PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Note 1 - Background

      These financial statements include the accounts of Pennichuck Corporation (the "Company") and its wholly-owned subsidiaries, Pennichuck Water Works, Inc. ("Pennichuck"), Pittsfield Aqueduct Company, Inc. ("Pittsfield"), Pennichuck East Utility, Inc. ("Pennichuck East"), The Southwood Corporation ("Southwood") and Pennichuck Water Service Corporation (the "Service Corporation"). The financial statements also include the accounts of Westwood Park LLC ("Westwood") in which Southwood owns a 60% majority interest. All significant intercompany accounts have been eliminated in consolidation.

      Certain amounts for the six months ended June 30, 2003 have been reclassified to conform with the 2004 financial statement presentation. These reclassifications had no effect on net income and relate primarily to the reclassification of certain customer payments on a note receivable from "net cash provided by operating activities" to "net cash provided by (used in) financing activities" in the Condensed Consolidated Statements of Cash Flows.

Note 2 - Summary of Significant Accounting Policies

(a) Basis of Presentation

      The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The Balance Sheet amounts shown under the December 31, 2003 column have been derived from the audited financial stateme nts of the Company as contained in its Annual Report on Form 10-K filed with the Securities and Exchange Commission.

(b) Use of Estimates in the Preparation of Financial Statements

      The preparation of 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, 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.

(c) Stock-Based Compensation

      In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Disclosure - an amendment to FASB Statement No. 123" ("SFAS 148") which provides for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 requires prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation. At this time, the Company does not intend to change to the fair value based method of accounting for stock-based compensation. On a pro forma basis, the Company's net income and earnings per share would have been reduced to the following amounts had compensation cost for the plan been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation".

Three Months Ended

Six Months Ended

June 30,

June 30,

2004

2003

2004

2003

(In thousands, except per share data)

Net income:

  As reported

$

215 

$

393 

$

194 

$

539 

Less:

  Total stock-based employee

   compensation expense determined

   under fair value based method for all

   awards, net of related taxes

(9)

- 

(209)

- 

Pro forma net income (loss)

$

206 

$

393 

$

(15)

$

539 

Basic net income (loss) per share:

  As reported

$

0.09 

$

0.16 

$

0.08 

$

0.23 

  Pro forma

$

0.09 

$

0.16 

$

(0.01)

$

0.23 

Diluted net income (loss) per share:

  As reported

$

0.09 

$

0.16 

$

0.08 

$

0.22 

  Pro forma

$

0.09 

$

0.16 

$

(0.01)

$

0.22 

Note 3 - New Accounting Pronouncements

      The Emerging Issues Task Force ("EITF") of the FASB issued EITF No. 03-6 on February 9, 2004. EITF No. 03-6 requires that earnings used to calculate earnings per share be allocated between common shareholders and other securities based on their respective rights to receive dividends. This requirement was effective for the second quarter of 2004. It had no impact on the Company's calculation of earning per share.

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Note 4 - Benefit Plans

Pension Plan

      The Company sponsors a non-contributory, defined benefit pension plan (the "Plan") that covers substantially all full-time employees. The benefits are formula-based, giving consideration to both past and future service as well as participant compensation levels. The Company's funding policy is to contribute annually allowable amounts deductible for federal tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. There were no contributions to the Plan during the three and six months ended June 30, 2004. The Company anticipates that it will contribute at least the minimum funding requirement of approximately $240,000 to the Plan in 2004.

      Effective for the quarter ended March 31, 2004, SFAS No. 132R, "Employers' Disclosures about Pension and Other Postretirement Benefits", requires disclosure of the net periodic pension and postretirement benefit cost. Components of net periodic pension benefit cost were as follows:

Three Months Ended

Six Months Ended

June 30,

June 30,

2004

2003

2004

2003

($000's)

Service cost

$

59 

$

39 

$

135 

$

79 

Interest cost

70 

53 

158 

107 

Expected return on plan assets

(78)

(49)

(177)

(99)

Amortization of prior service cost

- 

- 

- 

- 

Amortization of transition asset

(4)

(2)

(8)

(5)

Recognized net actuarial loss

11 

12 

25 

24 

    Net periodic benefit cost

$

58 

$

53 

$

133 

$

106 

Other Post-employment Benefits

      The Company also provides post-retirement medical benefits to current and retired employees through separate post-retirement medical plans for its union and non-union employees. These benefits include health insurance coverage and reimbursement of certain Medicare premiums for certain retirees. Additionally, in 2003, the Company began offering, through a separate plan, post-employment medical benefits for employees who retire prior to their normal retirement age and who have met certain age and service requirements. The benefits under this plan allow continuity of coverage at group rates from the employee's retirement date until the employee becomes eligible for Medicare.

      There were no contributions to these Plans during the three and six months ended June 30, 2004. The Company anticipates that it will contribute approximately $75,000 for these benefits in 2004.

      Components of net periodic post-retirement and post-employment benefit costs were as follows:

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Three Months Ended

Six Months Ended

June 30,

June 30,

2004

2003

2004

2003

($000's)

Service cost

$

32 

$

13 

$

57 

$

26 

Interest cost

29 

14 

51 

30 

Expected return on plan assets

(13)

(4)

(23)

(9)

Amortization of prior service cost

9 

3 

15 

6 

Amortization of transition asset

- 

- 

- 

- 

Recognized net actuarial loss

6 

2 

11 

4 

    Net periodic benefit cost

$

63

$

28 

$

111 

$

57 

      The net periodic pension and other post-retirement benefit costs for the six months ended June 30, 2004 were estimated based on the latest available participant census data. A full actuarial valuation will be completed during the third quarter. At that time, the cost amounts will be adjusted based on the actual actuarial study results.

      In December 2003, the FASB issued Staff Position (FSP) 106-1, "Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act provides for prescription drug benefits for retirees over the age of 65 under a new Medicare Part D program. For employers like the Company, who currently provide retiree medical programs for former employees over the age of 65, there are potential subsidies available which are inherent in the Act. The Act potentially entitles these employers to a direct tax-exempt federal subsidy.

      Pursuant to FSP 106-1, the Company has elected to defer recognition of the provisions of this Act until further accounting guidance is effective. As a result, the provisions of the Act are not reflected in this disclosure or in the accompanying Condensed Consolidated Financial Statements.

