PART I

Item 1. BUSINESS

Overview

       Pennichuck Corporation (the "Company") is a holding company based in Nashua, New Hampshire. Its principal operating subsidiaries are engaged primarily in the collection, storage, treatment, distribution and sale of potable water throughout southern and central New Hampshire. These subsidiary corporations - Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield"), are each engaged in business as a regulated public utility, subject to the jurisdiction of the New Hampshire Public Utilities Commission (the "NHPUC"). They collectively serve approximately 29,400 residential and commercial and industrial customers. The Company was formed in 1983 following the reorganization of Pennichuck Water Works, which was first established in 1852, into a dedicated water utility. At the same time several tracts of land, formerly held for watershed protection purposes, were transferred to The Southwood Corporation ("Southwood"). Southwood is involved in the development of commercial and residential real estate. The Company also conducts non-regulated, water-related management services and contract operations through another subsidiary, Pennichuck Water Service Corporation (the "Service Corporation").

Our Water Business

      Pennichuck is franchised by the NHPUC to gather and distribute water in the City of Nashua, New Hampshire and in portions of the towns of Amherst, Bedford, Derry, Epping, Hollis, Merrimack, Milford and Plaistow, New Hampshire. Pennichuck has transmission mains which directly interconnect its core system in Nashua with the surrounding towns of Amherst, Hudson, Merrimack and Milford. Its core system, which services nearly 22,100 customers, accounts for 95% of Pennichuck's revenues. Its franchises in the remaining towns consist of stand-alone satellite water systems serving over 2,100 customers. Pennichuck has no competition in its core franchise area. Currently, approximately 25% of its water revenues are derived from commercial and industrial customers and approximately 57% from residential customers, with the balance being derived from fire protection and other billings to municipalities, principally the City of Nashua and the towns of Amherst, Merrimack and Milford. Pennichuck's annual water revenues were approximately $14.75 million for calendar year 2003.

      Pennichuck East was organized in 1998 to acquire certain water utility assets from the Town of Hudson, New Hampshire ("Hudson"), following its acquisition of those assets from an investor-owned water utility which previously served Hudson and surrounding communities. Pennichuck East is franchised to gather and distribute water in the New Hampshire towns of Litchfield, Pelham, Windham, Londonderry, Derry, Raymond and Hooksett, which are areas adjacent to the service franchise served by Pennichuck. Pennichuck East has no competition in its core franchise area. The water utility assets owned by Pennichuck East consist principally of water transmission and distribution mains, hydrants, wells, pump stations and pumping equipment, water services and meters, easements and certain tracts of land. Pennichuck East serves approximately 4,450 customers and annual water revenues were approximately $2.98 million for calendar year 2003.

      Pittsfield was acquired by the Company in 1998 and serves approximately 640 customers in and around Pittsfield, New Hampshire with annual water revenues of approximately $447,000. Pittsfield has no competition in its franchise area.

Regulation

      The Company's water utilities are regulated by the NHPUC with respect to their water rates, financings and provision of service. New Hampshire law provides that utilities are entitled to charge rates which permit them to earn a reasonable return on the cost of the property employed in serving its customers, less accrued depreciation, contributed capital and deferred income taxes ("Rate Base"). The cost of capital permanently employed by a utility in its utility business marks the minimum rate of return which a utility is lawfully entitled to earn on its Rate Base. Pennichuck's water rates that were in effect during 2003 were based on a March 2002 NHPUC order in which Pennichuck was granted an overall permanent rate increase of 14.43% based on an overall rate of return of 8.58% and an approved rate base of approximately $43.1 million. Pennichuck East is authorized an overall rate of return of 8.37% on an approved rate base of approximately $7.5 million. Pittsfield is authorized an overall rate of return of 8.42% on an approved rate base of approximately $1.6 million.

      The Company's water utilities are subject to the water quality regulations issued by the United States Environmental Protection Agency ("USEPA") and the New Hampshire Department of Environmental Services ("NHDES"). The USEPA is required to periodically set new maximum contaminant levels for certain chemicals as required by the federal Safe Drinking Water Act ("SDWA"). The quality of the Company's water utilities' treated water currently meets or exceeds all current standards set by the USEPA and the NHDES.

