UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-K





x           ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
fiscal year ended December 31, 2009


OR


o           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
file number 000-18516





ARTESIAN
RESOURCES CORPORATION


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


(Exact
name of registrant as specified in its charter)





Delaware
            51-0002090--------------------------------------------------------------------
            -------------------------------------------------(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification Number)





664
Churchmans Road, Newark, Delaware 19702


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


Address
of principal executive offices





(302)
453 – 6900


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


Registrant's
telephone number, including area code





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





Title
      of each class
            Class
      A Non-Voting Common StockName
      of each exchange on which registered
            The
      NASDAQ Global Select Market





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.





o
            Yes
            þ
            No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.





o
            Yes
            þ
            No




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





þ
            Yes
            o
            No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).





o
            Yes
            o
            No





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the
Exchange Act.:





Large
      Accelerated Filer o
            Accelerated
      Filer þ
            Non-Accelerated
      Filer o
            Smaller
      Reporting Company o





Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).





o
            Yes
            þ
            No





The
aggregate market value of the Class A Non-Voting Common Stock and Class B Common
Stock held by non-affiliates of the registrant at June 30, 2009 was $101,204,000
and $5,102,000, respectively.  The aggregate market value of Class A
Non-Voting Common Stock was computed by reference to the closing price of such
class as reported on the Nasdaq Global Market on June 30, 2009.  The
aggregate market value of Class B Common Stock was computed by reference to the
last reported trade of such class as reported on the OTC Bulletin Board as of
June 30, 2009, which trade date was June 29, 2009.





As of
March 9, 2010, 6,635,383 shares of Class A Non-Voting Common Stock and 881,452
shares of Class B Common Stock were outstanding.









ARTESIAN
RESOURCES CORPORATION


TABLE OF CONTENTS








FORWARD LOOKING
      STATEMENTSPART IItem 1. – BusinessItem 1A. – Risk FactorsItem 1B. – Unresolved Staff
      CommentsItem 2. – PropertiesItem 3. – Legal
    ProceedingsItem 4. – [Reserved]PART IIItem 5. – Market for Registrant’s Common Equity,
      Related Stockholder  Matters and Issuer Purchases of Equity
      SecuritiesItem 6. – Selected Financial
      DataItem 7. – Management’s Discussion and Analysis of
      Financial Condition and Results of OperationsItem 7A. – Quantitative and Qualitative
      Disclosure About Market RiskItem 8. – Financial Statements and Supplementary
      DataItem 9. – Changes in and Disagreements With
      Accountants on Accounting and Financial DisclosuresItem 9A. – Controls and
    ProceduresItem 9B. – Other InformationPART IIIItem 10. – Directors, Executive Officers
      and Corporate GovernanceItem 11. – Executive
      CompensationItem 12. – Security Ownership of Certain
      Beneficial  Owners and Management and Related Stockholder
      MattersItem 13. – Certain Relationships and Related
      Transactions, and Director IndependenceItem 14. – Principal Accountant Fees and
      ServicesPART IVItem 15. – Exhibits and Financial Statement
      SchedulesSIGNATURESExhibit 21-Subsidiaries of the CompanyExhibit 23.1-Consent of BDO Seidman
    LLPExhibit 31.1-Certification of Chief Executive
      OfficerExhibit 31.2-Certification of Chief Financial
      OfficerExhibit 32- Certification of Chief Executive Officer and
      Chief Financial Officer







SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS





Statements
in this Annual Report on Form 10-K which express our “belief,” “anticipation” or
“expectation,” as well as other statements which are not historical fact, are
forward-looking statements within the meaning of Section 27A of the Securities
Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act and the Private Securities Litigation Reform Act of
1995.  Statements regarding our goals, priorities, growth and
expansion plans and expectation for our water and wastewater subsidiaries and
non-regulated subsidiaries, customer base growth opportunities in Delaware and
Cecil County, Maryland, our belief regarding our capacity to provide water
services for the foreseeable future to our customers, our belief relating to our
compliance and the cost to achieve compliance with relevant governmental
regulations, our expectation of the timing of decisions by regulatory
authorities, our expectation of the timing of the closing for pending
acquisitions, the impact of weather on our operations and the execution of our
strategic initiatives, our expectation of the timing for construction on new
projects, our belief regarding our reliance on outside engineering firms, our
expectation relating to the adoption of recent accounting pronouncements,
contract operations opportunities, legal proceedings, our properties, deferred
tax assets, adequacy of our available sources of financing, the expected
recovery of expenses related to our long-term debt, our expectation to be in
compliance with financial covenants in our debt instruments, our ability to
refinance our debt as it comes due, the timing and terms of renewals of our
lines of credit, plans to increase our wastewater treatment operations and other
revenue streams less affected by weather, expected future contributions to our
postretirement benefit plan, and our liquidity needs are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and involve risks and uncertainties that could cause actual results to
differ materially from those projected.  Words such as “expects”,
“anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”,
“forecasts”, “may”, “should”, variations of such words and similar expressions
are intended to identify such forward-looking statements.  Certain
factors as discussed under Item 1A -Risk Factors, such as changes in weather,
changes in our contractual obligations, changes in government policies, the
timing and results of our rate requests, changes in economic and market
conditions generally, and other matters could cause results to differ materially
from those in the forward-looking statements.  While the Company may
elect to update forward-looking statements, we specifically disclaim any
obligation to do so and you should not rely on any forward-looking statement as
representation of the Company’s views as of any date subsequent to the date of
the filing of this Annual Report on Form 10-K.











PART I





ITEM 1. BUSINESS





General
Information





Artesian
Resources Corporation operates as the holding company of eight wholly-owned
subsidiaries offering water, wastewater and engineering services on the Delmarva
Peninsula.  Our principal subsidiary, Artesian Water Company, Inc., is
the oldest and largest investor-owned public water utility on the Delmarva
Peninsula, and has been providing superior water service since
1905.  We distribute and sell water, including water for public and
private fire protection, to residential, commercial, industrial, governmental,
municipal and utility customers throughout the states of Delaware, Maryland and
Pennsylvania.  In addition, we design and build water and wastewater
infrastructure and provide contract water, wastewater and engineering
services.  Our Class A Non-Voting Common Stock is listed on NASDAQ
Global Select Market and trades under the symbol "ARTNA."





Artesian
Resources Corporation, or Artesian Resources, operates as the parent holding
company of Artesian Water Company, Inc., or Artesian Water, Artesian Water
Pennsylvania, Inc., or Artesian Water Pennsylvania, Artesian Water Maryland,
Inc., or Artesian Water Maryland, Artesian Wastewater Management, Inc., or
Artesian Wastewater, Artesian Wastewater Maryland, Inc., or Artesian Wastewater
Maryland, each a regulated public utility, and three non-regulated subsidiaries;
Artesian Utility Development, Inc., or Artesian Utility, Artesian Development
Corporation, or Artesian Development, and Artesian Consulting Engineers, Inc.,
or Artesian Engineers.  The terms "we," "our" and the "Company" as
used herein refer to Artesian Resources and its subsidiaries.  The
business activity conducted by each of our subsidiaries is discussed below under
separate headings.





2
 Table of Contents





Our
Market





Our
current market area is the Delmarva Peninsula.  Our largest service
area is primarily in the State of Delaware, which had a population of
approximately 885,000 at July 1, 2009.  According to the US Census
Bureau, Delaware's population increased an estimated 13% from 2000 to 2009, as
compared to the nationwide growth rate of approximately
9%.  Substantial portions of Delaware, particularly outside of New
Castle County, are not served by a public water or wastewater system and
represent potential opportunities for Artesian Water and Artesian Wastewater to
obtain new exclusive franchised service areas.  We continue to focus
resources on developing and serving existing service territories and obtaining
new territories throughout the State.





Starting
in 2007, we expanded our services into Maryland.  Cecil County
Maryland, or Cecil County, has designated the Interstate 95 corridor as a
preferred growth area for business and residential expansion.  In
2005, the federal Base Re-Alignment and Closure Commission, or BRAC, announced
the relocation of approximately 14,000 jobs to nearby Aberdeen, Maryland by
2011.  The Wilmington Metropolitan Area Planning Commission projects
Cecil County will grow 61% between 2005 and 2030 and the Maryland Department of
Planning projects that Cecil County will experience the highest rate of
household growth through 2025 of any jurisdiction in the state.  With
so many new workers coming to the area in the next several years, as a result of
the BRAC relocation implementation in 2011, Cecil County and other surrounding
areas expect a significant increase in development.





We have
entered into interconnection agreements for the sale of water with the towns of
Elkton and Chesapeake City, Maryland.  The Town of Elkton began taking
a minimum of 50,000 gallons per day of water through the interconnection in July
2009 and may take a maximum of 200,000 gallons per day.  At the Town
of Elkton’s request, the maximum daily take may be raised to 1.5 mgd, with the
minimum required take set at one quarter of the requested maximum
level.  Additional approvals are necessary to construct the
transmission line to Chesapeake City.  We have also signed agreements
with Cecil County to purchase specific water and wastewater facilities, along
with an agreement with the Town of Port Deposit to purchase water assets, which
are both discussed below.  The existing water and wastewater systems
in the Cecil County agreements serve approximately 3,400 customers, while the
existing water system in the Town of Port Deposit serves approximately 280
customers.





In 2009,
we added approximately 10square miles of
franchised water service area and approximately 6 square miles of franchised
wastewater service area.  We hold Certificate’s of Public Convenience
and Necessity, or CPCN’s, for approximately 273 square miles of exclusive water
service territory and approximately 23 square miles of wastewater service
territory, most of which is in Delaware and some in Maryland.  Our
largest connected regional water system, consisting of approximately 98.6 square
miles and 67,500 customers, is located in northern Delaware.  A
significant portion of our exclusive service territory in Delaware remains
undeveloped, and if and when development occurs and there is population growth
in these areas, along with the anticipated population growth in Maryland, we
will increase our customer base by providing water and/or wastewater service to
the newly developed areas and new customers.





Subsidiaries





Artesian
Water





Artesian
Water, our principal subsidiary, is the oldest and largest public water utility
in the State of Delaware and has been providing water service within the state
since 1905.  Artesian Water distributes and sells water to
residential, commercial, industrial, governmental, municipal and utility
customers throughout the State of Delaware.  In addition, Artesian
Water provides services to other water utilities, including operations and
billing functions, and has contract operation agreements with 21 private and
municipal water providers.  As of December 31, 2009, we had
approximately 76,900 metered customers and served a population of approximately
276,000 (including contract services), representing approximately 31% of
Delaware's total population.  We also provide water for public and
private fire protection to customers in our service territories.





3
 Table of Contents





Artesian Water
Maryland





Artesian
Water Maryland began operations in August 2007 and has expanded its operations
through the following acquisitions:





Ø
            Carpenters Point Water
      Company – August 2007 acquisition of the Carpenters Point Water
      Company, which includes a 141 home community in Cecil County near the
      Interstate 95 growth corridor between Philadelphia and Baltimore and has
      sufficient groundwater supply and elevated water storage to serve
      additional customers in the undeveloped portions of its franchise and
      surrounding area.