      In May 2004, the FASB issued FSP 106-2. This FSP provides guidance on the accounting for the effects of the Act. The guidance indicates that, when an employer initially accounts for the subsidy, the effect on the accumulated postretirement benefit obligation should be accounted for as an actuarial gain (assuming no plan amendments are made). In addition, since the subsidy would affect the employer's share of its plan's costs, the subsidy is included in measuring the costs of benefits attributable to current service. Therefore, the subsidy should reduce service cost when it is recognized as a component of net periodic postretirement benefit cost. This FSP will be effective for the third quarter of 2004. The Company is evaluating the impact that the Act and this FSP will have on its financial position.

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Note 5 - Commitments and Contingencies

Termination of Merger Agreement

      On April 29, 2002, the Company entered into a definitive agreement with Philadelphia Suburban Corporation ("PSC") to merge into a wholly-owned subsidiary of PSC with shareholders of the Company receiving shares of PSC in the merger. The merger was subject to several conditions, including, among other things, approval by the shareholders of the Company and approval by the New Hampshire Public Utilities Commission ("NHPUC"). The review of the merger by the NHPUC and approval by the Company's shareholders was expected to occur in the first half of 2003.

      However, on November 26, 2002, the Board of Aldermen of the City of Nashua, New Hampshire (the "City") adopted a resolution calling for a referendum to authorize the City to pursue the acquisition, by an eminent domain proceeding or otherwise, of all or a portion of Pennichuck's water system serving the residents of the City and others. The City's voters passed the referendum on January 14, 2003. On February 4, 2003, the Company announced that it had reached an agreement with PSC to terminate PSC's pending acquisition of the Company. The decision to terminate the merger agreement resulted from the City's ongoing efforts to acquire Pennichuck's utility plant and property by eminent domain. Expenses associated with the PSC merger transaction and related issues totaled approximately $231,000, consisting of legal and other fees relating to merger and regulatory approval, for the year ended December 31, 2003.

      Under current Internal Revenue Code regulations, costs relating specifically to the merger transaction may be deductible for Federal income tax purposes in the year in which the merger is terminated. As a result, the Company realized approximately $1.5 million in tax-deductible merger-related costs for Federal income tax purposes in 2003.

Eminent Domain

      The City formally notified the Company's utility subsidiaries (the "Utilities") on February 5, 2003 of its intention to acquire all or a portion of their plant and property. The notification letters from the City stated that it was acting pursuant to New Hampshire's utility municipalization statute, RSA Ch. 38. On March 25, 2003, the Utilities notified the City of their decision not to sell their plant and property. Under RSA Ch. 38, a municipality may seek the NHPUC's authorization to compel the sale of utility assets through an eminent domain proceeding if the utility does not agree to sell the assets voluntarily. By letter dated March 26, 2003, the City indicated its intent to pursue such an eminent domain proceeding. On February 4, 2004, the Company and the Utilities filed a Petition for Declaratory Judgment against the City, seeking a determination by the New Hampshire Superior Court that, among other things, RSA Ch. 38 is unconstitutio nal and that the City had failed to commence eminent domain proceedings at the NHPUC in a timely fashion and therefore is barred from continuing the current utility municipalization process against the Utilities.

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

      On March 25, 2004, the City filed a petition with the NHPUC asking it to find that it is in the public interest for the City to take the Utilities' assets and requesting that the NHPUC set a price for those assets. On April 5, 2004, Pennichuck filed a Motion to Dismiss the City's petition, asking the NHPUC to dismiss Nashua's eminent domain petition on a number of grounds or, alternatively, to stay the proceeding pending the outcome of the Superior Court declaratory judgment case. The City subsequently filed an objection to Pennichuck's motion. On April 8, 2004, Pennichuck amended its declaratory judgment petition to ask the Superior Court to rule that the City does not have the authority under RSA Ch. 38 to take the assets of PEU and PAC, the two Pennichuck utility subsidiaries that do not provide service in Nashua, or those assets of PWW that are not necessary to provide service in the City. At the same time, Pennichuck also filed a Motion for Preliminary Injunction, asking the Superior Court to enjoin the City from proceeding with its case before the NHPUC for the same reasons which was denied on June 8, 2004. The City has sought dismissal of the Superior Court case, and Pennichuck has objected to the City's request. In addition, Pennichuck has requested that the court grant summary judgment on its claims that the municipalization statute is unconstitutional, that the City waited too long to file its municipalization case at the NHPUC, and that the City has no authority to take assets not necessary to provide water service within the City. The superior court heard oral arguments on both the City's and Pennichuck's motions on July 19, 2004, and a decision from the court is pending.

      On April 20, 2004, Pennichuck filed a suit for damages against the City, seeking recovery of approximately $5 to $6 million on numerous grounds. The City subsequently removed the damages case to federal court and requested that the court dismiss the case, claiming that it does not have jurisdiction over the issues presented and that Pennichuck's suit fails to allege facts sufficient to sustain its claims for inverse condemnation, intentional interference with contract, and violation of New Hampshire's consumer protection law. Pennichuck has objected to the City's motion, and the parties are awaiting a ruling from the federal court on these issues. On July 28, 2004, the NHPUC heard oral arguments on Pennichuck's motion to dismiss the City's municipalization petition. The NHPUC took the matter under advisement.

      On April 8, 2003, the Town of Pittsfield formally notified Pittsfield Aqueduct Company, Inc. that it wished to acquire the plant and property of that company. The letter indicated that the Town was providing its notification pursuant to the New Hampshire utility municipalization statute. By letter dated May 28, 2003, Pittsfield Aqueduct Company, Inc. notified the Town of Pittsfield of its decision not to sell its plant and property. To date, the Town of Pittsfield has not commenced an eminent domain proceeding at the NHPUC.

      If the City of Nashua is allowed to proceed with its case before the NHPUC, and if the Town of Pittsfield files such a case, it is not certain whether either municipality would ultimately choose to complete the acquisition of any portion of the property of the Company's utility subsidiaries even if the NHPUC ultimately approved such an acquisition and established a price for it. The Company cannot predict the ultimate outcome of these matters. It is possible that, if the acquisition efforts of the City and/or the Town of Pittsfield are successful, the financial position of the Company would be materially impacted. No adjustments have been recorded in the accompanying condensed consolidated financial statements for these uncertainties.