      Pennichuck's filtration plant in Nashua is impacted by the Interim Enhanced Surface Water Treatment Rule ("IESWTR") which established a new turbidity standard of 0.3 NTU. Pennichuck will complete its evaluation of alternatives to meet the new IESWTR turbidity standard and it expects to determine what modifications will be required to its filtration plant by the end of March 2004.

      Two of Pennichuck's small community water systems have wells that produce water with arsenic levels in excess of the new standard of 10 ppb. It will be necessary for Pennichuck to install arsenic treatment systems at these locations. Pennichuck's and Pennichuck East's remaining community water systems have wells that produce water meeting the new arsenic standard.

      Capital expenditures associated with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in our utilities' water rates.

Contract and Real Estate Operations

      The Company formed the Service Corporation to conduct its non-regulated, water-related activities. Its activities initially included providing contract operations and maintenance, water testing and billing services to municipalities. In 1998, the Service Corporation entered into a long-term agreement with the Town of Hudson to provide operations and maintenance contract services to the town with respect to the water utility assets it acquired from an investor-owned water utility. In September 2001, the Service Corporation also entered into a long-term agreement with the Town of Salisbury, Massachusetts to perform similar operations and maintenance services.

      The NHDES has mandated water quality standards for non-transient, non-community water systems ("NTNCWS") - defined as public facilities such as schools, apartment and office buildings accommodating more than 25 persons and served by a community well. There are an estimated 600 such NTNCWS in New Hampshire which will require the services of a certified water operator, such as the Service Corporation, in order to meet the mandates of the NHDES. Accordingly, the Service Corporation is actively pursuing new contracts under which it would serve as a certified water operator and provide

various water-related monitoring, maintenance, testing and compliance reporting services for these systems in New Hampshire. During 2003, the Service Corporation provided such services pursuant to 67 operating contracts.

      Southwood, the Company's real estate subsidiary, was organized for the purpose of owning, developing, selling and managing approximately 1,088 acres of undeveloped land in Nashua and Merrimack, New Hampshire formerly owned by Pennichuck Water Works for watershed protection purposes.

      Since 1988, Southwood has been involved in the planning and development of Southwood Corporate Park, a 65-acre commercially zoned land parcel located in Nashua, New Hampshire. From 1988 through 2001, Southwood sold four lots totaling 25 acres in the Corporate Park. In January 2002, Southwood sold the remaining 40 acres to Winstanley Enterprises, Inc. ("Winstanley"), a regional real estate developer, under the terms of an option agreement between Southwood and Winstanley. Under that 1995 agreement, Winstanley paid to Southwood an option fee each year equal to the annual carrying costs associated with that land.

      In September 1997, Southwood and Winstanley formed Westwood Park LLC ("Westwood") to develop a 404-acre tract of land in northwest Nashua zoned for park-industrial use. Southwood conveyed the land to Westwood in exchange for a 60% interest in Westwood. Since 1997, Westwood has sold four parcels totaling approximately 364 acres to third parties, leaving a balance of approximately 40 acres which are restricted in use for future groundwater supplies.

      Southwood holds a 50% ownership interest in HECOP I, LLC, HECOP II, LLC and HECOP III, LLC, which are limited liability corporations formed to construct and own a 39,000 square foot, a 42,000 square foot and a 66,000 square foot office building, respectively, located in Merrimack, New Hampshire. As of December 31, 2003, approximately 121,000 square feet had been leased to third parties under long-term lease agreements. Southwood also holds a 50% ownership interest in HECOP IV, LLC formed in May 2002. As of December 31, 2003, HECOP IV's principal asset was approximately 9.1 acres of raw land available for future commercial development. The remaining 50% ownership interest in each of these four LLC's is held by John Stabile, a local developer, with whom Southwood has participated in four residential joint ventures during the past 10 years.