Ø
            Mountain Hill Water
      Company - August 2008 acquisition of Mountain Hill Water Company,
      which includes service rights to the entire 8,000 acres of undeveloped
      land in Cecil County’s growth area and access to nearby planned business
      parks, or the Mountain Hill Service Area, and also provided Artesian Water
      Maryland the opportunity to serve future customers in the Principio
      Business Park, as well as the proposed 660 home residential development of
      Charlestown Crossing and the surrounding area.  We currently
      serve three commercial accounts in the Principio Business Park, located
      within Cecil County’s designated growth corridor.  On June 4,
      2009, the Maryland Public Service Commission, or MDPSC, approved
      installation of a water main to serve residents of Whitaker Woods, an
      existing 172 home development located adjacent to the Mountain Hill
      Service Area.  As of December 31, 2009, 25 homes in Whitaker
      Woods were receiving water service.  On September 9, 2009, the
      MDPSC approved Artesian Water Maryland’s request to construct a water
      system to serve the first phase, consisting of 71 homes, in the
      Charlestown Crossing housing
development.





In
addition, Artesian Maryland has entered into the following agreements to further
expand our service capabilities:





Ø
            Cecil County
      Agreement - In October 2008, Artesian Water Maryland signed an
      agreement, or the Cecil County Purchase Agreement, to purchase from Cecil
      County all of Cecil County’s rights, title and interest in and to the
      Meadowview, Pine Hills, Harbourview and the Route 7 water facilities and
      the associated parcels of real property, easement rights and water
      transmission and distribution systems at a price equal to the net asset
      value of the purchased assets, which was approximately $2.2 million as of
      June 30, 2008, and assume certain liabilities at closing.  This
      sum may be paid in cash at closing or, upon mutual agreement, by a note
      payable to Cecil County.  In response to the Cecil County
      Purchase Agreement, the Appleton Regional Community Alliance, or Appleton
      Alliance, filed a petition with The Circuit Court of Cecil County,
      Maryland, or Circuit Court, in opposition to the transactions, which has
      delayed the closing.  The Circuit Court decided in favor of
      Cecil County on July 24, 2009.  On August 19, 2009, the Appleton
      Alliance filed an appeal of the Circuit Court’s decision with the Maryland
      Court of Special Appeals.  Upon the request of Cecil County,
      which was not opposed by the Appleton Alliance, the matter has been moved
      to the state’s highest Court of Appeals and is scheduled for hearing in
      June 2010.  Closing on this transaction is also subject to the
      approval of the MDPSC.  The Cecil County Purchase Agreement may
      be terminated by either party, subject to certain exceptions, in the event
      of uncured breach by the other party, or if the closing has not occurred
      by December 31, 2009.  Upon the mutual agreement of the parties,
      the closing date has been extended to December 31, 2010 pending a final
      judicial determination on the Appleton Alliance
  petition.





Ø
            Town of Port
      Deposit - In December 2009, Artesian Water Maryland signed an
      agreement, or the Port Deposit Purchase Agreement, to purchase from the
      Town of Port Deposit, or Port Deposit, all of Port Deposit’s assets used
      in providing potable water and water distribution and water meter
      services, or the Facilities, to the town.  At the closing,
      Artesian Water Maryland will pay to Port Deposit $250,000, less an initial
      $25,000 deposit that was paid at the time of signing and any fees owed to
      Artesian Utility for operating the plant and equipment prior to
      closing.  Artesian Water Maryland will also deliver a promissory
      note in the amount of $800,000, or the Promissory Note, payable in four
      equal annual installments starting on the first day of July following the
      closing and will be secured by the assets purchased under the Port Deposit
      Purchase Agreement and guaranteed by Artesian Resources.  In
      addition, at the closing Artesian Water Maryland has agreed to assume Port
      Deposit’s $220,000 loan from the Maryland Water Quality Financing
      Administration, or MWQFA, either through the assumption of the loan
      agreement or through the execution of a promissory note to Port Deposit or
      the Second Promissory Note, based on the approval of the
      MWQFA.  The Second Promissory Note, if applicable, will be
      secured by the purchased assets and guaranteed by Artesian
      Resources.  Closing of this transaction is subject to the
      satisfaction of a number of closing conditions, including, among other
      matters, the completion of Artesian Resources’ due diligence, the approval
      of the MDPSC, and approval of a franchise agreement from Cecil
      County.  Closing on this transaction is expected to occur by May
      31, 2010.  However, if regulatory approvals have not been
      obtained by May 31, 2010, this date will be extended to a date a mutually
      agreed by the parties.  The existing water system subject to the
      Port Deposit Purchase Agreement serves approximately 280 customers and
      includes a water treatment facility with a capacity of up to approximately
      500,000 gallons per day and a 500,000 gallon ground storage
      tank.  The existing water system also has a water appropriation
      permit for withdrawals of up to 700,000 gallons per day from the
      Susquehanna River.





4
 Table of Contents





Artesian Water
Pennsylvania





Artesian
Water Pennsylvania began operations upon receiving recognition as a regulated
public water utility by the Pennsylvania Public Utility Commission, or PAPUC, in
2002.  It provides water service to a residential community consisting
of 38 customers in Chester County.  Artesian Water Pennsylvania filed
an application with the PAPUC to increase our service area in Pennsylvania,
which was approved and a related order was entered on February 4,
2005.  This application involved specific developments, in which we
expect modest future growth.  Home construction in these developments
has not progressed yet pending resolution of developer related township
approvals.





Artesian
Wastewater





Artesian
Wastewater is a regulated entity that owns wastewater collection and treatment
infrastructure and provides wastewater services to customers in Delaware as a
regulated public wastewater service company.  Artesian Wastewater
currently owns and operates five wastewater treatment facilities, which are
capable of treating approximately 750,000 gallons per day and can be expanded to
treat approximately 1.6 million gallons per day, or mgd.  Artesian
Wastewater currently provides wastewater service to eight communities in Sussex
County.  As of December 31, 2009, Artesian Wastewater provided
wastewater services to 729 residential customers.





The
preliminary engineering and design work was completed on a regional wastewater
treatment and disposal facility that could provide service for up to 40,000
homes, or equivalencies, in the northern Sussex County area.  This
facility is strategically situated to provide service to the growing population
in the Georgetown, Ellendale and Milton area, as well as to neighboring
municipal systems.  This facility was granted conditional use approval
by Sussex County Council to serve the Elizabethtown subdivision of approximately
4,000 homes and 439,000 square feet of proposed commercial space, as well as
seven additional projects comprising approximately 3,000 residential
units.  The facility will also be capable of offering wastewater
services to local municipalities.  Artesian Utility signed an
agreement on June 30, 2008 with Northern Sussex Regional Water Recycling
Complex, LLC, or NSRWRC, for the design, construction and operation of this
facility.  Once constructed, it will be operated by Artesian
Wastewater.





In July
2008, Artesian Wastewater and the Town of Georgetown, or Georgetown, finalized a
wastewater service agreement establishing a long term arrangement that will meet
the future wastewater treatment and disposal needs in Georgetown’s growth and
annexation areas.  Artesian Wastewater will provide up to 1 mgd of
wastewater capacity for the town over the next 10 years.





Artesian Wastewater
Maryland





Artesian
Wastewater Maryland was incorporated on June 3, 2008 specifically for the
purpose of executing the purchase agreements described below in order to provide
regulated wastewater services in the State of Maryland.





Ø
            Meadowview Wastewater
      Facility - In October 2008, Artesian Wastewater Maryland signed an
      agreement, or the Meadowview Agreement, to purchase the Meadowview
      Wastewater Facility and the Highlands Wastewater Facility and the
      associated parcels of real property, easement rights and wastewater
      collection systems with respect to each facility from Cecil County at a
      price equal to the net asset value of the purchased assets, which was
      approximately $7.8 million as of June 30, 2008, and assume certain
      liabilities at closing.  The majority of the purchase price
      shall be paid by Artesian Wastewater Maryland’s assumption of $7.2 million
      due by Cecil County under a tax-exempt Cecil County Sanitary District
      Bond, Series 2004B, or the Bond.  In the event that the net
      asset value of the purchased assets as of the closing exceeds the amount
      due under the Bond, then the positive difference (if any) shall be paid by
      Artesian Wastewater Maryland to Cecil County in cash at closing or, upon
      mutual agreement, by a note payable to Cecil
  County.





Ø
            Cherry Hill and
      Harbourview Wastewater Facilities - In October 2008, Artesian
      Wastewater Maryland signed an agreement, or the Cherry Hill Agreement, to
      purchase the Cherry Hill Wastewater Facility and the Harbourview
      Wastewater Facility and the associated parcels of real property, easement
      rights and wastewater collection systems with respect to each facility
      from Cecil County at a price equal to the net asset value of the purchased
      assets, which was approximately $3.8 million as of June 30, 2008, and
      assume certain liabilities at closing.  Cecil County shall
      immediately upon receipt of such payment, pay to its creditors an amount
      sufficient to pay all indebtedness of Cecil County in respect of the
      Cherry Hill and Harbourview Wastewater facilities, or the
      Indebtedness.  If the amount of the purchase price under the
      Cherry Hill Agreement is less than the Indebtedness, Cecil County will out
      of its own funds any amount sufficient to pay and discharge in full the
      Indebtedness in excess of the purchase price. If the purchase price
      exceeds the amount of Indebtedness, the positive difference will be paid
      by Artesian Wastewater Maryland and may be financed through a note payable
      to Cecil County.





5
 Table of Contents





These
asset purchase agreements with Cecil County are also subject to the petition
filed by the Appleton Alliance described in the Artesian Water Maryland section
above.  As a result, closing will be delayed until the final judicial
determination on the Appleton Alliance petition.  Closing on these
transactions is also subject to the approval of the MDPSC.  Under each
of the agreements, either party may terminate such agreement, subject to certain
exceptions, in the event of uncured breach by the other party, or if the closing
has not occurred by December 31, 2009.  Upon the mutual agreement of
the parties, the closing date has been extended to December 31, 2010 pending a
final judicial determination regarding the Appleton Alliance
petition.





Artesian
Utility





Artesian
Utility was formed in 1996.  It designs and builds water and
wastewater infrastructure and provides contract water and wastewater services on
the Delmarva Peninsula.  Artesian Utility also evaluates land parcels,
provides recommendations to developers on the size of water or wastewater
facilities and the type of technology that should be utilized for treatment at
such facilities, and operates 26 water and wastewater facilities in Delaware,
Maryland and Pennsylvania for others.  Artesian Utility also has
several contracts with developers for design and construction of wastewater
facilities within the Delmarva Peninsula, utilizing a number of different
technologies for treatment of wastewater at each facility.





We
currently operate several wastewater treatment facilities for the town of
Middletown, in Southern New Castle County, or Middletown, under a 20-year
contract that expires on February 1, 2021.  The facilities include a
2.5 mgd and a 250,000 gallon per day wastewater treatment station.  We
also operate a wastewater disposal facility in Middletown in order to support
the 2.5 mgd wastewater treatment station described above.





