more than 40 days after the commencement,
and prior to the expiration, of any Restricted Period shall not exceed 65% of
the Company's Net Income during such Restricted Period; and (c) the Company will
not authorize a Stock Payment if there has occurred and is continuing an event
of default under subsections (a) and (b) of Section 1 of Article XI of the
Original Indenture.

19

For the purposes of this Section 2 the following terms shall have the
following meanings:

"Capitalization" shall mean the sum of (i) the aggregate principal
amount of all Debt at the time outstanding, (ii) the aggregate par or stated
value of all capital stock of the Company of all classes at the time
outstanding, (iii) premium on capital stock, (iv) capital surplus, and (v)
retained earnings.

"Debt" means (i) all indebtedness, whether or not represented by bonds,
debentures, notes or other securities, for the repayment of money borrowed, (ii)
all deferred indebtedness for the payment of the purchase price of property or
assets purchased (but Debt shall not be deemed to include customer advances for
construction or any bonds issued under the Indenture which are not Outstanding
Bonds), (iii) leases which have been or, in accordance with generally accepted
accounting principles, should be recorded as capital leases and (iv) guarantees
of the obligations of another of the nature described in clauses (i), (ii) or
(iii) which have been or, in accordance with generally accepted accounting
principles, should be recorded as debt.

"Determination Date" shall mean the last day of each calendar quarter.
Any calculation with respect to any Determination Date shall be based on the
Company's balance sheet as of such date.

"Excluded Earnings" shall mean 35% of the Company's Net Income during
any Restricted Period.

"Net Income" for any particular Restricted Period shall mean the amount
of net income properly attributable to the conduct of the business of the
Company for such period, as determined in accordance with generally accepted
accounting principles consistently applied, after payment of or provision for
taxes on income for such period.

"Outstanding Bonds" shall mean bonds which are outstanding within the
meaning indicated in Section 20 of Article I of the Original Indenture except
that, in addition to the bonds referred to in clauses (a), (b) and (c) of said
Section 20, said term shall not include bonds for the retirement of which
sufficient funds have been deposited with the Trustee with irrevocable
instructions to apply such funds to the retirement of such bonds at a specified
time, which may be either the maturity thereof or a specified redemption date,
whether or not notice of redemption shall have been given.

"Restricted Period" shall mean a period commencing on any Determination
Date on which the total Debt of the Company is, or as the result of any Stock
Payment then declared or set aside and to be made thereafter will be, more than
70% of Capitalization, and continuing until the third consecutive Determination
Date on which the total Debt of the Company does not exceed 70% of
Capitalization.

20

"Stock Payment" shall mean any payment in cash or property (other than
stock of the Company) to any holder of shares of any class of capital stock of
the Company as such holder, whether by dividend or upon the purchase,
redemption, conversion or other acquisition of such shares, or otherwise.

SECTION 3. The Company covenants and agrees that so long as any of the
Bonds are outstanding, neither the Company nor any subsidiary of the Company
will, directly or indirectly, lend or in any manner extend its credit to, or
indemnify, or make any donation or capital contribution to, or purchase any
security of, any corporation which directly or indirectly controls the Company,
or any subsidiary or affiliate (other than an affiliate which is a subsidiary of
the Company) of any such corporation.

ARTICLE IV.
The Trustee.

SECTION 1. The Trustee hereby accepts the trust hereby declared and
provided, and agrees to perform the same upon the terms and conditions in the
Original Indenture, as supplemented by this Fortieth Supplemental Indenture.

SECTION 2. Subject to the provisions of Article XIII of the Original
Indenture, the Trustee may execute any of the trusts or powers hereof and
perform any of its duties by or through and consult with attorneys, agents,
officers or employees selected by the Trustee in its sole discretion. The
Trustee shall be entitled to advice of counsel concerning all matters of trusts
hereof and the duties hereunder and may in all cases pay such reasonable
compensation to all such attorneys, agents, officers and employees as may
reasonably be employed in connection with the trusts hereof. The Trustee may act
or refrain from acting and rely upon and be free from all liability for so
relying upon the opinion or advice of any attorney (who may be the attorney or
attorneys for the Company). The Trustee may act and rely on written opinions of
experts employed by the Trustee and such advice shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by the Trustee hereunder in good faith and in reliance thereon. The Trustee
shall not be responsible for any loss or damage resulting from any action or
non-action in good faith taken in reliance upon such opinion or advice. The
Trustee shall not be bound to confirm, verify or make any investigation into the
facts or matters stated in any financial or other statements, resolution,
certificate, statement, instrument, opinion, report, notice, request, direction,
consent, order or other paper or document furnished pursuant to the terms
hereof.

SECTION 3. Before the Trustee shall be required to foreclose on, or to
take control or possession of, the real property or leasehold interest (the
"Premises") which may be the subject of any mortgage or mortgages for which the
Trustee is mortgagee in connection with the issuance of the Bonds, the Trustee
shall be indemnified and held harmless by the holders and/or beneficial owners
of the Bonds from and against any and all expense, loss, or liability that may
be suffered by the Trustee in connection with any spill, leak or release which
may have occurred on or invaded the Premises or any contamination by any
Hazardous Substance (hereinafter defined), whether caused by the Company or any
other person or entity, including, but not limited to, (1) any and all
reasonable expenses that the Trustee may incur in complying with any of the
Environmental Statutes (hereinafter defined), (2) any and all reasonable costs
that 

21

the Trustee may incur in studying or remedying any spill, leak or release which
may have occurred on or invaded the Premises or any contamination, (3) any and
all fines or penalties assessed upon the Trustee by reason of such
contamination, (4) any and all loss of value of the Premises or the improvements
thereon by reason of such contamination, and (5) any and all legal fees and
costs reasonably incurred by the Trustee in connection with any of the
foregoing. As used in this Section, contamination by any Hazardous Substance
shall include contamination, arising from the presence, creation, production,
collection, treatment, disposal, discharge, release, storage, transport or
transfer of any Hazardous Substance at or from the Premises or any improvements
thereon. As used in this Section, the term "Hazardous Substance" shall mean
petroleum hydrocarbons or any substance which (a) constitutes a hazardous waste
or substance under any applicable federal, state or local law, rule, order or
regulation now or hereafter adopted; (b) constitutes a "hazardous substance" as
such term is defined under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended (42 U.S.C. ss.9601 et seq.) and the
regulations issued thereunder and any comparable state or local law or
regulation; (c) constitutes a "hazardous waste" under the Resource Conservation
and Recovery Act, (42 U.S.C. ss.6991) and the regulations issued thereunder and
any comparable state or local law or regulation; (d) constitutes a pollutant,
contaminant, chemical or industrial, toxic or hazardous substance or waste as
such terms are defined under Federal Clean Water Act, as amended (33 U.S.C.
ss.1251 et seq.), the Toxic Substances Control Act, as amended (15 U.S.C.
ss.2601 et seq.), or any comparable state or local laws or regulations; (e)
exhibits any of the characteristics enumerated in 40 C.F.R. Sections 261.20 -
261.24, inclusive; (f) those extremely hazardous substances listed in Section
302 of the Superfund Amendments and Reauthorization Act of 1986 (Public Law
99-499, 100 Stat. 1613) which are present in threshold planning or reportable
quantities as defined under such act; (g) toxic or hazardous chemical substances
which are present in quantities which exceed exposure standards as those terms
are defined under Sections 6 and 8 of the Occupational Safety and Health Act, as
amended (29 U.S.C. ss.ss.655 and 657 and 29 C.F.R. Part 1910, subpart 2); and
(h) any asbestos, petroleum-based products or any Hazardous Substance contained
within or release from any underground or aboveground storage tanks. As used in
this Section, the term "Environmental Statutes" shall mean the statutes, laws,
rules, orders and regulations referred to in (a) through (g) inclusive in the
preceding sentence.

ARTICLE V.
Miscellaneous.

SECTION 1. This instrument is executed and shall be construed as an
indenture supplemental to the Original Indenture, and shall form a part thereof,
and except as hereby supplemented, the Original Indenture and the First, Second,
Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, Twelfth,
Thirteenth, Fourteenth, Fifteenth, Sixteenth, Seventeenth, Eighteenth,
Nineteenth, Twentieth, Twenty-First, Twenty-Second, Twenty-Third, Twenty-Fourth,
Twenty-Fifth, Twenty-Sixth, Twenty-Seventh, Twenty-Eighth, Twenty-Ninth,
Thirtieth, Thirty-First, Thirty-Second, Thirty-Third, Thirty-Fourth,
Thirty-Fifth, Thirty-Sixth, Thirty-Seventh, Thirty-Eighth and Thirty-Ninth
Supplemental Indentures are hereby confirmed. All references in this Fortieth
Supplemental Indenture to the Original Indenture shall be deemed to refer to the
Original Indenture as heretofore amended and supplemented, and all terms used
herein and not specifically defined herein shall be taken to have the same
meaning as in the Original Indenture, as so amended, except in the cases where
the context clearly indicates otherwise.

22

SECTION 2. Any notices to the Trustee under this Fortieth Supplemental
Indenture shall be delivered to the Trustee by registered or certified mail,
hand delivery or other courier or express delivery service (with receipt
confirmed) or by telecopy (with receipt confirmed) at the following address:

J.P. Morgan Trust Company, National Association 
Worldwide Securities Services
c/o JPMorgan Chase Bank, N.A. 
4 NY Plaza 
New York, New York 10004 
Attention: Aqua Pennsylvania, Inc. Administrator 
Telecopy: (212) 623-6205

Any change in such address or telecopy number may be made by notice to the
Company delivered in the manner set forth above.

SECTION 3. All recitals in this Fortieth Supplemental Indenture are
made by the Company only and not by the Trustee; and all of the provisions
contained in the Original Indenture in respect of the rights, privileges,
immunities, powers and duties of the Trustee shall be applicable in respect
hereof as fully and with like effect as if set forth herein in full.

SECTION 4. Although this Fortieth Supplemental Indenture is dated as of
December 15, 2005 for convenience and for the purpose of reference, the actual
date or dates of execution hereof by the Company and the Trustee are as
indicated by their respective acknowledgments annexed hereto.

SECTION 5. In order to facilitate the recording or filing of this
Fortieth Supplemental Indenture, the same may be simultaneously executed in
several counterparts, each of which shall be deemed to be an original and such
counterparts shall together constitute but one and the same instrument.

SECTION 6. This Fortieth Supplemental Indenture shall become effective
for the incurrence of debt upon delivery to the Trustee by the Company of the
certificates required by Articles IV, VI and VII of the Original Indenture,
which shall occur concurrently with or prior to the authentication of the 5.00%
Series due 2035. This Fortieth Supplemental Indenture is effective to evidence
the Trustee's lien on the property described herein immediately upon execution.

23

IN WITNESS WHEREOF the parties hereto have caused their corporate seals
to be hereunto affixed and their authorized officers have hereto affixed their
signatures, and their authorized officers have duly attested the execution
hereof, this ___ day of December , 2005.

[CORPORATE SEAL]                          AQUA PENNSYLVANIA, INC.,
as successor by merger to
Philadelphia Suburban Water Company

Attest:   /s/  Roy H. Stahl               By:   /s/  Kathy L. Pape
--------------------------            -------------------------------
Vice President and Treasurer

[CORPORATE SEAL]                          J.P. MORGAN TRUST COMPANY,
NATIONAL ASSOCIATION,
As Trustee

Attest:   /s/  Beth Ann MacDonald         By:   /s/  Catherine Duffy
--------------------------            -------------------------------
Authorized Officer                    Authorized Signatory

24

EXHIBIT A
AQUA PENN SYLVANIA, INC.
SCHEDULE OF FIRST MORTGAGE BONDS AS OF DECEMBER 15, 2005

Interest      Issue      Maturity     Original     Balance (incl. CP)
Division        Structure       Rate         Date        Date        Amount          @  12/15/05
--------        ---------     --------      -----      --------    ----------   -------------------

Aqua Pa         Tax Exempt      5.35%      11/01/01    10/01/31    30,000,000          30,000,000
Aqua Pa         Tax Exempt      5.55%      06/01/02    09/01/32    25,000,000          25,000,000
Shenango        Tax Exempt      6.00%      10/01/99    06/01/29    25,000,000          25,000,000
Aqua Pa         Tax Exempt      6.00%      06/28/00    07/01/30    18,360,000          18,360,000
Roaring Creek   Tax Exempt      5.05%      11/30/04    10/01/39    14,000,000          14,000,000
Aqua Pa         Tax Exempt      3.75%      12/31/02    06/01/10     3,200,000           2,000,000
Aqua Pa         Tax Exempt      5.15%      06/26/02    09/01/32    25,000,000          25,000,000
Aqua Pa         Tax Exempt      5.00%      05/19/05    11/01/36    21,770,000          21,770,000
Aqua Pa         Tax Exempt      5.00%      05/19/05    11/01/37    24,165,000          24,165,000
Aqua Pa         Tax Exempt      5.00%      05/19/05    11/01/38    25,375,000          25,375,000
-----------         -----------
211,870,000         210,670,000
-----------         -----------
Aqua Pa          Taxable        5.93%      06/26/02    07/01/12    25,000,000          25,000,000
Aqua Pa          Taxable        6.14%      01/15/98    02/01/08    10,000,000          10,000,000
Aqua Pa          Taxable        6.21%      10/25/01    11/01/11    15,000,000          15,000,000
Aqua Pa          Taxable        6.75%      07/15/97    08/15/07    10,000,000          10,000,000
Aqua Pa          Taxable        6.89%      12/19/95    12/15/15    12,000,000          12,000,000
Aqua Pa          Taxable        6.99%      04/12/96    04/15/06    10,000,000          10,000,000
Aqua Pa          Taxable        7.15%      04/23/93    04/01/08    22,000,000           6,000,000
Aqua Pa          Taxable        7.72%      05/19/95    05/15/25    15,000,000          15,000,000
Shenango         Taxable        8.14%      11/01/95    11/01/25     4,000,000           4,000,000
Susquehanna      Taxable        8.26%      11/01/92    11/01/22     1,500,000           1,500,000
Shenango         Taxable        8.32%      11/01/92    11/01/22     3,500,000           3,500,000
Aqua Pa          Taxable        9.12%      01/12/90    01/15/10    20,000,000          20,000,000
Aqua Pa          Taxable        9.17%      11/01/91    09/15/21     8,000,000           6,400,000
Aqua Pa          Taxable        9.17%      11/01/91    09/15/11     5,000,000           5,000,000
Shenango         Taxable        9.22%      11/15/89    11/15/19     3,500,000           2,212,640
Aqua Pa          Taxable        9.29%      11/01/91    09/15/26    12,000,000          12,000,000
Shenango         Taxable        9.50%      09/12/86    09/12/06     3,000,000             960,000
Roaring Creek    Taxable        9.53%      12/15/89    12/15/19     4,000,000           4,000,000
Aqua Pa          Taxable        9.89%      06/01/88    06/01/08     5,000,000           5,000,000
Aqua Pa          Taxable        9.93%      06/01/88    06/01/13     5,000,000           5,000,000
Aqua Pa          Taxable        9.97%      06/01/88    06/01/18     5,000,000           5,000,000
Aqua Pa          Taxable        2.65%      05/10/04    05/15/06     5,000,000           5,000,000
Aqua Pa          Taxable       3.461%      05/10/04    05/15/07    12,000,000          12,000,000
Aqua Pa          Taxable        5.08%      05/10/04    05/15/15    20,000,000          20,000,000
Aqua Pa          Taxable        5.17%      05/10/04    05/10/17     7,000,000           7,000,000
Aqua Pa          Taxable       5.751%      05/10/04    05/15/19    15,000,000          15,000,000
Aqua Pa          Taxable       5.751%      05/10/04    05/15/19     5,000,000           5,000,000
Aqua Pa          Taxable        6.06%      05/10/04    05/10/27    15,000,000          15,000,000
Aqua Pa          Taxable        6.06%      05/10/04    05/15/27     5,000,000           5,000,000
Aqua Pa          Taxable        5.98%      05/10/04    05/15/28     3,000,000           3,000,000
-----------         -----------
285,500,000         264,572,640
-----------         -----------
TOTAL FIRST MORTGAGE BONDS                          497,370,000         475,242,640
===========         ===========

EXHIBIT B
RECORDING INFORMATION

BUCKS, CHESTER, DELAWARE AND MONTGOMERY COUNTIES

============================ ============= ========================== =============================== 
Bucks                       Chester              
---------------------------- ------------- -------------------------- ------------------------------- 
Date of                                                                
Indenture            Recording     Book          Page             Book            Page       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 

Original                       2/20/41       496           1           H-13.Vol.307         20        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
First Supplemental             8/26/48       632           1           F-16.Vol.380         200       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Second Supplemental             7/1/52       768          438           18.Vol.425          186       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Third Supplemental             11/25/53      895           1            18.Vol.442          325       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Fourth Supplemental             1/9/56      1089          155          Z-20.Vol.499          1        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Fifth Supplemental             3/20/57      1181          316          B-22.Vol.536         601       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Sixth Supplemental              5/9/58      1254           1               G-23             201       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Seventh Supplemental           9/25/59      1332          509              B-25             109       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Eighth Supplemental             5/9/61        -            -               Z-26             17        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Eighth Supplemental            5/10/61      1409          225                -               -        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Ninth Supplemental             4/10/62      1458          372              G-28             126       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Tenth Supplemental             3/19/64      1568           1               M-30             967       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Eleventh Supplemental          11/4/66      1655          695              Q-32            6682       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twelfth Supplemental           1/23/68      1691          531              N-33             219       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirteenth Supplemental         7/2/70      1763          1167             D-35             80        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Fourteenth Supplemental        11/5/70      1774          331              K-35             713       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Fifteenth Supplemental         12/11/72     1869          196              O-37             998       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Sixteenth Supplemental         5/28/75      1979           14              E-44             77        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Seventeenth Supplemental       12/18/77     2072          683              L-51              1        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 

[RESTUBBED] 

============================ ============= =============================== =============================
Delaware                      Montgomery
---------------------------- ------------- ------------------------------- -----------------------------
Date of                                                            
Indenture            Recording       Book            Page            Book           Page
---------------------------- ------------- ------------ ------------------ ------------ ----------------

Original                       2/20/41        1034              1             1625             1
---------------------------- ------------- ------------ ------------------ ------------ ----------------
First Supplemental             8/26/48        1668             169            2031            257
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Second Supplemental             7/1/52        1962             376            2360            517
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Third Supplemental             11/25/53       2052              1             2493             1
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Fourth Supplemental             1/9/56        2199              1             2722            425
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Fifth Supplemental             3/20/57        2294             50             2850            335
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Sixth Supplemental              5/9/58        2380             039            2952            289
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Seventh Supplemental           9/25/59        2442              1             3090            249
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Eighth Supplemental             5/9/61        2526             312              -              -
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Eighth Supplemental            5/10/61          -               -             3249            289
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Ninth Supplemental             4/10/62        2581             463            3307            169
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Tenth Supplemental             3/19/64        2976            1043            3310            237
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Eleventh Supplemental          11/4/66         762             223            3549            129
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twelfth Supplemental           1/23/68        2792             708            3542            315
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirteenth Supplemental         7/2/70        2850             301            3687            23
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Fourteenth Supplemental        11/5/70        2858            3113             700            548
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Fifteenth Supplemental         12/11/72       2926             550            3786            96
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Sixteenth Supplemental         5/28/75        3005             511            4010            307
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Seventeenth Supplemental       12/18/77       3072             43             5002            436
---------------------------- ------------- ------------ ------------------ ------------ ----------------

B-1

============================ ============= ========================== =============================== 
Bucks                       Chester              
---------------------------- ------------- -------------------------- ------------------------------- 
Date of                                                               
Indenture            Recording       Book            Page            Book           Page
---------------------------- ------------- -------- ----------------- ---------------- -------------- 

Eighteenth Supplemental        4/29/77      2082          567              B-52             344       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Nineteenth Supplemental        6/23/80      2303          714              J-62             92        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twentieth Supplemental          8/2/83      2487          370              D-72              1        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-First Supplemental      8/27/85      2690          806               54              550       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-First Supplemental      8/28/85        -            -                 -               -        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Second Supplemental     4/22/86      2774          160               263             275       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Third Supplemental       4/1/87      2960          693                -               -        
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Third Supplemental       4/2/87        -            -                680             337       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Fourth Supplemental     7/25/88      3199          1095             1224             389       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Fifth Supplemental      1/12/90      0136          0250             1848             205       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Sixth Supplemental      11/8/91       369          2190             2660             205       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Seventh Supplemental    6/29/92      0487          1829             3055             182       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Eighth Supplemental     4/22/93      0652          1335             3542            1542       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Twenty-Ninth Supplemental      3/30/95      1045          1872             3875            1368       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirtieth Supplemental         8/30/95      1111          0798             3932            0471       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-First Supplemental      7/11/97      1421          2196             4201            2133       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-Second Supplemental     10/6/99      1939          421              4646             642       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-Third Supplemental      11/30/99     1970          1573             4675            1272       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 

[RESTUBBED]

============================ ============= =============================== =============================
Delaware                      Montgomery
---------------------------- ------------- ------------------------------- -----------------------------
Date of                                                               
Indenture            Recording       Book            Page            Book           Page
---------------------------- ------------- ------------ ------------------ ------------ ----------------

Eighteenth Supplemental        4/29/77        3078             728            5003            291
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Nineteenth Supplemental        6/23/80        3261             293            5030            502
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twentieth Supplemental          8/2/83         96              810            5662           1045
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-First Supplemental      8/27/85          -               -             5864           1347
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-First Supplemental      8/28/85         264             159              -              -
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Second Supplemental     4/22/86         326             592            5944            360
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Third Supplemental       4/1/87          -               -               -              -
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Third Supplemental       4/2/87         447            1807            6115            602
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Fourth Supplemental     7/25/88        0593            0585            6324            143
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Fifth Supplemental      1/12/90         731            1571            6538            376
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Sixth Supplemental      11/8/91         894            2241            6780            891
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Seventh Supplemental    6/29/92        0969            2023            6918            302
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Eighth Supplemental     4/22/93        1081            0852            7112           0539
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Twenty-Ninth Supplemental      3/30/95        1349            0829            7561           1155
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirtieth Supplemental         8/30/95        1393            2255            7631           0689
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-First Supplemental      7/11/97        1607             138            7968            779
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-Second Supplemental     10/6/99        1936            1207            8548           1067
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-Third Supplemental      11/30/99       1936            1207            8548           1067
---------------------------- ------------- ------------ ------------------ ------------ ----------------

B-2

============================ ============= ========================== =============================== 
Bucks                       Chester              
---------------------------- ------------- -------------------------- ------------------------------- 
Date of      
Indenture            Recording     Book          Page             Book            Page       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 

Thirty-Fourth Supplemental     10/31/01     2471          1207             5101            2142       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-Fifth Supplemental      1/10/02      2541          765              5152             818       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-Sixth Supplemental       6/5/02      2731          1881             5296             356       
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-Seventh Supplemental    12/27/02     3036          1425           12/31/02          1552       
B-5514                      
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-Eighth Supplemental     11/9/04      4196          1557           11/23/04           800       
B-6342                      
---------------------------- ------------- -------- ----------------- ---------------- -------------- 
Thirty-Ninth Supplemental      5/18/05      4441          1471            5/19/05          1375       
#2005066104          6496          #10534807    
============================ ============= ======== ================= ================ ============== 

[RESTUBBED]

============================ ============= =============================== =============================
Delaware                      Montgomery
---------------------------- ------------- ------------------------------- -----------------------------
Date of     
Indenture            Recording       Book            Page            Book           Page
---------------------------- ------------- ------------ ------------------ ------------ ----------------

Thirty-Fourth Supplemental     10/31/01       2288            0174            9225            761
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-Fifth Supplemental      1/10/02        2329            1019            9314           1079
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-Sixth Supplemental       6/5/02        2448            1862            9593           1416
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-Seventh Supplemental    12/27/02     12/31/02          0294          12/30/02         0204
02631                           10018
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-Eighth Supplemental     11/9/04      11/22/04          1698          11/22/04         0237
B-3348                          B-00020
---------------------------- ------------- ------------ ------------------ ------------ ----------------
Thirty-Ninth Supplemental      5/18/05        03487           0939            0020           0688
32005044507                    2005069126
============================ ============= ============ ================== ============ ================

BERKS COUNTY

=========================== ==================== ========= ==========
Indenture              Date of Recording     Book      Page
--------------------------- -------------------- --------- ----------
Original                          8/16/99          3113       707
--------------------------- -------------------- --------- ----------
Thirty-Second Supplemental        10/6/99          3132      1510
--------------------------- -------------------- --------- ----------
Thirty-Third Supplemental        11/30/99          3149      1260
--------------------------- -------------------- --------- ----------
Thirty-Fourth Supplemental       10/31/01          3421       896
--------------------------- -------------------- --------- ----------
Thirty-Fifth Supplemental         1/10/02          3461       417
--------------------------- -------------------- --------- ----------
Thirty-Sixth Supplemental         6/4/02           3544      1357
--------------------------- -------------------- --------- ----------
Thirty-Seventh Supplemental      12/30/02          3664      0001
--------------------------- -------------------- --------- ----------
Thirty-Eighth Supplemental       11/30/04          4197       988
--------------------------- -------------------- --------- ----------
Thirty-Ninth Supplemental         5/18/05         04583      1017
=========================== ==================== ========= ==========

B-3

BRADFORD, COLUMBIA, LAWRENCE, MERCER, NORTHUMBERLAND, PIKE, SCHUYLKILL AND 
WAYNE COUNTIES

================== ========================= ========================= ================================= =========================
BRADFORD                  COLUMBIA                      LAWRENCE                       MERCER
------------------ ------------------------- ------------------------- --------------------------------- -------------------------
Date of    Instrument     Date of    Instrument     Date of                         Date of      Instrument
Indenture       Recording       No.       Recording       No.       Recording    Book      Page      Recording       No.
------------------ ------------ ------------ ------------ ------------ ------------ ------- ------------ ----------- -------------

Thirty-Fifth        12/21/01     200115497                                           1688       744
Supplemental
------------------ ------------ ------------ ------------ ------------ ------------ ------- ------------ ----------- -------------
Thirty-Sixth        07/04/02     200207151
Supplemental
------------------ ------------ ------------ ------------ ------------ ------------ ------- ------------ ----------- -------------
Thirty-Seventh      12/30/02     200216472
Supplemental
------------------ ------------ ------------ ------------ ------------ ------------ ------- ------------ ----------- -------------
Thirty-Eighth       11/22/04     200415112    11/30/04     200413567    11/24/04     1992      0291       11/24/04    2004020435
Supplemental
------------------ ------------ ------------ ------------ ------------ ------------ ------- ------------ ----------- -------------
Thirty-Ninth         5/16/05     200504827     5/18/05     200505042    5/16/2005    2032       200       5/13/05     2005-7340
Supplemental                                                                                  #005488
================== ============ ============ ============ ============ ============ ======= ============ =========== =============

================== ======================================= ===================================== 
NORTHUMBERLAND                              PIKE                  
------------------ --------------------------------------- ------------------------------------- 
Date of                                 Date of                               
Indenture        Rec.         Book          Page         Rec.      Book          Page        
------------------ ---------- ------------- -------------- ---------- -------- ----------------- 

Thirty-Fifth                      1404           246                   1909          2328        
Supplemental
------------------ ---------- ------------- -------------- ---------- -------- ----------------- 
Thirty-Sixth                      1445           028                                             
Supplemental
------------------ ---------- ------------- -------------- ---------- -------- ----------------- 
Thirty-Seventh     12/30/02       1500           911       12/30/02    1959          2447        
Supplemental
------------------ ---------- ------------- -------------- ---------- -------- ----------------- 
Thirty-Eighth      11/22/04       1714           748       11/23/04    2081          1757        
Supplemental
------------------ ---------- ------------- -------------- ---------- -------- ----------------- 
Thirty-Ninth        5/18/05       1761           50         5/17/05    2109          2201        
Supplemental                                 #200509076                         #200500008491    
================== ========== ============= ============== ========== ======== ================= 

[RESTUBBED]

================== ===================================== =====================================
SCHUYLKILL                              WAYNE
------------------ ------------------------------------- -------------------------------------
Date of                               Date of                          
Indenture        Rec.       Book          Page           Rec.     Book          Page
------------------ ---------- --------- ---------------- ----------- -------- ----------------

Thirty-Fifth                    1413           1                      1911           1
Supplemental
------------------ ---------- --------- ---------------- ----------- -------- ----------------
Thirty-Sixth                    1584         0259
Supplemental
------------------ ---------- --------- ---------------- ----------- -------- ----------------
Thirty-Seventh     12/27/02     2022         1006         12/30/02    2136          148
Supplemental
------------------ ---------- --------- ---------------- ----------- -------- ----------------
Thirty-Eighth      11/24/04     2126          569         11/23/04    2658          252
Supplemental
------------------ ---------- --------- ---------------- ----------- -------- ----------------
Thirty-Ninth        5/18/05     2150       1871-1919      5/16/05    Vol.            1
Supplemental                             #200500010263                2769     #200500004960
================== ========== ========= ================ =========== ======== ================

B-4

ADAMS, CARBON, CUMBERLAND, FOREST, JUNIATA, LACKAWANNA, LUZERNE, MONROE,
NORTHAMPTION, SNYDER, SUSQUEHANNA AND WYOMING COUNTIES

================== =========================== ======================================= 
ADAMS                             CARBON                  
------------------ --------------------------- --------------------------------------- 
Date of                     Date of                                 
Indenture            Rec.      Book     Page     Rec.         Book          Page       
------------------ ---------- -------- ------- ---------- ------------- -------------- 

Thirty-Eighth      11/23/04    3781      1     11/30/04    200416309                   
Supplemental
------------------ ---------- -------- ------- ---------- ------------- -------------- 
Thirty-Ninth        5/19/05    3970      54     5/18/05       1330           689       
Supplement                                                               #200505926    
================== ========== ======== ======= ========== ============= ============== 

[RESTUBBED]

================== ================================= ============================
CUMBERLAND                       FOREST
------------------ --------------------------------- ----------------------------
Date of                             Date of                   
Indenture            Rec.         Book        Page      Rec.       Book    Page
------------------ ---------- -------------- ------- ------------ -------- ------

Thirty-Eighth      11/22/04    2004047145             11/29/04      231     306
Supplemental
------------------ ---------- -------------- ------- ------------ -------- ------
Thirty-Ninth        5/13/05       1907        0247     5/16/05      234     345
Supplement                                                                 #478
================== ========== ============== ======= ============ ======== ======

================== ================================== ================================= 
JUNIATA                          LACKAWANNA             
------------------ ---------------------------------- --------------------------------- 
Date of                              Date of                         
Indenture            Rec.      Book        Page          Rec.          Book      Page   
------------------ ---------- -------- -------------- ------------ ------------- ------ 

Thirty-Eighth      11/22/04     345        1047        11/29/04     #200441665          
Supplemental
------------------ ---------- -------- -------------- ------------ ------------- ------ 
Thirty-Ninth        5/13/05     354        0049         5/16/05     #200512642          
Supplemental                            #2005-1512                                      
================== ========== ======== ============== ============ ============= ====== 

[RESTUBBED]

================== =================================== ====================================
LUZERNE                              MONROE
------------------ ----------------------------------- ------------------------------------
Date of                             Date of                      
Indenture             Rec.        Book       Page       Recording    Book        Page
------------------ ------------ --------- ------------ ------------ -------- --------------

Thirty-Eighth       11/23/04      3004      294775      11/24/04     2208        7674
Supplemental
------------------ ------------ --------- ------------ ------------ -------- --------------
Thirty-Ninth         5/17/05      3005      117727       5/18/05     2225        8444
Supplemental                               #5637329                           #200521128
================== ============ ========= ============ ============ ======== ==============

================== ================================== ================================ 
NORTHAMPTON                         SNYDER               
------------------ ---------------------------------- -------------------------------- 
Date of                            Date of                          
Indenture            Rec.      Book        Page         Rec.     Book        Page      
------------------ --------- --------- -------------- --------- -------- ------------- 

Thirty-Eighth      11/22/04   2004-1      452932      11/24/04    631        0001      
Supplemental
------------------ --------- --------- -------------- --------- -------- ------------- 
Thirty-Ninth       5/17/05    2005-1      182906      5/17/05     650        135       
Supplemental                            #2005026917                      #2005028880
================== ========= ========= ============== ========= ======== ============= 

[RESTUBBED]

================== =============================== ==============================
SUSQUEHANNA                       WYOMING
------------------ ------------------------------- ------------------------------
Date of                         Date of                       
Indenture            Rec.        Book       Page     Rec.      Book      Page
------------------ ---------- ------------ ------- ---------- -------- ----------

Thirty-Eighth      11/24/04    200411624           11/24/04    0513      0774
Supplemental
------------------ ---------- ------------ ------- ---------- -------- ----------
Thirty-Ninth        5/16/05   #200504384            5/18/05    0522      1289
Supplemental       
================== ========== ============ ======= ========== ======== ==========

B-5

EXHIBIT C

Company's    
County and          Real Estate                                           Recorded      Tax Parcel 
Grantor             Index No.         Date of Deed           Book           Page        I.D. Number
-------             ---------         ------------           ----         ---------     -----------

NONE

C-1

J.P. Morgan Trust Company National Association, Mortgagee and Trustee named in
the foregoing Fortieth Supplemental Indenture, hereby certifies that its precise
name and the post office address of its Worldwide Securities Services Group in
New York, New York, Pennsylvania are as follows:

J.P. Morgan Trust Company, National Association
Worldwide Securities Services Group 
c/o JPMorgan Chase Bank, N.A. 
4 NY Plaza 
New York, New York 10004 
Attention: Aqua Pennsylvania, Inc. 
Administrator 
Telecopy: (212) 623-6205

J.P. MORGAN TRUST COMPANY, 
NATIONAL ASSOCIATION

By:  /s/ Catherine Duffy
------------------------
Authorized Signatory

COMMONWEALTH OF PENNSYLVANIA

COUNTY OF MONTGOMERY

On the 21st day of December, 2005, before me, the Subscriber, a
Notary Public for the Commonwealth of Pennsylvania, personally appeared Kathy L.
Pape, who acknowledged herself to be the Vice President and Treasurer of Aqua
Pennsylvania, Inc., a corporation, and that she as such Vice President and
Treasurer, being authorized to do so, executed the foregoing Fortieth
Supplemental Indenture as and for the act and deed of said corporation and for
the uses and purposes therein mentioned, by signing the name of the corporation
by herself as such officer.