      In July 1998, Southwood entered into a joint venture known as Heron Cove at Bowers Pond LLC ("Heron Cove") for the development of an 87 unit, single-family community located in Merrimack, New Hampshire. Under the terms of the joint venture agreement, Southwood conveyed the related land parcel to Heron Cove in exchange for a non-interest bearing note secured by a second mortgage on the real estate conveyed. Southwood holds a 50% ownership interest in this joint venture. The remaining 50% ownership interest is held by John Stabile, a local developer. As of December 31, 2001, all 87 units had been constructed and sold to third parties and this LLC was closed out in 2002.

Financial Information About Industry Segments

      The business segment data of the Company and its subsidiaries for the latest three years is presented in "Note 12 - Business Segment Information" in the accompanying Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K Report.

Employees

      The Company, through its principal subsidiary Pennichuck, employs 82 permanent, full-time employees and officers. Of these, there are 43 management and clerical employees who are non-union. The remaining employees are members of the United Steelworkers Union. The current union contract, which was re-negotiated in February 2002, expires in February 2007. In the opinion of management, employee relations are satisfactory.

Additional Information

      The Company's Internet address is www.pennichuck.com. The Company's web site provides a hyperlink to a third party web site through which the Company's annual, quarterly and current reports, and amendments to those reports, are available free of charge. The Company believes these reports are made available as soon as reasonably practicable after it electronically files them with, or furnishes them to, the Securities and Exchange Commission ("SEC"). The Company does not maintain or provide any information directly to the third-party web site, and does not check its accuracy. The public can also obtain access to such reports at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC's web site which is www.sec.gov.

RISK FACTORS

Risks Related to the Company's Business

      The City of Nashua's use of the power of eminent domain to acquire certain of the water utility assets of the Company may result in material, adverse consequences to the Company and its shareholders.

      The Company is involved in ongoing proceedings with the City of Nashua (the "City") regarding the City's desire to acquire all or a portion of the Company's water utility assets. The City has determined to pursue such acquisition pursuant to its power of eminent domain. Separately, several 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 New Hampshire Public Utilities Commission ("NHPUC"). The Company's shareholders are not required to ratify or approve any such forced sale of assets, or the price thereof, if so approved by the NHPUC. 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 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.

Risks Related to Water Business

      The Company's main source of revenues and earnings is its water utility operations. The water supply and distribution industry is subject to regulations and uncertainties which affect the Company and its financial operations in varying degrees.

Rate Regulation. The Company's water utility subsidiaries, Pennichuck, Pennichuck East and Pittsfield are regulated by the NHPUC with respect to the rates we charge our customers for water and the amount of our capital and debt financing. The profitability of our water operations is largely dependent on the timeliness and adequacy of rate relief allowed by the NHPUC.

Regulatory Lag. The NHPUC generally provides our water utilities with the opportunity to earn a rate of return on our capital invested in property used to serve our customers. However, a delay, known as "regulatory lag," normally occurs between the time capital is invested and the effective date of increased water rates, which reflect that investment.

Water Quality Concerns; Changes in Regulatory Standards. Water utility companies are always subject to certain water quality risks related to environmental contamination. Our water systems have water treatment and alternate water source and storage facilities available as short-term sources of supply in the event of contamination of one of our water sources. While our treated water currently meets or exceeds all standards set by federal and state authorities, it is possible that new or stricter standards could be imposed that will raise our operating costs significantly. Although these costs would likely be recovered in the form of higher rates, there can be no assurance that the NHPUC would approve a rate increase to recover such costs.

Dam Safety. Pennichuck initiated an engineering study of two of its eight dams in 2002. The two dams being studied, the Supply and Harris Pond dams, were the last ones remaining to be studied to insure that the dams, crucial to the operation of Pennichuck, meet all current dam safety standards. The results of the completed study indicated that certain upgrades to the dams' spillways and earthen embankments were required in order to meet current NHDES and Federal standards. The engineering plans and permitting were completed in the fall of 2003 and the required construction will be completed in 2004. The estimated cost of the required dam repairs and upgrades will be about $950,000.

      The proposed dam and repair upgrade time frame has been accepted by the NHDES. Pennichuck could face adverse regulatory actions in the event it is unable to remedy the dam deficiencies within this time period.