We
currently provide contract water and wastewater operation services to private,
municipal and governmental institutions in the southeastern part of Pennsylvania
as a result of our acquisition of TMH Environmental Services, Inc., or TMH, in
May 2007.





On June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC, for the design, construction and
operation of the Northern Sussex Regional Water Recycling Complex, a wastewater
treatment facility to be located in Sussex County, Delaware.  NSRWRC
was created for the purpose of developing the treatment facility site, which
once constructed, will be operated by Artesian Wastewater.





In
connection with the Meadowview Agreement and the Cherry Hill Agreement described
above, in March 2009, Artesian Utility signed an agreement with the Cecil County
Public Works in Cecil County, Maryland to operate the Meadowview Wastewater and
Highlands Wastewater treatment and disposal facilities until Artesian Wastewater
Maryland’s purchase of the facilities is final.  This agreement also
employs Artesian Utility to operate two water supply and treatment stations and
two booster stations in Cecil County.  In addition, in connection with
the Port Deposit Purchase Agreement, in March 2009 Artesian Utility signed an
agreement with Port Deposit to operate and maintain a water system through
August 2010, with three additional one-year renewal options, pending closing on
the Port Deposit Purchase Agreement.





Artesian
Development





Artesian
Development owns an approximately six-acre parcel of land zoned for office
buildings located immediately adjacent to our corporate headquarters and 2
nine-acre parcels of land located in Sussex County.





In
October 2007, Artesian Development purchased the approximately eighteen acres of
land noted above, located on Route 9, west of the City of Lewes in Sussex
County, Delaware.  Artesian Development received a conditional use for
this land from Sussex County to construct an office facility, as we continue to
expand our operations in southern Delaware.  This conditional use also
permits the construction of water treatment and wastewater facilities and
elevated storage on the site to provide service to the area between Lewes and
Georgetown, Delaware.  Once permits and approvals to construct the
facilities are received, appropriate agreements with the utility affiliates of
Artesian Development for its use will be developed.  In January 2008
we received the approved Soils Investigation Report and in July 2008 we received
the approved Preliminary Groundwater Impact Assessment and Groundwater Mounding
Analysis from the Delaware Department of Natural Resources and Environmental
Control, or DNREC.  We submitted designs to DNREC, along with
supplying additional information to increase the number of units approved to be
served at the site from 400 units to approximately 1,900 units.  The
permitting process is complete.  Additional groundwater studies are
currently underway that are designed to improve the phasing and implementation
of the systems operation in accordance with DNREC requirements.  We
have current requests for service from four local developments.





6
 Table of Contents





Artesian
Engineers





Artesian
Engineers provides engineering services to developers for residential and
commercial development.  On June 6, 2008, Artesian Engineers acquired
all the assets of Meridian Architects and Engineers, or Meridian, a leading
provider of engineering services in Delaware, for a purchase price of
$130,000.  The acquisition included the assignment of certain current
contract agreements to provide engineering services to developers and included
services to be provided to Artesian Water.  This acquisition provided
Artesian Resources with enhanced design and engineering capabilities that we
believe have decreased our reliance on outside engineering firms for similar
services.  In addition, we believe that Meridian’s ability to offer
engineering services to design on-site water and wastewater systems for
developers, as well as offsite wastewater collection systems in Sussex County,
provides additional revenues that are not weather sensitive.





Other





Artesian
Resources initiated a Water Service Line Protection Plan, or WSLP Plan, in March
2005.  The WSLP Plan covers all parts, material and labor required to
repair or replace participants’ leaking water service lines up to an annual
limit.  As of December 31, 2009, approximately 14,000, or 20.3%, of
our 69,000 eligible water customers had signed up for the WSLP
Plan.  The WSLP Plan was expanded in the second quarter of 2008 to
include maintenance or repair to customers’ sewer lines.  This plan,
the Sewer Service Line Protection Plan, or SSLP Plan, covers all parts, material
and labor required to repair or replace participants’ leaking or clogged sewer
lines up to an annual limit.  As of December 31, 2009, approximately
6,200, or 9.0%, of our 69,000 eligible customers had signed up for the SSLP
Plan.





Regulatory
Matters





Overview





Our water
and wastewater utility operations are subject to regulation by their respective
state regulatory commissions, which have broad administrative power and
authority to regulate rates charged for service, determine franchise areas and
conditions of service, approve acquisitions, authorize the issuance of
securities and other matters.  The profitability of our utility
operations is influenced, to a great extent, by the timeliness and adequacy of
rate allowances we are granted by the respective regulatory commissions or
authorities in the states in which we operate.





We are
subject to regulation by the following state regulatory
commissions:  Artesian Water and Artesian Wastewater are subject to
the regulatory jurisdiction of the DEPSC, Artesian Water Maryland and Artesian
Wastewater Maryland are subject to the regulatory jurisdiction of the MDPSC and
Artesian Water Pennsylvania is subject to the regulatory jurisdiction of the
PAPUC.





Water and Wastewater
Rates





Our
regulated utilities periodically seek rate increases to cover the cost of
increased operating expenses, increased financing expenses due to additional
investments in utility plant and other costs of doing business.  The
timing of our rate increase requests are therefore dependent upon the estimated
cost of the administrative process in relation to the investments and expenses
that we hope to recover through the rate increase.  We can provide no
assurances that rate increase requests will be approved by applicable regulatory
agencies; and, if approved, we cannot guarantee that these rate increases will
be granted in a timely or sufficient manner to cover the investments and
expenses for which we initially sought the rate increase.





Our water
and wastewater utilities generate operating revenue from customers based on
rates that are established by their respective state regulatory commissions
through a rate-setting process that may include public hearings, evidentiary
hearings and the submission by the utility of evidence and testimony in support
of the requested level of rates.  In evaluating a rate case, state
regulatory commissions typically focus on five areas: (i) the amount of
investment in facilities considered “used and useful” in providing public
service; (ii) the operating and maintenance costs and taxes associated with
providing the service (typically by making reference to a representative
12-month period of time, known as a test year); (iii) the appropriate rate
of return; (iv) the tariff or rate design that allocates operating revenue
requirements equitably across the customer base; and (v) the quality of
service the utility provides, including issues raised by customers.





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In
Delaware, utilities are permitted by law to place rates into effect, under bond,
on a temporary basis pending completion of a rate increase
proceeding.  The first temporary increase may be up to the lesser of
$2.5 million on an annual basis or 15% of gross water sales.  Should
the rate case not be completed within seven months, by law, the utility may put
the entire requested rate relief, up to 15% of gross water sales, in effect
under bond until a final resolution is ordered and placed into
effect.  If any such rates are found to be in excess of rates the
DEPSC finds to be appropriate, the utility must refund the portion found to be
in excess to customers with interest.  The timing of our rate increase
requests are therefore dependent upon the estimated cost of the administrative
process in relation to the investments and expenses that we hope to recover
through the rate increase.  We can provide no assurances that rate
increase requests will be approved by applicable regulatory agencies; and, if
approved, we cannot guarantee that these rate increases will be granted in a
timely or sufficient manner to cover the investments and expenses for which we
initially sought the rate increase.





In April
2008, Artesian Water filed a petition with the DEPSC to implement new rates to
meet a requested increase in revenue of 28.8%, or approximately $14.2 million,
on an annualized basis.  On July, 11, 2008, pursuant to the DEPSC’s
minimum filing requirements, Artesian filed a supplemental filing with the DEPSC
to update financial schedules for actual experience through March 31, 2008 and
to reflect additional changes affecting the requested increase.  The
overall result was a reduction to the requested increase in revenue of 1.5%, to
27.3% or approximately $13.5 million, on an annualized basis.





As
permitted by law, on June 21, 2008, we placed temporary rates into effect,
designed to generate an increase in annual operating revenue of approximately
5.0%, or $2.5 million on an annualized basis, until new rates were approved by
the DEPSC.  Also pursuant to law, on December 17, 2008, we placed
temporary rates into effect, designed to generate an additional increase in
annual operating revenue of approximately 10% or $5.0 million on an annualized
basis, given that the rate case had not been concluded in a seven month
period.





In August
2009, Artesian Water, DEPSC, the Division of the Public Advocate and Christiana
Care Health Services, Inc. entered into an agreement to settle Artesian Water’s
April 2008 application for an increase in rates.  PSC Order No. 7657
was signed by the DEPSC on September 22, 2009, approving the settlement
agreement, which made the existing 15% temporary increase in base rates
permanent.  Since the rate was equal to the 15% temporary increase in
rates charged to customers since December 17, 2008, Artesian Water was not
required to refund any amounts to customers.  This settlement also
included the agreement that Artesian Water will not apply for a further rate
increase for an 18-month period from the date of the DEPSC’s order closing this
application.  It was also agreed that the revenue recovered by
Artesian Water pursuant to the settlement does not include any recovery of funds
attributable to state income tax expense, as it is unlikely that any state
income tax will be paid by Artesian Water during the rate effective
period.





In March
2009, Artesian Wastewater filed an application with the DEPSC for approval of a
uniform tariff applicable to all of our wastewater territories in
Delaware.  Previously, each time we added a new service territory, an
application was required to be submitted to the DEPSC for rate
approval.  As a result of the July 7, 2009 DEPSC approval of our
application, Artesian Wastewater is now permitted to apply its tariffed rates to
any new service territories without prior DEPSC approval.





Service Territory
Expansion





A
Certificate of Public Convenience and Necessity, or CPCN, grants a water or
wastewater company the exclusive right to serve all existing and new customers
within a designated area.  The applicable state Public Service
Commission has the authority to issue and revoke these CPCNs.  In this
Form 10-K, we may refer to CPCNs as "franchises" or "service
territories."





For a
water company, the applicable state Public Service Commission may grant a CPCN
under circumstances where there has been a determination that the water in the
proposed service area does not meet the regulations governing drinking water
standards of the State Division of Public Health for human consumption or where
the supply is insufficient to meet the projected demand.  For a
wastewater company, the applicable state Public Service Commission has
jurisdiction over non-governmental wastewater utilities having fifty or more
customers in the aggregate.  A CPCN for water and wastewater utilities
shall be granted by the applicable state Public Service Commission to applicants
in possession of one of the following:





Øa signed service
agreement with the developer of a proposed subdivision or development, which
subdivision or development has been duly approved by the respective county
government;





Øa petition requesting
such service signed by a majority of the landowners of the proposed territory to
be served; or





Øa duly certified copy of
a resolution from the governing body of a county or municipality requesting the
applicant to provide service to the proposed territory to be
served.





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CPCNs are
not transferable.  A water or wastewater utility that has a CPCN must
obtain the approval of the applicable state Public Service Commission to abandon
a service territory.  Once a CPCN is granted to a water or wastewater
utility, it may not be suspended or terminated unless the applicable state
Public Service Commission determines in accordance with its rules and
regulations that good cause exists for any such suspension or
termination.  Although Artesian has been granted an exclusive
franchise for each of its existing water and wastewater systems, its ability to
expand service areas can be affected by the applicable Public Service Commission
awarding franchises to other regulated water or wastewater utilities with whom
we compete for such franchises.