In Witness Whereof I hereunto set my hand and official seal.

[NOTARIAL SEAL]

/s/  Maria Gordiany
-------------------------

COMMONWEALTH OF PENNSYLVANIA

COUNTY OF PHILADELPHIA

On the 21st day of December, 2005 before me, the Subscriber, a
Notary Public for the Commonwealth of Pennsylvania, personally appeared
CatherineDuffy, who acknowledged herself to be an authorized signatory of J.P.
Morgan Trust Company, National Association, Trustee, a national banking
association, and that she as such authorized signatory, being authorized to do
so, executed the foregoing Fortieth Supplemental Indenture as and for the act
and deed of said national banking association and for the uses and purposes
therein mentioned by signing the name of said national banking association by
herself as such officer.

In Witness Whereof I hereunto set my hand and official seal.

[NOTARIAL SEAL]

/s/  John Sohier
-------------------------

EXHIBIT 10.30

AQUA AMERICA, INC.
AND SUBSIDIARIES
2006 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
2006 Management Incentive Program will cover officers, managers and
certain key employees of Aqua America, Inc., and its subsidiaries.

o        All incentive awards under the Plan shall be paid by March 15 of the
calendar year following the calendar year in which such awards are
earned, or as soon as administratively practicable thereafter.

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 (financial
factor, thresholds and weighting by applicable business unit)
for each participant will be established by the Chairman of
the Company and, for the senior executives of the Company,
approved individually by the Executive Compensation and
Employee Benefits 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 2006,
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 70 percent
depending on duties and responsibilities. The Executive
Compensation and Employee Benefits Committee will approve the
Target Bonus Percentage for the CEO and the senior executives
designated by the Committee each year.

--       For each company, the Target Bonus Percentage for each
participant within that company will be applied to their base
salary.

--       Actual bonuses may range from 0, if the company's financial
results falls 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, prior to the end of the Company's fiscal year
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                          $70,000
Target Bonus                        10 percent ($7,000)
Company Rating                     100 percent
Individual Rating                   90 percent

Calculation:

Individual      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 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 10.37

BOND PURCHASE AGREEMENT

$24,675,000
DELAWARE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY

WATER FACILITIES REVENUE BONDS
(AQUA PENNSYLVANIA INC. PROJECT)
SERIES C OF 2005

Bond Purchase Agreement dated December 21, 2005, among the DELAWARE
COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY (the "Authority"), AQUA PENNSYLVANIA,
INC., a Pennsylvania corporation (the "Company"), and SOVEREIGN SECURITIES
CORPORATION, LLC, a Pennsylvania limited liability company (the "Underwriter").

1. BACKGROUND.

(a) The Authority proposes to enter into a Financing Agreement (the
"Financing Agreement") dated as of December 15, 2005 with the Company, under
which the Authority will agree to loan to the Company funds to (i) finance
certain capital costs of numerous acquisitions, constructions, modifications,
expansions, installations and replacements of water distribution, treatment and
related operating systems located in the counties of Chester, Delaware and
Montgomery in Pennsylvania (the "Facilities") that are part of the Company's
system (the "System") for the distribution of water to its customers, and (ii)
pay related financing costs (collectively, the "Project"). To finance the loan
under the Financing Agreement, the Authority proposes to issue and sell
$24,675,000 aggregate principal amount of Delaware County Industrial Development
Authority Water Facilities Revenue Bonds (Aqua Pennsylvania, Inc. Project),
Series C of 2005 (the "Bonds") to the Underwriter, who will in turn reoffer the
Bonds for sale to the public.

(b) The Bonds will be issued pursuant to the Pennsylvania Economic
Development Financing Law, Act of August 23, 1967, P.L. 251, as amended and
supplemented (the "Act"), a resolution adopted by the Authority on November 18,
2005 (the "Authority Resolution") and under a Trust Indenture dated as of
December 15, 2005 (the "Trust Indenture"), between the Authority and Wachovia
Bank, National Association, as trustee (the "Trustee"). The Bonds will have such
terms as are set forth in Schedule I attached hereto.

The Bonds will be payable out of payments by the Company under the
Financing Agreement, including payments under its First Mortgage Bond issued
with respect to the Bonds in the aggregate principal amount of $24,675,000 (the
"First Mortgage Bond"). The First Mortgage Bond will be issued under and secured
by the Company's Indenture of Mortgage dated as of January 1, 1941 (the
"Indenture of Mortgage"), from the Company to J.P. Morgan Trust Company,
National Association, as trustee (successor to The Pennsylvania Company for
Insurance on Lives and Granting Annuities, The Pennsylvania Company for Banking
and Trusts, The First Pennsylvania Banking and Trust Company, First Pennsylvania
Bank, N.A., CoreStates Bank, N.A., Mellon Bank, N.A. and Chase Manhattan Trust
Company, National Association) (the "Mortgage Trustee"), as presently amended
and supplemented and as to be further supplemented by a Fortieth Supplemental
Indenture of Mortgage to be dated as of December 15, 2005 (the "Fortieth
Supplemental Mortgage," which together with the Indenture of Mortgage, as
amended and supplemented, is referred to hereinafter as the "Mortgage"). The
First Mortgage Bond will be issued in the same principal amount and will mature
on the same date and bear interest at the same rate as the Bonds that it
secures. All of the Authority's rights under the Financing Agreement to receive
and enforce repayment of its loan to the Company and to enforce payment of the
Bonds, including all of the Authority's rights to the First Mortgage Bond, and
all of the Authority's rights to moneys and securities in the Project Funds, the
Revenue Funds and the Debt Service Funds (and the accounts within all such Funds
applicable to the Bonds) established by the Trust Indenture, except for the
Authority's rights to certain fees and reimbursements for expenses,
indemnification and notice thereunder and rights relating to amendments of and
notices under the Financing Agreement, will be assigned to the Trustee as
security for the Bonds pursuant to the Trust Indenture.

(c) The Project will finance the acquisition, construction,
installation and equipping of facilities for the furnishing of water for
purposes of Section 142(a)(4) of the Internal Revenue Code of 1986, as amended
(the "Code"), so that the interest on the Bonds will not be includable in gross
income for federal income tax purposes under the Code and the Underwriter may
offer the Bonds for sale without registration under the Securities Act of 1933,
as amended (the "1933 Act) or qualification of the Trust Indenture under the
Trust Indenture Act of 1939, as amended (the "1939 Act").

(d) A Preliminary Official Statement dated December 16, 2005, including
the Appendices thereto and all documents incorporated therein by reference (the
"Preliminary Official Statement"), has been supplied to the parties hereto, and
a final Official Statement to be dated the date hereof, including the Appendices
thereto and all documents incorporated therein by reference, prepared for use in
such offerings will be supplied to the parties hereto as soon as it is
available, subject to Section 10 hereof (such final Official Statement, as it
may be amended or supplemented with the consent of the Authority, the
Underwriter and the Company, is hereinafter referred to as the "Official
Statement").

(e) The Bonds will be insured by a bond insurance policy (the "Bond
Insurance Policy") issued by Financial Guaranty Insurance Company (the "Bond
Insurer").

2. PURCHASE, SALE AND CLOSING. On the terms and conditions herein set
forth, the Underwriter will buy from the Authority, and the Authority will sell
to the Underwriter, all (but not less than all) of the Bonds at a purchase price
equal to $24,627,624, which is equal to the $24,675,000 aggregate principal
amount of the Bonds, plus original issue premium of $322,749, less the
underwriting discount of $370,125. Payment for the Bonds shall be made in
immediately available funds to the Trustee for the account of the Authority.
Closing (the "Closing") will be at the offices of Ballard Spahr Andrews &
Ingersoll, LLP, Philadelphia, Pennsylvania, bond counsel, at 10:00 a.m., Eastern
Daylight Time, on December 28, 2005 or at such other date, time or place or in
such other manner as may be agreed on by the parties hereto. The Bonds will be
delivered as one fully registered bond in the aggregate principal amount of
$24,675,000 in the name of Cede & Co., as nominee for The Depository Trust
Company ("DTC"), with CUSIP numbers printed thereon, and shall conform in all
respects to DTC's Book-Entry Only System. Delivery of the Bonds to DTC will be
made by delivering the Bonds to the Trustee utilizing the DTC FAST system. If
the Underwriter so requests, the Bonds shall be made available to the
Underwriter (prior to their delivery to DTC) in Philadelphia, Pennsylvania at
least three full business days before the Closing for purposes of inspection.

2

The Underwriter agrees to make a bona fide public offering of the Bonds
at the initial offering prices or yields set forth in the Official Statement;
provided, however, that the Underwriter reserves the right (and the Authority
and the Company hereby expressly acknowledge such right): to make concessions to
dealers; to effect transactions that stabilize or maintain the market price of
the Bonds above that which might otherwise prevail in the open market and to
discontinue at any time such stabilizing transactions; and to change such
initial offering prices, all as the Underwriter shall deem necessary in
connection with the marketing of the Bonds.

3. AUTHORITY'S REPRESENTATIONS AND WARRANTIES. The Authority makes the
following representations and warranties, all of which shall survive Closing;
that:

(a) The Authority is a body politic and corporate, duly created and
existing under the Constitution and laws of the Commonwealth of Pennsylvania
(the "Commonwealth"), and has, and at the date of Closing will have, full legal
right, power and authority to: enter into this Bond Purchase Agreement; execute
and deliver the Bonds, the Trust Indenture, the Financing Agreement, this Bond
Purchase Agreement and the Authority's tax certificate and the other various
certificates executed by the Authority in connection therewith (collectively,
with the Authority Resolution, the "Authority Financing Documents"); issue, sell
and deliver the Bonds to the Underwriter as provided herein; and carry out and
consummate the transactions contemplated by the Authority Financing Documents
and the Official Statement to be carried out and/or consummated by it;

(b) The Authority Resolution was duly adopted at a public meeting of
the Authority at which a quorum was present and acted throughout; and the
Authority Resolution is in full force and effect and has not been amended,
repealed or superseded in any way;

(c) The sections entitled "INTRODUCTORY STATEMENT" (insofar as it
relates to the Authority), "THE AUTHORITY" and "ABSENCE OF MATERIAL LITIGATION"
(solely insofar as the information set forth therein relates to the Authority)
contained in the Preliminary Official Statement as of its date did not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
contained therein, in the light of the circumstances under which they were made,
not misleading;

(d) The sections entitled "INTRODUCTORY STATEMENT" (insofar as it
relates to the Authority), "THE AUTHORITY" and "ABSENCE OF MATERIAL LITIGATION"
(solely insofar as the information set forth therein relates to the Authority)
contained in the Official Statement as of its date does not or will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
contained therein, in the light of the circumstances under which they were made,
not misleading;

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(e) The Authority has complied, and will at the Closing be in
compliance, in all material respects with the provisions of the Act;

(f) The Authority has duly authorized and approved the Preliminary
Official Statement and the Official Statement; and has duly authorized and
approved the execution and delivery of, and the performance by the Authority of
the obligations on its part contained in, the Authority Financing Documents;

(g) To the best of the knowledge of the officer of the Authority
executing this Bond Purchase Agreement, the Authority is not in material breach
of or in default under any applicable law or administrative regulation of the
Commonwealth or the United States; and the execution and delivery of the
Authority Financing Documents, and compliance with the provisions of each
thereof, do not and will not conflict with or constitute a breach of or default
under any existing law, administrative regulation, judgment, decree, loan
agreement, note, resolution, agreement or other instrument to which the
Authority is a party or is otherwise subject;

(h) All approvals, consents and orders of any governmental authority,
board, agency or commission having jurisdiction that would constitute a
condition precedent to the Authority's legal ability to issue the Bonds or to
the Authority's performance of its obligations hereunder and under the Authority
Financing Documents have been obtained or will be obtained prior to the Closing;

(i) The Bonds, when issued, authenticated and delivered in accordance
with the Trust Indenture and sold to the Underwriter as provided herein, will be
validly issued and will be valid and binding limited obligations of the
Authority enforceable against the Authority in accordance with their terms
(except as enforcement of remedies may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws or legal or equitable principles
affecting the enforcement of creditors' rights ("Creditors' Rights
Limitations"));

(j) The terms and provisions of the Authority Financing Documents when
executed and delivered by the respective parties thereto will constitute the
valid, legal and binding obligations of the Authority enforceable against the
Authority in accordance with their respective terms (except as enforcement of
remedies may be limited by Creditors' Rights Limitations);

(k) There is no action, suit, proceeding, inquiry or investigation, at
law or in equity, before or by any court, or public board or body, pending or,
to the knowledge of the Authority after due inquiry, threatened against the
Authority, affecting the existence of the Authority or the titles of its
officers to their respective offices or seeking to prohibit, restrain or enjoin
the sale, issuance or delivery of the Bonds or of the revenues or assets of the
Authority pledged or to be pledged to pay the principal of and interest on the
Bonds, or the pledge thereof, or in any way contesting or affecting the validity
or enforceability of the Authority Financing Documents or contesting in any way
the completeness or accuracy of the Preliminary Official Statement or the
Official Statement, or contesting the power or authority of the Authority with
respect to the issuance of the Bonds or the execution, delivery or performance
of any of the Authority Financing Documents, wherein an unfavorable decision,
ruling or finding would affect in any way the validity or enforceability of any
of the Authority Financing Documents;

4

(l) The net proceeds received from the Bonds and applied in accordance
with the Trust Indenture and Financing Agreement shall be used in accordance
with the Act as described in the Official Statement;

(m) The Authority has not been notified of any listing or proposed
listing by the Internal Revenue Service to the effect that the Authority is a
bond issuer whose arbitrage certifications may not be relied upon; and

(n) Any certificate signed by any of the authorized officers of the
Authority and delivered to the Underwriter shall be deemed a representation and
warranty by the Authority to the Underwriter as to the statements made therein.

4. COMPANY'S REPRESENTATIONS AND WARRANTIES. The Company makes the
following representations and warranties on and as of the date hereof and as of
the date of Closing, all of which will survive the Closing:

(a) The Company has not sustained since December 31, 2004 any material
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree; and since the respective dates as
of which information is given in the Official Statement, there have not been any
material changes in the outstanding capital stock or the long-term debt of the
Company or any material adverse change, or a development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company, otherwise than as set forth or contemplated in the Official Statement;

(b) The Company was organized, is in good standing and subsists as a
corporation under the laws of the Commonwealth, with power (corporate and other)
to own its properties and conduct its business as described in the Official
Statement;

(c) The First Mortgage Bond has been duly authorized; and, when issued
and delivered as contemplated by this Bond Purchase Agreement, will have been
duly executed, authenticated, issued and delivered and will constitute a valid
and legally binding obligation of the Company entitled to the benefits provided
by the Mortgage;

(d) The Original Indenture has been duly authorized, executed and
delivered by the Company, and the Fortieth Supplemental Mortgage has been duly
authorized by the Company. When the Fortieth Supplemental Mortgage, in
substantially the form approved by the Company, has been executed and delivered
by the Company and assuming due authorization and execution by the Mortgage
Trustee, and recorded as required by law, the Mortgage will constitute a valid
and legally binding instrument enforceable against the Company in accordance
with its terms except as enforceability may be limited by Creditors' Rights
Limitations; will constitute a direct, valid and enforceable first mortgage lien
(except as enforceability of such lien may be limited by Creditors' Rights
Limitations) upon all of the properties and assets of the Company (not
heretofore released as provided for in the Mortgage) specifically or generally
described or referred to in the Mortgage as being subject to the lien thereof,
excepting permitted liens under the Mortgage and excepting property and assets
that the Mortgage expressly excludes from the lien thereof; and will create a
mortgage upon all properties and assets acquired by the Company after the
execution and delivery of the Fortieth Supplemental Mortgage and required to be
subjected to the lien of the Mortgage pursuant thereto when so acquired, except
for permitted liens under the Mortgage. The Original Indenture has been and the
Fortieth Supplemental Mortgage will be duly filed, recorded or registered in
each place in the Commonwealth in which such filing, recording or registration
was or is required to protect and preserve the lien of the Mortgage; and all
necessary approvals of regulatory authorities, commissions and other
governmental bodies having jurisdiction over the Company required to subject the
mortgaged properties and assets or trust estate (as defined in the Mortgage) to
the lien of the Mortgage have been duly obtained;

5

(e) In each of the following cases with such exceptions as are not
material and do not interfere with the conduct of the business of the Company,
the Company has good and marketable title to all of its real property currently
held in fee simple; and all of its other interests in real property (other than
certain rights of way, easements, occupancy rights, riparian and flowage rights,
licenses, leaseholds, and real property interests of a similar nature). In each
case such title is free and clear of all liens, encumbrances and defects except
such as may be described in the Official Statement, the lien of the Mortgage,
permitted liens under the Mortgage or such as do not materially affect the value
of such property and do not interfere with the use made and proposed to be made
of such property by the Company. Any real property and buildings held under
lease by the Company are held by it under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company;

(f) In each of the following cases except for such exceptions that are
not material and do not interfere with the conduct of the business of the
Company, the Company has all licenses, franchises, permits, authorizations,
rights, approvals, consents and orders of all governmental authorities or
agencies necessary for the ownership or lease of the properties owned or leased
by it and for the operation of the business carried on by it as described in the
Official Statement, and all water rights, riparian rights, easements, rights of
way and other similar interests and rights described or referred to in the
Mortgage necessary for the operation of the business carried on by it as
described in the Official Statement. Except as otherwise set forth in the
Official Statement, all such licenses, franchises, permits, orders,
authorizations, rights, approvals and consents are in full force and effect and
contain no unduly burdensome provisions; except as otherwise set forth in the
Official Statement, there are no legal or governmental proceedings pending or,
to its knowledge after due inquiry, threatened that would result in a material
modification, suspension or revocation thereof. The Company has the legal power
to exercise the rights of eminent domain for the purposes of conducting its
water utility operations;

(g) The issue and sale of the Bonds, the issue and delivery of the
First Mortgage Bond and the compliance by the Company with all of the applicable
provisions of the First Mortgage Bond and the Mortgage and the execution,
delivery and performance by the Company of the Fortieth Supplemental Mortgage,
the Financing Agreement, this Bond Purchase Agreement and the Continuing
Disclosure Agreement will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, or result in the creation
or imposition of any lien, charge or encumbrance (other than the lien of the
Mortgage) upon any of the property or assets of the Company pursuant to the
terms of any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company is a party or by which the Company
is bound or to which any of the property or assets of the Company are subject,
nor will such action result in a violation of the provisions of the Articles of
Incorporation, as amended, or the Bylaws of the Company or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its property. No consent, approval,
authorization, order, registration or qualification of or with any court or any
such regulatory authority or other governmental body (other than those already
obtained) is required to be obtained by the Company for the issue and sale of
the Bonds, the issue and delivery of the First Mortgage Bond, the execution,
delivery and performance by the Company of this Bond Purchase Agreement, the
Financing Agreement, the Fortieth Supplemental Mortgage, the First Mortgage Bond
and the Continuing Disclosure Agreement, or the consummation by the Company of
the other transactions contemplated by this Bond Purchase Agreement or the
Mortgage;

6

(h) The Pennsylvania Public Utility Commission by order has duly
authorized the issuance and delivery of the First Mortgage Bond on terms not
inconsistent with this Bond Purchase Agreement;

(i) The Company is not a holding company, a registered holding company
or an affiliate of a registered holding company within the meaning of the Public
Utility Holding Company Act of 1935, as amended;

(j) There are no legal or governmental proceedings pending to which the
Company is a party or to which any property of the Company is subject, other
than as set forth in the Official Statement and other than litigation incident
to the kind of business conducted by the Company, wherein an unfavorable ruling,
decision or finding is likely that would have a material adverse effect on the
financial position, stockholders' equity or results of operations of the
Company; and, to the best of the Company's knowledge after due diligence, no
such proceedings are threatened by governmental authorities or threatened by
others;

(k) The Project consists of either land or property of a character
subject to depreciation for federal income tax purposes and will be used to
furnish water that is or will be made available to members of the general public
(including electric utility, industrial, agricultural, or commercial users); the
rates for the furnishing or sale of the water have been established or approved
by a State or political subdivision thereof, by an agency or instrumentality of
the United States, or by a public service or public utility commission or other
similar body of any State or political subdivision thereof; and all other
information supplied by the Company to the Underwriter with respect to the
exclusion from gross income pursuant to Section 103 of the Code of the interest
on the Bonds is correct and complete;

(l) The Company has not, within the immediately preceding ten (10)
years, defaulted in the payment of principal or interest on any of its bonds,
notes or other securities, or any legally authorized obligation issued by it;
and

7

(m) The information with respect to the Company and the Project and the
descriptions of the First Mortgage Bond and the Mortgage contained in the
Preliminary Official Statement and the Official Statement (including appendices
A and B thereto) do not contain an untrue statement of a material fact or omit
to state a material fact necessary to make such information and descriptions, in
the light of the circumstances under which they were made, not misleading.

5. AUTHORITY'S COVENANTS. The Authority will:

(a) furnish such information, execute such instruments and take such
other action in cooperation with the Underwriter as the Underwriter may
reasonably request to qualify the Bonds for offer and sale under the Blue Sky or
other securities laws and regulations of such states and other jurisdictions in
the United States of America as the Underwriter may designate and will assist,
if necessary therefor, in the continuance of such qualifications in effect so
long as required for distribution of the Bonds; provided, however, that the
Authority shall in no event be required to file a general consent to suit or
service of process or to qualify as a foreign corporation or as a dealer in
securities in any such state or other jurisdiction;

(b) not, on its part, amend or supplement the Official Statement
without prior notice to and the consent of the Underwriter and the Company and
will advise the Underwriter and the Company promptly of the institution of any
proceedings by any governmental agency or otherwise affecting the use of the
Official Statement in connection with the offer and sale of the Bonds; and

(c) refrain from knowingly taking any action (and permitting any action
with regard to which the Authority may exercise control) which would result in
the loss of the exclusion from gross income for federal income tax purposes of
interest on the Bonds referred to under the caption "TAX MATTERS" in the
Official Statement.

6. COMPANY'S COVENANTS. The Company agrees that it will:

(a) refrain from knowingly taking any actions (and from permitting any
action with regard to which the Company may exercise control) that would result
in the loss of the exclusion from gross income for federal tax purposes of
interest on the Bonds;

(b) indemnify and hold harmless the Authority, its members, directors,
officers, agents, attorneys, and employees and the Underwriter, its officers,
directors, officials, agents, attorneys, employees, and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
from and against all losses, claims, damages, liabilities and expenses, joint or
several, to which the Authority and the Underwriter, or either of them, or any
of their respective members, directors, officers, agents, attorneys, and
employees and each person, if any, who controls the Underwriter within the
meaning of the 1933 Act or 1934 Act as aforedescribed may become subject, under
federal laws or regulations, or otherwise, insofar as such losses, claims,
damages, liabilities and expenses (or actions in respect thereof) arise out of
or are based upon: a breach of the Company's representations included in this
Agreement; any untrue statement or alleged untrue statement of any material fact
pertaining to the Project or the Company set forth in the Official Statement,
the Preliminary Official Statement or any amendment to either; or the willful or
negligent omission of (or the alleged omission to state) a material fact in the
Official Statement, in the Preliminary Official Statement, or in any amendment
or supplement to either, as such fact is required to be stated therein or
necessary to make the statements therein that pertain to the Company or the
Project not misleading in the light of the circumstances under which they were
made; or (iv) arising by virtue of the failure to register the Bonds under the
1933 Act or the failure to qualify the Indenture under the 1939 Act; or (v)
arising by virtue of any audit or investigation conducted by a state or federal
agency, department or entity questioning, among other things, the tax-exempt
status of the Bonds;

8

(c) undertake, pursuant to the Continuing Disclosure Agreement dated as
of December 15, 2005 to be entered into between the Company and the Trustee (the
"Continuing Disclosure Agreement"), to provide annual reports and notices of
certain material events in accordance with Rule 15c2-12 under the 1934 Act, as
amended ("Rule 15c2-12"). A description of this undertaking and the Continuing
Disclosure Agreement is set forth in the Preliminary Official Statement and will
also be set forth in the Final Official Statement; and

(d) not amend or supplement the Official Statement without prior notice
to, and the consent of, the Underwriter, and will advise the Underwriter and the
Authority promptly of the institution of any proceedings by any governmental
agency or otherwise affecting the use of the Official Statement in connection
with the offer and the sale of the Bonds.

7. UNDERWRITER'S COVENANT AND REPRESENTATIONS AND WARRANTIES.

(a) By acceptance hereof the Underwriter agrees to indemnify and hold
harmless the Authority, its members, directors, officers, agents, attorneys, and
employees and the Company, its officers, directors, agents, attorneys, and
employees and each person if any, who controls the Company within the meaning of
Section 15 of the 1933 Act against all or several claims, losses, damages,
liabilities and expenses asserted against them, or any of them, at law or in
equity, in connection with the offering and sale of the Bonds on the grounds
that the information under the caption "UNDERWRITING" in the Preliminary
Official Statement or the Official Statement (or any supplement or amendment to
said information) contains an untrue or allegedly untrue statement of a material
fact or omits or allegedly omits to state any material fact necessary to make
the statements therein not misleading in the light of the circumstances under
which they were made (it being understood that the Underwriter furnished only
the information under such "UNDERWRITING" heading), or failure on the part of
the Underwriter to deliver an Official Statement to any purchaser. The
Underwriter will reimburse any legal or other expenses reasonably incurred by a
party, person or entity indemnifiable under this Section 7 in connection with
investigating or defending any such loss, claim, damage, liability or action.
This indemnity agreement will be in addition to any liability that the
Underwriter may otherwise have. The Underwriter shall not be liable for any
settlement of, any such action effected without its consent.

(b) The Underwriter will be paid an underwriting discount of $370,125
with respect to the Bonds.

9

(c) The Underwriter acknowledges that the Authority is relying upon the
veracity of the certification in clause (b) above on the date hereof as a
condition precedent to lending the proceeds of the Bonds to the Company.

8. NOTICE OF INDEMNIFICATION; SETTLEMENT. Promptly after a party,
person or entity indemnifiable under Section 6 or 7 of this Bond Purchase
Agreement (an "Indemnitee") receives notice of the commencement of any audit,
investigation or action against such Indemnitee in respect of which indemnity is
to be sought by the Indemnitee against the Company or an Underwriter, as the
case may be (the "Indemnifying Party"), the Indemnitee will notify the
Indemnifying Party in writing of such action, and the Indemnifying Party may
assume the defense thereof, including the employment of counsel and the payment
of all expenses; but the omission so to notify the Indemnifying Party will not
relieve the Indemnifying Party from any liability that it may have to the
Indemnitee otherwise than hereunder. The Indemnifying Party shall not be liable
for any settlement of any such action effected without its consent, but if
settled with the consent of the Indemnifying Party or if there is a final
judgment for the plaintiff in any such action, the Indemnifying Party will
indemnify and hold harmless the Indemnitee from and against any loss or
liability by reason of such settlement or judgment. The indemnity agreements
contained in this Bond Purchase Agreement shall include reimbursement for
expenses reasonably incurred by an Indemnitee in investigating the claim and in
defending it if the Indemnifying Party declines to assume the defense and shall
survive delivery of the Bonds. Notwithstanding the foregoing, in the event of an
investigation or audit by the Internal Revenue Service or the Securities and
Exchange Commission or any other state or federal agency, department, or entity
with respect to the Bonds, the Authority shall have the right and duty to
undertake its own defense, including the employment of counsel, with full power
to litigate, compromise or settle the same on its own behalf, and the Company
agrees that it will indemnify and hold the Authority harmless for all costs and
expenses, including, but not limited to, attorney fees and expenses and costs,
of any such settlement.

9. EQUITABLE CONTRIBUTION. If the indemnification provided for in
Section 6(b) of this Bond Purchase Agreement is unavailable to the Underwriter
(or any controlling person thereof) in respect of any losses, claims, damages or
liabilities referred to therein, then the Company shall, in lieu of indemnifying
the Underwriter, contribute to the amount paid or payable by the Underwriter as
a result of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Underwriter, respectively, from the offering of the Bonds. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then the Company shall contribute to such amount paid or payable
by the Underwriter in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the
Underwriter, respectively, in connection with the statements or omission which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefit received by the Company
or the Underwriter shall be deemed to be in the same proportion as the total
proceeds from the offering (before deducting issuance costs and expenses other
than underwriting fees and commissions) received by the Company, on the one
hand, bear to the total underwriting fees and commissions received by the
Underwriter, on the other hand. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
related to information supplied by the Company or the Underwriter and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriter
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by pro rata allocation or by any other method of
allocation that does not take account of the equitable considerations referred
to above in this Section 9. The amount paid or payable by the Underwriter as a
result of the losses, claims, damages or liabilities referred to above in this
Section 9 shall be deemed to include any reasonable legal or other expenses
reasonably incurred by the Underwriter in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 9, the Underwriter shall not be required to contribute any amount in
excess of the amount by which the total price at which the Bonds underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages that the Underwriter has otherwise been required to pay by reason
of such untrue or allegedly untrue statement or omission or alleged omission.

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10. OFFICIAL STATEMENT; PUBLIC OFFERING.

(a) In order to enable the Underwriter to comply with Rule 15c2-12: the
Company has prepared (or caused to be prepared) the Preliminary Official
Statement, which the Company and the Authority (but, in the case of the
Authority, only with respect to the information therein under the headings "THE
AUTHORITY" and, insofar as they relate to the Authority, "INTRODUCTORY
STATEMENT" and "ABSENCE OF MATERIAL LITIGATION") deem final and complete as of
its date except for certain "Permitted Omissions" as described in Rule 15c2-12;
the Company shall provide to the Underwriter sufficient copies of the Official
Statement in sufficient time to accompany any confirmation that requires payment
from any customer and in any event within seven business days after the date of
this Bond Purchase Agreement; and of which the Company has or gains knowledge
would render the Official Statement misleading in any material respect in the
period from the date of its delivery to the Underwriter by the Company (as that
phrase is defined in Rule 15c2-12) then the Company shall promptly give the
Underwriter notice thereof. The Authority and the Company hereby authorize the
use of the Preliminary Official Statement and the Official Statement by the
Underwriter in connection with the offering of the Bonds.

(b) After the Closing, and until the Underwriter has informed the
Authority and the Company that the Underwriter has sold all the Bonds, the
Authority and the Company will not adopt or distribute any amendment of or
supplement to the Official Statement, except with the prior written consent of
the Underwriter; and if any event relating to or affecting the Authority, the
Company or the Bonds shall occur, the result of which shall make it necessary,
in the opinion of the Underwriter, to amend or supplement the Official Statement
in order to make it not misleading in the light of the circumstances existing at
that time, the Company shall forthwith prepare, and the Company and the
Authority shall approve for distribution, a reasonable number of copies of an
amendment of or supplement to the Official Statement, in form and substance
reasonably satisfactory to the Underwriter, so that the Official Statement then
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances existing at that time, not misleading. The Authority shall
cooperate with the Company in the issuance and distribution of any such
amendment or supplement.

(c) Upon Closing, the Underwriter shall promptly provide a Nationally
Recognized Municipal Securities Information Repository ("NRMSIR") and the
Municipal Securities Rulemaking Board ("MSRB") with a copy of the Official
Statement for filing in accordance with Rule 15c2-12, and inform the Authority
and the Company in writing as to the date and place of such filing and the date
of the end of the underwriting period.