Threats to Nation's Health and Security. Water utility companies have generally been on a heightened state of alert since the threats to the nation's health and security in the fall of 2001. The USEPA recently issued a set of instructions to describe what community water systems must do to comply with the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. The Act requires all community drinking water systems that serve more than 3,300 people to certify and submit assessments to the EPA no later than June 2004. We have taken steps to increase security at our water utility facilities, heightened employee awareness of threats to our water supplies, and added security measures regarding the delivery and handling of certain chemicals used in our business. We are not aware of any specific threats to our water utility businesses or other operations.

Impact of Weather and Seasonal Demands. The demand for our water and our revenues is impacted by weather and is seasonal in nature. Normally, our most profitable quarters are the second and third calendar year quarters due to increased water consumption during the late spring and summer months. Demand is normally lower during cool, wet springs and summers than it is during warm, hot springs and summers.

Dependence on Certain Industrial Customers. Approximately $3.66 million of our operating revenues are derived from commercial and industrial customers. Pennichuck's largest water customer, Anheuser

Busch ("AB"), was responsible for about 16.1% of its demand in 2003. In the short term, our profitability would be adversely impacted were AB to significantly reduce its water requirements in the future or if our other commercial and industrial customers materially reduce their use of our water.

      Pennichuck and AB have entered into a ten-year contract that provides the terms and conditions under which AB receives service from Pennichuck. The contract provides for a supply of up to 2 million gallons per day for the AB plant in Merrimack, New Hampshire. AB pays a cost-of-service based rate that is approximately 52% of the retail volumetric rate. The contract contains a "minimum payment obligation" clause that requires AB to pay, each year, at least 90% of the volumetric charges of the prior year. The contract provides that, should AB opt for early termination, there is a minimum annual charge to AB of 90%, 66.67% and 33.3% in the first, second and third year following the year of notification of early termination, respectively, based on the annual charge in the year of notification. In such case, we would seek the approval of the NHPUC to increase the rates of our remaining customers to recover any lost revenues from the loss of such a major industrial customer. Any increase in our rates and improvement in our profitability from a loss of a major customer could take at least 12 months to realize, an example of regulatory lag. In addition, there can be no assurance that the NHPUC would approve such a rate increase request.

Risks Related to Real Estate Business

Development Risks. Southwood, our real estate subsidiary, is the owner of several tracts of land located in southern New Hampshire which are planned for development. The demand and prices for Southwood's real estate are dependent upon interest rates and construction costs as well as general economic conditions.

Carrying Costs. Real estate assets are subject to ongoing maintenance costs and property taxes. Reductions in demand for our properties may cause us to continue to incur operating costs without any offsetting income.

Building Vacancies. Southwood has a 50% ownership interest in three separate joint ventures owning commercial office buildings located in Merrimack, New Hampshire. Southwood's share of the net operating income from leases associated with those buildings could be adversely impacted by a downturn in the local economy and commercial real estate market.

Item 2. PROPERTIES

Office Buildings

      The Company owns and occupies a three story, 11,616 square foot building located in downtown Nashua, New Hampshire. It also owns a separate building in Nashua which serves as an operations center and storage facility for its construction and maintenance activities. Except as noted in "Note 3- Debt" in the accompanying Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K Report, there are no mortgages or encumbrances on our properties.

Water Supply Facilities

      Pennichuck's principal properties are located in Nashua, New Hampshire, with the exception of several source-of-supply land tracts which are located in the neighboring towns of Amherst, Merrimack

and Hollis, New Hampshire. In addition, Pennichuck owns four impounding dams which are situated on the Nashua and Merrimack border.

      The location and general character of Pennichuck's principal plant and other materially important physical properties are as follows:

      1.    Holt Pond, Bowers Pond, Harris Pond and Supply Pond and related impounding dams comprise the chief source of water supply in Nashua, New Hampshire.

      2.    An Infilco Degremont treatment plant using physical chemical removal of suspended solids and sand and carbon filtration with a rated capacity of 35 million gallons per day, located in Nashua, New Hampshire.