On March
20, 2007, the DEPSC entered Order No. 7142 which re-opened Regulation Docket No.
51.  By this Order, the DEPSC proposed to repeal rules implemented in
2001 and replace them with new "Regulations Governing Certificates of Public
Convenience and Necessity."  The proposed rules addressed the content
of how notifications are sent to landowners, the definitions for the “Proposed
Service Area,” and the requirement of the applying utility to certify that it
will actually provide water services to a new proposed service territory within
three years.  If water service is not provided within the three year
time frame, the proposed rule provides a mechanism for the DEPSC to determine
whether the utility should be able to retain the new CPCN.  In the
March 2009 proceedings, the DEPSC recommended that a utility provide water
service to a new proposed service territory within five years.  Under
the revised proposal a landowner could request the opportunity to opt-out of the
CPCN if service has not been provided within five years.  The utility
would be entitled to a hearing before DEPSC on the opt-out
request.  On March 2, 2010, the DEPSC reached decisions on these
proposed rules.  They voted unanimously to not adopt any change
regarding the proposed five-year opt out rule, but did approve changes to the
definition of “Proposed Service Area.”  In the future, a Proposed
Service Area will encompass either a single parcel or two or more contiguous
parcels that will be provided water by the same system or main
extension.





In
Maryland, if we are seeking new franchise areas, we must first seek approval
from the county government and this franchise area must be included in that
county’s master water and sewer plan.  The authority to exercise these
franchise areas must then be obtained from the MDPSC.  If utilities
want to construct a new plant, approvals must be obtained from the Maryland
Department of the Environment, the county government and the
MDPSC.  Also, soil and erosion plans must be approved and easement
agreements with affected parties must be obtained.  The MDPSC also
approves rates and charges for service, acquisitions, mergers, issuance of
securities and other matters.





In
December 2008, the MDPSC approved an application for Artesian Water Maryland to
construct a water system from the Delaware state line, interconnecting with the
Artesian Water system, to the Town of Elkton.  The Town of Elkton
agreed to take a minimum of 50,000 gallons per day and a maximum of 200,000
gallons per day.  At the Town of Elkton’s request, the maximum daily
take may be raised to 1.5 mgd, with the minimum required take set at one quarter
of the requested maximum level.  The Town of Elkton started taking
water in July 2009.





On June
4, 2009, the MDPSC approved Artesian Water Maryland’s request to construct a
water system to serve the 172 residents of the Whitaker Woods housing
development located adjacent to the Mountain Hill Service Area.  This
expanded franchise area was approved by the MDPSC in the Mountain Hill
acquisition and is subject to the Mountain Hill tariff rates.  We
began serving customers in this development in November 2009.  On
September 9, 2009, the MDPSC approved Artesian Water Maryland’s request to
construct a water system to serve 71 residents in the Charlestown Crossing
housing development.  Construction is expected to be completed
mid-year 2010.





In
December 2009, Artesian Water Maryland applied for approval from the MDPSC to
exercise a franchise to provide water service to the Town of Port
Deposit.  This application also requested authority to finance the
purchase of water system facilities, and to establish water service
rates.  We expect a decision mid-year 2010.





Environment





Our water
and wastewater operations are subject to federal, state, and local requirements
relating to environmental protection.  The United States Environmental
Protection Agency, or the EPA, the Delaware Department of Natural Resources and
Environmental Control, or DNREC, and the Delaware Division of Public Health or
the DPH, regulate the water quality of our treatment and distribution systems in
Delaware, as do the EPA and the Maryland Department of the Environment, or MDE,
with respect to our operations in Maryland.  Chester Water Authority,
which supplies water to Artesian Water through interconnections in northern New
Castle County, is regulated by the Pennsylvania Department of Environmental
Protection, as well as the EPA.  We believe that we are in material
compliance with all current federal, state and local water quality standards,
including regulations under the federal Safe Drinking Water
Act.  However, if new water quality regulations are too costly, or if
we fail to comply with such regulations, it could have a material adverse affect
on our financial condition and results of operations.





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The water
industry is capital intensive, with the highest capital investment in plant and
equipment per dollar of revenue among all utilities.  Increasingly
stringent drinking water regulations to meet the requirements of the Safe
Drinking Water Act of 1974 have required the water industry to invest in more
advanced treatment systems and processes, which require a heightened level of
expertise.  We are currently in full compliance with the requirements
of the Safe Drinking Water Act.  Even though our water utility was
founded in 1905, the majority of our investment in infrastructure occurred in
the last 30 years.





Under
Delaware state laws and regulations, we are required to file applications with
DNREC, for water allocation permits for each of our operating wells pumping
greater than 50,000 gallons per day.  We have 118 operating and 56
observation and monitoring wells in our systems.  At December 31,
2009, we had allocation permits for 82 wells, permit applications pending for 13
wells, and 23 wells that do not require a permit.  Our access to
aquifers within our service territory is not exclusive.  Water
allocation permits control the amount of water that can be drawn from water
resources and are granted with specific restrictions on water level draw down
limits, annual, monthly and daily pumpage limits, and well field allocation
pumpage limits.  We are also subject to water allocation regulations
that control the amount of water that we can draw from water
sources.  As a result, if new or more restrictive water allocation
regulations are imposed, they could have an adverse effect on our ability to
supply the demands of our customers, and in turn, our water supply revenues and
results of operations.  Our ability to supply the demands of our
customers historically has not been affected by private usage of the aquifers by
landowners or the limits imposed by the state of Delaware.  Because of
the extensive regulatory requirements relating to the withdrawal of any
significant amounts of water from the aquifers, we believe that third party
usage of the aquifers within our service territory will not interfere with our
ability to meet the present and future demands of our customers.





In 2003,
legislation was enacted in Delaware requiring all water utilities serving within
northern New Castle County, Delaware to certify by July 2006, and each three
years thereafter, that they have sufficient sources of self-supply to serve
their respective systems.  On June 30, 2006, Artesian Water filed our
certification related to the adequacy of our water supply through
2009.  After completion of their review, on July 24, 2007, the DEPSC
accepted our certification of sufficient water supply.  As required,
we filed a new certification of self-sufficiency with the DEPSC on June 30,
2009, for the period through 2012.  We expect final review by the
DEPSC by the second quarter of 2010.





As
required by the Safe Drinking Water Act, the EPA has established maximum
contaminant levels for various substances found in drinking water to ensure that
the water is safe for human consumption.  These limits are known as
Maximum Contaminant Levels and Maximum Residual Disinfection
Levels.  The EPA also regulates how often public water systems monitor
their water for contaminants and report the monitoring results to the individual
state agencies or the EPA.  Generally, the larger the population
served by a water system, the more frequent the monitoring and reporting
requirements.  The Safe Water Drinking Act applies to all 50
states.





DPH has
set maximum contaminant levels for certain substances that are more restrictive
than the maximum contaminant levels set by the EPA.  The DPH is the
EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that
capacity, monitors the activities of Artesian Water and reviews the results of
water quality tests performed by Artesian Water for adherence to applicable
regulations.  Artesian Water is also subject to other laws regulating
substances and contaminants in water, including the Lead and Copper Rule, rules
for volatile organic compounds and the Total Coliform Rule.  Because
we have no surface water sources of supply that we treat for consumption, the
Surface Water Treatment Rule generally does not apply to us.





Delaware
enacted legislation in 1998 requiring water utilities to meet secondary water
quality standards that include limitations on iron content, odor and other water
quality-related issues that are not proven health risks but may be aesthetically
objectionable for consumption.  We believe our current treatment
systems and facilities meet these secondary standards.





A normal
by-product of our iron removal treatment facilities is a solid consisting of the
iron removed from untreated groundwater plus residue from chemicals used in the
treatment process.  The solids produced at our facilities are either
disposed directly into approved wastewater facilities or removed from our
facilities by a licensed third party vendor.  Management believes that
compliance with existing federal, state or local laws and regulations regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, has no material effect upon the business and
affairs of the Company, but there is no assurance that such compliance will
continue to not have a material effect in the future.





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The MDE
ensures that water quality and quantity at all public water systems in Maryland
meet the needs of the public and are in compliance with federal and state
regulations.  The MDE also ensures that public drinking water systems
provide safe and adequate water to all current and future users in Maryland, and
that appropriate usage, planning, and conservation policies are implemented for
Maryland’s water resources.  The MDE oversees the development of
Source Water Assessments for water supplies, and issues water appropriation
permits for public drinking water systems.  In order to appropriate
water for municipal, commercial, industrial or other non-domestic uses, a Water
Appropriation Permit must be obtained.  Issuance of the permit
involves evaluating the needs of the user and the potential impact of the
withdrawal on neighboring users and the water source in order to maximize
beneficial use of the water of the State of Maryland.  Permits for
large appropriations often involve conducting pump tests to measure adequacy of
an aquifer and safe yield of a well, or reviewing stream flow records to
determine the adequacy of a surface water source.  Regulations were
finalized in 1999 that require all new community water systems to have
sufficient technical, managerial and financial capacity to provide safe drinking
water to their consumers prior to being issued a Construction
Permit.  Also, in 2007, capacity management guidance was
finalized.  Capacity limiting factors can include, source capacity,
treatment capacity and appropriation permit quantity.  As of December
31, 2009, we have 5 wells that pump groundwater to 2 separate water treatment
facilities located in Cecil County, Maryland.





The Clean
Water Act has established the foundation for wastewater discharge control in the
United States.  The Clean Water Act established a control program for
ensuring that communities have clean water by regulating the release of
contaminants into waterways.  Permits that limit the amounts of
pollutants discharged are required of all wastewater dischargers under the
National Pollutant Discharge Elimination System permit program.  The
Clean Water Act also requires that wastewater treatment plant discharges meet a
minimum of secondary treatment.  The secondary treatment process can
remove up to 90% of the organic matter in wastewater.  Over 30% of the
nation’s wastewater treatment facilities produce cleaner discharges by providing
even greater levels of treatment.  We operate environmentally friendly
wastewater systems that meet all requirements of federal, state and local
standards.





Other Regulatory
Matters





Delaware
statute permits water utilities to put into effect, on a semi-annual basis,
increases related to specific types of distribution system improvements through
a Distribution System Improvement Charge or DSIC.  This charge is
available to water utilities to be implemented between general rate increase
applications that normally recognize changes in a water utility’s overall
financial position.  The DSIC approval process is less costly when
compared to the approval process for general rate increase
requests.  The DSIC rate applied between base rate filings is capped
at 7.5% of the amount billed to customers under otherwise applicable rates and
charges, and the DSIC rate increase applied can not exceed 5% within any
12-month period.  In December 2007, Artesian Water filed an
application with the DEPSC for approval to collect a 0.46% increase, effective
January 1, 2008, to recover the costs of eligible non-revenue producing
improvements made since the last rate increase in 2006.  The DEPSC
approved the DSIC effective January 1, 2008 subject to audit at a later
date.  During 2008, we earned approximately $99,000 in DSIC
revenue.  On June 21, 2008, the Company discontinued the collection of
DSIC pursuant to Delaware law which requires the Company to discontinue a DSIC
when new base rates are put into effect.  We did not have DSIC in
effect during 2009.  In November 2009, Artesian Water filed an
application with the DEPSC for approval to collect a 0.34% increase, an
estimated $92,500, effective January 1, 2010.  This will recover the
costs of eligible non-revenue producing improvements made since the last rate
increase in 2008.  The DEPSC approved the DSIC effective January 1,
2010 subject to audit at a later date.