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11. CONDITIONS OF UNDERWRITER'S AND AUTHORITY'S OBLIGATIONS. The
Underwriter's obligations to purchase and pay for the Bonds and the Authority's
obligation to issue and deliver the Bonds are subject to fulfillment of the
following conditions at or before Closing:

(a) The representations of the Authority and the Company herein shall
be true in all material respects on and as of the date of the Closing and shall
be confirmed by appropriate certificates at Closing;

(b) Neither the Authority nor the Company shall be in default in the
performance of any of their respective covenants herein;

(c) The Underwriter shall have received:

(i) An opinion of Ballard Spahr Andrews & Ingersoll, LLP, Bond
Counsel, dated the date of Closing, substantially in the form attached
as Exhibit A hereto, addressed to (or with reliance letters delivered
in respect of) the Authority, the Trustee and the Underwriter;

(ii) An opinion of Ballard Spahr Andrews & Ingersoll, LLP,
Bond Counsel, dated the date of Closing, substantially in the form
attached as Exhibit B hereto, addressed to the Underwriter;

(iii) An opinion of Blank Rome LLP, counsel for the Authority,
dated the date of Closing, substantially in the form attached as
Exhibit C hereto, addressed to the Underwriter and in form and
substance reasonably satisfactory to the Underwriter and Bond Counsel;

(iv) Opinions of Dilworth Paxson LLP, counsel to the Company,
and the Company's Senior Vice President - Law and Administration, dated
the date of Closing, substantially in the forms attached as Exhibit D
hereto, addressed to the Underwriter, the Authority and Bond Counsel,
in form and substance reasonably satisfactory to the Underwriter and to
Bond Counsel;

(v) An opinion of Saul Ewing LLP, counsel for the Underwriter,
in form and substance reasonably satisfactory to the Underwriter;

(vi) An opinion of legal counsel to the Bond Insurer in form
and substance reasonably satisfactory to Bond Counsel and the
Underwriter, relating to the enforceability of the Bond Insurance
Policy and the information concerning the Bond Insurer in the Official
Statement;

12

(vii) An agreed upon procedures letter dated the date of the
Official Statement and addressed to the Company from the Company's
auditor with respect to financial information set forth in Appendix A
to the Official Statement, in form and substance reasonably
satisfactory to the Company's auditor and the Underwriter;

(viii) A certificate dated the date of Closing executed by the
Chairman of the Authority to the effect that:

(A) the representations and warranties of the
Authority contained herein, to the best of the knowledge of
such Chairman, are true and correct in all material respects
as of the date of Closing; and

(B) to the best of the knowledge of such Chairman,
the Authority has complied in all material respects with all
agreements executed by the Authority in connection with
issuance of the Bonds and satisfied in all material respects
the Authority's covenants contained in Section 5 herein and
all of the conditions on its part to be performed or satisfied
at or prior to the Closing;

(ix) A certificate dated the date of Closing executed by the
chief financial officer of the Company to the effect that:

(A) the representations and warranties of the Company
in this Bond Purchase Agreement are true and correct in all
material respects as of the date of Closing;

(B) the Preliminary Official Statement and the
Official Statement, as of their respective dates, insofar as
they relate to the Company, do not contain any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein, under the circumstances in which they were
made, not misleading in any respect; and

(C) no event affecting the Company has occurred since
the date of the Bond Purchase Agreement that is required to be
disclosed in the Official Statement in order to make the
statements and information therein not misleading in any
material respect;

(x) Two executed copies of the Trust Indenture, the Financing
Agreement, the Bond Purchase Agreement, the Fortieth Supplemental
Mortgage and the Continuing Disclosure Agreement and specimen copies of
the First Mortgage Bond;

(xi) Two copies of the Articles of Incorporation and By-laws
of the Company, as amended to the date of Closing, and of the
resolutions of the Board of Directors of the Company authorizing and
approving the execution and delivery of this Bond Purchase Agreement,
the Financing Agreement, the First Mortgage Bond, the Fortieth
Supplemental Mortgage, the Continuing Disclosure Agreement and the
incurrence of indebtedness with respect thereto and all transactions
described in the Official Statement and contemplated by this Bond
Purchase Agreement, all certified by its Secretary or Assistant
Secretary;

13

(xii) Two copies of the Authority Resolution;

(xiii) One or more letters from the Company's auditor, dated
the date of the Preliminary Official Statement and the Official
Statement and addressed to the Company, consenting to the use of the
financial statements prepared by such firm and all references to such
firm contained in the Preliminary Official Statement and the Official
Statement;

(xiv) Evidence of the issuance of the Bond Insurance Policy by
the Bond Insurer, which policy shall unconditionally and irrevocably
guarantee the payment when due of the principal of and interest on the
Bonds;

(xv) Evidence satisfactory to the Underwriter of a rating of
"AAA" assigned by Standard & Poor's Ratings Services, a Division of The
McGraw-Hill Companies, and that such rating is in full force and effect
as of the date of Closing;

(xvi) Evidence satisfactory to Bond Counsel and the
Underwriter of the receipt by the Authority of a Preliminary Allocation
relating to the Bonds from the Pennsylvania Department of Community and
Economic Development and of the registration of a Securities
Certificate relating to the First Mortgage Bond and the Bonds with the
Pennsylvania Public Utility Commission; and

(xvii) Such additional documentation as the Underwriter or its
counsel or Bond Counsel may reasonably request to evidence compliance
with applicable law and the validity of the Bonds, the Financing
Agreement, the Trust Indenture, this Bond Purchase Agreement, the
Mortgage, the First Mortgage Bond and the Continuing Disclosure
Agreement, and to evidence that the interest on the Bonds is not
includable in gross income under the Code and the status of the
offering under the 1933 Act and the 1939 Act;

(d) At Closing there shall not have been any material adverse change in
the financial condition of the Company or any adverse development concerning the
business or assets of the Company that would result in a material adverse change
in the prospective financial condition or results of operations of the Company
from that described in the Official Statement, which, in the judgment of the
Underwriter, makes it inadvisable to proceed with the sale of the Bonds; and the
Underwriter shall have received certificates of the Company certifying that no
such material adverse change has occurred or, if such a change has occurred,
full information with respect thereto; and

(e) The Underwriter shall deliver at Closing a certificate in form
acceptable to Bond Counsel to the effect that the Underwriter has sold to the
public (excluding bond houses and brokers) a substantial amount of the Bonds at
initial offering prices no higher than, or yields no lower than, those shown on
the cover page of the Official Statement and that such certificate may be relied
upon for purposes of determining compliance with Section 148 of the Code.

14

12. EVENTS PERMITTING THE UNDERWRITER TO TERMINATE. The Underwriter may
terminate its obligation to purchase the Bonds at any time before Closing if any
of the following occurs:

(a) A legislative, executive or regulatory action or proposed action,
or a court decision, which in the reasonable judgment of the Underwriter casts
sufficient doubt on the legality of, or the exclusion from gross income for
federal income tax purposes of interest on, obligations such as the Bonds so as
to materially impair the marketability or materially lower the market price of
the Bonds; or

(b) Any action by the Securities and Exchange Commission or a court
that would require registration of the Bonds or the First Mortgage Bond under
the 1933 Act or qualification of the Indenture under the 1939 Act; or

(c) Any general suspension of trading in securities on the New York
Stock Exchange or the establishment, by the New York Stock Exchange, by the
Securities and Exchange Commission, by any federal or state agency, or by the
decision of any court, of any limitation on prices for such trading, or any
outbreak of hostilities or other national or international calamity or crisis,
or any material escalation in any such hostilities, calamity or crisis, the
effect of which on the financial markets of the United States of America shall
be such as to materially impair the marketability or materially lower the market
price of the Bonds; or

(d) Any event or condition occurring or arising after the date hereof,
which in the reasonable judgment of the Underwriter renders untrue or incorrect,
in any material respect as of the time to which the same purports to relate, the
information contained in the Official Statement, or which requires that
information not reflected in the Official Statement or Appendices thereto should
be reflected therein in order to make the statements and information contained
therein not misleading in any material respect as of such time; provided that
the Authority, the Company and the Underwriter will use their best efforts to
amend or supplement the Official Statement to reflect, to the reasonable
satisfaction of the Underwriter, such changes in or additions to the information
contained in the Official Statement; or

(e) Pending or threatened litigation affecting or arising out of the
ownership of the Facilities or any other facilities of the Company or the
issuance of the Bonds, which, in the reasonable judgment of the Underwriter,
would materially impair the marketability or materially lower the market price
of the Bonds; or 

(f) Quantities of the Official Statement are not delivered to the
Underwriter in a timely manner as required by Section 10 hereof. If the
Underwriter terminates its obligation to purchase the Bonds because any of the
conditions specified in Section 11 hereof or this Section 12 shall not have been
fulfilled at or before the Closing, such termination shall not result in any
liability on the part of the Authority, the Underwriter, or, except for the
payment of such costs of issuance described in Section 13 hereof which are due
and payable, the Company.

15

13. EXPENSES. All expenses and costs of the authorization, issuance,
sale and delivery of the Bonds including, without limitation, accrued interest,
the preparation of and furnishing to the Underwriter of the Preliminary Official
Statement and the Official Statement, the preparation and execution of the
Bonds, the Financing Agreement, the Trust Indenture, the First Mortgage Bond,
the Fortieth Supplemental Mortgage, the Continuing Disclosure Agreement and this
Bond Purchase Agreement, the Insurance Policy premium, rating agency fees, the
issuance and closing fees of the Authority, the fees and disbursements of
counsel to the Authority, the fees and disbursements of Bond Counsel, the fees
and disbursements of counsel to the Underwriter and the expenses incurred in
connection with qualifying the Bonds for sale under the securities laws of
various jurisdictions and preparing Blue Sky and legal investment memoranda,
shall be paid by the Company from funds contributed by the Company and from
proceeds of the Bonds. The Authority shall, bear no out-of-pocket expense in
connection with the transactions contemplated by this Bond Purchase Agreement.
The Underwriter will pay all other expenses of the Underwriter in connection
with the public offering of the Bonds.

14. EXECUTION IN COUNTERPARTS. This Bond Purchase Agreement may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any of the parties hereto may
execute this Bond Purchase Agreement by signing any such counterpart.

15. NOTICES AND OTHER ACTIONS. All notices, requests, demands and
formal actions hereunder will be in writing mailed, faxed (with confirmation of
receipt) or delivered by nationally recognized, next-day delivery service to:

The Underwriter:

Sovereign Securities Corporation, LLC
Mail Code: 20-210-CPC LLC
1500 Market Street
Centre Square-Concourse
Philadelphia, Pennsylvania 19102
Attention: George C. Werner, III
Managing Director
Fax #: (267) 675-0643
Email: gwerner@sovereignbank.com

The Company:

Aqua Pennsylvania, Inc.
762 Lancaster Avenue
Bryn Mawr, Pennsylvania 19010
Attention: Kathy Lee Pape, Vice President, Treasurer
& Rate Counsel
Fax #: (610) 519-0989
Email:  klpape@aquaamerica.com

The Authority:

Delaware County Industrial Development Authority
200 East State Street, Suite 205
Media, Pennsylvania 19063
Attention: J. Patrick Killian, Commerce Director
Fax #: (610) 566-7337
Email: info@delcopa.org

16

16. GOVERNING LAW. This Bond Purchase Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Pennsylvania,
excluding those relating to choice of laws or conflict of laws, and may not be
assigned by the Authority, the Company or the Underwriter.

17. SUCCESSORS. This Bond Purchase Agreement will inure to the benefit
of and be binding upon the parties and their respective successors and, as to
Sections 6, 7 and 8 hereof, the Indemnitees, and will not confer any rights upon
any other person. The term "successor" shall not include any holder of any Bonds
merely by virtue of such holding.

18. LIMITATIONS ON LIABILITY. No personal recourse shall be had for any
claim based on this Bond Purchase Agreement or the Bonds against any board
member, officer, agent, employee, or attorney past, present or future, of the
Authority or any successor body as such, either directly or through the
Authority or any successor body, under any constitutional provision, statute, or
rule of law or by enforcement of any assessment or penalty or otherwise.
Notwithstanding any provision or obligation to the contrary in this Bond
Purchase Agreement, the liability of the Authority for payments of any kind,
nature or description provided for herein or in any other document executed
pursuant hereto shall be limited to the revenues derived by the Authority from
the Financing Agreement.

17

IN WITNESS WHEREOF, the Authority, the Company and the Underwriter have
caused their duly authorized Underwriters to execute and deliver this Bond
Purchase Agreement as of the date first written above.

DELAWARE COUNTY INDUSTRIAL
DEVELOPMENT AUTHORITY

By: /s/  Henry Coleman
-------------------------------------------
Chairman

AQUA PENNSYLVANIA , INC.

By: /s/  Kathy L. Pape
-------------------------------------------
Vice President, Treasurer and Rate Counsel

SOVEREIGN SECURITIES CORPORATION, LLC

By: /s/  George C. Werner, III
-------------------------------------------
George C. Werner, III
Managing Director

SCHEDULE I

Terms of Bonds

Dated Date:                         December 22, 2005

Series     Maturity Date      Principal Amount     Rate of Interest    Yield
------     -------------      ----------------     ----------------    ------
C       February 1, 2035      $24,675,000             5.00%          4.820%

Interest Payment Dates:    February 1 and August 1, commencing February 1, 2006

Redemption Provisions:

The Bonds are subject to redemption as follows:

OPTIONAL REDEMPTION. The Bonds are subject to optional redemption prior
to maturity by the Authority, at the direction of the Company, on or after
February 1, 2015, as a whole or in part at any time, at a redemption price equal
to one hundred percent (100%) of the principal amount thereof, plus interest
accrued to the date fixed for redemption.

EXTRAORDINARY OPTIONAL REDEMPTION. The Bonds are subject to redemption,
at any time prior to maturity, at the option of the Authority, upon the
direction of the Company, in whole, at a Redemption Price of 100% of the
principal amount of the Bonds to be redeemed, plus interest accrued thereon to
the date fixed for redemption, if any of the following events shall have
occurred:

(a) The damage or destruction of all or substantially all of
the Facilities to such extent, that, in the reasonable opinion of the Company,
the repair and restoration thereof would not be economical; or

(b) the taking by condemnation, or the threat thereof, of all
or substantially all of the Facilities or the taking by condemnation of any
part, use or control of the Facilities so as to render them unsatisfactory to
the Company for their intended use; or

(c) in the Company's reasonable opinion, (1) unreasonable
burdens or excessive liabilities shall have been imposed upon the Company with
respect to the Facilities or the operation thereof, including, but not limited
to, federal, state or other ad valorem, property, income or other taxes not
being imposed on the date of the Agreement other than ad valorem property taxes
presently levied upon privately owned property used for the same general
purposes as the Facilities, or (2) the continued operation of the Facilities is
impractical, uneconomical or undesirable for any reason.

Schedule 1-I

Any such redemption shall be on any date within 180 days following the
occurrence of one of the events listed above permitting the exercise of the
option.

SPECIAL MANDATORY REDEMPTION. The Bonds are subject to mandatory
redemption, in part, on the first interest payment date for which notice can be
given in accordance with the Trust Indenture after the Project has been
completed and the certificate of the Company with respect thereto required by
the Financing Agreement has been filed with the Authority and the Trustee, to
the extent of any amounts transferred from the Project Fund to the Debt Service
Fund pursuant to the Trust Indenture, at a Redemption Price of 100% of the
principal amount of the Bonds to be redeemed, plus accrued interest thereon to
the date fixed for redemption.

Schedule 1-I

EXHIBIT A

FORM OF APPROVING OPINION OF
BALLARD SPAHR ANDREWS & INGERSOLL, LLP

Upon delivery of the Bonds, Ballard Spahr Andrews & Ingersoll, LLP,
Philadelphia, Pennsylvania, Bond Counsel, will issue its approving opinion in
substantially the following form:

December 28, 2005

Delaware County Industrial Development Authority              Wachovia Bank, National Association, as Trustee
200 East State Street, Suite 205                              123 South Broad Street
Media, Pennsylvania  19063                                    Philadelphia, Pennsylvania 19109

Sovereign Securities Corporation, LLC                         Aqua Pennsylvania, Inc.
1500 Market Street                                            762 Lancaster Avenue
Centre Square - Concourse                                     Bryn Mawr, Pennsylvania 19010
Philadelphia, Pennsylvania 19102

Re:      $24,675,000 aggregate principal amount of Delaware
County Industrial Development Authority Water
Facilities Revenue Bonds (Aqua Pennsylvania, Inc.
Project) Series C of 2005
--------------------------------------------------
Ladies and Gentlemen:

We have acted as Bond Counsel to the Delaware County
Industrial Development Authority (the "Authority") in connection with the
issuance and sale of its $24,675,000 aggregate principal amount of Delaware
County Industrial Development Authority Water Facilities Revenue Bonds (Aqua
Pennsylvania, Inc. Project) Series C of 2005 (the "Bonds"). The Bonds are being
issued by the Authority at the request of Aqua Pennsylvania, Inc., as successor
to Philadelphia Suburban Water Company (the "Company"), to finance facilities
located in the Pennsylvania Counties of Chester, Delaware and Montgomery (the
"Project Facilities") for the furnishing of water which is made available on
reasonable demand to members of the general public in portions of the
Pennsylvania Counties of Chester, Delaware and Montgomery.

The Bonds are issuable in fully registered form, and are being
issued under the Trust Indenture dated as of December 15, 2005 (the "Indenture")
between the Authority and Wachovia Bank, National Association, as trustee (the
"Trustee"). The Authority and the Company are entering into a Financing
Agreement dated as of December 15, 2005 (the "Financing Agreement"), pursuant to
which the Authority will lend the proceeds of the Bonds to the Company to
finance the Project Facilities.

In satisfaction of its obligation under the Financing
Agreement with respect to the Bonds, the Company, concurrently with the issuance
of the Bonds, is delivering to the Trustee its First Mortgage Bond, 5.00% Series
C due 2035 (the "First Mortgage Bond") in the principal amount equal to the
principal amount of the Bonds. The Authority has assigned its interests under
the Financing Agreement with respect to the Bonds, including its right to
receive the First Mortgage Bond and the payments thereunder, to the Trustee for
the benefit of the holders of the Bonds.

A-1

The Internal Revenue Code of 1986, as amended (the "Code")
establishes certain requirements which must be met on a continuing basis
subsequent to the issuance and delivery of the Bonds for interest on the Bonds
to be excluded from the gross income of the holders thereof for federal income
tax purposes. For the purposes of the opinion set forth below, we have relied on
representations of the Authority and the Company with respect to the application
of the proceeds of the Bonds, the nature of the Project Facilities and other
matters solely within the knowledge of the Authority and the Company which we
have not independently verified, and have assumed continuing compliance with the
covenants in the Indenture, the Financing Agreement and the certificates of the
Company with respect to the Project Facilities delivered at closing pertaining
to the requirements of those sections of the Code which affect the exclusion
from gross income of interest on the Bonds for federal income tax purposes. In
the event that such representations are determined to be inaccurate or
incomplete or the Authority or the Company fails to comply with the
aforementioned covenants, interest on the Bonds could become includable in gross
income from the date of issuance, regardless of the date on which the event
causing such inclusion occurs.

In our capacity as Bond Counsel, we have examined such
documents, records of the Authority and other instruments as we deemed necessary
to enable us to express the opinions set forth below, including original
counterparts or certified copies of the Indenture, the Financing Agreement, the
First Mortgage Bond, the other documents listed in the closing memorandum filed
with the Trustee and an executed Water Facilities Revenue Bond (Aqua
Pennsylvania, Inc. Project) Series C of 2005 as authenticated by the Trustee.

Based on the foregoing, it is our opinion that:

1. The Authority is a public instrumentality of the
Commonwealth of Pennsylvania and a body corporate and politic, organized and
existing under Pennsylvania law, with full power and authority to execute and
deliver the Financing Agreement and the Indenture, and to issue and sell the
Bonds.

2. The Financing Agreement and the Indenture have been duly
authorized, executed and delivered by the Authority and constitute legal, valid
and binding obligations of the Authority enforceable against the Authority in
accordance with their respective terms, subject to state and federal laws and
equitable principles affecting the enforcement of creditors' rights.

3. All right, title and interest of the Authority under the
Financing Agreement as they relate to the Bonds, including the right to receive
the First Mortgage Bond and the payments thereunder (except for certain rights
to indemnification and to payments in respect of administrative expenses of the
Authority), have been effectively assigned to the Trustee by the Indenture.

4. The issuance and sale of the Bonds have been duly
authorized by the Authority; the Bonds have been duly executed and delivered by
the Authority; and, on the assumption that all Bonds have been authenticated by
the Trustee, the Bonds are legal, valid and binding obligations of the Authority
enforceable against the Authority in accordance with their terms, subject to
state and federal laws and equitable principles affecting the enforcement of
creditors' rights, and are entitled to the benefit and security of the
Indenture.

A-2

5. Under existing laws as enacted and construed on the date of
initial delivery of the Bonds, interest on the Bonds is excludable from gross
income for purposes of federal income tax, assuming the accuracy of the
certifications of the Authority and the Company and continuing compliance by the
Authority and the Company with the requirements of the Code, except that
interest on a Bond is not excludable while the Bond is held by a substantial
user of the Project Facilities or a related person as provided in the Code.
Interest on the Bonds is a tax preference item that is subject to individual and
corporate federal alternative minimum tax. Interest on Bonds held by foreign
corporations may be subject to the branch profits tax imposed by the Code.

Ownership of the Bonds may result in other federal income tax
consequences to certain taxpayers, including, without limitation, financial
institutions, property and casualty insurance companies, individual recipients
of social security or railroad retirement benefits, certain S corporations and
taxpayers who may be deemed to have incurred or continued debt to purchase or
carry the Bonds. We express no opinion as to these matters.

6. Under the existing laws of the Commonwealth of Pennsylvania
as enacted and construed on the date of initial delivery of the Bonds, interest
on the Bonds is exempt from Pennsylvania personal income tax and Pennsylvania
corporate net income tax, and the Bonds are exempt from personal property taxes
in Pennsylvania.

We do not express any opinion herein as to the adequacy or
accuracy of the Official Statement of the Authority pertaining to the offering
of the Bonds.

We call your attention to the fact that the Authority's
obligation to make payments in respect of the Bonds is limited to moneys
received from payments to be made by the Company pursuant to the First Mortgage
Bond and as provided in the Indenture and that the Bonds do not pledge the
credit or taxing power of the County of Delaware or the Commonwealth of
Pennsylvania or any political subdivision thereof. The Authority has no taxing
power.

Very truly yours,

A-3

EXHIBIT B

FORM OF SUPPLEMENTAL OPINION OF
BALLARD SPAHR ANDREWS & INGERSOLL, LLP

December 28, 2005

Sovereign Securities Corporation, LLC
1500 Market Street
Centre Square - Concourse
Philadelphia, Pennsylvania  19102

Re:      $24,675,000 aggregate principal amount of Delaware
County Industrial Development Authority Water
Facilities Revenue Bonds, (Aqua Pennsylvania, Inc.
Project), Series C of 2005
---------------------------------------------------
Ladies and Gentlemen:

Reference is made to our opinion as bond counsel identified as
Closing Item No. ____ delivered to you concurrently herewith and relating to the
above-referenced Bonds (the "Bonds"). At your request we have undertaken a
review of certain other matters pertaining to the Bonds. All terms are used
herein with the same meanings ascribed to them in the Official Statement dated
December 21, 2005 (the "Official Statement") prepared in connection with the
public offering of the Bonds.

Based on the review described in our bond opinion, it is our
opinion that:

1. The Bond Purchase Agreement dated December 21, 2005 (the
"Bond Purchase Agreement"), among you, the Company and the Authority relating to
the Bonds has been duly authorized, executed and delivered by the Authority and
constitutes the legal, valid and binding obligation of the Authority enforceable
against the Authority in accordance with its terms, except as enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally and general principles of equity.

2. The information in the Official Statement under the
captions "INTRODUCTORY STATEMENT - Description of the Bonds" and "- Security for
the Bonds," "THE BONDS" (other than the information under the sub-caption
"Book-Entry Only System") and "SECURITY FOR THE BONDS" (other than the
information under the sub-captions "The Mortgage" and "Additional Parity
Indebtedness" as to which we express no view) and the information set forth in
Appendix C to the Official Statement (other than information under the headings
"THE FIRST MORTGAGE BOND AND THE MORTGAGE" as to which we express no view),
insofar as such information purports to summarize provisions of the Bonds, the
Indenture and the Agreement, fairly and accurately summarize such information in
all material respects. The information in the Official Statement under the
caption "TAX MATTERS" and the information set forth in Appendix E to the
Official Statement accurately reflect our firm's opinion with respect to the
matters discussed therein in all material respects.

3. It is not necessary in connection with the offering and
sale of the Bonds to register the Bonds under the Securities Act of 1933, as
amended, or to qualify the Indenture under the Trust Indenture Act of 1939, as
amended.

This letter is furnished by us solely for your benefit in
connection with the provisions of the Bond Purchase Agreement and may not be
relied upon by any other persons for any purpose without our express written
permission.

Very truly yours,

B-1

EXHIBIT C

FORM OF OPINION OF COUNSEL FOR THE AUTHORITY

December 28, 2005

Delaware County Industrial Development Authority             Ballard Spahr Andrews & Ingersoll
200 E. State Street                                          Mellon Bank Center
Suite 205 Media, PA  19008                                   1735 Market Street, 51st Floor
Philadelphia, PA  19103

Sovereign Securities Corporation, LLC
1500 Market Street
Centre Square - Concourse
Philadelphia, PA  19102

Re:      $24,675,000 aggregate principal amount of Delaware
County Industrial Development Authority Water
Facilities Revenue Bonds (Aqua Pennsylvania, Inc.
Project) Series C of 2005
---------------------------------------------------
Ladies and Gentlemen:

We have acted as counsel to the Delaware County Industrial Development
Authority ("Authority") in connection with the authorization, execution and
issuance by the Authority of the captioned Bonds ("Bonds"). This opinion is
being rendered pursuant to Section 11(c)(iii) of the Bond Purchase Agreement,
dated December 21, 2005 (the "Bond Purchase Agreement") by and among Sovereign
Securities Corporation, LLC ("Underwriter"), Aqua Pennsylvania, Inc.
("Borrower") and the Authority. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Bond Purchase Agreement.

As the basis for this opinion, we have examined the Pennsylvania
Economic Development Financing Law, 73 P.S. ss.ss. 371 et seq., as amended
("Act"); the Resolution of the Authority relating to the Bonds adopted on
November 18, 2005 ("Resolution"), and such other documents, certificates and
records of the Authority and other instruments and matters of law as we have
deemed necessary to enable us to express the opinion set forth below, including,
without limitation, original counterparts or certified copies of the Trust
Indenture, dated as of December 15, 2005 ("Indenture"), between the Authority
and Wachovia Bank, National Association, as trustee ("Trustee"), the Financing
Agreement, dated as of December 15, 2005 ("Financing Agreement"), between the
Authority and the Borrower) and the Bond Purchase Agreement. The Indenture, the
Loan Agreement and the Bond Purchase Agreement are collectively referred to
herein as the "Authority Documents".

We have assumed and relied upon the truth, completeness, authority and
accuracy of all documents, certificates and instruments examined and the
authenticity of all signatures thereon.

C-1

We have also assumed that each of the documents referred to herein are,
where appropriate, duly authorized and executed by and valid and legally binding
obligations of, and enforceable in accordance with their terms against all
parties thereto other than the Authority and that the actions required to be
taken or consents required to be obtained by such parties have been taken and
obtained. In rendering this opinion, we have also assumed that such parties have
acted in full compliance with the terms of all applicable laws, regulations and
orders.

As to questions of fact material to this opinion, we have relied upon
certificates and representations of officers and representatives of the
Authority or of other public officials, without independent investigation.

We have not made any independent investigation in rendering this
opinion other than the examination described above. Our opinion is therefore
qualified in all respects by the scope of that examination.

Our opinions are specifically limited to the present internal laws of
the Commonwealth of Pennsylvania ("Commonwealth") and present federal law and no
opinion is expressed as to the effect the laws of any other jurisdiction might
have upon the subject matter of the opinions expressed herein under conflict of
laws principles or otherwise.

Based upon the foregoing, and subject to the limitations, assumptions,
qualifications and exceptions set forth herein, we are of the opinion that:

1. The Authority is a body corporate and politic constituting an
instrumentality of the Commonwealth and is duly created and existing pursuant to
the Act.

2. The Authority has duly authorized the execution and issuance of the
Bonds and the execution and delivery of the Authority Documents. The Bonds have
been duly and validly executed and delivered by the Authority and the Authority
Documents have each been duly and validly executed and delivered by the
Authority and the Bonds and each of the Authority Documents are valid and
binding agreements of the Authority, enforceable against the Authority in
accordance with their respective terms.

3. The execution and the issuance by the Authority of the Bonds, the
execution and delivery by the Authority of the Authority Documents and
performance by the Authority of the Authority's obligations under the Bonds and
the Authority Documents, do not conflict with or constitute on a part of the
Authority a violation of, breach of or default under any existing constitutional
provision or statute of the Commonwealth applicable to the Authority, or, to our
knowledge without having undertaken any independent investigation, any
indenture, mortgage, deed of trust, resolution, note agreement or other
agreement or instrument to which the Authority is a party or by which the
Authority is bound and which is known to us, or, to our knowledge, without
having undertaken any independent investigation, any order, rule or regulation
of any court, governmental agency or body of the Commonwealth having
jurisdiction over the Authority or any of its activities or property.

4. To our knowledge, without having undertaken any independent
investigation, there is no action, suit, proceeding, inquiry or investigation,
at law or in equity, before or by any court, public board or body, pending or
threatened against the Authority, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the obligations of the Authority
under the Bonds.

C-2

5. The Authority has approved the distribution of the Preliminary
Official Statement dated December 16, 2005 and the Official Statement dated
December 21, 2005 ("Official Statement") by the Underwriter in connection with
the offering of the Bonds.

6. The information contained in the Official Statement under the
heading "INTRODUCTORY STATEMENT - The Authority" and "THE AUTHORITY" has been
reviewed by us and nothing has come to our attention which would lead us to
believe that such information contains any untrue statement of a material fact
or omits to state a material fact which is required to be stated therein or
which is necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading in any material
respect.

The opinions expressed herein are subject in all respects to the
following qualifications: (a) no opinion is rendered as to the availability of
equitable remedies including, but not limited to, specific performance and
injunctive relief, whether enforceability is considered in a processing in
equity or at law; (b) no opinion is rendered as to the effect of bankruptcy,
reorganization, insolvency, fraudulent conveyance, moratorium and other similar
laws or legal principles affecting creditors' rights or remedies; (c) no opinion
is rendered as to the creation, perfection or priority of any lien or security
interest; (d) no opinion is rendered with respect to any "blue sky" or other
securities laws of the Commonwealth or of other jurisdictions; and (e) no
opinion is rendered with regard to any federal income tax law or regulation or
any state tax law or regulation of the Commonwealth or of other jurisdictions.

No opinion is expressed as to the validity or enforceability of any
provisions of the Authority Documents: (a) allowing any person or entity to
institute judicial or non-judicial proceedings or to exercise any other rights,
without notice to the person or entity against whom enforcement is sought; (b)
waiving any right or defense of any person or entity; (c) providing or implying
the availability of self-help in any particular event or circumstances; (d)
relating to court costs or legal fees which may be properly chargeable or
recoverable in any judicial proceedings; (e) relating to indemnification; and
(f) relating to confession of judgment.

We call your attention to the fact that the Bonds are special and
limited obligations of the Authority, payable solely from the payments derived
by the Authority under the Financing Agreement. The Bonds are not obligations or
liabilities of the Commonwealth or the County of Delaware, Pennsylvania or any
other political subdivision thereof nor do the Bonds pledge the credit of the
Commonwealth or the County of Delaware, Pennsylvania or any other political
subdivision thereof nor do the Bonds pledge the credit of the Authority (other
than to the limited extent described above). The Authority has no taxing power.

This opinion is given as of the date hereof. No opinion is expressed as
to any matter not set forth in the numbered paragraphs herein. We make no
undertaking to supplement this opinion if facts or circumstances hereafter come
to our attention or changes in law occur after the date hereof. This opinion is
rendered solely in connection with the original delivery and payment for the
Bonds on the date hereof, and may not be relied upon for any other purpose. This
opinion may not be relied upon by any other person, including any purchaser of
the Bonds from the Underwriter or otherwise or for any other purpose, nor may
this opinion be distributed, quoted or disclosed to any person, firm or entity
without the prior written consent in each instance of a partner of the
undersigned firm.

Very truly yours,

BLANK ROME LLP

C-3

EXHIBIT D

FORM OF OPINIONS OF THE COMPANY'S LEGAL COUNSEL AND THE
COMPANY'S SENIOR VICE PRESIDENT - LAW AND ADMINISTRATION

December 28, 2005

Delaware County Industrial Development Authority
200 East Street, Suite 205
Media, PA  19063

Sovereign Securities Corporation, LLC
1500 Market Street
Philadelphia, PA 19102

Re:      $24,675,000 aggregate principal amount of Delaware
County Industrial Development Authority Water
Facilities Revenue Bonds (Aqua Pennsylvania, Inc.
Project) Series C of 2005
---------------------------------------------------
Ladies and Gentlemen:

We have acted as counsel to Aqua Pennsylvania, Inc. (the "Company") in
connection with (i) the issuance by Delaware County Industrial Development
Authority (the "Authority"), and the sale to Sovereign Securities Corporation,
LLC pursuant to that certain Bond Purchase Agreement dated December 21, 2005
(the "Purchase Agreement"), of $24,675,000 aggregate principal amount of
Delaware County Industrial Development Authority Water Facilities Revenue Bonds
(Aqua Pennsylvania, Inc.), Series C of 2005 (the "Authority Bonds"), and (ii)
the issuance and delivery of $24,675,000 principal amount of the Company's First
Mortgage Bond, 5.00% Series due 2035 (the "First Mortgage Bond"), issued under
an Indenture of Mortgage (the "Original Mortgage") dated as of January 1, 1941,
as amended and supplemented by supplemental indentures thereto, including the
Fortieth Supplemental Indenture dated as of December 15, 2005 (the "Fortieth
Supplemental Indenture") under which J.P. Morgan Trust Company, National
Association is trustee (the "Mortgage Trustee"). The Original Mortgage as
amended and supplemented is hereinafter called the "Mortgage". Capitalized terms
used herein and not otherwise defined shall have the meanings ascribed to such
terms in the Purchase Agreement.

