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, 2002        Commission File number 1-6659

PHILADELPHIA SUBURBAN CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)

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

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

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

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

Name of each exchange on
Title of each class                         which registered
-------------------                     -------------------------

Common stock, par value $.50 per share         New York Stock Exchange, Inc.
Philadelphia Stock Exchange Inc.

Securities registered pursuant to Section 12(g) of the Act:  None

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

Yes    x          No
---              ---

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Section 12(b)-2 of the Securities Exchange Act of 1934).

Yes    x          No      .
---              ---

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 28, 2002. $1,162,063,479

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 28, 2002, 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 March 3, 2003.
68,034,808

Documents incorporated by reference

(1) Portions of registrant's 2002 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 15, 2003
annual meeting of shareholders of registrant, to be filed within 120
days after the end of the fiscal year covered by this Form 10-K Report,
have been incorporated by reference into Part III of this Form 10-K
Report.

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

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

o  projected capital expenditures and related funding requirements;

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

o  dividend payment projections;

o  opportunities for future acquisitions and success of pending
acquisitions;

o  the capacity of our water supplies and facilities;

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

o  the availability of qualified personnel;

o  general economic conditions;

o  acquisition-related costs and synergies; and

o  the forward-looking statements contained under the heading
"Forward-Looking Statements" in the section entitled "Management's
Discussion and Analysis" from the portion of our 2002 Annual Report
to Shareholders incorporated by reference herein and made a part
hereof.

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

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

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

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

o  abnormal weather conditions;

o  changes in capital requirements;

o  changes in our credit rating;

2

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  unanticipated capital requirements;

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

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

o  civil disturbance or terroristic threats or acts.

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

3

PART I
------

Item 1.  Business

The Company
-----------

Philadelphia Suburban Corporation (referred to as "we" or "us") is the
holding company for regulated utilities providing water or wastewater services
to approximately 2 million people in Pennsylvania, Ohio, Illinois, New Jersey,
Maine and North Carolina. Our two primary subsidiaries are Pennsylvania Suburban
Water Company, a regulated public utility that provides water or wastewater
services to approximately 1.3 million residents in the suburban areas north and
west of the City of Philadelphia and in 18 other counties in Pennsylvania, and
Consumers Water Company, a holding company for several regulated public utility
companies that provide water or wastewater service to approximately 700,000
residents in various communities in Ohio, Illinois, New Jersey and Maine. Other
of our smaller subsidiaries provide water or wastewater services in parts of
Pennsylvania, North Carolina and Ohio. Some of our subsidiaries provide
wastewater services to a population of approximately 40,000 people in
Pennsylvania, Illinois, New Jersey and North Carolina. In addition, we provide
water and wastewater service to approximately 45,000 people 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
investor-owned water utility based on number of customers.

The following table indicates by state our number of customers served
and operating revenues for the year ended December 31, 2002:

Number
Operating         of
Revenues       Customers
(000's)        Served
---------------------------

Pennsylvania                              $ 225,080      410,752
Ohio                                         38,848       86,535
Illinois                                     29,420       64,385
New Jersey                                   16,743       39,393
Maine                                         8,969       16,913
North Carolina                                2,968        8,808
---------------------------
$ 322,028      626,786
===========================

4

Item 1, Continued

The following table indicates by customer class our number of customers
served and operating revenues for the year ended December 31, 2002:

Number
Operating         of
Revenues       Customers
Customer class                                 (000's)        Served
--------------                              ---------------------------

Residential water                               $ 197,190      535,506
Commercial water                                   55,962       30,355
Industrial water                                   17,221        1,423
Other water                                        36,255       16,466
Wastewater                                          8,210       21,724
Operating contracts and other                       7,190       21,312
---------------------------
$ 322,028      626,786
===========================

Our customer base is diversified among residential, commercial,
industrial and wastewater customers. Residential customers make up the largest
component of our customer base, with these customers representing approximately
two-thirds 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 general, during these seasons, an extended period of dry weather increases
consumption, while above average rainfall decreases water consumption. Also, an
increase in the average temperature generally causes an increase in water
consumption. On occasion, abnormally dry weather in our service areas can result
in governmental authorities declaring drought warnings and water use
restrictions in the affected areas, which could reduce water consumption. See
"Water Supplies and Water Facilities" for a discussion of water use restrictions
that may impact water consumption during abnormally dry weather. The geographic
diversity of our customer base reduces our exposure to extreme or unusual
weather conditions in any one area of our service territory.

The growth in revenues over the past three years is a result of
increases in the customer base and in water rates. Excluding customers added
through acquisitions and other growth ventures, during the three-year period of
2000 through 2002, our customer base grew at an annual compound rate of 0.9%.
Including acquisitions and other growth ventures, our customer base increased at
an annual compound rate of 4.0% during this period. The customer growth rate in
2002 was 4.0%. Our business combination with Consumers Water Company in 1999 has
enabled us to grow through acquisitions in the areas where Consumers operates,
while continuing to grow through acquisitions in southeastern Pennsylvania.
Subsequently, we entered another new state, North Carolina, in 2000.

5

Item 1, Continued

Available Information
---------------------

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

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

Acquisitions and Water Sale Agreements
--------------------------------------

With more than 50,000 community water systems in the U.S. (84% of which
serve less than 3,300 customers), the water industry is the most fragmented of
the major utility industries (telephone, natural gas, electric and water). 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 8,700 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 1996, there are approximately
16,000 such facilities in the nation serving approximately 72% of the U.S.
population. The vast majority of wastewater facilities are government-owned
rather than privately-owned. The EPA survey also indicated that there are
approximately 3,500 wastewater facilities in operation or planned in the six
states where we operate.

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

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

We are actively exploring other opportunities to expand our utility
operations through acquisitions or otherwise. As of December 31, 2002, exclusive
of the Consumers Water Company merger, we had completed 92 acquisitions or other
growth ventures during the past five years. These transactions have added, as of
December 31, 2002, approximately 75,400 customers to our customer base during
this five-year period.

6

Item 1, Continued

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

Water Supplies and Water Facilities
-----------------------------------

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

o  Suburban Philadelphia - The principal supply of water is surface water from
eight rural streams, two rivers (Schuylkill River and Delaware River), and
the Upper Merion Reservoir, a former quarry now impounding groundwater.
Wells and interconnections with adjacent municipal authorities supplement
these surface supplies.

o  Pennsylvania (other than suburban Philadelphia) - The Roaring Creek
Division draws its water from a man-made lake within a 12,000 acre
watershed and two wells also located in the watershed. The Susquehanna
Division obtains its water supply from wells. The Shenango Division draws
its water from the Shenango River. The Waymart Division's water supply is
obtained from wells.

o  Ohio - Water supply is obtained for customers in Lake County from Lake
Erie. Customers in Mahoning County obtain their water from man-made lakes
and the Ashtabula division is supplied by purchased water. Water supply is
obtained for customers in Stark and Summit Counties from wells. In Trumbull
County, customers are served through an interconnection from our
Pennsylvania division.

o  Illinois - Water supply is obtained for customers in Kankakee County from
the Kankakee River and satellite wells, while customers in Vermilion County
are supplied from Lake Vermilion. In Will, Lee, Boone, Lake and Knox
counties, our customers are served from wells.

o  New Jersey - Water supply in our three non-contiguous divisions is obtained
principally from wells and is supplemented with purchased water in two
divisions.

o  Maine - Eleven non-contiguous water systems obtain their water supply as
follows: five systems use groundwater, five systems use surface water and
one system purchases water from a neighboring municipal district.

o  North Carolina - Water supply in 166 non-contiguous divisions is obtained
principally from wells, with 5 divisions purchasing water from neighboring
municipalities.

We believe that the capacities of our sources of supply, and our water
treatment, pumping and distribution facilities are generally sufficient to meet
the present requirements of our customers. We make system improvements and
additions to capacity in response to changing regulatory standards, changing
patterns of consumption and increased demand from a growing number of customers.

7

Item 1, Continued

The various state public utility commissions have 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.

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

Economic Regulation
-------------------

Our water and wastewater utility operations are subject to regulation
by their respective state regulatory commissions, which have broad
administrative power and authority to regulate rates and charges, determine
franchise areas and conditions of service and authorize the issuance of
securities. The regulatory commissions also establish uniform systems of
accounts and approve the terms of contracts with affiliates and customers,
business combinations with other utility systems, loans and the sales of
property. 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 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 are
subject to regulation by the following state regulatory commissions:

State                      Regulatory Commission
-----                      ---------------------

Pennsylvania               Pennsylvania Public Utility Commission
Ohio                       The Public Utilities Commission of Ohio
Illinois                   Illinois Commerce Commission
New Jersey                 New Jersey Board of Public Utilities
Maine                      Maine Public Utilities Commission
North Carolina             North Carolina Utilities Commission

Rates for some divisions of our Ohio water utility can be fixed by negotiated
agreements with the municipalities that are served by those divisions in lieu of
regulatory approval from the Public Utilities Commission of Ohio. Currently, two
of the six regulated divisions in Ohio are operating under such rate ordinances.

8

Item 1, Continued

The Pennsylvania Public Utility Commission ("PAPUC") permits
Pennsylvania water utilities to add an infrastructure replacement surcharge,
known as the Distribution System Improvement Charge ("DSIC"), to their water
bills. The revenues earned from the surcharge offsets the additional
depreciation and capital costs associated with certain capital expenditures
related to replacing and rehabilitating distribution systems. In general, the
capital expenditures are associated with projects that are non-revenue
producing, non-expense reducing replacements and distribution system
improvements. Prior to the DSIC, water 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 base rates is
known as regulatory lag. The DSIC is intended to eliminate or reduce regulatory
lag that often acted as a disincentive to water utilities in rehabilitating
their distribution systems. The DSIC is adjusted quarterly based on additional
qualified capital expenditures made in the previous quarter. The DSIC may never
exceed 5% of the base rates in effect. The DSIC is reset to zero when new base
rates that reflect the costs of those additions become effective. The PAPUC also
limits use of the DSIC to periods when a company's return on equity is less than
a benchmark the PAPUC establishes each quarter.

In 2001, the Illinois Commerce Commission issued regulations
implementing an infrastructure surcharge mechanism known as a Qualifying
Infrastructure Plant Surcharge ("QIPS") for use by Illinois water and wastewater
utilities. QIPS is similar to DSIC, however, it is established annually and
prospectively based on anticipated qualifying capital expenditures, and it
includes a broader range of qualifying capital expenditures, including certain
wastewater capital expenditures. Our Illinois operating subsidiary received
approval to add a QIPS to its bills in three of its operating divisions
beginning January 1, 2002. In February 2003, infrastructure surcharge
replacement legislation was introduced in the State of Ohio. We are currently
working to establish similar mechanisms in the other states in which we operate.

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

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

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

Item 1, Continued

In December 2002, as a result of the settlement of a condemnation
action, our Ohio operating subsidiary sold to Ashtabula County, Ohio its water
utility assets in the unincorporated areas of Ashtabula County and the area
within the Village of Geneva on the Lake for approximately $12,118,000, which
was in excess of the book value for these assets. The sale resulted in the
recognition in the fourth quarter of 2002 of a gain on the sale of these assets,
net of expenses, of $5,676,000 or an after-tax gain of $3,690,000 (or $0.05 per
share). We continue to operate this water system for Ashtabula County under a
one-year operating contract that began upon the closing of the sale that should
provide over $300,000 in operating revenues in 2003. The water utility assets
sold represent less than 1% of our total assets, and the total number of
customers included in the water system sold represents less than 1% of our total
customer base. In addition to the operating contract revenues, the interest
savings associated with paying off debt with the sale's proceeds will offset the
loss of this water system's normal contribution to income.

As part of the Ashtabula County condemnation, the adjacent City of
Geneva in Ashtabula County, Ohio, passed an ordinance seeking authorization to
condemn the assets of our Ohio operating subsidiary that are located in Geneva.
The issue was submitted to a referendum in 2000, whereby voters affirmed the
ordinance by a margin of 16 votes. The City engaged a consulting firm to assist
it in valuing the assets that may be condemned. In December 2002, the City of
Geneva filed a condemnation action. We believe that our Ohio operating
subsidiary will be entitled to fair market value for its assets, which we
believe will be in excess of the book value for these assets and may approximate
the multiple to book value of other recent industry business combinations. The
total number of customers included in the Geneva system represents approximately
0.4% of our total customer base. Despite these events in Ashtabula, Ohio, our
strategy continues to be to acquire additional water and wastewater systems,
maintain our existing systems, and to actively oppose unilateral efforts by
municipal governments to acquire any of our operations.

Environmental Regulation
------------------------

The provision of water and wastewater services is governed primarily by
the federal Safe Drinking Water Act, the Clean Water Act and related state laws,
and state and federal regulations issued under these laws by the Environmental
Protection Agency and state environmental regulatory agencies. These laws and
regulations establish criteria and standards for drinking water and for
discharges into the waters of the United States. The states may have the right
to establish criteria and standards that are stricter than those established by
the Environmental Protection Agency. In addition, we are subject to federal and
state laws and other regulations relating to residual waste disposal, dam safety
and other operations of our subsidiaries.

In addition to the capital expenditures and operating costs currently
anticipated, changes in environmental regulations, enforcement policies and
practices or related matters may result in additional capital expenditures and
operating costs. Capital expenditures and operating costs required as a result
of water quality standards and environmental requirements have been generally
recognized by state public utility commissions as appropriate for inclusion in
establishing rates.

Safe Drinking Water Act - The Safe Drinking Water Act establishes criteria and
procedures for the Environmental Protection Agency to develop national quality
standards for drinking water. Regulations issued pursuant to the Safe Drinking
Water Act set standards on the amount of certain microbial and chemical
contaminants and radionuclides allowable in drinking water. The 1996 Amendments
to the Safe Drinking Water Act require the Environmental Protection Agency to

10

Item 1, Continued

analyze both the benefits and the costs of compliance when considering new or
stricter water quality standards. The 1996 amendments to the Safe Drinking Water
Act also prescribe testing for certain additional substances and propose
establishing future rules that may change standards for water treatment. Current
requirements under the Safe Drinking Water Act are not expected to have a
material impact on our operations or financial condition as we have already made
investments to meet existing water quality standards. We may, in the future, be
required to change our method of treating drinking water at certain sources of
supply if additional regulations become effective. The cost of maintaining
compliance with new rulemakings is expected to be recoverable in water rates and
is not expected to have a material impact on our results from operations or
financial condition.

The EPA may issue a final rule for radon in the future, although the
EPA has postponed the issuance of these rules in the past. If a rule is issued,
limits for radon would probably become effective 4 or 5 years later. We
anticipate this rule may establish a radon level that would require treatment at
a small number of our wells. The capital costs to comply with the anticipated
limit are expected to total less than $1 million or less than 1% of our typical
annual capital expenditures. If the states in which we operate elect not to
implement general radon reduction programs (Multi-Media Mitigation), then a
lower limit for radon may apply and a larger number of wells would be affected.
We expect that states will adopt Multi-Media Mitigation programs. Whether or not
states adopt these programs, we expect that future costs associated with radon
treatment will be recoverable in water rates.

The Safe Drinking Water Act provides for the regulation of
radionuclides other than radon, such as radium and uranium. In December 2000,
the EPA issued a final rule regulating certain radionuclides other than radon.
The rule will become effective in December 2003 and no significant impact on our
operations or financial condition is anticipated from the new rulemaking. As a
result of revised testing procedures under the new regulation, additional
treatment or alternate sources of water supply may be required for a small
number of groundwater sources in one of our divisions. We believe the costs for
additional treatment or alternate sources of water supply will be recoverable in
water rates.

In order to eliminate or inactivate microbial organisms, the Surface
Water Treatment Rule and the Interim Enhanced Surface Water Treatment Rule were
issued by the EPA to improve disinfection or filtration. The EPA developed the
Disinfectants-Disinfection By-products Rule to reduce consumers' exposure to
disinfectants and by-products of the disinfection process. In 1998, the EPA
issued new rules on disinfection and on surface water treatment. All affected
water systems are in compliance with these rulemakings as of the date that this
report is filed, including the additional provisions that became effective in
January 2002. Groundwater and smaller surface water systems have until December
2003 to comply with the rules on disinfection and on surface water treatment. We
have developed a new groundwater source to replace a small, unfiltered surface
water system, and in the future may be required to install filtration for a
surface water supply. 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, and is not expected to
exceed $5 million. It is expected that these capital expenditures would be
recoverable in water rates and would represent a small portion of our typical
annual capital expenditures.

We conduct water quality monitoring for a variety of regulated and
unregulated contaminants. In the course of this monitoring, contaminants may be
identified that may prompt us to take a water supply source out of service or
add treatment at the water supply source. Where a source of contamination can be
identified, we pursue recovery of the associated costs from responsible parties.
In April 2000, the gasoline additive Methyl tert-Butyl Ether ("MtBE") was

11

Item 1, Continued

discovered in our New Jersey operating subsidiary production well at levels
exceeding the New Jersey drinking water standard. The well was immediately taken
out of service and alternate water supplies were obtained. The alternate
supplies include existing wells and an interconnection with an adjacent utility,
and are an interim measure until a permanent, long-term solution could be
implemented. The New Jersey Department of Environmental Protection identified
the source of the MtBE as a nearby gasoline station. The company responsible for
the contamination has reimbursed us for a substantial portion of the expenses
incurred to-date. We continue to pursue developing a long-term replacement
supply and based on various studies we believe an alternate water system will be
needed. The company responsible for the contamination believes the original well
can be cleaned and rehabilitated. As a result of these differences, we have
taken legal action seeking reimbursement for the costs associated with obtaining
an alternate water system. We expect to recover these costs.

In January 2001, the EPA issued a final rule for arsenic that lowers
the limit to a more stringent level effective by 2006, with a provision for
further time extensions for small systems. Currently, two small well systems
slightly exceed the new arsenic levels and will require additional treatment.
The cost of maintaining compliance with new rulemakings is expected to be
recoverable in water rates and is not expected to have a material impact on our
results from operations or financial condition.

Clean Water Act - The Clean Water Act regulates discharges from drinking water
and wastewater treatment facilities into lakes, rivers, streams, and
groundwater. We operate numerous water and wastewater facilities in a number of
states. It is our policy to obtain and maintain all required permits and
approvals for the discharge from these water and wastewater facilities, and to
comply with all conditions of those permits and other regulatory requirements.
We maintain a program to monitor our facilities for compliance with permitting,
monitoring and reporting for wastewater discharges. From time to time,
violations may occur which may result in fines. However, such violations or
fines are not expected to have a material impact on our results of operations or
financial condition. Additional capital expenditures and operating costs in
connection with the management and disposal of discharges from our water and
wastewater facilities may be required in the future, particularly if changes are
made in the requirements of the applicable Federal or state laws. We believe
that these capital expenditures would be recoverable in our rates.

Residual and Solid Waste Disposal - The handling and disposal of residuals and
solids from water and wastewater treatment facilities are governed by state and
federal laws and regulations. Water treatment residuals and solids are a
combination of the chemicals used in the treatment process and the silt and
other materials removed from the raw water. Most of our water treatment
residuals and solids are disposed of in company-owned, dedicated landfills, or
by land application by a licensed contractor. A small portion of our water
treatment residuals and solids are disposed of in state-approved landfills owned
by others or in a liquid form into municipal sewer systems. Wastewater residuals
and solids result from the treatment of wastewater, and these "sludges" are
disposed of in approved landfills, transferred to larger wastewater treatment
facilities or applied to farmland. It is our policy to obtain and maintain all
required permits for our water and wastewater treatment facilities and our
dedicated landfills, and to comply with all conditions of those permits and
other regulatory requirements. We maintain a program to monitor our facilities
for compliance with permitting. Additional capital expenditures and operating
costs in connection with the management and disposal of residuals and solids
from our water and wastewater facilities may be required in the future,
particularly if changes are made in the requirements of the applicable Federal
or state laws. We believe that these capital expenditures would be recoverable
in our rates.

12

Item 1, Continued

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

In Pennsylvania, the Department of Environmental Protection has
recently adopted the use of a new formula for determining the magnitude of the
Probable Maximum Flood. We are studying our dams to determine what improvements
may be needed to our dams as a result of this new calculation. As a result of
the initial results of the studies, we have identified three dams that could
require capital improvements of approximately $7 million in aggregate. We
believe that these capital expenditures that could be required by the new
formulas would be recoverable in our rates. In Ohio, the Department of
Environmental Resources has adopted the use of the new formula. We are studying
our dams in Ohio to determine the required improvements. Based on the
preliminary results, we believe that capital expenditures of approximately $3.6
million in aggregate will be required on three dams in Ohio over the next four
years.

Employee Relations
------------------

As of December 31, 2002, we employed a total of 971 full-time employees.
Our subsidiaries are parties to 11 agreements with labor unions covering 454
employees. One of the agreements expired December 2001, two agreements expired
in October 2002, and the balance of the agreements are due to expire between
March 2003 and August 2004. The expired agreements cover 45 employees and the
employees covered by these agreements continue to work under the expired
agreements. Negotiations with the unions representing these employees are
ongoing and we expect to reach new agreements.

Risk Factors
------------

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

The water utility business is capital intensive. On an annual basis, we
spend significant sums for additions to or replacement of property, plant and
equipment. Our ability to maintain and meet our financial objectives is
dependent upon the rates we charge our customers. These rates are subject to
approval by the public utility commissions of 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.

13

Item 1, Continued

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

Our water and wastewater services are governed by various federal and
state environmental protection and health and safety laws and regulations,
including the federal Safe Drinking Water Act, the Clean Water Act and similar
state laws, and state and federal regulations issued under these laws by the
United States Environmental Protection Agency and state environmental regulatory
agencies. These laws and regulations establish, among other things, criteria and
standards for drinking water and for discharges into the waters of the United
States and states. Pursuant to these laws, we are required to obtain various
environmental permits from environmental regulatory agencies for our operations.
We cannot assure you that we have been or will be at all times in total
compliance with these laws, regulations and permits. If we violate or fail to
comply with these laws, regulations or permits, we could be fined or otherwise
sanctioned by regulators. Environmental laws and regulations are complex and
change frequently. These laws, and the enforcement thereof, have tended to
become more stringent over time. While we have budgeted for future capital and
operating expenditures to maintain compliance with them 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 that govern our business would approve rate increases to enable us
to recover such costs. In summary, we cannot assure you that our costs of
complying with, or discharging liability under, current and future environmental
and health and safety laws will not adversely affect our business, results of
operations or financial condition.

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

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

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.

14

Item 1, Continued

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

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

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

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

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

Our water supplies are subject to contamination, including
contamination from the development of naturally-occurring compounds, chemicals
in groundwater systems, pollution resulting from man-made sources and possible
terrorist attacks. In the event that our water supply is contaminated, we may
have to interrupt the use of that water supply until we are able to substitute
the flow of water from an uncontaminated water source. In addition, we may incur
significant costs in order to treat the contaminated source through expansion of
our current treatment facilities, or development of new treatment methods. If we
are unable to substitute water supply from an uncontaminated water source, or to
adequately treat the contaminated water source in a cost-effective manner, there
may be an adverse effect on our revenues, operating results and financial
condition. The costs we incur to decontaminate a water source or an underground
water system could be significant and could adversely affect our business,
operating results and financial condition and may be recoverable in rates. We
could also be held liable for consequences arising out of human exposure to
hazardous substances in our water supplies or other environmental damage. For
example, private plaintiffs have the right to bring personal injury or other
toxic tort claims arising from the presence of hazardous substances in our
drinking water supplies. Our insurance policies may not be sufficient to cover
the costs of these claims.

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

15

Item 1, Continued

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

Our success depends significantly on the continued individual and
collective contributions of our senior management team. The loss of the services
of any member of our senior management or the inability to hire and retain
experienced management personnel could harm our operating results.

16

Item 2.  Properties.

Our properties consist of transmission and distribution mains and
conduits, water and wastewater treatment plants, pumping facilities, wells,
tanks, meters, supply lines, dams, reservoirs, buildings, vehicles, land,
easements, rights and other facilities and equipment used for the operation of
our systems, including the collection, treatment, storage and distribution of
water. Substantially all of our properties are owned by our subsidiaries and are
subject to liens of mortgage or indentures. These liens secure bonds, notes and
other evidences of long-term indebtedness of our subsidiaries. For certain
properties that we acquired through the exercise of the power of eminent domain
and certain other properties we purchased, we hold title for water supply
purposes only. We own, operate and maintain approximately 7,590 miles of
transmission and distribution mains, 19 water treatment plants and 18 wastewater
treatment plants. Some properties are leased under long-term leases. The
following table indicates our net utility plant as of December 31, 2002 by
state:

Net Property,
Plant and
Equipment
(000's)
----------------

Pennsylvania                                             $1,067,934
Ohio                                                        153,906
Illinois                                                    134,413
New Jersey                                                   87,258
Maine                                                        37,022
North Carolina                                               13,637
Inter-company eliminations and other                         (3,329)
----------------
$1,490,841
================

We believe that our properties are 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 Pennsylvania Suburban Water
Company and located in Bryn Mawr, Pennsylvania.

Item 3.  Legal Proceedings

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

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

No matters were submitted to a vote of security holders during the
fourth quarter of 2002.

Executive Officers of the Registrant

Information with respect to our executive officers is contained in Item
10 hereof and is hereby incorporated by reference herein.

17

PART II
-------

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

Our common stock is traded on the New York Stock Exchange and the
Philadelphia Stock Exchange. As of March 3, 2003, there were approximately
21,600 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:

First        Second       Third        Fourth
Quarter      Quarter      Quarter      Quarter        Year
-----------------------------------------------------------------
2002
---------------------------------------------------------------------------------------------------------------

Dividend paid per common share                     $0.1325      $0.1325      $0.1325      $0.1400      $0.5375
Price range of common stock
- high                                             24.61        25.00        20.30        21.87        25.00
- low                                              21.10        18.49        16.02        19.30        16.02

2001
---------------------------------------------------------------------------------------------------------------
Dividend paid per common share                     $ 0.124      $ 0.124      $ 0.124      $0.1325      $0.5045
Price range of common stock
- high                                             19.39        20.40        23.28        24.64        24.64
- low                                              15.65        16.60        18.66        20.80        15.65

We have paid common dividends consecutively for 58 years. Effective
December 1, 2002, our Board of Directors authorized an increase of 5.7% in the
dividend rate over the amount Philadelphia Suburban Corporation has historically
paid. As a result of this authorization, beginning with the dividend payment in
December 2002, the annual dividend rate increased to $0.56 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, after restatement for the Consumers
Water Company pooling, our common dividends paid have averaged 61.3% of net
income.

Item 6.  Selected Financial Data

The information appearing in the section captioned "Summary of Selected
Financial Data" from the portions of our 2002 Annual Report to Shareholders
filed as Exhibit 13.10 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 2002 Annual Report to
Shareholders filed as Exhibit 13.10 to this Form 10-K Report is incorporated by
reference herein.

18

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks in the normal course of business,
including changes in interest rates and equity prices. The exposure to changes
in interest rates is a result of financings through the issuance of fixed-rate,
long-term debt. Such exposure is typically related to financings between utility
rate increases, since generally our rate increases include a revenue level to
allow recovery of our current cost of capital. Interest rate risk is managed
through the use of a combination of long-term debt, which is at fixed interest
rates and short-term debt, which is at floating interest rates. As of December
31, 2002, 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
2003       2004       2005       2006       2007  Thereafter       Total       Value
--------------------------------------------------------------------------------------------------------------------

Long-term
debt (fixed rate)        $34,265    $40,423    $41,447    $17,072    $15,953    $468,015    $617,175    $660,436
Weighted average
interest rate              6.81%      6.27%      7.12%      6.96%      6.56%       6.51%       6.56%

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, 2002, our
carrying value of marketable equity securities was $1,336,000, which reflects
the market value of such securities. The market risks that we are exposed to are
consistent with the risks that we were exposed to in the prior year.

Item 8.  Financial Statements and Supplementary Data

Information appearing under the captions "Consolidated Statements of
Income and Comprehensive Income", "Consolidated Balance Sheets", "Consolidated
Cash Flow Statements" "Consolidated Statements of Capitalization" and "Notes to
Consolidated Financial Statements" from the portions of our 2002 Annual Report
to Shareholders filed as Exhibit 13.10 to this Form 10-K Report is incorporated
by reference herein. Also, the information appearing in the section captioned
"Reports on Financial Statements" from the portions of our 2002 Annual Report to
Shareholders filed as Exhibit 13.10 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.

19

PART III
--------

Item 10. Directors and Executive Officers of the Registrant

Directors of the Registrant
---------------------------

The information appearing in the section captioned "Information
Regarding Nominees and Directors" of the Proxy Statement relating to our May 15,
2003, annual meeting of shareholders, to be filed within 120 days after the end
of the fiscal year covered by this Form 10-K Report, is incorporated herein by
reference.

Executive Officers of the Registrant
------------------------------------

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

Position with the Registrant
Name                             Age         and date of election (1)
----                             ---         -----------------------------

Nicholas DeBenedictis             57         President  and Chairman (May 1993 to present);  President and Chief  Executive
Officer  (July  1992 to May  1993);  Chairman  and  Chief  Executive  Officer,
Pennsylvania  Suburban  Water  Company  (July  1992  to  present);  President,
Philadelphia Suburban Water Company (February 1995 to January 1999) (2)

Morrison Coulter                  66         President, Pennsylvania Suburban Water Company - Philadelphia Suburban Division
(December 2001 to present); President, Philadelphia Suburban Water Company 
(January 1999 to December 2001); Senior Vice President - Production, 
Philadelphia Suburban Water Company (February 1996 to January 1999); Vice
President - Production, Philadelphia Suburban Water Company (April 1989 
to February 1996) (3)

Richard R. Riegler                56         Senior Vice President - Engineering and Environmental Affairs (January 1999 to
present); Senior Vice President - Operations, Philadelphia Suburban Water
Company (April 1989 to January 1999) (4)

Roy H. Stahl                      50         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) (5)

David P. Smeltzer                 44         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) (6)

(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.

20

Item 10, Continued

(3)  Mr. Coulter was Superintendent of Pumping Facilities from 1971 to 1982.
From 1982 to 1987 he served as Manager - Electrical/Mechanical Department
and from 1987 to 1989 he was Assistant Vice President - Production. Mr.
Coulter has advised us of his intention to retire in 2003.

(4)  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.

(5)  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 the Registrant, and from May 1988 to April 1991 he was
Vice President and General Counsel of the Registrant.

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

Item 11. Executive Compensation

The information appearing in the sections captioned "Executive
Compensation" of the Proxy Statement relating to our May 15, 2003, 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

The information appearing in the sections captioned "Ownership of
Common Stock" and "Securities Authorized for Issuance under Equity Compensation
Plans" of the Proxy Statement relating to our May 15, 2003, 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 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 15, 2003, annual meeting of shareholders, to be filed within 120 days after
the end of the fiscal year covered by this Form 10-K Report, is incorporated
herein by reference.

Item 14. Controls and Procedures

Under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer (our principal executive officer and
principal financial officer), we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures within 90 days of the
filing date of this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.

21

PART IV
-------

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

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

Report of Management

Independent Accountants' Report of PricewaterhouseCoopers LLP - 2002

Consolidated Balance Sheets - December 31, 2002 and 2001

Consolidated Statements of Income and Comprehensive Income - 2002,
2001 and 2000

Consolidated Cash Flow Statements - 2002, 2001, and 2000

Consolidated Statements of Capitalization - December 31, 2002 and 2001

Notes to Consolidated Financial Statements

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

Reports on Form 8-K.
--------------------

Current Report on Form 8-K filed on December 20, 2002, responding to Item 5,
Other Events. (Related to the Company's press release of December 19, 2002
announcing the sale of a portion of the water operations of the Registrant's
subsidiary, Consumers Ohio Water Company, to Ashtabula County).

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

22

EXHIBIT INDEX
Exhibit No.                                                                                           Page No.
-----------                                                                                           --------

3.1       Amended and Restated Articles of Incorporation, as                                             -
amended (1) (Exhibit 3.1)

3.2       By-Laws, as amended (14) (Exhibit 3.2)                                                         -

3.3       Amendment to Amended and Restated Articles of                                                  -
Incorporation, as amended, to increase the number
of authorized shares to 41,770,819 and to
provide that 40,000,000 of such shares be
shares of Common Stock (14) (Exhibit 3.3)

3.4       Amendment to Amended and Restated Articles of                                                  -
Incorporation, as amended, designating the
Series B Preferred Stock (14) (Exhibit 3.4)

3.5       Amendment to Section 3.03 and addition of Section 3.17                                         -
to Bylaws (16) (Exhibits 1 and 2)

3.6       Amendment to Amended and Restated Articles of                                                  -
Incorporation, designating the terms of the Series A
Junior Participating Preferred Shares (18) (Exhibit 3.6)

3.7       Amendment to Amended and Restated Articles of Incorporation,                                   -
to increase the number of authorized shares to 101,770,819
and to provide that 100,000,000 of such shares be shares of
Common Stock (20) (Annex E)

3.8       Amendment to Section 3.03 of the Bylaws (23) (Exhibit 3.8)                                     -

3.9       Amendment to Section 5.05(a) to the Amended and restated Articles                              -
of Incorporation (24) (Annex A)

3.10      Amendments to Sections 2.01(a), 2.02 and 3.08(b) of the Bylaws (25) (Exhibit 3.10)             -

3.11      Restated Articles of Incorporation (as of May 17, 2001) (27)                                   -

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-first Supplemental Indenture dated as of August 1,                                      -
1985 (3) (Exhibit 4.2)

4.4       Twenty-second Supplemental Indenture dated as of April 1,                                      -
1986  (4) (Exhibit 4.3)

4.5       Twenty-third Supplemental Indenture dated as of April 1,                                       -
1987  (5) (Exhibit 4.4)

4.6       Twenty-fourth Supplemental Indenture dated as of June 1,                                       -
1988  (6) (Exhibit 4.5)

4.7       Twenty-fifth Supplemental Indenture dated as of                                                -
January 1, 1990 (7) (Exhibit 4.6)

4.8       Twenty-sixth Supplemental Indenture dated as of November                                       -
1, 1991  (8) (Exhibit 4.12)

23

EXHIBIT INDEX
Exhibit No.                                                                                           Page No.
-----------                                                                                           --------

4.9       Twenty-seventh Supplemental Indenture dated as of June 1,                                      -
1992 (1) (Exhibit 4.14)

4.10      Twenty-eighth Supplemental Indenture dated as of April 1,                                      -
1993 (9) (Exhibit 4.15)

4.11      Twenty-ninth Supplemental Indenture dated as of March 30,                                      -
1995 (11) (Exhibit 4.17)

4.12      Thirtieth Supplemental Indenture dated as of August 15,                                        -
1995 (12) (Exhibit 4.18)

4.13      Thirty-first Supplemental Indenture dated as of July 1,                                        -
1997 (15) (Exhibit 4.22)

4.14      Rights Agreement, dated as of March 1, 1998 between Philadelphia                               -
Suburban Corporation and BankBoston, N.A., as Rights Agent (21)
(Exhibit 4.25)

4.15      Thirty-second Supplement Indenture, dated as of October 1, 1999 (22)                           -
(Exhibit 4.26)

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

4.17      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.
(23) (Exhibit 4.27)

4.18      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. (25) (Exhibit 4.19)

4.19      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. (27) (4.20)

4.20      Thirty-fourth Supplemental Indenture, dated as of October 15, 2001. (27) (4.21)                -

4.21      Thirty-fifth Supplemental Indenture, dated as of January 1, 2002. (27) (4.22)                  -

4.22      Thirty-sixth Supplemental Indenture, dated as of June 1, 2002. (29) (4.23)                     -

4.23      Thirty-seventh Supplemental Indenture, dated as of December 15, 2002.                         34

4.24      Credit Agreement dated as of October 25, 2002, between Philadelphia
Suburban Corporation and PNC Bank, National Association.                                  76

4.25      Third Amendment to Revolving Credit Agreement dated as of December 16,                       143
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.

4.26      Fourth Amendment to Revolving Credit Agreement dated as of December 24,                      149
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.

24

EXHIBIT INDEX
Exhibit No.                                                                                           Page No.
-----------                                                                                           --------

10.1       1982 Stock Option Plan, as amended and restated effective                                      -
May 21, 1992* (1) (Exhibit 10.1)

10.2       1988 Stock Option Plan, as amended and restated effective                                      -
May 21, 1992* (1) (Exhibit 10.2)

10.3       Excess Benefit Plan for Salaried Employees, effective                                          -
December 1, 1989*  (7) (Exhibit 10.4)

10.4       Supplemental Executive Retirement Plan, effective                                              -
December 1, 1989*  (7) (Exhibit 10.5)

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

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

10.7       1994 Equity Compensation Plan, as amended by Amendment                                         -
1994-1* (13) (Exhibit 10.10)

10.8       Placement Agency Agreement between Philadelphia                                                -
Suburban Water Company and PaineWebber Incorporated
dated as of March 30, 1995 (11) (Exhibit 10.12)

10.9       Bond Purchase Agreement among the Delaware County                                              -
Industrial Development Authority, Philadelphia
Suburban Water Company and Legg Mason Wood Walker,
Incorporated dated August 24, 1995 (12) (Exhibit 10.13)

10.10      Construction and Financing Agreement between the                                               -
Delaware County Industrial Development Authority and
Philadelphia Suburban Water Company dated as of August
15, 1995 (12) (Exhibit 10.14)

10.11      Amendment 1994-2  to 1994 Equity Compensation                                                  -
Plan, as amended* (14) (Exhibit 10.16)

10.12      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and Nicholas
DeBenedictis, dated as of January 1, 1997* (14) (Exhibit 10.18)

10.13      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and Roy H.
Stahl, dated as of January 1, 1997* (14) (Exhibit 10.19)

10.14      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and Richard R.
Riegler, dated as of January 1, 1997* (14) (Exhibit 10.21)

10.15      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and Morrison
Coulter, dated as of January 1, 1997* (14) (Exhibit 10.22)

10.16      Philadelphia Suburban Corporation Amended and                                                  -
Restated Executive Deferral Plan* (14) (Exhibit 10.23)

10.17      Philadelphia Suburban Corporation Deferred                                                     -
Compensation Plan Master Trust Agreement
with PNC Bank, National Association, dated
as of December 31, 1996* (14) (Exhibit 10.24)

25

EXHIBIT INDEX
Exhibit No.                                                                                           Page No.
-----------                                                                                           --------

10.18      First Amendment to Supplemental Executive Retirement                                           -
Plan* (14) (Exhibit 10.25)

10.19      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 (15) (Exhibit 10.26)

10.20      Philadelphia Suburban Corporation Director Deferral Plan* (21)                                 -
(Exhibit 10.28)

10.21      Amendment No. 1 dated as of February 1, 1999 to Agreement                                      -
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Nicholas DeBenedictis,
dated as of January 1, 1997* (21) (Exhibit 10.29)

10.22      Amendment No. 1 dated as of February 1, 1999 to Agreement                                      -
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Roy H. Stahl, dated as of
January 1, 1997* (21) (Exhibit 10.30)

10.23      Amendment No. 1 dated as of February 1, 1999 to Agreement                                      -
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Richard R. Riegler, dated
as of January 1, 1997* (21) (Exhibit 10.32)

10.24      Amendment No. 1 dated as of February 1, 1999 to Agreement                                      -
among Philadelphia Suburban Corporation, Philadelphia
Suburban Water Company and Morrison Coulter, dated
as of January 1, 1997* (21) (Exhibit 10.33)

10.25      1999 Annual Cash Incentive Compensation Plan* (21)                                             -
(Exhibit 10.34)

10.26      The Philadelphia Suburban Corporation 1994 Equity                                              -
Compensation Plan (as Amended and Restated
Effective March 3, 1998)* (19) (Exhibit A)

10.27      Amendment 1998-1 to The Philadelphia Suburban                                                  -
Corporation 1994 Equity Compensation Plan*
(20) (Annex F)

10.28      Bond Purchase Agreement among the Delaware County                                              -
Industrial Development Authority, Philadelphia
Suburban Water Company and Commerce Capital
Markets dated September 29, 1999 (22) (Exhibit 10.37)

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

10.30      2000 Annual Cash Incentive Compensation Plan * (23) (Exhibit 10.39)                            -

10.31      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and
David P. Smeltzer dated December 1,1999. (23) (Exhibit 10.40)

10.32      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
(23) (Exhibit 10.41)

26

EXHIBIT INDEX
Exhibit No.                                                                                           Page No.
-----------                                                                                           --------

10.33      Amendment 2000-1 to 1994 Equity Compensation Plan* (24) (Exhibit 10.33)                        -

10.34      2001 Annual Cash Incentive Compensation Plan* (26) (Exhibit 10.34)                             -

10.35      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 (27) (10.35)

10.36      Construction and Financing Agreement between the Delaware                                      -
County Industrial Development Authority and Philadelphia
Suburban Water Company dated as of October 15, 2001 (27) (10.36)

10.37      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and Nicholas DeBenedictis,
dated August 7, 2001* (27) (10.37)

10.38      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and Roy H. Stahl,
dated August 7, 2001* (27) (10.38)

10.39      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and Richard R. Riegler,
dated August 7, 2001* (27) (10.39)

10.40      Agreement among Philadelphia Suburban Corporation,                                             -
Philadelphia Suburban Water Company and David P. Smeltzer,
dated August 7, 2001* (27) (10.40)

10.41      2002 Annual Cash Incentive Compensation Plan* (28) (Exhibit 10.41)                             -

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

10.43      Construction and Financing Agreement between the Bucks County
Industrial Development Authority and Pennsylvania Suburban
Water Company dated as of June 1, 2002  (29) (Exhibit 10.42)                               -

10.44      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                                       155

10.45      Construction and Financing Agreement between the Delaware County
Industrial Development Authority and Pennsylvania Suburban
Water Company dated as of December 15, 2002                                              188

10.46      2003 Annual Cash Incentive Compensation Plan*                                                215

13.1       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 1993 incorporated
by reference in Annual Report on Form 10-K for
the year ended December 31, 1993 (9) (Exhibit 13.1)

13.2       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 1994 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1994 (10) (Exhibit 13.2)

13.3       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 1995 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1995 (13) (Exhibit 13.3)

27

EXHIBIT INDEX
Exhibit No.                                                                                           Page No.
-----------                                                                                           --------

13.4       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 1996 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1996 (14) (Exhibit 13.4)

13.5       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 1997 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1997 (18) (Exhibit 13.5)

13.6       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 1998 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1998 (21) (Exhibit 13.6)

13.7       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 1999 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 1999 (23) (Exhibit 13.7)

13.8       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 2000 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 2000 (25) (Exhibit 13.8)

13.9       Selected portions of Annual Report to Shareholders                                             -
for the year ended December 31, 2001 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 2001 (27) (Exhibit 13.8)

13.10      Selected portions of Annual Report to Shareholders                                           222
for the year ended December 31, 2002 incorporated
by reference in Annual Report on Form 10-K for the
year ended December 31, 2002

21.        Subsidiaries of Philadelphia Suburban Corporation                                            271

23.1       Consent of Independent Accountants - PricewaterhouseCoopers LLP                              272

24.        Power of Attorney (set forth as a part of this report)                                        30

99.1        Certification Pursuant to 18 U.S.C. Section 1350, as Adopted                                 273
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2       Certification Pursuant to 18 U.S.C. Section 1350, as Adopted                                 274
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

28

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, 1985.

(4)  Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1986.

(5)  Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1987.

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

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

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

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

(10) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1994.

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

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

(13) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1995.

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

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

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

(17) Filed as Exhibit 1 to the Registration Statement on Form 8-A filed on March
17, 1998.

(18) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1997.

(19) Filed as Exhibit A to definitive Proxy Statement dated April 7, 1998.

(20) Filed as an Annex to Registration Statement on Form S-4 filed on September
11, 1998.

(21) Filed as an Exhibit to Annual Report on Form 10-K for the year ended
December 31, 1998.

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

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

(24) Filed as Annex A to definitive Proxy Statement dated April 10, 2000.

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

(26) Filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001.

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

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

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

* Indicates management contract or compensatory plan or arrangement.

29

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.