On April
10, 2006, the DEPSC made effective new rules under Regulation Docket 15 that
govern the terms and conditions under which water utilities require advances or
contributions from customers or developers.  These regulations require
that developers pay for all water facilities within a new development, with such
funding recorded as contributions in aid of construction by the water
utility.  In addition, the utility is required to receive a
contribution in aid of construction of $1,500 for each new residential
connection to its system towards the cost of water supply, treatment and storage
facilities.  These regulations further require developers to fully pay
for facilities to serve satellite systems.  These required
contributions are intended to place a greater burden upon new customers to pay
for the cost of facilities required to serve them.  On February 12,
2010, we filed the first of three required annual reports with the DEPSC, in
order to demonstrate our compliance with Regulation Docket 15.





Sources
of Water





We derive
about 95% of our self-supplied groundwater from wells located in the Atlantic
Coastal Plain.  The remaining 5% comes from wells in the Piedmont
Province.  We use a variety of treatment methods, including aeration,
pH adjustment, chlorination, fluoridation, arsenic removal, nitrate removal and
iron removal, to meet federal, state and local water quality
standards.  Additionally, a corrosion inhibitor is added to all of our
self-supplied groundwater and most of the supply from
interconnections.  We have 56 different water treatment facilities in
our Delaware systems.  All water supplies that we purchase from
neighboring utilities are potable.  Based on our experience, we
believe that the costs of treating groundwater are significantly lower than
those of treating surface water.





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Our
primary sources of water are our wells that pump groundwater from aquifers and
other formations.  To supplement our groundwater supply, we purchase
surface water through interconnections only in the northern service area of our
New Castle County, Delaware system.  The purchased surface water is
blended with our groundwater supply for distribution to our
customers.  Nearly 85% of the overall 7.1 billion gallons of water we
distributed in all of our Delaware systems during 2009came from our
groundwater wells, while the remaining 15% came from interconnections with other
utilities and municipalities.  During 2009, our average rate of water
pumped was approximately 16.4 million gallons per day, or mgd, from our
groundwater wells and approximately 3.0 mgd was supplied from
interconnections.  Our peak water supply capacity currently is
approximately 59.0 mgd.  We believe that we have in place sufficient
capacity to provide water service for the foreseeable future to all existing and
new customers in all of our service territories.





Interconnections
and Storage





Most of
our New Castle County, Delaware water system is interconnected.  In
the remainder of the State of Delaware, we have several satellite systems that
have not yet been connected by transmission and distribution
facilities.  We intend to join these systems into larger integrated
regional systems through the construction of a transmission and distribution
network as development continues and our expansion efforts provide us with
contiguous exclusive service territories.  In Maryland, we have an
interconnection that connects with the Artesian Water system from the Delaware
state line to the Town of Elkton, providing up to 1.5 mgd.





We have
20 interconnections with 2 neighboring water utilities and 5 municipalities that
provide us with the ability to purchase or sell water.  An
interconnection agreement with the Chester Water Authority has a "take or pay"
clause requiring us to purchase 1.095 billion gallons
annually.  During the fiscal year ended December 31, 2009, we used the
minimum draw under this agreement.  The Chester Water Authority
agreement, which expires December 31, 2021, provides for the right to extend the
term of this agreement through and including December 31, 2047, at our option,
subject to the approval of the Susquehanna River Basin
Commission.  All of the interconnections provide Artesian Water the
ability to sell water to neighboring water utilities or
municipalities.





As of
December 31, 2009, we were serving customers through approximately
1,124 miles of transmission and distribution mains.  Mains range in
diameter from two inches to twenty-four inches, and most of the mains are made
of ductile iron or cast iron.  We supply public fire protection
service through approximately 5,286 hydrants installed throughout our service
territories.





We have
29 storage tanks in Delaware, most of which are elevated, providing total system
storage of 42 million gallons.  We have developed and are using an
Aquifer Storage and Recovery, or ASR, system in New Castle County
Delaware.  Our ASR system provides approximately 130 million gallons
of storage capacity, which can be withdrawn at a rate of approximately 1
mgd.  At some locations, we rely on hydropneumatic tanks to maintain
adequate system pressures.  Where possible, we combine our smaller
satellite systems with systems having elevated storage facilities.  In
Cecil County, Maryland we have 2 elevated storage tanks capable of storing
approximately 0.6 million gallons.





Additional
General Information





Seasonality





Substantially
all of our water customers are metered, which allows us to measure and bill for
our customers’ water consumption.  Demand for water during the warmer
months is generally greater than during cooler months due primarily to
additional customer requirements for water in connection with cooling systems,
swimming pools, irrigation systems and other outside water
use.  Throughout the year, and particularly during typically warmer
months, demand for water will vary with temperature and rainfall.  In
the event that temperatures during the typically warmer months are cooler than
expected, or there is more rainfall than expected, the demand for water may
decrease and our revenues may be adversely affected.





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Competition





Our
business in our franchised service areas is substantially free from direct
competition with other public utilities, municipalities and other
entities.  However, our ability to provide additional water and
wastewater services is subject to competition from other public utilities,
municipalities and other entities. Even though our regulated utilities have been
granted an exclusive franchise for each of our existing community water and
wastewater systems, our ability to expand service areas can be affected by the
DEPSC, the MDPSC or the PAPUC, awarding franchises to other regulated water or
wastewater utilities with whom we compete for such franchises.





Employees





The
Company has no collective bargaining agreements with any of its employees, and
its work force is not union organized or union represented.  As of
December 31, 2009, we employed 226 full-time and 9 part-time
employees.  Of these employees, 19 were officers and managers; 141
were employed as operations personnel, including engineers, technicians,
draftsman, maintenance and repair persons, meter readers and utility personnel;
and 60 were employed in the accounting, budgeting, information systems, human
resources, customer relations and public relations.  The remaining 15
employees were administrative personnel.  In addition, we have 12
employees that accepted continued employment with the Company after the Meridian
acquisition in June 2008.  We believe that our employee relations are
good.





Available
Information





We are a
Delaware corporation with our principal executive offices located at 664
Churchmans Road, Newark, Delaware, 19702.  Our telephone number is
(302) 453-6900 and our website address is www.artesianwater.com.  We
make available free of charge through the Investor Information section of our
website our Code of Ethics, Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with
or furnished to the SEC.  We include our website address in this
Annual Report on Form 10-K only as an inactive textual reference and do not
intend it to be an active link to our website.





We file
our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Exchange Act
electronically with the Securities and Exchange Commission, SEC.  The
public may read or copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC, 20549.  The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site,
www.sec.gov, that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC.





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ITEM 1A. RISK FACTORS





We are
exposed to a variety of risks and uncertainties.  Most are general
risks and uncertainties applicable to all water utility
companies.  Our financial position and results of operations may be
affected by factors that are either not currently known to us or which we
currently consider immaterial to our business.  We describe below some
of the specific known risk factors that could negatively affect our business,
financial condition or results of operations.  If one or more of these
or other risks or uncertainties materialize, actual results may vary materially
from our projections.  All forward-looking statements made by us in
this Annual Report to the Securities and Exchange Commission on Form 10-K, in
our Annual Report to Shareholders and in our subsequently filed quarterly and
current reports to the Securities and Exchange Commission, as well as in our
press releases and other public communications, are qualified by the risks
described below.





Our operating revenue is
primarily from water sales.  The rates that we charge our customers
are subject to the regulations of the Public Service Commissions in the states
in which we operate.  Additionally, our business requires significant
capital expenditures on an annual basis and these expenditures are made for
additions and replacement of property.  If a Public Service Commission
disapproves or is unable to timely approve our requests for rate increase or
approves rate increases that are inadequate to cover our investments or
increased costs, our profitability may suffer.





We file
rate increase requests, from time to time, to recover our investments in utility
plant and expenses.  Once a rate increase petition is filed with a
Public Service Commission, the ensuing administrative and hearing process may be
lengthy and costly.  We can provide no assurances that any future rate
increase request will be approved by the DEPSC, MDPSC or PAPUC, and if approved,
we cannot guarantee that these rate increases will be granted in a timely manner
and/or will be sufficient in amount to cover the investments and expenses for
which we initially sought the rate increase.





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





Demand
for water during warmer months is generally greater than during cooler months
primarily due to additional customer requirements in irrigation systems,
swimming pools, cooling systems and other outside water use.  In the
event that temperatures during typically warmer months are cooler than normal,
or when rainfall is more than normal, the demand for our water may decrease and
adversely affect our revenues.





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





We
believe that we have in place sufficient capacity to provide water service for
the foreseeable future to all existing and new customers in all of our service
territories.  However, severe drought conditions could interfere with
our sources of water supply and could adversely affect our ability to supply
water in sufficient quantities to our existing and future
customers.  This may adversely affect our revenues and
earnings.  Moreover, governmental restrictions on water usage during
drought conditions may result in a decreased demand for water, which may
adversely affect our revenue and earnings.





Our operating costs could be
significantly increased if new or stricter regulatory standards are imposed by
Federal and State Environmental agencies.





Our water
and wastewater services are governed by various federal and state environmental
protection and health and safety laws and regulations, including the federal
Safe Drinking Water Act, the Clean Water Act and similar state
laws.  These federal and state regulations are issued by the United
States Environmental Protection Agency and state environmental regulatory
agencies.  Pursuant to these laws, we are required to obtain various
water allocation permits and environmental permits for our
operations.  The water allocation permits control the amount of water
that can be drawn from water resources.  New or stricter water
allocation regulations can adversely affect our ability to meet the demands of
our customers.  While we have budgeted for future capital and
operating expenditures to maintain compliance with these laws and our permits,
it is possible that new or stricter standards would be imposed that will raise
our operating costs.  Thus, we can provide no assurances that our
costs of complying with, or discharging liability under current and future
environmental and health and safety laws will not adversely affect our business,
results of operations or financial condition.





14
 Table of Contents





We are subject to risks
associated with the collection, treatment and disposal of
wastewater.





Wastewater
collection, treatment and disposal involve various unique risks.  If
collection or treatment systems fail, overflow, or do not operate properly,
untreated wastewater or other contaminants could spill onto nearby properties or
into nearby streams and rivers, causing damage to persons or property, injury to
aquatic life and economic damages, which may not be recoverable in
fees.  This risk is most acute during periods of substantial rainfall
or flooding, which are common causes of sewer overflow and system
failure.  Liabilities resulting from such damages and injuries could
materially and adversely affect the Company’s results of operations and
financial condition.