We have examined and reviewed, among other things:

(a)      a copy of the Articles of Incorporation of the Company, as
amended and restated and now in effect;

(b)      a copy of the bylaws of the Company as now in effect;

D-1

(c)      resolutions of the Board of Directors of the Company
authorizing the execution and delivery of the Purchase
Agreement, the Financing Agreement, the Fortieth Supplemental
Indenture, the First Mortgage Bond, the Continuing Disclosure
Agreement and the Official Statement;

(d)      the Purchase Agreement;

(e)      the Financing Agreement dated as of December 15, 2005 (the
"Financing Agreement") between the Authority and the Company;

(f)      the Continuing Disclosure Agreement dated as of December 15,
2005 (the "Continuing Disclosure Agreement") between the
Company and Wachovia Bank, National Association, as trustee
for the Authority Bonds (the "Trustee");

(g)      the Official Statement relating to the Authority Bonds dated
December 21, 2005 (the "Official Statement");

(h)      the Securities Certificate relating to the issue and sale of
the First Mortgage Bond, filed by the Company with the
Pennsylvania Public Utility Commission pursuant to the
provisions of Chapter 19 of the Pennsylvania Public Utility
Code, and a copy of the Order of the Public Utility Commission
registering such Securities Certificate, certified by the
Secretary of the Pennsylvania Public Utility Commission;

(i)      a Subsistence Certificate from the Secretary of the
Commonwealth with respect to the Company;

(j)      executed counterparts of the Original Mortgage and of the
Fortieth Supplemental Indenture supplemental thereto and
evidence satisfactory to us of the due recordation thereof in
the Counties of Adams, Berks, Bradford, Bucks, Carbon,
Chester, Columbia, Cumberland, Delaware, Forest, Juniata,
Lackawanna, Lawrence, Luzerne, Mercer, Monroe, Montgomery,
Northampton, Northumberland, Pike, Schuylkill, Snyder,
Susquehanna, Wayne and Wyoming, Pennsylvania;

(k)      the documents delivered to the Mortgage Trustee in connection
with the authentication of the First Mortgage Bond pursuant to
the provisions of Sections 2(B) and 3 of Article IV of the
Original Mortgage;

(l)      the First Mortgage Bond delivered to the Trustee at the
Closing held today;

(m)      the certificates of the Company and other documents delivered
to the Mortgage Trustee at the Closing;

(n)      a certificate of the Company and various bringdown title
searches of various title companies in the Counties of Adams,
Berks, Bradford, Bucks, Carbon, Chester, Columbia, Cumberland,
Delaware, Forest, Juniata, Lackawanna, Lawrence, Luzerne,
Mercer, Monroe, Montgomery, Northampton, Northumberland, Pike,
Schuylkill, Snyder, Susquehanna, Wayne and Wyoming,
Pennsylvania, each dated as of a recent date (collectively,
"Title Searches"), as to matters relating to title to real
estate and the lien of the Mortgage thereon, on which
certificate and searches we are relying for the purposes of
this opinion; and

(o)      various certificates of officers of the Company relating to
title to real property and the priority of any lien thereon.

D-2

In rendering this opinion, we have assumed that all signatures on
documents and instruments examined by us are genuine (except signatures of the
Company on the Purchase Agreement, the Fortieth Supplemental Indenture, the
Financing Agreement, the First Mortgage Bond and the Continuing Disclosure
Agreement (collectively, the "Company Documents") and the Official Statement),
the authenticity of all documents submitted to us as originals and the
conformity with the original documents of all documents submitted to us as
copies. We have also assumed, with your permission, that none of the signatories
of the documents and instruments referred to above is an affiliate of the
Company within the meaning of 66 Pa.C.S. ss.2101 (1989).

As to questions of fact material to the opinions hereinafter expressed,
we have relied solely and without investigation upon certificates of public
officials, certificates of officers of the Company and the representations of
the Company contained in the Company Documents (including the exhibits and
schedules to such documents) and the certificates and other documents delivered
pursuant thereto. To the extent that the opinions contained herein are given to
the best of our knowledge, such knowledge means the actual knowledge of those
attorneys within our firm who have provided substantive representation to the
Company in connection with this financing, without investigation and inquiry,
and does not include matters of which such attorneys could be deemed to have
constructive knowledge.

In rendering this opinion, we have also assumed that each of the
Company Documents has been duly authorized, executed and delivered by each party
thereto (other than the Company) and that each of the Company Documents is
binding and enforceable against each such party in accordance with its
respective terms.

Further, as to matters relating to title to real estate and the lien of
the Mortgage, we have relied exclusively upon various certificates of officers
of the Company and the Title Searches and we have not made, nor undertaken to
make, any investigation or inquiry with respect to title to real property or the
priority of any lien thereon.

We are generally familiar with the Company's operations as a public
utility within the Commonwealth of Pennsylvania (the "Commonwealth").

Based upon the foregoing and such other examination of fact and law as
we have deemed necessary for purposes of this opinion, we are of the opinion
that:

1. The Company was organized and subsists under the laws of the
Commonwealth, with power (corporate and other) to own its properties and conduct
its business as described in the Official Statement.

2. The Company has the corporate power and authority to enter into and
perform the Purchase Agreement, the Financing Agreement, the First Mortgage
Bond, the Fortieth Supplemental Indenture and the Continuing Disclosure
Agreement. The execution, delivery and performance by the Company of the
Financing Agreement, the Bond Purchase Agreement, the First Mortgage Bond, the
Fortieth Supplemental Indenture and the Continuing Disclosure Agreement have
been duly authorized by all requisite corporate action.

D-3

3. The Purchase Agreement, the Financing Agreement and the Continuing
Disclosure Agreement constitute legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms.

4. The First Mortgage Bond has been duly authorized, executed,
authenticated, issued and delivered and each constitutes a valid and legally
binding obligation of the Company entitled to the benefits provided by the
Mortgage.

5. The First Mortgage Bond is not subject to the registration
requirements of the 1933 Act.

6. The Mortgage constitutes a direct, valid and enforceable mortgage
lien (except as enforceability of such lien may be limited by bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights) upon all of the properties and assets of the Company (not heretofore
released as provided for in the Mortgage) specifically or generally described or
referred to in the Mortgage as being subject to the lien thereof, except for
permitted liens under the Mortgage; the Original Mortgage, either separately or
as an exhibit to the Thirty-Fifth Supplemental Indenture dated as of January 1,
2002 or the Thirty-Eighth Supplemental Indenture dated as of November 15, 2004,
and the Fortieth Supplemental Indenture dated as of December 15, 2005 has been
properly recorded in the Counties of Adams, Berks, Bradford, Bucks, Carbon,
Chester, Columbia, Cumberland, Delaware, Forest, Juniata, Lackawanna, Lawrence,
Luzerne, Mercer, Monroe, Montgomery, Northampton, Northumberland, Pike,
Schuylkill, Snyder, Susquehanna, Wayne and Wyoming in the Commonwealth and such
recordations are the only recordations necessary in order to establish,
preserve, protect and perfect the lien of the Mortgage on all real estate and
fixed property of the Company (excluding easement and other similar rights)
described in the Mortgage as subject to the lien thereof.

7. In each of the following cases with such exceptions as are not
material and do not interfere with the conduct of the business of the Company,
the Company has good and marketable title to all of its real property currently
held in fee simple; good and marketable title to all of its other interests in
real property (other than to certain rights of way, easements, occupancy rights,
riparian and flowage rights, licenses, leaseholds, and real property interests
of a similar nature); and good and marketable title to all personal property
owned by it; in each case free and clear of all liens, encumbrances and defects
except such as may be described in the Official Statement, the lien of the
Mortgage, permitted liens under the Mortgage or such as do not materially affect
the value of such property and do not interfere with the use made and proposed
to be made of such property by the Company; and any real property and buildings
held under lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company.

D-4

8. The Company is not a holding company, a registered holding company
or an affiliate of a registered holding company within the meaning of the Public
Utility Company Holding Act of 1935, as amended.

9. The Mortgage and the First Mortgage Bond conform in all material
respects as to legal matters to the descriptions thereof in the Official
Statement.

Without having undertaken to determine independently the accuracy,
completeness and fairness of the statements contained in the Official Statement,
nothing has come to our attention in connection with our representation of the
Company in respect of the issuance of the First Mortgage Bond which leads us to
believe that the information with respect to the Company contained in the
Official Statement (including Appendix A and the information incorporated
therein by reference) contains any untrue statement of a material fact or omits
to state a material fact which is required to be stated therein or which is
necessary to make such information and descriptions, in the light of the
circumstances under which they were made, not misleading in any material
respect.

The foregoing opinions are subject to the following qualifications:

(i) The opinions expressed in paragraphs 3 and 4 are subject
to the qualifications that the enforceability of the First Mortgage Bond are
subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium,
and other similar laws of general application relating to or affecting
creditors' rights, (ii) certain provisions of Pennsylvania law affecting the
availability of certain remedies, and (iii) the further qualification that the
availability of specific performance, injunctive relief or other equitable
remedies is subject to the discretion of the court before which any proceeding
therefor may be brought.

(ii) Our opinions are subject to limitations imposed by
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is considered in
proceedings at law or in equity).

(iii) We express no opinion as to the enforceability with
respect to any provisions purporting to waive the effect of applicable laws and
remedies and any provisions releasing any party from, or requiring
indemnification for, liability for gross negligence, recklessness or willful
misconduct.

(iv) Any requirements in any of the documents specifying that
provisions of a document may only be waived in writing may not be enforced to
the extent that an oral agreement or an implied agreement by trade practice or
course of conduct has been created modifying any provision of such document.

(v) We express no opinion as to the applicability to the
transactions contemplated by the Company Documents of Section 548 of the
Bankruptcy Code or any applicable state law relating to fraudulent transfers and
obligations.

(vi) Other applicable local, state and federal laws,
regulations and ordinances, court decisions and constitutional requirements may
limit or render unenforceable certain of the rights or remedies contained in the
Company Documents, but in our opinion, none of the same would materially impair
the practical realization of the benefits intended to be provided by the Company
pursuant to the Company Documents.

D-5

(vii) Our opinion is limited in all respects to the laws of
the Commonwealth in effect as of the date hereof and we express no opinion as to
the laws of any other jurisdiction.

(viii) This opinion is limited to the matters set forth
herein, no opinion may be inferred or implied beyond the matters expressly
stated herein, and our statements contained in the opinion portion of this
letter must be read in conjunction with the assumptions, limitations, exceptions
and qualifications set forth in this letter.

(ix) The opinions herein are expressed as of the date hereof
only and not as of some future date. We undertake no responsibility to advise
you of any change in law or new laws, regulations or judicial decisions in the
future. Nor do we assume any obligation to update or supplement this opinion to
reflect any facts or circumstances which may hereafter come to our attention.
References to "laws," "regulations" and "judicial decisions" herein shall
include only officially published laws and regulations of the Commonwealth of
Pennsylvania.

This opinion is solely for the benefit of each of you and the benefit
of any subsequent holder of the First Mortgage Bond or the Authority Bonds and
may not be relied upon by any other person or for any other purpose.

Very truly yours,

D-6

[Letterhead of Aqua Pennsylvania]

December 28, 2005

Sovereign Securities Corporation, LLC
1500 Market Street
Philadelphia, PA 19102

Re:      $24,675,000 aggregate principal amount of Delaware County
Industrial Development Authority Water Facilities Revenue
Bonds (Aqua Pennsylvania, Inc. Project) Series C of 2005
----------------------------------------------------------

Ladies and Gentlemen:

I am Senior Vice President-Law and Administration for Aqua
Pennsylvania, Inc. (the "Company").

Pursuant to Section 11(c)(iv) of the Bond Purchase Agreement dated
December 21, 2005 (the "Purchase Agreement") among the Authority, the
Underwriter and the Company (f/k/a Pennsylvania Suburban Water Company, as
successor by merger to Philadelphia Suburban Water Company) relating to the
Authority Bonds, I have been asked to render an opinion to you regarding certain
matters involving the Company. Capitalized terms used herein and not otherwise
defined shall have the definitions ascribed to such terms in the Purchase
Agreement.

In rendering this opinion, I have assumed the following:

i. the genuineness of all signatures (other than the
signatures of the Company on the Fortieth Supplemental Mortgage, as hereinafter
defined);

ii. the authenticity and completeness of all documents
submitted to me as originals;

iii. the conformity to original documents of all documents
submitted to me as copies, and the authenticity of the originals of such copies;

iv. the entity executing the Mortgage as trustee is duly
organized and validly existing, in good standing under the laws of the
jurisdiction of its organization, is properly qualified to do business in all
jurisdictions in which the business conducted by it makes such qualification
necessary and has all necessary legal and corporate power and authority to enter
into and perform its obligations under the Mortgage;

v. the due authorization, execution and delivery of the
Mortgage by or on behalf of the party thereto other than the Company;

D-7

vi. the enforceability against each party thereto (other than
the Company) of the Mortgage in accordance with its respective terms; and

vii. that the execution, delivery and performance of the
Mortgage by the entity other than the Company which is party thereto does not
and will not conflict with, result in any breach of, or constitute a default
under any order, writ, injunction or decree of any court or governmental
authority, or any agreement, indenture or other instrument, to which any such
party is a party or by which it or its properties are bound, and that all
necessary approvals, consents, permits, registrations, filings or other notices
to or grants of authority from any federal or local governmental body necessary
for the execution, delivery and performance of the Mortgage by each party
thereto (other than the Company) have been duly received or made, with all
appeal periods expired and no appeals taken.

I am making each of the foregoing assumptions with your permission and
with the disclaimer that we make no representation as to the accuracy of such
assumptions, although I have no knowledge that any such assumption is untrue.

In my opinion:

1. In each of the following cases with such exceptions as are not
material and do not materially interfere with the conduct of the business of the
Company: (a) the Company has all licenses, franchises, permits, authorizations,
rights, approvals, consents and order of all governmental authorities or
agencies necessary for the ownership or lease of the properties owned or leased
by it and for the operation of the business carried on by it as described in the
Official Statement, and all water rights, riparian rights, easements, rights of
way and other similar interests and rights described or referred to in the
Mortgage necessary for the operation of the business carried on by it as
described in the Official Statement; (b) except as otherwise set forth in the
Official Statement, all such licenses, franchises, permits, orders,
authorizations, rights, approvals and consents are in full force and effect and
contain no unduly burdensome provisions; (c) to the best of my knowledge, except
as otherwise set forth in the Official Statement, there are no legal or
governmental proceedings pending or, to my knowledge, threatened that would
result in a material modification, suspension or revocation thereof; and (d) the
Company has the legal power to exercise the rights of eminent domain for the
purposes of conducting its water utility operations.

2. The issue and sale of the Bonds; the issue and delivery of the First
Mortgage Bond and the compliance by the Company with all of the applicable
provisions of the First Mortgage Bond and the Mortgage; and the execution,
delivery and performance by the Company of the Fortieth Supplemental Mortgage,
the Financing Agreement, the Purchase Agreement and the Continuing Disclosure
Agreement will not materially conflict with or result in a material breach of
any of the terms or provisions of, or constitute a material default under, or
result in the creation or imposition of any material lien, charge or encumbrance
(other than the lien of the Mortgage) upon any of the property or assets of the
Company pursuant to the terms of, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or by
which the Company is bound or to which any of the property or assets of the
Company is subject, nor will such action result in a violation of the provisions
of the Articles of Incorporation, as amended, or the Bylaws of the Company or
any statute or any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its property. No consent,
approval, authorization, order, registration or qualification of or with any
court or any such regulatory authority or other governmental body not already
obtained is required for the issue and delivery of the First Mortgage Bond, the
execution, delivery and performance of the Purchase Agreement, the Financing
Agreement, the Fortieth Supplemental Mortgage, the First Mortgage Bond, and the
Continuing Disclosure Agreement, or the consummation of the other transactions
contemplated by the Purchase Agreement or the Mortgage.

D-8

3. There are no legal or governmental proceedings pending to which the
Company is a party or of which any property of the Company is the subject, other
than as set forth in the Official Statement and other than litigation incident
to the kind of business conducted by the Company, wherein an unfavorable ruling,
decision or finding is likely that would have a material adverse effect on the
financial position, stockholders' equity or results of operations of the
Company.

4. Each of the Indenture of Mortgage dated as of January 1, 1941 (the
"Original Mortgage"), between the Company and The Philadelphia Company for
Insurance on Lives and Exacting Annuities (now J.P. Morgan Trust Company,
National Association, as successor in interest), as trustee (the "Trustee") and
the forty indentures supplemental thereto, including the Fortieth Supplemental
Indenture dated as of December 15, 2005 between the Company and the Trustee (the
Original Mortgage as so supplemented and amended, the "Mortgage") was duly
authorized, executed and delivered by the Company and the Mortgage constitutes a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms (subject to applicable bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or other similar
laws relating to creditors' rights generally from time to time in effect, and
subject, as to enforceability, to general principles of equity, regardless of
whether such enforceability is considered in a proceeding in equity or at law).

The foregoing opinions are subject to the following qualifications:

i. The enforceability of the Mortgage, including, without
limitation, any non-judicial and self-help remedies and waivers contained
therein, may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws affecting the rights of creditors
generally and are subject to limitations imposed by general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is considered in proceedings at law
or in equity), public policy and applicable law which may limit the availability
of the remedies provided for therein,

ii. I express no opinion as to the adequacy of any notice with
respect to the disposition of any collateral. I also express no opinion as to
the effectiveness or enforceability of provisions relating to waivers of notice
or waivers of other rights, severability, prepayment fees or penalties, choice
of law, or any provisions which release or limit the Company's liability or
relate to cumulative remedies or, to the extent they purport to or would have
the effect of compensating the Company in amounts in excess of any actual loss
suffered by the Company, provisions relating to the payment of a default rate of
interest.

D-9

iii. I express no opinion as to enforceability with respect to
any provisions in the Mortgage executed by the Company purporting to waive the
effect of applicable laws and remedies and any provisions releasing any party
from, or requiring indemnification for, liability for gross negligence,
recklessness or willful misconduct.

iv. Requirements in the Mortgage specifying that provisions of
the Mortgage may only be waived in writing may not be enforced to the extent
that an oral agreement or an implied agreement by trade practice or course of
conduct has been created modifying any provision of such Mortgage.

v. My opinion is limited in all respects to laws of the
Commonwealth of Pennsylvania in effect as of the date hereof and we express no
opinion as to the laws of any other jurisdiction.

vi. This opinion is limited to the matters set forth herein,
no opinion may be inferred or implied beyond the matters expressly stated
herein, and our statements contained in the opinion portion of this letter must
be read in conjunction with the assumptions, limitations, exceptions and
qualifications set forth in this letter.

vii. The opinions herein are expressed as of the date hereof
only and not as of some future date. I undertake no responsibility to advise you
of any change in law or new laws, regulations or judicial decisions in the
future nor do I assume any obligation to update or supplement this opinion to
reflect any facts or circumstances which may hereafter come to our attention.
References to "laws," "regulations" and "judicial decisions" herein shall
include only officially published laws and regulations of the Commonwealth of
Pennsylvania.

This opinion is solely for your benefit and may not be relied upon by
any other person or for any other purpose.

Very truly yours,

Roy H. Stahl

D-10

EXHIBIT 10.39

AQUA AMERICA, INC.

AMENDED AND RESTATED 2001 EMPLOYEE STOCK PURCHASE PLAN

(as amended and restated on January 1, 2006)

The purpose of the Aqua America, Inc. Amended and Restated 2001
Employee Stock Purchase Plan is to provide eligible employees of Aqua America,
Inc. (the "Company") and its subsidiaries an opportunity to purchase the common
stock of the Company. The Board of Directors of the Company believes that
employee participation in stock ownership will be to the mutual benefit of the
employees and the Company. The Plan must be approved by the stockholders of the
Company within 12 months after the date on which the Plan is adopted.

ARTICLE I
DEFINITIONS

SECTION 1.01 "Board of Directors" means the Board of Directors of the
Company.

SECTION 1.02 "Code" means the Internal Revenue Code of 1986, as
amended. References to specific sections of the Code shall be taken to be
references to corresponding sections of any successor statute.

SECTION 1.03 "Committee" means the committee appointed by the Board of
Directors to administer the Plan, as provided in Section 5.04.

SECTION 1.04 "Company" means Aqua America, Inc., a Pennsylvania
corporation, or any successor by merger or otherwise.

SECTION 1.05 "Compensation" means a Participant's base wages, overtime
pay, commissions, cash bonuses, premium pay and shift differential, before
giving effect to any compensation reductions made in connection with plans
described in section 401(k) or 125 of the Code.

SECTION 1.06 "Effective Date" shall mean March 6, 2001.

SECTION 1.07 "Election Date" means the first business day of each
calendar month during which the Plan is in effect, or such other dates as the
Committee shall specify; provided that the first Election Date for the Plan
shall be the Effective Date.

SECTION 1.08 "Eligible Employee" means each employee of the Employer:

(i) Who is employed by the Employer and (a) who is classified
by the Employer as an "active regular or part-time non-union
employee" or as an "active full or part-time union employee" and (b)
each person who is not so classified, if such person's customary
employment is for more than twenty (20) hours per week and for more
than five months per year, and

(ii) Who is not deemed for purposes of section 423(b)(3) of
the Code to own stock possessing five percent or more of the total
combined voting power or value of all classes of stock of the
Company or any subsidiary.

SECTION 1.09 "Employer" means the Company and each Subsidiary.

SECTION 1.10 "Exchange Act" means the Securities Exchange Act of 1934,
as amended, and as the same may hereafter be amended.

SECTION 1.11 "Market Value" means the average of the high and low
trading prices for the Stock as reported on the principal market on which the
Stock is traded for the date of reference. If there was no such price reported
for the date of reference, "Market Value" means the average of the high and low
trading prices for the Stock on the day next preceding the date of reference for
which such price was reported or, if there was no such reported price, the fair
market value as determined by the Committee.

SECTION 1.12 "Participant" means each Eligible Employee who elects to
participate in the Plan.

SECTION 1.13 "Plan" means the Aqua America, Inc. Amended and Restated
2001 Employee Stock Purchase Plan, as set forth herein and as hereafter amended.

SECTION 1.14 "Plan Year" means each calendar year during which the Plan
is in effect.

SECTION 1.15 "Purchase Agreement" means the instrument prescribed by
the Committee pursuant to which an Eligible Employee may enroll as a Participant
and subscribe for the purchase of shares of Stock on the terms and conditions
offered by the Company. The Purchase Agreement is intended to evidence the
Company's offer of an option to the Eligible Employee to purchase Stock on the
terms and conditions set forth therein and herein.

SECTION 1.16 "Purchase Date" means the last day of each Purchase
Period.

SECTION 1.17 "Purchase Period" means each one month period or other
period specified by the Committee, beginning on or after the Effective Date,
during which the Participant's Stock purchase is funded through payroll
deduction accumulations or a lump sum deposit under Section 3.05(b).

SECTION 1.18 "Purchase Price" means the purchase price for shares of
Stock purchased under the Plan, determined as set forth in Section 3.03.

SECTION 1.19 "Stock" means the common stock of the Company.

SECTION 1.20 "Subsidiary" means any present or future corporation which
(i) constitutes a "subsidiary corporation" of the Company as that term is
defined in section 424 of the Code and (ii) is designated as a participating
entity in the Plan by the Committee. Unless the Committee specifically
designates otherwise, a Canadian or other foreign subsidiary shall not be
considered a Subsidiary for purposes of the Plan, and employees of such a
subsidiary shall not be Eligible Employees.

ARTICLE II
ADMISSION TO PARTICIPATION

SECTION 2.01 Initial Participation. An Eligible Employee may elect to
participate in the Plan and may become a Participant effective as of any
Election Date, by executing and filing with the Committee a Purchase Agreement
at such time in advance of the Election Date as the Committee shall prescribe.
The Purchase Agreement shall remain in effect until it is modified through
discontinuance of participation under Section 2.02 or a change under Section
3.05.

SECTION 2.02 Discontinuance of Participation.

(a) A Participant may voluntarily cease his or her
participation in the Plan and stop payroll deductions at any time by
filing a notice of cessation of participation on such form and at such
time in advance of the Purchase Date as the Committee shall prescribe.
A Participant who ceases contributions during a Purchase Period may
make additional contributions to the Plan during the Purchase Period.
The Participant may again elect to make payroll deductions on the next
Election Date, if the Participant is then an Eligible Employee. A
Participant who ceases contributions during a Purchase Period may
request payment of any funds held in his or her account under the Plan.
Any funds remaining in the Participant's account on the Purchase Date
shall be used to purchase Stock pursuant to Section 3.04, if the
Participant remains an Eligible Employee.

(b) If a Participant ceases to be an Eligible Employee, his or
her participation automatically shall cease, no further purchase of
Stock shall be made for the Participant, and the Participant shall
receive payment of any funds held in his or her account under the Plan.

SECTION 2.03 Readmission to Participation. Any Eligible Employee who
has previously been a Participant, who has discontinued participation (whether
by cessation of eligibility or otherwise), and who wishes to be reinstated as a
Participant may again become a Participant by executing and filing with the
Committee a new Purchase Agreement. Reinstatement to Participant status shall be
effective as of any Election Date, provided the Participant files a new Purchase
Agreement with the Committee at such time in advance of the Election Date as the
Committee shall prescribe.

SECTION 2.04 Leave of Absence. A Participant who is on an approved
leave of absence may continue to participate in the Plan during the leave of
absence by making cash payments to the Company, at such times as the Committee
determines, equal to the payroll deductions that would have been made had the
leave of absence not occurred.

ARTICLE III
STOCK PURCHASE AND RESALE

SECTION 3.01 Reservation of Shares. There shall be 300,000 shares of
Stock reserved for issuance or transfer under the Plan, subject to adjustment in
accordance with Section 4.02. Except as provided in Section 4.02, the aggregate
number of shares of Stock that may be purchased under the Plan shall not exceed
the number of shares of Stock reserved under the Plan. The shares of Stock may
be (i) Treasury or newly issued shares of the Company or (ii) purchased by the
Company on the open market.

SECTION 3.02 Limitation on Shares Available.

(a) The maximum number of shares of Stock that may be
purchased for each Participant on a Purchase Date is the lesser of (a)
the number of whole and fractional shares of Stock that can be
purchased by applying the full balance of the Participant's withheld
funds to the purchase of shares of Stock at the Purchase Price, or the
Participant's proportionate part of the maximum number of shares of
Stock available under the Plan, as stated in Section 3.01.

(b) Notwithstanding the foregoing, if any person entitled to
purchase shares pursuant to any offering under the Plan would be deemed
for purposes of section 423(b)(3) of the Code to own stock (including
any number of shares of Stock that such person would be entitled to
purchase under the Plan) possessing five percent or more of the total
combined voting power or value of all classes of stock of Company, the
maximum number of shares of Stock that such person shall be entitled to
purchase pursuant to the Plan shall be reduced to that number which,
when added to the number of shares of stock that such person is deemed
to own (excluding any number of shares of Stock that such person would
be entitled to purchase under the Plan), is one less than such five
percent. Any amounts withheld from a Participant's compensation that
cannot be applied to the purchase of Stock by reason of the foregoing
limitation shall be returned to the Participant as soon as practicable.

(c) A Participant may not purchase shares of Stock having an
aggregate Market Value of more than $25,000, determined at the
beginning of each Purchase Period, for any calendar year in which one
or more offerings under this Plan are outstanding at any time, and a
Participant may not purchase a share of Stock under any offering after
the expiration of the Purchase Period for the offering.

SECTION 3.03 Purchase Price of Shares.

(a) Unless the Committee determines otherwise, the Purchase
Price per share of the Stock to be sold to Participants under the Plan
shall be the lower of:

(i) 85% of the Market Value of such share on the first
day of the Purchase Period, or

(ii) 85% of the Market Value of such share on the
Purchase Date.

(b) The Committee may determine that the Purchase Price shall
be the Market Value, or a percentage of the Market Value, on either of
the first day of the Purchase Period or the Purchase Date, or the lower
of such values, so long as the percentage shall not be lower than 85%
of such Market Value.

SECTION 3.04 Exercise of Purchase Privilege.

(a) As of the first day of each Purchase Period, each
Participant shall be granted an option to purchase shares of Stock at
the Purchase Price specified in Section 3.03. The option shall continue
in effect through the Purchase Date for the Purchase Period. Subject to
the provisions of Section 3.02 above, on each Purchase Date, the
Participant shall automatically be deemed to have exercised his or her
option to purchase shares of Stock, unless he or she notifies the
Committee, in such manner and at such time in advance of the Purchase
Date as the Committee shall prescribe, of his or her desire not to make
such purchase.

(b) Subject to the provisions of Section 3.02, there shall be
purchased for the Participant on each Purchase Date, at the Purchase
Price for the Purchase Period, the largest number of whole shares of
Stock and fractional shares as can be purchased with the amounts
withheld from the Participant's Compensation or deposited by the
Participant as described in Section 3.05(b) during the Purchase Period.
Each such purchase shall be deemed to have occurred on the Purchase
Date occurring at the close of the Purchase Period for which the
purchase was made. Any amounts that are withheld from a Participant's
Compensation in a Purchase Period and that remain after the purchase of
whole shares of Stock on a Purchase Date will be held in the
Participant's account, without interest, and applied on the
Participant's behalf to purchase Stock on the next Purchase Date.

SECTION 3.05 Payroll Deductions and Deposits.

(a) Each Participant shall authorize payroll deductions from
his or her Compensation for the purpose of funding the purchase of
Stock pursuant to his or her Purchase Agreement. In the Purchase
Agreement, each Participant shall authorize an after-tax payroll
deduction from each payment of Compensation during the Purchase Period
of an amount (i) not less than $5.00 per paycheck for a Participant who
is paid on a weekly payroll period basis or $10.00 per paycheck for a
Participant who is paid biweekly or semi-monthly payroll period basis,
and (ii) not more than ten percent (10%) of such Participant's
Compensation, rounded to the next highest whole dollar amount. A
Participant may change the deduction to any permissible level effective
as of any Election Date. A change shall be made by filing with the
Committee a notice in such form and at such time in advance of the
Election Date on which the change is to be effective as the Committee
shall prescribe.

(b) The Committee may allow Participants to deposit funds with
the Company to be used for the purpose of purchasing Stock pursuant to
their Purchase Agreements, instead of or in addition to payroll
deductions pursuant to Section 3.05(a) subject to the following: (i)
only one deposit as described in this paragraph shall be accepted in
Purchase Period, (ii) the minimum amount that a Participant may
contribute to the Plan pursuant to this paragraph shall be twenty-five
dollars ($25) per Purchase Period and (iii) the total amount that the
Participant may contribute to the Plan pursuant to this paragraph
together with all payroll deductions pursuant to paragraph (a) above
may not exceed the $25,000 limitation specified in paragraph (d) of
Section 3.02 above. The Committee shall designate the dates by which
any such deposits must be made for a Purchase Period.

(c) Dividends will be paid on all whole and fractional shares
purchased by a Participant. Unless otherwise directed by the
Participant, all dividends paid with respect to shares purchased by
each Participant will be automatically be reinvested under the Aqua
America, Inc. Dividend Reinvestment and Direct Stock Purchase Plan.

SECTION 3.06 Payment for Stock. The Purchase Price for all shares of
Stock purchased by a Participant under the Plan shall be paid out of the
Participant's authorized payroll deductions and any deposits made by a
Participant pursuant to Section 3.05(b). All funds received or held by the
Company under the Plan are general assets of the Company, shall be held free of
any trust or other restriction, and may be used for any corporate purpose.

SECTION 3.07 Share Ownership; Issuance of Certificates.

(a) The shares of Stock purchased by a Participant on a
Purchase Date shall, for all purposes, be deemed to have been issued or
sold at the close of business on the Purchase Date. Prior to that time,
none of the rights or privileges of a stockholder of the Company shall
inure to the Participant with respect to such shares of Stock. All the
shares of Stock purchased under the Plan shall be delivered by the
Company in a manner as determined by the Committee.

(b) The Committee, in its sole discretion, may determine that
shares of Stock shall be delivered by (i) issuing and delivering to the
Participant a certificate for the number of shares of Stock purchased
by the Participant, (ii) issuing and delivering certificates for the
number of shares of Stock purchased to a firm which is a member of the
National Association of Securities Dealers, as selected by the
Committee from time to time, which shares shall be maintained by such
firm in a separate brokerage account for each Participant, or (iii)
issuing and delivering certificates for the number of shares of Stock
purchased by Participants to a bank or trust company or affiliate
thereof, as selected by the Committee from time to time, which shares
may be held by such bank or trust company or affiliate in street name,
but with a separate account maintained by such entity for each
Participant reflecting such Participant's share interests in the Stock.
Each certificate or account, as the case may be, may be in the name of
the Participant or, if he or she so designates on the Participant's
Purchase Agreement, in the Participant's name jointly with the
Participant's spouse, with right of survivorship, or in such other form
as the Committee may permit.