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Regulatory Investigations

      The Company is the subject of an investigation by the New Hampshire Bureau of Securities Regulation (the "Bureau") and the Securities and Exchange Commission (the "SEC"). The scope of the investigation relates generally to the Company's commercialization of real estate through joint ventures involving its Southwood Corporation subsidiary and, in particular, to certain of the Company's public disclosures regarding various joint venture transactions. Specifically, the Bureau and the SEC have alleged that in Note A to the Company's 1998 financial statements, which were included in the Company's annual report to shareholders and incorporated into its Annual Report on Form 10-KSB, the Company improperly disclosed the purchase of a home by Maurice L. Arel, the Company's former President who is also a target of the investigation, from one of the Company's real estate joint ventures as being "on the same terms which would be given to any independent third-party". In fact, the purchase was not made on such terms, and the Company believes that Mr. Arel received a benefit in the range of $50,000 to $75,000 in connection with the purchase.

      In addition, the Bureau and the SEC have alleged that the Company failed to properly disclose payments from the Company's real estate joint ventures to a landscaping company with which one of Mr. Arel's sons was involved. During the seven-year period from 1996 to 2002, six of the Company's joint ventures engaged for various landscaping projects a company with which one of Mr. Arel's sons was involved. The joint ventures' payments to that landscaping company totaled approximately $517,600 during that period. In three of those years, the aggregate payments for the year exceeded $60,000. In 1999, the joint ventures paid the landscaping company a total of $259,000, the greatest amount that the joint ventures paid to the landscaping company during a single year.

      The regulators have also alleged that the Company failed to disclose the fact that nearly all of its real estate joint ventures had been formed with the same developer, and that the Company did not exercise proper oversight of the activities of those various joint ventures, including by failing to obtain or to keep adequate records, such as copies of financial records, contracts, correspondence or other material information, by failing to obtain formal appraisals of the land the Company contributed to the joint ventures, and by failing to consider or investigate real estate development alternatives since the early 1990s.

      The Company's board of directors retained legal counsel to conduct an independent review of the allegations, under the direction of the Company's Audit Committee, and instructed the Company's executive officers and counsel to cooperate fully with the investigation by the Bureau and the SEC. That independent review is now substantially complete and the Company's counsel has briefed the regulators on the board's findings. In addition, and as a result of the independent review, Mr. Arel's employment with the Company and its subsidiaries was terminated in May 2003.

      The Bureau and the SEC could seek to impose fines, penalties or other sanctions upon the Company as a result of their respective investigations. In November 2003, the Bureau and the SEC indicated a willingness to consider a global settlement of their claims against the Company and against Mr. Arel. Although no definitive agreement or understanding has been reached, the framework of the settlement that is under consideration would consist of a fund to be established for the benefit of the

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Company's shareholders, a fine to be paid to the Bureau, and a payment to the Bureau to defray its expenses. In addition to the negotiations with the Bureau and the SEC regarding the proposed settlement, the Company is also engaged in negotiations with Mr. Arel as to what portion, if any, of the settlement amounts he would be responsible for paying. There can be no assurance that a settlement agreement with the regulators and Mr. Arel will in fact be reached. The Company has recorded as an expense in 2003 a liability for this settlement based on the best estimates of the Company and its legal counsel.

Guarantee of Subsidiary Indebtedness

      Southwood holds a 50% interest in four limited liability companies known as HECOP I, HECOP II, HECOP III and HECOP IV, each of which owns land and three of which each own a commercial office building, subject to a mortgage note with a local bank. The remaining 50% ownership interest in each of the LLCs is principally held by John Stabile, owner of H. J. Stabile & Son, Inc. The mortgage notes, totaling $9.1 million, which are not included in the accompanying condensed consolidated balance sheets, are each secured by the underlying real property. In addition, Southwood is contingently liable on one-half of the outstanding balance, and as such, it has issued a guarantee to the mortgagee for its share of the guaranteed indebtedness. At June 30, 2004, Southwood was contingently liable on approximately $4.5 million of mortgage indebtedness associated with the limited liability companies.

Note 6 - Deferred Gain on Land Sale

Note 7 - Related Party Transaction

      On April 23, 2004, Pennichuck executed an Indenture of Lease agreement (the "lease agreement") with HECOP III, LLC for the relocation of its corporate headquarters to a new leased facility in Merrimack, New Hampshire. As discussed in Note 5, under "Guarantee of Subsidiary Indebtedness," HECOP III, LLC is one of the four limited liability companies which is 50% owned by Southwood. The lease agreement was effective on May 1, 2004 with an expiration date of April 30, 2009 and provides for 14,289 rentable square feet at prevailing market rates during the term of the lease. In connection with tenant improvements for the new facility, Stabile Construction Services, an affiliate of H. J. Stabile & Son, Inc., acted as construction manager for Pennichuck as provided for under the terms of the lease agreement. Stabile Construction Services has provided similar services for other non-related tenants in HECOPs I, II and III.

PENNICHUCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2004

Note 8 - Assets Held for Sale

      The Company owns a three story, 11,616 square foot building located in downtown Nashua, New Hampshire. This building served as the Company's corporate office until its relocation to a new leased facility on April 30, 2004 as described in "Note 7 - Related Party Transaction". The Company is currently in active negotiations for the sale of this facility which it is expecting to conclude during the second half of 2004. In accordance with the requirements established under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), the Company has classified the costs related to this building separately as Assets Held for Sale. SFAS 144 requires that long-lived assets classified as held for sale be measured at the lower of their carrying amounts or fair value less cost to sell. Such assets consist of the following at June 30, 2004:

Accumulated

Net Book

Cost

Depreciation

Value

($000's)

Land

$

59

$

-

$

59

Building

735

328

407

Leasehold Improvements

318

54

264

$

1,112

$

382

$

730

PART I. FINANCIAL INFORMATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

      Pennichuck Corporation (the "Company") has five wholly-owned subsidiaries. Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield") are involved in water supply and distribution in cities and towns throughout southern and central New Hampshire. These water subsidiaries are regulated by the New Hampshire Public Utilities Commission ("NHPUC") and, as such, they must obtain approval to increase their water rates to recover increases in operating expenses and to obtain the opportunity to earn a return on rate base investments. Pennichuck Water Service Corporation (the "Service Corporation") is involved in non-regulated, water-related services and contract operations. The Southwood Corporation ("Southwood") owns, manages, develops, and sells real estate, principally through real estate joint ventures.