PHILADELPHIA SUBURBAN CORPORATION

By   /s/  Nicholas DeBenedictis
---------------------------
Nicholas DeBenedictis
President and Chairman

Date: March 26, 2003

30

Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

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

/s/  Nicholas DeBenedictis             /s/  David P. Smeltzer
----------------------------------     ----------------------------------------
Nicholas DeBenedictis                  David P. Smeltzer
President and Chairman                 Senior Vice President - Finance and
(principal executive officer)          Chief Financial Officer
and Director

/s/  Mary C. Carroll                   /s/  G. Fred DiBona, Jr.
----------------------------------     ----------------------------------------
Mary C. Carroll                        G. Fred DiBona, Jr.
Director                               Director

/s/  Richard H. Glanton                /s/  Alan Hirsig
----------------------------------     ----------------------------------------
Richard H. Glanton                     Alan Hirsig
Director                               Director

/s/  John F. McCaughan                 /s/  John E. Menario
----------------------------------     ----------------------------------------
John F. McCaughan                      John E. Menario
Director                               Director

/s/   Richard L. Smoot
----------------------------------
Richard L. Smoot
Director

31

CERTIFICATIONS

I, Nicholas DeBenedictis, Chairman, President and Chief Executive Officer of
Philadelphia Suburban Corporation, certify that:

1.   I have reviewed this annual report on Form 10-K of Philadelphia Suburban
Corporation;

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-14 and 15d-14) for the registrant and we have:

a)   designed such disclosure controls and procedures 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)   evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c)   presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a)   all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b)   any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6.   The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 26, 2003
/s/ Nicholas DeBenedictis
-----------------------------------------------
Nicholas DeBenedictis
Chairman, President and Chief Executive Officer

32

I, David P. Smeltzer, Senior Vice President - Finance and Chief Financial
Officer of Philadelphia Suburban Corporation, certify that:

1.   I have reviewed this annual report on Form 10-K of Philadelphia Suburban
Corporation;

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-14 and 15d-14) for the registrant and we have:

a)   designed such disclosure controls and procedures 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)   evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c)   presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a)   all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b)   any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6.   The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 26, 2003
/s/ David P. Smeltzer
---------------------------------------------
David P. Smeltzer
Senior Vice President - Finance and Chief
Financial Officer

33

Exhibit 4.23
--------------------------------------------------------------------------------

THIRTY-SEVENTH SUPPLEMENTAL

INDENTURE

DATED AS OF DECEMBER 15, 2002

TO

INDENTURE OF MORTGAGE

DATED AS OF JANUARY 1, 1941

----------

PENNSYLVANIA SUBURBAN WATER COMPANY, as successor by merger to
Philadelphia Suburban Water Company

TO

J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION

----------

THIRTY-SEVENTH SUPPLEMENTAL INDENTURE

THIRTY-SEVENTH SUPPLEMENTAL INDENTURE dated as of December 15, 2002, by
and between 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 a
Thirty-Fifth Supplemental Indenture dated as of January 1, 2002 (the
"Thirty-Fifth Supplemental Indenture") and a Thirty-Sixth Supplemental Indenture
dated as of June 1, 2002 (the "Thirty-Sixth Supplemental 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,
the Company agreed to assume the obligations of the Original Company under the
Original Indenture and all supplements thereto; and

WHEREAS, the Original Company has issued under the Original
Indenture, as supplemented at the respective dates of issue, forty-one 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:

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
Series                                 Twenty-Ninth Supplemental              77,000,000
7.72% Subseries A due 2025                        15,000,000
6.82% Subseries B due 2005                        10,000,000
6.89% Subseries C due 2015                        12,000,000

2

6.99% Subseries D due 2006                        10,000,000
7.47% Subseries E due 2003                        10,000,000
6.83% Subseries F due 2003                        10,000,000
7.06% Subseries G due 2004                        10,000,000
6.35% Series due 2025                           Thirtieth Supplemental                 22,000,000
1997 Medium Term Note
Series                                 Thirty-First Supplemental              65,000,000
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
6.00% Subseries F due 2004                        15,000,000
6.00% Series due 2029                           Thirty-Second Supplemental             25,000,000
1999 Medium Term Note
Series                                 Thirty-Third Supplemental
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
5.35% Series due 2031                           Thirty-Fourth Supplemental             30,000,000
5.55% Series due 2032                           Thirty-Sixth Supplemental              25,000,000

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

WHEREAS, the Original Indenture and said Supplemental
Indentures were duly recorded in the Commonwealth of Pennsylvania on the dates
and in the office for the Recording of Deeds for the following counties in the
Mortgage Books and at the pages indicated in the following table:

3

COUNTY

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

Original                     2/20/41       496         1       H-13.Vol.307     20         1034           1         1625          1
------------------------------------------------------------------------------------------------------------------------------------
First Supplemental           8/26/48       632         1       F-16.Vol.380    200         1668          169        2031         257
------------------------------------------------------------------------------------------------------------------------------------
Second Supplemental           7/1/52       768        438      18.Vol.425      186         1962          376        2360         517
------------------------------------------------------------------------------------------------------------------------------------
Third Supplemental          11/25/53       895         1       18.Vol.442      325         2052           1         2493          1
------------------------------------------------------------------------------------------------------------------------------------
Fourth Supplemental           1/9/56      1089        155      Z-20.Vol.499      1         2199           1         2722         425
------------------------------------------------------------------------------------------------------------------------------------
Fifth Supplemental           3/20/57      1181        316      B-22.Vol.536    601         2294           50        2850         335
------------------------------------------------------------------------------------------------------------------------------------
Sixth Supplemental            5/9/58      1254         1          G-23         201         2380          039        2952         289
------------------------------------------------------------------------------------------------------------------------------------
Seventh Supplemental         9/25/59      1332        509         B-25         109         2442           1         3090         249
------------------------------------------------------------------------------------------------------------------------------------
Eighth Supplemental           5/9/61        -          -          Z-26          17         2526          312          -           -
------------------------------------------------------------------------------------------------------------------------------------
Eighth Supplemental          5/10/61      1409        225           -           -            -            -         3249         289
------------------------------------------------------------------------------------------------------------------------------------
Ninth Supplemental           4/10/62      1458        372         G-28         126         2581          463        3307         169
------------------------------------------------------------------------------------------------------------------------------------
Tenth Supplemental           3/19/64      1568         1          M-30         967         2976          1043       3310         237
------------------------------------------------------------------------------------------------------------------------------------
Eleventh Supplemental        11/4/66      1655        695         Q-32        6682          762          223        3549         129
------------------------------------------------------------------------------------------------------------------------------------
Twelfth Supplemental         1/23/68      1691        531         N-33         219         2792          708        3542         315
------------------------------------------------------------------------------------------------------------------------------------
Thirteenth Supplemental       7/2/70      1763       1167         D-35          80         2850          301        3687         23
------------------------------------------------------------------------------------------------------------------------------------
Fourteenth Supplemental      11/5/70      1774        331         K-35         713         2858          3113        700         548
------------------------------------------------------------------------------------------------------------------------------------
Fifteenth Supplemental      12/11/72      1869        196         O-37         998         2926          550        3786         96
------------------------------------------------------------------------------------------------------------------------------------
Sixteenth Supplemental       5/28/75      1979        14          E-44          77         3005          511        4010         307
------------------------------------------------------------------------------------------------------------------------------------
Seventeenth Supplemental    12/18/77      2072        683         L-51           1         3072           43        5002         436
------------------------------------------------------------------------------------------------------------------------------------

4

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

Eighteenth Supplemental      4/29/77      2082        567         B-52         344         3078           728        5003       291
------------------------------------------------------------------------------------------------------------------------------------
Nineteenth Supplemental      6/23/80      2303        714         J-62          92         3261           293        5030       502
------------------------------------------------------------------------------------------------------------------------------------
Twentieth Supplemental        8/2/83      2487        370         D-72           1           96           810        5662      1045
------------------------------------------------------------------------------------------------------------------------------------
Twenty-First Supplemental    8/27/85      2690        806           54         550           -             -         5864      1347
------------------------------------------------------------------------------------------------------------------------------------
Twenty-First Supplemental    8/28/85        -          -            -           -           264           159          -         -
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Second Supplemental   4/22/86      2774        160          263         275          326           592        5944       360
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Third Supplemental     4/1/87      2960        693           -           -            -             -           -         -
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Third Supplemental     4/2/87        -          -           680         337          447          1807        6115       602
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Fourth Supplemental   7/25/88      3199       1095         1224         389         0593          0585        6324       143
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Fifth Supplemental    1/12/90      0136       0250         1848         205          731          1571        6538       376
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Sixth Supplemental    11/8/91       369       2190         2660         205          894          2241        6780       891
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Seventh Supplemental  6/29/92      0487       1829         3055         182         0969          2023        6918       302
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Eighth Supplemental   4/22/93      0652       1335         3542        1542         1081          0852        7112      0539
------------------------------------------------------------------------------------------------------------------------------------
Twenty-Ninth                 3/30/95      1045       1872         3875        1368         1349          0829        7561      1155
Supplemental
------------------------------------------------------------------------------------------------------------------------------------
Thirtieth Supplemental       8/30/95      1111       0798         3932        0471         1393          2255        7631      0689
------------------------------------------------------------------------------------------------------------------------------------
Thirty-First Supplemental    7/11/97      1421       2196         4201        2133         1607           138        7968       779
------------------------------------------------------------------------------------------------------------------------------------
Thirty-Second Supplemental   10/6/99      1939        421         4646         642         1936          1207        8548      1067
------------------------------------------------------------------------------------------------------------------------------------
Thirty-Third Supplemental   11/30/99      1970       1573         4675        1272         1936          1207        8548      1067
------------------------------------------------------------------------------------------------------------------------------------

5

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

Thirty-Fourth Supplemental  10/31/01      2471       1207         5101        2142         2288          0174       9225         761
------------------------------------------------------------------------------------------------------------------------------------
Thirty-Fifth Supplemental    1/10/02      2541        765         5152         818         2329          1019       9314        1079
------------------------------------------------------------------------------------------------------------------------------------
Thirty-Sixth Supplemental     6/5/02      2731       1881         5296         356         2448          1862       9593        1416
====================================================================================================================================

; and

WHEREAS, the Original Indenture and the Supplemental Indentures
indicated below were duly recorded in the Commonwealth of Pennsylvania on the
dates and in the office for the Recording of Deeds for Berks County in the
Mortgage Books and at the pages indicated in the following table:

======================================================================
Indenture            Date of Recording      Book       Page
----------------------------------------------------------------------
Original                         8/16/99           3113        707
----------------------------------------------------------------------
Thirty-Second Supplement         10/6/99           3132       1510
----------------------------------------------------------------------
Thirty-Third Supplement          11/30/99          3149       1260
----------------------------------------------------------------------
Thirty-Fourth Supplement         10/31/01          3421        896
----------------------------------------------------------------------
Thirty-Fifth Supplement          1/10/02           3461        417
----------------------------------------------------------------------
Thirty-Sixth Supplement           6/4/02           3544       1357
======================================================================

6

WHEREAS, in order to secure the Lien of the Original Indenture
on the properties of the Merging Entities, the Thirty-Fifth Supplemental
Indenture, with a true and correct copy of the Original Indenture (redacted to
delete property descriptions for counties in which such Original Indenture had
already been recorded), and the Thirty-Sixth Supplemental Indenture were also
recorded in the Commonwealth of Pennsylvania on the dates and in the office for
the Recording of Deeds for the following counties in the Mortgage Books and at
the pages indicated in the following table:

====================================================================================================================================
Bradford                         Columbia                    Lawrence                      Mercer
------------------------------------------------------------------------------------------------------------------------------------
Date of                          Date of                     Date of                       Date of
Indenture      Recording    Book      Page      Recording    Book    Page   Recording    Book     Page    Recording    Book     Page
------------------------------------------------------------------------------------------------------------------------------------

Thirty-Fifth    12/21/01            200115497                                             1688     744
Supplemental
------------------------------------------------------------------------------------------------------------------------------------
Thirty-Sixth    07/04/02            200207151
Supplemental
====================================================================================================================================

====================================================================================================================================
Northumberland                       Pike                       Schuylkill                      Wayne
------------------------------------------------------------------------------------------------------------------------------------
Date of                          Date of                     Date of                       Date of
Indenture      Recording    Book      Page      Recording    Book    Page   Recording    Book     Page    Recording    Book     Page
------------------------------------------------------------------------------------------------------------------------------------

Thirty-Fifth                 1404     246                  1909     2328                  1413      1                  1911      1
Supplemental
------------------------------------------------------------------------------------------------------------------------------------
Thirty-Sixth                 1445     028                                                 1584    0259
Supplemental
====================================================================================================================================

; and

WHEREAS, in addition to the property described in 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 and Thirty-Sixth Supplemental
Indentures, the Company has acquired certain other property and desires to
confirm the lien of the Original Indenture thereon; and

7

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 Thirty-Seventh Supplemental Indenture, two
new series of bonds to be designated "First Mortgage Bonds, 5.15% Series due
2032" (herein referred to as the "5.15% Series due 2032 ") to be limited in
aggregate principal amount to $25,000,000, to bear interest at the rate of 5.15%
per annum, and to mature on September 1, 2032, and "First Mortgage Bonds, 3.75%
Series due 2010" (herein referred to as the "3.75% Series due 2010" and,
together with the 5.15% Series due 2032, the "Bonds"), to be limited in
aggregate principal amount to $3,200,000, to bear interest at the rate of 3.75%
per annum, and to mature on June 1, 2010, both series of Bonds 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 cost of cleaning, re-lining
and related improvement of pipelines and related equipment and facilities
located in the Counties of Delaware, Montgomery and Bucks 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, 2002 (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 therefor
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 Company has requested the
Authority to issue a new series of bonds to be known as the Authority's Water
Facilities Revenue Bonds (Pennsylvania Suburban Water Company Project), Series A
of 2002 in the aggregate principal amount of $25,000,000 (the "Authority Series
A Bonds"); and

WHEREAS, the Authority previously issued its Water Facilities
Revenue Bonds (Philadelphia Suburban Water Company Project), Series of 1992 (the
"1992 Bonds"), of which $[3,200,000] are currently outstanding to finance a
project (the "1980 Refunding Project") involving the refunding of the
Authority's Water Facilities Revenue Bonds (Philadelphia Suburban Water Company
Project), Series A of 1980 (the "1980 Bonds") in the aggregate principal amount
of $8,000,000 which were issued to finance certain facilities for the furnishing
of water on behalf of Philadelphia Suburban Water Company (predecessor to the
Company);

WHEREAS, the Company previously issued its bonds of the 6.50%
Series due 2010 (the "6.50% Series due 2010") under the Twenty-Seventh
Supplemental Indenture to secure the obligations of the Company to pay the costs
of the 1980 Refunding Project; and

WHEREAS, in order to finance the refunding of the 1992 Bonds,
the Company has requested the Authority to issue a new series of bonds to be
known as the Authority's Water Facilities Revenue Refunding Bonds (Pennsylvania
Suburban Water Company Project), Series B of 2002 in the aggregate principal
amount of $3,200,000 (the "Authority Series B Bonds" and, together with the
Authority Series A Bonds, the "Authority Bonds"); and

WHEREAS, in connection with the refunding of the 1992 Bonds,
the 6.50% Bonds due 2010 will be cancelled; and

WHEREAS, the Company proposes to issue the 5.15% Series due
2032 and the 3.75% Series due 2010 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

8

WHEREAS, the Authority Bonds are to be issued under a Trust
Indenture, dated as of December 15, 2002 (the "Authority Indenture"), between
the Authority and Wachovia Bank, National Association, as trustee (the
"Authority Trustee"); and

WHEREAS, 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 Trustee, as security for the payment
of the principal of, redemption premium, if any, and interest on, the Authority
Bonds; and

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 5.15% Series due 2032 and the 3.75% Series due
2010 (to be issued in accordance with the terms and provisions of the Original
Indenture and indentures supplemental thereto, including this Thirty-Seventh
Supplemental Indenture, and to be secured by said Original Indenture and
indentures supplemental thereto, including this Thirty-Seventh Supplemental
Indenture) and has further duly authorized the execution, delivery and recording
of this Thirty-Seventh Supplemental Indenture setting forth the terms and
provisions of the Bonds 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:

No. AR-1        $25,000,000

9

PENNSYLVANIA SUBURBAN WATER
COMPANY

(Incorporated under the Laws of the Commonwealth
of Pennsylvania)

First Mortgage Bond, 5.15% Series Due 2032

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 September, 2032, at the designated office of J.P. Morgan Trust Company,
National Association (hereinafter called the "Trustee") in Dallas, Texas, the
sum of Twenty-Five Million 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 prior to March 1, 2003, from the date
hereof) until the principal hereof shall become due and payable, at the rate of
five and 15/100ths percent (5.15%) per annum, payable semiannually in like coin
or currency on the first day of March and the first day of September in each
year, commencing March 1, 2003 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 5.15% per annum after maturity whether by
acceleration or otherwise until paid.

The interest so payable will (except as otherwise provided in
the Thirty-Seventh 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")

10

dated as of January 1, 1941, executed by the Philadelphia Suburban Water Company
(now 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, 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
"Thirty-Seventh Supplemental Indenture" dated as of December 15, 2002, and
designated therein as "First Mortgage Bonds, 5.15% Series due 2032" (the "5.15%
Series due 2032").

Concurrently herewith the Company is issuing its "First
Mortgage Bonds, 3.75% Series due 2010" in the aggregate principal amount of
$3,200,000 (the "3.75% Series due 2010" and, together with the 5.15% Series due
2032, the "Bonds").

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.

11

The 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, 2002, 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 (1) the cost of cleaning, re-lining and related improvement of
pipelines and related equipment and facilities located in the Counties of
Delaware, Montgomery and Bucks 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, 2002 (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 therefor 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"), and (2) the refunding of the Authority's Water Facilities Revenue
Bonds (Philadelphia Suburban Water Company Project), Series of 1992 previously
issued by the Authority on behalf of Philadelphia Suburban Water Company (the
"Refunding Project"). The Facilities are to be financed through the sale of the
Authority's Water Facilities Revenue Bonds (Pennsylvania Suburban Water Company
Project), Series A of 2002, in the aggregate principal amount of $25,000,000 due
September 1, 2032 (the "Authority Series A Bonds") and bearing interest at 5.15%
per annum, and the Refunding Project is to be financed through the sale of the
Authority's Water Facilities Revenue Refunding Bonds (Pennsylvania Suburban
Water Company Project), Series B of 2002 (the "Authority Series B Bonds" and,
together with the Authority Series A Bonds, the "Authority Bonds").

The Authority Bonds are to be issued under a Trust Indenture,
dated as of December 15, 2002 (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 Bonds subject to the same restriction on transfer.

12

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 5.15% Series due 2032 are subject to redemption prior to
maturity on or after September 1, 2013 by the Company, to the extent that the
Authority Series A Bonds are called for redemption under Section 7.01(a) 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 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 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.

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 Dallas, Texas
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.

13

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.

(Form of Trustee's Certificate)

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

J.P. MORGAN TRUST COMPANY,
NATIONAL ASSOCIATION

By:__________________________
Authorized Signer

IN WITNESS WHEREOF, Pennsylvania Suburban Water Company 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 December 31, 2002.

Attest:                             PENNSYLVANIA SUBURBAN WATER COMPANY

By:
---------------------------                     -------------------------------
(Assistant) Secretary                           Vice President and Treasurer

14

No. BR-1                                                              $3,200,000

PENNSYLVANIA SUBURBAN WATER
COMPANY

(Incorporated under the Laws of the Commonwealth
of Pennsylvania)

First Mortgage Bond, 3.75% Series Due 2010

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 June, 2010, at the designated office of J.P. Morgan Trust Company,
National Association (hereinafter called the "Trustee") in Dallas, Texas, the
sum of Three Million Two Hundred 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
prior to June 1, 2003, from the date hereof) until the principal hereof shall
become due and payable, at the rate of three and 75/100ths percent (3.75%) per
annum, payable semiannually in like coin or currency on the first day of January
and the first day of June in each year, commencing June 1, 2003 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 3.75% per annum
after maturity whether by acceleration or otherwise until paid.

The interest so payable will (except as otherwise provided in
the Thirty-Seventh 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.

15

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 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, 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
"Thirty-Seventh Supplemental Indenture" dated as of December 15, 2002, and
designated therein as "First Mortgage Bonds, 3.75% Series due 2010" (the "3.75%
Series due 2010").

Concurrently herewith the Company is issuing its "First
Mortgage Bonds, 5.15% Series due 2032" in the aggregate principal amount of
$25,000,000 (the "5.15% Series due 2032" and, together with the 3.75% Series due
2010, the "Bonds").

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.

16

The 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, 2002, 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 (1) cleaning, re-lining and related improvement of pipelines
and related equipment and facilities located in the Counties of Delaware,
Montgomery and Bucks 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,
2002 (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 therefor 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"), and
(2) the refunding of the Authority's Water Facilities Revenue Bonds
(Philadelphia Suburban Water Company Project), Series of 1992 previously issued
by the Authority on behalf of Philadelphia Suburban Water Company (the
"Refunding Project"). The Facilities are to be financed through the sale of the
Authority's Water Facilities Revenue Bonds (Pennsylvania Suburban Water Company
Project), Series A of 2002, in the aggregate principal amount of $25,000,000 due
September 1, 2032 (the "Authority Series A Bonds") and bearing interest at 5.15%
per annum, and the Refunding Project is to be financed through the sale of the
Authority's Water Facilities Revenue Refunding Bonds (Pennsylvania Suburban
Water Company Project), Series B of 2002 (the "Authority Series B Bonds" and,
together with the Authority Series A Bonds, the "Authority Bonds").

The Authority Bonds are to be issued under a Trust Indenture,
dated as of December 15, 2002 (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 Bonds subject to the same restriction on transfer.

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.

17

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 mandatory redemption as a whole or in part
at any time prior to maturity should the Company be required to make payments
with respect to the Authority Bonds pursuant to the provisions of Section
7.02(a) of the Financing Agreement, or Sections 7.01(b)of the Authority
Indenture, if the Trustee shall receive a notice from the Authority or the
Authority Trustee that the Bonds are subject to mandatory redemption in
accordance with any of such provisions.

(b) 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.

(c) The 3.75% Series due 2010 are not subject to optional redemption.

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 Dallas, Texas
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.

18

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, Pennsylvania Suburban Water Company 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 December 31, 2002.

Attest:                                      PENNSYLVANIA SUBURBAN WATER COMPANY

By:
---------------------------                  -----------------------------------
(Assistant) Secretary                        Vice President and Treasurer

(Form of Trustee's Certificate)

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

J.P. MORGAN TRUST COMPANY,
NATIONAL ASSOCIATION

By:__________________________
Authorized Signer

19

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 Thirty-Seventh Supplemental Indenture provided and issued by the Company,
valid, binding and legal obligations of the Company, and this Thirty-Seventh
Supplemental Indenture a valid and enforceable supplement to said Original
Indenture, have been done, performed and fulfilled, and the execution of this
Thirty-Seventh Supplemental Indenture has been in all respects duly authorized;
and

NOW, THEREFORE, THIS THIRTY-SEVENTH 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
Thirty-Seventh 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:

I.

REAL ESTATE AND WATER RIGHTS.

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

20

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.

IV.

AFTER ACQUIRED PROPERTY.

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

21

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.

22

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:

23

ARTICLE I.

Form, Authentication and Delivery of the Bonds;
Redemption Provisions
---------------------

SECTION 1. There shall be a forty-second series of bonds,
limited in aggregate principal amount to $25,000,000 designated as "Pennsylvania
Suburban Water Company, First Mortgage Bonds, 5.15% Series due 2032", and a
forty-third series of Bonds, limited in aggregate principal amount to $3,200,000
designated as "Pennsylvania Suburban Water Company, First Mortgage Bonds, 3.75%
Series due 2010".

Interest on the 5.15% Series due 2032 shall be payable semiannually on March 1
and September 1 of each year (each an "interest payment date"), commencing March
1, 2003; interest on the 3.75 Series due 2010 shall be payable semiannually on
January 1 and June 1 of each year (each an "interest payment date"), commencing
June 1, 2003. Each Bond shall be dated the date of its authentication and shall
bear interest from the interest payment date next preceding its date of
authentication, unless authenticated after a record date and on or before the
succeeding interest payment date, in which case it shall bear interest from such
succeeding interest payment date, or, unless 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 5.15% Series due 2032 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 September 1, 2032
and shall bear interest at the rate of 5.15%. The 3.75% Series due 2010 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 June 1, 2010
and shall bear interest at the rate of 3.75%.

The Bonds 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
"AR" in the case of the 5.15% Series due 2032 and "BR" in the case of the 3.75%
Series due 2010, 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 Dallas, Texas, 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.

24

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, and interest on, the Authority Bonds pursuant
to the Financing Agreement. The Authority Bonds are being sold to finance the
cost of the acquiring, constructing, installing and equipping of the Facilities
and to finance the refunding of the 1992 Bonds.

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, 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.

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 5.15% Series due 2032 are subject to redemption prior
to maturity on or after September 1, 2013 by the Company, to the extent that the
Authority Series A Bonds are called for redemption under Section 7.01(a) 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:

25

(b) The Bonds are subject to mandatory redemption as a whole
or in part at any time prior to maturity should the Company be required to make
payments with respect to the Authority Bonds pursuant to the provisions of
Section 7.02(a) of the Financing Agreement, or Sections 7.01(b)of the Authority
Indenture, if the Trustee shall receive a notice from the Authority or the
Authority Trustee that the Bonds are subject to mandatory redemption in
accordance with any of such provisions.

(c) The 3.75% Series due 2010 are not subject to optional
redemption.

(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.

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.

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 Thirty-Seventh
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.

26

SECTION 7. 5.15% Series due 2032 in the aggregate principal
amount of $25,000,000 and 3.75% Series due 2010 in the aggregate principal
amount of $3,200,000 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 6.50% Series due 2010 cease to be outstanding, or on or before
the next March 1 next occurring after the bonds of the 5.95% Series due 2002
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 6.82% Subseries B due 2005,
the 6.89% Subseries C due 2015, the 6.99% Subseries D due 2006, the 7.47%
Subseries E due 2003, the 6.83% Subseries F due 2003, and the 7.06% Subseries G
due 2004) shall cease to be outstanding, or on or before the March 1 next
occurring after bonds of the 6.35% Series due 2025 shall cease to be
outstanding, on or before the March 1 next occurring after the bonds of any of
the Subseries of the 1997 Medium Term Note Series issued under the Thirty-First
Supplemental Indenture (consisting of the 6.75% Subseries A due 2007, the 6.30%
Subseries B due 2002, the 6.14% Subseries C due 2008, the 5.80% Subseries D due
2003, the 5.85% Subseries E due 2004 and the 6.00% Subseries F due 2004) 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
7.40% Subseries A due 2005, the 7.40% Subseries B due 2005, the 6.21% Subseries
C due 2011, the 9.53% Subseries D due 2019, the 6.375% Subseries E due 2023, 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 and
the 6.00% Subseries K due 2030) cease to be outstanding, or on or before March 1
next occurring after the bonds of the 5.35% Series due 2031 or on or before
March 1 next occurring after the bonds of the 5.55% Series due 2032 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:

27

(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;

(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;

28

(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

(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.

29

(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 Thirty-Seventh 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, 2001, 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.

30

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.

31

"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 Thirty-Seventh
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

32

reasonable expenses that the Trustee may incur in complying with any of the
Environmental Statutes (hereinafter defined), (2) any and all reasonable costs
that 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 (h) 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 and Thirty-Sixth Supplemental Indentures are hereby
confirmed. All references in this Thirty-Seventh 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.

33

SECTION 2. Any notices to the Trustee under this
Thirty-Seventh 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
Institutional Trust Services
1650 Market Street, Suite 5210
Philadelphia, PA  19103
Attention:  Pennsylvania Suburban Water
Administrator
Telecopy:  (215) 972-1685

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 Thirty-Seventh 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 Thirty-Seventh Supplemental Indenture
is dated as of December 15, 2002 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 Thirty-Seventh 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.

34

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, as of the 15th day of December, 2002.

[CORPORATE SEAL]                           PENNSYLVANIA SUBURBAN WATER
COMPANY, as successor by merger to
Philadelphia Suburban Water Company

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

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

Attest:  /s/ Alan R. Halpern               By:  /s/ Catherine Lenhardt
-----------------------------          -------------------------------
Authorized Officer                     Authorized Officer

35

EXHIBIT A

BONDS REDEEMED OR PAID AT MATURITY

[to be supplied]

EXHIBIT B

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

[TO BE SUPPLIED]

J.P. Morgan Trust Company National Association, Mortgagee and
Trustee named in the foregoing Thirty-Seventh Supplemental Indenture, hereby
certifies that its precise name and the post office address of its Institutional
Trust Services Group in Philadelphia, Pennsylvania are as follows:

J.P. Morgan Trust Company, National Association
Institutional Trust Services
1650 Market Street, Suite 5210
Philadelphia, PA  19103
Attention: Pennsylvania Suburban Water
Administrator
Telecopy:  (215) 972-1685

J.P. MORGAN TRUST COMPANY,
NATIONAL ASSOCIATION

By:
------------------------
Authorized Officer

COMMONWEALTH OF PENNSYLVANIA

COUNTY OF MONTGOMERY

On the ___20th_ day of December, 2002, 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 Pennsylvania Suburban Water Company, a corporation, and that she as
such Vice President and Treasurer, being authorized to do so, executed the
foregoing Thirty-Seventh 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/ Catherine A. Iezzi, Notary
------------------------------

COMMONWEALTH OF PENNSYLVANIA

COUNTY OF PHILADELPHIA

On the ___24th____ day of December, 2002 before me, the
Subscriber, a Notary Public for the Commonwealth of Pennsylvania, personally
appeared Catherine Lenhardt, who acknowledged herself to be a Vice President of
J.P. Morgan Trust Company, National Association, Trustee, a national banking
association, and that she as such Vice President, being authorized to do so,
executed the foregoing Thirty-Seventh 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/ Sandra M. Abrahams, Notary
------------------------------

This Thirty-Seventh Supplemental Indenture was recorded on
_________, 2002 in the Office for the Recording of Deeds for each of the
counties tabulated below in the Mortgage Book and at the page indicated:

Mortgage
County                                         Book           Page
--------         ----

Berks ...............................          ____           ____
Bradford ............................          ____           ____
Bucks ...............................          ____           ____
Chester .............................          ____           ____
Columbia ............................          ____           ____
Delaware ............................          ____           ____
Lawrence ............................          ____           ____
Mercer ..............................          ____           ____
Montgomery ..........................          ____           ____
Northumberland ......................          ____           ____
Pike ................................          ____           ____
Schuylkill ..........................          ____           ____
Wayne ...............................          ____           ____

For the recording information with respect to the Original Indenture and the
first thirty-five supplemental indentures, see pages 4-6 of this Thirty-Seventh
Supplemental Indenture.

Exhibit 4.24

CREDIT AGREEMENT

THIS CREDIT AGREEMENT (this "Agreement") dated as of October
25, 2002, by and among PHILADELPHIA SUBURBAN CORPORATION, a Pennsylvania
corporation (the "Borrower"), the several banks and other financial institutions
from time to time parties to this Agreement (the "Banks"), and PNC BANK,
NATIONAL ASSOCIATION, a national banking association, as administrative agent
(in such capacity, the "Agent").

BACKGROUND

The Borrower has requested that the Banks make Loans (that
term and certain other terms are defined in Section 1.1 hereof) to the Borrower,
and the Banks severally have agreed to make such Loans on the terms and
conditions herein contained. Proceeds of the Loans will be used by the Borrower
to purchase certain of its issued and outstanding Capital Stock from one or more
of the Vivendi Entities.

NOW, THEREFORE, the parties hereto, in consideration of their
mutual covenants and agreements herein set forth and for other consideration,
the receipt and sufficiency of which is hereby acknowledged and intending to be
legally bound hereby, covenant and agree as follows:

SECTION 1. DEFINITIONS

1.1 Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:

"Affiliate": any Person (other than a Subsidiary, or an
officer, director or employee of the Borrower who would not be an
Affiliate but for such Person's status as an officer, director and/or
employee) which, directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common
control with, the Borrower, and any member, director, officer or
employee of any such Person or any Subsidiary of the Borrower. For
purposes of this definition, "control" shall mean the power, directly
or indirectly, either to (i) vote 5% or more of the securities having
ordinary voting power for the election of directors of such Person or
(ii) direct or in effect cause the direction of the management and
policies of such Person whether by contract or otherwise.

"Agreement": this Credit Agreement, as amended, supplemented
or otherwise modified from time to time.

"Assignment and Acceptance":  an assignment and acceptance
entered into by a Bank and an assignee, and acknowledged by the Agent,
in the form of Exhibit B or such other form as shall be approved by
the Agent.

"Base Rate": for any day, a rate per annum (rounded upwards,
if necessary, to the next 1/100th of 1%) equal to the greater of (a)
the Prime Rate in effect on such day and (b) the Federal Funds
Effective Rate in effect on such day plus one half of one percent
(0.5%). If for any reason the Agent shall have determined (which

determination shall be conclusive absent manifest error) that it is
unable to ascertain the Federal Funds Effective Rate for any reason,
including the inability or failure of the Agent to obtain sufficient
quotations in accordance with the definition of such term, the Base
Rate shall be determined without regard to clause (b) of the first
sentence of this definition until the circumstances giving rise to such
inability no longer exist. Any change in the Base Rate due to a change
in the Prime Rate or the Federal Funds Effective Rate shall be
effective on the effective date of such change in the Prime Rate or the
Federal Funds Effective Rate, as the case may be.

"Base Rate Loan": any portion of a Loan bearing interest at a
rate determined by reference to the Base Rate.

"Borrower": as defined in the heading of this Agreement.

"Business Day": a day other than a Saturday, Sunday or other
day on which commercial banks in Philadelphia, Pennsylvania are
authorized or required by law to close; provided, however, that, when
used in connection with a Eurodollar Loan, the term "Business Day"
shall also exclude any day on which banks are not open for dealings in
dollar deposits in the London Interbank Market.

"Capital Lease": at any time, a lease with respect to which
the lessee is required to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.

"Capital Stock": any and all shares, interests, participations
or other equivalents (however designated and whether newly issued or
reissued from treasury shares) of capital stock of a corporation, any
and all equivalent ownership interests in a Person (other than a
corporation) and any and all warrants or options to purchase any of the
foregoing.

"Change of Control": an event or series of events by which (a)
any "person" or "group" (as such terms are defined in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder), is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under such
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire
without condition, other than passage of time, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 25% of the total voting power of the then
outstanding Voting Stock of the Borrower, or (b) from and after the
date hereof, individuals who on the date hereof constitute the Board of
Directors of the Borrower (together with any new directors whose
election by such Board of Directors or whose nomination for election by
the shareholders of the Borrower was approved by a vote of a majority
of the directors then still in office who were either directors on the
date hereof or whose election or nomination for election was previously
so approved) cease for any reason to constitute a majority of the Board
of Directors of the Borrower then in office.

"Closing":  as defined in Section 4.2.

"Closing Date":  as defined in Section 4.2.

2

"Code": the Internal Revenue Code of 1986, as amended from
time to time.

"Commitment": as to any Bank, the obligation of such Bank to
make a Loan to the Borrower hereunder in the principal amount not to
exceed the amount set forth opposite such Bank's name on Schedule I.

"Commonly Controlled Entity": an entity, whether or not
incorporated, which is under common control with the Borrower within
the meaning of Section 4001 of ERISA or is part of a group which
includes the Borrower and which is treated as a single employer under
Section 414 of the Code.

"Consolidated EBIT": for any period, Consolidated Net Income
for such period, plus the amount of income taxes and interest expense
deducted from earnings in determining such Consolidated Net Income.

"Consolidated Funded Debt": at any time, all Debt of the
Borrower determined on a consolidated basis consisting of, without
duplication (a) borrowed money Debt, including without limitation
capitalized lease obligations; (b) reimbursement obligations in respect
of letters of credit, bank guarantees and the like; and (c) Debt in the
nature of a Contingent Obligation, whether or not required to be
reflected on a balance sheet of the Borrower in accordance with GAAP.

"Consolidated Interest Expense": for any period, the amount of
cash interest expense deducted from earnings of the Borrower in
determining Consolidated Net Income for such period in accordance with
GAAP.

"Consolidated Net Income": for any fiscal period, net earnings
(or loss) after income and other taxes computed on the basis of income
of the Borrower for such period determined on a consolidated basis in
accordance with GAAP, but excluding:

(a) the amount of any extraordinary items included in
such calculation of net earnings (or loss);

(b) any gain or loss resulting from the write-up or
write-off of fixed assets;

(c) earnings of any Subsidiary accrued prior to the
date it became a Subsidiary;

(d) earnings of any Person, substantially all assets
of which have been acquired in any manner, realized by such
Person prior to the date of such acquisition; and

(e) any gain arising from the acquisition of any
Securities of the Borrower or any Subsidiary thereof.

"Consolidated Shareholders' Equity": at a particular date, the
net book value of the shareholders' equity of the Borrower as would be
shown on a consolidated balance sheet at such time determined in
accordance with GAAP.

3

"Contingent Obligation": with respect to any Person (for the
purpose of this definition, the "Obligor") any obligation (except the
endorsement in the ordinary course of business of instruments for
deposit or collection) of the Obligor guaranteeing or in effect
guaranteeing any indebtedness of any other Person (for the purpose of
this definition, the "Primary Obligor") in any manner, whether directly
or indirectly, including (without limitation) indebtedness incurred
through an agreement, contingent or otherwise, by the Obligor:

(a) to purchase such indebtedness of the Primary
Obligor or any Property or assets constituting security
therefor;

(b) to advance or supply funds

(i) for the purpose of payment of
such indebtedness (except to the extent such
indebtedness otherwise appears on Borrower's
balance sheet as indebtedness), or

(ii) to maintain working capital or
other balance sheet condition or any income
statement condition of the Primary Obligor
or otherwise to advance or make available
funds for the purchase or payment of such
indebtedness or obligation; or

(c) to lease Property or to purchase Securities or
other Property or services primarily for the purpose of
assuring the owner of such indebtedness or obligation of the
ability of the Primary Obligor to make payment of the
indebtedness or obligation.

For purposes of computing the amount of any Contingent Obligation, in
connection with any computation of indebtedness or other liability, it
shall be assumed that, without duplication, the indebtedness or other
liabilities of the Primary Obligor that are the subject of such
Contingent Obligation are direct obligations of the issuer of such
Obligation.

"Contractual Obligation": as to any Person, any provision of
any Security issued by such Person or of any agreement, instrument or
other undertaking to which such Person is a party or by which it or any
of its property is bound.

"Debt": with respect to any Person, at any time, without
duplication, all of (i) its liabilities for borrowed money, (ii)
liabilities secured by any Lien existing on property owned by such
Person (whether or not such liabilities have been assumed), (iii) its
liabilities in respect to Capital Leases; (iv) its liabilities under
Contingent Obligations; and (v) all other obligations which are
required by GAAP to be shown as liabilities on its balance sheet but
excluding (x) deferred taxes and other deferred or long-term
liabilities and other amounts not in respect of borrowed money; (y) the
aggregate amount of accounts receivable sold, factored or otherwise
transferred for value without recourse (other than for breach of
representations) and (z) current trade accounts payable incurred in the
ordinary course of business.

4

"Debt to Capitalization Ratio" for any period, the ratio of
(i) Consolidated Funded Debt to (ii) Total Capitalization.

"Default": any of the events specified in Section 7, whether
or not any requirement for the giving of notice, the lapse of time, or
both, or any other condition precedent therein set forth, has been
satisfied.

"Distribution": in respect of any corporation, (a) dividends,
distributions or other payments on account of any capital stock of the
corporation (except distributions in common stock of such corporation);
(b) the redemption or acquisition of such stock or of warrants, rights
or other options to purchase such stock (except when solely in exchange
for common stock of such corporation); and (c) any payment on account
of, or the setting apart of any assets for a sinking or other analogous
fund for, the purchase, redemption, defeasance, retirement or other
acquisition of any share of any class of capital stock of such
corporation or any warrants or options to purchase any such stock.

"Dollars" and "$": dollars in lawful currency of the United
States of America.

"Environmental Laws": any and all applicable foreign, Federal,
state, local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, decrees or binding requirements of any Governmental
Authority, or binding Requirement of Law (including common law)
regulating, relating to or imposing liability or standards of conduct
concerning protection of the environment, as now or may at any time
hereafter be in effect.

"ERISA": the Employee Retirement Income Security Act of 1974,
as amended from time to time.

"Eurocurrency Reserve Requirements": for any day as applied to
a Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on
such day (including, without limitation, basic, supplemental, marginal
and emergency reserves under any regulations of the Board of Governors
of the Federal Reserve System or other Governmental Authority having
jurisdiction with respect thereto) dealing with reserve requirements
prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board) maintained by
a member bank of such System.

"Eurodollar Base Rate": with respect to any Eurodollar Loans
for any Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next 1/100 of 1%) equal to the rate determined by
the Agent in accordance with its usual procedures (which determination
shall be conclusive absent manifest error) to be the average of the
London interbank offered rates of interest per annum for Dollars set
forth on Telerate display page 3750 or such other display page on the
Telerate System as may replace such page to evidence the average of
rates quoted by banks designated by the British Bankers' Association
(or appropriate successor, or if the British Bankers' Association or
its successor ceases to provide such quotes, a comparable replacement
determined by the Agent), for an amount approximately equal in
principal amount to the amount of such Eurodollar Loans.

5

"Eurodollar Loan": any portion of a Loan bearing interest at a
rate determined by reference to the Eurodollar Rate in accordance with
the provisions of Section 2.

"Eurodollar Rate": with respect to each Interest Period
pertaining to a Eurodollar Loan, a rate per annum determined in
accordance with the following formula (rounded upward to the nearest
1/100th of 1%):

Eurodollar Base Rate
--------------------------------------------
1.00     - Eurocurrency Reserve Requirements

"Event of Default": any of the events specified in Section 7,
provided that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.

"Federal Funds Effective Rate": for any day, the weighted
average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds
brokers, as published on the next succeeding Business Day by the
Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for
the day of such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by it.

"Fees":  as defined in subsection 2.3(a).

"GAAP": at any time with respect to the determination of the
character or amount of any asset or liability or item of income or
expense, or any consolidation or other accounting computation,
generally accepted accounting principles as applied to the public
utility industry, as such principles shall be in effect on the date of,
or at the end of the period covered by, the financial statements from
which such asset, liability, item of income, or item of expense, is
derived, or, in the case of any such computation, as in effect on the
date when such computation is required to be determined, subject to
Section 1.3(b).

"Governmental Authority": any nation or government, any state
or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.

"Insolvency": with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section
4245 of ERISA.

"Insolvent": pertaining to a condition of Insolvency.

"Interest Coverage Ratio": at the date of determination, the
ratio of Consolidated EBIT to Consolidated Interest Expense, in each
case for the prior four (4) consecutive fiscal quarters.

"Interest Payment Date": (a) as to any Base Rate Loan, the
last day of each month, (b) as to any Eurodollar Loan having an
Interest Period of three months or less, the last day of such Interest
Period, and (c) as to any Eurodollar Loan having an Interest Period
longer than three months, each day which is three months, or a whole
multiple thereof, after the first day of such Interest Period and the
last day of such Interest Period.

6

"Interest Period": with respect to any Eurodollar Loan:

(a) initially the period commencing on the conversion
date with respect to such Eurodollar Loan and ending one, three or six
months thereafter, as selected by the Borrower in its notice of
conversion, given with respect thereto; and

(b) thereafter, each period commencing on the last
day of the next preceding Interest Period applicable to such Eurodollar
Loan and ending one, three or six months thereafter, as selected by the
Borrower by irrevocable notice to the Agent not less than three
Business Days prior to the last day of the then current Interest Period
with respect thereto;

provided that, the foregoing provisions relating to Interest Periods
are subject to the following:

(i) if any Interest Period would end on a day other
than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless such next succeeding Business Day would
fall in the next calendar month, in which case such Interest Period
shall end on the next preceding Business Day;

(ii) any Interest Period that begins on the last
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Business Day of a calendar
month;

(iii) an Interest Period that otherwise would extend
beyond the Maturity Date shall end on the Maturity Date; and

(iv) the Borrower shall select Interest Periods so as
not to require a payment or prepayment of any Eurodollar Loan during an
Interest Period for such Eurodollar Loan.

"Investments": investments (by loan or extension of credit,
purchase, advance, guaranty, capital contribution or otherwise) made in
cash or by delivery of Property, by the Borrower (i) in any Person,
whether by acquisition of stock or other ownership interest,
indebtedness or other obligation or Security, or by loan, advance or
capital contribution, or (ii) in any Property or (iii) any agreement to
do any of the foregoing.

"Lien": any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), charge, or
other security interest or any preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title
retention agreement and any Capital Lease having substantially the same
economic effect as any of the foregoing).

"Loan": the term loan made by each Bank to the Borrower
pursuant to Section 2.1 hereof and "Loans" shall be the collective
reference to all such term loans.

7

"Loan Documents": this Agreement and the Notes and any other
instruments, certificates or documents delivered or contemplated to be
delivered hereunder or in connection herewith.

"Material Adverse Effect": a material adverse effect on (a)
the validity or enforceability of this Agreement or any other Loan
Document, (b) the business, prospects, Property, assets, financial
condition, results of operations or prospects of the Borrower, (c) the
ability of the Borrower duly and punctually to pay its Debts and
perform its obligations hereunder, or (d) the ability of the Agent or
any of the Banks, to the extent permitted, to enforce their legal
remedies pursuant to this Agreement or any other Loan Document.

"Materials of Environmental Concern": any gasoline or
petroleum (including crude oil or any fraction thereof) or petroleum
products or any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Law,
including, without limitation, asbestos, polychlorinated biphenyls, and
ureaformaldehyde insulation.

"Maturity Date": October 24, 2003.

"Moody's": Moody's Investors Service, Inc.

"Multiemployer Plan": a Plan which is a multiemployer plan as
defined in Section 4001(a) (3) of ERISA.

"Net Proceeds": (a) with respect to the sale or issuance of
any Capital Stock by the Borrower, the net amount equal to (i) the
aggregate amount received in cash in connection with such sale or
issuance minus (ii) the reasonable fees, commissions and other
out-of-pocket expenses incurred by the Borrower in connection with such
sale or issuance; and (b) with respect to the incurrence by the
Borrower of any indebtedness for borrowed money (other than under
operating lines of credit), the net amount equal to (i) the aggregate
amount received in cash from the incurrence of such indebtedness minus
(ii) the sum of (A) the principal amount of any Debt which is promptly
repaid in connection with such incurrence (i.e., a refinancing) and (B)
the reasonable fees, commissions and other out-of-pocket expenses
incurred by the Borrower payable in connection with such incurrence to
Persons other than an Affiliate of the Borrower.

"Note": a promissory note of the Borrower in the form of
Exhibit A issued to a Bank, as the same may be amended, supplemented or
otherwise modified from time to time and "Notes" shall be the
collective reference to all such promissory notes issued to the Banks.

"Participant": as defined in Section 9.6(f).

"PBGC": the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.

"Permitted Acquisition": an acquisition by the Borrower of the
stock or assets of a Person engaged in businesses similar or incidental
or ancillary to Borrower's or any Subsidiary's existing business,
provided that at least 30 days prior to the consummation of any such
acquisition for which cash consideration paid by the Borrower
(including the assumption of Debt in connection therewith) exceeds

8

$25,000,000, no Default or Event of Default shall exist or would exist
if such acquisition were consummated on such date (assuming for
purposes of the covenants contained in Section 6.1 that pro forma
adjustments are made to the financial statements of the Borrower
reflecting such acquisition; provided, that historical EBIT of the
Person to be acquired (or the assets of which are to be acquired) shall
be included for purposes of calculating such covenant compliance only
if historical financial statements of such Person are received by the
Agent at least 30 days prior to the consummation of such acquisition),
and the Borrower shall have delivered to the Agent a certificate of a
Responsible Officer showing calculations in reasonable detail
demonstrating such pro forma compliance with the covenants contained in
Section 6.1, and provided further, that any such acquisition for which
cash consideration paid by the Borrower (including the assumption of
Debt in connection therewith) exceeds $50,000,000, shall also have been
consented to by the Required Banks.

"Permitted Investments":  Investments in:

(a) one or more Subsidiaries thereof;

(b) current assets arising from the sale or purchase
of goods and services in the ordinary course of business of
the Borrower;

(c) direct obligations of the United States of
America, or any agency or instrumentality thereof or
obligations guaranteed by the United States of America,
provided that such obligations mature within one (1) year from
the date of acquisition thereof;

(d) certificates of deposit, time deposits or
banker's acceptances, maturing within one (1) year from the
date of acquisition, with banks or trust companies organized
under the laws of the United States, the unsecured long-term
debt obligations of which are rated "A3" or higher by Moody's
or "A-" or higher by S&P, and issued, or in the case of
banker's acceptance, accepted, by a bank or trust company
having capital, surplus and undivided profits aggregating at
least $250,000,000;

(e) commercial paper given the highest rating by
either S&P or Moody's maturing not more than 270 days from the
date of creation thereof;

(f) mutual funds registered with the Securities and
Exchange Commission under the Investment Company Act of 1940
that hold themselves out as "money market funds"; and

(g) other loans, advances and investments not
exceeding in the aggregate $2,000,000 at any one time
outstanding.

9

"Person": an individual, partnership, corporation, business
trust, joint stock company, limited liability company, trust,
unincorporated association, joint venture, Governmental Authority or
other entity of whatever nature.

"Plan": at a particular time, any employee benefit plan which
is covered by ERISA and in respect of which the Borrower or a Commonly
Controlled Entity is (or, if such plan were terminated at such time,
would under Section 4069 of ERISA be deemed to be) an "employer" as
defined in Section 3(5) of ERISA.

"PNC": PNC Bank, National Association, a national banking
association.

"Prime Rate": the rate of interest per annum announced from
time to time by PNC as its prime rate in effect at its principal office
in Philadelphia, Pennsylvania; each change in the Prime Rate shall be
effective on the date such change is announced as effective.

"Property": any interest in any kind of property or asset,
whether real, personal or mixed, and whether tangible or intangible.

"Pro-Rata Percentage": as to any Bank at any time, the
proportion (expressed as a percentage) that such Bank's Commitment
bears to the Total Commitment or, at any time after the Loans have been
made, the percentage which the amount of such Bank's outstanding Loan
constitutes of the aggregate amount of the Loans of the Banks then
outstanding.

"Purchase Agreement": that certain Registration and Stock
Purchase Agreement dated as of July 8, 2002, between the Borrower and
the Vivendi Entities, as the same may be amended, supplemented or
otherwise modified from time to time.

"Purchase Money Security Interest": Liens upon tangible
personal property securing loans to the Borrower or deferred payments
by the Borrower for the purchase of such tangible personal property, in
each case securing amounts which do not exceed the purchase price of
the property subject to such security interests.

"Regulation U": Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect, and all official
rulings and interpretations thereunder or thereof.

"Regulation X": Regulation X of the Board of Governors of the
Federal Reserve System as from time to time in effect, and all official
rulings and interpretations thereunder or thereof.

"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of
Section 4241 of ERISA.

"Reportable Event": any of the events set forth in Section
4043(b) of ERISA, except to the extent that notice thereof has been
waived by the PBGC.

10

"Required Banks": at any time, (a) Banks whose Pro-Rata
Percentages aggregate at least 66 2/3%, or (b) if there are only two
Banks which have outstanding Loans, both Banks.

"Requirement of Law": as to any Person, the Certificate of
Incorporation, By-Laws, Operating Agreement or other organizational or
governing documents of such Person, and any law, treaty, rule or
regulation or determination of an arbitrator or a court or other
Governmental Authority, in each case binding upon such Person or any of
its property or to which such Person or any of its property is subject.

"Responsible Officer": the chief financial officer, treasurer
or controller of the Borrower.

"S&P": Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc.

"Security": "security" as defined in Section 2(1) of the
Securities Act of 1933, as amended.

"Single Employer Plan": any Plan which is covered by Title IV
of ERISA, but which is not a Multiemployer Plan.

"Solvent": as to any Person, as of the time of determination,
the financial condition under which the following conditions are
satisfied:

(a) the fair market value of the assets of such
Person will exceed the debts and liabilities, subordinated,
contingent or otherwise, of such Person; and

(b) the present fair saleable value of the Property
of such Person will be greater than the amount that will be
required to pay the probable liability of such Person on its
debts and other liabilities, subordinated, contingent or
otherwise, as such debts and other liabilities become absolute
and matured; and

(c) such Person will be able to pay its debts and
liabilities, subordinated, contingent or otherwise, as such
debts and liabilities become absolute and matured; and

(d) such Person will not have unreasonably small
capital with which to conduct the businesses in which it is
engaged as such businesses are then conducted and are proposed
to be conducted after the date thereof.

"Subordinated Debt": at any time, all Debt of the Borrower
subordinated to all of the obligations of the Borrower to the Banks on
terms satisfactory to the Banks.

"Subsidiary": as to any Person, (i) any corporation, limited
liability company, company or trust of which 50% or more (by number of
shares or number of votes) of the outstanding capital stock, interests,
shares or similar items of beneficial interest normally entitled to
vote for the election of one or more directors, managers or trustees
(regardless of any contingency which does or may suspend or dilute the
voting rights) is at such time owned directly or indirectly by such
person or one or more of such Person's Subsidiaries, or any partnership

11

of which such Person is a general partner or of which 50% or more of
the partnership interests is at the time directly or indirectly owned
by such Person or one or more of such Person's Subsidiaries, and (ii)
any corporation, company, trust, partnership or other entity which is
controlled or capable of being controlled by such Person or one or more
of such Person's subsidiaries. Unless otherwise indicated, all
references to a "Subsidiary" or to "Subsidiaries" in this Agreement
shall refer to a Subsidiary of the Borrower.

"Total Capitalization": at any period, the sum of (i)
Consolidated Shareholders' Equity plus (ii) Consolidated Funded Debt.

"Total Commitment": at any time, the aggregate amount of the
Banks' Commitments, as in effect at such time.

"Tranche": the collective reference to Eurodollar Loans whose
Interest Periods begin on the same date and end on the same later date.

"Vivendi Entities": Vivendi Environnement S.A., a French
corporation, Vivendi Water S.A., a French corporation and Vivendi North
America Company, a Delaware corporation.

"Voting Stock": capital stock of any class or classes of a
corporation the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the directors (or
Persons performing similar functions) and, as applicable, any equity,
participation or ownership interests in any partnership, business
trust, joint stock company, limited liability company, trust,
unincorporated association, joint venture or any other Person which
interests are similar by analogy to capital stock or ownership rights
giving rise to voting or governance rights.

1.2 Other Definitional Provisions. (a) Unless otherwise
specified therein, all terms defined in this Agreement shall have the defined
meanings when used in the Notes or any certificate or other document made or
delivered pursuant hereto.

(b) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section,
subsection, Schedule and Exhibit references are to this Agreement unless
otherwise specified.

1.3 Construction. (a) Unless the context of this Agreement
otherwise clearly requires, references to the plural include the singular, the
singular the plural and the part the whole, "or" has the inclusive meaning
represented by the phrase "and/or," and "including" has the meaning represented
by the phrase "including without limitation." References in this Agreement to
"determination" of or by the Agent or the Banks shall be deemed to include good
faith estimates by the Agent or the Banks (in the case of quantitative
determinations) and good faith beliefs by the Agent or the Banks (in the case of
qualitative determinations). Whenever the Agent or the Banks are granted the
right herein to act in their sole discretion or to grant or withhold consent
such right shall be exercised in good faith, except as otherwise provided
herein. Except as otherwise expressly provided, all references herein to the
"knowledge of" or "best knowledge of" the Borrower shall be deemed to refer to
the knowledge of a Responsible Officer thereof. The words "hereof," "herein,"

12

"hereunder", "hereby" and similar terms in this Agreement refer to this
Agreement as a whole and not to any particular provision of this Agreement. The
section and other headings contained in this Agreement and the Table of Contents
preceding this Agreement are for reference purposes only and shall not control
or affect the construction of this Agreement or the interpretation thereof in
any respect. Section, subsection, schedule and exhibit references are to this
Agreement unless otherwise specified.

(b) Except as otherwise provided in this Agreement, all
computations and determinations as to accounting or financial matters and all
financial statements to be delivered pursuant to this Agreement shall be made
and prepared in accordance with GAAP (including principles of consolidation
where appropriate). As used herein and in the Notes, and any certificate or
other document made or delivered pursuant hereto, accounting terms relating to
the Borrower and any Subsidiary thereof not defined in subsection 1.1 and
accounting terms partly defined in subsection 1.1, to the extent not defined,
shall have the respective meanings given to them under GAAP. In the event that
any future change in GAAP, without more, materially affects the Borrower's
compliance with any financial covenant herein, the Borrower, the Banks and the
Agent shall use their best efforts to modify such covenant in order to account
for such change and to secure for the Banks the intended benefits of such
covenant.

SECTION 2. THE LOANS

2.1 Loans. Subject to the terms and conditions and relying upon the
representations and warranties herein set forth, each Bank, severally and not
jointly, agrees to make a Loan to the Borrower in the amount of such Bank's
Commitment; provided, however, that the failure of any Bank to make its Loan
shall not in itself relieve any other Bank of its obligation to lend hereunder
(it being understood, however, that no Bank shall be responsible for the failure
of any other Bank to make a Loan required to be made by such other Bank). The
Loans shall initially be Base Rate Loans, provided that they may be converted to
Eurodollar Loans in accordance with the provisions of this Agreement. Each Loan
shall be made on the Closing Date. Each Bank's Commitment shall terminate upon
the making of its Loan and the Borrower may not reborrow any amount of the Loan
which has been repaid.

2.2 General Provisions Regarding Loans. (a) Each Bank shall make the
Loan to be made by it hereunder on the Closing Date by wire transfer of
immediately available funds to the Agent in Philadelphia, Pennsylvania, not
later than 1:00 p.m., Philadelphia time, and the Agent shall by 3:00 p.m.,
Philadelphia time, credit the amounts so received to the general deposit account
of the Borrower with the Agent or, if the Loans shall not occur on such date
because any condition precedent herein specified shall not have been met, return
the amounts so received to the respective Banks. Unless the Agent shall have
received notice from a Bank prior to the Closing Date that such Bank will not
make available to the Agent such Bank's Loan, the Agent may assume that such
Bank has made such Loan available to the Agent on the Closing Date in accordance
with this paragraph (c) and the Agent may, in reliance upon such assumption,
make available to the Borrower on such date a corresponding amount. If and to
the extent that such Bank shall not have made such Loan available to the Agent,
such Bank and the Borrower severally agree to repay to the Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Agent at (i) in the case of the Borrower, the interest
rate applicable at the time to the Loans and (ii) in the case of such Bank, the
Federal Funds Effective Rate. If such Bank shall repay to the Agent such
corresponding amount, such amount shall constitute such Bank's Loan for purposes
of this Agreement.

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(b) All conversions and continuations of Loans hereunder and
all selections of Interest Periods hereunder shall be in such amounts and be
made pursuant to such elections so that, after giving effect thereto, (A) the
aggregate principal amount of the portion of the Loans comprising each Tranche
of Eurodollar Loans shall be equal to $500,000 or a whole multiple of $100,000
in excess thereof and (B) the Borrower shall not have outstanding at any one
time more than in the aggregate five (5) separate Tranches of Eurodollar Loans.