(c) The Committee, in its sole discretion, may impose such
restrictions or limitations as it shall determine on the resale of
Stock, the issuance of individual stock certificates or the withdrawal
from any stockholder accounts established for a Participant.

SECTION 3.08 Distribution of Shares or Resale of Stock.

(i) In accordance with the procedures established by the
Committee, a Participant may request a distribution of shares
of Stock purchased for the Participant under the Plan or order
the sale of such shares at any time by making a request in
such form and at such time as the Committee shall prescribe.

(ii) If a Participant terminates his or her employment
with the Employer or otherwise ceases to be an Eligible
Employee, the Participant shall receive a distribution of his
or her shares of Stock held in any stockholder account
established pursuant to Section 3.07(b), unless the
Participant elects to have the shares of Stock sold in
accordance with such procedures as the Committee shall
prescribe.

(b) If a Participant is to receive a distribution of shares of
Stock, or if shares are to be sold, the distribution or sale shall be
made in whole shares of Stock, with fractional shares paid in cash. Any
brokerage commissions resulting from a sale of Stock shall be deducted
from amounts payable to the Participant.

ARTICLE IV
SPECIAL ADJUSTMENTS

SECTION 4.01 Shares Unavailable. If, on any Purchase Date, the
aggregate funds available for the purchase of Stock would purchase a number of
shares in excess of the number of shares of Stock then available for purchase
under the Plan, the following events shall occur:

(a) The number of shares of Stock that would otherwise be
purchased by each Participant shall be proportionately reduced on the
Purchase Date in order to eliminate such excess;

(b) The Plan shall automatically terminate immediately after
the Purchase Date as of which the supply of available shares is
exhausted; and

(c) Any amounts remaining shall be repaid the Participants.

SECTION 4.02 Anti-Dilution Provisions. The aggregate number of shares
of Stock reserved for purchase under the Plan, as provided in Section 3.01, the
maximum number of shares that may be purchased by a Participant as provided in
Section 3.02(b), and the calculation of the Purchase Price per share may be
appropriately adjusted by the Committee to reflect any increase or decrease in
the number of issued shares of Stock resulting from a subdivision or
consolidation of shares or other capital adjustment, or the payment of a stock
dividend, or other increase or decrease in such shares, if effected without
receipt of consideration by the Company.

SECTION 4.03 Effect of Certain Transactions. Subject to any required
action by the stockholders, if the Company shall be the surviving corporation in
any merger or consolidation, any offering hereunder shall pertain to and apply
to the shares of Stock of the Company. However, in the event of a dissolution or
liquidation of the Company, or of a merger or consolidation in which the Company
is not the surviving corporation, the Plan and any offering hereunder shall
terminate upon the effective date of such dissolution, liquidation, merger or
consolidation, unless the Board determines otherwise, and the balance of any
amounts withheld from a Participant's Compensation or deposited pursuant to
Section 3.05(b) which have not by such time been applied to the purchase of
Stock shall be returned to the Participant.

ARTICLE V
MISCELLANEOUS

SECTION 5.01 Non-Alienation. Except as set forth below, the right to
purchase shares of Stock under the Plan is personal to the Participant, is
exercisable only by the Participant during the Participant's lifetime and may
not be assigned or otherwise transferred by the Participant. If a Participant
dies, unless the executor, administrator or other personal representative of the
deceased Participant directs otherwise, any amounts previously withheld from the
Participant's Compensation or deposited pursuant to Section 3.05(b) before the
Participant's death during the Purchase Period in which the Participant dies
shall be used to purchase Stock on the Purchase Date for the Purchase Period.
After that Purchase Date, there shall be delivered to the executor,
administrator or other personal representative of the deceased Participant all
shares of Stock and such residual amounts as may remain to the Participant's
credit under the Plan.

SECTION 5.02 Administrative Costs. The Company shall pay the
administrative expenses associated with the operation of the Plan (other than
brokerage commissions resulting from sales of Stock directed by Participants).

SECTION 5.03 No Interest. No interest shall be payable with respect to
amounts withheld or deposited under the Plan.

SECTION 5.04 Committee. The Board of Directors shall appoint the
Committee, which shall have the authority and power to administer the Plan and
to make, adopt, construe, and enforce rules and regulations not inconsistent
with the provisions of the Plan. The Committee shall adopt and prescribe the
contents of all forms required in connection with the administration of the
Plan, including, but not limited to, the Purchase Agreement, payroll withholding
authorizations, requests for distribution of shares, and all other notices
required hereunder. The Committee shall have the fullest discretion permissible
under law in the discharge of its duties. The Committee's interpretations and
decisions with respect to the Plan shall be final and conclusive.

SECTION 5.05 Withholding of Taxes; Notification of Transfer.

(a) All acquisitions and sales of Stock under the Plan shall
be subject to applicable federal (including FICA), state and local tax
withholding requirements if the Internal Revenue Service or other
taxing authority requires such withholding. The Company may require
that Participants pay to the Company (or make other arrangements
satisfactory to the Company for the payment of) the amount of any
federal, state or local taxes that the Company is required to withhold
with respect to the purchase of Stock or the sale of Stock acquired
under the Plan, or the Company may deduct from the Participant's wages
or other compensation the amount of any withholding taxes due with
respect to the purchase of Stock or the sale of Stock acquired under
the Plan.

(b) A Participant shall be required to advise the Committee
immediately if the Participant transfers (by sale, gift or other
manner) any shares of Stock acquired under the Plan within two years
after the beginning of the Purchase Period in which the Stock is
purchased.

SECTION 5.06 Amendment of the Plan. The Board of Directors may, at any
time and from time to time, amend the Plan in any respect, except that any
amendment that is required to be approved by the stockholders under Section 423
of the Code shall be submitted to the stockholders of the Company for approval.

SECTION 5.07 Expiration and Termination of the Plan. The Plan shall
continue in effect for ten years from the Effective Date, unless terminated
prior to that date pursuant to the provisions of the Plan or pursuant to action
by the Board of Directors. The Board of Directors shall have the right to
terminate the Plan at any time without prior notice to any Participant and
without liability to any Participant. Upon the expiration or termination of the
Plan, the balance, if any, then standing to the credit of each Participant from
amounts withheld from the Participant's Compensation or deposited by the
Participant which has not, by such time, been applied to the purchase of Stock
shall be refunded to the Participant.

SECTION 5.08 No Employment Rights. Participation in the Plan shall not
give an employee any right to continue in the employment of an Employer, and
shall not affect the right of the Employer to terminate the employee's
employment at any time, with or without cause.

SECTION 5.09 Repurchase of Stock. The Company shall not be required to
purchase or repurchase from any Participant any of the shares of Stock that the
Participant acquires under the Plan.

SECTION 5.10 Notice. A Purchase Agreement and any notice that a
Participant files pursuant to the Plan shall be on the form prescribed by the
Committee and shall be effective only when received by the Committee. Delivery
of such forms may be made by hand or by certified mail, sent postage prepaid, to
the Company's corporate headquarters, or such other address as the Committee may
designate. Delivery by any other mechanism shall be deemed effective at the
option and discretion of the Committee.

SECTION 5.11 Government Regulation. The Company's obligation to sell
and to deliver the Stock under the Plan is at all times subject to all approvals
of any governmental authority required in connection with the authorization,
issuance, sale or delivery of such Stock.

SECTION 5.12 Internal Revenue Code and ERISA Considerations. The Plan
is intended to constitute an "employee stock purchase plan" within the meaning
of Section 423 of the Internal Revenue Code of 1986, as amended. The Plan is not
intended and shall not be construed as constituting an "employee benefit plan,"
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended.

SECTION 5.13 Headings, Captions, Gender. The headings and captions
herein are for convenience of reference only and shall not be considered as part
of the text. The masculine shall include the feminine, and vice versa.

SECTION 5.14 Severability of Provisions, Prevailing Law. The provisions
of the Plan shall be deemed severable. In the event any such provision is
determined to be unlawful or unenforceable by a court of competent jurisdiction
or by reason of a change in an applicable statute, the Plan shall continue to
exist as though such provision had never been included therein (or, in the case
of a change in an applicable statute, had been deleted as of the date of such
change). The Plan shall be governed by the laws of the Commonwealth of
Pennsylvania to the extent such laws are not in conflict with, or superseded by,
federal law.

* * * * * * * * * * *

EXHIBIT 10.40

AQUA AMERICA, INC.
2004 EQUITY COMPENSATION PLAN

STOCK OPTION AND DIVIDEND EQUIVALENT GRANT

This Incentive Stock Option and Dividend Equivalent Grant Agreement
evidences the grant made by Aqua America, Inc., a Pennsylvania corporation (the
"Corporation"), to XX, an officer of the Corporation or one of its
subsidiaries (the "Grantee"), under the terms and provisions of the Aqua
America, Inc. 2004 Equity Compensation Plan (the "Plan").

WHEREAS, on March 18, 2004 the Executive Committee of the Board of
Directors of the Corporation (the "Board") adopted the Plan, subject to the
approval of the shareholders of the Corporation;

WHEREAS, the Plan was approved and ratified at the Corporation's 2004
Annual Meeting of the Shareholders by the vote of the holders of a majority of
the Corporation's common stock (the "Common Stock") entitled to vote thereon;

WHEREAS, the Plan has been amended or amended and restated from time to
time with the approval of the Corporation's Board of Directors and, when
required, the Corporation's shareholders;

WHEREAS, pursuant to the Plan, the Board has empowered its compensation
committee (the "Committee") to grant options to purchase Common Stock and to
grant dividend equivalents based upon the dividends earned on Common Stock
(collectively, the "Grants") to eligible persons in accordance with the terms
and provisions of the Plan; and

WHEREAS, the Committee, as required by the Plan, considers the Grantee
to be an eligible person as contemplated by the Plan and has determined that it
would be in the best interests of the Corporation to make the Grants referred to
herein;

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

1

1. Grant of Option.

a. Number of Shares, Option Price and Exercise Schedule. Subject to the
terms and conditions hereinafter set forth, the Corporation, with the approval
and at the direction of the Committee, hereby grants to the Grantee an option to
purchase an aggregate of XX shares of Common Stock at a price of $XX.XX per
share. This option shall become exercisable in three (3) annual installments,
the Grantee having the right hereunder to purchase from the Corporation, on and
after the following dates, the following numbers of shares of Common Stock:

________________: XX SHARES,
________________: AN ADDITIONAL XX SHARES,
________________: AN ADDITIONAL XX SHARES;

The right of the Grantee to purchase shares of Common Stock subject to any
accrued installment may be exercised in whole or in part from time to time,
subject to the restrictions set forth herein. The Committee may, in its sole
discretion, accelerate the time at which the option may be exercised in whole or
in part. Notwithstanding any determinations by the Committee regarding the
exercise period of the option or the exercise schedule set forth above, all
outstanding options shall become immediately exercisable upon a Change of
Control of the Corporation (as defined in the Plan).

b. Options as an Incentive Stock Option. It is intended that this
option shall meet the applicable requirements of, and qualify as, an incentive
stock option under the terms of Section 422 of the Internal Revenue Code as now
or hereafter constituted (the "Code") and as interpreted by relevant rulings,
regulations and other applicable authority, and shall in all respects be so
interpreted and construed. In conformance with the foregoing, the Grantee
understands and hereby acknowledges that: (i) in the event that the aggregate
fair market value (determined at the time the option is granted) of the stock
with respect to which incentive stock options are exercisable for the first time
by the Grantee during any calendar year (under all stock option plans of the
Corporation and its parents and subsidiaries, if any) exceeds $100,000, then to
the extent of such excess, all or a portion of this option shall (if, and to the
extent, required by Section 422 of the Code) not be treated as an incentive
stock option; and (ii) any exercise of this option following the termination of
employment of the Grantee which occurs more than three months from the date of
such termination (including termination of employment on account of retirement,
but excluding termination on account of death), or more than one year from the
date of such termination in the case of total disability, will not satisfy the
conditions of Section 422 of the Code for treatment as an incentive stock
option; and (iii) therefore, any such excess referred to in (i), or exercise
referred to in (ii), will be taxed in accordance with the rules of taxation
governing the exercise of nonqualified stock options. Unless the Grantee could
otherwise transfer Common Stock issued pursuant to an incentive stock option
granted hereunder without incurring liability under Section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), at least six months must
elapse from the date of grant of an incentive stock option to the date of
disposition of the Common Stock issued upon exercise of such option.

c. Termination of Option. This option and all rights hereunder, to the
extent such rights shall not have been exercised, shall terminate and become
null and void after the expiration of ten (10) years from the Date of Grant (the
"option term"). The Date of Grant for the options granted hereunder is [GRANT
DATE].

2

Upon the termination of the Grantee's employment for any reason (except
as a result of retirement, disability or death), this option shall terminate.
Notwithstanding the fact that, in all cases, the Grantee's employment shall be
deemed to have terminated upon the sale of a subsidiary of the Corporation that
employs the Grantee, the Committee, in its sole discretion, may extend the
period during which the option 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 retirement or
a disability other than a total disability, or (iv) the expiration of the
original term of the option as established in the first paragraph of this
Section. The Committee, in its sole discretion, may similarly extend the period
of exercise of the option if the Grantee's employment with the Corporation is
terminated in connection with the sale of a subsidiary of the Corporation.

Upon termination of the Grantee's employment as a result of retirement,
disability or death, the period during which any option that is exercisable as
of the date of Grantee's termination of employment 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; but in no event shall the period
extend beyond the expiration of the option term. Stock options that are not
exercisable as of the termination of the Grantee's employment as a result of
retirement, disability or death shall terminate as of the date of the Grantee's
termination of employment.

Subject to the foregoing, in the event of the Grantee's death, such
option may be exercised by the Grantee's legal representative but only to the
extent exercisable by Grantee as of the date of death. Notwithstanding the
foregoing, the Committee, in its sole discretion, may determine that
installments that are not 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 the Grantee or in the case of death, the Grantee's
legal representative or beneficiary. Grantee's transfer of employment among the
Corporation, its parent or any subsidiary shall not be deemed to be a
termination of employment.

d. Forfeiture of Option. Notwithstanding any other provisions set forth
herein or in the Plan, if the Grantee shall (i) commit any act of malfeasance or
wrongdoing affecting the Corporation, any parent or subsidiary, (ii) breach any
covenant not to compete, or employment contract, with the Corporation, any
parent or subsidiary, or (iii) engage in conduct that would warrant the
Grantee's discharge for cause (excluding general dissatisfaction with the
performance of the Grantee's duties, but including any act of disloyalty or any
conduct clearly tending to bring discredit upon the Corporation, any parent or
subsidiary) this option, or the unexercised portion thereof, shall immediately
terminate and be void.

3

e. Exercise Procedures. The Grantee may exercise this option with
respect to all or any part of the whole number of shares then subject to
exercise. Such exercise shall be effected as follows: Grantee shall deliver to
the Committee written notice of intent to exercise. Such notice shall specify
the number of shares as to which this option is to be exercised and the date of
exercise thereof, which date shall be at least five (5) days after the delivery
of such notice unless an earlier time shall have been mutually agreed upon. 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. Full payment by the Grantee of the option
price for the shares purchased shall be made on or before the date of issuance
of the shares being purchased in cash, or, with the prior written consent of the
Committee, in whole or in part through the surrender of shares of Common Stock
(including without limitation shares of Common Stock acquired pursuant to the
option then being exercised) at their fair market value as determined pursuant
to the terms of the Plan. On the exercise date specified in the Grantee's notice
or as soon thereafter as is practicable, the Corporation shall, without transfer
or issue tax or other incidental expense to the Grantee, cause to be delivered
to the Grantee a certificate or certificates for such shares out of theretofore
unissued shares or reacquired shares, as the Corporation may elect, upon payment
for the shares. The Corporation shall, without transfer or issue tax or other
incidental expense to the Grantee, cause to be delivered to the Grantee separate
certificates for those shares which will be treated as being issued pursuant to
the exercise of an incentive stock option and for those shares, if any, which
under Section 2 of the Agreement will be treated as being issued pursuant to the
exercise of an option which is not an incentive stock option. The Corporation
shall identify in its stock transfer records which shares are being issued
pursuant to the exercise of an incentive stock option and which shares are being
issued pursuant to the exercise of an option which is not an incentive stock
option.

2. Dividend Equivalents.

a. Number of Dividend Equivalents. Subject to the terms and conditions
hereinafter set forth, the Corporation, with the approval and at the direction
of the Committee, hereby grants to the Grantee XX dividend equivalents. The
amount of dividend equivalents (the "Dividend Equivalent Amount") subject to
this grant shall be equal to the number of dividend equivalents specified in
this Section 2.a. multiplied 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 2.b.

b. Amount of Dividend Equivalent Credited. The Corporation shall credit
to an account for the Grantee maintained by the Corporation in its books and
records on each record date, from the Date of Grant until the earlier of (i) the
date of the Grantee's termination of employment for any reason (including
retirement), other than total disability (as defined in Section 22(e)(3) of the

4

Code) or the Grantee's death, or as otherwise determined by the Committee, in
its sole discretion, at the time of the Grantee's termination of employment or
(ii) four years from the Date of Grant (such period being hereinafter referred
to as the "Accumulation Period"), that portion of the Dividend Equivalent Amount
for the Grantee attributable to such 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 2.g. below, no
interest shall be credited to any such account. The Date of Grant for the
dividend equivalents granted hereunder is <<DIVIDEND>>.

c. Payment of Credited Dividend Equivalents. At the end of the
applicable performance period (the "Performance Period"), 100% of the Grantee's
Dividend Equivalent Amount shall be paid to the Grantee. The Performance Period
shall be equal to four years from the Date 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 set forth in Section 2.d. of the
Agreement for the applicable Performance Period exceeds the targets for
such criteria.

(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 set forth in Section 2.d. for the
applicable Performance Period is less than the targets for such
criteria.

(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 Accumulation Period described in Section 2.b., the 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 attributable to a dividend record date between the
end of the Performance Period and the end of the Accumulation Period
shall be paid on the Corporation's normal dividend payment dates until
the Grantee's Dividend Equivalent Amount for the period described in
Section 2(b) is fully paid to the Grantee.

d. Performance Criteria. The performance criteria applicable to the
Performance Period for the dividend equivalents granted hereunder shall be as
set forth in Exhibit A attached hereto and made a part hereof.

e. Timing of Payment of Dividend Equivalents. Except as otherwise
determined by the Committee, if the Grantee terminates 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 the Grantee if the Grantee's employment
with 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 2.c.(iv), as soon

5

as practicable after the end of such Performance Period, unless the Grantee
shall have made an election under Section 2(h) to defer receipt of any portion
of such amount, the Grantee shall receive 100% of the Dividend Equivalent Amount
payable to him. Notwithstanding the foregoing, upon a Change of Control of the
Corporation (as defined in the Plan), 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.

f. 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.

g. 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 the 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.

h. Deferral of Dividend Equivalents. The 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 the Grantee for this purpose.

3. 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 subject to the Grants, the option price or other terms and conditions
applicable to dividend equivalents.

4. No Rights of Shareholders.

Neither the Grantee nor any personal representative shall be, or have
any of the rights and privileges of, a shareholder of the Corporation with
respect to any shares related to the Grants or purchasable upon the exercise of
this option, in whole or in part, prior to the date of exercise of the option.

6

5. Non-Transferability of Grants.

Except as otherwise provided in this Section, during the Grantee's
lifetime, only the Grantee or any guardian or legal representative of the
Grantee, may exercise rights under the Grants and the Grants shall not be
assigned or transferred by the Grantee (other than an assignment pursuant to a
qualified domestic order as defined under the Code or Title I of ERISA or the
rules thereunder or transfer by will or by the laws of descent or distribution
in the event of the death of the Grantee). Upon a transfer of an option granted
hereunder by will or by the laws of descent or distribution, or a family
transfer (as hereinafter provided), the person to whom the option is transferred
shall have the right to exercise the option in accordance with the Plan and this
Grant.

The Grantee may transfer all or a portion of a nonqualified stock
option granted hereunder to family members, one or more trusts for the benefit
of family members, or one or more other entities of which family members control
the management of assets or own more than 50% of the voting interests,
consistent with applicable securities laws, provided that the Grantee receives
no consideration for the transfer of the 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.

In the event of any attempt by the Grantee (or assignee) to alienate,
assign, pledge, hypothecate or otherwise dispose of a Grant or of any right
hereunder, except as provided for herein, or in the event of the levy of any
attachment, execution or similar process upon the rights or interest hereby
conferred, the Corporation may terminate the Grant by notice to the Grantee and
it shall thereupon become null and void.

6. Employment Not Affected.

Neither the making of the Grants nor the exercise of the option or the
payment of the Dividend Equivalent Amount shall be construed as granting to the
Grantee any right with respect to continuance of employment by the Corporation
or any of its subsidiaries. Except as may otherwise be limited by a written
agreement between the Corporation or any subsidiary and the Grantee, the right
of the Corporation or any parent or subsidiary to terminate at will the
Grantee's employment with it at any time (whether by dismissal, discharge, or
otherwise) is specifically reserved and acknowledged by the Grantee.

7. Withholding of Tax.

Whenever shares of Common Stock are to be delivered upon exercise of
the option, the Corporation shall be entitled to require as a condition of such
delivery that the Grantee remit to the Grantee's employer or, in appropriate
cases, agree to remit to such employer when due, an amount sufficient to satisfy
all federal, state and local withholding tax requirements relating thereto.

7

8. Amendment of Grants.

The Grants may be amended by the Committee at any time (i) if it
determines, in its sole discretion, that amendment is necessary or advisable in
the light of any addition to or change in the Internal Revenue Code or
regulations issued thereunder, or any federal or state securities law or other
law or regulation, which change occurs after the grant of the option and
dividend equivalents and by its terms retroactively applies to the option or
dividend equivalent; and (ii) with the consent of the Grantee. Any such
amendment shall be in writing and signed by the Corporation and the Grantee.

9. Notice.

Any notice to the Corporation provided for in this instrument shall be
addressed to it in care of its Secretary, and any notice to the Grantee shall be
addressed to the Grantee at the current address shown on the payroll of the
Corporation or any subsidiary. Except as otherwise provided herein, any notice
shall be deemed to be duly given if and when properly addressed and posted by
registered or certified mail, postage prepaid.

10. Incorporation of Plan by Reference.

The Grants are made pursuant to the terms of the Plan, as in effect on
March 18, 2004, as approved by a majority of the Corporation's shareholders on
May 20, 2004 and as the Plan may be amended from time to time, and shall in all
respects be interpreted in accordance therewith. The Committee shall interpret
and construe the Grants, and its decision shall be conclusive and binding upon
any questions arising hereunder. By executing this Grant Agreement and by
accepting the option granted hereunder, the Grantee acknowledges and accepts the
terms of the Plan and the Committee's authority and discretion as specified in
the Plan.

11. Governing Law.

The validity, construction, interpretation and effect of this
instrument shall exclusively be governed by and determined in accordance with
the law of the Commonwealth of Pennsylvania.

AQUA AMERICA, INC.

By:______________________________            By:________________________________
Grantee

8

EXHIBIT 13.1

AQUA AMERICA, INC.

SELECTED PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 2005

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, that
may be outside our control and 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, the success of pending
acquisitions and the impact of future acquisitions;
o   acquisition-related costs and synergies;
o   the capacity of our water supplies, water facilities and wastewater
facilities;
o   general economic conditions;
o   the impact of geographic diversity on our exposure to unusual weather;
and
o   the impact of accounting pronouncements.

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, or unanticipated, 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   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   increasing difficulties in obtaining insurance and increased cost of
insurance;
o   cost overruns relating to improvements or the expansion of our
operations;
o   changes in accounting pronouncements; 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. As you read this report, you should pay particular attention to the
"Risk Factors" included in our Annual Report on Form 10-K.

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)

OVERVIEW

THE COMPANY

Aqua America, Inc. is the holding company for regulated utilities providing
water or wastewater services to approximately 2.5 million people in
Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Florida,
Indiana, Virginia, Maine, Missouri, New York and South Carolina. Our largest
operating subsidiary, Aqua Pennsylvania, Inc., accounts for approximately 56% of
our operating revenues for 2005 and, as of December 31, 2005, provides water or
wastewater services to approximately one-half of the total number of people we
serve, located in the suburban areas north and west of the City of Philadelphia
and in 22 other counties in Pennsylvania. Our other subsidiaries provide similar
services in 12 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.

INDUSTRY MISSION

The mission of the investor-owned water utility industry is to provide quality
and reliable water service at an affordable price for the customer with a fair
return for 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 state, and/or, in some cases, local government;
and
o   the impact of weather and drought conditions on water sales demand.

RATE CASE MANAGEMENT CAPABILITY

We strive to achieve the industry mission by effective planning and efficient
use of our resources. We maintain a rate case management capability to pursue
timely and adequate returns on the capital investments that we make in improving
or replacing water mains, treatment plants and other infrastructure. This
capability 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.

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. 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 other
financings, and the franchise areas that we serve. A small number of our
operations are subject to rate regulation by county or city government. The
profitability of our utility operations is influenced to 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.

Some of the states in which we acquired operations in 2004 and 2003 require
separate filings for each of our local systems, as compared to a single
state-wide rate filing. Between August 2003 and December 2005, we have filed
rate filings in over 25 jurisdictions. Due to the length of time since the last
rate increase for some acquired systems and the large amount of capital
improvements relative to the number of customers in some smaller systems, the
proposed rate increase in some of these systems may be substantial. While each
of these rate filings will proceed through the applicable regulatory process, we
can provide no assurance that the rate increases will be granted in a timely or
sufficient manner to cover the investments and expenses for which we initially
sought the rate increases. Further, there remain 116 divisions within these
recently acquired operations where we have not yet filed a rate request.

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)

REVENUE SURCHARGES - Five states in which we operate permit water utilities, and
in some of these five 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. In all other states, water and wastewater
utilities absorb 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 acts as a disincentive to water and wastewater utilities to rehabilitate
their infrastructure. In addition, certain states permit our subsidiaries to use
a surcharge or credit on their bill to reflect certain allowable changes in
costs until such time as these costs are fully incorporated in base rates.

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.

CUSTOMER AND BUSINESS SERVICES PROJECTS - We are currently consolidating our
customer service locations into three principal call centers, implementing a
common customer information system, and upgrading our financial information
systems. We expect to complete our primary customer service initiatives by the
end of 2006. Consistent with prior practice, we have capitalized costs and
services associated with these projects and expect to recover these costs in
future rates. Certain information technology costs associated with these
projects, such as software training, data conversion and business process
reengineering costs, have been deferred in accordance with SFAS No. 71. Although
we believe it is probable that the applicable public utility commissions will
allow recovery of these costs, we can provide no assurances as to their full
recoverability until the conclusion of the applicable rate proceeding. As of
December 31, 2005, $3,952 of costs have been incurred and deferred as a
regulatory asset since the last rate proceeding, and $251 has been expensed
during the year ended December 31, 2005, in the jurisdictions where future
recovery is unlikely.

GROWTH-THROUGH-ACQUISITION STRATEGY

Part of our strategy to meet the industry 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 for possible future
growth. The ability to successfully execute this strategy 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. Please refer to the section captioned
"Acquisitions" for an additional discussion of acquisitions.

We believe that acquisitions will continue to be an important source of growth
for us. With approximately 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 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
6,600 wastewater facilities in operation or planned in the 13 states where we
operate.

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)

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.

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.

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 helps reduce 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 Heater and
Florida Water acquisitions which closed in mid-year 2004 and the AquaSource
acquisition which closed in 2003. During the year ended December 31, 2005, our
operating revenues were derived principally from the following states: 56% in
Pennsylvania, 8% in Ohio, 8% in Texas, 7% in Illinois, and 6% in North Carolina.

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.

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)

SELECTED FINANCIAL AND OPERATING STATISTICS

Our selected five-year financial and operating statistics follow:

Years ended December 31,                                 2005      2004 (a)     2003 (b)     2002 (c)        2001
------------------------------------------------------------------------------------------------------------------

Customers:
Residential water                                724,954      702,367      624,355      535,506      526,776
Commercial water                                  33,975       33,720       33,015       30,355       29,745
Industrial water                                   1,356        1,365        1,397        1,423        1,454
Other water                                       15,584       15,700       20,483       16,466        9,947
Wastewater                                        89,025       82,360       70,241       21,724       19,615
------------------------------------------------------------------------------------------------------------------
Total                                                 864,894      835,512      749,491      605,474      587,537
==================================================================================================================

Operating revenues:
Residential water                               $295,473     $264,910     $218,487     $197,190     $188,303
Commercial water                                  73,455       65,605       61,343       55,962       53,103
Industrial water                                  18,364       17,377       17,675       17,221       16,141
Other water                                       50,827       44,593       40,048       36,255       35,681
Wastewater                                        42,176       35,931       17,874        8,210        6,960
Other                                             16,484       13,623       11,806        7,190        7,092
------------------------------------------------------------------------------------------------------------------
Total                                                $496,779     $442,039     $367,233     $322,028     $307,280
==================================================================================================================

Operations and maintenance expense                   $203,088     $178,345     $140,602     $117,735     $111,885
==================================================================================================================

Net income available to common stock                  $91,156      $80,007      $70,785      $67,154      $60,005
==================================================================================================================

Capital expenditures                                 $237,462     $195,736     $163,320     $136,164     $124,088
==================================================================================================================
Operating Statistics
Selected operating results as a
percentage of operating revenues:
Operations and maintenance                         40.9%        40.3%        38.3%        36.6%        36.4%
Depreciation and amortization                      13.2%        13.3%        14.0%        13.8%        13.1%
Taxes other than income taxes                       6.4%         6.2%         5.9%         6.0%         6.8%
Interest expense, net                              10.4%        11.0%        12.2%        12.5%        11.9%
Net income available to common stock               18.3%        18.1%        19.3%        20.9%        19.5%
==================================================================================================================
Effective tax rates                                     38.4%        39.4%        39.3%        38.5%        39.3%
==================================================================================================================

(a) Net income available to common stock includes the gain of $1,522 ($2,342
pre-tax) realized on the sale of our Geneva, Ohio water system. The gain is
reported in the 2004 consolidated statement of income as a reduction to
operations and maintenance expense. 2004 includes a partial year of
financial results for the mid-year acquisition of Heater Utilities, Inc. and
certain utility assets of Florida Water Services Corporation.
(b) 2003 includes five months of financial results for the AquaSource operations
acquired in July 2003.
(c) Net income available to common stock and net income includes the gain of
$3,690 ($5,676 pre-tax) realized on the sale of a portion of our Ashtabula,
Ohio water system.

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)

PERFORMANCE MEASURES CONSIDERED BY MANAGEMENT

We consider the following nonfinancial measure and financial measures to be the
fundamental basis by which we evaluate our performance: our number of customers,
operating revenues, net income and dividend rate on common stock. In addition,
we consider other key financial measures in evaluating our operating results:
earnings per share, the ratio of operations and maintenance expense compared to
operating revenues (this percentage is termed "operating expense ratio" or
"efficiency ratio"); return on revenues (net income divided by operating
revenues); and return on equity (net income divided by common stockholders'
equity). We review these measurements regularly and compare them 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 table above, and as
anticipated, our operating expense ratio increased for 2004 over 2003, and
increased for 2003 over 2002 as a result of the additional operating costs
associated with the AquaSource acquisition which closed in July 2003. Our 2004
results reflect a full twelve months of operating results for the acquisition,
while our 2003 results reflect only five months of operating results for the
acquisition. The business model of the acquired AquaSource operations, generally
referred to as our Aqua South operations, is different from the rest of the Aqua
America operations. The Aqua South operations are comprised of approximately 600
small systems, which are generally clustered in regions to achieve some level of
operating efficiency. The small, separate systems of the Aqua South operations
result in the operating revenues generated by the Aqua South operations being
accompanied by a higher ratio of operations and maintenance expenses as compared
to the rest of the pre-existing Aqua America operations. The Aqua South
operations can be characterized as having relatively-higher fixed operating
costs, in contrast to the rest of the Aqua America operations which generally
consist of larger, interconnected systems, resulting in higher fixed capital
costs (utility plant investment) and lower operating costs per customer. For the
twelve-month period ended 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. To a lesser extent, the
2005 and 2004 efficiency ratios increased over the previous years due to the
influence of the mid-year 2004 acquisitions of Heater Utilities, Inc. and
Florida Water Services Corporation, which have similar operating characteristics
as our Aqua South operations. Our efficiency ratio in 2004 was reduced by
approximately 53 basis-points for a $2,342 gain realized on the sale of our
Geneva, Ohio water system that was reported in the 2004 consolidated statement
of income as a reduction to operations and maintenance expense. Other factors
that influence the efficiency ratio include regulatory lag, i.e., changes in
operations and maintenance expenses without an immediate corresponding change in
operating revenues, and operating revenues when accompanied by a dissimilar
change in operations and maintenance expense, such as changes in water
consumption as impacted by weather conditions. On January 1, 2006, we adopted
SFAS No. 123R, "Share-Based Payment." As required, we began to record
compensation expense for the fair value of stock options granted and the
adoption of this accounting standard is expected to increase our 2006 operations
and maintenance expense by approximately $3,500.

We continue to evaluate management initiatives to help control costs and improve
efficiencies, but the effect of these acquisitions have been to increase our
overall operating expense ratio from the levels experienced during the three
years preceding the AquaSource acquisition. Consequently, our return on revenues
in 2005 and 2004 was lower than 2003, 2002 and 2001 as a result of the impact of
the higher cost of Aqua South's operations.