Forward Looking Statements

      In addition to historical financial information, this quarterly report, including management's discussion and analysis, contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on current information and expectations available to management at the time the statements are made and on several assumptions concerning future events that involve risks, uncertainties and factors that may be beyond the Company's control. As such, the actual performance of the Company may be materially different from the future results or performance expressed or implied by the forward looking statements contained in this report. Such statements address the following subjects, among others: the status of eminent domain proceedings before the NHPUC to acquire the Company's water utility assets, ongoing litigation with respect thereto and impact thereof on the Company's co nsolidated business operations and planning; projected capital and liquidity needs; timeliness and extent of water utility rate increases, if any; future operating results in the water utility and real estate sectors; earnings growth and expectations; and corporate spending. The following factors, among others, could cause actual results to differ materially from those described in the forward looking statements: with respect to eminent domain and related litigation proceedings, the timeframe in which proceedings occur, and the results thereof or negotiated alternatives thereto; with respect to projected capital and liquidity needs, the condition of the financial markets and the Company's financial position; with respect to regulated water utility rate relief, the timing and amount of rate increases as well as general regulatory lag in realizing changes; with respect to water utility operations, the impact of weather, such as the amount of rainfall and temperature; with respect to real estate development, th e impact of overall economic conditions in the local and national economy; with respect to corporate spending, changes in capital projects as well as enhanced security measures that may affect the Company's level of capital expenditures. We undertake no obligation to update or revise forward looking statements, whether as a result of new information, future events or otherwise.

Eminent Domain

      The Company is the subject of eminent domain efforts by the City of Nashua (the "City") and the Town of Pittsfield (the "Town") regarding their desire to acquire all or a portion of the Company's water utility assets. In addition, a number of other communities whose residents are served by one or more of the Company's subsidiaries have expressed interest in forming a regional water authority for the purposes of acquiring and operating a substantial portion of the Company's water related assets. The acquisition of Company assets by eminent domain would be highly uncertain and likely involve protracted proceedings before the NHPUC and other litigation forums.

      Given the highly integrated nature of the Company's businesses, a forced sale of some or all of the Company's water-related assets may result in increased costs and operating inefficiencies borne by the remaining assets of the Company not so acquired. Additionally, the Service Corporation's ability to service its existing contracts as well as pursue additional operating contracts may be impaired. There is no assurance that the City of Nashua or a regional water authority, if any, would be successful in acquiring some or all of the Company's assets by eminent domain, nor in such case is there any assurance as to the price determined by the NHPUC to be paid for those assets. The status of these eminent domain efforts is discussed in greater detail in "Note 5 - Commitments and Contingencies - Eminent Domain," to the Notes to Condensed Consolidated Financial Statements.

Regulatory Investigations

      The Company is the subject of an investigation by the New Hampshire Bureau of Securities Regulation (the "Bureau") and the Securities and Exchange Commission (the "SEC"). The scope of the investigation relates generally to the Company's commercialization of real estate through joint ventures involving its Southwood Corporation subsidiary and, in particular, to certain of the Company's public disclosures regarding various joint venture transactions. Specifically, the Bureau and the SEC have alleged that in Note A to the Company's 1998 financial statements, which were included in the Company's annual report to shareholders and incorporated into its Annual Report on Form 10-KSB, the Company improperly disclosed the purchase of a home by Maurice L. Arel, the Company's former President who is also a target of the investigation, from one of the Company's real estate joint ventures as being "on the same terms which would be given to any independent third-party". In fact, the purchase was not made on such terms, and the Company believes that Mr. Arel received a benefit in the range of $50,000 to $75,000 in connection with the purchase.

      In addition, the Bureau and the SEC have alleged that the Company failed to properly disclose payments from the Company's real estate joint ventures to a landscaping company with which one of Mr. Arel's sons was involved. During the seven-year period from 1996 to 2002, six of the Company's joint ventures engaged for various landscaping projects a company with which one of Mr. Arel's sons was involved. The joint ventures' payments to that landscaping company totaled approximately $517,600 during that period. In three of those years, the aggregate payments for the year exceeded $60,000. In 1999, the joint ventures paid the landscaping company a total of $259,000, the greatest amount that the joint ventures paid to the landscaping company during a single year.

      The regulators have also alleged that the Company failed to disclose the fact that nearly all of its real estate joint ventures had been formed with the same developer, and that the Company did not exercise proper oversight of the activities of those various joint ventures, including by failing to obtain or to keep adequate records, such as copies of financial records, contracts, correspondence or other material information, by failing to obtain formal appraisals of the land the Company contributed to the joint

ventures, and by failing to consider or investigate real estate development alternatives since the early 1990s.

      The Company's board of directors retained legal counsel to conduct an independent review of the allegations, under the direction of the Company's Audit Committee, and instructed the Company's executive officers and counsel to cooperate fully with the investigation by the Bureau and the SEC. That independent review is now substantially complete and the Company's counsel has briefed the regulators on the board's findings. In addition, and as a result of the independent review, Mr. Arel's employment with the Company and its subsidiaries was terminated in May 2003.

      The Bureau and the SEC could seek to impose fines, penalties or other sanctions upon the Company as a result of their respective investigations. In November 2003, the Bureau and the SEC indicated a willingness to consider a global settlement of their claims against the Company and against Mr. Arel. Although no definitive agreement or understanding has been reached, the framework of the settlement that is under consideration would consist of a fund to be established for the benefit of the Company's shareholders, a fine to be paid to the Bureau, and a payment to the Bureau to defray its expenses. In addition to the negotiations with the Bureau and the SEC regarding the proposed settlement, the Company is also engaged in negotiations with Mr. Arel as to what portion, if any, of the settlement amounts he would be responsible for paying. There can be no assurance that a settlement agreement with the regulators and Mr. Arel will in fact be reached . The Company has recorded as an expense in 2003 a liability for this settlement based on the best estimates of the Company and its legal counsel.