2.3 Fees. (a) The Borrower agrees to pay to the Agent for its own
account administrative and other fees at the times and in the amounts as the
Agent and the Borrower may agree from time to time (collectively, the "Fees").

(b) All Fees shall be paid on the dates due, in immediately
available funds, to the Agent. Once paid, none of the Fees shall be refundable
under any circumstances.

2.4 Notes; Repayment of Loans. The Loan made by each Bank shall be
evidenced by a single Note duly executed on behalf of the Borrower, dated the
Closing Date, in substantially the form attached hereto as Exhibit A with the
blanks appropriately filled, payable to such Bank in a principal amount equal to
the Loan made by such Bank. Each Note shall bear interest from the date thereof
on the outstanding principal balance thereof as set forth in Section 2.5. Each
Bank shall, and is hereby authorized by the Borrower to, endorse on the schedule
attached to the relevant Note held by such Bank (or on a continuation of such
schedule attached to each such Note and made a part thereof), or otherwise to
record in such Bank's internal records, an appropriate notation evidencing the
date and amount of the Loan of such Bank, each payment or prepayment of
principal of the Loan, and the other information provided for on such schedule;
provided, however, that the failure of any Bank to make such a notation or any
error therein shall not in any manner affect the obligation of the Borrower to
repay the Loan made by such Bank in accordance with the terms of the relevant
Note. The outstanding principal balance of each Loan, as evidenced by the
relevant Note, shall be payable on the Maturity Date and is subject to optional
and mandatory prepayment as provided in Section 2.7.

2.5 Interest on Loans. (a) Subject to the provisions of Section 2.6,
each Base Rate Loan shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 365 or 366 days, as the case may be) at a
rate per annum equal to the Base Rate.

(b) Subject to the provisions of Section 2.6, each Eurodollar
Loan shall bear interest (computed on the basis of the actual number of days
elapsed over a year of 360 days) at a rate per annum equal to the Eurodollar
Rate for the Interest Period in effect for such Eurodollar Loan plus one hundred
basis points (1.00%).

(c) Interest on each Loan shall be payable on each Interest
Payment Date applicable to such Loan; provided that, interest accruing on
overdue amounts pursuant to Section 2.6 shall be payable on demand as provided
in the Notes. The Eurodollar Rate and the Base Rate shall be determined by the
Agent, and such determination shall be conclusive absent error.

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2.6 Default Rate; Additional Interest; Alternate Rate of Interest. (a)
To the extent not contrary to any Requirement of Law, upon the occurrence and
during the continuation of an Event of Default, any principal, past due
interest, fee or other amount outstanding hereunder shall, at the option of the
Required Banks, bear interest for each day thereafter until paid in full (after
as well as before judgment) at a rate per annum which shall be equal to two
percent (2%) above the Base Rate (but in no event shall any such rate exceed the
maximum rate permitted by any Requirement of Law). The Borrower acknowledges
that such increased interest rate reflects, among other things, the fact that
such loans or other amounts have become a substantially greater risk given their
default status and that the Banks are entitled to additional compensation for
such risk.

(b) In the event, and on each occasion, that on the day two
Business Days prior to the commencement of any Interest Period for a Eurodollar
Loan, the Agent shall have determined (which determination absent manifest error
shall be conclusive and binding upon the Borrower) that dollar deposits in the
principal amount of such Eurodollar Loan are not generally available in the
London Interbank Market, or that the rate at which such dollar deposits are
being offered will not adequately and fairly reflect the cost to the Banks of
making or maintaining the principal amount of such Eurodollar Loan during such
Interest Period, or that reasonable means do not exist for ascertaining the
Eurodollar Rate, the Agent shall, as soon as practicable thereafter, give
written, telegraphic or telephonic notice of such determination to the Borrower
and the Banks, and any request by the Borrower for a Eurodollar Loan or for
conversion to or maintenance of a Eurodollar Loan pursuant to the terms of this
Agreement shall be deemed a request for a Base Rate Loan. After such notice
shall have been given and until the circumstances giving rise to such notice no
longer exist, each request for a Eurodollar Loan shall be deemed to be a request
for a Base Rate Loan. Each determination by the Agent hereunder shall be
conclusive absent manifest error.

2.7 Optional and Mandatory Prepayments of Loans. (a) The Borrower shall
have the right at any time and from time to time to prepay the Loans, in whole
or in part, without premium or penalty (but in any event subject to Section
2.11), upon prior written, telecopy or telephonic notice to the Agent given no
later than 11:00 a.m., Philadelphia time, one Business Day before any proposed
prepayment; provided, however, that each such partial prepayment of Loans shall
be in the principal amount of at least $500,000 or in whole multiples of
$100,000 in excess thereof.

(b) Promptly upon receipt by the Borrower of any Net Proceeds
from the issuance of Capital Stock of the Borrower or the incurrence by the
Borrower of indebtedness for borrowed money (other than under operating lines of
credit), the Borrower shall pay to the Agent 100% of such Net Proceeds. Such
payments shall be applied by the Agent to the prepayment of the Loans then
outstanding, without premium or penalty (but in any event subject to Section
2.11). The Borrower shall give the Agent no later than 11:00 a.m., Philadelphia
time, one Business Day's prior written, telecopy or telephonic notice of each
prepayment pursuant to this clause (b) setting forth the date and expected
amount thereof. All prepayments of the Loans under this clause (b) shall be
applied to Base Rate Loans then outstanding and the balance, if any, shall be
applied to Eurodollar Loans then outstanding, with payments applied to
Eurodollar Loans being applied in order of next maturing Interest Periods.

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(c) Each notice of prepayment shall specify the prepayment
date and the principal amount of the Loans to be prepaid, shall be irrevocable
and shall commit the Borrower to prepay such Loans (or portion thereof) by the
amount stated therein. All prepayments under this Section on other than Base
Rate Loans shall be accompanied by accrued interest on the principal amount
being prepaid to the date of prepayment. No prepayments of the Loans, whether
optional or mandatory, may be reborrowed by the Borrower.

2.8 Illegality. Notwithstanding any other provision herein, if any
change in any Requirement of Law or in the interpretation or application thereof
shall make it unlawful for any Bank to make or maintain Eurodollar Loans as
contemplated by this Agreement, (a) the commitment of such Bank hereunder to
make Eurodollar Loans, continue Eurodollar Loans as such and convert Base Rate
Loans to Eurodollar Loans shall forthwith be cancelled and (b) the portion of
such Bank's Loan then outstanding as Eurodollar Loans, if any, shall be
converted automatically to Base Rate Loans on the respective last days of the
then current Interest Periods with respect to such Loan or within such earlier
period as required by law. If any such conversion of a Eurodollar Loan occurs on
a day which is not the last day of the then current Interest Period with respect
thereto, the Borrower shall pay to such Bank such amounts, if any, as may be
required pursuant to Section 2.11.

2.9 Requirements of Law. (a) In the event that any change in any
Requirement of Law or in the interpretation, or application thereof or
compliance by any Bank with any request or directive (whether or not having the
force of law) from any central bank or other Governmental Authority made
subsequent to the date hereof: 

(i) shall subject any Bank to any tax of any
kind whatsoever with respect to this Agreement, any Note or any
Eurodollar Loan made by it, or change the basis of taxation of payments
to such Bank in respect thereof (except for taxes covered by Section
2.12 and changes in the rate of tax on the overall net income, gross
receipts or revenue of such Bank);

(ii) shall impose, modify or hold applicable
any reserve, special deposit or similar requirement against assets held
by, deposits or other liabilities in or for the account of, advances,
loans or other extensions of credit by, or any other acquisition of
funds by, any office of such Bank which is not otherwise included in
the determination of the interest rate on such Eurodollar Loan
hereunder; or

(iii) shall impose on such Bank any other
condition;

and the result of any of the foregoing is to increase the cost to such Bank, by
an amount which such Bank reasonably deems to be material, of making, converting
into, continuing or maintaining Eurodollar Loans or to reduce any amount
receivable hereunder in respect thereof then, in any such case, the Borrower
shall as promptly as practicable pay such Bank, upon its demand, any additional
amounts necessary to compensate such Bank for such increased cost or reduced
amount receivable; provided, that the Borrower shall not be liable for any such
amounts incurred by such Bank more than 180 days prior to the date of such
Bank's notification to the Borrower. If any Bank becomes entitled to claim any
additional amounts pursuant to this subsection, it shall as promptly as
practicable notify the Borrower, through the Agent, of the event by reason of
which it has become so entitled. A certificate describing in reasonable detail
the determination of any additional amounts payable pursuant to this subsection
submitted by such Bank, through the Agent, to the Borrower shall be conclusive
in the absence of manifest error. This covenant shall survive the termination of
this Agreement and the payment of the Notes and all other amounts payable
hereunder. If any amount is refunded to such Bank, such Bank will reimburse
Borrower for amounts paid in respect of the refunded amount.

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(b) In the event that any Bank shall have determined that any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Bank or any
corporation controlling such Bank with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof does or shall have the effect of
reducing the rate of return on such Bank's or such corporation's capital as a
consequence of its obligations hereunder to a level below that which such Bank
or such corporation could have achieved but for such change or compliance
(taking into consideration such Bank's or such corporation's policies with
respect to capital adequacy) by an amount reasonably deemed by such Bank to be
material, then from time to time, after submission as promptly as practicable by
such Bank to the Borrower (with a copy to the Agent) of a written request
therefor, the Borrower shall pay to such Bank such additional amount or amounts
as will compensate such Bank for such reduction.

(c) Each Bank agrees that it will use reasonable efforts in
order to avoid or to minimize, as the case may be, the payment by the Borrower
of any additional amount under subsections 2.9(a) and (b); provided, however,
that no Bank shall be obligated to incur any expense, cost or other amount in
connection with utilizing such reasonable efforts. Notwithstanding any other
provision of this Section 2.9, no Bank shall apply the provisions of subsections
2.9(a) or (b) hereof with respect to the Borrower if it shall not at the time be
the general policy or practice of the Bank exercising its rights hereunder to
apply the provisions similar to those of this Section 2.9 to other Borrower in
substantially similar circumstances under substantially comparable provisions of
other credit agreements.

2.10 Taxes. (a) All payments made by the Borrower under this Agreement
and the Notes shall be made free and clear of, and without deduction or
withholding for or on account of, any present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now
or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority, excluding, in the case of the Agent and each Bank, net
income taxes and franchise or gross receipts taxes (imposed in lieu of net
income taxes) imposed on the Agent or such Bank, as the case may be, as a result
of a present or former connection between the jurisdiction of the government or
taxing authority imposing such tax and the Agent or such Bank or any political
subdivision or taxing authority thereof or therein (all such non-excluded taxes,
levies, imposts, duties, charges, fees, deductions and withholdings being
hereinafter called "Taxes"). Except as provided in Section 2.10(c) and the
penultimate sentence of this Section 2.10(a), if any Taxes are required to be
withheld from any amounts payable to the Agent or any Bank hereunder or under
the Notes, the amounts so payable to the Agent or such Bank shall be increased
to the extent necessary to yield to the Agent or such Bank (after payment of all
Taxes) interest or any such other amounts payable hereunder at the rates or in
the amounts specified in this Agreement and the Notes. Whenever any Taxes are
payable by the Borrower, as promptly as possible thereafter the Borrower shall
send to the Agent for its own account or for the account of such Bank, as the
case may be, a certified copy of an original official receipt received by the
Borrower showing payment thereof. If the Borrower fails to pay any Taxes when
due to the appropriate taxing authority or fails to remit to the Agent the
required receipts or other required documentary evidence, the Borrower shall
indemnify the Agent and the Banks for any incremental taxes, interest or
penalties that may become payable by the Agent or any Bank as a result of any
such failure. If as a result of a payment by the Borrower of Taxes pursuant to
this subsection a Bank receives a tax benefit or tax savings such as by
receiving a credit against, refund of, or reduction in Taxes which such Bank
would not have received but for the payment by the Borrower of Taxes pursuant to
this subsection, then such Bank shall promptly pay to the Borrower the amount of
such credit, refund, reduction or any other similar item. The agreements in this
subsection shall survive the termination of this Agreement and the payment of
the Notes and all other amounts payable hereunder.

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(b) Each Bank that is not incorporated under the laws of the
United States of America or a state thereof agrees that it will deliver to the
Borrower and the Agent (i) two duly completed copies of United States Internal
Revenue Service Form W-8ECI or W-8BEN or successor applicable form, as the case
may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor
applicable form. Each such Bank also agrees to deliver to the Borrower and the
Agent two further copies of the said Form W-8ECI or W-8BEN and Form W-8 or W-9,
or successor applicable forms or other manner of certification, as the case may
be, on or before the date that any such form expires or becomes obsolete or
after the occurrence of any event requiring a change in the most recent form
previously delivered by it to the Borrower, and such extensions or renewals
thereof as may reasonably be requested by the Borrower or the Agent, unless in
any such case an event (including, without limitation, any change in treaty, law
or regulation) has occurred prior to the date on which any such delivery would
otherwise be required which renders all such forms inapplicable or which would
prevent such Bank from duly completing and delivering any such form with respect
to it and such Bank so advises the Borrower and the Agent. Such Bank shall
certify (i) in the case of a Form W-8ECI or W-8BEN, that it is entitled to
receive payments under this Agreement without deduction or withholding of any
United States federal income taxes and (ii) in the case of a Form W-8 or W-9,
that it is entitled to an exemption from United States backup withholding tax.
Each Bank shall deliver to the Borrower and the Agent, with respect to Taxes
imposed by any Governmental Authority other than the United States of America,
similar forms, if available (or the information that would be contained in
similar forms if such forms were available), to the forms which are required to
be provided under this subsection with respect to Taxes of the United States of
America.

(c) The Borrower shall not be required to pay any additional
amounts to the Agent or any Bank in respect of payments of United States
withholding tax or other Taxes made by the Borrower which are consistent with
the forms and information delivered to the Borrower and the Agent or if the
payment of such amounts would not have arisen but for a failure by the Agent or
such Bank to comply with the requirements of subsection 2.10(b) or the Agent or
such Bank did not timely deliver to the Borrower the forms listed or described
in subsection 2.10(b) or did not take such other steps as reasonably may be
available to it under applicable tax laws and any applicable tax treaty or
convention to obtain an exemption from, or reduction (to the lowest applicable
rate) of, such United States withholding tax and other Taxes or, if such steps
were taken, the information was not timely and duly delivered to Borrower.

2.11 Indemnity. The Borrower agrees to indemnify each Bank and to hold
each Bank harmless from any loss or expense which such Bank may sustain or incur
as a consequence of (a) default by the Borrower in payment when due of the
principal amount of or interest on any Eurodollar Loan, (b) default by the
Borrower in making a borrowing of, conversion into or continuation of Eurodollar
Loans after the Borrower has given a notice requesting the same in accordance
with the provisions of this Agreement, (c) default by the Borrower in making any
prepayment after the Borrower has given a notice thereof in accordance with the
provisions of this Agreement or (d) the making of a prepayment of Eurodollar
Loans on a day which is not the last day of an Interest Period with respect
thereto, including, without limitation, in each case, any such loss or expense
arising from the reemployment of funds obtained by it or from fees payable to
terminate the deposits from which such funds were obtained. This covenant shall
survive the termination of this Agreement and the payment of the Notes and all
other amounts payable hereunder.

18

2.12 Pro Rata Treatment, etc. Except as required under Section 2.8,
each Borrowing, each payment or prepayment of principal of the Loans, each
payment of interest on the Loans, and each conversion of Loans shall be made pro
rata among the Banks in accordance with their respective Pro-Rata Percentages.

2.13 Payments. (a) The Borrower shall make each payment (including
principal of or interest on any Loan or any Fees or other amounts) hereunder not
later than 12:00 (noon), Philadelphia time, on the date when due in Dollars to
the Agent at its offices at 1600 Market Street, Philadelphia, Pennsylvania, or
at such other place as may be designated by the Agent, in immediately available
funds.

(b) Whenever any payment (including principal of or interest
on any Loan or any Fees or other amounts) hereunder shall become due, or
otherwise would occur, on a day that is not a Business Day, such payment may be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of interest or Fees, if applicable.

2.14 Conversion and Continuation Options. The Borrower shall have the
right at any time upon prior irrevocable notice to the Agent (i) not later than
11:00 a.m., Philadelphia time, on the Business Day of conversion, to convert any
Eurodollar Loan to a Base Rate Loan, (ii) not later than 11:00 a.m.,
Philadelphia time, three Business Days prior to conversion or continuation, (y)
to convert any Base Rate Loan into a Eurodollar Loan, or (z) to continue any
Eurodollar Loan as a Eurodollar Loan for any additional Interest Period, and
(iii) not later than 11:00 a.m., Philadelphia time, three Business Days prior to
conversion, to convert the Interest Period with respect to any Eurodollar Loan
to another permissible Interest Period, subject in each case to the following:

(a) a Eurodollar Loan may not be converted at a time other
than the last day of the Interest Period applicable thereto;

(b) any portion of a Loan maturing or required to be repaid in
less than one month may not be converted into or continued as a Eurodollar Loan;

(c) no Eurodollar Loan may be continued as such and no Base
Rate Loan may be converted to a Eurodollar Loan when any Default or Event of
Default has occurred and is continuing;

(d) any portion of a Eurodollar Loan that cannot be converted
into or continued as a Eurodollar Loan by reason of paragraph 2.14(b) or 2.14(c)
automatically shall be converted at the end of the Interest Period in effect for
such Loan to a Base Rate Loan;

19

(e) if by the third Business Day prior to the last day of any
Interest Period for Eurodollar Loans, the Borrower has failed to give notice of
conversion or continuation as described in this subsection, the Agent shall give
notice thereof to the Banks and such portion of the Loans shall be automatically
converted to Base Rate Loans on the last day of such then expiring Interest
Period; and

(f) each request by the Borrower to convert or continue any
portion of a Loan shall constitute a representation and warranty that each of
the representations and warranties made by the Borrower herein is true and
correct in all material respects on and as of such date as if made on and as of
such date.

Accrued interest on a Loan (or portion thereof) being converted shall be paid by
the Borrower at the time of conversion.

SECTION 3. REPRESENTATIONS AND WARRANTIES

To induce the Banks to enter into this Agreement, and to make
the Loans, the Borrower hereby represents and warrants to the Agent and each
Bank that:

3.1 Financial Condition. (a) The audited consolidated balance sheet of
the Borrower and its Subsidiaries as at December 31, 2001 and the related
consolidated statements of income and of cash flows for the fiscal year ended on
such date, and the consolidated balance sheet as at June 30, 2002 and the
statements of income and cash flow of the Borrower and its Subsidiaries for the
six month period ended June 30, 2002, copies of all of which have heretofore
been furnished to each Bank, present fairly the consolidated financial condition
of the Borrower as at such dates, and the consolidated results of its operations
and its consolidated cash flows for the periods covered thereby. All such
financial statements, including the related schedules and notes thereto, have
been prepared in accordance with GAAP applied consistently throughout the
periods involved. Neither the Borrower nor any of its Subsidiaries had, at the
date of the most recent balance sheet referred to above, any material Contingent
Obligation, liability for taxes, or any long-term lease or unusual forward or
long-term commitment, including, without limitation, any interest rate or
foreign currency swap or exchange transaction, which is required by GAAP to be
but is not reflected in the foregoing statements or in the notes thereto.

(b) (i) As of the Closing Date and after giving effect to this
Agreement and the Loans to be made on the Closing Date, the Borrower is
Solvent.

(ii) The Borrower does not intend to incur debts beyond
its ability to pay such debts as they mature, taking into account the
timing of and amounts of cash to be received by it and the timing of
the amounts of cash to be payable on or in respect of its Debt.

3.2 No Adverse Change. Since December 31, 2001, there has been no
development or event which has had a Material Adverse Effect.

3.3 Existence; Compliance with Law. The Borrower (a) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has the corporate power and authority, and the legal right, to
own and operate its property, to lease the property it operates as lessee and to
conduct the business in which it is currently engaged, (c) is duly qualified as
a foreign entity and in good standing under the laws of each jurisdiction where
its ownership, lease or operation of property or the conduct of its business
requires such qualification, except to the extent that the failure to be so
qualified would not, in the aggregate, have a Material Adverse Effect and (d) is
in compliance with all Requirements of Law the non-compliance with which would
have a Material Adverse Effect.

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3.4 Corporate Power; Authorization; Enforceable Obligations. The
Borrower has the corporate power, authority, and legal right, to make, deliver
and perform this Agreement, the Notes, the other Loan Documents to which it is a
party and the Purchase Agreement and to borrow hereunder and has taken all
necessary corporate action to authorize the borrowings on the terms and
conditions of this Agreement and the Notes and to authorize the execution,
delivery and performance of this Agreement, the Notes, the other Loan Documents
to which it is a party and the Purchase Agreement. No consent or authorization
of, filing with or other act by or in respect of, any Governmental Authority or
any other Person (including stockholders and creditors of the Borrower) is
required in connection with the borrowings hereunder or with the execution,
delivery, performance, validity or enforceability of this Agreement, the Notes,
the other Loan Documents or the Purchase Agreement. This Agreement and the
Purchase Agreement have been, and each Note and other Loan Document will be,
duly executed and delivered on behalf of the Borrower. Each of this Agreement
and the Purchase Agreement constitutes, and each Note and other Loan Document
when executed and delivered will constitute, a legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).

3.5 No Legal Bar. The execution, delivery and performance of this
Agreement, the Notes and the other Loan Documents and the Purchase Agreement by
the Borrower, the borrowings hereunder and the use of the proceeds thereof and
the purchase by the Borrower of its Capital Stock pursuant to the Purchase
Agreement will not violate any Requirement of Law or Contractual Obligation of
the Borrower or of any of the Subsidiaries and will not result in, or require,
the creation or imposition of any Lien on any of its or their respective
properties or revenues pursuant to any such Requirement of Law or Contractual
Obligation.

3.6 No Material Litigation. Except as set forth on Schedule 3.6, no
litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of the Borrower,
threatened against the Borrower or against any of the properties or revenues of
the Borrower or against any Plan (a) with respect to this Agreement, the Notes
or the other Loan Documents or any of the transactions contemplated hereby, or
(b) as to which there is a reasonable likelihood of an adverse determination and
which, if adversely determined, would have a Material Adverse Effect.

3.7 No Default. The Borrower is not in default under or with respect to
any of its Contractual Obligations, including without limitation, those under
the Purchase Agreement, in any respect which would have a Material Adverse
Effect. No Event of Default has occurred and is continuing.

21

3.8 Taxes. The Borrower has filed or caused to be filed all tax returns
which are required to be filed (or has obtained authorized extensions for such
filings) and has paid all taxes shown to be due and payable on said returns or
on any assessments made against it or any of its property and all other taxes,
fees or other charges imposed on it or any of its property by any Governmental
Authority (other than any the amount or validity of which are currently being
contested in good faith by appropriate proceedings and with respect to which
reserves in conformity with GAAP have been provided on the books of the
Borrower, as the case may be); no material tax Lien has been filed against the
Borrower, and, to the knowledge of the Borrower, no claim is being asserted,
with respect to any such tax, fee or other charges.

3.9 Federal Regulations. No part of the proceeds of any Loans will be
used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U or for any purpose which
violates the provisions of Regulation U. If requested by any Bank or the Agent,
the Borrower will furnish to the Agent and each Bank a statement to the
foregoing effect in conformity with the requirements of FR Form U-l referred to
in said Regulation U. No part of the proceeds of the Loans hereunder will be
used for any purpose which violates, or which is inconsistent with, the
provisions of Regulation X.

3.10 ERISA. (a) Each Plan has complied in all respects with the
applicable provisions of ERISA and the Code, except to the extent that failure
to so comply would not have a Material Adverse Effect. No prohibited transaction
or accumulated funding deficiency (each as defined in subsection 7(h)) or
Reportable Event has occurred with respect to any Single Employer Plan which
would have a Material Adverse Effect, except as disclosed on Schedule 3.10.

(b) The present value of all accrued benefits under each
Single Employer Plan maintained by the Borrower or a Commonly Controlled Entity
(based on those assumptions used to fund the Plans), as calculated on a
termination basis, did not, as of the last annual valuation date, exceed the
value of the assets of the Plans allocable to such benefits by an amount which
exceeds $1,000,000 or which would have a Material Adverse Effect.

(c) Neither the Borrower nor any Commonly Controlled Entity
has had a complete or partial withdrawal from any Multiemployer Plan for which
any liability remains unsatisfied which would exceed $500,000 or which, together
with liabilities referred in subsections (b) and (d) hereof, would exceed
$1,000,000 or which in either event would have a Material Adverse Effect, and
neither the Borrower nor any Commonly Controlled Entity would become subject
under ERISA to any liability which would exceed $250,000 or which, together with
other liabilities referred in subsections (b) and (d) hereof or this subsection
(c), would exceed $500,000 or which in either event would have a Material
Adverse Effect if the Borrower or such Commonly Controlled Entity were to
withdraw completely from any Multiemployer Plan as of the valuation date most
closely preceding the date this representation is made or deemed made. To the
best of the Borrower's knowledge, such Multiemployer Plans are neither in
Reorganization as defined in Section 4241 of ERISA nor Insolvent.

(d) The present value (determined using actuarial and other
assumptions which are reasonable in respect of the benefits provided and the
employees participating) of the liability of the Borrower and each Commonly
Controlled Entity for post-retirement benefits to be provided to their current
and former employees under Plans which are welfare benefit plans (as defined in
Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all
such Plans allocable to such benefits by an amount (i) which exceeds the amount
being recovered by the Borrower to cover such deficiency amortized over a twenty
year period as part of its revenue requirement as most recently approved by the
Pennsylvania Public Utility Commission or (ii) which together with liabilities
referred to in subsections (b) and (c) hereof would have a Material Adverse
Effect.

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3.11 Investment Company Act; Public Utility Holding Company Act. Except
as set forth on Schedule 3.11, the Borrower is not (a) an "investment company",
or a company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended; (b) a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of either a
"holding company" or a "subsidiary company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended, or (c) subject to any other
federal or state law or regulation which purports to restrict or regulate its
ability to borrow money.

3.12 Purpose of Loans. The proceeds of the Loans shall be used by the
Borrower solely to purchase the Capital Stock of the Borrower from one or more
of the Vivendi Entities pursuant to and in accordance with the terms of the
Purchase Agreement, a true and correct copy of which has been delivered to the
Agent.

3.13 Environmental Matters. To the best knowledge of the Borrower,
except as may be disclosed on Schedule 3.13 and except to the extent that the
aggregate cost of any remediation or other expense to the Borrower as a
consequence of the failure of any of the following representations to be true
and correct does not exceed $1,000,000, each of the representations and
warranties set forth in paragraphs (a) through (e) of this subsection is true
and correct with respect to each parcel of real property owned or operated by
the Borrower (the "Properties"):

(a) the Properties do not contain, and have not previously
contained, in, on, or under, including, without limitation, the soil and
groundwater thereunder, any Materials of Environmental Concern in concentrations
which violate Environmental Laws;

(b) the Properties and all operations and facilities at the
Properties are in compliance with Environmental Laws in all material respects,
and there is no Materials of Environmental Concern contamination or violation of
any Environmental Law which would materially interfere with the continued
operation of any of the Properties or materially impair the fair saleable value
of any thereof;

(c) the Borrower has not received any written complaint,
notice of violation, alleged violation, investigation or advisory action or of
potential liability or of potential responsibility regarding a violation of
Environmental Law or permit compliance with regard to the Properties, nor is the
Borrower aware that any Governmental Authority is contemplating delivering to
the Borrower any such notice;

(d) Materials of Environmental Concern have not been
generated, treated, stored, disposed of, at, on or under any of the Properties,
nor have any Materials of Environmental Concern been transferred from the
Properties to any other location except in either case in the ordinary course of
business of the Borrower and in material compliance with all Environmental Laws;
and

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(e) there are no governmental, administrative actions or
judicial proceedings pending or contemplated under any Environmental Laws to
which the Borrower or any of its Subsidiaries is or will be named as a party
with respect to the Properties, nor are there any consent decrees or other
decrees, consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any Environmental Law
with respect to any of the Properties.

3.14 Patents, Trademarks, etc. The Borrower has obtained and holds in
full force and effects all patents, trademarks, servicemarks, trade names,
copyrights or licenses therefor and other such rights, free from burdensome
restrictions, which are necessary for the operation of its business as presently
conducted. To the Borrower's best knowledge, no material product, process,
method, substance, part or other material presently sold by or employed by the
Borrower in connection with such business infringes any patent, trademark,
service mark, trade name, copyright, license or other right owned by any other
Person so as to have a Material Adverse Effect. There is not pending or, to the
Borrower's knowledge, threatened any claim or litigation against or affecting
the Borrower contesting its right to sell or use any such product, process,
method, substance, part or other material.

3.15 Ownership of Property. The Borrower has good and marketable fee
simple title to or valid leasehold interests in all real property owned or
leased by the Borrower (except in the case of certain properties not material to
its business as to which its title was obtained by quit-claim or special
warranty deed), and good title to all of its personal property subject to no
Lien of any kind except Liens permitted hereby. The Borrower enjoys peaceful and
undisturbed possession under all of its respective material leases.

3.16 Licenses, etc. The Borrower has obtained and holds in full force
and effect, all franchises, licenses, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights, consents and
approvals which are necessary for the operation of its business as presently
conducted.

3.17 No Burdensome Restrictions. The Borrower is not a party to any
agreement or instrument or subject to any other Contractual Obligation or any
charter or corporate restriction or any provision of any applicable law, rule or
regulation which, to the best of the Borrower's knowledge, individually or in
the aggregate, could reasonably be expected to have a Material Adverse Effect.

3.18 Labor Matters. The Borrower has not suffered any strikes,
walkouts, work stoppages or other material labor difficulty within the last five
years and to the best of the Borrower's knowledge, there are none now
threatened.

3.19 Partnerships. Except as disclosed on Schedule 3.19, as of the
Closing Date, the Borrower is not a partner in any partnership or in any joint
venture.

3.20 No Material Misstatements. To the best of the Borrower's
knowledge, no information, report, financial statement, exhibit or schedule
furnished by or on behalf of the Borrower to the Agent or any Bank in connection
with the negotiation of this Agreement or any Note or other Loan Document or
included therein contains any misstatement of fact, or omitted or omits to state
any fact necessary to make the statements therein not misleading, where such
misstatement or omission would in the Borrower's judgment be material to the
interests of the Banks with respect to the Borrower's performance of its
obligations hereunder.

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All of the foregoing representations and warranties shall survive the
execution and delivery of the Notes and the making by the Banks of the Loans
hereunder.

SECTION 4. CONDITIONS PRECEDENT; CLOSING

4.1 Conditions to Closing. The agreement of each Bank to enter into
this Agreement and make its Loan hereunder is subject to the satisfaction,
immediately prior to or concurrently with such Loan, of the following conditions
precedent:

(a) Loan Documents. The Agent shall have received (i) this
Agreement, executed and delivered by a duly authorized officer of the Borrower,
with a counterpart for each Bank, and (ii) for the account of each Bank, a Note
conforming to the requirements hereof and executed by a duly authorized officer
of the Borrower.

(b) Corporate Proceedings of the Borrower. The Agent shall
have received a copy of the resolutions or other corporate proceedings or
action, in form and substance satisfactory to the Agent, taken on behalf of the
Borrower authorizing (i) the execution, delivery and performance of this
Agreement, the Notes, the other Loan Documents to which it is a party and the
Purchase Agreement, and (ii) the borrowings contemplated hereunder, certified by
a Responsible Officer of the Borrower as of the Closing Date, which certificate
shall state that such resolutions, or other proceedings or action thereby
certified have not been amended, modified, revoked or rescinded and shall be in
form and substance satisfactory to the Agent.

(c) Representations and Warranties True; No Default. The
representations and warranties of the Borrower contained in Section 3 hereof
shall be true and accurate on and as of the Closing Date in all material
respects with the same effect as though such representations and warranties had
been made on and as of such date (except representations and warranties which
relate solely to an earlier date or time, which representations and warranties
shall be true and correct on and as of the specific dates or times referred to
therein), and the Borrower shall have performed and complied with all covenants
and conditions hereof; and no Event of Default or Default under this Agreement
shall have occurred and be continuing or shall exist.

(d) Corporate Documents. The Agent shall have received, with a
counterpart for each Bank, true and complete copies of (i) the articles of
incorporation and bylaws of the Borrower, certified as of the Closing Date as
complete and correct copies thereof by a Responsible Officer of the Borrower;
and (ii) good standing certificates issued by the Secretaries of State (or the
equivalent thereof) of each state in which the Borrower has been formed or is
required to be qualified to transact business no earlier than thirty days prior
to the Closing Date.

(e) Incumbency. The Agent shall have received a written
certificate dated the Closing Date by a Responsible Officer of the Borrower as
to the names and signatures of the officers of the Borrower authorized to sign
this Agreement and the other Loan Documents. The Agent may conclusively rely on
such certificate until it shall receive a further certificate by a Responsible
Officer of the Borrower amending such prior certificate.

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(f) Fees. The Borrower shall have paid or caused to be paid to
the Agent (i) all Fees then due hereunder and (ii) all other fees and expenses
due and payable hereunder on or before the Closing Date (if then invoiced),
including without limitation the reasonable fees and expenses of counsel to the
Agent.

(g) Legal Opinion. The Agent shall have received, with a
counterpart for each Bank, the executed legal opinion of the Executive Vice
President, General Counsel and Secretary of the Borrower, addressed to the Banks
and satisfactory in form and substance to the Agent and its counsel covering
such matters incident to the transactions contemplated by this Agreement and the
Purchase Agreement as the Agent may reasonably require. The Borrower hereby
directs such counsel to deliver such opinion, upon which the Banks and the Agent
may rely.

(h) No Material Adverse Change. There shall be no material
adverse change in the business, operations, Property, prospects or financial or
other condition of the Borrower nor any material change in the management of the
Borrower or an event which would cause or constitute a Material Adverse Effect;
and there shall be delivered to the Agent for the benefit of each Bank a
certificate dated the Closing Date and signed on behalf of the Borrower by a
Responsible Officer to each such effect.

(i) No Litigation. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain or
prohibit, or to obtain damages in respect of this Agreement or the consummation
of the transactions contemplated hereby or which, in the Agent's sole
discretion, would make it inadvisable to consummate the transactions
contemplated by this Agreement or by the Purchase Agreement.

(j) Evidence of Insurance. The Borrower shall have provided to
each of the Banks copies of the evidence of insurance required by subsection
5.5(b).

(k) Evidence of Regulatory Approval. The Borrower shall have
provided to the Agent a copy of each and every authorization, permit, consent,
and approval of and other actions by, and notice to and filing with, every
Governmental Authority which is required to be obtained or made by the Borrower
for the due execution, delivery and performance of this Agreement and the other
Loan Documents, if any.

(l) Purchase Agreement. All conditions for the purchase of the
Capital Stock of the Borrower pursuant to the Purchase Agreement, including any
and all required approvals of any Governmental Authority, shall have been
satisfied and the Agent shall have received evidence satisfactory to it that
such purchase has been consummated simultaneously with the making of the Loans.

(m) Additional Documents. The Agent shall have received such
additional documents, certificates and information as the Agent may require
pursuant to the provisions hereof or as the Agent may otherwise reasonably
request.

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4.2 Closing. The closing (the "Closing") of the transactions
contemplated hereby shall take place at the offices of Ballard Spahr Andrews &
Ingersoll, LLP, commencing at 10:00 a.m., Philadelphia time, on October 25, 2002
or such other place or date as to which the Agent, the Banks and the Borrower
shall agree. The date on which the Closing shall be completed is referred to
herein as the "Closing Date".

SECTION 5. AFFIRMATIVE COVENANTS

The Borrower hereby agrees that, so long as any Note remains
outstanding and unpaid or any other amount is owing to any Bank or the Agent
hereunder, the Borrower shall:

5.1 Financial Statements. Furnish to each Bank (i) within 60 days after
the end of each of the first three fiscal quarters of each fiscal year a
consolidated balance sheet of the Borrower and its Subsidiaries as of the end of
each such fiscal quarter and statements of income for the period from the
beginning of such fiscal year to the end of such fiscal quarter, and (ii) within
120 days after the end of each fiscal year a consolidated balance sheet of the
Borrower and its Subsidiaries as of the end of each fiscal year and statements
of income, statements of retained earnings and cash flow for such fiscal year.
All financial statements will be prepared in accordance with GAAP applied on a
basis consistently maintained throughout the period involved and with the prior
periods, such annual financial statements to be certified by independent
certified public accountants selected by the Borrower and reasonably acceptable
to the Agent, without any exception or qualification arising out of the
restricted or limited nature of the examination made by such accountants.

5.2 Certificates; Other Information. Furnish to each Bank:

(a) concurrently with the delivery of the financial statements
referred to in subsection 5.1, a certificate on behalf of the Borrower executed
by a Responsible Officer, (i) showing in detail the calculations supporting such
statements in respect of Section 6.1; and (ii) stating that, to the best of his
or her knowledge, the Borrower during such period has kept, observed, performed
and fulfilled each and every covenant and condition contained in this Agreement
and in the Notes and the other Loan Documents applicable to it and that he or
she obtained no knowledge of any Default or Event of Default except as
specifically indicated; and

(b) promptly, such forecasts and additional financial and
other information as any Bank or the Agent may from time to time reasonably
request.

5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all its
obligations of whatever nature, except (x) in the case of indebtedness other
than that described in subsection 7.1(f), when the amount or validity thereof is
currently being contested in good faith by appropriate proceedings and reserves
in conformity with GAAP with respect thereto have been provided on the books of
the Borrower or (y) where the failure so to pay such indebtedness is in the
normal course of the Borrower's business as now conducted and would not have a
Material Adverse Effect.

5.4 Conduct of Business and Maintenance of Existence. Subject to
Section 6.4 hereof, continue to engage in business of the same general type as
now conducted by it and preserve, renew and keep in full force and effect its
corporate existence and, except to the extent that failure to do so would not
have a Material Adverse Effect, take all reasonable action to maintain all
rights, privileges, trademarks, trade names, licenses, franchises and other

27

authorizations necessary or desirable in the normal conduct of its business;
comply with all Contractual Obligations and Requirements of Law except to the
extent that failure to comply therewith would not reasonably be expected to
have, in the aggregate, a Material Adverse Effect.

5.5 Maintenance of Property; Insurance. (a) Maintain in good repair,
working order and condition (ordinary wear and tear excepted) in accordance with
the general practice of other businesses of similar character and size, all of
those properties material or necessary to its business, and from time to time
make or cause to be made all appropriate repairs, renewals or replacements
thereof.

(b) Insure its properties and assets against loss or damage by
fire and such other insurable hazards as such assets are commonly insured
(including fire, extended coverage, property damage, worker's compensation,
public liability and business interruption insurance) and against other risks
(including errors and omissions) in such amounts as similar properties and
assets are insured by prudent companies in similar circumstances carrying on
similar businesses, and with reputable and financially sound insurers, including
self-insurance to the extent customary. The Borrower shall deliver at the
request of the Agent from time to time a summary schedule indicating all
insurance then in force with respect to the Borrower.

5.6 Inspection of Property; Books and Records; Discussions. (a) Permit
any of the officers or authorized employees or representatives of the Agent or
any of the Banks to visit and inspect during normal business hours any of its
properties and to examine and make excerpts from its books and records and
discuss its business affairs, finances and accounts (including those of its
Affiliates) with its officers, all in such detail and at such times and as often
as any of the Banks may reasonably request, provided that each Bank shall
provide the Borrower and the Agent with reasonable notice prior to any visit or
inspection. In the event Required Banks desire to conduct an audit of the
Borrower (to which the Borrower hereby consents), such Banks shall make a
reasonable effort to conduct such audit contemporaneously with any audit to be
performed by the Agent.

(b) Maintain and keep proper books of record and account which
enable the Borrower to issue financial statements in accordance with GAAP and as
otherwise required by applicable Requirements of Law, and in which full, true
and correct entries shall be made in all material respects of all its dealings
and business and financial affairs.

5.7 Notices. Promptly, upon the Borrower becoming aware, give notice to
the Agent and each Bank of:

(a) the occurrence of any Default or Event of Default;

(b) any (i) default or event of default under any Contractual
Obligation of the Borrower, including, without limitation, the Purchase
Agreement, or (ii) litigation, investigation or proceeding which may exist at
any time between the Borrower and any Governmental Authority, which in either
case, if not cured or if adversely determined, as the case may be, would have a
Material Adverse Effect;

28

(c) any litigation or proceeding which, if adversely
determined, would have a Material Adverse Effect;

(d) the following events, as soon as possible and in any event
within 30 days after the Borrower knows or has reason to know thereof: (i) the
occurrence of any Reportable Event with respect to any Single Employer Plan, or
any withdrawal from, or the termination, Reorganization or Insolvency of any
Multiemployer Plan which may, individually or in the aggregate, result in a
liability which would have a Material Adverse Effect or (ii) the institution of
proceedings or the taking of any other action by the PBGC or the Borrower or any
Commonly Controlled Entity or any Multiemployer Plan with respect to the
withdrawal from, or the terminating, Reorganization or Insolvency of, any Single
Employer Plan in a distress termination under Section 4041(c) of ERISA or
Multiemployer Plan; and

(e) an event which has had a Material Adverse Effect.

Each notice pursuant to this Section shall be accompanied by a statement of the
Borrower, executed on its behalf by a Responsible Officer, setting forth details
of the occurrence referred to therein and stating what action the Borrower
propose to take with respect thereto.

5.8 Environmental Laws. (a) Comply with, and require compliance by all
tenants and to the extent possible, all subtenants, if any, with, all
Environmental Laws and obtain and comply with and maintain, and require that all
tenants and to the extent possible, all subtenants obtain and comply with and
maintain, any and all licenses, approvals, registrations or permits required by
Environmental Laws except to the extent that failure to so comply or obtain or
maintain such documents would not have a Material Adverse Effect.

(b) Except as set forth in Schedule 3.13, comply with all
lawful and binding orders and directives of all Governmental Authorities
respecting Environmental Laws except to the extent that failure to so comply
would not have a Material Adverse Effect.

(c) Defend, indemnify and hold harmless the Agent and the
Banks, and their respective employees, agents, officers and directors, from and
against any claims, demands, penalties, fines, liabilities, settlements,
damages, costs and expenses of whatever kind or nature known or unknown,
contingent or otherwise, arising out of, or in any way relating to the violation
of or noncompliance with any Environmental Laws applicable to the real property
owned or operated by the Borrower, or any orders, requirements or demands of
Governmental Authorities related thereto, including, without limitation,
attorneys' and consultants' fees, investigation and laboratory fees, court costs
and litigation expenses, except to the extent that any of the foregoing arise
out of the negligence or willful misconduct of any of the foregoing enumerated
parties.

5.9 Taxes. Pay when due all taxes, assessments and governmental charges
imposed upon it or any of its properties or that it is required to withhold and
pay over, except where contested in good faith and where adequate reserves have
been set aside to the extent required under GAAP.

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SECTION 6. NEGATIVE COVENANTS

The Borrower hereby agrees that, so long as any Note remains
outstanding and unpaid or any other amount is owing to any Bank or the Agent
hereunder, the Borrower shall not directly or indirectly:

6.1 Financial Covenants.

(a) Debt to Capitalization Ratio. Permit as of the end of any
fiscal quarter the Debt to Capitalization Ratio to be greater than sixty five
percent (65%).

(b) Interest Coverage Ratio. Permit as of the end of any
fiscal quarter the Interest Coverage Ratio to be less than 2.0 to 1.

6.2 Limitation on Debt. At any time incur, create, assume, or suffer to
exist any Debt except:

(i) amounts outstanding hereunder as Loans;

(ii) Debt existing as of the date hereof described on
Schedule 6.2 (including any extensions or renewals or refinancings
thereof provided there is no increase in the amount thereof or other
significant change in the terms thereof);

(iii) Subordinated Debt;

(iv) Debt to commercial banks under lines of credit
in an aggregate outstanding amount of up to $37,000,000;

(v) intercompany indebtedness to the extent permitted
by Section 6.8; and

(vi) other indebtedness incurred in the ordinary
course of business for the purchase of capital assets.

6.3 Limitation on Liens. Create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, including, without
limitation, the stock of its Subsidiaries, whether now owned or hereafter
acquired, except for:

(a) The following (i) if the validity or amount thereof is
being contested in good faith by appropriate and lawful proceedings diligently
conducted so long as levy and execution thereon have been stayed and continue to
be stayed or (ii) if a final judgment is entered and such judgment is discharged
within thirty (30) days of entry, and in either case they do not materially
impair the ability of the Borrower to perform its obligations hereunder or under
the other Loan Documents:

(A) Claims or Liens for taxes, assessments
or charges due and payable and subject to interest or penalty, provided
that the Borrower maintains such reserves or other appropriate
provisions as shall be required by GAAP and pays all such taxes,
assessments or charges forthwith upon the commencement of proceedings
to foreclose any such Lien;

30

(B) Claims, Liens or encumbrances upon, and
defects of title to, real or personal property including any attachment
of personal or real property or other legal process prior to
adjudication of a dispute on the merits; and

(C) Claims or Liens of mechanics,
materialmen, warehousemen, carriers, or other statutory nonconsensual
Liens;

(b) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security legislation;

(c) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business of the Borrower;

(d) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not interfere with the
ordinary conduct of the business of the Borrower;

(e) Liens which were in existence on the date hereof and shown
on Schedule 6.3 and replacements, extensions or replacements thereof;

(f) Liens on assets acquired by the Borrower in acquisitions
permitted by Section 6.6 (which liens were in existence at the time of such
acquisitions);

(g) Liens upon real property, which property was acquired
after the Closing Date by the Borrower, each of which Liens existed on such
property before the time of its acquisition or was created to finance, refinance
or refund the cost (including the cost of construction) of the respective
property; provided, however, that no such Lien shall extend to or cover any
accounts receivable or inventory under any circumstances or any property of the
Borrower other than the respective property so acquired and improvements
thereon, and the principal amount of indebtedness secured by any such Lien shall
not exceed the fair market value of the respective property at the time it was
acquired;

(h) Capital Leases as and to the extent permitted under this
Agreement; and

(i) Purchase Money Security Interests in capital equipment
purchased in the ordinary course of business.

6.4 Limitations on Fundamental Changes. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets except that:

(a) any Subsidiary of the Borrower may be merged or
consolidated with or into the Borrower (provided that the Borrower shall be the
continuing or surviving corporation); and

31

(b) any corporation or limited liability company may be merged
or consolidated with or into the Borrower in connection with a Permitted
Acquisition in accordance with Section 6.6 in which the continuing or surviving
entity is the Borrower;

provided that, immediately after each such transaction and after giving effect
thereto, the Borrower is in compliance with this Agreement and no Default or
Event of Default shall be in existence or result from such transaction.

6.5 Limitation on Sale of Assets. Convey, sell, lease, assign, transfer
or otherwise dispose of any of its property, business or assets (including,
without limitation, accounts receivable and leasehold interests and Capital
Stock or other equity interests in any Subsidiary), whether now owned or
hereafter acquired, except:

(i) the sale, transfer or other disposition of
obsolete or worn out property in the ordinary course of business;

(ii) the sale or lease of inventory or other assets,
or the licensing of intellectual property, in each case in the ordinary
course of business;

(iii) any sale, transfer or lease of assets (i) which
are replaced by like-kind assets or (ii) the proceeds of the sale of
which are used within one-hundred and twenty (120) days of such sale to
purchase like-kind assets;

(iv) any sale, transfer or lease of assets the
proceeds of the sale of which are used to prepay the Loans; and

(v) in addition to the above subsections 6.5(a)(i)
through 6.5(a)(iv), inclusive, any such conveyances, sales, leases,
assignments, transfers or other disposals, the aggregate amount of
which for any fiscal year does not exceed 5% of the Borrower's
Consolidated Shareholders' Equity as at the end of the immediately
preceding fiscal year.

6.6 Limitation on Acquisitions, Investments, Loans and Advances.
Purchase, hold or acquire beneficially any stock, other securities or evidences
of indebtedness of, or all or a substantial amount of the assets of, make or
permit to exist any loans or advances to, or make or permit to exist any
investment or acquire any interest whatsoever in, any other Person, except:

(a) extensions of trade credit to customers in the ordinary
course of business;

(b) Permitted Investments;

(c) loans and advances to or other investments in any
Wholly-Owned Subsidiary;

(d) loans and advances to employees of the Borrower for travel
and entertainment expenses in the ordinary course of business; and

(e) Permitted Acquisitions.

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6.7 No Negative Pledge or Other Restrictions.(a) Enter into any
agreement after the date hereof with any Person other than the Agent on behalf
of the Banks pursuant to which the Borrower covenants or agrees to a prohibition
upon creating, incurring, or suffering any Lien upon any of its properties,
assets or revenues, whether now owned or hereafter acquired, except in
connection with a Capital Lease or Purchase Money Security Interest, in which
case such agreement shall be permitted but only with respect to the specific
asset or assets subject to such Capital Lease or Purchase Money Security
Interest or

(b) Permit any Subsidiary to enter into any agreement after
the date hereof with any Person pursuant to which such Subsidiary agrees to any
limitation or restriction on its ability to declare and pay dividends or
otherwise make Distributions directly or indirectly to the Borrower in respect
of the Capital Stock of such Subsidiary owned directly or indirectly by the
Borrower.

6.8 Transactions with Affiliates. Except as expressly permitted in this
Agreement, directly or indirectly enter into any transaction or arrangement
whatsoever or make any payment to or otherwise deal with any Affiliate, except
(i) as to all of the foregoing, in the ordinary course of and pursuant to the
reasonable requirements of the Borrower's business and upon fair and reasonable
terms no less favorable to the Borrower than would be obtained in a comparable
arm's length transaction with a Person not an Affiliate of the Borrower, and
(ii) intercompany loans among the Borrower and its Subsidiaries in the ordinary
course of and pursuant to the reasonable requirements of the Borrower's or any
such Subsidiary's business.

6.9 Sale and Leaseback. Except if reasonably contemporaneous with the
Borrower's purchase, enter into any arrangement with any Person providing for
the leasing by the Borrower of real or personal property which has been or is to
be sold or transferred by such Borrower to such Person or to any other Person to
whom funds have been or are to be advanced by such Person on the security of
such property or rental obligations of such Borrower.

6.10 Fiscal Year. Permit its Fiscal Year to end on a day other than
December 31.

6.11 Continuation of or Change in Business. Discontinue any substantial
part, or change the nature of, the existing business activities of the Borrower,
or engage in any business either directly or through any Subsidiary except for
businesses in which the Borrower is engaged on the date of this Agreement and
any business activities directly related, similar or incidental or ancillary to
such existing businesses.