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)

RESULTS OF OPERATIONS

Our net income has grown at an annual compound rate of approximately 11.5%
during the five-year period ended December 31, 2005. During the past five years,
operating revenues grew at a compound rate of 12.6% and total expenses,
exclusive of income taxes, grew at a compound rate of 12.8%.

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 8.9% in the past five years primarily as a result of
acquisitions of water and wastewater systems, including the mid-year 2004 Heater
and Florida Water Services acquisitions, and the AquaSource acquisition
completed July 2003. Acquisitions made during the five-year period ended
December 31, 2005 have provided water and wastewater revenues of approximately
$114,176 in 2005, $87,919 in 2004 and $32,427 in 2003. Excluding the effect of
acquisitions, our customer base increased at a five-year annual compound rate of
1.5%. Rate increases implemented during the past three years have provided
additional operating revenues of approximately $25,500 in 2005, $15,800 in 2004
and $19,900 in 2003.

In November 2005, our Pennsylvania operating subsidiary filed an application
with the Pennsylvania Public Utility Commission (PAPUC) requesting a $38,800 or
14.4% increase in annual revenues. The application is currently pending before
the PAPUC and a final determination is anticipated by August 2006. On August 5,
2004, the PAPUC granted our Pennsylvania operating subsidiary a $13,800 base
rate increase. The rates in effect at the time of the filing included $11,200 in
Distribution System Improvement Charges ("DSIC") or 5.0% above the prior base
rates. Consequently, the total base rates increased by $25,000 and the DSIC was
reset to zero.

In May 2004, our operating subsidiary in Texas filed an application with the
Texas Commission on Environmental Quality to increase rates by $11,920 over a
multi-year period. The application seeks to increase annual revenues in phases
and is accompanied by a plan to defer and amortize a portion of our
depreciation, operating and other tax expense over a similar multi-year period,
such that the impact on operating income approximates the requested amount
during the first years that the new rates are in effect. The application is
currently pending before the Commission and several parties have joined the
proceeding to challenge our rate request. We commenced billing for the requested
rates and implemented the deferral plan in August 2004, in accordance with
authorization from the Texas Commission on Environmental Quality in July 2004.
The additional revenue billed and collected prior to the final ruling are
subject to refund based on the outcome of the ruling. The revenue recognized and
the expenses deferred by us reflect an estimate of the final outcome of the
ruling. As of December 31, 2005, we have deferred $9,486 of expenses and
recognized $5,202 of revenue that is subject to refund based on the outcome of
the final commission order, which is not expected to be issued prior to December
2006. In the event our request is denied completely or in part, we could be
required to refund some or all of the revenue billed to date, and write-off some
or all of the regulatory asset for the expense deferral. Based on our review of
the present circumstances, no additional reserve or change in estimate
adjustments are required for the revenue recognized to date or for the
impairment of our regulatory asset.

Our operating subsidiaries located in other states received rate increases
representing estimated annualized revenues of $5,142 in 2005 resulting from
twenty-three decisions, $6,673 in 2004 resulting from fourteen rate decisions,
and $1,275 in 2003 resulting from eight rate decisions. Revenues from these
increases realized in the year of grant were approximately $3,144 in 2005,
$3,995 in 2004 and $839 in 2003. These operating subsidiaries currently have
filed 18 rate requests which are being reviewed by the state regulatory
commissions, proposing an aggregate increase of $9,202 in annual revenues. In
addition, there were 14 rate awards received to date in 2006 for cases filed in
2005 in the amount of $1,961. During 2006, we intend to file 27 additional rate
requests proposing an aggregate of approximately $17,029 of increased annual
revenues.

Currently, Pennsylvania, Illinois, Ohio, Indiana and Missouri allow for the use
of infrastructure rehabilitation surcharges. In Pennsylvania, this mechanism is
referred to as a DSIC. These surcharge 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 at 5% to 9% 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 $10,186 in 2005,
$7,817 in 2004 and $8,147 in 2003.

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)

In addition to regulated 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 $16,484 in 2005,
$13,623 in 2004 and $11,806 in 2003. The increase in 2005 over 2004 resulted
primarily from the additional revenues associated with the acquisition of an
on-site septic tank pumping business, and increased revenues resulting from new
and expanded contract operations. The increase in 2004 over the previous year
resulted primarily from the additional revenues from contract operations
associated with the July 2003 AquaSource acquisition.

OPERATIONS AND MAINTENANCE EXPENSES

Operations and maintenance expenses totaled $203,088 in 2005, $178,345 in 2004
and $140,602 in 2003. Most elements of operating costs are subject to the
effects of inflation, and changes in the number of customers served, and several
elements are subject to the effects of changes in water consumption, weather 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 2005 as compared to 2004 by $24,743 or 13.9% primarily due
to the additional operating costs associated with acquisitions of $9,574,
additional water production expenses of $3,856, increased postretirement costs
of $2,430, higher insurance costs due to the absence in 2005 of the favorable
claim settlements that had occurred in 2004 of $2,142, and the effect of the
$2,342 gain on the sale of the Geneva water system which was recorded as a
component of operations and maintenance expense in 2004.

Operations and maintenance expenses increased in 2004 as compared to 2003 by
$37,743 or 26.8% primarily due to added operating costs associated with
acquisitions of $36,123, additional postretirement costs of $2,110, increased
accounting expense of $1,496 for assessing internal control effectiveness under
the Sarbanes-Oxley Act and higher water production expenses. Partially
offsetting these increases were lower insurance costs due to the favorable
settlement of insurance claims during 2004, and the gain on the sale of the
Geneva, Ohio water system of $2,342. In the consolidated statement of income for
2004, the gain on the sale of the Geneva water system is reported as a component
of the line titled operations and maintenance expense. The impact of
acquisitions is primarily the result of the effect of AquaSource for the full
twelve-month period versus five months in 2003, and the mid-year 2004
acquisitions of Heater and the Florida Water Services systems.

DEPRECIATION AND AMORTIZATION EXPENSES

Depreciation expense was $60,747 in 2005, $54,564 in 2004 and $48,522 in 2003,
and has increased principally as a result of the significant capital
expenditures made to expand and improve our utility facilities, and as a result
of acquisitions of water systems.

Amortization expense was $4,741 in 2005, $4,300 in 2004 and $2,941 in 2003. The
increase in 2005 and 2004 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 $4,100 or 14.9% in 2005 as compared
to 2004 and $5,989 or 27.7% in 2004 as compared to 2003. The increase in both
2005 and 2004 is due to additional taxes associated with acquisitions and
increases in state and local taxes. The other taxes associated with acquisitions
resulted from the effect of the July 2003 AquaSource acquisition for a
twelve-month period in 2004 as compared to the five-month period in 2003, and
the mid-year 2004 acquisitions of Heater Utilities and the systems of Florida
Water.

INTEREST EXPENSE, NET

Net interest expense was $52,062 in 2005, $48,679 in 2004 and $44,662 in 2003.
Interest income of $3,040 in 2005, $1,762 in 2004 and $395 in 2003 was netted
against interest expense. Interest expense increased in 2005 and 2004 primarily
as a result of higher levels of borrowings, offset partially by the effects of
decreased interest rates on borrowings. The higher level of average borrowings
in 2004 was used to finance the acquisition of AquaSource in mid-year 2003, the
Heater and Florida Water acquisitions in mid-year 2004, and capital
expenditures. Interest income increased in 2005 due to additional investment
income earned in 2005 on the proceeds from the issuance of tax-exempt bonds

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)

while being held by trustees pending completion of projects financed with the
issues. Such interest income is capitalized by a reduction in our allowance for
funds used during construction. Interest income increased in 2004 due to $532 of
interest income in connection with the arbitration award related to the final
purchase price for the AquaSource acquisition received in 2004 and additional
interest income associated with acquisitions. Interest expense during 2005 was
favorably impacted by a reduction in the weighted cost of long-term debt from
6.00% at December 31, 2004 to 5.74% at December 31, 2005.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION

The allowance for funds used during construction (AFUDC) was $2,447 in 2005,
$2,304 in 2004 and $2,127 in 2003 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 2005 is due to an increase in the average balance of CWIP to which
AFUDC is applied, and additional AFUDC recorded as an adjustment in 2005 of $719
resulting from the identification in 2005 of a previously issued rate order
which allowed the continuation of AFUDC on certain capital projects subsequent
to being placed into utility service. This post-in-service AFUDC was not
recognized in prior periods. These variances were partially offset by investment
income earned during 2005, which reduced AFUDC. The increase in 2004 is due to
an increase in the average balance of CWIP to which AFUDC is applied.

GAIN ON SALE OF OTHER ASSETS

Gain on sale of other assets totaled $1,177 in 2005, $1,272 in 2004 and $5,692
in 2003 and consisted of gains on land and marketable securities sales. Gain on
sale of land totaled $1,177 in 2005, $869 in 2004 and $5,153 in 2003. Gain on
sale of marketable securities totaled $403 in 2004 and $539 in 2003.

INCOME TAXES

Our effective income tax rate was 38.4% in 2005, 39.4% in 2004 and 39.3% in
2003. The changes in the effective tax rates in 2005 and 2004 are due to
differences between tax deductible expenses and book expenses and the
recognition in 2005 of the American Jobs Creation Act tax deduction for
qualified domestic production activities that reduced our tax provision by
approximately $740.

SUMMARY

Operating income was $196,507 in 2005, $177,234 in 2004 and $153,561 in 2003 and
net income available to common stock was $91,156 in 2005, $80,007 in 2004 and
$70,785 in 2003. Diluted income per share was $0.71 in 2005, $0.64 in 2004, and
$0.59 in 2004. The changes in the per share income in 2005 and 2004 over the
previous years were due to the aforementioned changes in income and impacted by
a 2.8% increase in the average number of common shares outstanding during 2005
and a 5.6% increase in the average number of common shares outstanding during
2004, respectively. The increase in the number of shares outstanding in 2005 is
primarily a result of the additional shares issued through our dividend
reinvestment plan, employee stock purchase plan and equity compensation plan.
The increase in the number of shares outstanding in 2004 is primarily a result
of the additional shares issued in common share offerings and the aforementioned
factors for 2005.

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.

FOURTH QUARTER RESULTS

Net income available to common stock was $22,150 in the fourth quarter of 2005
and $22,474 in the same period of 2004. The change in net income is due to
increased operations and maintenance expense of $6,717, increased depreciation
of $2,585 and increased other taxes of $1,522, offset partially by a $7,466
increase in operating revenues. The higher operations and maintenance expense is
due primarily to the gain on the December 2004 sale of the Geneva water system
of $2,342 which reduced operations and maintenance expense in 2004, additional
operating cots associated with acquisitions, higher water production costs and
increased postretirement costs. The increased depreciation expense reflects the
utility plant placed in service since the fourth quarter of 2004. Other taxes
increased due to higher property taxes and additional local taxes incurred in
the fourth quarter of 2005. The increase in operating revenues was a result of
additional revenues of $2,131 resulting from an increase in water rates granted
to our operating subsidiaries, additional infrastructure rehabilitation
surcharge revenue of $2,377, and the additional revenue from acquisitions.

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)

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,
2005 were as follows:

------------------------------------------------------------------------------------------------
Net Operating         Common            Capital          Acquisitions of
Cash Flow          Dividends       Expenditures        Utility Systems
------------------------------------------------------------------------------------------------

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
2004           173,603             45,807           195,736                54,300
2005           199,674             51,139           237,462                11,633
------------------------------------------------------------------------------------------------
$ 740,375          $ 207,886         $ 856,770             $ 276,695
================================================================================================

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 $52,619 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 repaid debt in the amount of $242,849, retired $1,760 of
preferred stock, and have refunded $23,701 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 number of shares outstanding during the period.

Our planned 2006 capital program, exclusive of the costs of new mains financed
by advances and contributions in aid of construction, is estimated to be
$255,200 of which $64,790 is for infrastructure rehabilitation
surcharge-qualified projects. Our planned capital program includes 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 of our
capital program. Our 2006 capital program, along with $24,645 of sinking fund
obligations and debt maturities, and $93,626 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 2007 through 2010, 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 $950,000. We
anticipate that less than one-half of these expenditures will require external
financing of debt and the additional issuance of common stock through our
dividend reinvestment and stock purchase plans and possible future public equity
offerings. We expect to refinance $115,166 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.

Our primary source of liquidity is cash flows from operations, borrowings under
various short-term lines of credit and other credit facilities, and customer
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 and cash flow to
enable them to secure the capital they will need to operate and to maintain
satisfactory debt coverage ratios.

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)

ACQUISITIONS

During the past five years, we have expended cash of $276,695 and issued 816,019
shares of common stock, valued at $8,781 at the time of the acquisition, related
to the acquisitions of utility systems, primarily water utilities and some
wastewater utilities. We included the operating results of these acquisitions in
our consolidated financial statements beginning on the respective acquisition
date.

During 2005, we completed 30 acquisitions for $11,633 in cash and the issuance
of 24,684 shares of common stock. The acquisitions completed in 2005 included
both water and wastewater systems in seven of the states in which we operate.
Pursuant to our strategy to grow through acquisitions, on June 1, 2004, we
acquired the capital stock of Heater Utilities, Inc. for $48,000 in cash and the
assumption of long-term debt of $19,219 and short-term debt of $8,500. The
acquired operation provides water and wastewater service to over 50,000 water
and wastewater customers primarily in the areas of suburban Raleigh, Charlotte,
Gastonia and Fayetteville, North Carolina. For the fiscal year ended December
31, 2003, Heater had operating revenues of $19,489. The acquisition was
accounted for as a purchase and accordingly, we recorded goodwill of $18,842. In
2004, as part of the North Carolina Utilities Commission approval process for
this acquisition, the Commission approved a mechanism through which we could
recover up to two-thirds of the goodwill through customer rates in the future
upon achieving certain objectives. We intend to pursue these objectives to
facilitate recognition of this premium in customer rates. However, there can be
no assurance that we will be able to achieve these objectives and recover such
amount of goodwill, if any.

On June 30, 2004, we acquired certain utility assets of Florida Water Services
Corporation, comprised of 63 water and wastewater systems located in central
Florida for $14,747 in cash. In accordance with Florida Public Service
Commission procedures, the acquisition was approved by the Commission and rate
base was determined on December 20, 2005. Under the terms of the purchase
agreement, the Commission's rate base determination will result in a reduction
of the final purchase price that could be as much as approximately $2,000, which
is not expected to result in the recognition of goodwill.

The acquisition of Heater and the Florida Water Systems were initially funded by
a portion of the proceeds from the issuance by Aqua America of an unsecured
short-term note in May 2004. A portion of the short-term note was subsequently
repaid by Aqua America with the proceeds from a November 2004 secondary equity
offering, and a portion of the short-term note was refinanced through the
February 2005 issuance of $30,000 of unsecured notes. In November 2004, we sold
2,606,667 shares of common stock in a public offering for proceeds of $42,600,
net of expenses. In February 2005, Aqua America issued $18,000 of notes due in
2015 with an interest rate of 5.01% and $12,000 of notes due in 2020 with an
interest rate of 5.20%.

Pursuant to our growth strategy, in July 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 based on working capital at closing. In
August 2004, we were awarded and received $12,289 plus interest in an
arbitration related to the calculation of the final purchase price under the
terms of the purchase agreement, which resulted in a final purchase price of
$178,428. In the consolidated statement of cash flow for 2004, the $12,289 award
has been reported as proceeds on the line titled acquisitions of water and
wastewater systems, net. 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 6,666,667 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
and Kentucky operations which were subsequently sold to other parties). Please
refer to the section captioned "Dispositions" for a discussion of the AquaSource
operations located in Connecticut and Kentucky. The acquisition provides an
expanded platform from which to extend our growth-through-acquisition strategy
of acquiring water and wastewater 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.

We continue to hold acquisition discussions with several water and wastewater
systems. Generally 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.

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)

DISPOSITIONS

In December 2004, as a result of the settlement of a condemnation action, our
Ohio operating subsidiary sold its water utility assets within the municipal
boundaries of the City of Geneva in Ashtabula County, Ohio for net proceeds of
approximately $4,716, 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 2004 of a gain on the sale of these assets,
net of expenses, of $2,342. The gain is reported in the 2004 consolidated
statement of income as a reduction to operations and maintenance expense. We
continue to operate this water system for the City of Geneva under an operating
contract that began upon the closing of the sale for a period through December
2006. These water utility assets represented less than 1% of Aqua America's
total assets, and the total number of customers included in the water system
sold represented less than 1% of our total customer base.

We reviewed and evaluated areas of our business and operating divisions that
were acquired in July 2003 with the AquaSource operations and have completed the
following sale transactions of operating divisions acquired as part of the
AquaSource transaction:

o   In July 2004, we sold our only operation in Kentucky. The sale price
approximated our investment in this operation. The operation
represented approximately 0.2% of the operations acquired from
AquaSource, Inc.
o   In October 2003, we completed the sale of our only operation in
Connecticut. The sale price of $4,000 approximated our investment in
this operation. The operation represented approximately 2% of the
operations acquired from AquaSource, Inc.

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 2002 of a gain on
the sale of these assets, net of expenses, of $5,676. We continue to operate
this water system for Ashtabula County under a multi-year operating contract
that expires in December 2008. 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.

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. We
have challenged whether the City is following the correct legal procedures in
connection with the City's attempted condemnation and we have challenged the
City's valuation of this portion of our system. 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 we will be
entitled to fair market value for our assets if they are condemned, and that the
fair market value will be in excess of the book value for such assets.

Despite these transactions, our strategy continues to be to acquire additional
water and wastewater systems, to maintain our existing systems where there is a
business or a strategic benefit, and to actively oppose unilateral efforts by
municipal governments to acquire any of our operations.

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 $659,214 of long-term debt and obtained other short-term
borrowings during the past five years. During the past five years, the Trustees
held an aggregate $64,664 of the proceeds from certain long-term debt issuances
pending completion of the projects financed with the issues. At December 31,
2005, we had short-term lines of credit and other credit facilities of $217,000,
of which $78,495 was available. Our short-term lines of credit and other credit
facilities are either payable on demand or have a 364-day term.

In December 2005, we filed a universal shelf registration with the SEC to allow
for the potential future sale by us, from time to time, in one or more public
offerings, of an indeterminant amount of our common stock, preferred stock, debt
securities and other securities specified therein at indeterminant prices. No
issuances have been completed to date under this shelf registration. During the
last three years, we completed the following offerings of equity:

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)

o   In November 2004, we sold 2,606,667 shares of common stock in a public
offering for proceeds of $42,600, net of expenses. The net proceeds
were used to repay a portion of our short-term debt. The short-term
debt was incurred by Aqua America in connection with the Heater and
Florida Water acquisitions.
o   In August 2003, we sold 6,666,667 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.
o   In May 2003, we sold 2,491,667 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 2,017,700
shares of our common stock from affiliates of Veolia Environnement,
S.A., formerly Vivendi Environnement, S.A., in October 2002.

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 in connection with acquisitions. During 2005, we issued 24,684 shares of
common stock totaling $675 to acquire a water system. During 2004 and 2003, we
did not issue any shares under the acquisition shelf registration. During 2002,
we issued 238,219 shares of common stock totaling $2,745 to acquire water and
wastewater systems. The balance remaining available for use under the
acquisition shelf registration as of December 31, 2005 is 2,194,262 shares. We
will determine the form and terms of any securities issued under these shelf
registrations at the time of issuance.

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. The dividend reinvestment portion of the Plan offers a 5%
discount on the purchase of shares of common stock with reinvested dividends. As
of the December 2005 dividend payment, holders of 16.7% of the common shares
outstanding participated in the dividend reinvestment portion of the Plan. The
shares issued under the Plan are either original issue shares or shares
purchased by the Company's transfer agent in the open-market. During the past
five years, we have sold 2,484,207 original issue shares of common stock for net
proceeds of $35,711 through the dividend reinvestment portion of the Plan and we
used the proceeds to invest in our operating subsidiaries, to repay short-term
debt, and for general corporate purposes.

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 16,475,427 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 2,017,700 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 2,491,667
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, 2005, 548,278 shares remain available for repurchase. Funding for
future stock purchases, if any, is not expected to have a material impact on our
financial position.

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)

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

We do not engage in any off-balance sheet financing arrangements. We do not have
any interest in entities referred to as variable interest entities, which
includes special purpose entities and other structured finance entities.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual cash obligations as of December
31, 2005:

Payments Due By Period
------------------------------------------------------------------------------------------------------------------------
2006         2007        2008        2009          2010     Thereafter         Total
------------------------------------------------------------------------------------------------------------------------

Long-term debt (a)              $24,645     $ 30,959    $ 23,651     $ 6,672      $ 53,884      $ 763,272      $903,083
Interest on fixed-rate,
long-term debt (b)            51,661       49,419      47,558      46,922        44,287        568,828       808,675
Operating leases (c)              3,482        3,033       2,559       1,218           969         15,264        26,525
Unconditional purchase
obligations (d)               12,184       11,763      11,358      11,009        11,778         75,559       133,651
Other purchase
obligations (e)               13,552            -           -           -             -              -        13,552
Postretirement benefit
plans' obligations (f)         9,282            -           -           -             -              -         9,282
Other obligations (g)             3,465          400         400         257             -              -         4,522
---------------------------------------------------------------------------------------------
Total                          $118,271     $ 95,574    $ 85,526    $ 66,078     $ 110,918     $1,422,923    $1,899,290
=============================================================================================

(a) Represents sinking fund obligations and debt maturities.
(b) Represents interest payable on fixed-rate, long-term debt. Amounts reported
may differ from actual due to future refinancing of debt.
(c) Represents operating leases that are noncancelable, before expiration, for
the lease of motor vehicles, buildings, land and other equipment.
(d) 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.
(e) Represents an approximation of the open purchase orders as of the period end
for goods and services purchased in the ordinary course of business.
(f) Represents contributions expected to be made to postretirement benefit
plans. The amount of required contributions in 2007 and thereafter is not
determinable.
(g) Represents capital expenditures estimated to be required under legal and
binding contractual obligations.

In addition to these obligations, we pay 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 paid, 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 are dependent
upon several variables, including new customer connections, customer consumption
levels and future rate increases, which cannot be accurately estimated. Portions
of these refund amounts are payable annually through 2020 and amounts not paid
by the contract expiration dates become non-refundable.

We will fund these contractual obligations with cash flows from operations and
liquidity sources held by or available to us.

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)

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, 2005,
the debt maturities by period and the weighted average interest rate for
fixed-rate, long-term debt are as follows:

Fair
2006        2007       2008       2009       2010   Thereafter        Total        Value
-----------------------------------------------------------------------------------------------------------------------

Long-term
debt (fixed rate)       $24,645     $30,959    $23,651     $6,672    $53,884     $763,272     $903,083    $ 950,479
Weighted average
interest rate             5.74%       5.64%      5.63%      5.72%      5.44%        5.35%        5.74%

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, 2005, we
owned no marketable equity securities as we sold the balance of our securities
during 2004.

CAPITALIZATION

The following table summarizes our capitalization during the past five years:

December 31,                                   2005          2004       2003        2002         2001
------------------------------------------------------------------------------------------------------

Long-term debt*                               52.7%         52.8%      52.8%       55.6%        52.9%
Preferred stock                                0.0%          0.0%       0.0%        0.0%         0.1%
Common stockholders' equity                   47.3%         47.2%      47.2%       44.4%        47.0%
------------------------------------------------------------------------------------------------------
100.0%        100.0%     100.0%      100.0%       100.0%
======================================================================================================
*Includes current portion.

The changes in the capitalization ratios primarily resulted 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 in 2002. It is our goal to maintain an
equity ratio adequate to support the 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 61 years. Effective December 1,
2005, our Board of Directors authorized an increase of 9.6% 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 2005, the annual
dividend rate increased to $0.4276 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 56.3% of net
income.

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
judgments of matters of uncertainty. Changes in the estimates or other judgments
included within these accounting policies could result in a significant change
to the financial statements. We believe our most critical accounting policies

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)

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, our accounting for pensions and other
postretirement benefits and our accounting for income taxes. We have discussed
the selection and development of our critical accounting policies and estimates
with the Audit Committee of the Board of Directors.

REVENUE RECOGNITION -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 judgment 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.
In some operating divisions, we commence the billing of our utility customers,
under new rates, upon authorization from the respective regulatory commission
and before the final commission rate order is issued. The revenue recognized
reflects an estimate based on our judgment of the final outcome of the ruling.
We monitor the facts and circumstances regularly, and revise the estimate as
required. The revenue billed and collected prior to the final ruling is subject
to refund based on the final ruling. Please refer to the section named
"Operating Revenues" for a discussion of revenue currently being recognized
under rate filings that are not final.

REGULATORY ASSETS AND LIABILITIES-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.

IMPAIRMENT OF LONG-LIVED ASSETS -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.

ACCOUNTING FOR POSTRETIREMENT BENEFITS-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. During 2005, we undertook a comprehensive study of
the key demographic assumptions which impact the obligations and expense for
these plans. Based on the study, we updated the assumed retirement and turnover
rates for the plans to better reflect the recent experience combined with our
expectations of future patterns. In addition, we have updated the mortality
assumptions to reflect a more recent actuarial study of mortality experience and
an expectation of future mortality improvements. The net effect of the changes
in these assumptions was a decrease of $1,600 in our pension and postretirement
benefit obligation measured as of December 31, 2005.

Our discount rate assumption was determined using a yield curve that was
produced from a universe containing over 500 U.S.-issued Aa-graded corporate
bonds, all of which were noncallable (or callable with make-whole provisions),
and excluding the 10% of the bonds with the highest yields and the 10% with the
lowest yields. The discount rate was then developed as the single rate that
would produce the same present value as if we used spot rates, for various time
periods, to discount the projected pension benefit payments. 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 2005 pension
expense by $660 and the pension liabilities by $7,000. The present values of
Aqua America's future pension and other postretirement obligations were
determined using discount rates of 5.65% at December 31, 2005 and 5.75% at
December 31, 2004. Our expense under these plans is determined using the
discount rate as of the beginning of the year, which was 5.75% for 2005, and
will be 5.65% for 2006.

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)

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 2005 pension expense by $280. For 2005, we used an 8.5% expected
return on assets assumption, and will lower this assumption to 8.0% for the
calculation of pension expense for 2006. This change was made to reflect a
change in our expectations of long-term market returns given the recent decrease
in bond yields. 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, 2005, we have an additional minimum liability of $10,909
associated with our defined benefit pension plans. The additional minimum
liability is a result of the accumulated benefit obligation exceeding the fair
value of plan assets. The portion of the additional minimum liability related to
our employees in one of our rate jurisdictions results in the establishment of a
regulatory asset of $6,167, as we expect recovery of the future, increased
pension expense through customer rates. Since the balance of the additional
minimum liability of $4,742 may not be recovered through rates, the accounting
requirements for recording a regulatory asset are not met and as a result this
amount is recorded as accumulated other comprehensive loss through aggregate
charges to accumulated other comprehensive income in 2004 and 2005, net of
income tax benefits of $1,660. The change in the additional minimum liability
from December 31, 2004 of $6,820 to December 31, 2005 of $10,909 resulted from
the effect of a decreased discount rate, offset partially by an increase in the
pension plan assets during 2005 due to positive equity market performance and
pension contributions. 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
the plans' funded status. Funding requirements for qualified defined benefit
pension plans are determined by government regulations and not by accounting
pronouncements. In accordance with our funding policy, during 2006 our required
pension contribution is expected to be approximately $6,400. We do not expect
our estimate for the 2006 funding amount to change as a result of the pending
pension funding reform. Pension funding reform will impact future contributions,
though we expect future changes in the amount of contributions and expense
recognized will be generally included in customer rates.

ACCOUNTING FOR INCOME TAXES-We estimate the amount of income tax payable or
refundable for the current year and the deferred income tax liabilities and
assets that results from estimating temporary differences resulting from the
treatment of certain items, such as depreciation, for tax and financial
statement reporting. These differences result in the recognition of a deferred
tax asset or liability on our consolidated balance sheet and require us to make
judgments regarding the probability of the ultimate tax impact of the various
transactions we enter into. Based on these judgments we may record tax reserves
or adjustments to valuation allowances on deferred tax assets to reflect the
expected realization of future tax benefits. Actual income taxes could vary from
these estimates and changes in these estimates can increase income tax expense
in the period that these changes in estimates occur.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

On October 22, 2004, the American Jobs Creation Act ("AJCA") was signed into
law. Among other provisions, the AJCA creates a new deduction for qualified
domestic production activities. Certain of our activities, such as our water
treatment activity, are considered as qualifying production activities for
purposes of determining the deduction for qualified production activities. In
December 2004, the Financial Accounting Standards Board ("FASB") issued FSP
109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004." In accordance with FSP 109-1, we treat the deduction
for qualified domestic production activities as a reduction of the income tax
provision in the period realized. We adopted this statement in the first quarter
of 2005 and have recorded an estimate for the effect of the statement which
reduced the provision for Federal and state income taxes by approximately $740
for the year ended December 31, 2005.

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)

In November 2004, the FASB approved Statement of Financial Accounting Standards
("SFAS") No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4."
SFAS No. 151 requires the exclusion of certain costs from inventories and the
allocation of fixed production overheads to inventories to be based on the
normal capacity of the production facilities. The standard is effective for Aqua
America for costs incurred after December 31, 2005. We believe this statement
will not have a material impact on our results of operations or financial
position.

In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29." SFAS No. 153 eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
fiscal periods beginning after June 15, 2005. We adopted this standard and it
did not have a material impact on our results of operations or financial
position.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
revises SFAS No. 123, "Accounting for Stock-based Compensation," and supersedes
APB No. 25, "Accounting for Stock Issued to Employees." As noted in the
footnotes to our consolidated financial statements, we currently provide pro
forma disclosure of our compensation costs associated with the fair value of
stock options that have been granted. We currently account for stock-based
compensation associated with stock options using the intrinsic method, and
accordingly, no compensation costs have been recognized in our consolidated
financial statements. SFAS 123R generally requires that we measure the cost of
employee services received in exchange for stock-based awards on the grant-date
fair value and this cost will be recognized over the period during which an
employee provides service in exchange for the award. We adopted this standard as
required on January 1, 2006. We adopted this standard using the modified
prospective method in which stock option awards that are granted, modified or
cancelled after the date of adoption are measured and accounted for in
accordance with SFAS No. 123R. Awards that are granted prior to the effective
date will continue to be accounted for in accordance with SFAS No. 123 except
that the stock option expense for unvested options will be recognized in the
income statement. We intend to use the Black-Scholes option-pricing model as
permitted under SFAS No. 123R. The impact of adoption of SFAS No. 123R on our
earnings depends on a number of variables including the level of share-based
payments granted in the future, the fair value of the options granted and the
associated income tax benefits that we receive. Assuming we grant a comparable
number of stock options in 2006 as compared to 2005 and the fair value
approximates the value of recent stock option grants reported in the notes to
our consolidated financial statements, the after-tax impact of SFAS No. 123R is
expected to approximate $3,000 during the year ending December 31, 2006. We
believe the adoption of this standard will have no impact on our overall
financial position or cash flow, but will result in the reclassification of
related tax benefits from operating cash flow to financing cash flow to the
extent these tax benefits exceed the associated compensation cost recognized in
the income statement.

In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," which clarifies that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value can be reasonably estimated. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. We adopted
this standard as required on December 15, 2005 and it did not have a material
effect on our results of operations or financial position.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle should be recognized in the period
of the accounting change. SFAS No. 154 further requires that a change in
depreciation, amortization or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. Aqua America intends to adopt this standard as required
in 2006.

18

AQUA AMERICA, INC. AND SUBSIDIARIES

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

In assessing the effectiveness of internal control over financial reporting,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. As a result of management's assessment and based on the criteria in
the framework, management has concluded that, as of December 31, 2005, the
Company's internal control over financial reporting was effective.

The Company's independent registered public accounting firm,
PricewaterhouseCoopers LLP, has audited management's assessment of the
effectiveness of the Company's internal control over financial reporting, as
stated in their report which appears herein.

/S/ Nicholas DeBenedictis                                        /S/ David P. Smeltzer

Nicholas DeBenedictis                                                David P. Smeltzer
Chairman, President and Chief Executive Officer               Senior Vice President Finance and Chief Financial Officer

March 13, 2006

19

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of Aqua America, Inc.:

We have completed integrated audits of Aqua America, Inc.'s 2005 and 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005 and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

CONSOLIDATED FINANCIAL STATEMENTS
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of capitalization,
of common stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Aqua America, Inc. and its subsidiaries at
December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements 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.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

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

20

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

/S/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Philadelphia, PA
March 13, 2006

21

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPENHENSIVE INCOME
(In thousands, except per share amounts)
Years ended December 31, 2005, 2004 and 2003

2005            2004           2003
----------------------------------------

Operating revenues                                                      $ 496,779      $ 442,039       $ 367,233
Costs and expenses:
Operations and maintenance                                            203,088        178,345         140,602
Depreciation                                                           60,747         54,564          48,522
Amortization                                                            4,741          4,300           2,941
Taxes other than income taxes                                          31,696         27,596          21,607
----------------------------------------
300,272        264,805         213,672

Operating income                                                          196,507        177,234         153,561
Other expense (income):
Interest expense, net                                                  52,062         48,679          44,662
Allowance for funds used during construction                           (2,447)        (2,304)         (2,127)
Gain on sale of other assets                                           (1,177)        (1,272)         (5,692)
----------------------------------------
Income before income taxes                                                148,069        132,131         116,718
Provision for income taxes                                                 56,913         52,124          45,923
----------------------------------------
Net income                                                                 91,156         80,007          70,795
Dividends on preferred stock                                                    -              -              10
----------------------------------------
Net income available to common stock                                    $  91,156      $  80,007       $  70,785
========================================

Net income                                                              $  91,156      $  80,007       $  70,795
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment                                   (1,340)        (1,742)              -
Unrealized gains on securities                                              -             59             455
Reclassification adjustment for gains reported in net income                -           (230)           (347)
----------------------------------------
(1,340)        (1,913)            108
----------------------------------------
Comprehensive income                                                    $  89,816      $  78,094       $  70,903
========================================
Net income per common share:
Basic                                                               $    0.72      $    0.64       $    0.60
========================================
Diluted                                                             $    0.71      $    0.64       $    0.59
========================================
Average common shares outstanding during the period:
Basic                                                                 127,364        124,329         117,700
========================================
Diluted                                                               129,206        125,710         118,993
========================================

See accompanying notes to consolidated financial statements.