Results of Operations - Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

      For the three months ended June 30, 2004, consolidated net income was $215,000, or $.09 per share. For the same period in 2003, the Company's consolidated net income was $393,000, or $.16 per share. As discussed in greater detail below, the decrease in net income was primarily attributable to costs incurred in connection with the eminent domain proceeding conducted by the City of Nashua (the "City"). The Company's consolidated revenues for the three months ended June 30, 2004 totaled $5.4 million, a 2.9% increase over the three months ended June 30, 2003. As discussed below, this increase in consolidated revenues occurred primarily in the Company's water utility segment.

      Our consolidated revenues are generally seasonal due to the overall significance of the water sales of Pennichuck, Pennichuck East and Pittsfield as a percent of consolidated revenues. Water revenues are typically at their lowest point during the first and fourth quarters of the calendar year while water revenues in the second and third quarters tend to be greater as a result of increased water consumption during the late spring and summer months. In addition, our consolidated revenues may be significantly affected by sales of major real estate parcels, which may occur from time to time.

Water Utility Operations

      The Company's water utility operations include the activities of Pennichuck, Pennichuck East and Pittsfield, each of which is regulated by the NHPUC. The combined utility operating revenues for the three months ended June 30, 2004 increased $321,000 to $4.9 million, or a 7.0% increase from the same period in 2003 as shown in the table below broken out by each regulated water utility:

June 30,

June 30,

2004

2003

Change

($000's)

Pennichuck

$

3,959

$

3,707

$

252

Pennichuck East

807

762

45

Pittsfield

122

98

24

      Total

$

4,888

$

4,567

$

321

      The percentage of each utility's revenues to the total combined utility revenues remained generally unchanged from the second quarter of 2003 to the second quarter of 2004.

      The increase in combined utility revenues was the result of (i) a 1.9% increase in the utilities' customer base, (ii) an increase in billed consumption of 2.1% as compared to 2003 primarily due to lower levels of precipitation experienced in the regions served by our water utilities during the second quarter of 2004 as compared to the same quarter in 2003 and (iii) a 17.74% rate increase approved by the NHPUC and implemented by Pittsfield in February 2004.

      During the past twelve months, the total increase in our combined utilities' customer base was 543 customers, or 1.9%. The number of customers in our utilities' community water systems has increased by 178 customers, or 8.8% during the last twelve months. Similarly, the number of customers in Pennichuck East has increased by 134 customers, or 3.1% since June 30, 2003. By contrast, however, the number of customers within Pennichuck's core system has increased by only 227 customers, or 1.0% (from 22,116 at the end of June 2003 to 22,343 at the end of June 2004). These growth trends are consistent with our historical experience in recent prior years.

      Total utility operating expenses were $3.6 million for the three months ended June 30, 2004, a $131,000, or 3.8%, increase over the same period last year. The combined water utilities' operating costs increased primarily due to:

(i)

approximately $30,000 of increased treatment and purchased water costs associated with operating our community systems in Pennichuck East during the second quarter of 2004, reflecting the increase in customer base in those systems;

(ii)

approximately $24,000 of increased distribution system expenses as a result of colder temperatures experienced in the first quarter of 2003 as well as increased labor costs;

(iii)

additional depreciation charges and property taxes totaling $54,000 and $15,000, respectively, associated with approximately $9.5 million of new utility plant and equipment placed in service during the past year; and

(iv)

an overall increase of approximately 3% in union wages effective in mid-February 2004.

      On May 28, 2004, Pennichuck filed a Petition for Rate Relief with the NHPUC in which it is seeking an overall increase in its rates, which if granted, would result in approximately $2.34 million of additional annual revenues. The NHPUC has scheduled a hearing on August 24, 2004 for a temporary rate increase requested by Pennichuck, which if granted, would result in approximately $1.7 million in additional annual revenues effective beginning the third quarter of 2004. It is uncertain (i) whether the temporary rate increase will be granted, and if so, the amount of the increase, (ii) whether or not this rate case will be concluded in 2004, and (iii) the amount of the permanent rate increase which will ultimately be determined by the NHPUC.

Real Estate Operations

      For the three months ended June 30, 2004, revenues from Southwood's real estate activities were $22,000 compared to $277,000 for the same period last year. Last year's revenues included $150,000 received by Westwood Park, LLC ("Westwood"), representing escrowed funds from a land sale which occurred in 2000. During the three months ended June 30, 2003, the restrictions relating to those escrowed funds expired and as a result, the funds were recognized as revenues. Westwood is a consolidated joint venture, in which Southwood has a 60% ownership interest, that was formed in 1997 to develop and sell certain parcels of land in northwest Nashua.

      Southwood holds a 50% ownership interest in four limited liability companies ("LLCs"), known as HECOP I, HECOP II, HECOP III and HECOP IV. Each of these LLCs owns land and three of the LLCs each own a commercial office building in Merrimack, New Hampshire. The remaining 50% ownership interest in each of the LLC's is principally held by John Stabile, a local developer, with whom Southwood has also participated in four residential joint ventures during the past 10 years. The assets and liabilities of those LLCs are not included in the accompanying Condensed Consolidated Balance Sheets. For the three months ended June 30, 2004 and 2003, Southwood recognized revenues of approximately $19,000 and $81,000, respectively, representing its 50% share of the pretax operating income from these LLCs. The decline in pretax operating income primarily reflects a loss of approximately $70,000 of rental income resulting from 25,600 square feet of office vacat ed in January 2004 by of one the tenants in the HECOP III building. However, as reported in "Note 7 - Related Party Transaction" to the Notes to Condensed Consolidated Financial Statements, Pennichuck has entered into a 5 year lease effective May 1, 2004, for 14,289 square feet of office space in HECOP III.

Contract Operations

      Revenues from contract operations were $482,000 for the three months ended June 30, 2004, compared to $390,000 for the same period in 2003. The Service Corporation's revenues consist chiefly of fees earned under various operations and billing contracts as well as rental income from several tower leases. The $92,000 increase in contract revenues over last year is principally due to: (i) additional work performed under the Service Corporation's two largest operating contracts with the Town of Hudson, New Hampshire and the Town of Salisbury, Massachusetts; and (ii) additional contract revenues from 12 new community water system contracts. During the three months ended June 30, 2004, the Service Corporation acquired 3 new operating contracts for smaller community water systems.