SECTION 7. EVENTS OF DEFAULT

7.1 Events of Default. If any of the following events shall occur and
be continuing:

(a) The Borrower shall fail to pay when due any principal of
any Note, or shall fail to pay within five (5) days after the date when due any
interest, Fees or other amount payable hereunder; or

(b) Any representation or warranty made or deemed made by the
Borrower herein or in any other Loan Document or which is contained in any
certificate, document or financial or other statement furnished at any time
under or in connection with this Agreement shall prove to have been incorrect in
any material respect on or as of the date made or deemed made; or

33

(c) The Borrower shall default in the observance or
performance of any agreement contained in Section 6; or

(d) The Borrower shall default in the observance or
performance of any other agreement contained in this Agreement (other than as
provided in paragraphs (a), (b) or (c) of this Section 7.1) or any other Loan
Document, and such default shall continue unremedied for a period of thirty (30)
days after notice of such default is given by the Agent; or

(e) One or more judgments or decrees shall be entered against
the Borrower involving in the aggregate a liability (not paid or fully covered
by insurance) of $1,000,000 or more and all such judgments or decrees shall not
have been vacated, discharged, settled, satisfied or paid, or stayed or bonded
pending appeal, within thirty (30) days from the entry thereof; or

(f) The Borrower or any of its Subsidiaries shall (i) default
in the payment of any amount due under any Debt of the Borrower or any such
Subsidiary in excess of $1,000,000 in the aggregate (other than the Notes),
beyond the period of grace, if any, provided in the instrument or agreement
under which such Debt was created; or (ii) default in the observance or
performance of any other agreement contained in any such Debt or in any
instrument or agreement evidencing, securing or relating thereto beyond any
applicable notice and grace period, or any other event shall occur the effect of
which default or other event is to cause, or to permit the holder or holders or
beneficiary or beneficiaries of such Debt (or a trustee or agent on behalf of
such holder or holders or beneficiary or beneficiaries) to cause such Debt to
become due and payable prior to its stated maturity or any such Debt is declared
to be due and payable prior to its stated maturity unless such default, event or
declaration referred to in this subparagraph (ii) is waived or cured to the
satisfaction of such other party as demonstrated to the satisfaction of the
Agent by the Borrower prior to the Agent taking any action under Section 7.2 in
respect of such occurrence; or

(g) (i) The Borrower shall commence any case, proceeding or
other action (A) under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
other relief with respect to it or its debts, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Borrower shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against the
Borrower any case, proceeding or other action of a nature referred to in clause
(i) above which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or unbonded
for a period of sixty (60) days; or (iii) there shall be commenced against the
Borrower any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process on a claim in excess of
$1,000,000 against all or any substantial part of its assets which results in
the entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within sixty (60) days from the
entry thereof; or (iv) the Borrower shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clause (i), (ii), or (iii) above; or (v) the Borrower shall generally
not, or shall be unable to, or shall admit in writing its inability to, pay its
debts as they become due; or

34

(h) (i) Any Person shall engage in any "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan, (ii) any "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived, shall exist with respect to any
Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall
commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate, any Single Employer Plan, which Reportable Event or
institution of proceedings is, in the reasonable opinion of the Required Banks,
likely to result in the termination by action of the PBGC or any court of such
Plan for purposes of Title IV of ERISA, or (iv) any Single Employer Plan shall
terminate for purposes of Title IV of ERISA; and in each case in clauses (i)
through (iv) above, such event or condition, together with all other such events
or conditions, if any would have a Material Adverse Effect; or

(i) Any Change of Control shall occur; or

(j) Any of the Loan Documents shall cease to be legal, valid
and binding agreements enforceable against the party executing the same or such
party's successors and assigns (as permitted under the Loan Documents) in
accordance with the respective terms thereof or shall in any way be terminated
(except in accordance with its terms) or become or be declared ineffective or
inoperative or shall in any way be challenged and thereby deprive or deny the
Banks and the Agent the intended benefits thereof or they shall thereby cease
substantially to have the rights, titles, interests, remedies, powers or
privileges intended to be created thereby; or

(k) A notice of lien or assessment in excess of $1,000,000 is
filed of record with respect to all or any part of the Borrower's assets having
a value of at least that amount by the United States, or any department, agency
or instrumentality thereof, or by any state, county, municipal, or other
governmental agency, including, without limitation, the PBGC, becomes payable
and the same is not paid, vacated, bonded or stayed pending appeal within thirty
(30) days after the same becomes payable; or

(l) The Borrower ceases to be Solvent; or

(m) Except as otherwise permitted in this Agreement, the
Borrower ceases to conduct its business as contemplated or the Borrower is
enjoined, restrained or in any way prevented by court order from conducting all
or any material part of its business so as to cause or result in a Material
Adverse Effect, and such injunction, restraint or other preventive order is not
dismissed within thirty (30) days after the entry thereof.

7.2 Remedies. (a) If an Event of Default specified under subsections
7.1 (a) through (f) or (h) through (m) shall occur and be continuing, the Banks
shall be under no further obligation to make Loans hereunder, and the Agent upon
the request of the Required Banks shall, by written notice to the Borrower,
declare the unpaid principal amount of the Notes then outstanding and all
interest accrued thereon, any unpaid fees and all other obligations of the
Borrower to the Banks hereunder and thereunder to be forthwith due and payable,
and the same shall thereupon become and be immediately due and payable to the
Agent for the benefit of each Bank without presentment, demand, protest or any
other notice of any kind, all of which are hereby expressly waived.

35

(b) If an Event of Default specified under subsections 7.1(g)
hereof shall occur, the unpaid principal amount of the Notes then outstanding
and all interest accrued thereon, any unpaid fees and all other obligations of
the Borrower to the Banks hereunder and thereunder shall be immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived.

(c) If an Event of Default shall occur and be continuing, any
Bank to whom any obligation is owed by the Borrower hereunder or under any other
Loan Document or any participant of such Bank which has agreed in writing to be
bound by the provisions of Section 9.6 hereof and any branch, subsidiary or
Affiliate of such Bank or Participant shall have the right, in addition to all
other rights and remedies available to it, without notice to the Borrower, to
set-off against and apply to the then unpaid balance of all the Loans and all
other obligations of the Borrower hereunder or under any other Loan Document any
debt owing to, and any other funds held in any manner for the account of, the
Borrower by such Bank or participant or by such branch, Subsidiary or Affiliate,
including, without limitation, all funds in all deposit accounts (whether time
or demand, general or special, provisionally credited or finally credited, or
otherwise) now or hereafter maintained by the Borrower for its own account (but
not including funds held in custodian or trust accounts or other accounts
established solely for the benefit of parties other than the Borrower) with such
Bank or Participant or such branch, Subsidiary or Affiliate. Such right shall
exist whether or not any Bank or the Agent shall have made any demand under this
Agreement or any other Loan Document, whether or not such debt owing to or funds
held for the account of the Borrower is or are matured or unmatured and
regardless of the existence or adequacy of any collateral, guaranty or any other
security, right or remedy available to any Bank or the Agent.

(d) Notwithstanding any provision herein to the contrary or in
the other Loan Documents, any proceeds received by the Agent from any payment
made by the Borrower under this Agreement or the other Loan Documents after the
occurrence of an Event of Default, or received by the Agent from the
foreclosure, sale, lease, collection upon, realization of or other disposition
of any collateral which may have been provided to the Agent for the obligations
of the Borrower hereunder after the occurrence of an Event of Default (including
without limitation insurance proceeds), shall be applied by the Agent as
follows, unless otherwise agreed by all the Banks:

(i) first, to reimburse the Agent for out-of-pocket
costs, expenses and disbursements, including without limitation
reasonable attorneys' fees and legal expenses, incurred by the Agent in
connection with collection of any obligations of the Borrower under any
of the Loan Documents;

(ii) second, to accrued and unpaid interest on the
Loans;

(iii) third, to the principal amount of the Loans
then outstanding;

(iv) fourth, to fees payable under this Agreement or
any of the other Loan Documents (ratably according to the respective
amounts then outstanding);

36

(v) fifth, to the repayment of all other indebtedness
then due and unpaid of the Borrower to the Banks incurred under this
Agreement or any of the other Loan Documents, whether of principal,
interest, fees, expenses or otherwise (ratably according to the
respective amounts then outstanding); and

(vi) the balance, if any, as required by law.

(e) Each Bank agrees that (i) if at any time it shall receive
the proceeds of any collateral or any proceeds thereof or (ii) if after the
occurrence of an Event of Default it shall receive any payment on account of the
Loans or any other amounts owing hereunder or under the other Loan Documents (in
either case other than through application by the Agent in accordance with
subsection 7.2(d)), it shall promptly turn the same over to the Agent for
application in accordance with the terms of subsection 7.2(d).

(f) In addition to the other rights and remedies contained in
this Agreement or in the other Loan Documents, the Loans shall, at the Required
Banks' option, bear the interest rates provided in Section 2.6 hereof.

(g) In addition to all of the rights and remedies contained in
this Agreement or in any of the other Loan Documents, the Agent shall have all
of the rights and remedies under applicable Law, all of which rights and
remedies shall be cumulative and non-exclusive, to the extent permitted by Law.
The Agent may, and upon the request of the Required Banks shall, exercise all
post-default rights granted to it and the Banks under the Loan Documents or
applicable Law.

SECTION 8. THE AGENT

8.1 Appointment. Each Bank hereby irrevocably designates and appoints
PNC as the Agent of such Bank under this Agreement. Each such Bank irrevocably
authorizes the Agent, as the agent for such Bank to take such action on its
behalf under the provisions of this Agreement and to exercise such powers and
perform such duties as are expressly delegated to the Agent by the terms of this
Agreement, together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere in this Agreement, the
Agent shall not have any duties or responsibilities, except those expressly set
forth herein, or any fiduciary relationship with any Bank, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or otherwise exist against the Agent. The Agent
agrees to act as the Agent on behalf of the Banks to the extent provided in this
Agreement.

8.2 Delegation of Duties. The Agent may execute any of its duties under
this Agreement by or through agents or attorneys-in-fact and shall be entitled
to engage and pay for the advice and services of counsel concerning all matters
pertaining to such duties. The Agent shall not be responsible to the Banks for
the negligence or misconduct of any agents or attorneys in-fact selected by it
with reasonable care.

8.3 Exculpatory Provisions. Neither the Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates shall be (i)
liable to any of the Banks for any action lawfully taken or omitted to be taken
by them or such Person under or in connection with this Agreement (except for
their or such Person's own gross negligence or willful misconduct) or (ii)
responsible in any manner to any of the Banks for any recitals, statements,
representations or warranties made by the Borrower or any officer thereof

37

contained in this Agreement or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement, the Notes or the
other Loan Documents or for any failure of the Borrower to perform its
obligations hereunder or thereunder. The Agent shall not be under any obligation
to any Bank to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or the
other Loan Documents, or to inspect the properties, books or records of the
Borrower.

8.4 Reliance by Agent. The Agent shall be entitled to rely, and shall
be fully protected in relying, upon any Note, writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or
teletype message, statement, order or other document or conversation believed by
it to be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including,
without limitation, counsel to the Borrower), independent accountants and other
experts selected by the Agent. The Agent may deem and treat the payee of any
Note as the owner thereof for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement unless it shall first receive such advice or
concurrence of the Required Banks as they deem appropriate or they shall first
be indemnified to its satisfaction by the Banks against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. The Agent shall in all cases be fully protected in acting,
or in refraining from acting, under this Agreement, the Notes and the other Loan
Documents in accordance with a request of the Required Banks, and such request
and any action taken or failure to act pursuant thereto shall be binding upon
all the Banks and all future holders of the Notes.

8.5 Notice of Default. The Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Event of Default hereunder unless
they have received notice from a Bank or the Borrower referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default". In the event that the Agent receives such a
notice, the Agent shall give notice thereof to the Banks. The Agent shall take
such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Banks; provided that unless and until the
Agent shall have received such directions, the Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interests of the Banks.

8.6 Non-Reliance on Agent and Other Banks. Each Bank expressly
acknowledges that neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or Affiliates has made any representations
or warranties to it and that no act by the Agent hereinafter taken, including
any review of the affairs of the Borrower, shall be deemed to constitute any
representation or warranty by the Agent to any Bank. Each Bank represents to the
Agent that it has, independently and without reliance upon the Agent or any
other Bank, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of the
Borrower and made its own decision to make its Loans hereunder and enter into
this Agreement. Each Bank also represents that it will, independently and
without reliance upon the Agent or any other Bank, and based on such documents
and information as it shall deem appropriate at the time, continue to make its

38

own credit analysis, appraisals and decisions in taking or not taking action
under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Borrower. Except for notices, reports and other documents expressly required to
be furnished to the Banks by the Agent hereunder, the Agent shall not have any
duty or responsibility to provide any Bank with any credit or other information
concerning the business, operations, property, condition (financial or
otherwise), prospects or creditworthiness of the Borrower which may come into
the possession of the Agent or any of its officers, directors, employees,
agents, attorneys-in-fact or Affiliates.

8.7 Indemnification. The Banks agree to indemnify the Agent in its
capacity as such (to the extent not reimbursed by the Borrower and without
limiting the obligation of the Borrower to do so), ratably according to their
respective Pro-Rata Percentages, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Notes)
be imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of this Agreement, the other Loan Documents, or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the Agent under
or in connection with any of the foregoing; provided that no Bank shall be
liable for the payment of any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting solely from the Agent's gross negligence or willful misconduct. The
agreements in this Section 8.7 shall survive the payment of the Notes and all
other amounts payable hereunder.

8.8 Agent in its Individual Capacity. The Agent and its Affiliates may
make loans to, accept deposits from and generally engage in any kind of business
with the Borrower as though it was not the Agent hereunder. With respect to its
Loans made or renewed by it and any Note issued to it, the Agent shall have the
same rights and powers under this Agreement as any Bank and may exercise the
same as though it were not the Agent, and the terms "Bank" and "Banks" shall
include the Agent in its individual capacity.

8.9 Successor Agent. The Agent may resign as Agent upon sixty (60)
days' notice to the Banks and the Borrower. If such Agent shall resign as Agent
under this Agreement, then the Required Banks shall appoint from among the Banks
a successor agent for the Banks, which appointment shall be subject to the
approval of the Borrower (which approval shall not be unreasonably withheld),
whereupon such successor agent shall succeed to the rights, powers and duties of
an Agent, and the term "Agent" shall mean such successor agent effective upon
its appointment, and the former Agent's rights, powers and duties as Agent shall
be terminated, without any other or further act or deed on the part of such
former Agent or any of the parties to this Agreement or any holders of the
Notes. After any retiring Agent's resignation as Agent, the provisions of this
Section 8.9 shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under this Agreement.

8.10 Beneficiaries. Except as expressly provided herein, the provisions
of this Section 8 are solely for the benefit of the Agent and the Banks, and the
Borrower shall not have any rights to rely on or enforce any of the provisions
hereof. In performing their functions and duties under this Agreement the Agent
shall act solely as agent of the Banks and does not assume and shall not be
deemed to have assumed any obligation toward or relationship of agency or trust
with or for the Borrower.

39

SECTION 9. MISCELLANEOUS

9.1 Amendments and Waivers. Neither this Agreement, any Note or any
other Loan Document, nor any terms hereof of thereof may be amended,
supplemented or modified except in accordance with the provisions of this
subsection. With the written consent of the Required Banks, the Agent and the
Borrower may, from time to time, enter into written amendments, supplements or
modifications hereto and to the Notes and the other Loan Documents for the
purpose of adding any provisions to this Agreement or the Notes or the other
Loan Documents or changing in any manner the rights of the Banks or of the
Borrower hereunder or thereunder or waiving, on such terms and conditions as the
Agent may specify in such instrument, any of the requirements of this Agreement
or the Notes or the other Loan Documents or any Default or Event of Default and
its consequences; provided, however, that no such waiver and no such amendment,
supplement or modification shall directly or indirectly (a) reduce the amount or
extend the maturity of any Note or any installment thereof, or reduce the rate
or extend the time of payment of interest thereon, or reduce any Fees payable to
any Bank hereunder, or change the duration or amount of any Bank's Commitment,
in each case without the consent of the Bank affected thereby or (b) amend,
modify or waive any provision of this Section 9.1 or reduce the percentages
specified in the definition of Required Banks or consent to the assignment or
transfer by the Borrower of any of its rights and obligations under this
Agreement, the Notes and the other Loan Documents, in each case without the
written consent of all the Banks or (c) amend, modify or waive any provision of
Section 8 without the written consent of the then Agent. Any such waiver and any
such amendment, supplement or modification shall apply equally to each of the
Banks and shall be binding upon the Borrower, the Banks, the Agent and all
future holders of the Notes. In the case of any waiver, the Borrower, the Banks
and the Agent shall be restored to their former position and rights hereunder
and under the outstanding Notes, and any Default or Event of Default waived
shall be deemed to be cured and not continuing; but no such waiver shall extend
to any subsequent or other Default or Event of Default, or impair any right
consequent thereon.

9.2 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including
electronic transmission, facsimile transmission or posting on a secured web
site), and, unless otherwise expressly provided herein, shall be deemed to have
been duly given or made when delivered by hand, or three days after being
deposited in the mail, postage prepaid, or, in the case of facsimile
transmission notice, when sent during normal business hours with electronic
confirmation or otherwise when received, or in the case of electronic
transmission, when received and in the case of posting on a secured web site,
upon receipt of (i) notice of such posting and (ii) rights to access such web
site, addressed as follows in the case of the Borrower and the Agent, and as set
forth in Schedule I in the case of the other parties hereto, or to such other
address as may be hereafter notified by the respective parties hereto and any
future holders of the Notes:

the Borrower:                Philadelphia Suburban Corporation
762 W. Lancaster Avenue
Bryn Mawr, PA 19010-3489
Attention: Kathy L. Pape,
Vice President and Treasurer
Facsimile: (610) 519-0989

40

with a copy to:              Philadelphia Suburban Corporation
762 West Lancaster Avenue
Bryn Mawr, PA 19010
Attention: Roy H. Stahl
Executive Vice President,
General Counsel and
Secretary
(provided that failure to send a
copy of any notice to said counsel
shall in no way affect, limit or
invalidate any notice sent to the
Borrower or the exercise of any of
the Banks' or the Agent's rights or
remedies pursuant to a notice sent
to the Borrower.)

The Agent:                   PNC Bank, National Association
1000 Westlakes Drive, Suite 200
Berwyn, PA 19312
Attention: Forrest B. Patterson, Jr.
Facsimile: (610) 725-5799
and
PNC Agency Services
One PNC Plaza
249 Fifth Avenue
22nd Floor
Pittsburgh, PA 15222
Attention: Andrea Gibb
Facsimile: (412) 762-8672

provided that any notice, request or demand to or upon the Agent, the Swing Line
Bank or the Banks pursuant to Sections 2.1 or 2.7 shall not be effective until
received.

9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay
in exercising, on the part of the Agent or any Bank, any right, remedy, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. The rights, remedies, powers and privileges herein provided
are cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.

9.4 Survival of Representations and Warranties. All representations and
warranties made hereunder and in any document, certificate or statement
delivered pursuant hereto or in connection herewith shall survive the execution
and delivery of this Agreement, the Notes and the other Loan Documents.

9.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or
reimburse the Agent for all of its reasonable out-of-pocket costs and expenses
incurred in connection with any amendment, supplement or modification to this
Agreement, the Notes, the other Loan Documents and any other documents prepared
in connection therewith, including, without limitation, the reasonable fees and
disbursements of counsel to the Agent (which counsel may or may not include

41

employees of the Agent), (b) to pay or reimburse each Bank and the Agent for all
of their costs and expenses incurred in connection with the enforcement or
preservation of any rights under this Agreement, the other Loan Documents and
any such other documents, including, without limitation, reasonable fees and
disbursements of counsel to the Agent (which counsel may or may not include
employees of the Agent) and to the several Banks, and (c) to pay, indemnify, and
hold each Bank and the Agent harmless from, any and all recording and filing
fees and any and all liabilities with respect to, or resulting from any delay in
paying, stamp, excise and other similar taxes, if any (other than Taxes
expressly excluded from the definition of Taxes in Section 2.10 and Taxes for
which the Borrower has no liability under subsection 2.10(c)) which may be
payable or determined to be payable in connection with the execution and
delivery of, or consummation of any of the transactions contemplated by, or any
amendment, supplement or modification of, or any waiver or consent under or in
respect of, this Agreement, the Notes, the other Loan Documents, and any such
other documents, and (d) to pay, indemnify, and hold each Bank and the Agent
harmless from and against any and all other liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever with respect to the execution, delivery,
enforcement, and, incident to a Default or Event of Default, the performance and
administration, of this Agreement, the Notes, the other Loan Documents and any
such other documents or the transactions contemplated hereby or thereby or any
action taken or omitted under or in connection with any of the foregoing (all
the foregoing, collectively, the "indemnified liabilities"), provided, that the
Borrower shall have no obligation hereunder to the Agent or any Bank with
respect to indemnified liabilities arising from the gross negligence or willful
misconduct of the Agent or any such Bank. The Borrower shall be given notice of
any claim for indemnified liabilities and shall be afforded a reasonable
opportunity to participate in the defense, compromise or settlement thereof. The
agreements in this subsection shall survive repayment of the Notes and all other
amounts payable hereunder.

9.6 Successors and Assigns. (a) Whenever in this Agreement any of the
parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party, and all covenants, promises and agreements
by or on behalf of the Borrower, the Agent or the Banks that are contained in
this Agreement shall bind and inure to the benefit of their respective
successors and assigns. The Borrower may not assign or transfer any of its
rights or obligations under this Agreement or the other Loan Documents without
the prior written consent of each Bank.

(b) Each Bank may, in accordance with applicable law, assign
all or a portion of its interests, rights and obligations under this Agreement
and the other Loan Documents (including the Loan at the time owing to it and the
Note held by it); provided, however, that (i) each such assignment shall be to a
Bank or Affiliate thereof, or, with the consent of the Agent and, prior to the
occurrence of an Event of Default, of the Borrower (which consent shall not be
unreasonably withheld or delayed) to one or more banks or other financial
institutions; (ii) the amount of each such assignment shall not be less than the
lesser of $5,000,000 and the outstanding principal amount of such Bank's Loan;
and (iii) the parties to each such assignment shall execute and deliver to the
Agent an Assignment and Acceptance, together with the Note subject to such
assignment and a processing and recordation fee of $3,500 (except in the case of
an assignment by any Bank to one of its Affiliates). Upon acceptance and

42

recording pursuant to paragraph (d) of this Section 9.6, from and after the
effective date specified in each Assignment and Acceptance, which effective date
shall be at least five Business Days after the execution thereof, (A) the
assignee thereunder shall be a party hereto and, to the extent of the interest
assigned by such Assignment and Acceptance, have the rights and obligations of a
Bank under this Agreement and (B) the assigning Bank thereunder shall, to the
extent of the interest assigned by such Assignment and Acceptance, be released
from its obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Bank's rights
and obligations under this Agreement, such Bank shall cease to be a party hereto
but shall continue to be entitled to the benefits of Sections 2.9, 2.10, 2.11
and 9.5 (to the extent that such Bank's entitlement to such benefits arose out
of such Bank's position as a Bank prior to the applicable assignment)).

(c) By executing and delivering an Assignment and Acceptance,
the assigning Bank thereunder and the assignee thereunder shall be deemed to
confirm to and agree with each other and the other parties hereto as follows:
(i) such assigning Bank warrants that it is the legal and beneficial owner of
the interest being assigned thereby, free and clear of any adverse claim, and
that the outstanding balances of its Loan, without giving effect to assignments
thereof which have not become effective, are as set forth in such Assignment and
Acceptance, (ii) except as set forth in (i) above, such assigning Bank makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the other Loan Documents, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or the other
Loan Documents, or any other instrument or document furnished pursuant hereto or
thereto, or the financial condition of the Borrower or the performance or
observance by the Borrower of any of its obligations under this Agreement or any
other instrument or document furnished pursuant hereto; (iii) such assignee
represents and warrants that it is legally authorized to enter into such
Assignment and Acceptance; (iv) such assignee confirms that it has received a
copy of this Agreement, together with copies of the most recent financial
statements delivered pursuant to Section 5.1 and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (v) such assignee will
independently and without reliance upon the Agent, such assigning Bank or any
other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (vi) such assignee appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto; and
(vii) such assignee agrees that it will perform in accordance with their terms
all the obligations which by the terms of this Agreement are required to be
performed by it as a Bank.

(d) The Agent shall maintain at its offices in Philadelphia,
Pennsylvania a copy of each Assignment and Acceptance and the names and
addresses of the Banks, and the principal amount of the Loan owing to each Bank
pursuant to the terms hereof from time to time (the "Register"). The entries in
the Register shall be conclusive in the absence of error and the Borrower, the
Agent and the Banks may treat each person whose name is recorded in the Register
pursuant to the terms hereof as a Bank hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrower and
any Bank, at any reasonable time and from time to time upon reasonable prior
notice.

43

(e) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Bank and an assignee together with the Note
subject to such assignment, the processing and recordation fee referred to in
paragraph (b) above, the Agent shall (i) accept such Assignment and Acceptance,
(ii) record the information contained therein in the Register and (iii) give
prompt notice thereof to the Banks. Within five Business Days after receipt of
notice, the Borrower, at its own expense, shall execute and deliver to the
Agent, in exchange for the surrendered original Note, (x) a new Note to the
order of such assignee in an amount equal to the portion of the outstanding Loan
purchased by it pursuant to such Assignment and Acceptance and, (y) if the
assigning Bank has retained a portion of the Loan, a new Note to the order of
such assigning Bank in a principal amount equal to the portion of the
outstanding Loan retained by it. Such new Notes shall be dated the date of the
surrendered Note which it replaces and shall otherwise be in substantially the
form of Exhibit A hereto. Canceled Notes shall be returned to the Borrower.

(f) Each Bank may without the consent of the Borrower or the
Agent sell participations to one or more banks or other entities (each a
"Participant") in all or a portion of its rights and obligations under this
Agreement (including all or a portion of the Loan owing to it and the Note held
by it); provided, however, that (i) such Bank's obligations under this Agreement
shall remain unchanged, (ii) such Bank shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii) such Bank
shall remain the holder of any such Note for all purposes under this Agreement,
(iv) the Borrower, the Agent and the other Banks shall continue to deal solely
and directly with such Bank in connection with such Bank's rights and
obligations under this Agreement, (v) in any proceeding under the Bankruptcy
Code such Bank shall be, to the extent permitted by law, the sole representative
with respect to the obligations held in the name of such Bank whether for its
own account or for the account of any Participant and (vi) such Bank shall
retain the sole right to enforce the obligations of the Borrower relating to the
Loan and to approve any amendment, modification or waiver of any provision of
this Agreement or the Note held by such Bank other than any such amendment,
modification or waiver with respect to any Loan or Commitment in which such
Participant has an interest and which is described in subsection 9.1(a) hereof.

(g) If amounts outstanding under this Agreement and the Notes
are due or unpaid, or shall have been declared or shall have become due and
payable upon the occurrence of an Event of Default, each Participant shall be
deemed to have the right of set-off in respect of its participating interest in
amounts owing under this Agreement and any Note to the same extent as if the
amount of its participating interest were owing directly to it as a Bank under
this Agreement or any Note, provided that in purchasing such participation such
Participant shall be deemed to have agreed to share with the Banks the proceeds
thereof as provided in Section 9.8. The Borrower also agrees that each
Participant shall be entitled to the benefits of Sections 2.9, 2.10, 2.11 and
9.5 with respect to its participation in the Loan outstanding from time to time;
provided, that no Participant shall be entitled to receive any greater amount
pursuant to such Sections than the Bank selling the participation would have
been entitled to receive in respect of the amount of the participation
transferred by such Bank to such Participant had no such transfer occurred.

(h) If any Participant is organized under the laws of any
jurisdiction other than the United States or any state thereof, the Bank selling
the participation, concurrently with the sale of a participating interest to
such Participant, shall cause such Participant (i) to represent to the Bank
selling the participation (for the benefit of such Bank, the other Banks, the
Agent and the Borrower) that under applicable law and treaties no taxes will be
required to be withheld by the Agent, the Borrower or the Bank selling the

44

participation with respect to any payments to be made to such Participant in
respect of its participation in the Loan and (ii) to agree (for the benefit of
such Bank, the other Banks, the Agent and Borrower) that it will deliver the tax
forms and other documents required to be delivered pursuant to Section 2.10 and
comply from time to time with all applicable U.S. laws and regulations with
respect to withholding tax exemptions.

(i) Any Bank may at any time assign all or any portion of its
rights under this Agreement and the Note issued to it to a Federal Reserve Bank;
provided that no such assignment shall release a Bank from any of its
obligations hereunder.

9.7 Confidentiality. The Banks agree that they will maintain all
information and financial statements provided to them or otherwise obtained by
them with respect to the Borrower and its Subsidiaries confidential and that
they will not disclose the same or use it for any purposes; provided that
nothing herein shall prevent any Bank from disclosing any such information (a)
to the Agent or any other Bank, (b) to any prospective assignee or participant
in connection with any assignment or participation of Loans permitted by this
Agreement, (c) to its employees, directors, agents, attorneys, accountants and
other professional advisers, provided that any such person is advised by such
Bank that such information is subject to the confidentiality limitations of this
Section, (d) upon the request or demand of any Governmental Authority having
jurisdiction over such Bank, (e) in response to any order of any court or other
Governmental Authority or as may otherwise be required pursuant to any
Requirement of Law, provided that the Borrower has (unless prohibited by the
terms of any such order or requirement) been advised at least ten (10) days (or
if such is not possible or practicable, such lesser number of days as is
possible or practicable under the circumstances) prior to such disclosure of the
existence of such order or requirement, (f) which has been publicly disclosed
other than in breach of this Agreement, or (g) in connection with the exercise
of any remedy hereunder or under the Notes.

9.8 Adjustments; Set-off. (a) If any Bank (a "benefited Bank") shall at
any time receive any payment of all or part of its Loan, or interest thereon, or
receive any collateral in respect thereof (whether voluntarily or involuntarily,
by set-off, pursuant to events or proceedings of the nature referred to in
subsection 7(g), or otherwise), in a greater proportion than any such payment to
or collateral received by any other Bank, if any, in respect of such other
Bank's Loan, or interest thereon, being paid in respect of Loans being repaid
simultaneously therewith or Loans required hereby to be paid proportionately,
such benefited Bank shall purchase for cash from the other Banks such portion of
each such other Bank's Loan, or shall provide such other Banks with the benefits
of any such collateral, or the proceeds thereof, as shall be necessary to cause
such benefited Bank to share the excess payment or benefits of such collateral
or proceeds ratably with each of the Banks; provided, however, that if all or
any portion of such excess payment or benefits is thereafter recovered from such
benefited Bank, such purchase shall be rescinded, and the purchase price and
benefits returned, to the extent of such recovery, but without interest. The
Borrower agrees that each Bank so purchasing a portion of another Bank's Loan
may exercise all rights of payment (including, without limitation, rights of
set-off) with respect to such portion as fully as if such Bank were the direct
holder of such portion.

45

(b) In addition to any rights and remedies of the Banks
provided by law, upon the occurrence of an Event of Default, each Bank shall
have the right, without prior notice to the Borrower, any such notice being
expressly waived by the Borrower to the extent permitted by applicable law, upon
any amount becoming due and payable by the Borrower hereunder or under the Notes
(whether at the stated maturity, by acceleration or otherwise) to set-off and
appropriate and apply against such amount any and all deposits (general or
special, time or demand, provisional or final), in any currency, and any other
credits, indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by such Bank to or for the credit or the account of the Borrower. Each
Bank agrees promptly to notify the Borrower and the Agent after any such set-off
and application made by such Bank, that the failure to give such notice shall
not affect the validity of such set-off and application.

9.9 Counterparts. This Agreement may be executed by one or more of the
parties to this Agreement on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Agreement signed by all the parties
shall be lodged with the Borrower and each of the Banks.

9.10 Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

9.11 Integration. This Agreement represents the agreement of the
Borrower, the Agent and the Banks with respect to the subject matter hereof, and
there are no promises, undertakings, representations or warranties by the Agent
or any Bank relative to subject matter hereof not expressly set forth or
referred to herein or in the Notes or the other Loan Documents.

9.12 GOVERNING LAW. THIS AGREEMENT, THE NOTES AND THE OTHER LOAN
DOCUMENTS HAVE BEEN EXECUTED IN THE COMMONWEALTH OF PENNSYLVANIA AND SAID
DOCUMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT, THE
NOTES AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF PENNSYLVANIA.

9.13 Submission To Jurisdiction; Waivers. The Borrower hereby
irrevocably and unconditionally:

(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement, the Notes or the other Loan Documents, or
for recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction of the Courts of the Commonwealth of
Pennsylvania, the courts of the United States of America for the Eastern
District of Pennsylvania, and appellate courts from any thereof;

46

(b) consents that any such action or proceeding may be brought
in such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;

(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to the
Borrower at the address set forth in Section 9.2 for the Borrower or at such
other address of which the Agent shall have been notified pursuant thereto; and

(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction.

9.14 Acknowledgments. The Borrower hereby acknowledges that:

(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement, the Notes and the other Loan
Documents;

(b) neither the Agent nor any Bank has any fiduciary
relationship to the Borrower, and the relationship between the Agent and the
Banks, on one hand, and the Borrower, on the other hand, is solely that of
debtor and creditor; and

(c) no joint venture exists among the Banks or between the
Borrower and the Banks.

9.15 WAIVERS OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE
BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, THE NOTES OR THE OTHER LOAN
DOCUMENTS AND FOR ANY COUNTERCLAIM THEREIN.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written. PHILADELPHIA SUBURBAN CORPORATION

By: /s/ David P. Smeltzer
------------------------------------
Title: Senior Vice President-Finance and
Chief Financial Officer

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

By: /s/ Kristine Manili
------------------------------------
Title: Vice President

47

Exhibit 4.24
Schedule I

Bank and Commitment Information

Bank                                              Commitment
----                                              ----------

PNC Bank, National Association                              $22,000,000
100 Westlakes Drive, Suite 200
Berwyn, PA  19312
Attention: Forrest B. Patterson, Jr.

Exhibit 4.24

Schedule 3.6

Existing Litigation

None

Exhibit 4.24

Schedule 3.10

ERISA Matters

None

Exhibit 4.24

Schedule 3.11

Regulatory Approvals

None

Exhibit 4.24

Schedule 3.13

Environmental Matters

None

Exhibit 4.24

Schedule 3.19

Interests in Partnerships

None

Exhibit 4.24

Schedule 6.2

Permitted Debt

Contingent Obligations
----------------------

Guaranty and Suretyship Agreement between the Borrower and the Pennsylvania
Infrastructure Investment Authority ("PENNVEST") dated March 12, 2002
securing payment of a loan from PENNVEST to Little Washington
Wastewater Company in the amount of $2,102,612.71.

Guaranty and Suretyship Agreement between the Borrower and PENNVEST dated March
12, 2002 securing payment of a loan from PENNVEST to Little Washington
Wastewater Company in the amount of $3,004,780.71.

Exhibit 4.24

Schedule 6.3

Existing Liens

None

Exhibit 4.24

EXHIBIT A

NOTE

$________________                                   Philadelphia, Pennsylvania
October __, 2002

FOR VALUE RECEIVED, the undersigned, PHILADELPHIA SUBURBAN CORPORATION
(the "Borrower"), hereby promises to pay to the order of ___________________
(the "Bank"), at the office of PNC Bank, National Association (the "Agent"), at
1600 Market Street, Philadelphia, PA 19103, on the Maturity Date, the lesser of
the principal sum of ___________ ___________ Dollars ($__________) and the
aggregate unpaid principal amount of the Loan made by the Bank to the Borrower
pursuant to Section 2.1 of the Credit Agreement dated as of October 25, 2002,
among the Borrower, the Banks party thereto and the Agent (as amended, modified,
extended or restated from time to time, the "Agreement"), in lawful money of the
United States of America in same day funds, and to pay interest from the date
hereof on such principal amount from time to time outstanding, in like funds, at
said office, at a rate or rates per annum and payable on the dates determined
pursuant to the Agreement.

The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from their due
dates at the rate or rates determined as set forth in the Agreement.

The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The nonexercise by the holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.

All borrowings evidenced by this Note and all payments and prepayments
of the principal hereof and interest hereon and the respective dates thereof
shall be endorsed by the holder hereof on the schedule attached hereto and made
a part hereof, or on a continuation thereof which shall be attached hereto and
made a part hereof, or otherwise recorded by such holder in its internal
records; provided, however, that the failure of the holder hereof to make such a
notation or any error in such a notation shall not in any manner affect the
obligations of the Borrower to make payments of principal and interest in
accordance with the terms of this Note and the Agreement.

This Note is one of the Notes referred to in, evidences indebtedness
incurred under, and is entitled to the benefits of the Agreement. The Agreement,
among other things, contains provisions for the acceleration of the maturity
hereof upon the happening of certain events, for optional and mandatory
prepayments of the principal hereof prior to the maturity hereof, for a higher
rate of interest hereunder after an Event of Default and for the amendment or
waiver of certain provisions of the Agreement, all upon the terms and conditions
therein specified. This Note shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania and any applicable laws of the
United States of America. Capitalized terms not otherwise defined herein shall
have the meanings set forth in the Agreement.

PHILADELPHIA SUBURBAN CORPORATION

By:_______________________________
Name:
Title:

A-1

Loans and Payments

Unpaid        Name of
Payments              Principal       Person
Amount of       Interest      Interest                                   Balance of       Making
Date                 Loan           Rate         Period      Principal         Interest       Note         Notation
----              ---------       --------      --------     ---------         --------    ----------      --------

A-2

EXHIBIT B

FORM OF
ASSIGNMENT AND ACCEPTANCE

Reference is made to the Credit Agreement dated as of October 25, 2002
(as amended, modified, extended or restated from time to time, the "Agreement"),
among Philadelphia Suburban Corporation (the "Borrower"), the banks party
thereto (the "Banks") and PNC Bank, National Association, as Agent. Terms
defined in the Agreement are used herein with the same meanings.

________________ (the "Assignor") and ________________ (the "Assignee")
hereby agree as follows:

The Assignor hereby sells and assigns, without recourse, to the
Assignee, and the Assignee hereby purchases and assumes, without recourse, from
the Assignor, effective as of the Effective Date set forth on Schedule A
attached hereto, the interests set forth on Schedule A (the "Assigned Interest")
in the Assignor's rights and obligations under the Agreement, including, without
limitation, the interests set forth on Schedule A in the Loan owing to the
Assignor which is outstanding on the Effective Date, together with unpaid
interest accrued on the assigned Loan to the Effective Date and the amount, if
any, set forth on Schedule A of the Fees accrued to the Effective Date for the
account of the Assignor. Each of the Assignor and the Assignee hereby makes and
agrees to be bound by all the representations, warranties and agreements set
forth in Section 9.6(c) of the Agreement, a copy of which has been received by
each such party. From and after the Effective Date (i) the Assignee shall be a
party to and be bound by the provisions of the Agreement and, to the extent of
the interests assigned by this Assignment and Acceptance, have the rights and
obligations of a Bank thereunder and under the Agreement or any other document
issued in connection therewith and (ii) the Assignor shall, to the extent of the
interests assigned by this Assignment and Acceptance, relinquish its rights and
be released from its obligations under this Agreement.

This Assignment and Acceptance is being delivered to the Agent together
with (i) the Note evidencing the Loan included in the Assigned Interest, (ii) if
the Assignee is organized under the laws of a jurisdiction outside the United
States, the forms prescribed by the Internal Revenue Service of the United
States certifying as to the Assignee's exemption from withholding taxes with
respect to all payments to be made to the Assignee under the Agreement or such
other documents as are necessary to indicate that all such payments are subject
to such tax at a rate reduced by an applicable tax treaty, all duly completed
and executed by such Assignee, and (iii) a processing and recordation fee of
$3,500, if required.

This Assignment and Acceptance shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.

B-1

The terms set forth above and on Schedule A attached hereto are hereby
agreed to as of the date hereof.

______________________, as Assignor

By:________________________________
Name:
Title:

_____________________, as Assignee

By:________________________________
Name:
Title:
Acknowledged:

PNC BANK, NATIONAL ASSOCIATION,
as Agent

By:________________________________
Name:
Title:

Consented to:

PHILADELPHIA SUBURBAN CORPORATION

By:________________________________
Name:
Title:

B-2

Exhibit 4.24

SCHEDULE A

Date of Assignment:

Legal Name of Assignor:

Legal Name of Assignee:

Assignee's Address for Notices:

___________________________________

___________________________________

Attention: ________________________

Telecopy: _________________________

Effective Date of Assignment
(may not be fewer than 5 Business
Days after the Date of Assignment):____________________

Principal Amount of Loan Assigned          Pro-Percentage of Loans Assigned
---------------------------------          --------------------------------

$                                          %

Exhibit 4.24

================================================================================

CREDIT AGREEMENT

among

PHILADELPHIA SUBURBAN CORPORATION

and

THE BANKS PARTY HERETO

and

PNC BANK, NATIONAL ASSOCIATION

as Agent

Dated as of October 25, 2002

$22,000,000

================================================================================

Exhibit 4.24

Table of Contents                                  Page

SECTION  1. DEFINITIONS.................................................................................1
1.1      Defined Terms.........................................................................1
1.2      Other Definitional Provisions........................................................12
1.3      Construction.........................................................................12
SECTION  2. THE LOANS..................................................................................13
2.1      Loans................................................................................13
2.2      General Provisions Regarding Loans...................................................13
2.3      Fees.................................................................................14
2.4      Notes; Repayment of Loans............................................................14
2.5      Interest on Loans....................................................................14
2.6      Default Rate; Additional Interest; Alternate Rate of Interest........................15
2.7      Optional and Mandatory Prepayments of Loans..........................................15
2.8      Illegality...........................................................................16
2.9      Requirements of Law..................................................................16
2.10     Taxes................................................................................17
2.11     Indemnity............................................................................18
2.12     Pro Rata Treatment, etc..............................................................19
2.13     Payments.............................................................................19
2.14     Conversion and Continuation Options..................................................19
SECTION  3. REPRESENTATIONS AND WARRANTIES.............................................................20
3.1      Financial Condition..................................................................20
3.2      No Adverse Change....................................................................20
3.3      Existence; Compliance with Law.......................................................20
3.4      Corporate Power; Authorization; Enforceable Obligations..............................21
3.5      No Legal Bar.........................................................................21
3.6      No Material Litigation...............................................................21
3.7      No Default...........................................................................21
3.8      Taxes................................................................................22
3.9      Federal Regulations..................................................................22
3.10     ERISA................................................................................22
3.11     Investment Company Act; Public Utility Holding Company Act...........................23
3.12     Purpose of Loans.....................................................................23
3.13     Environmental Matters................................................................23
3.14     Patents, Trademarks, etc.............................................................24
3.15     Ownership of Property................................................................24
3.16     Licenses, etc........................................................................24
3.17     No Burdensome Restrictions...........................................................24
3.18     Labor Matters........................................................................24
3.19     Partnerships.........................................................................24
3.20     No Material Misstatements............................................................24
SECTION  4. CONDITIONS PRECEDENT; CLOSING..............................................................25
4.1      Conditions to Closing................................................................25
4.2      Closing..............................................................................27

i

SECTION  5. AFFIRMATIVE COVENANTS......................................................................27
5.1      Financial Statements.................................................................27
5.2      Certificates; Other Information.  Furnish to each Bank:..............................27
5.3      Payment of Obligations...............................................................27
5.4      Conduct of Business and Maintenance of Existence.....................................27
5.5      Maintenance of Property; Insurance...................................................28
5.6      Inspection of Property; Books and Records; Discussions...............................28
5.7      Notices..............................................................................28
5.8      Environmental Laws...................................................................29
5.9      Taxes................................................................................29
SECTION  6. NEGATIVE COVENANTS.........................................................................30
6.1      Financial Covenants..................................................................30
6.2      Limitation on Debt...................................................................30
6.3      Limitation on Liens..................................................................30
6.4      Limitations on Fundamental Changes...................................................31
6.5      Limitation on Sale of Assets.........................................................32
6.6      Limitation on Acquisitions, Investments, Loans and Advances..........................32
6.7      No Negative Pledge or Other Restrictions.............................................33
6.8      Transactions with Affiliates.........................................................33
6.9      Sale and Leaseback...................................................................33
6.10     Fiscal Year..........................................................................33
6.11     Continuation of or Change in Business................................................33
SECTION  7. EVENTS OF DEFAULT..........................................................................33
7.1      Events of Default....................................................................33
7.2      Remedies.............................................................................35
SECTION  8. THE AGENT..................................................................................37
8.1      Appointment..........................................................................37
8.2      Delegation of Duties.................................................................37
8.3      Exculpatory Provisions...............................................................37
8.4      Reliance by Agent....................................................................38
8.5      Notice of Default....................................................................38
8.6      Non-Reliance on Agent and Other Banks................................................38
8.7      Indemnification......................................................................39
8.8      Agent in its Individual Capacity.....................................................39
8.9      Successor Agent......................................................................39
8.10     Beneficiaries........................................................................39
SECTION  9. MISCELLANEOUS..............................................................................40
9.1      Amendments and Waivers...............................................................40
9.2      Notices..............................................................................40
9.3      No Waiver; Cumulative Remedies.......................................................41
9.4      Survival of Representations and Warranties...........................................41
9.5      Payment of Expenses and Taxes........................................................41
9.6      Successors and Assigns...............................................................42
9.7      Confidentiality......................................................................45
9.8      Adjustments; Set-off.................................................................45

ii

9.9      Counterparts.........................................................................46
9.10     Severability.........................................................................46
9.11     Integration..........................................................................46
9.12     GOVERNING LAW........................................................................46
9.13     Submission To Jurisdiction; Waivers..................................................46
9.14     Acknowledgments......................................................................47
9.15     WAIVERS OF JURY TRIAL................................................................47

SCHEDULES

SCHEDULE I        Bank and Commitment Information
SCHEDULE 3.6      Existing Litigation
SCHEDULE 3.10     ERISA Matters
SCHEDULE 3.11     Regulatory Approvals
SCHEDULE 3.13     Environmental Matters
SCHEDULE 3.19     Interests in Partnerships
SCHEDULE 6.2      Permitted Debt
SCHEDULE 6.3      Existing Liens

EXHIBITS

EXHIBIT A         Form of Note
EXHIBIT B         Form of Assignment and Acceptance

iii

NOTE

$22,000,000                                          Philadelphia, Pennsylvania
October 25, 2002

FOR VALUE RECEIVED, the undersigned, PHILADELPHIA SUBURBAN CORPORATION
(the "Borrower"), hereby promises to pay to the order of PNC BANK, NATIONAL
ASSOCIATION (the "Bank"), at the office of PNC Bank, National Association (the
"Agent"), at 1600 Market Street, Philadelphia, PA 19103, on the Maturity Date,
the lesser of the principal sum of Twenty Two Million Dollars ($22,000,000) and
the aggregate unpaid principal amount of the Loan made by the Bank to the
Borrower pursuant to Section 2.1 of the Credit Agreement dated as of October 25,
2002, among the Borrower, the Banks party thereto and the Agent (as amended,
modified, extended or restated from time to time, the "Agreement"), in lawful
money of the United States of America in same day funds, and to pay interest
from the date hereof on such principal amount from time to time outstanding, in
like funds, at said office, at a rate or rates per annum and payable on the
dates determined pursuant to the Agreement.

The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from their due
dates at the rate or rates determined as set forth in the Agreement.

The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The nonexercise by the holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.

All borrowings evidenced by this Note and all payments and prepayments
of the principal hereof and interest hereon and the respective dates thereof
shall be endorsed by the holder hereof on the schedule attached hereto and made
a part hereof, or on a continuation thereof which shall be attached hereto and
made a part hereof, or otherwise recorded by such holder in its internal
records; provided, however, that the failure of the holder hereof to make such a
notation or any error in such a notation shall not in any manner affect the
obligations of the Borrower to make payments of principal and interest in
accordance with the terms of this Note and the Agreement.

This Note is one of the Notes referred to in, evidences indebtedness
incurred under, and is entitled to the benefits of the Agreement. The Agreement,
among other things, contains provisions for the acceleration of the maturity
hereof upon the happening of certain events, for optional and mandatory
prepayments of the principal hereof prior to the maturity hereof, for a higher
rate of interest hereunder after an Event of Default and for the amendment or
waiver of certain provisions of the Agreement, all upon the terms and conditions
therein specified. This

Note shall be construed in accordance with and governed by the laws of the
Commonwealth of Pennsylvania and any applicable laws of the United States of
America. Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Agreement.

PHILADELPHIA SUBURBAN CORPORATION

By:    /s/ David P. Smeltzer
-----------------------------------
Name:  David P. Smeltzer
Title: Senior Vice President - Finance and
Chief Financial Officer

2

Loans and Payments

Unpaid        Name of
Payments              Principal       Person
Amount of       Interest      Interest                                   Balance of       Making
Date                 Loan           Rate         Period      Principal         Interest       Note         Notation
----              ---------       -------       --------     ---------         --------    ----------      --------

3

Exhibit 4.25

THIRD AMENDMENT TO CREDIT AGREEMENT
-----------------------------------  

THIS THIRD AMENDMENT TO CREDIT AGREEMENT is made as of this 16th day of
December, 2002, by and among PENNSYLVANIA SUBURBAN WATER COMPANY, a Pennsylvania
corporation and successor by merger to Philadelphia Suburban Water Company
("Borrower"), the several banks which are parties to this Agreement (each a
"Bank" and collectively, "Banks") and PNC BANK, NATIONAL ASSOCIATION in its
capacity as agent for Banks (in such capacity, "Agent").

BACKGROUND
----------

A. Borrower, Agent, Banks and Wachovia Bank, National Association
(successor by merger to First Union National Bank) ("Wachovia") 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 and a Second Amendment to
Credit Agreement dated as of December 18, 2001 (as so amended, the "Credit
Agreement"), pursuant to which Banks and Wachovia 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 (the "Notes").

B. Borrower, Agent and Banks desire to decrease the amount of the
facility by $15,000,000, terminate, at its request, the Commitment of Wachovia,
modify the interest rate provisions of the Credit Agreement and 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 16, 2002 (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 14, 2003 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."

(b) Section 2.6(b) is hereby amended by deleting "twenty two and
one-half basis points (.225%)" and substituting therefor "twenty five basis
points (.25%)."

(c) The Commitment of Wachovia is hereby terminated at its request and
the amount of the Total Commitment is hereby reduced from $70,000,000 to
$55,000,000 and any references to "$70,000,000" in the Credit Agreement shall be
changed to "$55,000,000." The Commitment of each of the other Banks shall remain
unchanged.

(d) To give effect to the termination of Wachovia's Commitment and the
corresponding reduction in the Total Commitment, Schedule I to the Credit
Agreement is hereby amended and replaced with Schedule I attached hereto.

3. Repayment of Wachovia. On the Effective Date, all of the Revolving
Credit Loans of Wachovia, all accrued interest thereon and any Fees and other
amounts due to Wachovia under the Credit Agreement shall be paid by Borrower to
Wachovia, the Revolving Credit Note of Wachovia shall be canceled and returned
to Borrower and Wachovia shall cease to be a Bank under (and accordingly shall
cease to be a party to) the Credit Agreement. Following such repayment Agent
shall obtain from Wachovia its acknowledgment that it is no longer a Bank under
or a party to the Credit Agreement.

4. Adjusting Payments. On or before the Effective Date Agent shall
notify each Bank as to the adjusting payments, if any, which will be required to
be made to the outstanding Revolving Credit Loans of each Bank in order to give
effect to the termination of Wachovia's Commitment and the decrease in the Total
Commitment so that after such adjusting payments are made each Bank's
outstanding Revolving Credit Loans evidenced by such Bank's Revolving Credit
Note shall be in an amount equal to its Commitment Percentage of all outstanding
Revolving Credit Loans. On the Effective Date each Bank agrees to pay to the
other Banks the amounts, if any, specified by Agent in such notice.

5. 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.

6. 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.

7. 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;

2

(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.

8. 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 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 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 additional fee of $66,000 to be distributed to Banks pro rata in accordance
with their Commitments (after giving effect to the decrease in the Total
Commitments provided herein).

3

9. 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.

4

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

PENNSYLVANIA SUBURBAN
WATER COMPANY

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

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

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

CITIZENS BANK OF PENNSYLVANIA

By:  /s/ Mark W. Torie
------------------------------------
Title:  Vice President

FLEET NATIONAL BANK

By:  /s/ Diane Donaldson
------------------------------------
Title:  Vice President

5

Exhibit 4.25

Schedule I

Bank and Commitment Information

Swing Line
Bank                              Commitment              Commitment
----                              ----------              ----------

PNC Bank, National Association             $22,500,000             $5,000,000
1000 Westlakes Drive, Suite 200
Berwyn, PA  19312
Attention:  Forrest B. Patterson, Jr.