Turnover in our management
team could have an adverse impact on our business or the financial market’s
perception of our ability to continue to grow.





Our
success depends significantly on the continued contribution of our management
team both individually and collectively.  The loss of the services of
any member of our management team or the inability to hire and retain
experienced management personnel could harm our operating results.





We face competition from
other water and wastewater utilities for the acquisition of new exclusive
service territories.





Water and
wastewater utilities competitively pursue the right to exclusively serve
territories in Delaware and Maryland by entering into agreements with
landowners, developers or municipalities and, under current law, then applying
to the DEPSC or the MDPSC for a CPCN, which grants a water or wastewater utility
the exclusive right to serve all existing and new customers of a water or
wastewater utility within a designated area.  Typically, water and
wastewater utilities enter into agreements with developers who have approval
from county governments with respect to proposed subdivisions or
developments.  Once a CPCN is granted to a water or wastewater
utility, generally it may not be suspended or terminated unless the DEPSC or
MDPSC determines in accordance with its rules and regulations that good cause
exists for any such suspension or termination.  Therefore, we face
competition from other water and wastewater utilities as we pursue the right to
exclusively serve territories.  If we are unable to enter into
agreements with landowners, developers or municipalities and secure CPCNs for
the right to exclusively serve territories in Delaware or Maryland, our ability
to expand may be significantly impeded.





We depend on the
availability of capital for expansion, construction and
maintenance.  Weaknesses in capital and credit markets may limit our
access to capital.





Our
ability to continue our expansion efforts and fund our utility construction and
maintenance program depends on the availability of adequate
capital.  There is no guarantee that we will be able to obtain
sufficient capital in the future on favorable terms and conditions for
expansion, construction and maintenance.  Recent economic conditions
and disruptions have caused substantial volatility in capital markets, including
credit markets and the banking industry and have increased the cost and
significantly reduced the availability of credit from financing sources, which
may continue or worsen in the future.  In the event our lines of
credit are not extended or we are unable to refinance our first mortgage bonds
when due and the borrowings are called for payment, we will have to seek
alternative financing sources, although there can be no assurance that these
alternative financing sources will be available on terms acceptable to
us.  In the event we are unable to obtain sufficient capital, our
expansion efforts could be curtailed, which may affect our growth and may affect
our future results of operations.





General economic conditions
may materially and adversely affect our financial condition and results of
operations.





A general
economic downturn such as the one the U.S. economy recently experienced may lead
to a number of impacts on our business that may materially and adversely affect
our financial condition and results of operations.  Such impacts may
include a reduction in discretionary and recreational water use by our
residential water customers, particularly during the summer months; a decline in
usage by industrial and commercial customers as a result of decreased business
activity and commerce in our customers’ businesses; an increased incidence of
customers’ inability, bankruptcy or delay in paying their bills which may lead
to higher bad debt expense and reduced cash flow; and a lower natural customer
growth rate may result as compared to what had been experienced before the
economic downturn due to a decline in new housing starts and a possible slight
decline in the number of active customers due to housing vacancies or
abandonments.





15
 Table of Contents





Any future acquisitions we
undertake or other actions to further grow our water and wastewater business may
involve risks.





An
element of our growth strategy is the acquisition and integration of water and
wastewater systems in order to broaden our current service areas, and move into
new ones.  It is our intent, when practical, to integrate any
businesses we acquire with our existing operations.  The negotiation
of potential acquisitions as well as the integration of acquired businesses
could require us to incur significant costs and cause diversion of our
management’s time and resources.  We may not be successful in the
future in identifying businesses that meet our acquisition
criteria.  The failure to identify such businesses may limit the rate
of our growth.  In addition, future acquisitions or expansion of our
service areas by us could result in:





ØDilutive issuance of our
equity securities;


ØIncurrence of debt and
contingent liabilities;


ØDifficulties in
integrating the operations and personnel of the acquired
businesses;


ØDiversion of our
management’s attention from ongoing business concerns;


ØFailure to have
effective internal control over financial reporting;


ØShuffling of human
resources; and


ØOther
acquisition-related expense





Some or
all of these items could have a material adverse effect on our business and our
ability to finance our business and comply with regulatory
requirements.  The businesses we acquire in the future may not achieve
sales and profitability that would justify our investment.





We are dependent on the
continuous and reliable operation of our information technology
systems.





We rely
on our information technology systems in connection with the operation of our
business, specifically with respect to customer service and billing, managing
construction projects, managing our financial records, tracking assets, remotely
monitoring some of our plants and facilities and managing human resources,
inventory and accounts receivable collections.  A loss of these
systems or major problems with the operation of these systems could affect our
operations and have a significant material adverse effect on our results of
operations.





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





Our water
supplies are subject to contamination from naturally-occurring compounds as well
as pollution resulting from man-made sources.  Even though we monitor
the quality of water on on-going basis, any possible contamination due to
factors beyond our control could interrupt the use of our water supply until we
are able to substitute it from an uncontaminated water
source.  Additionally, treating the contaminated water source could
involve significant costs and could adversely affect our business.  We
could also be held liable for consequences arising out of human or environmental
exposure to hazardous substances, if found, in our water supply.  This
could adversely affect our business, results of operations and financial
condition.





Potential terrorist attacks
may disrupt our operations and adversely affect our business, operating results
and financial condition.





In the
wake of the September 11, 2001 terrorist attacks, we have taken steps to
increase security measures at our facilities and heighten employee awareness of
threats to our water supply.  We also have tightened our security
measures regarding delivery and handling of certain chemicals used in our
business.  We are currently not aware of any specific threats to our
facilities, operations or supplies, however, it is possible that we would not be
in a position to control the outcome of terrorist events, if they
occur.








16
 Table of Contents


ITEM 1B. UNRESOLVED STAFF
COMMENTS





None.





ITEM 2. - PROPERTIES





Our
corporate headquarters are located at 664 Churchmans Road, Newark, Delaware and
are owned by Artesian Water.





Artesian
Development owns approximately 6 acres of land in New Castle County, Delaware
zoned for office development and approximately 18 acres of land in Sussex
County, Delaware for an office facility, water and wastewater treatment
facilities and elevated water storage.





On June
30, 2008, Artesian Utility entered into an agreement with NSRWRC for the design,
construction and operation of a wastewater treatment facility to be located in
Sussex County Delaware.  Pursuant to the terms of the June 2008
agreement between Artesian Utility and NSRWRC, NSRWRC purchased a 75 acre parcel
of land for $5 million using the proceeds from a $10 million construction
loan.  The construction loan is secured by the land and guaranteed by
Artesian Resources.  NSRWRC is financially responsible for designing
and building a treatment facility on this parcel of land and once constructed,
this treatment facility will be operated by Artesian Wastewater.





Artesian
Water owns land, transmission and distribution mains, pump facilities, treatment
plants, storage tanks, meters, vehicles, land, easements and related equipment
and facilities throughout Delaware, of which the majority is used for utility
operations.  Artesian Water Pennsylvania owns transmission and
distribution mains. Artesian Water Maryland owns land, transmission and
distribution mains, pump facilities and storage tanks.  Artesian
Wastewater owns treatment, disposal plants collection mains and lift
stations.  The following table indicates our utility plant as of
December 31, 2009.





Utility plant
      comprises:In
      thousandsEstimated
      Useful Life(In
      Years)
            
            2009Utility
      plant at original costUtility
      plant in service-WaterIntangible
      plant
            ---
            $
            140Source
      of supply plant
            45-85
            
            16,327Pumping
      and water treatment plant
            35-62
            
            55,995Transmission
      and distribution plantMains
            81
            
            175,164Services
            39
            
            28,533Storage
      tanks
            76
            
            22,237Meters
            26
            
            14,766Hydrants
            60
            
            9,283General
      plant
            3-31
            
            43,716Utility
      plant in service-WastewaterTreatment
      and Disposal Plant
            35-62
            
            11,495Collection
      Mains and Lift Stations
            81
            
            4,575General
      plant
            3-31
            
            929Property
      held for future use
            ---
            
            1,932Construction
      work in progress
            ---
            
            6,457391,549Less
      – accumulated depreciation
            
            
            64,650$
            326,899





In
aggregate, we own land, rights-of-way and easements totaling approximately 722
acres.  Substantially all of Artesian Water's utility plant, except
the utility plant in the town of Townsend, Delaware, is pledged as security for
First Mortgage Securities.  As of December 31, 2009, no other utility
plant has been pledged as security for loans.





17
 Table of Contents





We
believe that our properties are generally maintained in good condition and in
accordance with current standards of good water and wastewater works industry
practice.  We believe that all of our existing facilities adequately
meet current necessary production capacities and current levels of
utilization.





ITEM 3. – LEGAL PROCEEDINGS





There are
no material legal proceedings pending at this time to which we or any of our
subsidiaries is a party or to which any of our properties is the subject that
are material or are expected to have a material effect on our financial
position, results of operations or cash flows.





ITEM 4. -[RESERVED]








PART II





ITEM 5. -MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES





Market Information for the
Company’s Common Equity


Artesian
Resources' Class A Non-Voting Common Stock, or Class A Stock, is listed on
NASDAQ Global Select Market and trades under the symbol "ARTNA."  On
March 2, 2010, the last closing sale price as reported by the NASDAQ Global
Select Market was $18.01 per share.  On March 2, 2010, there were 810
holders of record of the Class A Stock.  The following table sets
forth, for the periods indicated, the high and low closing sale prices for the
Class A Stock as reported by NASDAQ Global Select Market and the cash dividends
declared per share.





CLASS A
NON-VOTING COMMON STOCK





High
            
            
            Low
            
            
            Dividend
      Per Share2008First
      Quarter
            
            $
            19.24
            
            
            $
            18.05
            
            
            $
            0.17Second
      Quarter
            
            
            19.00
            
            
            
            18.00
            
            
            
            0.18Third
      Quarter
            
            
            18.50
            
            
            
            16.61
            
            
            
            0.18Fourth
      Quarter
            
            
            16.84
            
            
            
            13.95
            
            
            
            0.182009First
      Quarter
            
            $
            16.19
            
            
            $
            12.95
            
            
            $
            0.18Second
      Quarter
            
            
            16.44
            
            
            
            13.90
            
            
            
            0.18Third
      Quarter
            
            
            17.83
            
            
            
            16.06
            
            
            
            0.18Fourth
      Quarter
            
            
            18.61
            
            
            
            15.65
            
            
            
            0.19








Our Class
B Voting Stock, or Class B Stock, is quoted on the OTC Bulletin Board under the
symbol "ARTNB.OB."  There has been a limited and sporadic public
trading market for the Class B Stock.  As of March 2, 2010, the last
reported trade of the Class B Stock on the OTC Bulletin Board was at a price of
$18.00 per share on February 17, 2010.  As of March 2, 2010, we had
179 holders of record of the Class B Stock.  The Class B shares are
paid the same dividend as the Class A shares noted in the table
above.





Recent
Sales of Unregistered Securities


During
the quarter ended December 31, 2009, we did not issue any unregistered shares of
our Class A or Class B Stock.