22

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 2005 and 2004

2005           2004
--------------------------

Assets
Property, plant and equipment, at cost                                                $ 2,900,585    $ 2,626,151
Less: accumulated depreciation                                                            620,635        556,339
--------------------------
Net property, plant and equipment                                                   2,279,950      2,069,812
--------------------------
Current assets:
Cash and cash equivalents                                                              11,872         14,192
Accounts receivable and unbilled revenues, net                                         62,690         64,538
Inventory, materials and supplies                                                       7,798          6,903
Prepayments and other current assets                                                    7,596          5,570
--------------------------
Total current assets                                                                   89,956         91,203
--------------------------
Regulatory assets                                                                         130,953        122,935
Deferred charges and other assets, net                                                     37,061         34,106
Funds restricted for construction activity                                                 68,625         17,196
Goodwill                                                                                   20,180         20,122
--------------------------
$ 2,626,725    $ 2,355,374
==========================
Liabilities and Stockholders' Equity
Common stockholders' equity:
Common stock at $.50 par value, authorized 300,000,000 shares,
issued 129,658,806 and 127,866,524 in 2005 and 2004                          $    64,829    $    48,036
Capital in excess of par value                                                        478,508        468,524
Retained earnings                                                                     285,132        245,115
Treasury stock, at cost, 688,625 and 686,747 shares in 2005 and 2004                  (12,914)       (12,702)
Accumulated other comprehensive income                                                 (3,082)        (1,742)
Unearned compensation                                                                    (550)             -
--------------------------
Total common stockholders' equity                                                     811,923        747,231
--------------------------
Minority interest                                                                           1,551          1,237
Long-term debt, excluding current portion                                                 878,438        784,461
Commitments                                                                                     -              -

Current liabilities:
Current portion of long-term debt                                                      24,645         50,195
Loans payable                                                                         138,505         74,810
Accounts payable                                                                       55,455         34,915
Accrued interest                                                                       13,052         12,029
Accrued taxes                                                                           1,111          8,975
Other accrued liabilities                                                              30,571         33,506
--------------------------
Total current liabilities                                                             263,339        214,430
--------------------------
Deferred credits and other liabilities:
Deferred income taxes and investment tax credits                                      250,346        223,887
Customers' advances for construction                                                   74,828         73,095
Regulatory liabilities                                                                 11,751         11,942
Other                                                                                  31,969         21,283
--------------------------
Total deferred credits and other liabilities                                          368,894        330,207
--------------------------
Contributions in aid of construction                                                      302,580        277,808
--------------------------
$ 2,626,725    $ 2,355,374
==========================

See accompanying notes to consolidated financial statements.

23

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 2005 and 2004

2005            2004
--------------------------

Common stockholders' equity:
Common stock, $.50 par value                                      $ 64,829        $ 48,036
Capital in excess of par value                                     478,508         468,524
Retained earnings                                                  285,132         245,115
Treasury stock, at cost                                            (12,914)        (12,702)
Accumulated other comprehensive income                              (3,082)         (1,742)
Unearned compensation                                                 (550)              -
--------------------------
Total common stockholders' equity                                       811,923         747,231
--------------------------
Long-term debt:
Long-term debt of subsidiaries (substantially secured
by utility plant):
Interest Rate Range
0.00% to  2.49%                                                  21,574          20,051
2.50% to  2.99%                                                  28,684          29,924
3.00% to  3.49%                                                  17,380          17,546
3.50% to  3.99%                                                   6,748           7,123
4.00% to  4.99%                                                  30,695           9,435
5.00% to  5.49%                                                 262,588         165,615
5.50% to  5.99%                                                  79,000          89,260
6.00% to  6.49%                                                  88,504         110,360
6.50% to  6.99%                                                  32,000          42,000
7.00% to  7.49%                                                  15,878          45,105
7.50% to  7.99%                                                  25,012          25,231
8.00% to  8.49%                                                  26,507          26,714
8.50% to  8.99%                                                   9,000           9,000
9.00% to  9.49%                                                  46,764          53,244
9.50% to  9.99%                                                  40,933          42,088
10.00% to  10.50%                                                  6,000           6,000
--------------------------
737,267         698,696
Unsecured notes payable, 4.87%, maturing in
various installments 2010 - 2023                                   135,000         135,000
Unsecured notes payable, 5.01%, due 2015                                 18,000               -
Unsecured notes payable, 5.20%, due 2020                                 12,000               -
Notes payable, 6.05%, maturing in 2006 through 2008                         816             960

--------------------------
903,083         834,656
Current portion of long-term debt                                        24,645          50,195
--------------------------
Long-term debt, excluding current portion                               878,438         784,461
--------------------------
Total capitalization                                                 $1,690,361      $1,531,692
==========================

See accompanying notes to consolidated financial statements.

24

AQUA AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(In thousands of dollars, except per share amounts)

Accumulated      Unearned
Capital in                         Other       Compensation
Common   excess of  Retained   Treasury  Comprehensive  on Restricted
stock   par value  earnings    stock        Loss           Stock      Total
-----------------------------------------------------------------------------

Balance at December 31, 2002                   $35,034   $317,871  $180,047   $(40,421)    $     63      $    -   $492,594
Net income                                           -          -    70,785          -            -           -     70,785
Other comprehensive income: unrealized gains
on securities, 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 (9,745,160 shares)                 2,168     99,031         -     29,163            -           -    130,362
Repurchase of stock (60,646 shares)                  -          -         -     (1,353)           -           -     (1,353)
Equity Compensation Plan (26,875 shares)             8        344         -          -            -           -        352
Exercise of stock options (579,777 shares)         181      4,283         -          -            -           -      4,464
Employee stock plan tax benefits                     -        723         -          -            -           -        723
---------------------------------------------------------------------------
Balance at December 31, 2003                    46,635    413,008   210,915    (12,611)         171           -    658,118
---------------------------------------------------------------------------
Net income                                           -          -    80,007          -            -           -     80,007
Other comprehensive income (loss):
Minimum pension liability adjustment, net
of income tax of $938                          -          -         -          -       (1,742)          -     (1,742)
Unrealized gain on securities, net of
income tax of $32                              -          -         -          -           59           -         59
Less: reclassification adjustment for gains
reported in net income, net of income
tax of $173                                    -          -         -          -         (230)          -       (230)
Dividends                                            -          -   (45,807)         -            -           -    (45,807)
Sale of stock (3,181,203 shares)                 1,170     48,971         -        991            -           -     51,132
Repurchase of stock (51,808 shares)                  -          -         -     (1,082)           -           -     (1,082)
Equity Compensation Plan (45,535 shares)            17        692         -          -            -           -        709
Exercise of stock options (570,064 shares)         214      4,847         -          -            -           -      5,061
Employee stock plan tax benefits                     -      1,006         -          -            -           -      1,006
---------------------------------------------------------------------------
Balance at December 31, 2004                    48,036    468,524   245,115    (12,702)      (1,742)          -    747,231
---------------------------------------------------------------------------
Net income                                           -          -    91,156          -            -           -     91,156
Other comprehensive loss: minimum pension
liability adjustment, net of income tax
of $722                                           -          -         -          -       (1,340)          -     (1,340)
Dividends                                            -          -   (51,139)         -            -           -    (51,139)
Stock issued for acquisitions (24,684 shares)       12        663         -          -            -           -        675
Stock split                                     16,095    (16,095)        -          -            -           -          -
Sale of stock (471,682 shares)                     161      7,943         -      1,537            -           -      9,641
Repurchase of stock (56,930 shares)                  -          -         -     (1,749)           -           -     (1,749)
Equity Compensation Plan (37,751 shares)            14        708         -          -            -        (722)         -
Exercise of stock options (1,327,717 shares)       511     11,264         -          -            -           -     11,775
Employee stock plan tax benefits                     -      5,501         -          -            -           -      5,501
Amortization of unearned compensation                -          -         -          -            -         172        172
---------------------------------------------------------------------------
Balance at December 31, 2005                   $64,829   $478,508  $285,132   $(12,914)    $ (3,082)     $ (550)  $811,923
===========================================================================

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, 2005, 2004 and 2003

2005          2004          2003
------------------------------------

Cash flows from operating activities:
Net income                                                               $ 91,156      $ 80,007      $ 70,795
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization                                          65,488        58,864        51,463
Deferred income taxes                                                  26,027        40,577        26,741
Gain on sale of water system                                                -        (2,342)            -
Gain on sale of other assets                                           (1,177)       (1,272)       (5,692)
Net decrease (increase) in receivables, inventory and prepayments       7,572        (2,766)         (314)
Net increase in payables, accrued interest, accrued taxes
and other accrued liabilities                                       12,933           863         7,777
Other                                                                  (2,325)         (328)       (7,397)
------------------------------------
Net cash flows from operating activities                                      199,674       173,603       143,373
------------------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance for
funds used during construction of $2,447, $2,304 and $2,127          (237,462)     (195,736)     (163,320)
Acquisitions of water and wastewater systems, net                         (11,633)      (54,300)     (192,331)
Release of funds previously restricted for construction activity           56,137        14,015        16,339
Additions to funds restricted for construction activity                  (107,566)       (2,772)       (1,025)
Net proceeds from the sale of water systems                                     -         4,716         4,000
Net proceeds from the sale of other assets                                  1,300         2,098         6,496
Other                                                                         102          (517)         (312)
------------------------------------
Net cash flows used in investing activities                                  (299,122)     (232,496)     (330,153)
------------------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction               14,728        14,269         8,181
Repayments of customers' advances                                          (4,792)       (4,930)       (4,257)
Net proceeds (repayments) of short-term debt                               63,695       (30,150)      (18,654)
Proceeds from long-term debt                                              147,012       130,258       154,537
Repayments of long-term debt                                              (83,235)      (55,928)      (44,204)
Change in cash overdraft position                                          (8,808)       (2,190)        5,200
Redemption of preferred stock                                                   -             -          (172)
Proceeds from issuing common stock                                         21,416        56,193       134,826
Repurchase of common stock                                                 (1,749)       (1,082)       (1,353)
Dividends paid on preferred stock                                               -             -           (10)
Dividends paid on common stock                                            (51,139)      (45,807)      (39,917)
Other                                                                           -           179             -
------------------------------------
Net cash flows from financing activities                                       97,128        60,812       194,177
------------------------------------
Net increase (decrease) in cash and cash equivalents                           (2,320)        1,919         7,397
Cash and cash equivalents at beginning of year                                 14,192        12,273         4,876
------------------------------------
Cash and cash equivalents at end of year                                     $ 11,872      $ 14,192      $ 12,273
====================================
Cash paid during the year for:
Interest, net of amounts capitalized                                     $ 48,278      $ 45,261      $ 40,572
====================================
Income taxes                                                             $ 30,734      $ 22,322      $ 19,168
====================================

See Summary of Significant Accounting Policies-Customers' Advances for
Construction, Acquisitions and Employee Stock and 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

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, North Carolina, Illinois, Texas, New Jersey, Florida,
Indiana, Virginia, Maine, Missouri, New York and South Carolina. Our largest
operating subsidiary, Aqua Pennsylvania, Inc., accounts for approximately 56% of
our operating revenues for 2005 and provides water or wastewater services to
customers in the suburban areas north and west of the City of Philadelphia and
in 22 other counties in Pennsylvania. The Company's other subsidiaries provide
similar services in 12 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. The company has identified thirteen operating segments that are
based on the thirteen states where we provide water or wastewater services.
These operating segments are aggregated into one reportable segment since each
of the Company's operating segments has the following similarities: economic
characteristics, nature of services, production processes, customers, water
distribution or wastewater collection methods, and the nature of the regulatory
environment.

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 $16,484 in 2005, $13,623 in 2004 and $11,806 in 2003.

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, 2005, utility
plant includes a net credit acquisition adjustment of $64,165, which is
generally being amortized from 0 to 20 years. Amortization of the acquisition
adjustments totaled $3,674 in 2005, $3,961 in 2004 and $1,649 in 2003.

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. Utility expenditures for
water main cleaning and relining of pipes are deferred and recorded in net
property, plant and equipment in accordance with SFAS No. 71. As of December 31,
2005, $15,788 of costs has been incurred since the last rate proceeding and the
Company expects to recover these costs in future rates.

The cost of software upgrades and enhancements are capitalized if they result in
added functionality which enable the software to perform tasks it was previously
incapable of performing. Certain information technology costs associated with
major system installations, conversions and improvements, such as software
training, data conversion and business process reengineering costs, are deferred
as a regulatory asset if the Company expects to recover these costs in future
rates. If these costs are not deferred in accordance with SFAS No. 71, then
these costs are charged to operating expenses when incurred. As of December 31,
2005, $3,952 of costs have been incurred and deferred, since the last rate
proceeding, as a regulatory asset, and the deferral is reported as a component
of net property, plant and equipment.

27

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

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.

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.

In accordance with the requirements of 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 2005 was $1. There was no AFUDC related to equity funds in 2004
and 2003. 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.

The Company had a book overdraft for certain of its disbursement cash accounts
of $2,573 and $11,381 at December 31, 2005 and 2004, respectively. A book
overdraft represents transactions that have not cleared the bank accounts at the
end of the period. The Company transfers cash on an as-needed basis to fund
these items as they clear the bank in subsequent periods. The balance of the
book overdraft is reported as accounts payable and the change in the book
overdraft balance is reported as cash flows from financing activities.

ACCOUNTS RECEIVABLE-Accounts receivable are recorded at the invoiced amounts.
The allowance for doubtful accounts is the Company's best estimate of the amount
of probable credit losses in our existing accounts receivable, and is determined
based on historical write-off experience and the aging of account balances. The
Company reviews the allowance for doubtful accounts quarterly. Account balances
are written off against the allowance when it is probable the receivable will
not be recovered.

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.

GOODWILL-Goodwill represents the excess cost over the fair value of net tangible
and identifiable intangible assets acquired, and a substantial portion of the
goodwill balance is associated with the acquisition of Heater Utilities, Inc. in
June 2004. Goodwill is not amortized but is tested for impairment annually, or
more often, if certain circumstances indicate a possible impairment may exist.
In accordance with the requirements of SFAS No. 142, "Goodwill and Other
Intangible Assets," the Company tested the goodwill attributable to each of our
reporting units for impairment as of July 31, 2005, in conjunction with the
timing of our annual strategic business plan. Based on the Company's comparison
of the estimated fair value of each reporting unit to their respective carrying
amounts, the impairment test concluded that none of its goodwill was impaired.

28

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

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 AND CONTRIBUTIONS IN AID OF 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. Non-cash property, in the form of water mains, has been
received, generally from developers, as advances or contributions of $15,729,
$9,273 and $9,991 in 2005, 2004 and 2003, respectively. 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. Contributions in aid of
construction include direct non-refundable contributions and the portion of
customers' advances for construction that become non-refundable. Contributed
property is generally not depreciated. Certain of the subsidiaries do depreciate
contributed property and amortize contributions in aid of construction at the
composite rate of the related property.

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 currently 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. Please refer to
the Recent Accounting Pronouncements section of this footnote for information
concerning changes to the Company's accounting for stock-based compensation,
including the expected after-tax impact of adopting SFAS No. 123R, "Share-Based
Payment." Pursuant to the current 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,
-----------------------------------------
2005         2004          2003
-----------------------------------------

Net income available to common stock, as reported              $ 91,156      $ 80,007      $ 70,785
Add:  stock-based employee compensation expense
included in reported net income, net of tax                     290           266           224
Less: pro forma expense related to stock options
granted, net of tax effects                                   (2,054)      (1,990)       (1,793)
---------------------------------------
Pro forma                                                  $ 89,392      $ 78,283      $ 69,216
=======================================
Basic net income per share:
As reported                                                  $ 0.72        $ 0.64        $ 0.60
Pro forma                                                      0.70          0.63          0.59
Diluted net income per share:
As reported                                                  $ 0.71        $ 0.64        $ 0.59
Pro forma                                                      0.69          0.62          0.58

29

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

The per share weighted-average fair value at the date of grant for stock options
granted during 2005, 2004 and 2003 was $4.23, $4.07 and $3.50 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:

2005        2004       2003
------------------------------
Expected life (years)           6.0         4.5        5.6
Interest rate                  4.1%        4.0%       3.7%
Volatility                    23.4%       29.9%      32.4%
Dividend yield                 2.4%        2.2%       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 AND REVISIONS-Certain prior year amounts have been changed to
conform with current year's presentation. The changes include the presentation
of regulatory assets and cash overdrafts. Regulatory assets were previously
reported on a net basis. This presentation was changed to report regulatory
assets and liabilities on a gross basis and regulatory liabilities have been
reclassified to deferred credits and other liabilities. Cash overdrafts were
previously reported as components of cash or loans payable. This presentation
was changed to classify cash overdrafts as accounts payable. Accordingly,
applicable historic balance sheet and cash flow amounts have been revised to
conform to the new presentation and a new line has been added in the cash flow
from financing activities section titled "change in cash overdraft position".
This revision had no impact on the Company's net income, cash flows from
operating activities or cash flows used in investing activities. The revision
impacted the Company's net cash flows from financing activities from that which
was previously reported, by a $440 decrease for the year ended December 31,
2004, and an increase of $2,555 for the year ended December 31, 2003.

RECENT ACCOUNTING PRONOUNCEMENTS-On October 22, 2004, the American Jobs Creation
Act ("AJCA") was signed into law. Among other provisions, the AJCA creates a new
deduction for qualified domestic production activities. Certain activities of
the Company, such as our water treatment activity, are considered as qualifying
production activities for purposes of determining the deduction for qualified
production activities. In December 2004, the Financial Accounting Standards
Board ("FASB") issued FSP 109-1, "Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." In accordance
with FSP 109-1, the Company will treat the deduction for qualified domestic
production activities as a reduction of the income tax provision in the period
realized. The Company adopted this statement in the first quarter of 2005 and
has recorded an estimate for the effect of the statement which reduced the
provision for Federal and state income taxes by approximately $740 for the year
ended December 31, 2005.

In November 2004, the FASB approved Statement of Financial Accounting Standards
("SFAS") No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4."
SFAS No. 151 requires the exclusion of certain costs from inventories and the
allocation of fixed production overheads to inventories to be based on the
normal capacity of the production facilities. The standard is effective for the
Company for costs incurred after December 31, 2005. The Company believes this
statement will not have a material impact on its results of operations or
financial position.

In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29." SFAS No. 153 eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
fiscal periods beginning after June 15, 2005. The Company adopted this statement
and it did not have a material impact on the Company's results of operations or
financial position.

30

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment," which
revises SFAS No. 123, "Accounting for Stock-based Compensation," and supersedes
APB No. 25, "Accounting for Stock Issued to Employees." As noted in the section
captioned "Stock-based Compensation" in the Summary of Significant Accounting
Policies footnote, the Company currently provides pro forma disclosure of its
compensation costs associated with the fair value of stock options that have
been granted. The Company currently accounts for stock-based compensation
associated with stock options using the intrinsic method, and accordingly, no
compensation costs have been recognized in its consolidated financial
statements. SFAS 123R generally requires that we measure the cost of employee
services received in exchange for stock-based awards on the grant-date fair
value and this cost will be recognized over the period during which an employee
provides service in exchange for the award. The Company adopted this standard as
required on January 1, 2006. The Company adopted this standard using the
modified prospective method in which stock option awards that are granted,
modified or cancelled after the date of adoption are measured and accounted for
in accordance with SFAS No. 123R. Awards that are granted prior to the effective
date will continue to be accounted for in accordance with SFAS No. 123 except
that the stock option expense for unvested options will be recognized in the
income statement. The Company intends to use the Black-Scholes option-pricing
model as permitted under SFAS No. 123R. The impact of adoption of SFAS No. 123R
on the Company's earnings depends on a number of variables including the level
of share-based payments granted in the future, the fair value of the options
granted and the associated income tax benefits that the Company receives.
Assuming the Company grants a comparable number of stock options in 2006 as
compared to 2005 and the fair value approximates the value of recent stock
option grants reported in the notes to our consolidated financial statements,
the after-tax impact of SFAS No. 123R is expected to approximate $3,000 during
the year ending December 31, 2006. The Company believes that the adoption of
this standard will have no impact on our overall financial position or cash
flow, but will result in the reclassification of related tax benefits from
operating cash flow to financing cash flow to the extent these tax benefits
exceed the associated compensation cost recognized in the income statement.

In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," which clarifies that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value can be reasonably estimated. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. The Company
adopted this standard as required on December 15, 2005 and it did not have a
material effect on its results of operations or financial position.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle should be recognized in the period
of the accounting change. SFAS No. 154 further requires that a change in
depreciation, amortization or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. The Company intends to adopt this standard as required
in 2006.

31

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

ACQUISITIONS

HEATER-Pursuant to our strategy to grow through acquisitions, on June 1, 2004
the Company acquired the capital stock of Heater Utilities, Inc. for $48,000 in
cash and the assumption of long-term debt of $19,219 and short-term debt of
$8,500. The acquired operation provides water and wastewater service to over
50,000 water and wastewater customers primarily in the areas of suburban
Raleigh, Charlotte, Gastonia and Fayetteville, North Carolina. For the fiscal
year ended December 31, 2003, Heater had operating revenues of $19,489. The
acquisition was accounted for as a purchase and accordingly, the purchase price
is allocated to the net tangible and intangible assets based upon their
estimated fair values at the date of the acquisition. The Company obtained a
third-party valuation of these assets and liabilities, and it resulted in the
recording of a purchase accounting fair value adjustment of $3,141 to increase
the carrying-value of long-term debt assumed. The purchase price allocation is
as follows:

June 1,
2004
--------
Property, plant and equipment, net            $ 96,779
Current assets                                   4,133
Other long-term assets                           6,005
Goodwill                                        18,842
--------
Total assets acquired                          125,759
--------

Current liabilities                              3,063
Loans payable                                    8,500
Long-term debt                                  22,360
Other long-term liabilities                     43,836
--------
Total liabilities assumed                       77,759
--------
Net assets acquired                           $ 48,000
========

The Company has recorded goodwill of $18,842, and a substantial portion of the
goodwill is expected to be deductible for tax purposes. The purchase price was
arrived at through arms-length negotiations with the seller and is consistent
with the multiples paid in other comparable transactions. Aqua America
considered important regulatory, strategic and valuation considerations in
arriving at the final purchase price. During 2004, through the North Carolina
Utilities Commission approval process, a mechanism has been developed through
which the Company could recover up to two-thirds of the goodwill through
customer rates in the future upon achieving certain objectives. The Company
intends to pursue these objectives to facilitate recognition of this premium in
customer rates. However, there can be no assurance that the Company will be able
to achieve these objectives and recover such amount of goodwill, if any.

FLORIDA WATER-On June 30, 2004, the Company acquired certain utility assets of
Florida Water Services Corporation, comprised of 63 water and wastewater systems
located in central Florida for $14,747 in cash. In accordance with Florida
Public Service Commission procedures, the acquisition was approved by the
Commission and rate base was determined on December 20, 2005. Under the terms of
the purchase agreement, the Commission's rate base determination will result in
a reduction of the final purchase price that could be as much as approximately
$2,000, which is not expected to result in the recognition of goodwill.

AQUASOURCE-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 based on working capital at closing. On August 27, 2004, we were
awarded and received $12,289 plus interest in an arbitration related to the
calculation of the final purchase price under the terms of the purchase
agreement, which resulted in a final purchase price of $178,428. In the
consolidated statement of cash flow for 2004, the $12,289 award has been
reported as proceeds on the line titled acquisitions of water and wastewater
systems, net.

32

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

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 and Kentucky operations which were
subsequently sold to other parties). Please refer to the Dispositions footnote
for a discussion of the AquaSource operations located in Connecticut and
Kentucky. 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 6,666,667 shares of common stock through a shelf
registration.

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 purchase price allocation, which
reflects the effects of the August 2004 purchase price arbitration proceeding,
is as follows:

July 31,
2003
--------
Property, plant and equipment, net               $197,719
Current assets                                      9,687
Other long-term assets                             14,204
Assets held for sale, net                           4,096
--------
Total assets acquired                             225,706
--------

Current liabilities                                 8,214
Long-term debt                                      7,170
Other long-term liabilities                        31,894
--------
Total liabilities assumed                          47,278
--------
Net assets acquired                              $178,428
========

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 as if the
acquisition had occurred at the beginning of the period (unaudited):

Operating revenues                        $407,628
Net income                                $ 74,436
Net income per common share:
Basic                                     $ 0.61
Diluted                                   $ 0.60

The supplemental information is not necessarily representative of the actual
results that may have occurred for this period 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- During 2005, the Company completed 30 acquisitions or other
growth ventures in various states. The total purchase price of $12,308 for the
systems acquired in 2005 consisted of $11,633 in cash and the issuance of 24,684
shares of the Company's common stock. The operating revenues included in the
consolidated financial statements of the Company during the period owned by the
Company were $2,145.

During 2004, in addition to the Heater and Florida Water acquisitions, the
Company completed 27 acquisitions or other growth ventures in the various states
in which the Company operates for an aggregate purchase price of $3,842 in cash.
The operating revenues included in the consolidated financial statements of the
Company during the period owned by the Company were $1,281 in 2005 and $617 in
2004.

33

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. Operating revenues
included in the consolidated financial statements of the Company related to
these systems were $976 in 2005, $860 in 2004 and $312 in 2003.

DISPOSITIONS

In December 2004, as a result of the settlement of a condemnation action, the
Company's Ohio operating subsidiary sold its water utility assets within the
municipal boundaries of the City of Geneva in Ashtabula County, Ohio for net
proceeds of approximately $4,716, 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 2004 of a gain on the sale
of these assets, net of expenses, of $2,342. The gain is reported in the 2004
consolidated statement of income as a reduction to operations and maintenance
expense. We continue to operate this water system for the City of Geneva under
an operating contract that began upon the closing of the sale for a period
through December 2006. The operating contract provides for an annual base
operating fee of $135 and allows for additional fees to be earned commensurate
with the services provided. These water utility assets represent less than 1% of
Aqua America's total assets, and the total number of customers included in the
water system sold represents less than 1% of our total customer base.

In July 2004, the Company sold its only operations in Kentucky. The sale price
approximates our investment in this operation. The operation represented
approximately 0.2% of the operations acquired from AquaSource, Inc. In October
2003, the Company sold its only operation in Connecticut. The sale price of
$4,000 approximates our investment in this operation. The operation represented
approximately 2% of the operations acquired from AquaSource, Inc.

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 the Company acquired in connection with the AquaSource
acquisition in 2003. The Company has challenged whether the City is following
the correct legal procedures in connection with the City's attempted
condemnation and the Company has challenged the City's valuation of this portion
of its system. The portion of the system under consideration represents
approximately 1% of the Company's total customer base. While the Company
continues to discuss this matter with officials from the City of Fort Wayne, the
Company continues to protect its interests in this proceeding. The Company
believes that it will be entitled to fair market value for its assets if they
are condemned, and it is believed that the fair market value will be in excess
of the book value for such assets.

PROPERTY, PLANT AND EQUIPMENT

December 31,
--------------------------------     Approximate range
2005            2004            of remaining lives
--------------------------------  ------------------------

Utility plant and equipment:
Mains and accessories                          $1,187,597      $1,087,712          10 to 85 years
Services, hydrants, treatment
plants and reservoirs                        660,279         607,331           5 to 85 years
Operations structures and water tanks             222,107         218,888          15 to 77 years
Miscellaneous pumping and
purification equipment                       376,599         342,985          10 to 50 years
Meters, data processing, transportation
and operating equipment                      341,550         298,015           5 to 50 years
Land and other non-depreciable assets              73,346          67,260              -
-----------------------------
Utility Plant and equipment                          2,861,478       2,622,191
Utility construction work in progress                   98,898          63,754              -
Net utility plant acquisition adjustment               (64,165)        (63,347)          0 to 20 years
Non-utility plant and equipment                          4,374           3,553           2 to 40 years
-----------------------------
Total property, plant and equipment                 $2,900,585      $2,626,151
=============================

34

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

ACCOUNTS RECEIVABLE
December 31,
-------------------------
2005          2004
-------------------------

Billed utility revenue                       $ 42,541      $ 39,783
Unbilled utility revenue                       21,419        27,927
Other                                           3,136         1,677
-------------------------
67,096        69,387
Less allowance for doubtful accounts            4,406         4,849
-------------------------
Net accounts receivable                      $ 62,690      $ 64,538
=========================

The Company's customers are located principally in the following states: 48% in
Pennsylvania, 10% in Ohio, 9% in North Carolina, 8% in Illinois, 6% in Texas, 6%
in New Jersey, 4% in Florida, 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, 2005, 2004 or 2003. The following table summarizes the
changes in the Company's allowance for doubtful accounts:

2005          2004          2003
--------------------------------------

Balance at January 1,                       $ 4,849       $ 5,851       $ 3,580
Amounts charged to expense                    3,116         3,695         2,643
Accounts written off                         (4,113)       (5,460)       (2,715)
Recoveries of accounts written off              554           701           253
Allowance acquired through acquisitions           -            62         2,090
--------------------------------------
Balance at December 31,                     $ 4,406       $ 4,849       $ 5,851
======================================

35

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 regulatory liabilities are as
follows:

December 31,                    December 31,
---------------------------     ----------------------------
2005                            2004
---------------------------     ----------------------------
Regulatory     Regulatory       Regulatory     Regulatory
Assets       Liabilities        Assets       Liabilities
-------------   -----------     -------------   ------------

Income taxes                               $69,531        $2,203           $68,990         $3,283
Utility plant retirement costs              17,421         8,368            14,729          8,184
Postretirement benefits                     10,871             -            11,403              -
Texas rate filing expense deferral           9,486             -             3,365              -
CTC payment                                  5,733             -             6,879              -
Water tank painting                          4,292           267             4,593            130
Fair value of long-term debt
assumed in acquisition                  2,804             -             3,015              -
Merger costs                                 1,641             -             2,170              -
Rate case filing expenses & other            9,174           913             7,791            345
--------------------------     ----------------------------
$ 130,953       $11,751          $122,935        $11,942
==========================     ============================

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 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.

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 discount rate assumed for pension
obligations and a change in the fair market value of plan assets. 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 for the Texas rate filing of 2004 results from a multi-year
plan to increase annual revenues in phases, and to defer and amortize a portion
of the Company's depreciation, operating and other tax expense over a similar
multi-year period.

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 an
electric distribution 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.
Expenses associated with water tank painting are deferred and amortized over a
period of time as approved in the regulatory process.

36

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

As a requirement of purchase accounting, the Company recorded a fair value
adjustment for fixed-rate, long-term debt assumed in the Heater Utilities, Inc.
acquisition in 2004.

The regulatory asset results from the rate setting process continuing to
recognize the historical interest cost of the assumed debt. 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. 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 five years.

The regulatory asset related to the costs incurred for information technology
software projects and water main cleaning and relining projects are described in
the Summary of Significant Accounting Policies - Property Plant and Equipment
and Depreciation.

INCOME TAXES

The provision for income taxes consists of:

Years Ended December 31,
---------------------------------------
2005          2004           2003
---------------------------------------
Current:
Federal                $ 24,417       $ 2,042       $ 11,933
State                     6,586         7,553          7,249
---------------------------------------

31,003         9,595         19,182
---------------------------------------
Deferred:
Federal                  22,294        41,414         25,521
State                     3,616         1,115          1,220
---------------------------------------

25,910        42,529         26,741
---------------------------------------
Total tax expense        $ 56,913      $ 52,124       $ 45,923
=======================================

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 5.00% to 9.99% for all
years presented. The Company's Federal income tax returns for all years through
2001 have been closed, and 2002 was closed as a result of the conclusion of a
tax audit.