Citizens Bank of Pennsylvania              $17,500,000                    N/A
610 W. Germantown Avenue
Plymouth Meeting, PA  19462
Attention:  Mark W. Torie

Fleet National Bank                        $15,000,000                    N/A
2 Portland Square, 5th Floor
Portland, Maine  04101
Attention:  Diane Donaldson

Exhibit 4.26

FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------

THIS FOURTH AMENDMENT TO CREDIT AGREEMENT is made as of this 24th day
of December, 2002, by and among PENNSYLVANIA SUBURBAN WATER COMPANY, a
Pennsylvania corporation and successor by merger to Philadelphia Suburban Water
Company ("Borrower"), the several banks which are parties to this Agreement
(each a "Bank" and collectively, "Banks") and PNC BANK, NATIONAL ASSOCIATION in
its capacity as agent for Banks (in such capacity, "Agent").

BACKGROUND
----------

A. Borrower, Agent and Banks other than National City Bank ("National
City") 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 and a Third
Amendment to Credit Agreement dated as of December 16, 2002 (as so amended, the
"Credit Agreement"), pursuant to which Banks (other than National City) agreed
to make revolving credit loans to Borrower in an aggregate outstanding amount of
up to $55,000,000 (the "Loans"). The Loans are evidenced by Borrower's Revolving
Credit Notes in the aggregate principal face amount of $55,000,000 (the
"Notes").

B. Borrower, Agent and Banks desire to increase the amount of the
facility by $15,000,000 and add National City as an additional bank under the
Credit Agreement, 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 26, 2002 (the
"Effective Date") the Credit Agreement is hereby amended as follows:

(a) The amount of the Total Commitment is hereby increased from
$55,000,000 to $70,000,000 and any references to "$55,000,000" in the Credit
Agreement shall be changed to "$70,000,000." The entire $15,000,000 of such
increase shall become the Commitment of National City upon its joinder as a
party to the Credit Agreement as provided hereunder. The Commitment of each of
the other Banks shall remain unchanged.

(b) To give effect to the increase in the Total Commitment and the
joinder of National City as a Bank, Schedule I to the Credit Agreement is hereby
amended and replaced with Schedule I attached hereto.

3. Joinder of National City. Effective on the Effective Date, National
City hereby joins in and becomes a party to the Credit Agreement with a
Commitment of $15,000,000, agrees to be bound by the provisions of the Credit
Agreement and shall have the rights and obligations of a Bank thereunder and
under any other document issued in connection therewith. National City hereby
makes and agrees to be bound by all of the representations, warranties and
agreements set forth in Section 9.6(c) of the Agreement as if it were the
assignee of its Commitment under the provisions of Section 9.6.

4. Additional Note. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to National City a Revolving
Credit Note in the face amount of $15,000,000 in the form of Exhibit B-2
attached to the Credit Agreement.

5. Adjusting Payments. Prior to the Effective Date Agent shall notify
each Bank as to the adjusting payments which will be required to be made to the
outstanding Revolving Credit Loans of each Bank in order to give effect to the
increase in the Total Commitment and the addition of the individual Commitment
of National City pursuant to the provisions of Sections 2(c) and 3 above so that
after such adjusting payments are made each Bank's outstanding Revolving Credit
Loans evidenced by such Bank's Revolving Credit Note shall be in an amount equal
to its Commitment Percentage of all outstanding Revolving Credit Loans. On the
Effective Date each Bank agrees to pay to the other Banks the amounts, if any,
specified by Agent in such notice.

6. 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.

7. 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.

8. 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

2

(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.

9. 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)     The additional Revolving Credit Note to National
City;

(iii)    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;

(iv)     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

(v)      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
National City a fee of $18,000 to be distributed to National City.

10. 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.

3

(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.

4

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

PENNSYLVANIA SUBURBAN
WATER COMPANY

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

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

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

CITIZENS BANK OF PENNSYLVANIA

By: /s/ Mark W. Torie
------------------------------------
Title:  Vice President

FLEET NATIONAL BANK

By: /s/ Diane Donaldson
------------------------------------
Title:  Vice President

NATIONAL CITY BANK

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

5

Exhibit 4.26

Schedule I

Bank and Commitment Information

Swing Line
Bank                                   Commitment           Commitment
----                                   ----------           ----------

PNC Bank, National Association                  $22,500,000          $5,000,000
1000 Westlakes Drive, Suite 200
Berwyn, PA  19312
Attention:  Forrest B. Patterson, Jr.

Citizens Bank of Pennsylvania                   $17,500,000                 N/A
610 W. Germantown Avenue
Plymouth Meeting, PA  19462
Attention:  Mark W. Torie

Fleet National Bank                             $15,000,000                 N/A
2 Portland Square, 5th Floor
Portland, Maine  04101
Attention:  Diane Donaldson

National City Bank                              $15,000,000                 N/A
20 Federal Plaza W.
Youngstown, Ohio  44501
Attention:  David P. Dobstaff

Exhibit 10.44
Execution Copy

BOND PURCHASE AGREEMENT

$28,200,000
DELAWARE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY

$25,000,000                                   $3,200,000
Water Facilities Revenue Bonds          Water Facilities Revenue Refunding Bonds
(Pennsylvania Suburban Water                 (Pennsylvania Suburban Water
Company Project)                             Company Project)
Series A of 2002                             Series B of 2002

Bond Purchase Agreement dated December 19, 2002, among the DELAWARE
COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY (the "Authority"), PENNSYLVANIA SUBURBAN
WATER COMPANY, a Pennsylvania corporation (the "Company"), and THE GMS GROUP,
L.L.C., a Pennsylvania limited liability company, as representative (the
"Representative") for itself, First American Municipals Inc. and Janney
Montgomery Scott LLC (collectively, the "Underwriters").

1. Background.

(a) The Authority proposes to enter into a Financing Agreement
(the "Financing Agreement") dated as of December 15, 2002 with the Company,
under which the Authority will agree to loan to the Company funds to (i) finance
the cleaning, re-lining and related improvement of pipelines and related
equipment and facilities located in the Counties of Delaware, Montgomery and
Bucks in Pennsylvania (the "2002A Facilities") and that are part of the
Company's system (the "System") for the distribution of water to its customers,
and related financing costs (collectively, the "Construction Project") and pay
costs of issuance; and (ii) currently refund (the "Refunding Project") the
Authority's Water Facilities Revenue Refunding Bonds (Philadelphia Suburban
Water Company Project) Series of 1992 (the "1992 Bonds"), which were issued to
refund a like principal amount of Delaware County Industrial Development
Authority Water Facilities Revenue Bonds (Philadelphia Suburban Water Company
Project) Series A of 1980, (the "1980 Bonds"). The 1980 Bonds were issued to
finance the acquisition, construction, installation and equipping of the certain
facilities (the "2002B Facilities" and, together with the 2002A Facilities, the
"Facilities") and pay costs of issuance of the 1980 Bonds. The 2002B Facilities
include water mains, pipelines, reservoirs, wells and related equipment and
facilities in various locations in Bucks, Chester, Delaware and Montgomery
Counties. To finance the loan under the Financing Agreement, the Authority
proposes to issue and sell $25,000,000 aggregate principal amount of Delaware
County Industrial Development Authority Water Facilities Revenue Bonds,
(Pennsylvania Suburban Water Company Project) Series A of 2002 (the "Series A
Bonds") and $3,200,000 aggregate principal amount of Delaware County Industrial
Development Authority Water Facilities Revenue Refunding Bonds, (Pennsylvania
Suburban Water Company Project) Series B of 2002 (the "Series B Bonds" and,
together with the Series A Bonds, the "Bonds") to the Underwriters, 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"), resolutions adopted by the Authority on October
25, 2002 and November 8, 2002 (together, the "Authority Resolution") and under a
Trust Indenture dated as of December 15, 2002 (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 Series A 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 Series A Bonds in the principal amount
of $25,000,000 (the "2002A First Mortgage Bond"). The Series B 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 Series B Bonds
in the principal amount of $3,200,000 (the "2002B First Mortgage Bond" and
together with the 2002A First Mortgage Bond, the "First Mortgage Bonds"). The
First Mortgage Bonds will be issued concurrently with the Bonds pursuant to the
Company's Indenture of Mortgage (the "Indenture of Mortgage") dated as of
January 1, 1941, 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 Thirty-Seventh Supplemental
Indenture of Mortgage (the "Thirty-Seventh Supplemental Mortgage," which
together with the Indenture of Mortgage, as amended and supplemented, is
referred to hereinafter as the "Mortgage") to be dated as of December 15, 2002.
Each First Mortgage Bond will be issued in the same principal amount and will
mature on the date and bear interest at the rate of the series of 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 Bonds, 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 Construction Project and Refunding Project
(collectively, the "Project") will finance and refinance, respectfully, 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 Underwriters 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").

-2-

(d) A Preliminary Official Statement dated December 13, 2002,
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 as of 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 Representative and the Company, is hereinafter referred to as the
"Official Statement").

2. Purchase, Sale and Closing. On the terms and conditions herein set
forth, the Underwriters will buy from the Authority, and the Authority will sell
to the Underwriters, all (but not less than all) of the Bonds at a purchase
price equal to $27,777,000, consisting of the aggregate principal amount of the
Bonds, less an Underwriting fee of $423,000. Payment 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 Obermayer Rebmann Maxwell &
Hippel LLP, bond counsel, at 10:00 a.m., Eastern Daylight Time, on December 31,
2002 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 fully registered
Bonds with one Bond for each maturity, each in the aggregate principal amount of
Bonds for each such maturity as requested 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 will be made at the office of DTC in New York, New York (or such other
location as is acceptable to the Representative). If the Representative so
requests, the Bonds shall be made available to the Underwriters (prior to their
delivery to DTC) in Philadelphia, Pennsylvania at least three full business days
before the Closing for purposes of inspection.

The Underwriters agree 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 Underwriters reserve the right (and the Authority
and the Company hereby expressly acknowledge such right): (i) to make
concessions to dealers; (ii) 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
(iii) to change such initial offering prices, all as the Underwriters 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: (i) enter into this Bond
Purchase Agreement; (ii) 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"); (iii) issue, sell and deliver the Bonds to the
Underwriters as provided herein; and (iv) 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;

-3-

(b) The Authority Resolution was duly adopted at two separate
public meetings of the Authority at which a quorum was present and acting
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) and "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) and "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;

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

(f) To the extent required by law, 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 Underwriters 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 an 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"));

-4-

(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;

(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 Representative shall be deemed a
representation and warranty by the Authority to the Underwriters as to the
statements made therein.

4. Company's Representations and Warranties. The Company makes the
following representations and warranties, all of which will survive the Closing:

(a) The Company has not sustained since September 30, 2002 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.

-5-

(c) Each 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 Mortgage Trustee, and the Thirty-Seventh
Supplemental Mortgage has been duly authorized. When the Thirty-Seventh
Supplemental Mortgage, in substantially the form approved by the Company, has
been executed and delivered by the Company and the Mortgage Trustee and recorded
as required by law, the Mortgage (i) will constitute a valid and legally binding
instrument enforceable in accordance with its terms except as enforceability may
be limited by Creditors' Rights Limitations; (ii) 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 (iii) and will create a similar lien upon all properties and assets
acquired by the Company after the execution and delivery of the Thirty-Seventh
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 Thirty-Seventh 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.

(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 (i) all of its real
property currently held in fee simple; (ii) 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); and (iii) all personal property owned by it. 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

-6-

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 Bonds and the compliance by the Company with all of the
applicable provisions of the First Mortgage Bonds and the Mortgage and the
execution, delivery and performance by the Company of the Thirty-Seventh
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 for the issue and sale of the Bonds, the issue and
delivery of the First Mortgage Bonds, the execution, delivery and performance by
the Company of this Bond Purchase Agreement, the Financing Agreement, the
Thirty-Seventh Supplemental Mortgage, the First Mortgage Bonds and the
Continuing Disclosure Agreement, or the consummation by the Company of the other
transactions contemplated by this Bond Purchase Agreement or the Mortgage.

(h) The Pennsylvania Public Utility Commission by order has
duly authorized the issuance and delivery of the First Mortgage Bonds 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.

-7-

(k) (i) 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); (ii) 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 (iii) all other information supplied by the Company to the
Representative 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

(m) The information with respect to the Company and the
Project and the descriptions of the Financing Agreement, the First Mortgage
Bonds, the Mortgage and the Continuing Disclosure Agreement 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 Representative as the
Representative 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 Representative 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 Representative and the
Company and will advise the Representative 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 referred to under the caption "TAX MATTERS" in
the Official Statement;

-8-

(b) indemnify and hold harmless the Authority, its members,
directors, officers, agents, attorneys, and employees and the Underwriters,
their officers, directors, officials, agents, attorneys, employees, and each
person, if any, who controls any of the Underwriters 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
Underwriters, or any of them, or any of their respective members, directors,
officers, agents, attorneys, and employees and each person, if any, who controls
any of the Underwriters 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: (i) a breach of the
Company's representations included in this Agreement; (ii) 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 either, or (iii) 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;

(c) undertake, pursuant to the Continuing Disclosure Agreement
dated December 31, 2002 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 Representative, and will advise the
Representative 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. Underwriters' Covenant. By acceptance hereof the Underwriters agree
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 (i) the offering and sale of
the Bonds on the grounds that the information under the caption "UNDERWRITING"
in the Preliminary 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

-9-

Representative furnished only the information under such "UNDERWRITING"
heading), or (ii) failure on the part of any Underwriter to deliver an Official
Statement to any purchaser. The Underwriters 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 Underwriters may otherwise have. The Underwriters
shall not be liable for any settlement of, any such action effected without its
consent.

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 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 (i) 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 (ii) shall survive delivery of the
Bonds.

9. Equitable Contribution. If the indemnification provided for in
Section 6(b) of this Bond Purchase Agreement is unavailable to any 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
such Underwriter, contribute to the amount paid or payable by such 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 such
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 such Underwriter in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and such
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 an 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 such
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 such Underwriter and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
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 an Underwriter as a

-10-

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 such Underwriter in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 9, an 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 such Underwriter has otherwise been required to pay by
reason of such untrue or allegedly untrue statement or omission or alleged
omission.

10. Official Statement; Public Offering.

(a) In order to enable the Underwriters to comply with Rule
15c2-12: (i) 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 it relates to the Authority, "INTRODUCTORY
STATEMENT") deem final and complete as of its date; (ii) the Company shall
provide to the Underwriters 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 (iii) 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 Underwriters by the Company (as that phrase
is defined in Rule 15c2-12) then the Company shall promptly give the
Representative notice thereof. The Authority and the Company hereby authorize
the use of the Preliminary Official Statement and the Official Statement by the
Underwriters in connection with the offering of the Bonds.

(b) After the Closing, and until the Representative has
informed the Authority and the Company that the Underwriters have 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 Representative; 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 Representative, 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 Representative, 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 Representative 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 to inform the Authority
and the Company in writing as to (i) the date and place of such filing and (ii)
the date of the end of the underwriting period.

-11-

11. Conditions of Underwriters' and Authority's Obligations. The
Underwriters' 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 Representative shall have received:

(i) An opinion of Obermayer, Rebmann, Maxwell &
Hippel, 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 holders of the
Bonds and the Representative;

(ii) An opinion of Obermayer, Rebmann, Maxwell &
Hippel, LLP, Bond Counsel, dated the date of Closing, substantially in
the form attached as Exhibit B hereto, addressed to the Representative;

(iii) An opinion of Blank Rome Comisky & McCauley
LLP, counsel for the Authority, dated the date of Closing, with respect
to the matters set forth in Exhibit C hereto, addressed to the
Representative and in form and substance reasonably satisfactory to the
Representative 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 Representative, the
Authority and Bond Counsel, in form and substance reasonably
satisfactory to the Representative and to Bond Counsel;

(v) An opinion of Ballard Spahr Andrews & Ingersoll,
LLP, counsel for the Underwriters, in form and substance reasonably
satisfactory to the Representative;

(vi) An opinion of legal counsel to the "Bond
Insurer" in form and substance reasonably satisfactory to the
Representative, relating to the enforceability of a municipal bond
insurance policy from the Bond Insurer (the "Bond Insurance Policy")
and the information concerning the Bond Insurer in the Official
Statement;

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

-12-

(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 Thirty-Seventh
Supplemental Mortgage and the Continuing Disclosure Agreement;

(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 Bonds, the Thirty-Seventh
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;

(xii) Two copies of the Authority Resolution;

-13-

(xiii) A letter from PricewaterhouseCoopers LLP,
dated the date of Closing and addressed to the Representative;
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 Representative 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
Representative of the receipt by the Authority of a Preliminary
Allocation relating to the Series A Bonds from the Pennsylvania
Department of Community and Economic Development and of the
registration of a Securities Certificate relating to the First Mortgage
Bonds and the Bonds with the Pennsylvania Public Utility Commission;
and

(xvii) Such additional documentation as the
Representative 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 Bonds 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 Representative, makes it inadvisable to proceed with the sale of
the Bonds; and the Representative 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 Representative shall deliver at Closing a certificate
in form acceptable to Bond Counsel to the effect that the Underwriters have 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.

12. Events Permitting the Underwriters to Terminate. The Underwriters
may terminate their obligation to purchase the Bonds at any time before Closing
if any of the following occurs:

-14-

(a) A legislative, executive or regulatory action or proposed
action, or a court decision, which in the reasonable judgment of the
Representative 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 Bonds
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 Representative 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 Representative will use their
best efforts to amend or supplement the Official Statement to reflect, to the
reasonable satisfaction of the Representative, 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 Project or any other facilities of the Company or the
issuance of the Bonds, which, in the reasonable judgment of the Representative,
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 Underwriters in a timely manner as required by Section 10 hereof. If the
Underwriters terminate their 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 Underwriters, or, except for the
payment of such costs of issuance described in Section 13 hereof which are due
and payable, the Company.

13. Expenses. All expenses and costs of the authorization, issuance,
sale and delivery of the Bonds including, without limitation, the preparation of
and furnishing to the Underwriters 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 Bonds, the Thirty-Seventh
Supplemental Mortgage 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 Underwriters 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. The Authority shall, bear no
out-of-pocket expense in connection with the transactions contemplated by this
Bond Purchase Agreement. The Underwriters will pay all other expenses of the
Underwriters in connection with the public offering of the Bonds.

-15-

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 Representative:

The GMS Group, L.L.C.
1489 Baltimore Pike
Building 200, Suite 245
Springfield, Pennsylvania 19064

Attention: George C. Werner, III
Senior Vice President

Fax #: (215) 851-6988
Email: gwerner@gmsgroup.com
--------------------

The Company:

Pennsylvania Suburban Water Company
762 Lancaster Avenue
Bryn Mawr, Pennsylvania 19010

Attention: Kathy Lee Pape, Vice President,
Treasurer & Rate Counsel

Fax #: (610) 519-0989
Email: papek@suburbanwater.com
-----------------------

-16-

The Authority:

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

Attention: J. Patrick Killian, Commerce Director

Fax #: (610) 566-7337
Email: infor@delcopa.org
-----------------

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 Representative.

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-

Exhibit 10.44
Execution Copy

IN WITNESS WHEREOF, the Authority, the Company and the Representative
have caused their duly authorized representatives 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

PENNSYLVANIA SUBURBAN WATER COMPANY

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

THE GMS GROUP, L.L.C.

By:  /s/ George C. Werner
---------------------------------
George C. Werner, III
Senior Vice President

S-1

SCHEDULE I
----------

Terms of Bonds
--------------

Principal Amounts:               Series A Bonds: $25,000,000
Series B Bonds: $3,200,000

Dated Date:                      December 31, 2002

Maturity Dates:                  Series A Bonds: September 1, 2032
Series B Bonds: June 1, 2010

Interest Payment Dates:          Series A Bonds: March 1 and September 1, commencing March 1, 2003
Series B Bonds: June 1 and December 1, commencing June 1, 2003

Rates of Interest:               Series A Bonds: 5.15%
Series B Bonds: 3.75%

Redemption provisions:

The Bonds are subject to redemption as follows:

Optional Redemption. The Series A Bonds are subject to redemption prior
to maturity by the Authority, at the direction of the Company, on or after
September 1, 2013, 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. The Series B Bonds are not
subject to optional redemption at any time.

Mandatory Sinking Fund Redemption. The Series B Bonds are subject to
mandatory sinking fund redemption prior to maturity by the Authority on the
dates and in the amounts set forth in the table below and at a redemption price
equal to one hundred percent (100%) of the principal amount thereof, plus
interest accrued to the date fixed for redemption. 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.

Redemption Date                Principal Amount
---------------                ----------------
June 1, 2003                   $400,000
June 1, 2004                   $400,000
June 1, 2005                   $400,000
June 1, 2006                   $400,000
June 1, 2007                   $400,000
June 1, 2008                   $400,000
June 1, 2009                   $400,000
June 1, 2010*                  $400,000

* Maturity Date

EXHIBIT A
---------

FORMS OF APPROVING OPINIONS OF
OBERMAYER REBMANN MAXWELL & HIPPEL LLP
(SEE APPENDIX D OF OFFICIAL STATEMENT)

A-1

EXHIBIT B
---------

FORM OF SUPPLEMENTAL OPINION OF
OBERMAYER REBMANN MAXWELL & HIPPEL LLP

December 31, 2002

The GMS Group, L.L.C.
The Mills at Victoria
1489 Baltimore Pike
Building 200, Suite 245
Springfield, PA  19064

RE: Delaware County Industrial Development Authority
$25,000,000 Water Facilities Revenue Bonds
(Pennsylvania Suburban Water Company Project), Series A of 2002
$3,200,000 Water Facilities Revenue Refunding Bonds
(Pennsylvania Suburban Water Company Project), Series B of 2002

Ladies and Gentlemen:

We have acted as Bond Counsel in connection with the issuance by the
Delaware County Industrial Development Authority (the "Authority") of the
above-referenced bonds (the "Bonds"). The Bonds are being sold by the Authority
pursuant to a Bond Purchase Agreement, dated December 19, 2002 (the "Purchase
Contract") among the Authority, Pennsylvania Suburban Water Company (the
"Company") and The GMS Group, L.L.C., as representative (the "Representative")
for itself, First American Municipals, Inc. and Janney Montgomery Scott LLC
(collectively, the "Underwriters"). This opinion is being delivered to you
pursuant to Section 11(c)(i) of the Purchase Contract. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed thereto in the
Purchase Contract.

The Bonds are being issued under the Pennsylvania Economic Development
Financing Law, as supplemented and amended (the "Act"), and a Trust Indenture,
dated as of December 15, 2002 (the "Indenture"), between the Authority and
Wachovia Bank, National Association, as trustee (the "Trustee"), to finance
certain projects for the benefit of the Company. The Authority and the Company
have entered into a Financing Agreement, dated as of December 15, 2002 (the
"Financing Agreement"), pursuant to which the Authority has agreed to loan the
proceeds of the issuance and sale of the Bonds to the Company and the Company
has agreed, among other things, to make payments to the Authority or its assigns
in such amounts and at such times as shall be sufficient to enable the Authority
to pay when due the principal of, premium if any, and interest on the Bonds.

B-1

As the basis for this opinion we have examined such matters of law and
such documents, certifications, instruments and records as we deemed necessary
to enable us to render the opinions set forth below, including the Act,
applicable provisions of the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder or made applicable with respect thereto
(collectively, "Code"), and original counterparts or certified copies of the
Authority Resolution, the Official Statement, the Purchase Contract,
certifications of certain Authority officials having responsibility for issuing
the Bonds given pursuant to the Code, opinions as to various matters delivered
by the Solicitor of the Authority and counsel to the Company, and the other
documents, certifications, instruments and records listed in the Index of
Closing Documents in respect of the Bonds.

In rendering this opinion, we have relied on the opinions referred to
above as to all matters of fact and law stated therein, and on the genuineness,
truthfulness and completeness of all documentation examined as referred to
above. We have assumed the conformity to original documents of all conformed
copies and photocopies, the genuineness of all signatures and, except with
respect to the Authority, the due authorization, execution and delivery of all
documents, the authority to do so of all persons executing such documents and
the enforceability thereof. We have further assumed that all certificates of
public officials examined by us have been duly and properly given and remain
accurate as of the date hereof.

Based on the foregoing and the other qualifications and limitations set
forth herein, we are of the opinion that:

1. The Bonds are not subject to the registration requirements
of the Securities Act of 1933, as amended, and the Indenture is not required to
be qualified under the Trust Indenture Act of 1939, as amended.

2. The Bond Purchase Agreement has been duly authorized,
executed and delivered by the Authority and constitutes the valid and binding
obligation of the Authority enforceable in accordance with its terms, subject
only to applicable bankruptcy, insolvency, moratorium, reorganization or other
laws affecting creditors' rights heretofore or hereafter enacted and to general
equity principles.

3. The execution and delivery of the Official Statement have
been authorized by the Authority.

4. The information and statements contained in the Official
Statement under the sections captioned "INTRODUCTORY STATEMENT," "THE BONDS,"
"SECURITY FOR THE BONDS" and in APPENDIX C thereto (insofar as Appendix C
purports to summarize provisions of the Bonds, the Trust Indenture and the
Financing Agreement) are fair and accurate summaries of the provisions of the
Bonds and the documents purported to be summarized therein, and matters set
forth in the section captioned "TAX MATTERS" and APPENDIX D thereto accurately
reflects our opinion as to such matters and the tax exempt nature of the
interest on the Bonds.

B-2

We have not verified and are not passing upon and do not assume any
responsibility for the accuracy, completeness or reasonableness of the
statements contained in the Official Statement, except for the determinations
with respect to the sections referred to in numbered paragraph 4 above, and
without having undertaken to determine independently the accuracy or
completeness of the statements contained in the Official Statement, nothing has
come to our attention which would lead us to believe that the Official Statement
(except for financial, tabular, demographic or statistical data therein and the
information contained under the headings "THE BONDS - Book-Entry Only System,"
"BOND INSURANCE," "ESTIMATED SOURCES AND USES OF FUNDS," "BONDHOLDERS' RISKS,"
and "LITIGATION" and in APPENDIX A, APPENDIX B and APPENDIX E of the Official
Statement, as to which we express no view) as of its date and as of the date of
Closing, contains any untrue statement of a material fact or omits to state any
material fact that is required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

Our opinion is specifically limited to the present internal laws of the
Commonwealth of Pennsylvania and present federal law and no opinion is expressed
as to the effect the law of any other jurisdiction might have upon the subject
matter of the opinions expressed herein under conflict of laws principles or
otherwise. We assume no obligation to update or supplement this opinion to
reflect any facts or circumstances that may hereafter come to our attention or
any changes in law that may hereafter occur. No opinion is expressed as to any
matter not set forth in the numbered paragraphs herein. This opinion is being
furnished to you solely in connection with the sale of the Bonds pursuant to the
Purchase Contract and may not be relied upon by any other person or for any
other purpose without our prior written consent.

This opinion may not be distributed or disclosed to any person, firm or
entity other than those represented at the Closing for the Bonds without our
prior written consent.

Very truly yours,

OBERMAYER REBMANN MAXWELL & HIPPEL LLP

B-3

EXHIBIT C
---------

Points to be covered in Opinion of Counsel for the Authority

(Terms defined in Bond Purchase Agreement are used here with same meanings)

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 Resolution was duly adopted by the Authority at two
public meetings held in accordance with the provisions of Section 13 of the act
of July 3,1986, (P.L. 388, No. 84, as amended), known as the Pennsylvania
Sunshine Act; and the Authority resolution remains in full force and effect and
has not been amended, repealed or superseded in any way.

3. The Authority has by proper action duly authorized the execution and
issuance of the Bonds and the execution and delivery of the Authority Financing
Documents. The Bonds have been duly and validly issued by the Authority and the
Authority Financing Documents have each been duly and validly executed and
delivered by the Authority and the Bonds and each of such documents are valid
and binding agreements of the Authority, enforceable against the Authority in
accordance with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws or legal or
equitable principles affecting the enforcement of creditor's rights.

4. To the knowledge of such counsel, the execution and the issuance by
the Authority of the Bonds, the execution and delivery by the Authority of the
Authority Financing Documents and performance by the Authority of the
Authority's obligations under the Bonds and the Authority's Financing 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, 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, or, to our knowledge, 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.

5. To the knowledge of such counsel, 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 transactions contemplated by the Bonds.

6. The Authority has approved the distribution of the Preliminary
Official Statement and the Official Statement by the Underwriters in connection
with the sale of the Bonds.

7. The information contained in the Preliminary Official Statement and
the Official Statement under the headings "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.

C-1

EXHIBIT D
---------

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

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

The GMS Group, L.L.C.,
The Mills at Victoria
1489 Baltimore Pike
Building 200, Suite 245
Springfield, Pennsylvania  19064

RE: $25,000,000 Aggregate Principal Amount of Delaware County
Industrial Development Authority Water Facilities Revenue
Bonds (Pennsylvania Suburban Water Company Project) Series A of 2002
and $3,200,000 Aggregate Principal Amount of Delaware County
Industrial Development Authority Water Facilities Revenue Refunding
Bonds (Pennsylvania Water Company Project) Series B of 2002
--------------------------------------------------------------------

Ladies and Gentlemen:

We have acted as counsel to Pennsylvania Suburban Water Company (the
"Company") in connection with (i) the issuance by Delaware County Industrial
Development Authority (the "Authority"), and the sale to The GMS Group, L.L.C.
pursuant to that certain Bond Purchase Agreement dated December 19, 2002 (the
"Purchase Agreement"), of $25,000,000 aggregate principal amount of Delaware
County Industrial Development Authority Water Facilities Revenue Bonds
(Pennsylvania Suburban Water Company) Series of A of 2002 and $3,200,000
aggregate principal amount of Delaware County Industrial Development Authority
Water Facilities Revenue Refunding Bonds (Pennsylvania Suburban Water Company)
Series B of 2002 (collectively, the "2002 Authority Bonds"), and (ii) the
issuance and delivery of $25,000,000 principal amount of the Company's First
Mortgage Bond, 5.15% Series due 2032 (the "Series A First Mortgage Bond") and

D-1

$3,200,000 principal amount of the Company's First Mortgage Bond, 3.75% Series
due 2010 (the "Series B First Mortgage Bond" and, together with the Series A
First Mortgage Bond, the "First Mortgage Bonds"), 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 Thirty-Seventh
Supplemental Indenture dated as of December 1, 2002 (the "Thirty-Seventh
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;

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

(d)      the Purchase Agreement;

(e)      the Construction and Financing Agreement dated as of December
1, 2002 (the "Financing Agreement") between the Authority and
the Company;

(f)      the Continuing Disclosure Agreement dated December 31, 2002
(the "Continuing Disclosure Agreement") between the Company
and J.P. Morgan Trust Company, National Association, as
trustee for the 2002 Authority Bonds (the "Trustee");

(g)      the Official Statement relating to the 2002 Authority Bonds
dated December 19, 2002 (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;

D-2

(j)      executed counterparts of the Original Mortgage and of the
Thirty-Seventh Supplemental Indenture supplemental thereto and
evidence satisfactory to us of the due recordation thereof in
the Counties of Berks, Bradford, Bucks, Chester, Columbia,
Delaware, Lawrence, Mercer, Montgomery, Northumberland, Pike,
Schuylkill and Wayne, Pennsylvania;

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

(l)      the First Mortgage Bonds 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; and

(n)      a certificate of the Company and various bringdown title
searches by Commonwealth Land Title Insurance Company in the
Counties of Berks, Bucks, Chester, Delaware and Montgomery,
Pennsylvania, by Landy & Landy of Sayre, Pennsylvania, in
Bradford County, Pennsylvania, by Fruit, Dill, Goodwin and
Scholl of Sharon, Pennsylvania, in the Counties of Lawrence
and Mercer, Pennsylvania, by Leavens & Roberts of Shamokin,
Pennsylvania in the Counties of Columbia, Northumberland and
Schuylkill, Pennsylvania, and by Raymond L. Hamill of
Honesdale, Pennsylvania in the Counties of Pike and Wayne,
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.

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 Thirty-Seventh Supplemental Indenture,
the Financing 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, without investigation and inquiry, and does not include matters of
which such attorneys could be deemed to have constructive knowledge.

D-3

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 Bond Purchase Agreement, the Financing Agreement, the First Mortgage
Bonds, Thirty-Seventh 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 Bonds,
Thirty-Seventh Supplemental Indenture and the Continuing Disclosure Agreement
have been duly authorized by all requisite corporate action.

3. Each 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.

4. The First Mortgage Bonds are not subject to the registration
requirements of the 1933 Act.

5. 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 and the Thirty-Seventh
Supplemental Mortgage have been properly recorded in the Counties of Berks,
Bradford, Bucks, Chester, Columbia, Delaware, Lawrence, Mercer, Montgomery,
Northumberland, Pike, Schuylkill and Wayne 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.

D-4

6. 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.

7. 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.

8. The Mortgage and the First Mortgage Bonds 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 Bonds which leads us to
believe that the information with respect to the Company and the Capital
Projects contained in the Official Statement (including Appendix A and the
information incorporated therein by reference) contain any untrue statement of a
material fact or omit 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 opinion expressed in paragraph 3 is subject to the
qualifications that the enforceability of the First Mortgage Bonds is 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.

D-5

(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.

(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 Bonds or the 2002 Authority Bonds
and may not be relied upon by any other person or for any other purpose.

Very truly yours,

D-6

The GMS Group, L.L.C.
The Mills at Victoria
1489 Baltimore Pike
Building 200,  Suite 245
Springfield, PA  19064103

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

RE: $25,000,000 Aggregate Principal Amount of Delaware County
Industrial Development Authority Water Facilities Revenue Bonds
(Pennsylvania Suburban Water Company Project) Series A of 2002
and $3,200,000 Aggregate Principal Amount of Delaware County
Industrial Development Authority Water Facilities Revenue Refunding
Bonds (Pennsylvania Water Company Project) Series B of 2002
(collectively, the "Bonds")

Ladies and Gentlemen:

I am Senior Vice President - Law and Administration for Pennsylvania
Suburban Water Company (the "Company").

Pursuant to Section 11(c)(iii) of the Bond Purchase Agreement among the
Authority, the Underwriter and the Company dated December 19, 2002 relating to
the Bonds (the "Bond Purchase Agreement"), 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 as set
forth in the Bond Purchase Agreement.

In my opinion:

(i) 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 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; 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; to the best of such counsel's knowledge, except as otherwise set
forth in the Official Statement, there are no legal or governmental proceedings
pending or, to its knowledge, threatened that would result in a material
modification, suspension or revocation thereof; and the Company has the legal
power to exercise the rights of eminent domain for the purposes of conducting
its water utility operations.

D-7

(ii) The issue and sale of the Bonds; the issue and delivery of the
First Mortgage Bonds and the compliance by the Company with all of the
applicable provisions of the First Mortgage Bonds and the Mortgage; and the
execution, delivery and performance by the Company of the Thirty-Seventh
Supplemental Mortgage, the Financing Agreement, the 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 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 Bonds; the execution,
delivery and performance of the Bond Purchase Agreement, the Financing
Agreement, the Thirty-Seventh Supplemental Mortgage, the First Mortgage Bonds
and the Continuing Disclosure Agreement; or the consummation of the other
transactions contemplated by the Bond Purchase Agreement or the Mortgage.

(iii) 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.

(iv) Each of the Indenture of Mortgage dated as of January 1, 1941 (the
"Original Indenture"), 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 thirty-seven indentures supplemental thereto, including the Thirty-Seventh
Supplemental Indenture dated as of December 1, 2002 between the Company and the
Trustee (the Original Indenture as so supplemented and amended, the "Indenture")
was duly authorized, executed and delivered by the Company and the Indenture
constitutes a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with tits 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).

D-8

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

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

The information set forth herein is as of the date set forth above and
the Company and I disclaim any undertaking to provide any updates or changes
which thereafter may be brought to our attention.

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-9

EXHIBIT 10.45

FINANCING AGREEMENT

between

DELAWARE COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY

and

PENNSYLVANIA SUBURBAN WATER COMPANY

Dated as of December 15, 2002

________________________________________________________________________________
________________________________________________________________________________

Relating to
$25,000,000 aggregate principal amount of
Delaware County Industrial Development Authority
Water Facilities Revenue Bonds
(Pennsylvania Suburban Water Company Project)
Series A of 2002

and

$3,200,000 aggregate principal amount of
Delaware County Industrial Development Authority
Water Facilities Revenue Refunding Bonds
(Pennsylvania Suburban Water Company Project)
Series B of 2002

________________________________________________________________________________
________________________________________________________________________________

SUBSTANTIALLY ALL OF THE RIGHTS OF THE DELAWARE COUNTY INDUSTRIAL DEVELOPMENT
AUTHORITY IN AND TO THIS AGREEMENT HAVE BEEN ASSIGNED TO WACHOVIA BANK, NATIONAL
ASSOCIATION, AS TRUSTEE UNDER THE TRUST INDENTURE DATED AS OF DECEMBER 15, 2002
BETWEEN SAID AUTHORITY AND SAID TRUSTEE.

TABLE OF CONTENTS

ARTICLE I............................................................................................2

DEFINITIONS.......................................................................................2
SECTION 1.01. .................................................................................2

ARTICLE II...........................................................................................3

REPRESENTATIONS AND FINDINGS......................................................................3
SECTION 2.01.  Representations and Warranties of the Authority.................................3
SECTION 2.02.  Representation and Warranties of the Company....................................4
SECTION 2.03.  Findings of the Authority.......................................................4

ARTICLE III..........................................................................................4

COMPLETION OF THE FACILITIES; ISSUANCE OF THE 2002

BONDS..........................................4
SECTION 3.01.  Improvement of the Facilities; Completion.......................................4
SECTION 3.02.  Issuance of Bonds...............................................................5
SECTION 3.03.  Payments From Project Funds.....................................................5
SECTION 3.04.  Requisitions....................................................................5
SECTION 3.05.  Plans and Specifications........................................................5
SECTION 3.06.  Completion of Construction Project..............................................6
SECTION 3.07.  Company to Pay Additional Amounts If Required...................................6
SECTION 3.08.  Investment of Amounts in the Series A Project Fund..............................6

ARTICLE IV...........................................................................................7

LOAN AND OTHER AMOUNTS............................................................................7
SECTION 4.01.  Loans by Authority to Company...................................................7
SECTION 4.02.  Repayment of Loans and Other Amounts............................................7
SECTION 4.03.  Security For Payment...........................................................10
SECTION 4.04.  Assignment to Trustee..........................................................10
SECTION 4.05.  Operation and Maintenance......................................................11
SECTION 4.06.  Insurance......................................................................11
SECTION 4.07.  Liens..........................................................................11
SECTION 4.08.  Facilities Used For Purpose of the Act.........................................12
SECTION 4.09.  Payment of Certain Costs.......................................................12
SECTION 4.10.  Obligation to Make Payments Absolute...........................................12

ARTICLE V...........................................................................................12

SPECIAL COVENANTS................................................................................12
SECTION 5.01.  No Warranty....................................................................12
SECTION 5.02.  Company to Maintain Corporate Existence, Etc...................................12
SECTION 5.03.  Operation of Facilities; Maintenance of Licenses and Permits...................13
SECTION 5.04.  Additional Permits.............................................................13
SECTION 5.05.  Authority to Maintain Corporate Existence, Etc.................................13
SECTION 5.06.  Compliance With Continuing Disclosure Agreement................................13
SECTION 5.07.  Certain Tax Covenants..........................................................13
SECTION 5.08.  Financial Statements and Other Reporting Requirements of the Company...........14
SECTION 5.09.  Nondiscrimination Provisions...................................................14

i

ARTICLE VI..........................................................................................14

ASSIGNMENT, LEASING AND SALE OF FACILITIES.......................................................14
SECTION 6.01.  Assignment, Lease and Sale of Facilities.......................................14

ARTICLE VII.........................................................................................15

EVENTS OF DEFAULT AND REMEDIES...................................................................15
SECTION 7.01.  Events of Default..............................................................15
SECTION 7.02.  Remedies.......................................................................16
SECTION 7.03.  Remedies Not Exclusive.........................................................17
SECTION 7.04.  Reimbursement of Fees and Expenses.............................................17
SECTION 7.05.  Waivers of Breaches............................................................17

ARTICLE VIII........................................................................................18

MISCELLANEOUS....................................................................................18
SECTION 8.01.  Termination....................................................................18
SECTION 8.02.  Notices........................................................................18
SECTION 8.03.  Benefit of Agreement...........................................................18
SECTION 8.04.  Amendments.....................................................................18
SECTION 8.05.  Counterparts...................................................................18
SECTION 8.06.  Invalidity of Certain Clauses..................................................18
SECTION 8.07.  Governing Law..................................................................18
SECTION 8.08.  Indemnification................................................................18
SECTION 8.09.  Limitation of Rights Against Authority.........................................20
SECTION 8.10.  Limitation of Recourse Against Authority.......................................21

EXHIBIT "A" DESCRIPTION OF THE FACILITIES..........................................................A-1

EXHIBIT "B" NONDISCRIMINATION PROVISIONS...........................................................B-1

ii

FINANCING AGREEMENT

THIS FINANCING AGREEMENT, dated as of December 15, 2002 (as it may be
amended, supplemented or otherwise modified and in effect from time to time,
this "Agreement"), by and between the DELAWARE COUNTY INDUSTRIAL DEVELOPMENT
AUTHORITY, a body corporate and politic organized and existing under and by
virtue of the laws of the Commonwealth of Pennsylvania (the "Authority"), and
PENNSYLVANIA SUBURBAN WATER COMPANY, a corporation organized and existing under
the laws of the Commonwealth of Pennsylvania (the "Company").

WITNESSETH:

WHEREAS, the Authority was organized pursuant to the Economic
Development Financing Law of the Commonwealth of Pennsylvania, Act of August 23,
1967, P.L. 251, as amended (the "Act"), which Act declares it to be the policy
of the Commonwealth of Pennsylvania (the "Commonwealth") to promote the health,
safety, morals, employment, business opportunities and general welfare of the
people thereof by providing for the creation of industrial and commercial
development authorities which shall exist and operate as public
instrumentalities of the Commonwealth for the public purpose of alleviating
unemployment, maintaining employment at a high level, eliminating and preventing
blight and eliminating or reducing air and water pollution, and creating and
developing business opportunities by the construction, improvement,
rehabilitation, revitalization and financing of industrial, commercial,
manufacturing and research and development enterprises; and

WHEREAS, the Act declares that every authority incorporated under it
shall be for the purpose of acquiring, holding, constructing, improving,
maintaining, owning, financing and leasing, as lessor or as lessee, among other
things, facilities for the furnishing of water; and

WHEREAS, the Company is engaged primarily in the activity, under the
regulatory control of the Pennsylvania Public Utility Commission, of furnishing
water available on reasonable demand to members of the general public; and

WHEREAS, the Authority adopted a Resolution on November 8, 2002
providing for the issuance and sale by the Authority of its Water Facilities
Revenue Bonds (Pennsylvania Suburban Water Company Project), Series A of 2002,
in the aggregate principal amount of $25,000,000 (the "Series A Bonds"), to
provide funds to pay the costs of a project (the "Construction Project")
consisting of financing (i) the costs of cleaning, re-lining and related
improvement of pipelines and related equipment and facilities (the "Facilities")
located in the Counties of Delaware, Montgomery and Bucks in Pennsylvania and
that are part of the Company's system for the distribution of water to its
customers, and (ii) related financing costs; and

WHEREAS, the Authority adopted a Resolution on October 25, 2002
providing for the issuance and sale by the Authority of its Water Facilities
Revenue Refunding Bonds (Pennsylvania Suburban Water Company Project), Series B
of 2002, in the aggregate principal amount of $3,200,000 (the "Series B Bonds"
and, together with the Series A Bonds, the "2002 Bonds") to provide funds to pay
the costs of a project (the "Refunding Project" and, together with the
Construction Project, the "2002 Projects") consisting of the current refunding
of the Authority's Water Facilities Revenue Refunding Bonds (Philadelphia
Suburban Water Company Project), Series of 1992 (the "1992 Bonds"); and

WHEREAS, in connection with the issuance by the Authority of the 2002
Bonds to provide funds for the cost of the Construction Project and the
Refunding Project, the Company is to enter into this Agreement under which the
Authority agrees to loan the proceeds of the 2002 Bonds to the Company and the
Company agrees to pay to the Authority, in repayment of the loan, amounts
sufficient to pay the principal of and interest on the 2002 Bonds as and when
due; and

WHEREAS, the Company has commenced the Construction Project; and

WHEREAS, the Company now desires that the Authority proceed with (i)
the issuance and sale of the Series A Bonds to provide the funds to pay the
costs of the Construction Project and (ii) the issuance and sale of the Series B
Bonds to provide funds to pay the costs of the Refunding Project; and

WHEREAS, the Authority has authorized the issuance and sale of the
2002 Bonds; and

WHEREAS, the 2002 Bonds are to be issued under and secured by a Trust
Indenture, dated as of December 15, 2002 (as it may be amended, supplemented or
otherwise modified and in effect from time to time, the "Indenture"), between
the Authority and Wachovia Bank, National Association, a national banking
association organized and existing under the laws of the United States of
America and having a corporate trust office and place of business in
Philadelphia, Pennsylvania, as trustee ("Trustee"); and

WHEREAS, the proceedings to be undertaken by the Authority in respect
of the financing of the 2002 Projects have been approved by the Secretary of the
Department of Community and Economic Development of the Commonwealth;

NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby and in consideration of the mutual covenants hereinafter contained, DO
HEREBY AGREE as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01. Terms defined in the preambles hereof shall have the
meanings ascribed thereto in such preambles. Other capitalized terms used herein
and not otherwise defined herein shall have the meanings ascribed thereto in the
Indenture.

For all purposes of this Agreement, the terms defined in this Article I
shall have the respective meanings herein specified, unless the context clearly
otherwise requires:

2

"Completion Date" shall mean the date of completion of the improvements
to the Facilities, as that date shall be certified pursuant to Section 3.07
hereof.

"Construction Loan" shall mean the financing provided by the Authority
to the Company pursuant to Section 4.01 hereof to provide funds for and toward
the Costs of the Construction Project.

"Construction Loan Repayments" shall mean the payments to be made by
the Company to the Authority pursuant to Section 4.02(a) hereof.

"Event of Default" shall mean any of the events specified as such under
Section 7.01 hereof.

"Loan Repayments" shall mean the Construction Loan Repayments and the
Refunding Loan Repayments.

"Loans" shall mean the Construction Loan and the Refunding Loan.

"Refunding Loan" shall mean the financing provided by the Authority to
the Company pursuant to Section 4.01 hereof to provide funds for and toward the
Costs of the Refunding Project.

"Refunding Loan Repayments" shall mean the payments to be made by the
Company to the Authority pursuant to Section 4.02(b) hereof.

ARTICLE II

REPRESENTATIONS AND FINDINGS

SECTION 2.01. Representations and Warranties of the Authority. The
Authority makes the following representations as the basis for the undertakings
on the part of the Company herein contained:

(a) The Authority is a public instrumentality of the
Commonwealth and a public body corporate and politic organized and existing
under and pursuant to the Act.

(b) The Authority has full power and authority to enter into
this Agreement and to perform and observe the agreements and covenants on its
part contained herein, and by proper corporate action has duly authorized the
execution and delivery hereof. The execution and delivery of this Agreement by
the Authority and the performance of its obligations hereunder, do not and will
not violate or constitute a default under the Authority's Articles of
Incorporation or bylaws or any agreement, indenture, mortgage, lease, note or
other obligation or instrument or order or regulation of any court or
administrative agency binding upon the Authority.

(c) Under existing law, no taxes on income or profits are
imposed on the Authority.

3

(d) As required by the Act, the Secretary of the Department of
Community and Economic Development of the Commonwealth has determined that the
Facilities and the financing of the improvement thereof pursuant to the
Construction Project are in apparent conformity with the Act and any
regulations, statements of policy, guidelines or rulings promulgated pursuant to
the Act, and said Secretary has, by instrument dated December 10, 2002, approved
the same and certified such approval to the Authority.

SECTION 2.02. Representation and Warranties of the Company. The Company
makes the following representations as the basis for the undertakings on the
part of the Authority herein contained:

(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth, and has all
required corporate power and authority to enter into this Agreement and to
perform and observe the agreements and covenants on its part contained herein.
The Company by proper corporate action has duly authorized the execution and
delivery of this Agreement. The execution and delivery of this Agreement by the
Company and the performance of its obligations hereunder do not and will not
violate or constitute a default under the Corporation's articles of
incorporation or bylaws or any agreement, indenture, mortgage, lease, note or
other obligation or instrument or any order of any court or administrative
agency binding upon the Company.

(b) The "cost" of the Construction Project, as defined in the
Act, is estimated by the Company as of the date hereof to be not less than
$25,000,000.

(c) The Facilities are to be located in the Counties of
Delaware, Montgomery and Bucks in the Commonwealth, and within the authorized
service area of the Company.

SECTION 2.03. Findings of the Authority. The Authority hereby confirms
its findings that:

(a) The Company is of a nature and size and is engaged in
activities which require substantial capital, is financially responsible to
assume all obligations prescribed by the Authority and the Act and is qualified
to be an "occupant" for purposes of the Act.

(b) The Project to be undertaken by the Authority hereunder
will promote the purposes of the Act by protecting the health, safety and
general welfare of the people of the Commonwealth and encouraging economic
development within the Commonwealth through the provision of basic services and
facilities, thereby alleviating unemployment, maintaining employment at a high
level and creating and developing business opportunities.

ARTICLE III

COMPLETION OF THE FACILITIES; ISSUANCE OF THE 2002 BONDS

SECTION 3.01. Improvement of the Facilities; Completion. The
construction of certain of the improvements to the Facilities has been
commenced. The Company will cause the construction of improvements to the
Facilities undertaken by the Company to be completed with all reasonable
dispatch substantially in accordance with the Plans and Specifications. In order
to effectuate the purposes of this Agreement, the Company will make, execute,
acknowledge and deliver, or cause to be made, executed, acknowledged and
delivered, all such contracts, orders, receipts, writings and instructions, in
the name of the Company or otherwise, with or to other Persons, and in general
do or cause to be done all such other things, as may be requisite or proper for
constructing improvements to the Facilities pursuant to the Construction Project
and fulfilling the obligations of the Company under this Agreement.

4

The Company will maintain such records in connection with the
Construction Project as to permit ready identification of the Facilities and the
Cost of improvement thereof.

SECTION 3.02. Issuance of Bonds.

(a) To provide funds for payment of the Cost of the
Construction Project, the Authority will issue and sell the Series A Bonds and
deliver the proceeds thereof to the Trustee. All proceeds received from said
sale shall be deposited in the Series A Project Fund. The Company hereby
approves all of the terms, provisions and other details of the Series A Bonds
and the Indenture.

(b) To provide funds for payment of the Cost of the Refunding
Project, the Authority will issue and sell the Series B Bonds and deliver the
proceeds thereof to the Trustee. All proceeds received from said sale shall be
deposited in the Series B Project Fund. The Company hereby approves all of the
terms, provisions and other details of the Series B Bonds and the Indenture.

SECTION 3.03. Payments From Project Funds.

(a) In the Indenture, the Authority has authorized and
directed the Trustee to make payments from the Series A Project Fund to pay the
Cost of the Construction Project upon receipt of Requisitions signed by an
Authorized Company Representative, setting forth the matters required pursuant
to Exhibit "B" to the Indenture.

(b) In the Indenture, the Authority has authorized and
directed the Trustee to transfer from the Series B Project Fund the Escrow Agent
the amount required to effect the redemption of the 1992 Bonds pursuant to the
Refunding Project.