      3.    A water intake plant and pumping facility located on the Merrimack River in Merrimack, New Hampshire. Pennichuck has a permit from the Army Corps of Engineers to withdraw up to 30 million gallons per day of water from the Merrimack River at this intake. The existing pumps are capable of providing up to 16.2 million gallons per day. This supplemental water supply provides an additional source of water during dry summer periods and will provide a long-term supply for Pennichuck's service area.

      4.    Approximately 672 acres of land located in Nashua and Merrimack which are owned and held for watershed and reservoir purposes.

      5.    Eleven water storage reservoirs having a total storage capacity of 20.7 million gallons, six of which are located in Nashua, two in Amherst, one in Bedford, one in Derry and one in Hollis, New Hampshire.

      The source of supply for Pennichuck East is a well system owned by the Town of Hudson in Litchfield, New Hampshire, purchased water from the Manchester Water Works or individual bedrock wells. Pennichuck East has entered into long-term water supply agreements to obtain water from Hudson and Manchester Water Works.

      The Pittsfield Aqueduct Company owns the land surrounding Berry Pond and it treats the water from this Pond through a .5 mgd water filtration plant located in Pittsfield, New Hampshire. Berry Pond serves as the sole source of supply for Pittsfield.

Water Distribution Facilities

      The distribution facilities of the Company's regulated water companies consist of, among other assets, the following:

Pennichuck

Pennichuck

East

Pittsfield

Transmission & distribution mains (in miles)

     412

   119

  13

Services

23,670

4,597

635

Meters

23,952

4,352

681

Hydrants

  2,287

   403

  66

Land Held for Future Development

      Following Pennichuck Water Works' reorganization in 1984 into a holding company structure, the Company transferred 402 acres of previously designated watershed protection land to Pennichuck and approximately 1,088 acres of buffer and alternate use land were transferred to Southwood. Since 1984, Southwood has sold or transferred approximately 836 acres of land to third parties or to participating joint ventures.

      Based on vegetation, topographical, wetland and hydrological studies, the Company and Southwood have designated their remaining 525 acres into buffer (non-developable) and alternate use (developable) designations, resulting in an approximate breakout of 283 and 242 acres, respectively. Of the approximately 242 acres of alternate use land, 36 acres are located primarily in the northwestern section of the City of Nashua, New Hampshire and 206 acres are located in the western and southerly portions of the town of Merrimack, New Hampshire. The following table summarizes the currently approved zoning for alternate use land at December 31, 2003:

Nashua, NH

Merrimack, NH

Total

Residential

36

101

137

Industrial

--

105

105

Total Alternate Use Acreage

36

206

242

      The Company's and Southwood's landholdings in Nashua and Merrimack are classified under "Current Use" status, resulting in an assessment that is based on the property's actual use and not its highest or best use.

Item 3. LEGAL PROCEEDINGS

Regulatory Investigation

      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 failure to obtain or to keep adequate records, including copies of financial records, contracts, correspondence or other material information.

      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 early 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 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.

Municipalization Efforts

      The City of Nashua (the "City") formally notified the Company's utility subsidiaries 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 the City was acting pursuant to New Hampshire's utility municipalization statute. On March 25, 2003, the Company's three utilities notified the City of their decision not to sell their plant and property. Under New Hampshire statutes, 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. The City and the Company have had discussions since that time regarding the City's desire to acquire the Company's assets, the particular assets that the City is interested in acquiring and the price that the City would be willing to pay for those assets.

      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.

      On March 25, 2004, the City filed a petition for valuation pursuant to New Hampshire RSA 38:9 with the NHPUC. That petition asks the NHPUC to order a determination of the fair market value of the assets of Pennichuck, Pennichuck East and Pittsfield and to allow

the City to acquire these assets. It is not certain whether the City will ultimately choose to complete the acquisition of any portion of the property of the Company's utility subsidiairies even if the NHPUC ultimately approves such an acquisition and establishes a price for it.

Other Proceedings

      The Company and its subsidiaries are not otherwise involved in any material litigation or other proceedings which, in management's opinion, would have an adverse effect on the business, the consolidated financial condition or the operating results of the Company and its subsidiaries.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      During the fourth quarter of the fiscal year covered by this Report, no matters were submitted to a vote of security holders.