      Operating expenses associated with our contract operations were $464,000 for the three months ended June 30, 2004 compared to $375,000 for the three months ended June 30, 2003. The increase in operating expenses resulted primarily from (i) additional direct expenses of $18,000 for servicing the operating contracts and (ii) an increase of $83,000 in allocated intercompany charges reflecting additional time and resources utilized for the operation and development of the Service Corporation's various activities, including business development.

Eminent Domain Taking and Other Expenses

      During the three months ended June 30, 2004 and 2003, the Company incurred approximately $447,000 and $205,000, respectively, of legal and other fees in connection with the eminent domain proceeding conducted by the City of Nashua (the "City") and the pending regulatory investigations discussed in "Note 5 - Commitments and Contingencies" to the Notes to Condensed Consolidated Financial Statements. A breakout of these costs for the three months ended June 30, 2004 and 2003 is shown in the following table.

2004

2003

Eminent domain taking

$

379,000

$

20,000

Regulatory investigations

68,000

185,000

Total

$

447,000

$

205,000

      The Company currently expects that it will continue to incur significant legal and other costs associated with the eminent domain taking by the City until final resolution of this matter. The future adverse impact of such additional costs and the duration of this matter cannot be reasonably determined at this time.

Results of Operations - Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

      For the six months ended June 30, 2004, the Company's consolidated net income was $194,000, or $.08 per share. For the same period in 2003, the Company's consolidated net income was $539,000, or $.23 per share. The Company's consolidated revenues for the six months ended June 30, 2004 totaled $10.2 million compared to $10.1 million last year. As discussed below, the increase in consolidated revenues occurred primarily in the Company's water utility business segment due to slight increases in water consumption during 2004.

Water Utility Operations

      Utility operating revenues for the six months ended June 30, 2004 increased to $9.1 million, or 5.7%, from the same period in 2003 as shown in the table below broken out by each of our regulated water utilities:

June 30

June 30,

Change

2004

2003

($000's)

Pennichuck

$

7,399

$

7,033

$

366

Pennichuck East

1,469

1,354

115

Pittsfield

240

232

8

      Total

$

9,108

$

8,619

$

489

      For the six months ended June 30, 2004, 81%, 16% and 3% of the combined utilities' operating income was provided by Pennichuck, Pennichuck East and Pittsfield, respectively, which was comparable to 2003.

      The increase in combined utility revenues, which occurred primarily in Pennichuck, was the result of the following: (i) a 2% increase in total new customers from June 2003 to June 2004; (ii) an increase in year-to-date combined billed consumption of 1.4% attributable primarily to lower levels of precipitation experienced in the regions served by our water utilities during 2004 and (iii) a 17.74% rate increase approved by the NHPUC and implemented by Pittsfield in February 2004.

      For the six months ended June 30, 2004, utility operating expenses increased by $379,000, or 5.5%, to $7,246,000. That combined increase in the utilities' operating expenses over the six months ended June 30, 2003 resulted chiefly from:

(i)

approximately $63,000 of increased treatment and purchased water costs associated with operating our community systems in Pennichuck East during the six months ended June 30, 2004, reflecting the increase in customer base in those systems;

(ii)

approximately $16,000 of increased distribution system expenses as a result of colder temperatures experienced in the first quarter of 2003 as well as increased labor costs;

(iii)

approximately $58,000 for additional property and liability insurance premiums, consistent with recent changes in the insurance market;

(iv)

additional depreciation charges and property taxes totaling $129,000 and $51,000, respectively, associated with approximately $9.5 million of new utility plant and equipment placed in service during the past year; and

(v)

an overall increase of approximately 3% in union wages effective in mid-February 2004.

      On May 28, 2004, Pennichuck filed a Petition for Rate Relief with the NHPUC in which it is seeking an overall increase in its rates, which if granted, would result in approximately $2.34 million of additional annual revenues. The NHPUC has scheduled a hearing on August 24, 2004 for a temporary rate increase requested by Pennichuck, which if granted, would result in approximately $1.7 million in additional annual revenues effective beginning in the third quarter of 2004. It is uncertain (i) whether the temporary rate increase will be granted, and if so, the amount of the increase, (ii) whether or not this rate case will be concluded in 2004, and (iii) the amount of the permanent rate increase which will ultimately be determined by the NHPUC.

Real Estate Operations

      For the six months ended June 30, 2004, revenues from Southwood's real estate activities were $124,000 compared to $729,000 for the same period last year. Revenues for the six months ended June 30, 2003 included approximately $257,000 representing the net cash received at closing from the sale of a 67 acre parcel of unimproved land for approximately $1.5 million. Under the terms of that sale, Southwood also received a long-term note receivable of $1.2 million. The note, which matures in October 2005, carries a floating interest rate of prime plus 1.5% and is secured by a first mortgage on the property. The pretax gain on that sale was approximately $1.5 million, of which $257,000 was recognized in 2003. The remaining gain of approximately $1.2 million, represented by the note receivable, has been deferred until payment of the note since the requirements established under Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" for recognition of all of the profit from this sale have not yet been met.

      Revenues for the six months ended June 30, 2003 also included $150,000 received by Westwood representing escrowed funds from a land sale which occurred in 2000. During the six months ended June 30, 2003, the restrictions relating to those escrowed funds expired and as a result, the funds were recognized as revenues.

      Southwood's revenues for the first half of 2004 include approximately $99,000 representing its 50% share of the pretax profits from the office leasing activities of the three LLCs discussed earlier. For the same period in 2003, Southwood's share of pretax operating income from the LLCs was approximately $239,000. The decline in pretax operating income primarily reflects a loss of approximately $130,000 of rental income resulting from 25,600 square feet of office vacated in January 2004 by of one the tenants in the HECOP III building. However, as reported in "Note 7 - Subsequent Event with Related Party" to the Notes to Condensed Consolidated Financial Statements, Pennichuck has entered into a 5 year lease effective May 1, 2004, for 14,289 square feet of office space in HECOP III.