18
 Table of Contents


Equity Compensation Plan
Information


The
following table provides information on the shares of our Class A Stock that may
be issued upon exercise of outstanding stock options as of December 31, 2009
under the Company’s stockholder approved stock plans.





Equity
      Compensation Plan InformationPlan
      category
            
            Number
      of securities to be issued upon exercise of outstanding options
            
            
            Weighted-average
      exercise price of outstanding options
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)Equity
      compensation plans approved by security holders
            
            
            497,889
            
            
            $
            15.91
            
            
            
            500,250Equity
      compensation plans not approved by security holders
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total
            
            
            497,889
            
            
            
            
            
            
            
            500,250





The
following graph compares the percentage change in cumulative shareholder return
on the Company’s Class A common stock with the Standard & Poor’s 500
Stock Index and Peer Group (as defined below) since December 2004 (assuming a
$100 investment on December 31, 2004, and the reinvestment of any
dividends):

















INDEXED
      RETURNSBase
      Period
            Years
      Ending December 31Company
      Name / Index
            2004
            2005
            2006
            2007
            2008
            2009Artesian
      Resources Corporation
            100
            108.38
            111.39
            110.82
            96.97
            116.85S&P
      500 Index
            100
            104.91
            121.48
            128.16
            80.74
            102.11Peer
      Group
            100
            131.54
            131.76
            126.47
            122.05
            121.60





The Peer
Group includes American States Water Company, American Water Works Company,
Inc., Aqua America, Inc., California Water Service Group, Connecticut Water
Service, Inc., Middlesex Water Company, Pennichuck Corporation, SJW Corporation,
Southwest Water Company, and York Water Company.


19
 Table of Contents


ITEM 6. -SELECTED
FINANCIAL DATA





The
selected statement of operations and balance sheet data shown below were derived
from our consolidated financial statements. The consolidated statement of
operations data for the years ended December 31, 2009, 2008 and 2007 and the
consolidated balance sheet data as of December 31, 2009 and 2008 have been
derived from our audited financial statements included elsewhere in this Annual
Report on Form 10-K.  The consolidated statement of operations data
for the years ended December 31, 2006 and 2005 and the consolidated balance
sheet data as of December 31, 2007, 2006 and 2005 have been derived from audited
consolidated financial statements which are not included in this Annual Report
on Form 10-K.  You should read this selected financial data together
with our consolidated financial statements and related notes, as well as the
discussion under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”





In
      thousands, except per share and operating data
              
              2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005STATEMENT
      OF OPERATIONS DATAOperating
      revenuesWater
      sales
              
              $
              53,871
              
              
              $
              50,101
              
              
              $
              48,461
              
              
              $
              44,272
              
              
              $
              41,638Other
      utility operating revenue
              
              
              2,208
              
              
              
              2,019
              
              
              
              1,699
              
              
              
              1,268
              
              
              
              1,073Non-utility
      operating revenue
              
              
              4,833
              
              
              
              4,065
              
              
              
              2,364
              
              
              
              1,725
              
              
              
              2,574Sale
      of land
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              1,322
              
              
              
              ---Total
      operating revenues
              
              $
              60,912
              
              
              $
              56,185
              
              
              $
              52,524
              
              
              $
              48,587
              
              
              $
              45,285Operating
      expensesOperating
      and maintenance
              
              $
              32,368
              
              
              $
              30,871
              
              
              $
              28,594
              
              
              $
              25,733
              
              
              $
              24,543Depreciation
      and amortization
              
              
              6,556
              
              
              
              5,782
              
              
              
              5,162
              
              
              
              4,610
              
              
              
              4,365State
      and federal income taxes
              
              
              4,860
              
              
              
              4,427
              
              
              
              4,134
              
              
              
              3,887
              
              
              
              3,347Property
      and other taxes
              
              
              3,483
              
              
              
              3,199
              
              
              
              2,868
              
              
              
              2,562
              
              
              
              2,389Total
      operating expenses
              
              $
              47,267
              
              
              $
              44,279
              
              
              $
              40,758
              
              
              $
              36,792
              
              
              $
              34,644Operating
      income
              
              $
              13,645
              
              
              $
              11,906
              
              
              $
              11,766
              
              
              $
              11,795
              
              
              $
              10,641Other
      income, net
              
              
              835
              
              
              
              1,125
              
              
              
              802
              
              
              
              613
              
              
              
              515Total
      income before interest charges
              
              $
              14,480
              
              
              $
              13,031
              
              
              $
              12,568
              
              
              $
              12,408
              
              
              $
              11,156Interest
      charges
              
              $
              7,218
              
              
              $
              6,613
              
              
              $
              6,305
              
              
              $
              6,337
              
              
              $
              6,121Net
      income
              
              $
              7,262
              
              
              $
              6,418
              
              
              $
              6,263
              
              
              $
              6,071
              
              
              $
              5,035Dividends
      on preferred stock
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---Net
      income applicable to common stock
              
              $
              7,262
              
              
              $
              6,418
              
              
              $
              6,263
              
              
              $
              6,071
              
              
              $
              5,035Net
      income per share of common stock:Basic
              
              $
              0.97
              
              
              $
              0.87
              
              
              $
              0.92
              
              
              $
              1.00
              
              
              $
              0.84Diluted
              
              $
              0.97
              
              
              $
              0.86
              
              
              $
              0.90
              
              
              $
              0.97
              
              
              $
              0.81Avg.
      shares of common stock outstandingBasic
              
              
              7,454
              
              
              
              7,353
              
              
              
              6,787
              
              
              
              6,055
              
              
              
              5,984Diluted
              
              
              7,512
              
              
              
              7,427
              
              
              
              6,936
              
              
              
              6,235
              
              
              
              6,182Cash
      dividends per share of common stock
              
              $
              0.72
              
              
              $
              0.71
              
              
              $
              0.66
              
              
              $
              0.61
              
              
              $
              0.58
  BALANCE
      SHEET DATAUtility
      plant, at original costless
      accumulated depreciation
            
            $
            326,899
            
            
            $
            318,243
            
            
            $
            272,396
            
            
            $
            253,182
            
            
            $
            227,566Total
      assets
            
            $
            358,895
            
            
            $
            348,706
            
            
            $
            294,589
            
            
            $
            269,360
            
            
            $
            243,854Lines
      of credit
            
            $
            25,123
            
            
            $
            20,286
            
            
            $
            898
            
            
            $
            7,906
            
            
            $
            1,786Long-term
      obligations andredeemable
      preferred stock,including
      current portions
            
            $
            107,555
            
            
            $
            109,071
            
            
            $
            92,073
            
            
            $
            92,383
            
            
            $
            92,680Stockholders’
      equity
            
            $
            91,174
            
            
            $
            87,794
            
            
            $
            85,132
            
            
            $
            61,800
            
            
            $
            57,813Total
      capitalization
            
            $
            197,199
            
            
            $
            195,349
            
            
            $
            176,889
            
            
            $
            153,873
            
            
            $
            150,192





OPERATING
      DATAAverage
      water sales per customer
            
            $
            701
            
            
            $
            661
            
            
            $
            645
            
            
            $
            600
            
            
            $
            575Water
      pumped (millions of gallons)
            
            
            7,063
            
            
            
            7,526
            
            
            
            7,755
            
            
            
            7,608
            
            
            
            7,468Number
      of metered customers
            
            
            76,900
            
            
            
            75,800
            
            
            
            75,149
            
            
            
            73,814
            
            
            
            72,383Miles
      of water main
            
            
            1,124
            
            
            
            1,112
            
            
            
            1,086
            
            
            
            1,051
            
            
            
            1,001








20
 Table of Contents





ITEM
7. -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





OVERVIEW





Our
profitability is primarily attributable to the sale of water by Artesian
Water.  Gross water sales in Artesian Water comprise 88.3% of total
operating revenues, the amount of which is subject to seasonal fluctuations,
particularly during summer when water demand may vary with rainfall and
temperature.  In the event temperatures during the typically warmer
months are cooler than expected, or rainfall is greater than expected, the
demand for water may decrease and our revenues may be adversely
affected.  In 2009, demand for water declined due to the effects of an
unusually wet weather pattern, thereby reducing the effect of the rate
increases.  We believe the effects of weather are short term and do
not materially affect the execution of our strategic initiatives.





While
water sales revenues are our primary source of revenues, we continue to seek
growth opportunities to provide wastewater service in Delaware, Maryland and the
surrounding areas.  We also continue to explore and develop
relationships with developers and municipalities in order to increase revenues
from contract water and wastewater operations, wastewater management services
and design and construction services.  Our contract operations and
other services provide a revenue stream that is not affected by changes in
weather patterns.  We plan to continue developing and expanding our
contract operations and other services in a manner that complements our growth
in water service to new customers.  Our anticipated growth in these
areas is subject to changes in residential and commercial construction, which
may be affected by interest rates, inflation and general housing and economic
market conditions.  As a result of the general economic downturn, we
may not be able to increase our contract operations and other services at the
rate we had previously expected.  We will continue to focus attention
on expanding our contract operations opportunities with municipalities and
private water providers in Delaware and surrounding areas.





Water
Division





Overview





Artesian
Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water
service to residential, commercial, industrial, governmental, municipal and
utility customers.  Gross water sales in Artesian Water, our largest
operating subsidiary, accounted for approximately 88.3% of our total operating
revenues in 2009 and serves approximately 31% of Delaware’s total
population.  Increases in the number of customers served contributed
to increases in our operating revenue.  As of December 31, 2009, we
had approximately 76,900 metered water customers in Delaware, an increase of
approximately 1,000 compared to December 31, 2008, while the number of metered
customers in Maryland and Pennsylvania remained consistent with
2008.





2009 Operational
Highlights





Rate
Case Settlement





In August
2009, Artesian Water, DEPSC, the Division of the Public Advocate and Christiana
Care Health Services, Inc. entered into an agreement to settle Artesian Water’s
April 2008 application for an increase in rates.  PSC Order No. 7657
was signed by the DEPSC on September 22, 2009, approving the settlement
agreement, which made the existing 15% temporary increase in base rates
permanent.  Since the rate was equal to the 15% temporary increase in
rates charged to customers since December 17, 2008, Artesian Water was not
required to refund any amounts to customers.  This settlement also
included the agreement that Artesian Water will not apply for a further rate
increase for an 18-month period from the date of the DEPSC’s order closing this
application.  It was also agreed that the revenue recovered by the
Company pursuant to the settlement does not include any recovery of funds
attributable to state income tax expense, as it is unlikely that any state
income tax will be paid by Artesian Water during the rate effective
period.





21
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Other
Highlights





In
December 2009, Artesian Water Maryland signed an agreement, or the Port of
Deposit Purchase Agreement, to purchase from the Town of Port Deposit, or Port
Deposit, all of Port Deposit’s assets used in providing potable water and water
distribution and water meter services to the town. The closing of this
transaction is subject the satisfaction of a number of closing conditions, among
other matters, the completion of Artesian Resources’ due diligence, the approval
of the MDPSC, and the approval of a franchise agreement from Cecil
County.  In December 2009, Artesian Water Maryland applied for
approval from the MDPSC to exercise a franchise to provide water service to the
town.  This application also requested authority to finance the
purchase of water system facilities and to establish water service
rates.  We expect a decision mid-year 2010.