SECTION 3.04. Requisitions. The Company will cause Requisitions from
the Series A Project Fund to be submitted to the Trustee as may be necessary to
effect payments out of the Series A Project Fund in accordance with the
provisions of the Indenture; provided, however, that the Company will not submit
any Requisition for payment of any item not properly included in the "cost" of
the Construction Project as defined in the Act or not properly included in the
"Cost" of the Project as defined in the Indenture or which, if paid, would
result in less than 95% of the proceeds from the Series A Bonds being used to
construct improvements to the Facilities.

SECTION 3.05. Plans and Specifications. The Company may revise the
Plans and Specifications at any time and from time to time prior to the
Completion Date, provided that in the case of a change the amount of which, when
aggregated with the amount of all prior changes by the Company to the Plans and
Specifications, exceeds three percent (3%) of the principal amount of the Series
A Bonds (the "Threshold Amount"), (a) an Authorized Company Representative shall
certify to the Trustee that the Facilities provided for by the revised Plans and
Specifications will constitute facilities for the furnishing of water meeting
the requirements of Section 142(a)(4) of the Code; and (b) the Trustee shall be
furnished with a Favorable Opinion that the revision of the Plans and
Specifications and the expenditure of moneys from the Series A Project Fund to

5

pay the Cost of the Construction Project in accordance with the revised Plans
and Specifications will not adversely affect the exclusion of interest on the
Series A Bonds from gross proceeds of the holders thereof for federal income
purposes. The amount of any change to the Plans and Specifications with respect
to which the requirements of clauses (a) and (b) have been satisfied shall not
be included in determining whether the sum of changes to the Plans and
Specifications has exceeded the Threshold Amount.

SECTION 3.06. Completion of Construction Project. When the Construction
Project has been completed, the Company shall so notify the Authority and the
Trustee by a certificate of an Authorized Company Representative. Such
certificate shall establish the Completion Date and shall state that, except for
amounts retained by the Trustee at the Company's direction for any Costs of the
Construction Project not then due and payable or the liability for payment of
which is being contested or disputed by the Company, construction of
improvements to the Facilities has been completed substantially in accordance
with the Plans and Specifications, and all labor, services, materials and
supplies used therefor have been paid for. Notwithstanding the foregoing, such
certificate may state that it is given without prejudice to any rights against
third parties which exist at the date thereof or which may subsequently come
into being.

SECTION 3.07. Company to Pay Additional Amounts If Required. The
parties acknowledge that the Construction Project is comprised of a number of
discrete components that are independent of one another. If the Company has
commenced a discrete component of the Construction Project and the moneys in the
Series A Project Fund shall not be sufficient to pay the Costs of such component
of the Construction Project undertaken by the Company, the Company will complete
such component of the Construction Project and pay all Costs of Construction in
excess of the moneys available in the Series A Project Fund. The Authority does
not make any warranty, either express or implied, that the moneys which will be
paid into the Series A Project Fund will be sufficient to pay the Costs of the
Construction Project. If the Company shall pay any portion of the Costs of the
Construction Project pursuant to the provisions of this Section, it shall not be
entitled to any reimbursement therefor from the Authority, the Trustee or the
holders of any of the Series A Bonds, nor shall it be entitled to any diminution
in or postponement of the Construction Loan Repayments required in Section 4.02
hereof to be paid by the Company.

SECTION 3.08. Investment of Amounts in the Series A Project Fund. Any
moneys held in the Series A Project Fund shall be invested or reinvested as
provided in Article VI of the Indenture. The Company shall not request any
investment of such moneys which would be in violation of the covenant of the
Authority contained in the final paragraph of Section 6.03 of the Indenture.

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ARTICLE IV

LOAN AND OTHER AMOUNTS

SECTION 4.01. Loans by Authority to Company. Concurrently with the
execution and delivery of this Agreement and at the request of the Company, the
Authority is issuing the 2002 Bonds under the Indenture. The Authority hereby
agrees:

(a) to make a loan to the Company in the principal amount of
$25,000,000, such amount being equal to the aggregate principal amount of the
Series A Bonds; and the deposit by the Authority of the proceeds of the sale of
the Series A Bonds in accordance with Section 3.03 hereof shall be deemed to
constitute the advance by the Authority to the Company of the full principal
amount of the Construction Loan; and

(b) to make a loan to the Company in the principal amount of
$3,200,000, such amount being equal to the aggregate principal amount of the
Series B Bonds; and the deposit by the Authority of the proceeds of the sale of
the Series B Bonds in accordance with Section 3.03 hereof shall be deemed to
constitute the advance by the Authority to the Company of the full principal
amount of the Refunding Loan.

SECTION 4.02. Repayment of Loans and Other Amounts.

(a) Construction Loan Repayments. The Company shall pay to the
Authority, as and for the repayment of the Construction Loan, (i) on the second
Business Day prior to each Interest Payment Date, maturity date or date
established for the redemption of the Series A Bonds, as the case may be, an
amount which, together with other moneys available for the purpose in the Series
A Debt Service Fund under the Indenture, will equal the sum of (x) the interest
which will become due on such date on the Series A Bonds; plus (y) the principal
amount of the Series A Bonds, if any, maturing on such date; plus (z) the
principal amount of and premium, if any, on the Series A Bonds, if any, to be
redeemed on such date; and (ii) on any date on which the Series A Bonds shall be
declared to be and shall become due and payable prior to their stated maturity
pursuant to the provisions of the Indenture, an aggregate amount equal to the
sum of the principal or redemption price of and interest so becoming due and
payable on the Series A Bonds (all of the foregoing are collectively referred to
herein as the "Construction Loan Repayments").

Nothing herein contained shall be construed as imposing on the
Authority or on the Trustee any duty or responsibility of giving any prior
notice to the Company of the due date of any Construction Loan Repayment
hereunder, or of the amount on deposit in the Series A Debt Service Fund, or of
the amount of any credits available to the Company against any Construction Loan
Repayment, and failure by the Company to receive any such prior notice, even if
customarily given by the Authority or the Trustee, shall not relieve the Company
of its obligation to make any Construction Loan Repayment when it is due and
payable.

All such payments shall be made in immediately available funds at the
place of payment on the payment date in question. The Company shall have the
option to make prepayment, from time to time, in whole or in part, of any amount
due with respect to the Construction Loan, together with interest accrued and to
accrue with respect to such prepayment. The Authority shall direct the Trustee
in writing to apply such prepayments to the purchase or redemption of Series A
Bonds in such manner, consistent with the provisions of the Indenture, as may be
directed by the Company.

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In the event the Company shall fail to make any of the payments
required in this Section, such payment so in default shall continue as an
obligation of the Company until the amount in default shall have been fully
paid, and the Company will pay the same with interest thereon from the due date
until paid at the highest rate per annum borne by the Series A Bonds.

The obligation of the Company to make Construction Loan Repayments
hereunder is subject to acceleration as set forth in Section 7.02 hereof.

It is intended that the Company shall make Construction Loan Repayments
hereunder at such times and in such amounts as shall be sufficient to enable the
Authority to make full and timely payment of principal or Redemption Price of,
and interest on, the Series A Bonds. Accordingly, notwithstanding any other
provision hereof to the contrary, if for any reason the amounts paid by the
Company pursuant to this Section 4.02(a) or pursuant to the other provisions of
this Agreement, together with any other amounts available therefor under the
Indenture, are at any time insufficient to make payments of the principal or
Redemption Price of and interest on the Series A Bonds when due, whether at
maturity, upon redemption, by acceleration or otherwise, the Company will pay to
the Trustee forthwith the amount required to make up such deficiency.

(b) Refunding Loan Repayments. The Company shall pay to the
Authority, as and for the repayment of the Refunding Loan, (i) on the second
Business Day prior to each Interest Payment Date, maturity date or date
established for the redemption of the Series B Bonds, as the case may be, an
amount which, together with other moneys available for the purpose in the Series
B Debt Service Fund under the Indenture, will equal the sum of (x) the interest
which will become due on such date on the Series B Bonds; plus (y) the principal
amount of the Series B Bonds, if any, maturing on such date; plus (z) the
principal amount of and premium, if any, on the Series B Bonds, if any, to be
redeemed on such date; and (ii) on any date on which the Series B Bonds shall be
declared to be and shall become due and payable prior to their stated maturity
pursuant to the provisions of the Indenture, an aggregate amount equal to the
sum of the principal or redemption price of and interest so becoming due and
payable on the Series B Bonds (all of the foregoing are collectively referred to
herein as the "Refunding Loan Repayments").

Nothing herein contained shall be construed as imposing on the
Authority or on the Trustee any duty or responsibility of giving any prior
notice to the Company of the due date of any Refunding Loan Repayment hereunder,
or of the amount on deposit in the Series B Debt Service Fund, or of the amount
of any credits available to the Company against any Refunding Loan Repayment,
and failure by the Company to receive any such prior notice, even if customarily
given by the Authority or the Trustee, shall not relieve the Company of its
obligation to make any Refunding Loan Repayment when it is due and payable.

8

All such payments shall be made in funds which will be immediately
available funds at the place of payment on the payment date in question. The
Company shall have the option to make prepayment, from time to time, in whole or
in part, of any amount due with respect to the Refunding Loan, together with
interest accrued and to accrue with respect to such prepayment. The Authority
shall direct the Trustee in writing to apply such prepayments to the purchase or
redemption of Series B Bonds in such manner, consistent with the provisions of
the Indenture, as may be directed by the Company.

In the event the Company shall fail to make any of the payments
required in this Section, such payment so in default shall continue as an
obligation of the Company until the amount in default shall have been fully
paid, and the Company will pay the same with interest thereon from the due date
until paid at the highest rate per annum borne by the Series B Bonds.

The obligation of the Company to make Refunding Loan Repayments
hereunder is subject to acceleration as set forth in Section 7.02 hereof.

It is intended that the Company shall make Refunding Loan Repayments
hereunder at such times and in such amounts as shall be sufficient to enable the
Authority to make full and timely payment of principal or Redemption Price of,
and interest on, the Series B Bonds. Accordingly, notwithstanding any other
provision hereof to the contrary, if for any reason the amounts paid by the
Company pursuant to this Section 4.02(b) or pursuant to the other provisions of
this Agreement, together with any other amounts available therefor under the
Indenture, are at any time insufficient to make payments of the principal or
Redemption Price of and interest on the Series B Bonds when due, whether at
maturity, upon redemption, by acceleration or otherwise, the Company will pay to
the Trustee forthwith the amount required to make up such deficiency.

(c) Other Amounts. The Company agrees to make additional
payments as follows:

(i) to the Authority on the date of issuance and
delivery of the 2002 Bonds, a loan closing fee of $27,700 with respect to the
Loans (less $2,000 of such fee paid by the Company to the Authority as a deposit
upon submission of the Company's financing application for the Projects);

(ii) to the Authority upon its submission of an
invoice therefor to the Company from time to time, an annual fee and a
termination fee of such amount as the Authority may customarily charge from time
to time;

(iii) to the Authority upon its written request at
any time, an amount equal to the reasonable expenses incurred by the Authority
in enforcing the provisions of this Agreement or the Indenture, or incurred in
defending any action or proceeding with respect to the Facilities, this
Agreement, the Tax Compliance Agreement or the Indenture and not otherwise
required to be paid by the Company under this Agreement;

(iv) to the Trustee upon its written request, an
amount equal to the reasonable fees and charges of the Trustee for its services
and the reasonable expenses incurred by it in connection with the Indenture and
this Agreement (including without limitation the reasonable fees and expenses of
any attorneys retained by the Trustee), in accordance with any separate
agreement between the Company and the Trustee with respect thereto; and

9

(v) to the Trustee, for deposit to the credit of the
Series A Rebate Fund or the Series B Rebate Fund established under the
Indenture, any amount required to be deposited in such Rebate Fund pursuant to
the Indenture and the Tax Compliance Agreement at the times required under the
Indenture and the Tax Compliance Agreement.

SECTION 4.03. Security For Payment.

(a) To further secure the obligation of the Company to make
Construction Loan Repayments, the Company will execute and deliver,
contemporaneously with the execution and delivery of this Agreement, its Series
A First Mortgage Bond under the Mortgage Indenture in such principal amount and
with such interest rate, interest payment and maturity dates and redemption
provisions as may correspond to such provisions of the Series A Bonds issued and
sold by the Authority.

(b) To further secure the obligation of the Company to make
Refunding Loan Repayments, the Company will execute and deliver,
contemporaneously with the execution and delivery of this Agreement, its Series
B First Mortgage Bond under the Mortgage Indenture in such principal amount and
with such interest rate, interest payment and maturity dates and redemption
provisions as may correspond to such provisions of the Series B Bonds issued and
sold by the Authority.

SECTION 4.04. Assignment to Trustee.

(a) This Agreement (except for the Authority's Reserved
Rights), the Construction Loan Repayments hereunder and all security therefor,
including the payments under the Series A First Mortgage Bond and income earned
from the investment of funds held under the Indenture, are to be assigned and
pledged by the Authority to the Trustee pursuant to the Indenture as security
for the payment of the principal of, premium, if any, and interest on the Series
A Bonds. The Company consents to such assignment and pledge and agrees that, as
to the Trustee, its obligation to make such Construction Loan Repayments and the
payments required under the Series A First Mortgage Bond shall be absolute and
unconditional and shall not be subject to any defense (other than full and
indefeasible payment) or to any right of set off, counterclaim or recoupment
arising out of any breach by the Authority of any obligation to the Company,
whether hereunder or otherwise, or out of any indebtedness or liability at any
time owing to the Company by the Authority.

(b) This Agreement (except for the Authority's Reserved
Rights), the Refunding Loan Repayments hereunder and all security therefor,
including the payments under the Series B First Mortgage Bond and income earned
from the investment of funds held under the Indenture, are to be assigned and
pledged by the Authority to the Trustee as security for the payment of the
principal of, premium, if any, and interest on the Series B Bonds. The Company
consents to such assignment and pledge and agrees that, as to the Trustee, its
obligation to make such Refunding Loan Repayments and the payments required
under the Series B First Mortgage Bond shall be absolute and unconditional and
shall not be subject to any defense (other than full and indefeasible payment)
or to any right of set off, counterclaim or recoupment arising out of any breach
by the Authority of any obligation to the Company, whether hereunder or
otherwise, or out of any indebtedness or liability at any time owing to the
Company by the Authority.

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(c) The Authority hereby directs the Company and the Company
agrees to pay to the Trustee at its designated corporate office in Philadelphia,
Pennsylvania or Charlotte, North Carolina, all Loan Repayments pursuant to this
Agreement and the payments required under the First Mortgage Bonds.

(d) Except as provided herein and in Section 6.01, the
Authority will not otherwise sell, assign, transfer, convey or dispose of the
revenues from the Facilities or the Loan Repayments or the First Mortgage Bonds
during the term of this Agreement, nor will it take any action which may
reasonably be construed as tending to cause or induce the levy of special
assessments against the Facilities or such revenues or the First Mortgage Bonds,
nor will it create or suffer to be created any lien or charge upon the
Facilities or such revenues or the First Mortgage Bonds except Permitted
Encumbrances.

SECTION 4.05. Operation and Maintenance. The Company shall maintain,
preserve, and keep the Facilities or cause the Facilities to be maintained,
preserved and kept, with the appurtenances thereto and every part and parcel
thereof, in good repair, working order and condition and, from time to time,
will make or cause to be made all such repairs, replacements and renewals as it
deems necessary. The Authority shall not operate the Facilities or have any
obligation to maintain them.

The Company shall have the privilege of remodeling the Facilities or
making substitutions, modifications and improvements to the Facilities from time
to time as it, in its discretion, may deem to be desirable for its uses and
purposes, the cost of which remodeling, substitutions, modifications and
improvements shall be paid by the Company and the same shall be the property of
the Company and be included under the terms of this Agreement as part of the
Facilities.

SECTION 4.06. Insurance. At all times during the term of this
Agreement, the Company will keep the Facilities continuously insured in
accordance with the requirements of the Mortgage Indenture.

SECTION 4.07. Liens. The Company will pay or cause to be discharged or
make adequate provision to satisfy and discharge, within sixty (60) days after
the same shall accrue, any lien or charge (other than Permitted Encumbrances)
upon any Loan Repayments hereunder or upon the First Mortgage Bonds and all
lawful claims or demands which, if unpaid, might be or become a lien upon any
Loan Repayments hereunder or upon the First Mortgage Bonds. Notwithstanding the
foregoing, if the Company shall first notify the Authority and Trustee of its
intention so to do, the Company may in good faith contest any such lien or
charge or claim or demand in appropriate legal proceedings, and in such event
may permit the items so contested to remain undischarged and unsatisfied during
the period of such contest and any appeal therefrom, unless the Authority or the
Trustee shall notify the Company in writing that, in the opinion of Counsel, by
nonpayment of any such items the lien of the Indenture as to the Loan Repayments
or as to the First Mortgage Bonds shall be materially endangered, in which event
the Company shall promptly pay and cause to be satisfied and discharged all such
unpaid items. The Authority will cooperate fully with the Company in any such
contest.

11

SECTION 4.08. Facilities Used For Purpose of the Act. So long as the
Company operates the Facilities, they will be used for purposes permitted by the
Act and as facilities for the furnishing of water.

SECTION 4.09. Payment of Certain Costs. The Company shall pay or cause
to be paid all of the expenses of operation of the Facilities, including,
without limitation, the cost of all necessary and proper repairs, replacements
and renewals made pursuant to Section 4.05 hereof.

SECTION 4.10. Obligation to Make Payments Absolute. The obligations of
the Company to make the Loan Repayments and other payments required pursuant to
this Agreement and to perform and observe the other agreements contained herein
shall be absolute and unconditional until such time as the principal of,
premium, if any, and interest on the 2002 Bonds are paid in full. The Company
will not suspend or discontinue, or permit the suspension or discontinuance of,
any payment provided for in this Agreement or the performance or observance of
any of the Company's obligations hereunder, for any reason or cause whatsoever,
including (without limiting the generality of the foregoing), (i) any
destruction of or damage to, or any condemnation or taking by any public or
private entity of, all or any portion of the Facilities; (ii) any acts or
circumstances which may constitute failure of consideration or commercial
frustration of purpose; any change in the tax or other laws or administrative
rulings of or administrative actions by the United States or the Commonwealth or
any political subdivision of either; or (iii) any failure of the Authority, the
Trustee, any other Paying Agent or the Bond Insurer to perform and to observe
any agreement, whether express or implied, or any duty, liability or obligation,
arising out of or connected with this Agreement, the Indenture, the Financial
Guaranty Insurance Policy, the Tax Compliance Agreement or the 2002 Bonds, as
the case may be.

ARTICLE V

SPECIAL COVENANTS

SECTION 5.01. No Warranty. The Authority makes no warranty, either
express or implied, as to the actual or designed capacity of the Facilities, as
to the suitability of the Facilities for the purposes specified in this
Agreement, or that the Facilities will be suitable for the Company's purposes or
needs.

SECTION 5.02. Company to Maintain Corporate Existence, Etc. The Company
shall maintain its corporate existence and its qualification to do business in
the Commonwealth, will not dissolve or otherwise dispose of all or substantially
all its assets and will not consolidate with or merge into another corporation
except as provided in this Section 5.02; provided, however, that the Company may
consolidate with or merge into another corporation, or sell or otherwise
transfer to another Company all or substantially all its assets as an entirety
and thereafter dissolve, if (a) the successor corporation assumes in writing all
the obligations of the Company in the Agreement and in the First Mortgage Bonds,
(b) the Company delivers to the Authority, the Trustee and the Bond Insurer a
Favorable Opinion with respect to such action, and (c) the successor corporation
shall either qualify to do business in the Commonwealth or file with the Trustee
a consent to service of process in the Commonwealth in form satisfactory to the
Trustee if such successor is not a Pennsylvania corporation.

12

If consolidation, merger or sale or other transfer is made as permitted
by this Section, the provisions of this Section shall continue in full force and
effect and no further consolidation, merger or sale or other transfer shall be
made except in compliance with the provisions of this Section.

SECTION 5.03. Operation of Facilities; Maintenance of Licenses and
Permits. The Company shall operate the Facilities as part of its system for the
furnishing of water to the general public at rates approved by the Public
Utility Commission of the Commonwealth, and to that end will maintain in force
and effect the requisite franchises, operating rights, certificates of public
convenience and all necessary tariffs, licenses and permits.

SECTION 5.04. Additional Permits. In the event it may be necessary for
the proper performance of this Agreement on the part of the Authority or the
Company that any application or applications for any permit or license to do or
to perform certain things be made to any governmental or other agency by the
Company or the Authority, the Company and the Authority shall execute upon the
request of the other such application or applications.

SECTION 5.05. Authority to Maintain Corporate Existence, Etc. The
Authority will maintain its corporate existence and duly will procure any
necessary renewals and extensions thereof; will use its best efforts to
maintain, preserve and renew all its rights, powers, privileges and franchises;
and will comply with all valid acts, rules, regulations, orders and directions
of any legislative, executive, administrative or judicial body applicable to the
Project and the 2002 Bonds. The Authority further covenants that it will not
voluntarily or knowingly take or fail to take any action that would result in
the loss of any exemption from taxes which it presently enjoys or to which it
may subsequently become entitled.

SECTION 5.06. Compliance With Continuing Disclosure Agreement. The
Company hereby covenants and agrees that it will comply with and carry out all
of the provisions of the Continuing Disclosure Agreement. Notwithstanding any
other provision of this Agreement, failure of the Company to comply with the
Continuing Disclosure Agreement shall not be considered an Event of Default
hereunder or under the Indenture. However, the Trustee may (and, at the request
of any Participating Underwriter (as defined in the Continuing Disclosure
Agreement) or the holders of at least 25% aggregate principal amount in
Outstanding 2002 Bonds and provision of indemnity satisfactory to the Trustee in
its sole discretion, shall) or any Bondholder may, take such actions as may be
necessary and appropriate, including seeking specific performance by court
order, to cause the Company to comply with its obligations under this Section
5.06 and the Continuing Disclosure Agreement.

SECTION 5.07. Certain Tax Covenants. The Company will comply with all
provisions of the Tax Compliance Agreement applicable to it. The Company will
not take any action or fail to take any action (including the requirement to
make rebate payments to the United States as required under Section 148(f) of
the Code and the Tax Compliance Agreement and the obligations described in 5.05
of the Indenture) which would cause the 2002 Bonds to be "arbitrage bonds"
within the meaning of Sections 103(b) and 148(a) of the Code or would otherwise
cause interest on the 2002 Bonds to be includible in the gross income of the
holders thereof for federal income tax purposes (except with respect to the
interest on the 2002 Bonds during any period when such Bonds are held by a
"substantial user" of the Facilities financed by the 2002 Bonds or a "related
person" within the meaning of Section 147(a) of the Code).

13

SECTION 5.08. Financial Statements and Other Reporting Requirements of
the Company. The Company shall furnish to the Authority, the Trustee and the
Bond Insurer within 120 days after the end of the Company's fiscal year copies
of the Company's audited financial statements for such fiscal year. The Company
shall also furnish to the Bond Insurer such additional information as the Bond
Insurer may reasonably request from time to time. The Company will permit the
Bond Insurer to discuss the affairs, finances and accounts of the Company or any
information the Bond Insurer may reasonably request regarding the security for
the 2002 Bonds with appropriate officers of the Company. The Company will permit
the Bond Insurer to have access to the Facilities and to have access to and to
make copies of all books and records relating to the 2002 Bonds at any
reasonable time.

SECTION 5.09. Nondiscrimination Provisions. In connection with the
Project and the operation of the Facilities, the Company shall comply with the
nondiscrimination provisions attached to this Agreement as Exhibit B and by this
reference made a part hereof.

ARTICLE VI

ASSIGNMENT, LEASING AND SALE OF FACILITIES

SECTION 6.01. Assignment, Lease and Sale of Facilities. The Company
shall not sell, lease or otherwise dispose of or encumber the Facilities except
as permitted in the Mortgage Indenture and in this Agreement. This Agreement may
be assigned in whole or in part and the Facilities may be sold or leased as a
whole or in part by the Company, subject, however, to the following conditions:

(a) The Company may sell or otherwise dispose of any
machinery, fixtures, apparatus, tools, instruments or other movable property
constituting part of the Facilities (collectively, "Moveable Property") which
the Company deems no longer to be needed or useful in its operation of the
Facilities; provided, that if the original cost of acquisition of such
machinery, fixtures, apparatus, tools, instruments or other movable property was
more than $100,000, the Company shall, in writing, certify to the Authority that
such items are no longer needed or useful in its operation of the Facilities.
Any proceeds thereof shall be paid to the Trustee for deposit in the Series A
Project Fund or used to purchase replacements for the Moveable Property sold or
disposed of pursuant to this Section 6.01(a).

(b) No sale, assignment or lease of Facilities by or from the
Company (other than pursuant to Section 5.02 hereof) shall relieve the Company
from primary liability for any of its obligations hereunder, and in the event of
any such sale, assignment or lease the Company shall continue to remain
primarily liable for all Loan Repayments and all other payment obligations under
this Agreement and for performance and observance of the other agreements on its
part herein provided.

14

(c) The purchaser, assignee or lessee from the Company shall
assume the obligations of the Company hereunder to the extent of the interest
assigned or leased.

(d) The Company shall, at least fifteen (15) days prior to the
delivery thereof, furnish or cause to be furnished to the Authority, for its
information only, a true and complete copy of each such proposed sale agreement,
assignment or lease, as the case may be, and shall furnish to the Authority and
the Trustee an executed copy thereof following execution.

(e) The Company shall pay the Authority's and the Trustee's
reasonable costs and expenses incurred, and the reasonable fees charged thereby,
in connection with such sale, assignment or lease.

(f) The Company shall furnish to the Trustee a Favorable
Opinion to the effect that the proposed sale, assignment or lease, as the case
may be, is permissible under this Agreement, the Mortgage Indenture and the Act
and will not adversely affect the exclusion of interest on the 2002 Bonds from
gross income of the holders thereof from federal income tax purposes.

ARTICLE VII

EVENTS OF DEFAULT AND REMEDIES

SECTION 7.01. Events of Default.

(a) Subject to the provisions set forth in Section 7.01(c)
hereof, each of the following shall be an "Event of Default" under this
Agreement, and the terms "Event of Default" or "Default" shall mean, whenever
they are used in this Agreement, any one or more of the following events:

(i) Failure by the Company to pay when due any Loan
Repayments; or

(ii) Failure by the Company to pay when due any
payment required to be made under this Agreement other than Loan Repayments,
which failure shall continue for a period of sixty (60) days after written
notice, specifying such failure and requesting that it be remedied, is given to
the Company by the Authority or the Trustee, unless the Company is contesting in
good faith its obligation to make the payment or the Authority and the Trustee
shall agree in writing to an extension of such time prior to the expiration of
such period; or

(iii) Failure by the Company to observe and perform
any covenant, condition or agreement on its part to be observed or performed,
other than as referred to in subsections (a) and (b) of this Section, which
failure shall continue for a period of sixty (60) days after written notice,
specifying such failure and requesting that it be remedied, is given to the
Company by the Authority or the Trustee, unless the Authority and the Trustee
shall agree in writing to an extension of such time prior to the expiration of
such period; or

15

(iv) The dissolution or liquidation of the Company or
the filing by the Company of a voluntary petition under the laws of the United
States relating to bankruptcy or failure by the Company promptly to procure the
dismissal of an involuntary petition in bankruptcy filed against it, or an
assignment by the Company for the benefit of its creditors, or the entry by the
Company into an agreement of composition with its creditors, or the appointment
by a court of competent jurisdiction of a receiver for the Company. The term
"dissolution or liquidation of the Company" as used in this subsection shall not
be construed to include the cessation of the corporate existence of the Company
resulting either from a merger or consolidation of the Company into or with
another Company or a dissolution or liquidation of the Company following a
transfer of all or substantially all its assets as an entirety under the
conditions permitting such actions contained in Section 5.02 hereof.

(b) A failure by the Authority to observe or perform any
covenant or agreement herein contained on its part to be observed or performed
shall not constitute an Event of Default hereunder, but the Company shall be
entitled to enforce the observance and performance by the Authority of any of
its covenants or agreements herein contained by such remedies at law or in
equity as it deems desirable, subject to the limitation of liability set forth
in Section 8.10 hereof.

(c) The foregoing provisions of this Section are subject to
the following limitations: if by reason of acts of God; strikes, lockouts or
other industrial disturbances; acts of public enemies; orders of any kind of the
government of the United States or of the Commonwealth or any department,
agency, political subdivision or official of either of them, or any civil or
military authority; insurrections; riots; epidemics; landslides; lightning;
earthquakes; fires; hurricanes; storms; floods; washouts; droughts; arrests;
restraint of government and people; civil disturbances; explosions; breakage or
accident to machinery; partial or entire failure of utilities; or any cause or
event not reasonably within the control of the Company, the Company is unable in
whole or in part to carry out its agreements herein contained, the Company shall
not be deemed in default during the continuance of such inability.

The Company agrees to use its best efforts to remedy with all
reasonable dispatch the cause or causes preventing it from carrying out its
agreements; provided, however, that the settlement of strikes, lockouts and
other industrial disturbances shall be entirely within the discretion of the
Company, and the Company shall not be required to make settlement of strikes,
lockouts and other industrial disturbances by acceding to the demands of the
opposing party or parties when such course, in the judgment of the Company, is
unfavorable to the Company.

This Section 7.01(c) shall not apply to any Event of Default described
in Section 7.01(a)(i) or 7.01(a)(ii), and any failure of the Company to perform
its obligations under Section 4.02 hereof shall constitute an Event of Default
regardless of the reason for such failure to perform.

SECTION 7.02. Remedies. Whenever any Event of Default hereof shall have
happened and be continuing, any one or more of the following remedial steps may
be taken:

(a) The Authority or the Trustee, as the assignee of the
Authority, at its option, may declare the unpaid principal balance of the Loans
to be immediately due and payable, whereupon the same, together with all other
amounts due from the Company then accrued and unpaid, shall become immediately
due and payable; and

16

(b) The Authority or the Trustee, as the assignee of the
Authority, may take any action at law or in equity to collect the payments then
due and thereafter to become due or to enforce performance and observance of any
obligation, agreement or covenant of the Company under this Agreement and under
the First Mortgage Bonds. All amounts collected pursuant to action taken under
this Section shall be applied in accordance with the Indenture.

SECTION 7.03. Remedies Not Exclusive. No remedy conferred upon or
reserved to the Authority by this Agreement is intended to be exclusive of any
other available remedy or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Agreement or now or hereafter existing at law or in equity or by statute. No
delay or omission to exercise any right or power accruing upon any default shall
impair any such right or power or shall be construed to be a waiver thereof, but
any such right and power may be exercised from time to time and as often as may
be deemed expedient. In order to entitle the Authority to exercise any remedy
reserved to it in this Article, it shall not be necessary to give any notice
other than such notice as may be herein expressly required.

SECTION 7.04. Reimbursement of Fees and Expenses. If the Company shall
default under any of the provisions of this Agreement and the Authority shall
employ attorneys or incur other expenses for the collection of Loan Repayments
or for the enforcement of performance or observance of any obligation or
agreement on the part of the Company contained in this Agreement or in the First
Mortgage Bonds, the Company, on demand therefor, will reimburse the Authority
for reasonable fees and expenses of such attorneys and such other reasonable
expenses so incurred.

SECTION 7.05. Waivers of Breaches. In the event any agreement contained
in this Agreement shall be breached by either party and such breach shall
thereafter be waived by the other party, such waiver shall be limited to the
particular breach so waived and shall not be deemed to waive any other breach
hereunder. In view of the assignment of the Authority's rights under this
Agreement to the Trustee under the Indenture, the Authority shall have no power
to exercise any right hereunder or waive any default hereunder by the Company
(other than in respect of the Authority's Reserved Rights) without the written
consent of the Trustee to such exercise or waiver, or, if the maturity of the
Outstanding 2002 Bonds shall have been accelerated pursuant to the Indenture,
the consent of the holders of a majority in principal amount of the 2002 Bonds
then Outstanding. In the event any default by the Company hereunder shall have
been waived as a default under the Indenture by the holders of the requisite
majority in principal amount of the 2002 Bonds, no consent of the Trustee shall
be required, and the Authority shall be obligated to waive the Company's default
hereunder.

17

ARTICLE VIII

MISCELLANEOUS

SECTION 8.01. Termination. This Agreement shall terminate upon payment
in full of the 2002 Bonds (including interest and premium, if any, thereon), or
the making of provision for payment thereof in accordance with the provisions of
the Indenture, and payment of all other amounts owing to the Authority and the
Trustee hereunder and under the Indenture.

Any amounts, other than amounts being held for payment of the 2002
Bonds or other payments referred to in the preceding sentence, then remaining in
the Debt Service Fund and other Funds established under the Indenture shall
belong to and be paid to the Company by the Trustee.

SECTION 8.02. Notices. All notices hereunder shall be given in the
manner and to the locations specified in Section 14.08 of the Indenture with
respect to notices given thereunder.

SECTION 8.03. Benefit of Agreement. This Agreement shall inure to the
benefit of and shall be binding upon the Authority, the Company and the Trustee
and their respective successors and assigns.

SECTION 8.04. Amendments. This Agreement may be amended in any respect
but only by written agreement of the parties hereto and subject to the
additional requirements relating to such amendments set forth in the Indenture.
Any provision of this Agreement expressly recognizing or granting rights in or
to the Bond Insurer may not be amended in any manner which affects the rights of
the Bond Insurer hereunder without the prior written consent of the Bond
Insurer.

SECTION 8.05. Counterparts. This Agreement may be executed in any
number of counterparts, each of which, when so executed and delivered shall be
an original, but all such counterparts shall together constitute but one and the
same Agreement.

SECTION 8.06. Invalidity of Certain Clauses. If any clause, provision
or section of this Agreement be held illegal or invalid by any court, the
invalidity of such clause, provision or section shall not affect any of the
remaining clauses, provisions or sections hereof, and this Agreement shall be
construed and enforced as if such illegal or invalid clause, provision or
section had not been contained herein. In case any agreement or obligation
contained in this Agreement be held to be in violation of law, then such
agreement or obligation shall be deemed to be the agreement or obligation of the
Authority or the Company, as the case may be, only to the extent permitted by
law.

SECTION 8.07. Governing Law. The laws of the Commonwealth shall govern
the construction and interpretation of this Agreement.

SECTION 8.08. Indemnification.

(a) The Company agrees that at all times it will protect and
hold the Authority and its officers, members, employees and agents (including,
but not limited to, the Authority's legal counsel), past, present and future,
harmless and indemnified from and against all claims for losses, damages or
injuries to the Trustee or others, including death, personal injury and property
damage or loss, arising during the term hereof or during any other period when
the Authority has, had or shall have any interest in the Facilities or arising

18

out of the use thereof or any activity conducted thereon or in any other manner
connected therewith, directly or indirectly, including but not limited to claims
arising out of the construction of improvements to the Facilities; and the
Authority and said officers, members, employees and agents shall not be liable
for any loss, damage or injury to the person or property of the Company or its
agents, servants or employees or any other Person who or that may be upon the
Facilities or damaged or injured as a result of any condition existing or
activity occurring upon the Facilities or any other matter connected directly or
indirectly therewith due to any act or negligence of any Person, excepting only
willful misconduct or gross negligence of the Authority, and said officers,
agents, members or employees.

(b) The Company hereby covenants and agrees that it will
indemnify and hold the Trustee and its directors, officers, agents and employees
(collectively, the "Indemnitees") harmless from and against any and all claims,
liabilities, losses, damages, fines, penalties, and expenses, including
out-of-pocket, incidental expenses, legal fees and expenses, the allocated costs
and expenses of in-house counsel and legal staff and the costs and expenses of
defending or preparing to defend against any claim (collectively "Losses") that
may be imposed on, incurred by, or asserted against, the Indemnitees or any of
them for following any instruction or other direction upon which the Trustee is
authorized to rely pursuant to the terms of this Agreement and the Indenture. In
addition to and not in limitation of the immediately preceding sentence, the
Company also covenants and agrees to indemnify and hold the Indemnitees and each
of them harmless from and against any and all Losses that may be imposed on,
incurred by, or asserted against the Indemnitees or any of them in connection
with or arising out of the Trustee's performance under this Agreement and the
Indenture, provided the Trustee has not acted with negligence or engaged in
willful misconduct. The provisions of this Section 8.08(b) shall survive the
termination of this Agreement and the Indenture, the defeasance of the 2002
Bonds and the resignation or removal of the Trustee for any reason.

(c) The Company shall indemnify, hold harmless and defend the
Authority, the Underwriter and the Trustee and the respective officers, members,
directors, employees and agents (including, but not limited to, the Authority's,
the Underwriter's and the Trustee's legal counsel) of each of them, past,
present and future, against all loss, costs, damages, expenses, suits,
judgments, actions and liabilities of whatever nature, including, specifically,
(i) any liability under any state or federal securities laws (including but not
limited to attorneys fees, litigation and court costs, amounts paid in
settlement and amounts paid to discharge judgments) and (ii) any and all costs
and expense arising out of, or from, any state or federal environmental laws
(including, without limitation, costs of remediation, attorney's fees and
expenses, litigation and court costs, amounts paid in settlement and amounts
paid to discharge judgments) directly or indirectly resulting from or arising
out of or related to: (A) the design, construction, installation, operation,
use, maintenance or ownership of the Facilities (including compliance with laws,
ordinances and rules and regulations of public authorities relating thereto); or
(B) any statements or representations with respect to Company, the Project, this
Agreement, the 2002 Bonds, the Indenture or any other document or instrument
delivered in connection with the issuance of the 2002 Bonds (including any
statements or representations made in connection with the offer or sale thereof)
made or given to the Authority, the Trustee or any underwriters or purchasers of
any of the 2002 Bonds, by the Company or any of its directors, officers, agents
or employees, including but not limited to, statements or representations of
facts, financial information or corporate affairs.

19

The Company also will pay and discharge and indemnify and hold harmless
the Authority, the Underwriter and the Trustee from (i) any lien or charge upon
payments by the Company to the Authority and the Trustee under this Agreement,
and (ii) any taxes (including, without limitation, any ad valorem taxes and
sales taxes, assessments, impositions and other charges) in respect of any
portion of the Facilities.

If any such claim is asserted, or any such lien or charge upon
payments, or any such taxes, assessments, impositions or other charges are
sought to be imposed, the Authority or the Trustee will give prompt notice to
the Company, and the Company shall have the sole right and duty to assume, and
will assume, the defense thereof, with full power to litigate, compromise or
settle the same in its sole discretion.

(d) The Company releases the Authority, the Underwriter and
the Trustee from, agrees that the Authority, the Underwriter and the Trustee
shall not be liable for, and agrees to indemnify and hold the Authority, the
Underwriter and the Trustee and their agents, employees and servants, harmless
from, any liability arising out of the improvement of the Facilities or the
Loans. If any such claim is asserted, the Authority or the Trustee will give
prompt notice to the Company and the Company will assume the defense thereof,
with full power to litigate, compromise or settle the claim in its sole
discretion. The Company will reimburse the Authority, the Underwriter or the
Trustee, as the case may be, for all direct costs, including reasonable
attorney's fees and expenses properly incurred in connection therewith.

(e) If the indemnification provided herein is for any reason
determined to be unavailable to the Authority, the Underwriter or the Trustee,
then, with respect to any such loss, claim, demand or liability, including
expenses in connection therewith, the Authority, the Underwriter and the
Trustee, as appropriate, shall be entitled as a matter of right to contribution
by the Company. The amount of each contribution shall be in such proportion as
is appropriate to reflect relative culpability of the parties.

(f) The Company shall not make any claim against the
Authority, nor shall the Authority be liable for any damage or injury to any
property of the Company or any other Person on the Facilities or to any part of
the Facilities due to any cause whatsoever, nor will the Company resist the
Authority's claim to indemnification on the ground that the right to such claim
is not set forth herein with sufficient particularity.

(g) The obligations and liabilities of the Company under this
Section 8.08 shall survive the termination of this Agreement and the payment of
the 2002 Bonds.

SECTION 8.09. Limitation of Rights Against Authority.

(a) The Company hereby expressly acknowledges that the
Authority is a conduit issuer and that all of the right, title and interest of
the Authority in and to this Agreement are to be assigned to the Trustee (except
for the Authority's Reserved Rights), naming the Trustee its true and lawful
attorney for and in its name to enforce the terms and conditions of this
Agreement. Notwithstanding any other provision contained herein, the Company
hereby expressly agrees, acknowledges and covenants that to the extent
practicable it shall duly and punctually perform or cause to be performed each
and every duty and obligation of the Authority hereunder and under the
Indenture.

20

(b) The Company shall neither sue the Authority, or any of its
members, officers, agents or employees, past, present or future, for any costs,
damages, expenses, suits, judgments, liabilities, claims, losses, demands,
actions or nonactions based upon this financing or sustained in connection with
or as a result of this financing, nor will be Company ever raise as a defense in
any proceedings whatsoever that the Authority is a true party in interest.

Notwithstanding any other provisions of this Agreement, the Company
shall be entitled to (i) bring an action of specific performance against the
Authority to compel any action required to be taken by the Authority hereunder
or an action to enjoin the Authority from performing any action prohibited by
this instrument, but no such action shall in any way impose pecuniary liability
against the Authority or any of its members, officers, agents or employees,
past, present and future, (ii) join the Authority in any litigation if such
joinder is necessary to pursue any of the Company's rights, provided that prior
to such joinder, the Company shall post such security as the Authority may
require to further protect the Authority from loss and (iii) pecuniary
remuneration from the Authority for damage or loss suffered by Company by reason
of the willful misconduct of the Authority or any of its members, officers,
agents or employees, past, present or future.

SECTION 8.10. Limitation of Recourse Against Authority

(a) In the event of any default by the Authority hereunder,
and notwithstanding any provision or obligation to the contrary herein set
forth, the liability of the Authority, its incorporator, officers, members,
agents and employees, past, present or future, shall be limited to its interest
in the Trust Estate and the lien of any judgment shall be restricted thereto.
Other than as set forth hereinabove in this Section 8.10, there shall be no
other recourse for damages of any kind or nature by the Company or any other
Person against the Authority, its incorporator, officers, members, agents and
employees, past, present or future, or any of the property or other assets nor
or hereafter owned by it or them, either directly or indirectly; and all such
recourse or liability is hereby expressly waived and released as a condition of
and in consideration of execution and delivery of this Agreement by the
Authority.

(b) No recourse under or upon any obligation, covenant or
agreement contained herein or in any 2002 Bond shall be had against the
Authority or any member, officer, employee or agent, past, present or future, of
the Authority or of any successor of the Authority under this Agreement, any
other agreement, any rule of law, statute or constitutional provision, or by
enforcement of any assessment or by any legal or equitable proceeding or
otherwise, it being expressly agreed and understood that the obligations of the
Authority hereunder, and under the 2002 Bonds and elsewhere, are solely
corporate obligations of the Authority to the extent specifically limited in the
Act and that no personal liability whatsoever shall attach to or shall be
incurred by the Authority or such members, officers, employees or agents, past,
present or future, of the Authority or of any successor of the Authority, or any
of them, because of such indebtedness or by reason of any obligation, covenant
or agreement contained herein, in the 2002 Bonds on implied therefrom.

[Signature page follows]

21

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

DELAWARE COUNTY INDUSTRIAL
DEVELOPMENT AUTHORITY

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

PENNSYLVANIA SUBURBAN
WATER COMPANY

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

[Signature Page to Financing Agreement]

22

EXHIBIT "A"

DESCRIPTION OF THE FACILITIES

(Attached)

A-1

EXHIBIT "B"

NONDISCRIMINATION PROVISIONS

During the term of this Agreement, the Company agrees as to itself and
each tenant of the Project controlling, controlled by or under common control
with the Company (each of the Company and each such tenant, a "Contractor") as
follows:

1. In the hiring of an employee(s) for the manufacture of
supplies, performance of work, or any other activity required under the contract
or any subcontract, the Contractor, subcontractor, or any person acting on
behalf of the Contractor or subcontractor shall not, by reason of gender, race,
creed, or color, discriminate against any citizen of this Commonwealth who is
qualified and available to perform the work to which the employment relates.

2. Neither the Contractor nor any subcontractor nor any person
on their behalf shall in any manner discriminate against or intimidate any
employee involved in the manufacture of supplies, the performance of work, or
any other activity required under the contract on account of gender, race,
creed, or color.

3. Contractors and subcontractors shall establish and maintain
a written sexual harassment policy and shall inform their employees of the
policy. The policy must contain a notice that sexual harassment will not be
tolerated and employees who practice it will be disciplined.

4. Contractors shall not discriminate by reason of gender,
race, creed, or color against any subcontractor or supplier who is qualified to
perform the work to which the contracts relate.

5. The Contractor and each subcontractor shall furnish all
necessary employment documents and records to and permit access to their books,
records, and accounts by the contracting agency and the Bureau of Contract
Administration and Business Development for purposes of investigation, to
ascertain compliance with provisions of this Nondiscrimination/Sexual Harassment
Clause. If the Contractor or any subcontractor does not possess documents or
records reflecting the necessary information requested, the Contractor or
subcontractor shall furnish such information on reporting forms supplied by the
contracting agency or the Bureau of Contract Administration and Business
Development.

6. The Contractor shall include the provisions of this
Nondiscrimination/Sexual Harassment Clause in every subcontract so that such
provisions will be binding upon each subcontractor

7. The Commonwealth may cancel or terminate the contract, and
all money due or to become due under the contract may be forfeited for a
violation of the terms and conditions of this Nondiscrimination/Sexual
Harassment Clause. In addition, the agency may proceed with disbarment or
suspension and may place the Contractor in the Contractor Responsibility File.

B-1

Exhibit 10.46

PHILADELPHIA SUBURBAN CORPORATION
And SUBSIDIARIES
2003 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
2003 Management Incentive Program will cover officers, managers and
certain key employees of Philadelphia Suburban Corporation, and its
subsidiaries that adopt the Plan.

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

MANAGEMENT INCENTIVE PROGRAM
----------------------------

o        Performance Measures

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

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

--       The applicable company's actual after-tax net income from
continuing operations or earnings before interest, taxes and
depreciation ("EBITD") relative to its annual budget will be
the primary measure for the company's performance. The
measurement to be used as the Company Factor for each
participant will be proposed by the Chairman of the Company
and approved by the Executive Compensation Committee. Each
year a "Target Net Income or EBITD" level will be established.
Starting in 2000, portions of the Company Rating Factor may be
tied to the financial targets of more than one company for
some participants. For purposes of the Plan, the Target Net
Income or EBITD may differ from the budgeted net income or
EBITD level. For 2003, 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 50 percent
depending on duties and responsibilities.

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

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

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

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

o        Company Performance

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

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

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

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

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

o        Individual Performance

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

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

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

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

Sample Calculations
-------------------

o        Example 1

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

Calculation:

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

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

o        Example 2

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

Calculation:

$7,000  x  0  x  90%  =  0

o        Example 3

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

Calculation:

$7,000  x  100%  x  0  =  0

o        Example 4

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

Calculation:

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

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

$7,000   x     110%   x       80%    x     90%       = $5,544
------
Total Bonus                                          = $6,804

o        Example 5

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

Calculation:

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

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

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

EMPLOYEE RECOGNITION ("CHAIRMAN'S AWARD") PROGRAM

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

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

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

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

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

6.       The Chairman will determine the individuals to actually receive a bonus
and the amount.

Exhibit 13.10

Philadelphia Suburban Corporation
Selected Portions of Annual Report to Shareholders for the year ended
December 31, 2002

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

FORWARD-LOOKING STATEMENTS
--------------------------

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

o    recovery of capital expenditures and expenses in rates;

o    projected capital expenditures and related funding requirements;

o    dividend payment projections;

o    future financing plans;

o    future pension contributions;

o    opportunities for future acquisitions and success of pending acquisitions;

o    acquisition-related costs and synergies;

o    the capacity of our water supplies and facilities; and

o    general economic conditions.

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

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

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

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

o    abnormal weather conditions;

o    changes in capital requirements;

o    changes in our credit rating;

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

o    our ability to manage the expansion of our business;

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

o    unanticipated capital requirements;

1

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

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

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

o    civil disturbance or terroristic threats or acts.

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

GENERAL INFORMATION

Philadelphia Suburban Corporation is the holding company for regulated
utilities providing water or wastewater services to approximately two million
people in Pennsylvania, Ohio, Illinois, New Jersey, Maine and North Carolina.
Our two primary subsidiaries are Pennsylvania Suburban Water Company ("PSW"), a
regulated public utility that provides water or wastewater services to
approximately 1.3 million residents in the suburban areas north and west of the
City of Philadelphia and in 18 other counties in Pennsylvania, and Consumers
Water Company ("CWC"), a holding company for several regulated public utility
companies that provide water or wastewater service to approximately 700,000
residents in various communities in Ohio, Illinois, New Jersey and Maine. Other
of our smaller subsidiaries provide water and wastewater services in parts of
Pennsylvania, North Carolina and Ohio. Some of our subsidiaries provide
wastewater services to a population of approximately 40,000 people in
Pennsylvania, Illinois, New Jersey and North Carolina. During 2002 and each of
the previous four years, the operating revenues associated with wastewater
services have been less than 3% of our consolidated operating revenues. In
addition, we provide water and wastewater service to approximately 45,000 people
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 investor-owned water utility based on number of customers.

In March 1999, we completed a merger with CWC. Shares of our common
stock were exchanged for all of the outstanding shares of CWC and CWC became a
wholly-owned subsidiary. The merger was accounted for under the
pooling-of-interests method of accounting. Accordingly, this report includes the
accounts and results of CWC as if the merger had been completed as of the
beginning of the earliest period presented.

2

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Following are our selected five-year financial statistics:

Years ended December 31,                       2002         2001         2000         1999         1998
------------------------------------------------------------------------------------------------------------

Operating revenues                             $322,028     $307,280     $274,014     $256,546     $250,718
------------------------------------------------------------------------------------------------------------

Net income available to
common stock                                $67,154      $60,005      $52,784      $36,275      $44,820
------------------------------------------------------------------------------------------------------------
Income from operations before
non-recurring items (a)                     $63,464      $60,005      $50,548      $44,871      $40,917
------------------------------------------------------------------------------------------------------------

Operating Statistics
Selected operating results as a
percentage of operating revenues:
Operations and maintenance                    36.6%        36.4%        37.1%        38.5%        39.9%
Depreciation and amortization                 13.8%        13.1%        12.4%        12.4%        11.8%
Taxes other than income taxes                  6.0%         6.8%         8.2%         8.5%         8.7%
Interest expense, net                         12.5%        11.9%        12.9%        12.9%        12.8%
Allowance for funds used during
construction                              (0.4)%       (0.4)%       (1.0)%       (0.8)%       (0.5)%
Net income available to
common stock                              20.9%        19.5%        19.3%        14.1%        17.9%
============================================================================================================
Effective tax rates                               38.5%        39.3%        39.2%        42.2%        40.1%
============================================================================================================

Income from operations before non-recurring items is a measure that is not
determined in accordance with generally accepted accounting principles ("GAAP")
and may not be comparable to similarly titled measures reported by other
companies. This Non-GAAP measure should not be considered as an alternative to
net income as determined in accordance with GAAP. We believe that this is useful
as an indicator of operating performance, as we measure it for management
purposes, because it provides a better understanding of our results of
operations by highlighting our ongoing operations and the underlying
profitability of our core business.

(a) Non-recurring items represent the 2002 gain of $3,690 ($5,676 pre-tax)
realized on the sale of a portion of our Ashtabula, Ohio water system, the 2000
gain of $2,236 ($4,041 pre-tax) for the partial recovery of the merger costs
related to the 1999 merger with Consumers Water Company, the 1999 charges of
$8,596 ($10,121 pre-tax) for transaction costs and restructuring costs related
to the merger with Consumers Water Company, and the 1998 gain of $3,903 ($6,680
pre-tax) on the sale of Consumer Water Company's New Hampshire system.