      Operating expenses associated with our real estate activities for the first six months of 2004 totaled $81,000, comprised chiefly of allocated intercompany charges, consulting fees and property taxes on the remaining Southwood landholdings.

Contract Operations

      Revenues from contract operations totaled $945,000 for the six months ended June 30, 2004, representing a $211,000 increase over the same period last year. The increase over last year includes (i) additional work performed under the Service Corporation's two largest operating contracts with the Town of Hudson, New Hampshire and the Town of Salisbury, Massachusetts; and (2) additional contract revenues from 12 new community water system contracts.

      Operating expenses associated with our contract operations were $836,000 and $648,000 for the six months ended June 30, 2004 and 2003, respectively. The increase in operating expenses associated with our contract operations resulted primarily from $73,000 in additional direct expenses associated with the Hudson and Salisbury contracts and additional intercompany charges of $94,000 reflecting additional time and resources allocable to the Service Corporation activities, including new business development.

Eminent Domain Taking and Other Expenses

      Eminent domain taking and other expenses for the six months ended June 30, 2004 totaled $736,000 compared to $689,000 during the same period last year. These expenses in the current year related primarily to legal and other fees incurred in connection with the eminent domain proceeding conducted by the City and the pending regulatory investigations discussed in Note 5 to the Notes to Condensed Consolidated Financial Statements. During the six months ended June 30, 2003, the Company also incurred approximately $231,000 in merger costs relating to the terminated merger agreement with Philadelphia Suburban Corporation. A breakout of these costs for the six months ended June 30, 2004 and 2003 is shown in the following table.

2004

2003

Eminent domain taking

$

630,000

$

113,000

Regulatory investigations

106,000

345,000

Terminated merger

-----

231,000

Total

$

736,000

$

689,000

      The Company currently expects that it will continue to incur significant legal and other costs associated with the eminent domain taking by the City until final resolution of this matter. The future adverse impact of such additional costs and the duration of this matter cannot be reasonably determined at this time.

Liquidity and Financial Condition

      During the first half of 2004, the primary sources of cash needed for our day-to-day operating activities, debt service and dividend payments were (i) operating cash flow, (ii) available cash from the Company's short-term investments at the beginning of the year and (iii) additional borrowings under its revolving line of credit loan facility (the "Loan Agreement") with its bank, Bank of America ("BofA").

      On March 29, 2004, the Company and BofA amended the Loan Agreement to increase the available short-term credit from $2.5 million to $6.5 million. This increase is necessary in order to fund (i) the Company's planned capital expenditures over the next two years, (ii) any shortfall in operating cash flow and (iii) future costs associated with the Company's defense against the City of Nashua's eminent domain taking efforts and the likely settlement of the governmental regulatory investigations discussed in "Note 5 - Commitments and Contingencies" to the Notes to Condensed Consolidated Financial Statements. At June 30, 2004, there were $3.25 million in outstanding borrowings under this Loan Agreement at floating interest rates ranging from 2.55% to the prime rate of 4.0%. Nearly $630,000, or half of the $1.25 million of increased borrowings from the end of 2003, resulted from expenses incurred by the Company in its defense against the eminent do main action taken by the City of Nashua as discussed more fully in Note 5.

      At June 30, 2004, the Company reported a cash overdraft position of approximately $952,000 compared to $391,000 in cash and cash equivalents at the end of 2003. This overdraft was covered by additional advances under the Loan Agreement subsequent to June 30, 2004. The Company's two largest utilities, Pennichuck and Pennichuck East, intend to issue a combined total of $3.0 million in tax exempt bonds during the third quarter of 2004. Of that amount, approximately $1.3 million will be used to pay down a portion of any outstanding balance under the Company's Loan Agreement and the remainder will be used to fund the cost of two water utility projects expected to be undertaken in the second half of 2004.

      The Company, Pennichuck and Pennichuck East have a combined total of $9.5 million in balloon payments due on certain notes that mature in April 2005. These notes have been reclassified under Current Liabilities in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2004. At this time, there are no specific commitments with respect to repayment of these maturing notes. The Company is currently evaluating several financing alternatives which address the refinancing of these maturing principal amounts and its short-term liquidity needs. The Company fully expects to meet its ongoing capital requirements and liquidity needs over the next twelve to thirty six months.

      For 2004, we expect that our total expenditures for capital projects will be approximately $6.99 million. Funding for our current year capital projects is expected to be derived from a combination of contributions in aid of construction, state grants and low-interest, state revolving loans and the planned tax exempt bond offering as well as from internally-generated funds and short-term borrowings under the Company's Loan Agreement.

      As discussed under "Results of Operations - Water Utility Operations," Pennichuck, the Company's largest regulated subsidiary, filed a Petition for Rate Relief with the NHPUC on May 28, 2004 in which it is seeking an overall increase in its rates, which if granted, would result in approximately $2.34 million of additional annual revenues. The NHPUC has scheduled a hearing on August 24, 2004 with respect to an 11.3% temporary rate increase requested by Pennichuck, which if granted, would result in approximately $1.7 million in additional annual revenues effective beginning in the third quarter of 2004.

      Other major changes in our financial position from December 31, 2003 to June 30, 2004 are discussed below.

*

The increase in "Assets Held for Sale" of $730,000 represents the building cost and leasehold improvements relating to the Company's former corporate office as more fully explained in Note 8 to the Notes to Condensed Consolidated Financial Statements.

*

The increase in accounts receivable of $485,000 relates primarily to an increase in unbilled water revenues over the end of 2003, principally due to the greater demand and consumption of water during the second quarter of the year compared to consumption levels in the fourth quarter.

*

Prepaid expenses at June 30, 2004 reflect approximately $380,000 of increased insurance premiums for general liability and directors and officers liability insurance which were prepaid in the first quarter for calendar year 2004.

*

The $441,000 decrease in accounts payable from the end of 2003 to June 30, 2004 is primarily attributable to the payment of outstanding invoices due to various contractors for capital project work completed last year.

*

Retained earnings decreased from $13.18 million at the end of 2003 to $12.34 million at June 30, 2004 reflecting the Company's year-to-date net income of $194,000 and common dividends paid of $1,030,000.