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,
--------------------------------------
2005          2004          2003
--------------------------------------

Computed Federal tax expense at statutory rate         $ 51,824      $ 46,245      $ 40,852
Increase in tax expense for depreciation expense
to be recovered in future rates                          806         1,376         1,125
Domestic Production Credit                                 (656)            -             -
Deduction for Aqua America common dividends
paid under employee benefit plan                        (321)         (245)         (241)
Amortization of deferred investment tax credits            (359)         (285)         (285)
Prior year rate reductions                                 (437)         (538)         (431)
State income taxes, net of federal tax benefit            6,631         5,634         5,505
Other, net                                                 (575)          (63)         (602)
--------------------------------------
Actual income tax expense                              $ 56,913      $ 52,124      $ 45,923
======================================

37

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,
--------------------------
2005            2004
--------------------------
Deferred tax assets:
Customers' advances for construction                 $ 17,549        $ 17,057
Costs expensed for book not deducted
for tax, principally accrued expenses                 1,803           1,989
Utility plant acquisition adjustment
basis differences                                    29,429          30,920
Minimum pension liability adjustment                    1,660             938
--------------------------
Total gross deferred tax assets                          50,441          50,904
--------------------------

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                                 267,835         243,953
Deferred taxes associated with the gross-up
of revenues necessary to recover, in rates,
the effect of temporary differences                  25,796          23,670
Deferred investment tax credit                          6,066           6,328
Unrealized gain on marketable securities                    -               -
Other                                                   1,090             840
--------------------------
Total gross deferred tax liabilities                    300,787         274,791
--------------------------
Net deferred tax liability                             $250,346        $223,887
==========================

On October 22, 2004, the American Jobs Creation Act ("AJCA") was signed into
law. Among other provisions, the AJCA creates a new deduction for qualified
domestic production activities. Certain activities of the Company, such as our
water treatment activity, are considered as qualifying production activities for
purposes of determining the deduction for qualified production activities. In
December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." In accordance
with FSP 109-1, the Company will treat the deduction for qualified domestic
production activities as a reduction of the income tax provision in the period
realized. The Company adopted this statement in 2005 and has recorded an
estimate for the effect of the statement which reduced the provision for Federal
and state income taxes by approximately $740 for the year ended December 31,
2005.

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 through
2010 are expected to approximate $11,618 and $75,559 thereafter. The Company
purchased approximately $10,603, $8,724 and $8,014 of water under these
agreements during the years ended December 31, 2005, 2004 and 2003,
respectively.

The Company leases motor vehicles, buildings and other equipment under operating
leases that are noncancelable. The future annual minimum lease payments due are:
$2,934 in 2006, $2,488 in 2007, $2,012 in 2008, $670 in 2009, $430 in 2010 and
$256 thereafter. 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.
Subject to the aforesaid adjustment, during each of the next five years,
approximately $545 of annual lease payments for land are due, and $15,009
thereafter. The Company leases treatment plants to other parties under lease
agreements that require payments to the Company of $567 in 2006, $267 in 2007,
$308 in 2008, $246 in 2009, $246 in 2010 and $3,430 thereafter.

Rent expense was $3,390, $3,267 and $2,993 for the years ended December 31,
2005, 2004 and 2003, respectively.

38

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 provide a summary of long-term
debt as of December 31, 2005 and 2004. 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, 2005, approximately $281,000 of
Aqua Pennsylvania's retained earnings and $69,000 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.

Sinking fund payments are required by the terms of certain issues of long-term
debt. The future sinking fund payments and debt maturities of the Company's
long-term debt are as follows:

Interest Rate Range         2006         2007         2008         2009          2010      Thereafter
-------------------------------------------------------------------------------

0.00% to  2.49%       $  1,320     $  1,340     $  1,354      $ 1,378       $ 1,395       $  14,787
2.50% to  2.99%          6,502        1,489        1,534        1,583         1,657          15,919
3.00% to  3.49%            265       12,270          278          288           298           3,981
3.50% to  3.99%            675          685          695          706           717           3,270
4.00% to  4.99%             50           50           50           55        27,055         138,435
5.00% to  5.49%              -            -            -            -                       292,588
5.50% to  5.99%              -            -            -            -             -          79,000
6.00% to  6.49%            144          644       10,172            -             -          78,360
6.50% to  6.99%         10,000       10,000            -            -             -          12,000
7.00% to  7.49%          2,499        2,540        2,585          634           687           6,933
7.50% to  7.99%            194          210          227          245           264          23,872
8.00% to  8.49%            139          152          167          184           202          25,663
8.50% to  8.99%              -            -            -            -             -           9,000
9.00% to  9.49%            663          584          594          604        20,615          23,704
9.50% to  9.99%          2,194          995        5,995          995           994          29,760
10.00% to  10.50%            -            -            -            -             -           6,000
-----------------------------------------------------------------------------------
Total                   $ 24,645     $ 30,959     $ 23,651      $ 6,672       $53,884       $ 763,272
===================================================================================

In February 2005, the Company issued $30,000 of unsecured notes of which $18,000
are due in 2015 with an interest rate of 5.01% and $12,000 are due in 2020 with
an interest rate of 5.20%. The proceeds of this financing were used to refinance
existing short-term debt. In May 2005, Aqua Pennsylvania issued $72,000 of
tax-exempt bonds secured by a supplement to its first mortgage indenture at the
following terms: $22,000 at 4.87% due 2036, $25,000 at 4.88% due 2037 and
$25,000 at 4.89% due 2038. Of the $72,000 in proceeds, $22,000 was used to
retire previously issued tax-exempt bonds in August 2005 and the balance of
proceeds are restricted to funding the costs of certain capital projects during
the period 2005 through 2007. In December 2005, Aqua Pennsylvania issued $25,000
of tax-exempt bonds at 4.82% due 2035, which were secured by a supplement to its
first mortgage indenture. The proceeds are restricted to funding certain capital
projects during the period 2006 through 2008. At various times during 2005, Aqua
Pennsylvania and other operating subsidiaries issued other notes payable, first
mortgage bonds and tax-exempt bonds aggregating $24,677 at a weighted-average
interest rate of 4.10% due at various times ranging from 2019 to 2035. The
proceeds from these issuances were used to reduce a portion of the balance of
short-term debt at each of the respective operating subsidiaries and to redeem
$10,260 of first mortgage bonds of an operating subsidiary with an interest rate
of 5.60%. As of December 31, 2005, the Trustees for 12 issues held $68,625
pending construction of the projects to be financed with the issues and are
reported in the consolidated balance sheet as funds restricted for construction
activity.

39

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

In May 2004, Aqua Pennsylvania issued $87,000 of First Mortgage Bonds
secured by a supplement to its first mortgage indenture with a weighted-average
interest rate of approximately 5.1% and a weighted-average maturity of 13.7
years. The proceeds from this issuance were used to refinance short-term debt
and to fund long-term debt maturities. In May 2004, an unsecured note of $70,000
was issued by the Company. Interest under this note is 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. The proceeds of this
financing were used to fund acquisitions and to refinance existing debt. In
November 2004, $34,000 of the $70,000 unsecured note was repaid with the
proceeds from an equity offering. The remaining balance of the note of $36,000
was repaid in May 2005. In connection with the acquisition of Heater Utilities,
Inc. in 2004, the Company assumed $22,360 of long-term debt at interest rates
ranging from 7.05% to 8.24% due 2012 to 2025, which includes the purchase
accounting fair value adjustment of $3,141, increasing the carrying-value of
long-term debt. In November 2004, Aqua Pennsylvania issued $14,000 tax-exempt
bonds due 2039 at a rate of 5.05% and secured by a supplement to its first
mortgage indenture. The proceeds from the bonds issued were used to retire
previously issued tax-exempt bonds. At various times during 2004, Aqua
Pennsylvania and other operating subsidiaries issued other notes payable and
first mortgage bonds aggregating $31,239 at a weighted-average interest rate of
3.76% due at various times ranging from 2006 to 2037. 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 and to redeem $6,000 of first
mortgage bonds with a weighted-average interest rate of 9.19%. The weighted
average cost of long-term debt at December 31, 2005 and 2004 was 5.74% and
6.00%, respectively.

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, 2005 and 2004, funds
borrowed under the Aqua Pennsylvania revolving credit agreements were $65,000
and $29,000, respectively, and $17,000 and $0 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 short-term
borrowings of Aqua Pennsylvania and the Company. A commitment fee of 1/10 of 1%
is charged on the total commitment amount of Aqua Pennsylvania's revolving
credit agreement. The average cost of borrowing under these facilities was 3.8%
and 1.4%, and the average borrowing was $63,355 and $50,115, during 2005 and
2004, respectively. The maximum amount outstanding at the end of any one month
was $85,000 in 2005 and $89,519 in 2004.

At December 31, 2005 and 2004, the Company had combined short-term lines of
credit of $127,000 and $108,000, respectively. Funds borrowed under these lines
are classified as loans payable and are used to provide working capital. As of
December 31, 2005 and 2004, funds borrowed under the short-term lines of credit
were $56,505 and $9,810, respectively. The average borrowing under the lines was
$35,610 and $34,711 during 2005 and 2004, respectively. The maximum amount
outstanding at the end of any one month was $56,505 in 2005 and $51,288 in 2004.
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 2005 and 2004 was 3.9% and 2.3%, respectively.

Interest income of $3,040, $1,762 and $395 was netted against interest expense
on the consolidated statements of income for the years ended December 31, 2005,
2004 and 2003, respectively. The total interest cost was $55,102, $50,441 and
$45,057 in 2005, 2004 and 2003, including amounts capitalized of $2,447, $2,304
and $2,127, respectively.

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,
-------------------------
2005          2004
-------------------------

Carrying amount                  $903,083       $834,656
Estimated fair value              950,479        863,247

40

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

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 $74,828 and $73,095 at December
31, 2005 and 2004, 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
2020 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.

STOCKHOLDERS' EQUITY

At December 31, 2005, the Company had 300,000,000 shares of common stock
authorized; par value $0.50. Shares outstanding at December 31, 2005, 2004 and
2003 were 128,970,181, 127,179,777 and 123,452,053, respectively. Treasury
shares held at December 31, 2005, 2004 and 2003 were 688,625, 686,747 and
681,384, respectively. At December 31, 2005, the Company had 1,770,819 shares of
authorized but unissued Series Preferred Stock, $1.00 par value.

In August 2005, the Company's Board of Directors declared a 4-for-3 common stock
split to be effected in the form of a 33 1/3% stock distribution for all common
shares outstanding, to shareholders of record on November 17, 2005. Common
shares outstanding do not include shares held by the Company in treasury. The
new shares were distributed on December 1, 2005. The Company's par value of
$0.50 per share remained unchanged and $16,095 was transferred from Capital in
Excess of Par Value to Common Stock to record the split. All common share and
per common share data for all periods presented have been restated to give
effect to the stock split.

In December 2005, the Company filed a universal shelf registration with the
Securities and Exchange Commission to allow for the potential future sale by us,
from time to time, in one or more public offerings, of an indeterminant amount
of our common stock, preferred stock, debt securities and other securities
specified therein at indeterminant prices. No issuances have been completed to
date under this shelf registration. During the last three years, the Company
completed the following offerings of equity:

o   In November 2004, the Company issued 2,606,667 shares of common stock
in a public offering for proceeds of $42,600, net of expenses. The net
proceeds were used to repay a portion of our short-term debt. The
indebtedness was incurred by Aqua America in connection with
acquisitions.
o   In August 2003, the Company issued 6,666,667 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.
o   In May 2003, the Company issued 2,491,667 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 2,017,700 shares of common stock from affiliates of
Veolia Environnement, S.A. (formerly Vivendi Environnement, S.A.) in
October 2002.

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 in connection with
acquisitions. During 2005, 24,684 shares of common stock totaling $675 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, 2005 is 2,194,262 shares. The form and terms of any securities
issued under these shelf registrations will be determined at the time of
issuance.

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, 2005, 548,278 shares remain
available for repurchase.

The Company has a Dividend Reinvestment and Direct Stock Purchase Plan ("Plan")
that allows reinvested dividends to be used to purchase 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. The shares
issued under the Plan are either original issue shares or shares purchased by
the Company's transfer agent in the open-market. During 2005, 2004 and 2003,
under the dividend reinvestment portion of the Plan, 401,503, 512,609 and
527,473 original issue shares of common stock were sold providing the Company
with proceeds of $8,516, $7,808 and $7,000, respectively.

41

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." Accordingly, the Company's accumulated other
comprehensive income is reported in the Common Stockholders' Equity section of
the Consolidated Balance Sheets, the Consolidated Statements of Common
Stockholders' Equity and the related other comprehensive income is reported in
the Consolidated Statements of Income and Comprehensive Income. The Company
reports its unrealized gains on securities and minimum pension liability
adjustments as other comprehensive income or loss and accumulated other
comprehensive income or loss.

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,
----------------------------------
2005        2004         2003
----------------------------------
Average common shares outstanding during
the period for Basic computation           127,364     124,329      117,700
Dilutive effect of employee stock options       1,842       1,381        1,293
----------------------------------
Average common shares outstanding during
the period for Diluted computation         129,206     125,710      118,993
==================================

For the years ended December 31, 2005 and 2003, there were no outstanding
employee stock options excluded from the calculation of diluted net income per
share as the average market price of the Company's common stock was greater than
the options' exercise price. For the year ended December 31, 2004, employee
stock options outstanding to purchase 759,867 shares of common stock were
excluded from the calculation of diluted net income per share as the options'
exercise price was greater than the average market price of the Company's common
stock.

Equity per common share was $6.30 and $5.88 at December 31, 2005 and 2004,
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.

EMPLOYEE STOCK AND INCENTIVE PLAN

In May 2004, the 2004 Equity Compensation Plan ("the 2004 Plan") was approved by
the shareholders to replace the 1994 Equity Compensation Plan ("the 1994 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"). The 2004 Plan
authorizes 4,900,000 shares for issuance under the Plan. A maximum of 50% of the
shares available for issuance under the 2004 Plan may be issued as restricted
stock and the maximum number of shares that may be subject to grants under the
plans to any one individual in any one year is 200,000. Awards under the 2004
Plan are, and awards under the 1994 plan were, made by a committee of the Board
of Directors.

42

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Options under the plans 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 plans:

As of or For the Years Ended December 31,
-----------------------------------------------------------------------------------
2005                       2004                        2003
---------------------------  --------------------------  --------------------------
Weighted                    Weighted                    Weighted
Average                     Average                     Average
Exercise                    Exercise                    Exercise
Shares         Price         Shares        Price         Shares        Price
---------------------------  --------------------------  --------------------------

Options:
Outstanding, beginning of year          4,066,983      $ 11.22      3,991,228      $  9.98      3,773,511       $ 9.04
Granted                                   816,997        18.33        776,867        16.15        818,205        12.74
Terminated                                (63,900)       15.22       (131,048)       12.47        (20,711)       11.09
Exercised                              (1,327,717)        8.88       (570,064)        8.96       (579,777)        7.71
---------------------------  --------------------------  --------------------------
Outstanding, end of year                3,492,363      $ 13.70      4,066,983      $ 11.22      3,991,228       $ 9.98
===========================  ==========================  ==========================

Exercisable, end of year                1,957,079      $ 11.31      2,549,073      $  9.32      2,341,733       $ 8.26
===========================  ==========================  ==========================

Options exercised during 2005 ranged in price from $3.42 per share to $16.15 per
share. At December 31, 2005, 4,093,297 options under the 2004 Plan were still
available for grant, although under the terms of the 2004 Plan, terminated,
expired or forfeited grants under the 1994 Plan and shares withheld to satisfy
tax withholding requirements under the 1994 Plan may be re-issued under the 2004
Plan. The following table summarizes the price ranges of the options outstanding
and options exercisable as of December 31, 2005:

Options Outstanding                    Options Exercisable
----------------------------------------    ----------------------------
Weighted     Weighted                        Weighted
Average      Average                          Average
Remaining     Exercise                        Exercise
Shares     Life (years)    Price            Shares          Price
----------------------------------------    ----------------------------

Range of prices:
$ 4.30 -  7.99       290,026          3.1       $ 6.40          290,026         $ 6.40
$ 8.00 -  9.99       250,963          2.8         8.35          250,963           8.35
$10.00 - 12.99     1,301,947          6.4        12.20        1,109,069          12.15
$13.00 - 15.99       160,270          7.4        13.75          106,102          13.76
$16.00 - 16.99       680,491          8.3        16.15          200,919          16.15
$17.00 - 18.33       808,666          9.2        18.33                -              -
----------------------------------------    ----------------------------
3,492,363          6.9      $ 13.70        1,957,079        $ 11.31
========================================    ============================

Under SFAS No. 123 "Accounting for Stock-Based Compensation" and SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure", the
Company applied the provisions of APB Opinion No. 25 and provided the pro forma
disclosure provisions of this statement. Accordingly, no compensation cost was
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. On January 1, 2006, the Company adopted SFAS No. 123R, "Share-Base
Payment" which changes the accounting for the compensation costs for its stock
options granted as described in the Summary of Significant Accounting Policies -
Recent Accounting Pronouncements.

43

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 2005, 2004 and 2003, 37,751, 45,535 and 26,875 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. The company recorded compensation expense related to
restricted stock awards of $495, $439 and $369 during 2005, 2004 and 2003,
respectively.

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.

The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid in the years indicated:

Other
Pension         Postretirement
Benefits          Benefits
------------      --------------
Years:
2006                  $ 6,866            $ 1,829
2007                    7,076              1,950
2008                    7,415              2,095
2009                    7,911              2,261
2010                    8,383              2,442
2011 - 2015            52,787             14,802

In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003." FSP 106-2 supersedes FSP 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003," which was issued in January
2004 and permitted 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") until more authoritative guidance on the accounting for the
federal subsidy was issued. The Company had elected the one-time deferral
allowed under FSP 106-1 and as a result adopted FSP 106-2 as required in the
third quarter of 2004 and it did not have a material impact on our results of
operations or financial position.

44

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
-----------------------         -----------------------
2005           2004            2005            2004
--------       --------         -------         -------

Change in benefit obligation:
Benefit obligation at January 1,                 $171,076       $150,098         $32,804         $29,134
Service cost                                        4,847          4,312           1,223           1,112
Interest cost                                       9,805          9,512           1,882           1,825
Plan amendments                                         -            567          (7,047)              6
Actuarial loss                                        420         12,742           1,317           1,676
Plan participants' contributions                        -              -             584             631

Benefits paid                                      (6,407)        (6,155)         (1,602)         (1,580)
--------       --------         -------         -------
Benefit obligation at December 31,                179,741        171,076          29,161          32,804
--------       --------         -------         -------
Change in plan assets:
Fair value of plan assets at January 1,           115,292        108,731          16,606          14,391
Actual return on plan assets                        7,790          8,535             675             641
Employer contributions                                996          4,181           2,678           2,522
Benefits paid                                      (6,407)        (6,155)         (1,017)           (948)
--------       --------         -------         -------
Fair value of plan assets at December 31,         117,671        115,292          18,942          16,606
--------       --------         -------         -------
Funded status of plan:
Funded status at December 31,                      62,070         55,784          10,219          16,198
Unrecognized actuarial loss                       (42,092)       (41,531)         (8,537)         (6,853)
Unrecognized prior service cost                    (1,687)        (2,090)          7,517             527
Unrecognized net transition obligation                809          1,017          (5,624)         (6,428)
--------       --------         -------         -------
Net amount recognized                            $ 19,100       $ 13,180         $ 3,575         $ 3,444
========       ========         =======         =======

The Company's pension plans had an accumulated benefit obligation of $148,629
and $136,851 at December 31, 2005 and 2004, respectively. The following table
provides the net liability recognized on the Consolidated Balance Sheets at
December 31:

Other
Pension Benefits            Postretirement Benefits
--------------------------    ---------------------------
2005          2004            2005           2004
--------------------------    ---------------------------

Prepaid benefits cost                 $      -      $      -         $   555        $   762
Accrued benefit cost                   (19,100)      (13,180)         (4,130)        (4,206)
Additional minimum liability           (12,726)       (8,928)              -              -
Intangible assets                        1,817         2,108               -              -
Regulatory asset                         6,167         4,140               -              -
Accumulated other
comprehensive loss                  4,742         2,680               -              -
--------------------------    ---------------------------
Net liability recognized              $(19,100)     $(13,180)        $(3,575)       $(3,444)
==========================    ===========================

45

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

At December 31, 2005 and 2004, 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
------------------------------
2005            2004
------------------------------
Projected benefit obligation             $ 179,741       $ 171,076
Fair value of plan assets                  117,671         115,292

Accumulated Benefit
Obligation Exceeds
the Fair Value of
Plan Assets
------------------------------
2005            2004
------------------------------
Accumulated benefit obligation           $ 148,629       $ 136,851
Fair value of plan assets                  117,671         115,292

The following table provides the components of net periodic benefit costs for
the years ended December 31,:

Other
Pension Benefits                  Postretirement Benefits
----------------------------------   ----------------------------------
2005        2004       2003          2005        2004        2003
----------------------------------   ----------------------------------

Service cost                                $ 4,847     $ 4,312    $ 3,627       $ 1,223     $ 1,112      $ 987
Interest cost                                 9,805       9,512      8,999         1,882       1,825      1,703
Expected return on plan assets               (9,536)     (9,169)    (7,775)       (1,261)     (1,086)      (917)
Amortization of transition
obligation (asset)                        (209)       (209)      (209)          803         803        803
Amortization of prior service cost              403         419        395           (57)        (57)       (57)
Amortization of actuarial (gain) loss         1,606       1,009      1,282           219         125         62
Amortization of regulatory asset                  -           -          -           136         144        136
Capitalized costs                            (1,847)     (1,021)      (205)         (739)       (629)      (598)
----------------------------------   ----------------------------------
Net periodic benefit cost                   $ 5,069     $ 4,853    $ 6,114       $ 2,206     $ 2,237    $ 2,119
==================================   ==================================

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. During 2005, the Company undertook a
comprehensive study of the key demographic assumptions which impact the
obligations and expense for its plans. Based on the study, the Company updated
the assumed retirement and turnover rates for the plans to better reflect the
recent experience combined with our expectations of future patterns. In
addition, the Company has updated the mortality assumptions to reflect a more
recent actuarial study of mortality experience and an expectation of future
mortality improvements. The net effect of the changes in these assumptions was a
decrease of $1,600 in the Company's pension and postretirement benefit
obligation measured as of December 31, 2005.

46

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
---------------------------    ---------------------------
2005           2004            2005           2004
------------   ------------    ------------  -------------

Weighted-average Assumptions Used
to Determine Benefit Obligations
as of December 31,
Discount rate                                            5.65%          5.75%           5.65%          5.75%
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            2011           2010

Weighted-average Assumptions Used
to Determine Net Periodic Benefit
Costs for Years Ended December 31,
Discount rate                                            5.75%          6.25%           5.75%          6.25%
Expected return on plan assets                           8.50%          8.50%        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%            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            2010           2009

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                                      $    614         $   (689)
========         ========
Effect on total service and interest cost
components of net periodic postretirement
health-care benefit cost                        $     70         $   (104)
========         ========

47

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

The Company's discount rate assumption was determined using a yield curve that
was produced from a universe containing over 500 U.S.-issued Aa-graded corporate
bonds, all of which were noncallable (or callable with make-whole provisions),
and excluding the 10% of the bonds with the highest yields and the 10% with the
lowest yields. The discount rate was then developed as the single rate that
would produce the same present value as if the Company used spot rates, for
various time periods, to discount the projected pension benefit payments. The
Company's pension expense and liability (benefit obligations) increases as the
discount rate is reduced. A 25 basis-point reduction in this assumption would
have increased 2005 pension expense by $660 and the pension liabilities by
$7,000.

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. A 25 basis-point reduction in this
assumption would have increased 2005 pension expense by $280. For 2005, the
Company used an 8.5% expected return on assets assumption, and will lower this
assumption to 8.0% for the calculation of pension expense for 2006. This change
was made to reflect a change in the Company's expectations of long-term market
returns given the recent decrease in bond yields. 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 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
2006        Assets at December 31,
Target       -----------------------
Allocation        2005             2004
----------       ------           ------
Asset Category:
Equity securities          65%           60%              62%
Debt securities            35%           24%              27%
Cash                        0%           16%              11%
----          ----             ----
Total                     100%          100%             100%
====          ====             ====

Equity securities include Aqua America, Inc. common stock in the amounts of
$11,121 or 9.5% of total plan assets and $7,373 or 6.4% of total plan assets as
of December 31, 2005 and 2004, 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
2006        Assets at December 31,
Target       -----------------------
Allocation        2005             2004
----------       ------           ------
Asset Category:
Cash                       65%           67%              60%
Equity securities          35%           33%              40%
----          ----             ----
Total                     100%          100%             100%
====          ====             ====

Minimum funding requirements for qualified defined benefit pension plans are
determined by government regulations and not by accounting pronouncements. In
accordance with funding rules and the Company's funding policy, during 2006 our
pension contribution is expected to be $6,400. The Company's funding of its PBOP
cost during 2006 is expected to approximate $2,882.

As of December 31, 2005, the Company has an additional minimum liability of
$10,909 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.

48

AQUA AMERICA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

The portion of the additional minimum liability related to our employees in one
of our rate jurisdictions results in the establishment of a regulatory asset of
$6,167, as the Company expects recovery of the future, increased pension expense
through customer rates. Since the balance of the additional minimum liability of
$4,742 may not be recovered through rates, the accounting requirements for
recording a regulatory asset are not met and as a result this amount is recorded
as accumulated other comprehensive loss through aggregate charges to accumulated
other comprehensive income in 2004 and 2005, net of income tax benefits of
$1,660. The change in the additional minimum liability from December 31, 2004 to
December 31, 2005 resulted from the effect of a decreased discount rate, offset
partially by an increase in the pension plan assets during 2005 due to positive
equity market performance and pension contributions.

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 $1,236, $1,160 and $921 for the years ended December
31, 2005, 2004 and 2003, respectively.

WATER AND WASTEWATER RATES

In November 2005, the Company's Pennsylvania operating subsidiary, Aqua
Pennsylvania, Inc., filed an application with the Pennsylvania Public Utility
Commission ("PAPUC") requesting a $38,800 or 14.4% increase in annual revenues.
The application is currently pending before the PAPUC and a final determination
is anticipated by August 2006. On August 5, 2004, the PAPUC granted Aqua
Pennsylvania, Inc. a $13,800 base rate increase. The rates in effect at the time
of the filing included $11,200 in Distribution System Improvement Charges
("DSIC") or 5.0% above the prior base rates. Consequently, the total base rates
increased by $25,000 and the DSIC was reset to zero.

In May 2004, the Company's operating subsidiary in Texas filed an application
with the Texas Commission on Environmental Quality to increase rates by $11,920
over a multi-year period. The application seeks to increase annual revenues in
phases and is accompanied by a plan to defer and amortize a portion of the
Company's depreciation, operating and other tax expense over a similar
multi-year period, such that the impact on operating income approximates the
requested amount during the first years that the new rates are in effect. The
application is currently pending before the Commission and several parties have
joined the proceeding to challenge the rate request. The Company commenced
billing for the requested rates and implemented the deferral plan in August
2004, in accordance with authorization from the Texas Commission on
Environmental Quality in July 2004. The additional revenue billed and collected
prior to the final ruling are subject to refund based on the outcome of the
ruling. The revenue recognized and the expenses deferred by the Company reflect
an estimate of the final outcome of the ruling. As of December 31, 2005, we have
deferred $9,486 of expenses and recognized $5,202 of revenue that is subject to
refund based on the outcome of the final commission order, which is not expected
to be issued prior to December 2006.

The Company's other operating subsidiaries were allowed annual rate increases of
$5,142 in 2005, $6,673 in 2004 and $1,275 in 2003, represented by twenty-three,
fourteen and eight rate decisions, respectively. Revenues from these increases
realized in the year of grant were approximately $3,144, $3,995 and $839 in
2005, 2004 and 2003, respectively.

Five 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, Indiana and Missouri 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 at 5% to 9% 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 2005, 2004 and
2003 of $10,186, $7,817 and $8,147, respectively.

49

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
---------------------------------------------------------
2005
--------------------------------------------------------------------------------------------------

Operating revenues                       $ 113,988   $ 123,100   $ 136,783   $ 122,908   $ 496,779
Operations and maintenance expense          47,309      50,891      52,666      52,222     203,088
Operating income                            42,771      48,593      59,091      46,052     196,507
Net income                                  18,871      22,218      27,917      22,150      91,156
Basic net income per common share             0.15        0.17        0.22        0.17        0.72
Diluted net income per common share           0.15        0.17        0.21        0.17        0.71
Dividend paid per common share              0.0975      0.0975      0.0975      0.1069      0.3994
Dividend declared per common share          0.0975      0.0975      0.2044          --      0.3994
Price range of common stock
- high                                     19.37       23.24       29.15       29.22       29.22
- low                                      17.49       18.03       21.61       22.88       17.49

2004
--------------------------------------------------------------------------------------------------
Operating revenues                       $  99,768   $ 106,524   $ 120,305   $ 115,442   $ 442,039
Operations and maintenance expense          41,831      44,483      46,526      45,505     178,345
Operating income                            36,444      40,473      50,997      49,320     177,234
Net income                                  15,575      17,871      24,087      22,474      80,007
Basic net income per common share             0.13        0.14        0.19        0.18        0.64
Diluted net income per common share           0.12        0.14        0.19        0.18        0.64
Dividend paid per common share                0.09        0.09        0.09      0.0975      0.3675
Dividend declared per common share            0.09        0.09      0.1875          --      0.3675
Price range of common stock
- high                                     17.14       16.47       16.67       18.48       18.48
- low                                      15.00       14.24       14.18       15.58       14.18

All per share data as presented has been adjusted for the 2005 4-for-3 common
stock split effected in the form of a 33 1/3% 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 2005 of $0.1069 and
December 2004 of $0.0975 were declared in August 2005 and August 2004,
respectively.

50

Summary of Selected Financial Data                                                    Aqua America, Inc. and Subsidiaries
(in thousands of dollars, except per share amounts)

-------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                       2005     2004 (a)     2003 (b)          2002         2001
-------------------------------------------------------------------------------------------------------------------------

PER COMMON SHARE:
Net income
Basic                                              $     0.72   $     0.64   $     0.60    $     0.59   $     0.53
Diluted                                                  0.71         0.64         0.59          0.58         0.52
Cash dividends declared and paid                              0.40         0.37         0.34          0.32         0.30
Return on average stockholders' equity                        11.7%        11.4%        12.3%         13.9%        13.3%
Book value at year end                                  $     6.30   $     5.88   $     5.33    $     4.35   $     4.14
Market value at year end                                     27.30        18.44        16.58         12.36        13.53
-------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT HIGHLIGHTS:
Operating revenues                                      $  496,779   $  442,039   $  367,233    $  322,028   $  307,280
Depreciation and amortization                               65,488       58,864       51,463        44,322       40,168
Interest expense, net (c)                                   49,615       46,375       42,535        39,007       38,637
Income before income taxes                                 148,069      132,131      116,718       109,252       99,087
Provision for income taxes                                  56,913       52,124       45,923        42,046       38,976
Net income available to common stock                        91,156       80,007       70,785        67,154       60,005
-------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS:
Total assets                                            $2,626,725   $2,355,374   $2,071,252    $1,716,030   $1,554,483
Property, plant and equipment, net                       2,279,950    2,069,812    1,824,291     1,486,703    1,364,282
Common stockholders' equity                                811,923      747,231      658,118       492,594      471,930
Long-term debt, including current portion                  903,083      834,656      736,052       617,175      531,455
Total debt                                               1,041,588      909,466      832,511       732,288      641,123
-------------------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION:
Net cash flows from operating activities                $  199,674   $  173,603   $  143,373    $  121,560   $  102,165
Capital additions                                          237,462      195,736      163,320       136,164      124,088
Net cash expended for acquisitions
of utility systems                                     11,633       54,300      192,331         8,914        9,517
Dividends on common stock                                   51,139       45,807       39,917        36,789       34,234
Number of customers served                                 864,894      835,512      749,491       605,474      587,537
Number of shareholders of common stock                      27,054       24,082       22,726        21,389       20,920
Common shares outstanding (000)                            128,970      127,180      123,452       113,194      113,977
Employees (full-time)                                        1,489        1,442        1,260           971          951
-------------------------------------------------------------------------------------------------------------------------

All per share data as presented has been adjusted for the 2005 4-for-3 common
stock split effected in the form of a 33 1/3% stock distribution.
(a) 2004 includes a partial year of finanical results for the mid-year
acquisition of Heater Utilities, Inc. and certain utility assets of Florida
Water Services Corporation.
(b) 2003 includes five months of financial results for the AquaSource operations
acquired in July 2003.
(c) Net of allowance for funds used during construction and interest income.

51

Exhibit 21.1

AQUA AMERICA, INC. AND SUBSIDIARIES

The following table lists the significant subsidiaries and other active
subsidiaries of Aqua America, Inc. at December 31, 2005:

Aqua Pennsylvania, Inc.  (Pennsylvania)
Aqua Resources, Inc. (Pennsylvania)
Aqua Services, Inc.  (Delaware)
Aqua Ohio, Inc. (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)
Heater Utilities, Inc. (North Carolina)
Aqua New York, Inc. (New York)

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-61772, 333-42275, 333-104290, 333-122900 and
333-130400), on Form S-4 (No. 333-93243), and on Form S-8 (Nos. 333-61768,
333-70859, 033-52557, 033-53689, 333-26613, 333-81085, 333-107673, 333-113502,
333-116776 and 333-126042) of Aqua America, Inc. of our report dated March 13,
2006 relating to the consolidated financial statements, management's assessment
of the effectiveness of internal control over financial reporting and the
effectiveness of internal control over financial reporting, which appears in the
Annual Report to Shareholders, which is incorporated in this Annual Report on
Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 13, 2006

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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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)   Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
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 the 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 13, 2006
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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)   Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
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 the 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 13, 2006
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, 2005 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 13, 2006

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, 2005 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 13, 2006