3

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Following are our selected five-year operating and sales statistics:

Years ended December 31,                      2002           2001          2000           1999          1998
------------------------------------------------------------------------------------------------------------------

Customers          Residential water            535,506        526,776       512,442        497,937       478,160
Commercial water              30,355         29,745        29,317         29,241        27,612
Industrial water               1,423          1,454         1,446          1,430         1,327
Other water                   16,466          9,947         9,500          9,067         8,277
Wastewater                    21,724         19,615        12,441         11,262        10,583
Operating contracts           21,312         14,973        14,073          8,525         7,888
-----------------------------------------------------------------------------------------------
Total                        626,786        602,510       579,219        557,462       533,847
===============================================================================================

Operating          Residential water           $197,190       $188,303      $170,597       $154,881      $156,523
Revenues           Commercial water              55,962         53,103        47,109         45,192        44,894
Industrial water              17,221         16,141        14,943         13,944        13,970
Other water                   36,255         35,681        29,582         31,999        25,672
Wastewater                     8,210          6,960         5,414          5,235         4,755
Other                          7,190          7,092         6,369          5,295         4,904
-----------------------------------------------------------------------------------------------
Total                       $322,028       $307,280      $274,014       $256,546      $250,718
===============================================================================================

RESULTS OF OPERATIONS
---------------------

Our net income has grown at an annual compound rate of approximately
13.8% during the five-year period ended December 31, 2002. During this same
period, operating revenues grew at a compound rate of 6.5% and total expenses,
exclusive of income taxes, grew at a compound rate of 4.4%.

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 3.5% in the past five years primarily as
a result of acquisitions of local water systems. Acquisitions made during the
five-year period ended December 31, 2002 have provided water and wastewater
revenues of approximately $20,191 in 2002, $17,082 in 2001 and $10,296 in 2000.
Excluding the effect of acquisitions, our customer base increased at a five-year
annual compound rate of 0.9%. Rate increases implemented during the past three
years have provided additional operating revenues of approximately $14,700 in
2002, $13,100 in 2001 and $15,400 in 2000. In addition to water and wastewater
operating revenues, we had other non-regulated revenues that were primarily
associated with operating and management contracts, and data processing service
fees of $7,190 in 2002, $7,092 in 2001 and $6,369 in 2000.

Economic Regulation - 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 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

4

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

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.
The rates for some divisions of our Ohio subsidiary can be fixed by negotiated
agreements with the municipalities that are served by those divisions in lieu of
regulatory approval from the Public Utility Commission of Ohio. Currently, two
of the six regulated divisions in Ohio are operating under such rate ordinances.

On August 1, 2002, the Pennsylvania Public Utility Commission ("PAPUC")
granted Pennsylvania Suburban Water Company a $21,226 or 10.2% base rate
increase. The rates in effect at the time of the filing included $9,400 in
Distribution System Improvement Charges ("DSIC") at 5.0%. Consequently, the
total base rates increased by $30,626 and the DSIC was reset to zero. In April
2000, the PAPUC approved a rate settlement reached between Pennsylvania Suburban
Water Company and the parties actively litigating the joint rate application
filed in October 1999. The April 2000 settlement was designed to increase annual
revenues by $17,000 or 9.4% above the level in effect at the time of the filing.
The rates in effect at the time of the filing included $7,347 in DSIC ranging
from 0.33% to 5%. Consequently, the April 2000 settlement resulted in a total
base rate increase of $24,347 above the rates in effect before the DSIC was
applied. The settlement agreement also provided for the recovery of up to $5,295
(the merger costs allocable to our Pennsylvania operations) of the $10,121
($8,596 after-tax) in merger costs that were expensed in 1999 in connection with
the CWC merger. During 2000, a regulatory asset was established to reflect the
amount to be recovered as a result of the rate settlement. This resulted in a
recovery of $1,136 of restructuring costs and $2,905 of merger transaction costs
as reported on the Consolidated Statements of Income and Comprehensive Income.

Operating subsidiaries located in other states were allowed annual rate
increases of $3,024 in 2002, $4,799 in 2001 and $698 in 2000 resulting from
thirteen, nine and four rate decisions, respectively. Revenues from these
increases realized in the year of grant were approximately $1,403 in 2002,
$4,200 in 2001 and $450 in 2000. The operating subsidiaries currently have four
rate requests in process requesting a $777 increase in annual revenues. These
requests are currently under review by the respective state regulatory
commission.

Distribution System Improvement Charges - The PAPUC permits Pennsylvania water
utilities to add a surcharge to their water bills to offset the additional
depreciation and capital costs associated with certain capital expenditures
related to replacing and rehabilitating distribution systems. Prior to the DSIC
mechanism being approved in 1996, water 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 base rates is
known as regulatory lag. The DSIC mechanism is intended to substantially reduce
regulatory lag that often acted as a disincentive to water utilities in
rehabilitating their distribution systems.

The DSIC is adjusted quarterly based on additional qualified capital
expenditures made in the previous quarter. The DSIC is capped at 5% of base
rates. The DSIC 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 PAPUC
benchmark. The DSIC in 2002 was set at 5% until new base rates became effective
in August 2002, at which point the DSIC was reset to zero. The DSIC in 2001
ranged from the first quarter amount of 2.2% and increased each successive
quarter to 5% in the fourth quarter. The DSIC has been set at 1.96% in the first
quarter of 2003. The DSIC provided revenues of $5,301 in 2002, $6,672 in 2001
and $2,301 in 2000.

5

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

In 2001, the Illinois Commerce Commission issued regulations
implementing an infrastructure surcharge mechanism known as a Qualifying
Infrastructure Plant Surcharge ("QIPS") for use by Illinois water and wastewater
utilities. QIPS is similar to DSIC, however, it is established annually and
prospectively based on anticipated qualifying capital expenditures, and it
includes a broader range of qualifying capital expenditures, including certain
wastewater capital expenditures. Our operating subsidiary in Illinois received
approval to add a QIPS to its bills in three of its operating divisions
beginning January 1, 2002 at various rates ranging from 1.06% to 2.49% which
generated $217 of revenues in 2002. The QIPS remains in effect at rates ranging
from 3.13% to 5.0% in 2003.

Rate Surcharges - In addition to its base rates and DSIC, our Pennsylvania
subsidiary has utilized a surcharge or credit on its bills to reflect certain
changes in Pennsylvania State taxes until such time as the tax changes are
incorporated in base rates. Operating revenues were reduced by rate credits of
$286 in 2002, $639 in 2001 and increased by rate surcharges of $74 in 2000. In
the first quarter of 2003, the rate surcharge has been set at 0.14%.

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 during the late spring
and summer months when nonessential and recreational use of water is at its
highest. Consequently, a higher proportion of annual operating revenues is
realized in the second and third quarters. In general during this period, an
extended period of dry weather increases water consumption, while above average
rainfall decreases water consumption. Also, an increase in the average
temperature generally causes an increase in water consumption. Conservation
efforts, construction codes which require the use of low flow plumbing fixtures,
as well as mandated water use restrictions in response to drought conditions,
also affect water consumption.

The geographic diversity of our customer base reduces our exposure to
extreme or unusual weather conditions in any one area of our service territory.
Our customers are located in the following states: 66% in Pennsylvania, 14% in
Ohio, 10% in Illinois, 6% in New Jersey, 3% in Maine and 1% 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. At other times of
the year, warnings and restrictions generally have less of an effect on water
consumption. In November 2001, a drought warning was declared in nine counties
in Pennsylvania, including one of the five counties we serve in southeastern
Pennsylvania. A drought warning calls for a 10 to 15 percent voluntary reduction
of water use, particularly non-essential uses of water. In February 2002, a
drought emergency was declared in 24 counties in Pennsylvania, including all
five of the counties we serve in southeastern Pennsylvania where approximately
275,000 of our customers are located. A drought emergency imposes a ban on
nonessential water use. In June and July 2002, drought restrictions were relaxed
in three of the five counties we serve in southeastern Pennsylvania, moving from
the mandatory drought emergency to a voluntary drought warning. However, by
early September 2002, the Commonwealth of Pennsylvania reinstated the drought
emergency in the three counties where restrictions had been relaxed because of
hot, dry weather in August. In November and December 2002, the Commonwealth of

6

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Pennsylvania removed the drought restrictions in the counties we serve in
Pennsylvania. Water use restrictions were also imposed and relaxed at various
times during 2002 in our service territories in New Jersey. Currently there are
no drought warnings or restrictions in any of the areas we serve.

Operations and Maintenance Expenses
-----------------------------------

Operations and maintenance expenses totaled $117,735 in 2002, $111,885
in 2001 and $101,741 in 2000. Most elements of operating costs are subject to
the effects of inflation, as well as the effects of changes in the number of
customers served, in water consumption and the degree of water treatment
required due to variations in the quality of the raw water. The principal
elements of operating costs are labor, electricity, chemicals and maintenance
expenses. Electricity and chemical expenses vary in relationship to water
consumption, raw water quality, and to a lesser extent the 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 2002 as compared to 2001 by $5,850 or 5.2% due
to additional operating costs associated with acquisitions, transaction costs
related to planned and completed acquisitions, increased insurance expense,
higher bad debt expense and increased wages as a result of normal wage rate
increases.

Operations and maintenance expenses increased in 2001 as compared to
2000 by $10,144 or 10.0% due to additional operating costs associated with
acquisitions, increased water production expenses associated with the higher
water consumption, and increased wage and benefit costs.

Depreciation and Amortization Expenses
--------------------------------------

Depreciation expense was $41,424 in 2002, $37,979 in 2001 and $32,271
in 2000, and has increased principally as a result of the significant capital
expenditures made to expand and improve the utility facilities, and as a result
of acquisitions of water systems.

Amortization expense was $2,898 in 2002, $2,189 in 2001 and $1,829 in
2000. The increase in 2002 and 2001 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 decreased by $1,420 or 6.8% in 2002 as
compared to 2001, and decreased by $1,633 or 7.3% in 2001 as compared to 2000.
The decrease in 2002 is due to a reduction in state taxes and a decrease in the
Pennsylvania Capital Stock Tax. The decrease in state taxes is a result of a
reduction in assessments and the Capital Stock Tax declined due to a reduction
in the base on which the tax is applied and a legislated decrease in the tax
rate. The decrease in 2001 is due to a reduction in state and local taxes and a
decrease in the Pennsylvania Capital Stock Tax.

7

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Recovery of Restructuring Costs
-------------------------------

During 2000, a recovery of restructuring costs of $1,136 resulted from
an April 2000 rate settlement. These costs were incurred in 1999 in connection
with the Consumers Water Company merger and included severances and exit costs
associated with the closing of CWC's corporate office.

Interest Expense, net
---------------------

Net interest expense was $40,396 in 2002, $39,859 in 2001 and $40,360
in 2000. Interest income of $287, $367 and $402 was netted against interest
expense for the years ended December 31, 2002, 2001 and 2000, respectively.
Interest expense increased in 2002 primarily as a result of higher levels of
borrowings to finance capital expenditures, offset partially by the effects of
decreased interest rates on borrowings. Interest expense decreased in 2001
primarily as a result of decreased interest rates on short-term borrowings,
offset in part by increased borrowings to fund capital expenditures and the
acquisition of other utility systems. Interest expense during 2002 was favorably
impacted by a reduction in the weighted cost of long-term debt from 7.0% at
December 31, 2001 to 6.6% at December 31, 2002.

Allowance for Funds Used During Construction
--------------------------------------------

The allowance for funds used during construction ("AFUDC") was $1,389
in 2002, $1,222 in 2001 and $2,688 in 2000 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 2002 is a result of an increase in the average balance of CWIP
to which AFUDC is applied, offset in part by a decrease in the AFUDC rate which
is based on short-term interest rates. The decrease in 2001 is a result of a
reduction in the average balance of CWIP, to which AFUDC is applied, due to the
completion of a $35,000 water treatment plant in the third quarter of 2000 and a
decrease in the AFUDC rate. Construction commenced on this facility in 1997 and
was completed in 2000.

Gain on Sale of Water System
----------------------------

Gain on sale of water system represents the gain realized on the
December 2002 sale of a portion of the Ashtabula, Ohio water system. The sale
provided $12,118 of net proceeds and resulted in a fourth quarter 2002 gain of
$5,676.

Gain on Sale of Other Assets
----------------------------

Gain on sale of other assets totaled $2,079 in 2002, $3,384 in 2001 and
$5,076 in 2000. Gain on sale of land totaled $900 in 2002, $3,018 in 2001 and
$1,524 in 2000. Gain on sale of marketable securities totaled $1,179 in 2002,
$366 in 2001 and $3,552 in 2000.

Recovery of Merger Transaction Costs
------------------------------------

During 2000, a recovery of merger transaction costs of $2,905 was
recognized resulting from the April 2000 rate settlement. These costs were
recorded in 1999 when the CWC merger was completed and represented the fees for
investment bankers, attorneys, accountants and other administrative charges.

8

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Minority Interest
-----------------

Minority interest was $0 in 2002, $0 in 2001 and $103 in 2000. The
change in 2001 is a result of substantially eliminating the minority ownership
of three operating subsidiaries during 2001.

Income Taxes
------------

Our effective income tax rate was 38.5% in 2002, 39.3% in 2001 and
39.2% in 2000. The changes in the effective tax rates in 2002 and 2001 are due
to differences between tax deductible expenses and book expenses.

Summary
-------

Operating income was $140,504 in 2002, $134,340 in 2001 and $116,789 in
2000 and net income available to common stock was $67,154, $60,005 in 2001 and
$52,784 in 2000. Our operating results have been affected by non-recurring items
in 2002 and 2000. Net income for 2002 includes a gain of $5,676 ($3,690
after-tax or $0.05 per share) on the sale of a portion of our Ashtabula, Ohio
water system. Operating income and net income for 2000 includes the gain for the
partial recovery of restructuring costs related to the CWC merger of $1,136
($665 after tax or $0.015 per share). Net income for 2000 includes the gain for
the partial recovery of merger transaction costs related to the CWC merger of
$2,905 ($1,571 after tax or $0.025 per share). Diluted net income per share was
$0.97 in 2002, $0.87 in 2001 and $0.81 in 2000. Diluted income per share
exclusive of the aforementioned non-recurring items (for 2002, $0.05 per share
from the gain on the sale of water system; and for 2000, $0.04 per share for the
partial recovery of the merger costs related to the merger with Consumers Water
Company), was $0.92 in 2002, $0.87 in 2001 and $0.77 in 2000. Diluted income per
share exclusive of non-recurring items is a measure that is not determined in
accordance with GAAP and may not be comparable to similarly titled measures
reported by other companies. This Non-GAAP measure should not be considered as
an alternative to net income per share as determined in accordance with GAAP. We
believe that this is useful as an indicator of operating performance, as we
measure it for management purposes, because it provides a better understanding
of our results of operations by highlighting our ongoing operations and the
underlying profitability of our core business. The changes in the per share
income in 2002 and 2001 over the previous years were due to the aforementioned
changes in income and impacted by a 0.7% and 5.1% increase in the average number
of common shares outstanding during 2002 and 2001, respectively.

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 $18,646 in the fourth quarter
of 2002 and $12,209 in the same period of 2001. The change in net income is due
to a $6,705 increase in operating revenues, a gain on the sale of water systems
of $5,676 realized in the fourth quarter of 2002, and a reduction in taxes other
than income taxes expense of $604, offset by increased depreciation expense of
$1,331. The increase in operating revenues was a result of an increase in water
rates, higher water consumption and additional revenues from acquisitions. There
was no comparable gain on the sale of a water system in the prior year.
Depreciation expense increased due to utility plant additions and acquisitions
made since the fourth quarter of 2001.

9

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Effects of Inflation
--------------------

As a regulated enterprise, our rates are established to provide
recovery of costs and a return on our investment. Recovery of the effects of
inflation through higher water rates is dependent upon receiving adequate and
timely rate increases. However, rate increases are not retroactive and often lag
increases in costs caused by inflation. During periods of moderate to low
inflation, as has been experienced for the past several years, the effects of
inflation on our operating results are not significant.

Security
--------

In light of concerns regarding security in the wake of the September
11, 2001 terrorist attacks, we have increased security measures at our
facilities. These increased security measures were not made in response to any
specific threat. We are in contact with federal, state and local authorities and
industry trade associations regarding current information on possible threats
and security measures for water utility operations. The cost of the increased
security measures is expected to be recoverable in water rates and is not
expected to have a material impact on our results from operations or financial
condition.

FINANCIAL CONDITION
-------------------

Cash Flow and Capital Expenditures
----------------------------------

Net operating cash flow, dividends paid on common stock and capital
expenditures, including allowances for funds used during construction, for the
five years ended December 31, 2002 were as follows:

---------------------------------------------------------------------------------
Net Operating              Common                 Capital
Cash Flow              Dividends              Expenditures
---------------------------------------------------------------------------------

1998                 $  84,362              $  29,349                $  87,973
1999                    74,103                 29,217                   96,383
2000                    86,972                 30,406                  129,740
2001                   102,165                 34,234                  124,088
2002                   121,560                 36,789                  136,164
---------------------------------------------------------------------------------
$ 469,162              $ 159,995                $ 574,348
=================================================================================

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
$32,291 of customer advances and contributions in aid of construction to finance
new water mains and related facilities which are not included in the capital
expenditures presented in the above table. In addition, during this period, we
have made sinking fund contributions and retired debt in the amount of $83,570,
retired $7,262 of preferred stock, and have refunded $21,502 of customer
advances for construction. Despite an annual increase in the common dividends
declared and paid on our common stock over the past five years, the total common
dividends paid in 1999 declined as compared to 1998 due to the exchange of the
Consumers Water Company common stock for our common stock.

10

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

During the past five years, we have also expended $102,496 related to
the acquisitions of utility systems, primarily water utilities and some
wastewater utilities, including the issuance of 1,119,239 shares of common
stock. These acquisitions were accounted for as purchases. In March 1999, we
completed a merger with Consumers Water Company. On the date of the merger, we
issued 20,334,398 shares of Common Stock in exchange for all of the outstanding
shares of CWC and CWC became our wholly-owned subsidiary. The CWC merger has
been accounted for as a pooling-of-interests.

In December 2002, as a result of the settlement of a condemnation
action, our Ohio operating subsidiary sold to Ashtabula County, Ohio the water
utility assets in the unincorporated areas of Ashtabula County and the area
within the Village of Geneva on the Lake for net proceeds of $12,118, which was
in excess of the book value for these assets. The proceeds were used to pay down
short-term debt, and the sale resulted in the recognition in the fourth quarter
of 2002 of a gain on the sale of these assets of $5,676 (or an after-tax gain of
$3,690 and $0.05 per share). We continue to operate this water system for
Ashtabula County under a one-year operating contract that began upon the closing
of the sale that should provide over $300 in operating revenues in 2003. The
water utility assets sold represents less than 1% of our total assets, and the
total number of customers included in the water system sold represents less than
1% of our total customer base. In addition to the operating contract revenues,
the interest savings associated with paying off debt with the sale's proceeds
will offset the loss of this water system's normal contribution to income. In
1998, CWC's New Hampshire operations were sold under the New Hampshire
condemnation statute for $33,728, net of certain closing costs, which was used
to pay down long-term debt. Despite these transactions, our strategy continues
to be to acquire additional water and wastewater systems, maintain our existing
systems, and to actively oppose unilateral efforts by municipal governments to
acquire any of our operations.

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 $321,517 of First Mortgage Bonds and obtained other short-term
borrowings during the past five years. In September 2000, we sold 2,066,406
shares of common stock in a public offering for net proceeds of $29,689. The
proceeds of this offering were used to make an equity contribution to PSW. In
1998, we sold 1,953,125 shares of common stock in a public offering for net
proceeds of $25,840. The proceeds of this offering were used to make a $19,000
equity contribution to PSW and to repay short-term debt. At December 31, 2002,
we had short-term lines of credit and other credit facilities of $180,000, of
which $86,887 was available. Our short-term lines of credit and other credit
facilities are either payable on demand or have a 364-day term.

We offer a Dividend Reinvestment and Direct Stock Purchase Plan
("Plan") that provides a convenient and economical way to purchase shares of
Philadelphia Suburban Corporation. Under the direct stock purchase portion of
the Plan, shares are sold throughout the year and the shares are obtained by our
transfer agent in the open market. The dividend reinvestment portion of the Plan
offers a 5% discount on the purchase of original issue shares of common stock
with reinvested dividends. As of the December 2002 dividend payment, holders of
17.7% of the common shares outstanding participated in the dividend reinvestment
portion of the Plan. During the past five years, we have sold 1,723,140 original
issue shares of common stock for net proceeds of $27,110 through the dividend
reinvestment portion of the Plan and the proceeds were used to invest in our
operating subsidiaries, to repay short-term debt, and for general corporate
purposes.

11

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

In May 2002, Vivendi Environnement, S.A., which through its affiliates
(collectively "Vivendi") owned approximately 16.8% of our outstanding common
stock, advised us of its decision to sell its investment in PSC. Vivendi
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 Vivendi into the
market, we completed a secondary offering of 9,885,256 shares of PSC common
stock held by Vivendi. The number of outstanding shares of common stock was not
changed and we did not receive any proceeds as a result of this secondary
offering. In addition, in October 2002 we repurchased 1,210,620 shares of PSC
common stock representing the remainder of the shares of PSC common stock held
by Vivendi. The repurchase of shares was funded with proceeds of $22,000 from a
short-term credit facility. It is our current intention to repay these
short-term borrowings with proceeds from the issuance of common stock or an
instrument convertible into PSC common stock.

In addition, 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. Under this authorization, there were no shares
repurchased in 2002 and 2001. We repurchased 288,750 shares in 2000 at a net
cost of $3,500. As of December 31, 2002, 328,967 shares remain available for
repurchase. Funding for future stock purchases, if any, is not expected to have
a material impact on our financial position.

As of December 31, 2002, our contractual cash obligations are as
follows:

Payments Due By Period
----------------------------------------------------------------------------------------------------------------
2003        2004        2005       2006        2007       Thereafter        Total
----------------------------------------------------------------------------------------------------------------

Long-term debt                $ 34,265    $ 40,423   $ 41,447    $ 17,072    $ 15,953    $ 468,015    $ 617,175
----------------------------------------------------------------------------------------------------------------
Operating leases                 2,003       1,449      1,140         768         587        3,195        9,142
----------------------------------------------------------------------------------------------------------------
Unconditional purchase
obligations                   7,613       7,599      7,453       7,453       7,934       76,695      114,747
----------------------------------------------------------------------------------------------------------------
Total                           43,881    $ 49,471   $ 50,040    $ 25,293    $ 24,474    $ 547,905    $ 741,064
----------------------------------------------------------------------------------------------------------------

The amounts reported as long-term debt in the above table represent
sinking fund obligations and debt maturities that are due in the periods noted.
We lease motor vehicles, buildings, land and other equipment under operating
leases that are noncancelable prior to their expiration. The unconditional
purchase obligations represent 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. In addition to these obligations, we make refunds on Customers'
Advances for Construction over a specific period of time based on operating
revenues related to developer-installed water mains or as new customers are
connected to and take service from such mains. After all refunds are made, any
remaining balance is transferred to Contributions in Aid of Construction. The
refund amounts are not included in the above table because the refund amounts
and timing cannot be accurately estimated because future refund payments depend
on several variables, including new customer connections, customer consumption
levels and future rate increases. Portions of these refund amounts are payable
annually through 2017 and amounts not paid by the contract expiration dates
become non-refundable.

12

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Our planned 2003 capital program, exclusive of the costs of new mains
financed by advances and contributions in aid of construction, is estimated to
be $144,331 of which $62,799 is for DSIC-qualified projects in Pennsylvania and
QIPS-qualified projects in Illinois. We have increased our capital spending for
infrastructure rehabilitation in response to the DSIC and QIPS and should these
infrastructure surcharge mechanisms be discontinued for any reason, which is not
anticipated, we would likely reduce our capital program significantly. Our 2003
capital program, along with $34,265 of sinking fund obligations and debt
maturities, $9,616 of other contractual cash obligations as presented on the
contractual cash obligations table above, 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 2004 through 2007, including
recurring programs, such as the ongoing replacement of water meters, 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 $500,000. 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 plan and possible
future public equity offerings. We expect to refinance $114,895 of sinking fund
obligations and debt maturities during this period as they become due with new
issues of long-term debt. The estimates discussed above do not include any
amounts for possible future acquisitions of water systems or the financing
necessary to support them, including the AquaSource acquisition - see section
titled "Impact of AquaSource Acquisition."

We continue to hold acquisition discussions with several water systems.
In general, acquisitions are expected to be financed through the issuance of
equity (for the acquisition of some investor-owned systems) or funded initially
with short-term debt with subsequent repayment from the proceeds of long-term
debt or proceeds from equity offerings. For a discussion of our funding plan for
the AquaSource acquisition, see section titled "Impact of AquaSource
Acquisition."

Our primary source of liquidity is cash flows from operations,
borrowings under various short-term lines of credit and other credit facilities,
and advances and contributions in aid of construction. Our cash flow from
operations, or internally-generated funds, is impacted by the timing of rate
relief and water consumption. We fund our capital and acquisition programs
through internally-generated funds, supplemented by short-term borrowings. Over
time, we refinance our short-term borrowings with long-term debt and proceeds
from the issuance of common stock. The ability to finance our future
construction programs, as well as our acquisition activities, depends on our
ability to attract the necessary external financing and maintain
internally-generated funds. Rate orders permitting compensatory rates of return
on invested capital and timely rate adjustments will be required by our
operating subsidiaries to achieve an adequate level of earnings to enable them
to secure the capital they will need and to maintain satisfactory debt coverage
ratios.

Impact of AquaSource Acquisition
--------------------------------

We entered into a purchase agreement with DQE, Inc. ("DQE") and
AquaSource, Inc. ("AquaSource") dated July 29, 2002, as amended by Amendment No.
1 dated March 4, 2003, pursuant to which we agreed to acquire four operating
water and wastewater subsidiaries of AquaSource and assume selected, integrated
operating and maintenance contracts and related assets. The purchase agreement

13

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

provides for a target cash purchase price of approximately $205 million subject
to various adjustments. If the transaction is completed, we will purchase
operating utilities, including assets and franchises that serve approximately
130,000 water and wastewater customer accounts in 11 states, and selected water
and wastewater operating contracts that serve approximately 40,000 customers in
seven of these states. More than 80% of the customers in the businesses we are
purchasing are located in Texas, Florida, Virginia and Indiana. The acquisition
is subject to certain regulatory approvals, but does not require approval of the
shareholders of DQE or PSC. We expect to obtain the requisite regulatory
approvals in mid-2003. It is our intention to fund the acquisition at closing
with cash from a combination of short-term debt, long-term debt, the issuance of
our common stock and/or an instrument convertible into our common stock. The
ultimate decision regarding the funding of the acquisition will be based upon
market conditions existing at the time the acquisition is consummated.

If the AquaSource transaction is completed, it is expected to provide
approximately $70 million in additional operating revenues on an annual basis,
add approximately 300 employees to our workforce, and is anticipated to be
accretive to earnings. The acquisition provides an expanded platform from which
to extend our growth-through-acquisition strategy of acquiring water and
wastewater utility systems that are near or adjacent to our existing service
territories. The AquaSource operations are comprised of approximately 600 small
systems, which are generally clustered in regions to achieve some level of
operating efficiency. However, the fragmented nature of the operations will
likely result in the ratio of operations and maintenance expenses in relation to
operating revenues ("operating expense ratio") being higher than the level that
PSC currently achieves with its existing operations. While we intend to
implement management systems over time that will provide the ability to control
costs and improve efficiencies, the effect of this acquisition will be to
increase our overall operating expense ratio. As a result of this planned
acquisition, we expect our annual capital expenditure program to increase by
approximately $27 million over the existing capital program planned and we
believe these expenditures will be financed in a manner consistent with our
existing capital program.

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, 2002, the debt maturities by period and the weighted average interest rate
for fixed-rate, long-term debt are as follows:

---------------------------------------------------------------------------------------------------------------
Fair
2003       2004      2005      2006       2007 Thereafter       Total       Value
---------------------------------------------------------------------------------------------------------------

Long-term
debt (fixed rate)     $ 34,265   $ 40,423  $ 41,447  $ 17,072   $ 15,953  $ 468,015   $ 617,175   $ 660,436
---------------------------------------------------------------------------------------------------------------
Weighted average
interest rate            6.81%      6.27%     7.12%     6.96%      6.56%      6.51%       6.56%
---------------------------------------------------------------------------------------------------------------

14

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

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, 2002, our
carrying value of marketable equity securities was $1,336, which reflects the
market value of such securities. The market risks to which we are exposed are
consistent with the risks to which we were exposed in the prior year.

Capitalization
--------------

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

December 31,                                           2002         2001        2000         1999        1998
--------------------------------------------------------------------------------------------------------------

Long-term debt*                                       55.6%        52.9%       52.4%        53.8%       51.9%
Preferred stock*                                       0.0%         0.1%        0.2%         0.2%        0.4%
Common stockholders' equity                           44.4%        47.0%       47.4%        46.0%       47.7%
--------------------------------------------------------------------------------------------------------------
100.0%       100.0%      100.0%       100.0%      100.0%
==============================================================================================================

*Includes current portion.

The changes in the capitalization ratios primarily result from the
issuance of common stock over the past five years, and the issuance of debt to
finance our acquisitions and capital program and the previously mentioned
repurchase of common stock from Vivendi in 2002.

As a result of our entering into the purchase agreement for AquaSource
in July 2002, Standard and Poor's Rating Services ("S&P") placed PSW on
Creditwatch with negative implications (see section titled "Impact of AquaSource
Acquisition"). The Creditwatch listing reflects concern by S&P, that should we
fund the acquisition entirely with debt, PSW's credit rating could change. We
anticipate that after the acquisition closes, the Creditwatch listing will be
lifted.

Dividends on Common Stock
-------------------------

We have paid common dividends consecutively for 58 years. In 2002, our
Board of Directors authorized an increase of 5.7% in the dividend rate over the
amount we previously paid. As a result of this authorization, beginning with the
dividend payment in December 2002, the annual dividend rate increased to $0.56
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, after restatement
for the 1999 CWC pooling, our common dividends paid have averaged 61.3% of net
income.

CRITICAL ACCOUNTING POLICIES
----------------------------

Our financial condition and results of operations are impacted by the
methods, assumptions, and estimates used in the application of critical
accounting policies. The following accounting policies are particularly
important to our financial condition or results of operations, and require
estimates or other judgements of matters of uncertainty. Changes in the
estimates or other judgements included within these accounting policies could
result in a significant change to the financial statements. We believe our most
critical accounting policies include revenue recognition, the use of regulatory
assets and liabilities as permitted by Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation," the review for impairment of our long-lived assets which consist
primarily of Utility Plant in Service and regulatory assets, and our accounting
for pensions and other postretirement benefits.

15

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

Our utility revenues recognized in an accounting period include amounts
billed to customers on a cycle basis and unbilled amounts based on estimated
usage from the last billing to the end of the accounting period. The estimated
usage is based on our judgement and assumptions; our actual results could differ
from these estimates which would result in operating revenues being adjusted in
the period that the revision to our estimates are determined.

SFAS No. 71 stipulates generally accepted accounting principles for
companies whose rates are established by or are subject to approval by an
independent third-party regulator. In accordance with SFAS No. 71, we defer
costs and credits on the balance sheet as regulatory assets and liabilities when
it is probable that these costs and credits will be recognized in the
rate-making process in a period different from when the costs and credits were
incurred. These deferred amounts, both assets and liabilities, are then
recognized in the income statement in the same period that they are reflected in
our rates charged for water and wastewater service. In the event that our
assessment as to the probability of the inclusion in the rate-making process is
incorrect, the associated regulatory asset or liability would be adjusted to
reflect the change in our assessment or change in regulatory approval.

In accordance with the requirements of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", we review for impairment of
our long-lived assets, including Utility Plant in Service. We also review
regulatory assets for the continued application of SFAS No. 71. Our review
determines whether there have been changes in circumstances or events that have
occurred that require adjustments to the carrying value of these assets. In
accordance with SFAS No. 71, adjustments to the carrying value of these assets
would be made in instances where the inclusion in the rate-making process is
unlikely.

We maintain a qualified defined benefit pension plan and plans that
provide for certain postretirement benefits other than pensions. Accounting for
pensions and other postretirement benefits requires an extensive use of
assumptions about the discount rate, expected return on plan assets, the rate of
future compensation increases received by our employees, mortality, turnover and
medical costs. Each assumption is reviewed annually with assistance from our
actuarial consultant who provides guidance in establishing the assumptions. The
assumptions are selected to represent the average expected experience over time
and may differ in any one year from actual experience due to changes in capital
markets and the overall economy. These differences will impact the amount of
pension and other postretirement benefit expense that we recognize.

Our discount rate is based on a market rate for a recognized-rating
agency's high-quality long-term bond portfolio with durations matching the
expected payouts under our retirement plans. Our pension expense and liability
(benefit obligations) increases as the discount rate is reduced. A 25
basis-point reduction in this assumption would have increased 2002 pension
expense by $250 and the pension liabilities by $4,700. The present values of
PSC's future pension and other postretirement obligations were determined using
discount rates of 6.75% at December 31, 2002 and 7.25% at December 31, 2001. Our
expense under these plans is determined using the discount rate as of the
beginning of the year, which was 7.25% for 2002, and will be 6.75% for 2003.

16

PHILADELPHIA SUBURBAN CORPORATION 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 2002 pension expense by $275. For 2002, we used
a 9.0% expected return on assets assumption, and will lower this assumption to
8.5% in 2003. Over the last ten years, our pension plan assets have generated an
average annual investment return of 8.3%. Although those returns are below the
long-term assumption, this measurement period includes the three-year period
ended December 31, 2002 of declining performance of the equity markets. For the
seven-year period ended December 31, 1999, prior to this adverse investment
climate, the average annual investment return on PSC's pension plan assets was
14.8%. 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.

During 2002, the fair market value of our pension plan assets declined
due to negative equity market performance and our discount rate decreased
resulting in an increase in pension liabilities. As a result we recorded an
additional minimum liability of $4,731 on our consolidated balance sheet as of
December 31, 2002. The additional minimum liability equaled the excess of the
accumulated benefit obligation over the fair value of plan assets and resulted
in the establishment of a regulatory asset, as we anticipate recovery of the
future, increased pension expense through customer rates. Although the
additional minimum liability did not impact net income or cash flow in 2002, in
future years, our pension expense and cash funding requirements are anticipated
to increase as a result of the decline in plan assets and the discount rate. Our
required pension contribution in 2003 is anticipated to approximate $1,600. We
expect our required pension contribution to increase in 2004 as compared to
2003, and may even increase in 2005 as well, depending on the future performance
of our pension assets. We expect future changes in the amount of contributions
and expense recognized will be properly included in customer rates.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------

In July 2001, the Financial Accounting Standards Board ("FASB")
approved Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred. When the liability is initially recognized,
the carrying amount of the related long-lived asset is increased by the same
amount. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, we may settle the obligation for its
recorded amount, or an alternative amount, thereby incurring a gain or loss upon
settlement. We intend to adopt this statement as required in 2003. We are
currently evaluating the provisions of this statement and have not yet
determined the effect of adoption on our results of operations or financial
position.

In August 2001, the FASB approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." We adopted SFAS No. 144 on January 1, 2002 as
required and it did not have a material impact on our results of operations or
financial position.

17

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

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

In April 2002, the FASB approved SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement is not expected to have an impact on our results of operations or
financial position.

In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement replaces the previous accounting guidance provided in Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. We believe this
statement will not have a material impact on our results of operations and
financial position.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5,
57 and 107 and rescission of SFAS No. 34. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies" relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The disclosure provisions of the interpretation are effective for
financial statements of periods ending after December 15, 2002. We have adopted
the disclosure provisions of the interpretation for the year ended December 31,
2002 and it did not have an impact on our disclosures. The provisions for
initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002. We are currently
evaluating the provisions of this interpretation to determine the impact of
adoption.

In December 2002, the FASB approved SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We adopted SFAS No. 148 for the year ended December
31, 2002 as required and it did not have an impact on our results of operations
or financial position.

18

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Report of Management

The consolidated financial statements and related information for the
years ended December 31, 2002, 2001 and 2000 were prepared by management in
accordance with accounting principles generally accepted in the United States of
America and include management's best estimates and judgments, as required.
Financial information included in other sections of this annual report is
consistent with that in the consolidated financial statements.

The Company has an internal accounting control structure designed to
provide reasonable assurance that assets are safeguarded and that transactions
are properly authorized and recorded in accordance with established policies and
procedures. The internal control structure is supported by the selection and
training of qualified personnel, the delegation of management authority and
responsibility, dissemination of policies and procedures and periodic reviews by
our internal audit director.

The Company's independent accountants, PricewaterhouseCoopers LLP,
provide an independent review of management's reporting of results of operations
and financial condition. PricewaterhouseCoopers has audited the financial
statements by conducting tests as they deemed appropriate and their report
follows.

The Audit Committee of the Board of Directors selects and evaluates the
Company's independent accountants and reviews the scope and results of their
audits. The Audit Committee also reviews the integrity of the Company's
financial reporting process, system of internal controls and other significant
financial matters. The Audit Committee meets regularly with management, our
internal audit director and the independent accountants. The Audit Committee
held three meetings in 2002.

/s/ Nicholas DeBenedictis                          /s/ David P. Smeltzer

Nicholas DeBenedictis                                David P. Smeltzer
Chairman &                              Senior Vice President - Finance
President

19

Report of Independent Accountants

To the Board of Directors and Stockholders of
Philadelphia Suburban Corporation:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of capitalization
and of cash flow present fairly, in all material respects, the financial
position of Philadelphia Suburban Corporation and its subsidiaries at December
31, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Philadelphia, PA
January 31, 2003

20

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Years ended December 31, 2002, 2001 and 2000

2002            2001           2000
-----------------------------------------------

Operating revenues                                                           $ 322,028      $ 307,280       $ 274,014
Costs and expenses:
Operations and maintenance                                                 117,735        111,885         101,741
Depreciation                                                                41,424         37,979          32,271
Amortization                                                                 2,898          2,189           1,829
Taxes other than income taxes                                               19,467         20,887          22,520
Recovery of restructuring costs                                                  -              -          (1,136)
-----------------------------------------------
181,524        172,940         157,225

Operating income                                                               140,504        134,340         116,789
Other expense (income):
Interest expense, net                                                       40,396         39,859          40,360
Allowance for funds used during construction                                (1,389)        (1,222)         (2,688)
Gain on sale of water system                                                (5,676)             -               -
Gain on sale of other assets                                                (2,079)        (3,384)         (5,076)
Recovery of merger transaction costs                                             -              -          (2,905)
Minority interest                                                                -              -             103
-----------------------------------------------
Income before income taxes                                                     109,252         99,087          86,995
Provision for income taxes                                                      42,046         38,976          34,105
-----------------------------------------------
Net income                                                                      67,206         60,111          52,890
Dividends on preferred stock                                                        52            106             106
-----------------------------------------------
Net income available to common stock                                          $ 67,154       $ 60,005        $ 52,784
===============================================

Net income                                                                    $ 67,206       $ 60,111        $ 52,890
Other comprehensive income (loss), net of tax:
Unrealized gains on securities                                                 104             39             908
Reclassification adjustment for gains reported in net income                  (767)          (239)         (2,002)
-----------------------------------------------
(663)          (200)         (1,094)

-----------------------------------------------
Comprehensive income                                                          $ 66,543       $ 59,911        $ 51,796
===============================================

Net income per common share:
Basic                                                                       $ 0.98         $ 0.88          $ 0.82
===============================================
Diluted                                                                     $ 0.97         $ 0.87          $ 0.81
===============================================
Average common shares outstanding during the period:
Basic                                                                       68,539         67,873          64,759
===============================================
Diluted                                                                     69,231         68,755          65,414
===============================================

See accompanying notes to consolidated financial statements.

21

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
December 31, 2002 and 2001

2002           2001
------------------------------
Assets

Property, plant and equipment, at cost                                                   $ 1,836,892    $ 1,677,061
Less accumulated depreciation                                                                346,051        308,946
------------------------------
Net property, plant and equipment                                                      1,490,841      1,368,115
------------------------------

Current assets:
Cash and cash equivalents                                                                  5,915          1,010
Accounts receivable and unbilled revenues, net                                            57,680         56,331
Inventory, materials and supplies                                                          4,555          4,446
Prepayments and other current assets                                                       2,758          2,854
------------------------------
Total current assets                                                                      70,908         64,641
------------------------------

Regulatory assets                                                                             88,175         79,669
Deferred charges and other assets, net                                                        23,391         22,915
Funds restricted for construction activity                                                    43,754         19,768
------------------------------
$ 1,717,069    $ 1,555,108
==============================
Liabilities and Stockholders' Equity
Stockholders' equity:
Common stock at $.50 par value, authorized 100,000,000 shares,
issued 70,067,784 and 69,300,346 in 2002 and 2001                                  $ 35,034       $ 34,650
Capital in excess of par value                                                           317,871        304,039
Retained earnings                                                                        180,047        149,682
Minority interest                                                                            503            787
Treasury stock, at cost, 2,151,350 and 913,877 shares in 2002 and 2001                   (40,421)       (17,167)
Accumulated other comprehensive income                                                        63            726
------------------------------
Total stockholders' equity                                                               493,097        472,717
------------------------------

6.05% Series B cumulative preferred stock                                                        172          1,116
Long-term debt, excluding current portion                                                    582,910        516,520
Commitments                                                                                        -              -

Current liabilities:
Current portion of long-term debt                                                         34,265         14,935
Loans payable                                                                            115,113        109,668
Accounts payable                                                                          31,058         27,667
Accrued interest                                                                           9,269          8,302
Accrued taxes                                                                             14,500         17,634
Other accrued liabilities                                                                 22,326         19,198
------------------------------
Total current liabilities                                                                226,531        197,404
------------------------------

Deferred credits and other liabilities:
Deferred income taxes and investment tax credits                                         187,300        167,577
Customers' advances for construction                                                      69,790         59,886
Other                                                                                     13,330          9,204
------------------------------
Total deferred credits and other liabilities                                             270,420        236,667
------------------------------

Contributions in aid of construction                                                         143,939        130,684
------------------------------
$ 1,717,069    $ 1,555,108
==============================

See accompanying notes to consolidated financial statements.

22

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
December 31, 2002 and 2001

2002            2001
-------------------------------

Stockholders' equity:
Common stock, $.50 par value                                                           $ 35,034       $ 34,650
Capital in excess of par value                                                          317,871        304,039
Retained earnings                                                                       180,047        149,682
Minority interest                                                                           503            787
Treasury stock, at cost                                                                 (40,421)       (17,167)
Accumulated other comprehensive income                                                       63            726
-------------------------------
Total stockholders' equity                                                                   493,097        472,717
-------------------------------

6.05% Series B cumulative preferred stock                                                        172          1,116

Long-term debt:
First Mortgage Bonds secured by utility plant:
Interest Rate Range
0.00% to  2.49%                                                                       18,009          8,325
2.50% to  2.99%                                                                       14,052              -
3.00% to  3.49%                                                                        4,733              -
3.50% to  3.99%                                                                        3,200              -
4.00% to  4.99%                                                                        8,135          9,023
5.00% to  5.49%                                                                       90,955         50,545
5.50% to  5.99%                                                                       86,260         30,660
6.00% to  6.49%                                                                      126,360        160,525
6.50% to  6.99%                                                                       52,000         55,200
7.00% to  7.49%                                                                       58,000         60,000
7.50% to  7.99%                                                                       23,000         23,000
8.00% to  8.49%                                                                       17,497         17,595
8.50% to  8.99%                                                                        9,000          9,000
9.00% to  9.49%                                                                       53,054         53,535
9.50% to  9.99%                                                                       44,637         46,031
10.00% to  10.50%                                                                       6,000          6,000
-------------------------------
Total First Mortgage Bonds                                                                   614,892        529,439
Note payable, 6.05%, due 2006                                                                    978            644
Installment note payable, 9%, due in equal annual payments through 2013                        1,305          1,372
-------------------------------
617,175        531,455
Current portion of long-term debt                                                             34,265         14,935
-------------------------------
Long-term debt, excluding current portion                                                    582,910        516,520
-------------------------------
Total capitalization                                                                     $ 1,076,179      $ 990,353
===============================

See accompanying notes to consolidated financial statements.

23

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(In thousands of dollars)
Years ended December 31, 2002, 2001 and 2000

2002            2001           2000
-----------------------------------------------

Cash flows from operating activities:
Net income                                                                        $ 67,206       $ 60,111        $ 52,890
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization                                                   44,322         40,168          34,100
Deferred income taxes                                                           18,470         14,935          10,885
Gain on sale of water system                                                    (5,676)             -               -
Gain on sale of other assets                                                    (2,079)        (3,384)         (5,076)
Net increase in receivables, inventory and prepayments                            (742)        (5,295)         (5,531)
Net increase in payables, accrued interest, accrued taxes
and other accrued liabilities                                                 1,346          7,045           4,247
Payment of Competitive Transition Charge                                             -        (11,465)              -
Other                                                                           (1,287)            50          (4,543)
-----------------------------------------------
Net cash flows from operating activities                                               121,560        102,165          86,972
-----------------------------------------------
Cash flows from investing activities:
Property, plant and equipment additions, including allowance for
funds used during construction of $1,389, $1,222 and $2,688                   (136,164)      (124,088)       (129,740)
Acquisitions of water and wastewater systems                                        (8,914)        (9,517)         (3,546)
Net increase in funds restricted for construction activity                         (23,986)       (15,806)         (3,962)
Net proceeds from the sale of water system                                          12,118              -               -
Net proceeds from the sale of other assets                                           6,258          5,211           5,896
Other                                                                                 (362)          (173)         (1,711)
-----------------------------------------------
Net cash flows used in investing activities                                           (151,050)      (144,373)       (133,063)
-----------------------------------------------
Cash flows from financing activities:
Customers' advances and contributions in aid of construction                        10,266          5,175           7,603
Repayments of customers' advances                                                   (5,070)        (4,652)         (4,642)
Net proceeds (repayments) of short-term debt                                         5,445          8,385         (14,075)
Proceeds from long-term debt                                                       119,350         64,024          67,791
Repayments of long-term debt                                                       (43,279)        (8,498)        (13,289)
Redemption of preferred stock                                                         (944)          (644)              -
Proceeds from issuing common stock                                                  10,611         13,522          37,190
Repurchase of common stock                                                         (24,109)        (2,493)         (4,383)
Dividends paid on preferred stock                                                      (52)          (106)           (106)
Dividends paid on common stock                                                     (36,789)       (34,234)        (30,406)
Other                                                                               (1,034)        (1,348)           (163)
-----------------------------------------------
Net cash flows from financing activities                                                34,395         39,131          45,520
-----------------------------------------------

Net increase (decrease) in cash and cash equivalents                                     4,905         (3,077)           (571)
Cash and cash equivalents at beginning of year                                           1,010          4,087           4,658
-----------------------------------------------
Cash and cash equivalents at end of year                                               $ 5,915        $ 1,010         $ 4,087
===============================================
Cash paid during the year for:
Interest, net of amounts capitalized                                              $ 38,040       $ 38,637        $ 36,507
===============================================
Income taxes                                                                      $ 24,165       $ 19,388        $ 23,008
===============================================

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.

24

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(In thousands of dollars, except per share amounts)

Summary of Significant Accounting Policies
------------------------------------------

Nature of Operations - Philadelphia Suburban Corporation (the "Company" or
"PSC") is the holding company for regulated utilities providing water or
wastewater services in Pennsylvania, Ohio, Illinois, New Jersey, Maine and North
Carolina. Our two primary subsidiaries are Pennsylvania Suburban Water Company
("PSW"), a regulated public utility that provides water and wastewater service
to customers in the suburban areas north and west of the City of Philadelphia
and in 18 other counties in Pennsylvania, and Consumers Water Company ("CWC"), a
holding company for several regulated public utility companies that provide
water or wastewater service to customers in Ohio, Illinois, New Jersey and
Maine. Our subsidiaries serve 583,750 water customers. Some of our subsidiaries
provide wastewater services to 21,724 customers in Pennsylvania, Illinois, New
Jersey and North Carolina. In addition, the Company provides water and
wastewater service to 21,312 customers through operating and maintenance
contracts with municipal authorities and other parties close to our operating
companies' service territories.

Regulation - 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. 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 state 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 $7,190 in 2002, $7,092 in 2001 and $6,369 in 2000.

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, 2002, utility
plant includes a net credit acquisition adjustment of $6,210, which is being
amortized over 20 to 40 years. Consistent with the Company's rate settlements,
$633 was amortized during 2002, $545 was amortized during 2001 and $541 was
amortized during 2000.

25

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Utility expenditures for maintenance and repairs, including major
maintenance projects and minor renewals and betterments, are charged to
operating expenses when incurred in accordance with the system of accounts
prescribed by the public utility commissions of the states in which the company
operates. The cost of new units of property and betterments are capitalized.
When units of utility property are replaced, retired or abandoned, the recorded
value thereof is credited to the asset account and such value, together with the
net cost of removal, is charged to accumulated depreciation.

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 Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the long-lived assets of the Company, which
consist primarily of Utility Plant in Service and regulatory assets, have been
reviewed for impairment. 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 2002, 2001 and 2000 was $9, $0 and $334
respectively. No interest was capitalized by our nonregulated businesses.

Cash Equivalents - The Company considers all highly liquid investments with an
original maturity of three months or less, which are not restricted for
construction activity, to be cash equivalents.

Deferred Charges and Other Assets - Deferred charges and other assets consist of
financing expenses, other costs and marketable securities. Deferred bond
issuance expenses are amortized by the straight-line method over the life of the
related issues. Call premiums related to the early redemption of long-term debt,
along with the unamortized balance of the related issuance
expense, are deferred and amortized over the life of the long-term debt used to
fund the redemption. Other costs, for which the Company has received or expects
to receive prospective rate recovery, are deferred and amortized over the period
of rate recovery in accordance with SFAS No. 71.

Marketable securities are considered "available-for-sale" and
accordingly, are carried on the balance sheet at fair market value. Unrecognized
gains are included in other comprehensive income.

Income Taxes - The Company accounts for certain income and expense items in
different time periods for financial reporting than for tax reporting purposes.
Deferred income taxes are provided on the temporary differences between the tax
basis of the assets and liabilities, and the amounts at which they are carried
in the consolidated financial statements. The income tax effect of temporary
differences not allowed currently in rates is recorded as deferred taxes with an
offsetting regulatory asset or liability. These deferred income taxes are based
on the enacted tax rates expected to be in effect when such temporary
differences are projected to reverse. Investment tax credits are deferred and
amortized over the estimated useful lives of the related properties.

26

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Customers' Advances for Construction - Water mains or, in some instances, cash
advances to reimburse the Company for its costs to construct water mains, are
contributed to the Company by customers, real estate developers and builders in
order to extend water service to their properties. The value of these
contributions is recorded as Customers' Advances for Construction. The Company
makes refunds on these advances over a specific period of time based on
operating revenues related to the main or as new customers are connected to and
take service from the main. After all refunds are made, any remaining balance is
transferred to Contributions in Aid of Construction. Non-cash property, in the
form of water mains, has been received, generally from developers, as advances
or contributions of $17,271, $10,196 and $6,060 in 2002, 2001 and 2000.

Contributions in Aid of Construction - Contributions in aid of construction
include direct non-refundable contributions and the portion of customers'
advances for construction that become non-refundable.

Inventories, Materials and Supplies - Inventories are stated at cost. Cost is
determined using the first-in, first-out method.