Critical Accounting Policies, Significant Estimates and Judgments

      The Company has identified the accounting policies below as those policies critical to its business operations and the understanding of the results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Changes in the estimates or other judgments included within these accounting policies could result in significant changes to the financial statements. Our critical accounting policies are as follows.

      Regulatory Accounting - the use of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation" 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 rates charged to our water utilities' customers. In the event that the inclusion in the rate-making process is disallowed, the associated regul atory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.

      Revenue Recognition - utility revenues are based on authorized rates approved by the NHPUC. Estimates of water utility revenues for water delivered to customers but not yet billed are accrued at the end of each accounting period. The Company reads its residential customer meters generally on a quarterly basis and records its revenue based on meter reading results. Unbilled revenues from the last meter-reading date to the end of the accounting period are estimated based on historical usage patterns and the effective water rates. The estimate of the unbilled revenue is a management estimate utilizing certain sets of assumptions and conditions. Actual results could differ from those estimates.

      The Company's non-utility revenues are recognized when services are rendered or when water is delivered. Revenues are based, for the most part, on long-term contractual rates.

      Pension and Other Post Retirement Benefits - the Company's pension and other postretirement benefits costs are dependent upon several factors and assumptions, such as employee demographics, plan design, the level of cash contributions made to the plans, earnings on the plans' assets, the discount rate, the expected long-term rate of return on the plans' assets and health care cost trends.

      In accordance with SFAS No. 87, "Employers Accounting for Pensions" ("SFAS 87") and SFAS No. 106, "Employers Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"), changes in pension and postretirement benefit obligations other than pensions ("PBOP") associated with these factors may not be immediately recognized as pension and PBOP costs in the statements of income, but generally are recognized in future years over the remaining average service period of the plans' participants.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company has entered into two interest rate swap agreements at a fixed rate of 6.5% in order to mitigate interest rate risks associated with its floating-rate loans. The agreements provide for the exchange of fixed interest rate payments for floating interest rate payment obligations on notional amounts of principal totaling $6,000,000. The Company has designated these interest rate swaps as a cash flow hedge against the variable future cash flows associated with the interest payments due on $6,000,000 of notes. As of June 30, 2004, the Company has recorded a liability of approximately $193,000 in "Other liabilities and deferred credits" associated with these swap agreements with the offsetting amount in "Accumulated other comprehensive income" in the accompanying Condensed Consolidated Balance Sheets.

      The fair market value of the Company's interest rate swaps represents the estimated unrealized loss to terminate these agreements based upon current interest rates.

Item 4: CONTROLS AND PROCEDURES

      We carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934 under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" as of the end of the period covered by this report.

      Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) information is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

      Based on their evaluation, the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective to provide reasonable assurance that information relating to the Company (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms.

      There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

      The Company has been informed by the Securities and Exchange Commission and the New Hampshire Bureau of Securities Regulation that it is the subject of related investigations by each regulator as discussed in greater detail in "Note 5 - Commitments and Contingencies - Regulatory Investigations" to the Notes to Condensed Consolidated Financial Statements.

      Further, eminent domain proceedings have been commenced before the New Hampshire Public Utilities Commission ("NHPUC") against certain of the Company's water utility subsidiaries, and the Company and such subsidiaries are engaged in litigation with respect thereto as discussed in greater detail in "Note 5 - Commitments and Contingencies - Eminent Domain" to the Notes to Condensed Consolidated Financial Statements.

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

      (a)  On April 23, 2004, the Company held its Annual Meeting of Shareholders to elect six directors and to ratify the appointment by the Board of Directors of PricewaterhouseCoopers LLP as the Company's independent accountants for the year ending December 31, 2004.

      (b)  The following directors were elected to a three year term expiring at the Annual Meeting of Shareholders in 2007:

Votes Withheld

Election of Directors

Votes For

or Opposed

Michelle L. Chicoine

2,002,147

  59,243

John R. Kreick

1,936,528

124,862

Martha E. O'Neill

2,004,263

  57,127

      The following director was elected to a two year term expiring at the Annual Meeting of Shareholders in 2006:

Votes Withheld

Election of Directors

Votes For

or Opposed

Steven F. Bolander

2,001,796

59,594

      The following directors were elected to a one year term expiring at the Annual Meeting of Shareholders in 2005:

Votes Withheld

Election of Directors

Votes For

or Opposed

Charles E. Clough

1,985,980

75,410

Donald L. Correll

2,003,831

57,559

      The continuing directors whose terms expire beyond the April 23, 2004 Annual Meeting date are:

      Joseph A. Bellavance

      Hannah M. McCarthy

      Robert P. Keller

      (c)  By a vote of 2,041,407 shares FOR, 16,529 shares ABSTAINING and 3,451 shares AGAINST, the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants for the year ending December 31, 2004 was ratified.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K:

(a)

The following exhibits are filed as part of this report:

Exhibit

Number

Exhibit Description

10.19

Indenture of Lease dated as of April 23, 2004 by and between Pennichuck Water Works, Inc., as lessee and HECOP III, LLC, as lessor (Filed as Exhibit 10.19 to this report on Form 10-Q)

31.1

Rule 13a-14(a) Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 31.1 to this report on Form 10-Q)

31.2

Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 31.2 to this report on Form 10-Q)

32.1

Section 1350 Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 32.1 to this report on Form 10-Q)

32.2

Section 1350 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 32.2 to this report on Form 10-Q)

(b)

Reports on Form 8-K:

      The following reports were filed by the Company on Form 8-K during the second quarter of 2004:

      1. Current Report on Form 8-K dated April 6, 2004 under the caption "Item 5. Other Events and Regulation FD Disclosure."

      2. Current Report on Form 8-K dated April 20, 2004 under the caption "Item 5. Other Events and Regulation FD Disclosure."

      3. Current Report on Form 8-K dated June 10, 2004 under the caption "Item 5. Other Events and Regulation FD Disclosure."

SIGNATURES

Pursuant to the requirements 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.

Pennichuck Corporation

(Registrant)

Date: August 13, 2004

/s/ Donald L. Correll

Donald L. Correll, President and

Principal Executive Officer

Date: August 13, 2004

/s/ Charles J. Staab

Charles J. Staab, Vice President,

Treasurer and Principal Financial

Officer