Stock-Based Compensation - The Company accounts for stock-based compensation
using the intrinsic value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no compensation expense
related to granting of stock options has been recognized in the financial
statements for stock options that have been granted. Pursuant to the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, pro forma net income available to common stock and
earnings per share are presented in the following table as if compensation cost
for stock options was determined as of the grant date under the fair value
method:

Years Ended December 31,
-------------------------------------
2002          2001          2000
-------------------------------------

Net income available to common stock:
As reported                                      $ 67,154      $ 60,005     $ 52,784
Less: pro forma expense related to stock
options granted, net of tax effects            (1,268)         (931)        (767)
-------------------------------------
Pro forma                                        $ 65,886      $ 59,074     $ 52,017
=====================================
Basic net income per share:
As reported                                        $ 0.98        $ 0.88       $ 0.82
Pro forma                                            0.96          0.87         0.80
Diluted net income per share:
As reported                                        $ 0.97        $ 0.87       $ 0.81
Pro forma                                            0.95          0.86         0.80

The per share weighted-average fair value at the date of grant for
stock options granted during 2002, 2001 and 2000 was $6.44, $5.58 and $2.82 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:

2002           2001         2000
-----------------------------------

Expected life (years)                                      5.5           5.2           10
Interest rate                                              4.9%          5.0%         6.4%
Volatility                                                34.2%         32.7%        21.1%
Dividend yield                                             2.6%          2.6%         3.9%

27

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Use of Estimates in Preparation of Consolidated Financial Statements - The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Reclassifications - Certain prior year amounts have been reclassified to conform
with current year's presentation.

Recent Accounting Pronouncements -In July 2001, the Financial Accounting
Standards Board ("FASB") approved Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred. When the liability is
initially recognized, the carrying amount of the related long-lived asset is
increased by the same amount. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, the Company
may settle the obligation for its recorded amount, or an alternative amount,
thereby incurring a gain or loss upon settlement. The Company intends to adopt
this statement as required in 2003. The Company is currently evaluating the
provisions of this statement and has not yet determined the effect of adoption
on its results of operations or financial position.

In August 2001, the FASB approved SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Company adopted SFAS No. 144 on January 1, 2002
as required and it did not have a material impact on the Company's results of
operations or financial position.

In April 2002, the FASB approved SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement is not expected to have an impact on the Company's results of
operations or financial position.

In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement replaces the previous accounting guidance provided in Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
believes this statement will not have a material impact on our results of
operations and financial position.

In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of SFAS No. 5,
57 and 107 and rescission of SFAS No. 34. This interpretation clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies" relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The disclosure provisions of the interpretation are effective for
financial statements of periods ending after December 15, 2002. We have adopted

28

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

the disclosure provisions of the interpretation for the year ended December 31,
2002 and it did not have an impact on our disclosures. The provisions for
initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002. The Company is
currently evaluating the provisions of this interpretation to determine the
impact of adoption.

In December 2002, the FASB approved SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted SFAS No. 148 for the year ended
December 31, 2002 as required and it did not have an impact on the Company's
results of operations or financial position.

Acquisitions
------------

PSC entered into a purchase agreement with DQE, Inc. ("DQE") and
AquaSource, Inc. ("AquaSource") dated July 29, 2002, as amended by Amendment No.
1 dated March 4, 2003, pursuant to which PSC agreed to acquire four operating
water and wastewater subsidiaries of AquaSource and assume selected, integrated
operating and maintenance contracts and related assets. The purchase agreement
provides for a target cash purchase price of approximately $205 million subject
to various adjustments. If the transaction is completed, PSC will purchase
operating utilities, including assets and franchises that serve approximately
130,000 water and wastewater customer accounts in 11 states, and selected water
and wastewater operating contracts that serve approximately 40,000 customers in
seven of these states. Over 80% of the customers in the businesses PSC is
purchasing are located in Texas, Florida, Virginia and Indiana. The acquisition
is subject to certain regulatory approvals, but does not require approval of the
shareholders of DQE or PSC. The Company expects to obtain the requisite
regulatory approvals in mid-2003. The Company intends to fund the acquisition at
closing with cash from a combination of short-term debt, long-term debt, the
issuance of our common stock and/or an instrument convertible into PSC common
stock. The ultimate decision regarding the funding of the acquisition will be
based upon market conditions existing at the time the acquisition is
consummated.

During 2002, the Company completed 25 acquisitions or other growth
ventures in the various states in which the Company operates. The total purchase
price of $11,659 for the systems acquired in 2002 consisted of $8,914 in cash
and the issuance of 143,091 shares of the Company's common stock. The increase
in annual revenues resulting from the acquired systems approximate $3,180
(unaudited) and operating revenues included in the consolidated financial
statements during the period owned by the Company was $1,341.

During 2001, the Company completed 20 acquisitions or other growth
ventures in the various states. The total purchase price of $14,878 for the
systems acquired in 2001 consisted of $9,517 in cash and the issuance of 331,710
shares of the Company's common stock. Operating revenues included in the
consolidated financial statements related to the systems acquired in 2001 were
$4,736 in 2002 and $3,432 in 2001.

During 2000, the Company completed 18 acquisitions or other growth
ventures including the Company's entry into a sixth state, North Carolina. The
total purchase price of $11,840 for the systems acquired in 2000 consisted of
$3,546 in cash and the issuance of 578,813 shares of the Company's common stock.
Operating revenues included in the consolidated financial statements related to
the systems acquired in 2000 were $2,681 in 2002, $2,623 in 2001 and $394 in
2000.

29

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

On February 4, 2003, the Company entered into a mutual termination
agreement with Pennichuck Corporation terminating PSC's planned acquisition of
Pennichuck Corporation, which was originally announced in April 2002. The mutual
decision to terminate the merger agreement was in response to a recent
referendum of the City of Nashua, New Hampshire, authorizing Nashua to pursue
the acquisition, by an eminent domain proceeding or otherwise, of all or a
portion of Pennichuck Corporation's water works system. As a result of the
recent events, both PSC and Pennichuck Corporation concluded that the
termination of the merger agreement was in the best interests of both companies.

Disposition
-----------

In December 2002, as a result of the settlement of a condemnation
action, the Company's Ohio operating subsidiary sold to Ashtabula County, Ohio
the water utility assets in the unincorporated areas of Ashtabula County and the
area within the Village of Geneva on the Lake for $12,118, net of certain
closing costs. The sale was in excess of the book value for these assets and the
sale generated a gain of $5,676 (or an after-tax gain of $3,690 and $0.05 per
share) recorded in the fourth quarter of 2002. We continue to operate this water
system for Ashtabula County under a one-year operating contract that began upon
the closing of the sale. The water utility assets sold represent less than 1% of
our total assets, and the total number of customers included in the water system
sold represents less than 1% of our total customer base.

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

December 31,
--------------------------------      Approximate range
2002            2001            of remaining lives
--------------------------------  ------------------------

Utility plant and equipment:
Mains and accessories                                     $ 815,066       $ 739,208       50 to 85 years
Services, hydrants, treatment
plants and reservoirs                                  432,564         372,328       16 to 58 years
Operations structures and water tanks                       140,211         129,898       14 to 61 years
Miscellaneous pumping and
purification equipment                                 182,415         175,072       12 to 50 years
Meters, data processing, transportation
and operating equipment                                194,073         163,387        5 to 50 years
Land, intangibles and other
non-depreciable assets                                  45,692          42,895              -
--------------------------------
Utility Plant and equipment                                    1,810,021       1,622,788
Utility construction work in progress                             23,964          51,531              -
Non-utility plant and equipment                                    2,907           2,742        2 to 40 years
--------------------------------
Total property, plant and equipment                           $1,836,892      $1,677,061
================================

30

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Accounts Receivable
-------------------
December 31,
----------------------------
2002          2001
----------------------------

Billed utility revenue                                 $ 34,733      $ 33,476
Unbilled utility revenue                                 26,007        23,493
Other                                                       520         1,844
----------------------------
61,260        58,813
Less allowance for doubtful accounts                      3,580         2,482
----------------------------
Net accounts receivable                                $ 57,680      $ 56,331
============================

The Company's customers are located in the following states: 66% in
Pennsylvania, 14% in Ohio, 10% in Illinois, 6% in New Jersey, 3% in Maine and 1%
in North Carolina. No single customer accounted for more than one percent of the
Company's operating revenues during the years ended December 31, 2002, 2001 or
2000. The following table summarizes the changes in the Company's allowance for
doubtful accounts:

2002          2001          2000
------------------------------------------

Balance at January 1,                                        $ 2,482       $ 1,907       $ 1,309
Amounts charged to expense                                     3,182         2,557         1,884
Accounts written off                                          (2,375)       (2,179)       (1,377)
Recoveries of accounts written off                               291           197            91
------------------------------------------
Balance at December 31,                                      $ 3,580       $ 2,482       $ 1,907
==========================================

Regulatory Assets and Liabilities
---------------------------------

The regulatory assets represent costs that are expected to be fully
recovered in future rates while regulatory liabilities represent amounts that
are expected to be refunded to customers in future rates. Except for income
taxes and the competitive transition charge payment, regulatory assets and
regulatory liabilities are excluded from the Company's rate base and do not earn
a return. The components of regulatory assets and (liabilities) are as follows:

December 31,
-----------------------------
2002     2001
-----------------------------
Income taxes, asset                                    $ 67,658      $ 64,764
Income taxes, liability                                  (3,574)       (3,684)
CTC payment                                               9,172        10,319
Postretirement benefits                                   8,334         1,374
Merger Costs                                              3,229         3,759
Water tank painting                                       2,114         2,088
Rate case filing expenses & other                         1,242         1,049
-----------------------------
$ 88,175      $ 79,669
=============================

Items giving rise to deferred state income taxes, as well as a portion
of deferred Federal income taxes related to certain differences between tax and
book depreciation expense, are recognized in the rate setting process on a cash
or flow-through basis and will be recovered as they reverse. The regulatory
asset associated with the Competitive Transition Charge payment represents the
full payoff in 2001, net of amortization, of the allocable share of a
Competitive Transition Charge ("CTC") as negotiated by PSW from its electric
distribution company, PECO Energy Company. The Pennsylvania Electricity
Generation Customer Choice and Competition Act permitted electric distribution
utilities to recover their stranded costs from its customers in the form of a
CTC. Rate recovery of the $11,465 CTC payment began in 2000 and is expected to

31

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

conclude in 2010. Postretirement benefits include pension and other
postretirement benefits. The pension costs include deferred net pension expense
in excess of amounts funded which the Company believes will be recoverable in
future years as pension funding is required, and in addition includes an
additional minimum liability for pensions as a result of a decline in the fair
market value of plan assets and a decline in the discount rate assumed for
pension obligations. The additional minimum liability equals the excess of the
accumulated benefit obligation over the fair value of plan assets. The
regulatory asset related to postretirement benefits other than pensions
represents costs that were deferred between the time that the accrual method of
accounting for these benefits was adopted in 1993 and the recognition of the
accrual method in the Company's rates as prescribed in subsequent rate filings.
Amortization of the amount deferred for postretirement benefits other than
pensions began in 1994 and is currently being recovered in rates. The regulatory
asset related to the recovery of merger costs represents the portion of the CWC
merger costs that will be recovered in rates as a result of a rate settlement in
2000 and is being amortized over the recovery period. Expenses associated with
water tank painting are deferred and amortized over a period of time as approved
in the regulatory process. The regulatory asset related to rate case filing
expenses represents the costs associated with filing for rate increases that are
deferred and amortized over periods that generally range from one to three
years.

Income Taxes
------------

The provision for income taxes consists of:

Years Ended December 31,
--------------------------------------------
2002          2001           2000
--------------------------------------------
Current:
Federal                                $ 16,619      $ 18,935       $ 19,888
State                                     6,647         5,106          4,900
--------------------------------------------

23,266        24,041         24,788
--------------------------------------------
Deferred:
Federal                                  17,921        13,048          8,371
State                                       859         1,887            946
--------------------------------------------

18,780        14,935          9,317
--------------------------------------------
Total tax expense                        $ 42,046      $ 38,976       $ 34,105
============================================

The statutory Federal tax rate is 35% and the state corporate net
income tax rates range from 7.18% to 9.99% for all years presented. The
Company's Federal income tax returns for all years through 1999 have been
closed.

32

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

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,
-------------------------------------------
2002          2001          2000
-------------------------------------------

Computed Federal tax expense at statutory rate                     $ 38,238      $ 34,680      $ 30,448
Increase in tax expense for depreciation expense
to be recovered in future rates                                      558           452           353
Merger transaction costs                                               (680)            -           120
Charitable contribution                                                 (98)            -           (83)
Deduction for PSC common dividends paid under
employee benefit plan                                               (207)            -             -
Amortization of deferred investment tax credits                        (283)         (276)         (287)
Prior year rate reductions                                             (315)         (322)         (311)
State income taxes, net of federal tax benefit                        4,879         4,545         3,799
Other, net                                                              (46)         (103)           66
-------------------------------------------
Actual income tax expense                                          $ 42,046      $ 38,976      $ 34,105
===========================================

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,
-------------------------------
2002            2001
-------------------------------

Deferred tax assets:
Customers' advances for construction                        $ 17,787        $ 18,060
Costs expensed for book not deducted
for tax, principally accrued expenses
and bad debt reserves                                        4,015           1,689
Other                                                              -             290
-------------------------------
Total gross deferred tax assets                                 21,802          20,039
-------------------------------

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                                        177,620         156,332
Deferred taxes associated with the gross-up
of revenues necessary to recover, in rates,
the effect of temporary differences                         23,972          23,626
Deferred investment tax credit                                 6,903           7,219
Unrealized gain on marketable securities                          83             439
Other                                                            524               -
-------------------------------
Total gross deferred tax liabilities                           209,102         187,616
-------------------------------

Net deferred tax liability                                    $187,300        $167,577
===============================

33

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Commitments
-----------

The Company maintains agreements with other water purveyors for the
purchase of water to supplement its water supply, particularly during periods of
peak demand. The agreements stipulate purchases of minimum quantities of water
to the year 2026. The estimated annual commitments related to such purchases are
expected to approximate $7,610 through 2007. The Company purchased approximately
$7,079, $5,807 and $5,592 of water under these agreements during the years ended
December 31, 2002, 2001 and 2000, respectively.

The Company leases motor vehicles, buildings and other equipment under
operating leases that are noncancelable. During the next five years, $3,977 of
future minimum lease payments are due: $1,609 in 2003, $1,055 in 2004, $746 in
2005, $374 in 2006 and $193 in 2007. PSW leases parcels of land on which
treatment plants and other facilities are situated and adjacent parcels that are
used for watershed protection. The operating leases are noncancelable, expire
between 2012 and 2052 and contain certain renewal provisions. Certain leases are
subject to an adjustment every five years based on changes in the Consumer Price
Index. During each of the next five years, $394 of lease payments for land,
subject to the aforesaid adjustment, are due.

Rent expense was $2,182, $2,281 and $1,815 for the years ended December
31, 2002, 2001 and 2000, respectively.

Long-term Debt and Loans Payable
--------------------------------

The Consolidated Statements of Capitalization provides a summary of
long-term debt and loans outstanding as of December 31, 2002 and 2001. The
supplemental indentures with respect to certain issues of the First Mortgage
Bonds restrict the ability of PSW and CWC to declare dividends, in cash or
property, or repurchase or otherwise acquire PSW's and CWC's stock. As of
December 31, 2002, approximately $252,000 of PSW's and $45,000 of CWC's retained
earnings were free of these restrictions. Certain supplemental indentures also
prohibit PSW and CWC from making loans to, or purchasing the stock of, the
Company.

34

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Annual sinking fund payments are required for certain issues of First
Mortgage Bonds by the supplemental indentures. The future sinking fund payments
and debt maturities of the Company's long-term debt are as follows:

Interest Rate Range                  2003        2004        2005          2006         2007     Thereafter
------------------------------------------------------------------------------

0.00% to  2.49%                    $ 96       $ 831       $ 836         $ 817        $ 813       $ 14,616
2.50% to  2.99%                       -         278         287           297          307         12,883
3.00% to  3.49%                       -         129         132           129          135          4,208
3.50% to  3.99%                     400         400         400           400          400          1,200
4.00% to  4.99%                       -           -           -             -            -          8,135
5.00% to  5.49%                      60          70          70            75           75         90,605
5.50% to  5.99%                  10,000      10,000           -             -            -         66,260
6.00% to  6.49%                       -      15,000           -           344          644        111,350
6.50% to  6.99%                  10,000           -      10,000        10,000       10,000         12,000
7.00% to  7.49%                  12,000      12,000      28,000         2,000        2,000          2,000
7.50% to  7.99%                       -           -           -             -            -         23,000
8.00% to  8.49%                       -           -           -             -            -         17,497
8.50% to  8.99%                       -           -           -             -            -          9,000
9.00% to  9.49%                     554         560         567           575          584         51,519
9.50% to  9.99%                   1,155       1,155       1,155         2,435          995         37,742
10.00% to  10.50%                     -           -           -             -            -          6,000
------------------------------------------------------------------------------
Total                            $ 34,265    $ 40,423    $ 41,447       $17,072      $15,953      $ 468,015
==============================================================================

PSW has a five-year $300,000 medium-term note program through December
2004 that provides for the issuance of long-term debt with maturities ranging
between one and 35 years at fixed rates of interest, as determined at the time
of issuance. The notes issued under this program are secured by the Thirty-Third
Supplement to the trust indenture relating to PSW's First Mortgage Bonds. In
June 2002, PSW issued First Mortgage Bonds through the program of $25,000 5.93%
Series due 2012. In October 2001, PSW issued First Mortgage Bonds through the
program of $15,000 6.21% Series due 2011. The proceeds from these issuances were
used to fund acquisitions, to reduce the balance of PSW's short-term debt and
for PSW's ongoing capital program.

In June 2002, PSW issued $25,000 tax-exempt bonds due in 2032 at a rate
of 5.55%. In December 2002, PSW issued $25,000 tax-exempt bonds due in 2032 at a
rate of 5.15%. The proceeds from the bonds issued are restricted to funding the
costs of certain capital projects. At various times during 2002, PSW and other
operating subsidiaries issued notes payable and tax-exempt bonds in aggregate of
$47,765 at a weighted average interest rate of 4.32% due at various times
ranging from 2007 to 2032. The proceeds from these issuances were used to reduce
a portion of the balance of the short-term debt at each of the respective
operating subsidiaries, to redeem $26,835 of First Mortgage Bonds of operating
subsidiaries ranging from 3.75% to 5.6% and redeem PSC preferred stock of $944.
As of December 31, 2002, the Trustees for five issues held $43,754 pending
completion of the projects financed with the issues and are reported in the
consolidated balance sheet as funds restricted for construction activity. In
connection with acquisitions completed in 2002, $6,313 of long-term debt was
assumed as a result of acquisitions at an interest rate of 1% due in various
years.

35

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

In September 2001, one of CWC's operating subsidiaries issued $12,000
of tax-exempt bonds due in 2031 at a rate of 5.00%. In November 2001, PSW issued
$30,000 in First Mortgage Bonds 5.35% Series due 2031 as security for an equal
amount of Bonds issued by the Delaware County Industrial Development Authority.
The proceeds from these bonds are restricted to funding the costs of certain
capital projects. At various times during 2001, PSW and other operating
subsidiaries issued notes payable in aggregate of $6,725 at a weighted average
interest rate of 2.8% due at various times in 2006, 2021, 2022 and 2031. The
proceeds from the notes payable issued in 2001 were used to reduce a portion of
the balance of short-term debt at each of the respective operating subsidiaries,
to redeem $2,400 of 9.6% First Mortgage Bonds of one of CWC's operating
subsidiaries through an early redemption, and redeem PSC preferred stock of
$644. The pro forma weighted cost of long-term debt at December 31, 2002 and
2001 was 6.6% and 7.0%, respectively.

In October 2002, a 364-day note payable of $22,000 was issued by PSC,
the proceeds of which were used to repurchase shares of PSC common stock from
Vivendi Environnement, S.A. Interest under this facility 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.

PSW has a $70,000 364-day revolving credit facility with four banks and
CWC 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, 2002 and 2001, funds borrowed under the PSW
revolving credit agreements were $35,664 and $64,882, respectively, and $12,902
and $13,500 were borrowed under the CWC revolving credit agreement,
respectively. Interest under these facilities is based, at the borrower's
option, on the prime rate, an adjusted federal funds rate, an adjusted London
Interbank Offered Rate corresponding to the interest period selected, an
adjusted Euro-Rate corresponding to the interest period selected or at rates
offered by the banks. These agreements restrict the total amount of short-term
borrowings of PSW and CWC. A commitment fee ranging from 1/4 to 1/10 of 1% is
charged on the unused portion of the revolving credit agreements. The average
cost of borrowing under these facilities was 2.3% and 4.5%, and the average
borrowing was $63,529 and $60,417, during 2002 and 2001, respectively. The
maximum amount outstanding at the end of any one month was $83,836 in 2002 and
$78,382 in 2001.

At December 31, 2002 and 2001, the Company had combined short-term
lines of credit of $90,000 and $105,500, respectively. Funds borrowed under
these lines are classified as loans payable and are used to provide working
capital. The average borrowing under the lines was $48,527 and $61,232 during
2002 and 2001, respectively. The maximum amount outstanding at the end of any
one month was $75,575 in 2002 and $76,858 in 2001. 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 2002 and 2001 was
2.8% and 5.2%, respectively.

Interest income of $287, $367 and $402 was netted against interest
expense on the consolidated statements of income for the years ended December
31, 2002, 2001 and 2000, respectively. The total interest cost was $40,683,
$40,226 and $40,762 in 2002, 2001 and 2000, including amounts capitalized of
$1,389, $1,222 and $2,688, respectively.

36

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Fair Value of Financial Instruments
-----------------------------------

The carrying amount of current assets and liabilities that are
considered financial instruments approximates their fair value as of the dates
presented. The carrying amount and estimated fair value of the Company's
long-term debt are as follows:

December 31,
----------------------------
2002          2001
----------------------------

Carrying amount                              $617,175    $ 531,455
Estimated fair value                          660,436      562,740

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 $69,790 and
$59,886 at December 31, 2002 and 2001, respectively. Their relative fair values
cannot be accurately estimated because future refund payments depend on several
variables, including new customer connections, customer consumption levels and
future rate increases. Portions of these non-interest bearing instruments are
payable annually through 2017 and amounts not paid by the contract expiration
dates become non-refundable. The fair value of these amounts would, however, be
less than their carrying value due to the non-interest bearing feature.

Preferred Stock
---------------

At December 31, 2002, the Company had 1,770,819 shares of Series
Preferred Stock with a $1.00 par value authorized, of which 100,000 shares are
designated as Series A Preferred Stock. During 1996, the Company designated
32,200 shares as Series B Preferred Stock, $1.00 par value. The Series A
Preferred Stock, as well as the undesignated shares of Series Preferred Stock,
remains unissued. In 1996, the Company issued all of the 6.05% Series B
Preferred Stock in connection with an acquisition. The Series B Preferred Stock
is recorded on the balance sheet at its liquidation value of $100 per share.
Dividends on the Series B Preferred Stock are cumulative and payable quarterly.
PSC is not permitted to pay dividends on common stock unless provision has been
made for payment of the dividends on the Series B Preferred Stock. Under the
provisions of this issue, the holders may require the Company to redeem their
shares, in whole or in part, at the liquidation value beginning December 1, 1998
and the Company may elect to redeem up to 20% of this issue each year beginning
December 1, 2001 and, at the holders' option, this redemption may be made in
cash or through the issuance of debt with a five-year maturity at an interest
rate of 6.05% per annum. As of December 31, 2002, the Company has provided for
all dividends accrued on the Series B Preferred Stock. At various times since
1999, an aggregate of 30,480 shares of Series B Preferred Stock were redeemed at
the liquidation value of $100 per share, including 9,440 shares in 2002.

Stockholders' Equity
--------------------

At December 31, 2002, the Company had 100,000,000 shares of common
stock authorized; par value $0.50. Shares outstanding at December 31, 2002, 2001
and 2000 were 67,916,434, 68,386,469 and 67,094,905, respectively. Treasury
shares held at December 31, 2002, 2001 and 2000 were 2,151,350, 913,877 and
844,376, respectively.

37

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

The following table summarizes the activity of common stockholders'
equity:

Accumulated
Capital in                    Other
Common    Treasury    excess of     Retained   Comprehensive
stock      stock      par value     earnings       Income         Total
--------------------------------------------------------------------------------

Balance at December 31, 1999                $ 20,814    $ (11,270)    $251,440     $101,533         $ 2,020     $364,537
Net income                                         -            -            -       52,784               -       52,784
Other comprehensive income,
net of income tax of $489                       -            -            -            -             908          908
Reclassification adjustment for
gains reported in net income,
net of income tax of $1,375                     -            -            -            -          (2,002)      (2,002)
Dividends                                          -            -            -      (30,406)              -      (30,406)
Stock split                                    5,319            -       (5,319)           -               -            -
Stock issued for acquisitions                    228            -        8,067            -               -        8,295
Sale of stock                                    803          307       34,318            -               -       35,428
Repurchase of stock                                -       (4,383)           -            -               -       (4,383)
Equity Compensation Plan                          12            -          545            -               -          557
Exercise of stock options                         84            -        1,677            -               -        1,761
Employee stock plans tax benefits                  -            -          285            -               -          285
--------------------------------------------------------------------------------
Balance at December 31, 2000                  27,260      (15,346)     291,013      123,911             926      427,764
--------------------------------------------------------------------------------
Net income                                         -            -            -       60,005               -       60,005
Other comprehensive income,
net of income tax of $19                        -            -            -            -              39           39
Reclassification adjustment for
gains reported in net income,
net of income tax of $127                       -            -            -            -            (239)        (239)
Dividends                                          -            -            -      (34,234)              -      (34,234)
Stock split                                    6,829            -       (6,829)           -               -            -
Stock issued for acquisitions                    133            -        5,228            -               -        5,361
Sale of stock                                    128          672        5,783            -               -        6,583
Repurchase of stock                                -       (2,493)           -            -               -       (2,493)
Equity Compensation Plan                           3            -          141            -               -          144
Exercise of stock options                        297            -        6,642            -               -        6,939
Employee stock plans tax benefits                  -            -        2,061            -               -        2,061
--------------------------------------------------------------------------------
Balance at December 31, 2001                  34,650      (17,167)     304,039      149,682             726      471,930
--------------------------------------------------------------------------------
Net income                                         -            -            -       67,154               -       67,154
Other comprehensive income,
net of income tax of $56                        -            -            -            -             104          104
Reclassification adjustment for
gains reported in net income,
net of income tax of ($412)                     -            -            -            -            (767)        (767)
Dividends                                          -            -            -      (36,789)              -      (36,789)
Stock issued for acquisitions                     71            -        2,674            -               -        2,745
Sale of stock                                    161          855        6,220            -               -        7,236
Repurchase of stock                                -      (24,109)           -            -               -      (24,109)
Equity Compensation Plan                          15            -          598            -               -          613
Exercise of stock options                        137            -        3,237            -               -        3,374
Employee stock plans tax benefits                  -            -        1,103            -               -        1,103
--------------------------------------------------------------------------------
Balance at December 31, 2002                $ 35,034    $ (40,421)    $317,871     $180,047            $ 63     $492,594
================================================================================

38

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

In May 2002, Vivendi Environnement, S.A., which through its affiliates
(collectively "Vivendi") owned approximately 16.8% of our outstanding common
stock, advised the Company of their decision to sell its investment in PSC.
Vivendi 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 Vivendi
into the market, the Company completed a secondary offering of 9,885,256 shares
of PSC common stock held by Vivendi. The number of outstanding shares of common
stock was not changed and the Company did not receive any proceeds as a result
of this secondary offering. In addition, in October 2002 the Company repurchased
1,210,620 shares of PSC common stock representing the remainder of the shares of
PSC common stock held by Vivendi. The repurchase of shares was funded with
proceeds of $22,000 from a short-term credit facility. It is the Company's
current intention to repay these short-term borrowings with proceeds from the
issuance of common stock or an instrument convertible into PSC common stock.

In addition, the Board of Directors has authorized the Company to
purchase its common stock, from time to time, in the open market or through
privately negotiated transactions. Under this authorization, there were no
shares repurchased in 2002 and 2001. During 2000, 288,750 shares were
repurchased at a net cost of $3,500. As of December 31, 2002, 328,967 shares
remain available for purchase by the Company.

The Company has a Dividend Reinvestment and Direct Stock Purchase Plan
("Plan") that allows reinvested dividends to be used to purchase original issue
shares of common stock at a five percent discount from the current market value.
Under the direct stock purchase program, shares are purchased by investors at
market price and the shares are purchased by the Company's transfer agent in the
open-market at least weekly. During 2002, 2001 and 2000, under the dividend
reinvestment portion of the Plan, 321,667, 303,906 and 419,766 original issue
shares of common stock were sold providing the Company with proceeds of $6,407,
$5,980 and $5,482, respectively.

In September 2000, the Company issued 2,066,406 shares of common stock
through a public offering, providing net proceeds of $29,689 which were used to
make an equity contribution to PSW. PSW used the contribution from the Company
to reduce the balance of its revolving credit loan.

The Company has a shelf registration statement on file with the
Securities and Exchange Commission to permit the offering from time to time of
shares of common stock and shares of preferred stock for acquisitions. During
2002, 2001 and 2000, 143,091, 331,710 and 578,813 shares of common stock
totaling $2,745, $5,361 and $8,295, respectively, were issued to acquire water
and wastewater systems. The precise amount and timing of the application of such
proceeds will depend upon our funding requirements and the availability and cost
of other funds.

The Company reports comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income." Accordingly, the Company's accumulated
other comprehensive income for unrealized gains on securities is reported in the
Stockholders' Equity section of the Consolidated Balance Sheets and the related
other comprehensive income is reported in the Consolidated Statements of Income
and Comprehensive Income.

39

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

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,
---------------------------------
2002         2001       2000
---------------------------------

Average common shares outstanding during
the period for Basic computation                        68,539     67,873      64,759
Dilutive effect of employee stock options                     692        882         655
---------------------------------
Average common shares outstanding during
the period for Diluted computation                      69,231     68,755      65,414
=================================

Equity per common share was $7.25 and $6.90 at December 31, 2002 and
2001, 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 Plans
----------------------------------

Under the 1994 Equity Compensation Plan ("1994 Plan"), as amended and
restated effective March 3, 1998, the Company may grant qualified and
non-qualified stock options to officers, key employees and consultants. Officers
and key employees may also be granted dividend equivalents and restricted stock.
Restricted stock may also be granted to non-employee members of the Board of
Directors ("Board"). In November 1998, the Shareholders authorized an increase
to the number of shares from 1,900,000 shares to 2,900,000 shares of common
stock for issuance under the 1994 Plan. The maximum number of shares that may be
subject to grants under the 1994 Plan to any one individual in any one year is
150,000. Awards under this plan are made by a committee of the Board of
Directors.

40

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

Options under the 1994 plan, as well as the earlier 1988 Stock Option
Plan were issued at the market price of the stock on the day of the grant.
Options are exercisable in installments of 33% annually, starting one year from
the date of the grant and expire 10 years from the date of the grant. The
following table summarizes stock option transactions for the two plans:

As of or For the Years Ended December 31,
----------------------------------------------------------------------------------------
2002                          2001                           2000
----------------------------  ----------------------------   ---------------------------
Weighted                      Weighted                      Weighted
Average                       Average                       Average
Exercise                      Exercise                      Exercise
Shares          Price         Shares          Price          Shares         Price
----------------------------  ----------------------------   ---------------------------

Options:
Outstanding, beginning of year          2,047,810       $ 13.32       2,263,803       $ 10.69       2,005,194       $ 10.12
Granted                                   494,250         20.80         535,679         19.10         560,609         11.75
Terminated                                 (6,612)        16.24         (18,183)        12.13         (70,911)        13.17
Exercised                                (271,342)        12.28        (733,489)         9.39        (231,089)         7.58
----------------------------  ----------------------------   ---------------------------
Outstanding, end of year                2,264,106       $ 15.07       2,047,810       $ 13.32       2,263,803       $ 10.69
============================  ============================   ===========================

Exercisable, end of year                1,244,386       $ 12.13       1,015,708       $ 10.79       1,295,561        $ 9.21
============================  ============================   ===========================

Options exercised during 2002 ranged in price from $5.48 per share to
$19.10 per share. At December 31, 2002, 415,322 options under the 1994 Plan were
still available for grant. The following table summarizes the price ranges of
the options outstanding and options exercisable as of December 31, 2002:

Options Outstanding           Options Exercisable
---------------------------------------     ---------------------------
Weighted     Weighted                      Weighted
Average      Average                       Average
Remaining     Exercise                      Exercise
Shares     Life (years)    Price            Shares       Price
---------------------------------------    --------------------------
Range of prices:

$ 5.48 -  8.99           242,850      3.3       $ 6.49           242,850       $ 6.49
$ 9.00 -  13.99          837,001      6.7        12.04           662,425        12.13
$14.00 - 18.99           201,898      5.2        14.17           201,377        14.16
$19.00 - 19.99           491,106      9.4        19.10           137,734        19.10
$20.00 - 20.81           491,251      9.5        20.81                 -            -
---------------------------------------    ----------------------------
2,264,106      7.2      $ 15.07         1,244,386       $12.13
=======================================    ============================

Under SFAS No. 123 "Accounting for Stock-Based Compensation" and SFAS
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure",
the Company elects to continue to apply the provisions of APB Opinion No. 25 and
to provide the pro forma disclosure provisions of this statement. Accordingly,
no compensation cost has been recognized in the financial statements for stock
options that have been granted. Pursuant to the disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
pro forma net income available to common stock and earnings per share are
presented in the Summary of Significant Accounting Policies - Stock-Based
Compensation as if compensation cost for stock options was determined as of the
grant date under the fair value method.

41

PHILADELPHIA SUBURBAN CORPORATION 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 2002, 2001 and 2000, 29,625, 7,875 and 36,875 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 less
payments made by the grantee and is amortized ratably over the restriction
period.

Pension Plans and Other Postretirement Benefits
-----------------------------------------------

The Company maintains a qualified, defined benefit pension plan that
covers a majority of its full-time employees. 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 current and retired employees. The net pension costs and
obligations of the qualified and non-qualified plans are included in the tables
which follow.

In addition to providing pension benefits, the Company offers certain
Postretirement Benefits other than Pensions ("PBOPs") to employees 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 Company's pension expense (credit) includes the following
components:

Years Ended December 31,
-------------------------------------------
2002           2001          2000
-------------------------------------------

Benefits earned during the year                              3,205        $ 2,986       $ 2,553
Interest cost on projected benefit obligation                8,501          8,261         7,612
Expected return on plan assets                              (9,945)       (10,891)      (11,281)
Net amortization and deferral                                  203           (206)       (1,283)
Capitalized costs                                              (66)           (49)          (56)
Rate-regulated adjustment                                        -           (553)        1,403
Special termination benefits                                     -              -            43
-------------------------------------------
Net pension cost (credit)                                    1,898         $ (452)     $ (1,009)
===========================================

The rate-regulated adjustment set forth above is required for 2001 and
2000 in order to reflect pension expense (credit) for the Company in accordance
with the method used in establishing water rates. During 2001 and 2000, the
Company instituted early retirement and restructuring programs. These actions
resulted in additional termination benefits of $43 in 2000.

42

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

The Company's costs for postretirement benefits other than pensions
includes the following components:

Years Ended December 31,
-------------------------------------------
2002           2001          2000
-------------------------------------------

Benefits earned during the year                              $ 840          $ 705         $ 555
Interest cost                                                1,620          1,427         1,267
Expected return on plan assets                                (953)          (947)         (920)
Net amortization and deferral                                  741            567           417
Amortization of regulatory asset                               136            136           208
-------------------------------------------
Gross PBOP cost                                              2,384          1,888         1,527
Capitalized costs                                             (520)          (475)         (512)
-------------------------------------------
Net PBOP cost                                              $ 1,864        $ 1,413       $ 1,015
===========================================

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
------------------------------    -------------------------------
2002            2001              2002             2001
--------------  --------------    --------------   --------------

Change in benefit obligation:
Benefit obligation at January 1,                         $ 119,667       $ 110,214          $ 22,317         $ 18,581
Service cost                                                 3,205           2,986               840              705
Interest cost                                                8,501           8,261             1,620            1,428
Plan amendments                                                170               -                 -           (1,205)
Actuarial loss                                               5,104           3,645             1,574            3,680
Benefits paid                                               (5,588)         (5,439)             (915)            (872)
------------------------------    --------------   --------------
Benefit obligation at December 31,                         131,059         119,667            25,436           22,317
------------------------------    --------------   --------------

Change in plan assets:
Fair value of plan assets at January 1,                    113,330         123,715            12,216           11,896
Actual return on plan assets                               (13,369)         (5,001)           (1,168)            (688)
Employer contributions                                          65              55             2,067            1,880
Benefits paid                                               (5,588)         (5,439)             (915)            (872)
------------------------------    --------------   --------------
Fair value of plan assets at December 31,                   94,438         113,330            12,200           12,216
------------------------------    --------------   --------------

Funded status of plan:
Funded status at December 31,                               36,621           6,337            13,236           10,101
Unrecognized actuarial gain (loss)                         (30,471)         (2,051)           (2,839)             854
Unrecognized prior service cost                             (2,337)         (2,581)              647              704
Rate-regulated adjustment                                        -            (516)                -                -
Unrecognized net transition obligation                       1,436           1,645            (8,034)          (8,838)
------------------------------    --------------   --------------
Accrued benefit costs                                      $ 5,249         $ 2,834           $ 3,010          $ 2,821
==============================    ==============   ==============

Weighted-average assumptions
as of December 31,
Discount rate                                                6.75%           7.25%             6.75%            7.25%
Expected return on plan assets*                              9.00%           9.00%        6.00-9.00%       6.00-9.00%
Rate of compensation increase                             4.0-5.0%        4.5-5.5%              4.0%             4.5%

* On January 1, 2003, the Company has changed the pension plans' expected
return on plan assets to 8.5%.

43

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

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.

The discount rate is based on a market rate for a recognized-rating
agency's high-quality long-term bond portfolio with durations matching the
expected payouts under our retirement plans. The Company's pension expense and
liability (benefit obligations) increases as the discount rate is reduced. A 25
basis-point reduction in this assumption would have increased 2002 pension
expense by $250 and the pension liabilities by $4,700. The present values of the
Company's future pension and other postretirement obligations were determined
using discount rates of 6.75% at December 31, 2002 and 7.25% at December 31,
2001. Pension expense under these plans is determined using the discount rate as
of the beginning of the year, which was 7.25% for 2002, and will be 6.75% for
2003.

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 2002 pension expense by $275. For 2002, PSC used
a 9.0% expected return on assets assumption, and will lower this assumption to
8.5% in 2003. Over the last ten years, the Company's pension plan assets have
generated an average annual investment return of 8.3%. Although those returns
are below the long-term assumption, this measurement period includes the
three-year period ended December 31, 2002 of declining performance of the equity
markets. For the seven-year period ended December 31, 1999, prior to this
adverse investment climate, the average annual investment return on PSC's
pension plan assets was 14.8%. The expected return on assets is based on a
targeted allocation of 65% equities and 35% fixed income. We believe that the
Company's actual long-term asset allocation on average will approximate the
targeted allocation.

During 2002, the fair market value of the pension plan assets declined
due to negative equity market performance and our discount rate decreased
resulting in an increase in pension liabilities. As a result, we recorded an
additional minimum liability of $4,731 on our consolidated balance sheet as of
December 31, 2002. The additional minimum liability equaled the excess of the
accumulated benefit obligation over the fair value of plan assets and resulted
in the establishment of a regulatory asset, as the Company anticipates recovery
of the future, increased pension expense through customer rates. Although the
additional minimum liability did not impact net income or cash flow in 2002, in
future years, the Company's pension expense and cash funding requirements are
anticipated to increase as a result of the decline in plan assets and the
discount rate.

The accumulated benefit obligation is in excess of plan assets for
certain non-qualified plans. The projected benefit obligation, accumulated
benefit obligation and fair value of plan assets for these plans were $104,433
$84,756 and $72,551, and $3,551, $2,342 and $0, respectively as of December 31,
2002 and 2001.

The assumed medical inflation rates under the plans are 10.0%, reducing
to 5.0% by 2006. The effect of a 1% increase in the assumed medical inflation
rates would be to increase the accumulated postretirement benefit obligation as
of December 31, 2002 and the 2002 PBOP costs by $859 and $95, respectively. The
effect of a 1% decrease in the assumed medical inflation rates would be to
decrease the accumulated postretirement benefit obligation as of December 31,
2002 and the 2002 PBOP costs by $1,049 and $127, respectively. 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.

44

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

The Company has 401(k) savings plans that cover substantially all
employees. The Company makes matching contributions that are invested in PSC
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 $859, $798 and $786 for the years ended December 31,
2002, 2001 and 2000, respectively.

Water Rates
-----------

On August 1, 2002, the Pennsylvania Public Utility Commission ("PAPUC")
granted PSC's Pennsylvania utility subsidiary a $21,226 or 10.2% base rate
increase. The rates in effect at the time of the filing included $9,400 in
Distribution System Improvement Charges at 5.0%. Consequently, the total base
rates increased by $30,626 and the DSIC was reset to zero.

On April 27, 2000, the PAPUC approved a rate settlement reached between
PSC's Pennsylvania utility subsidiary, and the parties actively litigating the
joint rate application. The settlement was designed to increase annual revenue
by $17,000 or 9.4% above the level in effect at the time of the filing. The
rates in effect at the time of the filing included $7,347 in Distribution System
Improvement Charges ("DSIC") ranging from 0.33% to 5%. Consequently, the
settlement resulted in a total base rate increase of $24,347 above the rates in
effect before the DSIC was applied. As a part of the rate settlement, the DSIC
was reset to zero. The settlement agreement also provided for the recovery of up
to $5,295 (the merger costs allocable to our Pennsylvania operations) of the
$10,121 ($8,596 after-tax) in merger costs that were expensed in the first
quarter of 1999 in connection with the merger with Consumers Water Company. As a
result, a regulatory asset was established to reflect the amount to be recovered
as a result of the rate settlement. The merger transaction costs and related
recovery have been reported in Other expenses and the restructuring costs and
related recovery have been reported as Costs and expenses in the Consolidated
Statements of Income and Comprehensive Income.

The Company's other operating subsidiaries were allowed annual rate
increases of $3,024 in 2002, $4,799 in 2001 and $698 in 2000, represented by
thirteen, nine and four rate decisions, respectively. Revenues from these
increases realized in the year of grant were approximately $1,403, $4,200 and
$450 in 2002, 2001 and 2000, respectively.

The DSIC enables water utilities in Pennsylvania to add a surcharge to
customer bills reflecting the capital costs and depreciation related to certain
distribution system improvement projects completed and placed into service
between base rate filings. PSW is permitted to request adjustments to the DSIC
quarterly to reflect subsequent capital expenditures and it is reset to zero
when new base rates that reflect the costs of those additions become effective
or when PSW's pro forma earnings exceed a PUC benchmark. The maximum DSIC that
can be in effect at any time is 5%. The DSIC provided revenues in 2002, 2001 and
2000 of $5,301, $6,672 and $2,301, respectively.

45

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
(In thousands of dollars, except per share amounts)

In 2001, the Illinois Commerce Commission issued regulations
implementing an infrastructure surcharge known as a Qualifying Infrastructure
Plant Surcharge ("QIPS") for use by Illinois water and wastewater utilities.
QIPS is similar to DSIC, however, it is established annually and prospectively
based on anticipated qualifying capital expenditures, and it includes a broader
range of qualifying capital expenditures, including certain wastewater capital
expenditures. Our operating subsidiary in Illinois received approval to add a
QIPS to its bills in three of its operating divisions beginning January 1, 2002
at various rates ranging from 1.06% to 2.49% which generated $217 of revenues in
2002. The QIPS remains in effect at rates ranging from 3.13% to 5.0% in 2003.

In addition to its base rates and DSIC, PSW has utilized a surcharge or
credit on its bills to reflect certain changes in Pennsylvania State taxes until
such time as the tax changes are incorporated in base rates. A rate credit
reduced operating revenues by $286 in 2002, $639 in 2001, and increased
operating revenues by rate surcharges of $74 in 2000.

46

Selected Quarterly Financial Data (Unaudited)               Philadelphia Suburban Corporation and Subsidiaries
(in thousands of dollars, except per share amounts)

First        Second        Third        Fourth
Quarter      Quarter       Quarter      Quarter        Year
------------------------------------------------------------------
2002
--------------------------------------------------------------------------------------------------------------------

Operating revenues                                     $71,669      $76,615       $91,918      $81,826     $322,028
Operations and maintenance expense                      27,285       28,915        31,143       30,392      117,735
Net income available to common
stock                                                 11,875       14,818        21,815       18,646       67,154
Basic net income per common share                         0.17         0.22          0.32         0.27         0.98
Diluted net income per common share                       0.17         0.21          0.31         0.27         0.97
Dividend paid per common share                          0.1325       0.1325        0.1325        0.140       0.5375
Dividend declared per common share                      0.1325       0.1325        0.2725            -       0.5375
Price range of common stock
- high                                                 24.61        25.00         20.30        21.87        25.00
- low                                                  21.10        18.49         16.02        19.30        16.02

2001
--------------------------------------------------------------------------------------------------------------------
Operating revenues                                     $70,193      $77,240       $84,726      $75,121     $307,280
Operations and maintenance expense                      26,186       26,462        28,994       30,243      111,885
Net income available to common
stock                                                 13,085       15,432        19,279       12,209       60,005
Basic net income per common share                         0.19         0.23          0.28         0.18         0.88
Diluted net income per common share                       0.19         0.22          0.28         0.18         0.87
Dividend paid per common share                           0.124        0.124         0.124      0.13248        0.504
Dividend declared per common share                       0.124        0.124       0.25648            -        0.504
Price range of common stock
- high                                                 19.39        20.40         23.28        24.64        24.64
- low                                                  15.65        16.60         18.66        20.80        15.65

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 2002 of
$0.14 and December 2001 of $0.13248 were declared in August 2002 and August
2001, respectively.

Summary of Selected Financial Data                                      Philadelphia Suburban Corporation and Subsidiaries
(in thousands of dollars, except per share amounts)

-------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                           2002          2001          2000          1999          1998
-------------------------------------------------------------------------------------------------------------------------------

PER COMMON SHARE:
Income from operations before
non-recurring items: (a)
Basic                                                   $0.93         $0.88         $0.78         $0.70         $0.65
Diluted                                                  0.92          0.87          0.77          0.69          0.64
Net income
Basic                                                    0.98          0.88          0.82          0.57          0.71
Diluted                                                  0.97          0.87          0.81          0.56          0.70
Cash dividends paid                                           0.54          0.50          0.47          0.45          0.43
Cash dividends declared (b)                                   0.54          0.50          0.47          0.45          0.32
Return on average stockholders' equity                       13.9%         13.3%         13.2%         10.1%         13.7%
Book value at year end                                       $7.25         $6.90         $6.38         $5.69         $5.46
Market value at year end                                     20.60         22.55         19.60         13.24         18.92
-------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT HIGHLIGHTS:
Operating revenues                                        $322,028      $307,280      $274,014      $256,546      $250,718
Depreciation and amortization                               44,322        40,168        34,100        31,903        29,464
Interest expense (c)                                        39,007        38,637        37,775        31,796        30,785
Income before income taxes                                 109,252        99,087        86,995        62,915        75,133
Provision for income taxes                                  42,046        38,976        34,105        26,531        30,118
Net income available to common stock                        67,154        60,005        52,784        36,275        44,820
-

------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS:
Total assets                                            $1,717,069    $1,555,108    $1,413,723    $1,280,805    $1,156,733
Property, plant and equipment, net                       1,490,841     1,368,115     1,251,427     1,135,364     1,016,194
Stockholders' equity                                       493,097       472,717       430,587       367,141       349,868
Long-term debt (d)                                         617,175       531,455       472,712       425,946       377,355
Total debt                                                 732,288       641,123       573,706       529,015       440,905
-------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION:
Net cash flows from operating activities                  $121,560      $102,165       $86,972       $74,103       $84,362
Capital additions (e)                                      136,164       124,088       129,740        96,383        87,973
Dividends on common stock                                   36,789        34,234        30,406        29,217        29,349
Number of customers served                                 626,786       602,510       579,219       557,462       533,847
Number of shareholders of common stock                      21,389        20,920        20,978        21,187        20,553
Common shares outstanding (000)                             67,916        68,386        67,095        64,082        63,597
Employees (full-time)                                          971           951           943           945           973
-------------------------------------------------------------------------------------------------------------------------------

(a)  Income per share from operations before non-recurring items is a measure that is not determined in accor-
dance with GAAP and may not be comparable to similarly titled measures reported by other companies.
This Non-GAAP measure should not be considered as an alternative to net income per share as determined
in accordance with GAAP.  We believe that this is useful as an indicator of operating performance, as we
measure it for management purposes, because it provides a better understanding of our results of operations
by highlighting our ongoing operations and the underlying profitability of our core business.  Non-recurring
items include the following:  the 2002 amounts include a net gain of $3,690 ($5,676 pre-tax) or $0.05 per share
on the sale of a portion of our Ashtabula, Ohio water system; the 2000 amounts include a net gain of
$2,236 ($4,041 pre-tax) or $0.04 per share for the partial recovery of the merger costs related to the merger
with Consumers Water Company; the 1999 amounts include a net charge of $8,596 ($10,121 pre-tax) or
$0.13 per share for the Merger transaction costs and related restructuring costs; and the 1998 amounts
include a net gain of $3,903 ($6,680 pre-tax) or $0.06 per share on the sale of Consumers Water Company's
New Hampshire system pursuant to the State's condemnation statute.
(b)  The cash dividend of $0.10, paid in March 1998, was declared in December 1997.
(c)  Includes dividends on preferred stock of subsidiary and minority interest; net of allowance for funds
used during construction.
(d)  Includes current portion.
(e)  Excludes payments for acquired water systems of $8,914 in 2002, $9,517 in 2001, $3,546 in 2000,
$39,164 in 1999, and $24,498 in 1998.

Exhibit 21
----------
(unaudited)

PHILADELPHIA SUBURBAN CORPORATION AND SUBSIDIARIES

The following table lists the significant subsidiaries and other active
subsidiaries of Philadelphia Suburban Corporation at December 31, 2002:

Pennsylvania Suburban Water Company (Pa.)
Suburban Environmental Services, Inc. (Pa.)
Little Washington Wastewater Company (Pa.)
Consumers Water Company (Pa.)
Consumers Ohio Water Company (Ohio)
Consumers Applegrove Water Company (Ohio)
Consumers Illinois Water Company (Illinois)
Consumers New Jersey Water Company (New Jersey)
Consumers Maine Water Company (Maine)
Hydraulics, Ltd. (North Carolina)
Hawley Water Company (Pa)
Utility & Municipal Services, Inc. (Pa)

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-61772 and 333-42275), on Form S-4 (No.
333-93243), and on Form S-8 (Nos. 333-61768, 333-70859, 033-52557, 33-27032,
2-81757, 333-81085) of Philadelphia Suburban Corporation of our report dated
January 31, 2003 relating to the consolidated financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K.

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
March 26, 2003

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the year ended December
31, 2002 of Philadelphia Suburban Corporation (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:

(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.

/s/  Nicholas DeBenedictis               
------------------------------
Nicholas DeBenedictis
Chairman, President and Chief Executive Officer
March 26, 2003

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the year ended December
31, 2002 of Philadelphia Suburban Corporation (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:

(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.

/s/  David P. Smeltzer                     
--------------------------
David P. Smeltzer
Senior Vice President - Finance and Chief Financial Officer
March 26, 2003