In
October 2008, Artesian Water Maryland signed an agreement with Cecil County to
purchase four water facilities.  In opposition of Cecil County’s sale
of the water facilities, the Appleton Regional Community Alliance, or Appleton
Alliance, filed a petition with The Circuit Court of Cecil County, Maryland, or
Circuit Court, challenging the proposed transfer of certain Cecil County
property and assets to Artesian, delaying the closing of this transaction until
a final judicial determination is received.  The Circuit Court decided
in favor of Cecil County on July 24, 2009.  On August 19, 2009, the
Appleton Alliance filed an appeal of the Circuit Court’s decision with the
Maryland Court of Special Appeals.  Upon the request of Cecil County,
which was not opposed by the Appleton Alliance, the matter has been moved to the
state’s highest Court of Appeals and is scheduled for hearing in June 2010.Closing on this
transaction is also subject to the approval of the MDPSC.  Under each
of the agreements, either party may terminate such agreement, subject to certain
exceptions, in the event of uncured breach by the other party, or if the closing
has not occurred by December 31, 2009.  Upon the mutual agreement of
the parties, the closing date has been extended to December 31, 2010 pending a
final judicial determination regarding the Appleton Alliance
petition.





In
December 2008, the MDPSC approved an application for Artesian Water Maryland to
construct a water system from the Delaware state line, interconnecting with the
Artesian Water system, to the Town of Elkton.  The Town of Elkton
agreed to take a minimum of 50,000 gallons per day and a maximum of 200,000
gallons per day.  At the Town of Elkton’s request, the maximum daily
take may be raised to 1.5 mgd, with the minimum required take set at one quarter
of the requested maximum level.  The Town of Elkton started taking
water in July 2009.





In June
2009, the MDPSC approved Artesian Water Maryland’s request to construct a water
system to serve the 172 residents of the Whitaker Woods housing development
located adjacent to the Mountain Hill Service Area.  This expanded
franchise area was approved by the MDPSC in the Mountain Hill acquisition and is
subject to the Mountain Hill tariff rates.  We began serving customers
in this development in November 2009.  In September 2009, the MDPSC
approved Artesian Water Maryland’s request to construct a water system to serve
71 residents in the Charlestown Crossing housing
development.  Construction is expected to be completed mid-year
2010.





Wastewater
Division





Overview





Artesian
Wastewater owns wastewater infrastructure and began providing wastewater
services in Delaware in July 2005.  As of December 31, 2009, we had
approximately 730 wastewater customers in Delaware, an increase of approximately
100 compared to December 31, 2008.  Artesian Wastewater Maryland was
incorporated on June 3, 2008 to provide regulated wastewater services in the
State of Maryland pursuant to the purchase agreements described
below.  Our wastewater customers are billed a flat monthly fee, which
contributes to providing a revenue stream unaffected by weather.





2009 Operational
Highlights





In
October 2008, Artesian Wastewater Maryland signed two asset purchase agreements
with Cecil County to purchase four wastewater facilities in
Maryland.  These asset purchase agreements with Cecil County are also
subject to the petition filed by the Appleton Alliance described
above.  As a result, closing will be delayed until the final judicial
determination on the Appleton Alliance petition.  Closing on these
transactions is also subject to the approval of the MDPSC.  Under each of the
agreements, either party may terminate such agreement, subject to certain
exceptions, in the event of uncured breach by the other party, or if the closing
has not occurred by December 31, 2009.  Upon the mutual agreement of
the parties, the closing date has been extended to December 31, 2010 pending a
final judicial determination regarding the Appleton Alliance
petition.





In March
2009, Artesian Wastewater filed an application with the DEPSC for approval of a
uniform tariff applicable to all of our wastewater territories in
Delaware.  Previously, each time we added a new service territory, an
application was required to be submitted to the DEPSC for rate
approval.  As a result of the July 7, 2009 DEPSC approval of our
application, Artesian Wastewater is now permitted to apply its tariffed rates to
any new service territories without prior DEPSC approval.





22
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Non-Regulated
Division





Overview





Artesian
Utility provides contract water and wastewater operation services to 25 private,
municipal and governmental institutions.  Artesian Utility currently
operates several wastewater treatment facilities for the town of Middletown, in
Southern New Castle County, or Middletown, under a 20-year contract that expires
on February 1, 2021.  The facilities include a 2.5 mgd and a 250,000
gallon per day wastewater treatment station.  We also operate a
wastewater disposal facility in Middletown in order to support the 2.5 mgd
wastewater facility described above.





Artesian
Development owns an approximately six-acre parcel of land zoned for office
buildings located immediately adjacent to our corporate headquarters and
approximately eighteen acres of land, in Sussex County, on which an office
facility, a water treatment plant and a wastewater facility may be
constructed.





Artesian
Engineers, previously known as Meridian, provides engineering services to
developers for residential and commercial development.  The
acquisition of Meridian in June 2008 included the assignment of certain current
contract agreements to provide engineering services to developers and includes
services to be provided to Artesian Water.





2009 Operational
Highlights





In March
2009, Artesian Utility signed an agreement with the Cecil County Public Works in
Cecil County, Maryland to operate the Meadowview Wastewater and Highlands
Wastewater treatment and disposal facilities until Artesian Wastewater
Maryland’s purchase of the facilities is closed.  This agreement also
employs Artesian Utility to operate two water supply and treatment stations and
two booster stations in Cecil County.





In March
2009 Artesian Utility signed an agreement with the Town of Port Deposit in Cecil
County, Maryland to operate and maintain a water system through August 2009,
with three additional one-year renewal options, pending closing on the water
asset purchase agreement between Artesian Water Maryland and Port
Deposit.





Strategic
Direction





Our
strategy is to significantly increase customer growth, revenues, earnings and
dividends by expanding our water and wastewater services across the Delmarva
Peninsula.  We remain focused on providing superior service to our
customers and continuously seeking ways to improve our efficiency and
performance.  By providing both water and wastewater services, we
believe we are positioned as the primary resource for developers and communities
throughout the Delmarva Peninsula seeking to fill both needs
simultaneously.  We have a proven ability to acquire and integrate
high growth, established entities, through which we have captured additional
service territories that will serve as a base for future
revenue.  With recent acquisitions, we have successfully integrated
their operations, infrastructure, technology and employees.  We
believe this experience presents a strong platform for further expansion and
that our success to date also produces positive relationships and credibility
with regulators, municipalities, developers and customers in both existing and
prospective service areas.





In our
regulated water division, our strategy is to focus on a wide spectrum of
activities, which include identifying new and dependable sources of supply,
developing the wells, treatment plants and delivery systems to get water to
customers and educating customers on the wise use of water.  Our
strategy includes focusing our efforts to expand in new regions added to our
Delaware service territory over the last 10 years.  In addition, we
believe growth will occur in the Maryland counties on the Delmarva
Peninsula.  We plan to expand our regulated water service area in the
Cecil County designated growth corridor and to expand our business through the
design, construction, operation and management, as well as acquisition of
additional water systems.  The expansion of our exclusive franchise
areas elsewhere in Maryland and the award of additional contracts will similarly
enhance our operations within the state.





We
believe that Delaware's generally lower cost of living in the region,
availability of development sites in relatively close proximity to the Atlantic
Ocean in Sussex County, and attractive financing rates for construction and
mortgages have resulted, and will continue to result, in increases to our
customer base.  Substantial portions of Delaware are currently not
served by a public water system, which could also assist in an increase to our
customer base as systems are added.  According to the US Census
Bureau, Delaware's population increased an estimated 13% from 2000 to 2009, as
compared to the nationwide growth rate of approximately 9%.  General
economic conditions, particularly in the housing market, resulted in a much
lower rate of new customer additions than experienced in many
years.





23
 Table of Contents





In our
regulated wastewater division, we foresee significant growth opportunities and
will continue to seek strategic partnerships and relationships with developers
and municipalities to complement existing agreements for the provision of
wastewater service in Delaware, Maryland, and the surrounding
areas.  Artesian Wastewater completed an agreement with Georgetown,
Delaware in July 2008 to provide wastewater treatment and disposal services for
Georgetown’s growth and annexation areas.  Artesian Wastewater will
provide up to 1 mgd of wastewater capacity for the town over the next 10
years.  Artesian Wastewater Maryland signed two agreements in October
2008 with Cecil County for the purchase of specific wastewater
facilities.  The closing of these transactions is delayed until a
final judicial determination is received on the petition filed by the Appleton
Alliance.  Closing on these transactions is also subject to the
approval of the MDPSC.  Once completed, these acquisitions will add
four wastewater facilities to our service area.





The
general need for increased capital investment in wastewater systems is due to a
combination of population growth, more protective water quality standards, and
aging infrastructure.  Our capital investment plan for the next five
years includes projects for wastewater treatment plant improvements and
additions in both Delaware and Maryland.  Capital improvements are
planned and budgeted to meet anticipated changes in regulations and needs for
increased capacity related to projected growth.  The DEPSC and MDPSC
have generally recognized the operating and capital costs associated with these
improvements in setting wastewater rates for current customers and capacity
charges for new customers.





In our
non-regulated division, we are actively pursuing opportunities to expand our
contract operations.  In Artesian Utility, we will seek to expand our
contract design and construction services of water and wastewater facilities for
developers, municipalities and other utilities and will continue to actively
pursue water and wastewater operation contracts with municipalities across the
Delmarva Peninsula.  Artesian Development owns eighteen acres of land,
located in Sussex County, Delaware, which will allow for construction of an
office facility, water treatment facility and wastewater treatment
facility.  Artesian Engineers continues to provide engineering
services to design on-site and off-site water and wastewater systems for
developers.  Also, with the expansion efforts in our water and
wastewater divisions, we believe Artesian Engineers will provide increased
design and engineering services.





Protection
Plans





In
addition to services discussed above, Artesian Resources initiated a Water
Service Line Protection Plan, or WSLP Plan, in March 2005.  The WSLP
Plan covers all parts, material and labor required to repair or replace
participants’ leaking water service lines up to an annual limit.  As
of December 31, 2009, approximately 14,000, or 20.3%, of our 69,000 eligible
water customers had signed up for the WSLP Plan.  The WSLP Plan was
expanded in the second quarter of 2008 to include maintenance or repair to
customers’ sewer lines.  This plan, the Sewer Service Line Protection
Plan, or SSLP Plan, covers all parts, material and labor required to repair or
replace participants’ leaking or clogged sewer lines up to an annual
limit.  As of December 31, 2009, approximately 6,200, or 9.0%, of our
69,000 eligible customers had signed up for the SSLP Plan.





Inflation





We are
affected by inflation, most notably by the continually increasing costs required
to maintain, improve and expand our service capability.  The
cumulative effect of inflation results in significantly higher facility costs
compared to investments made 20 to 40 years ago, which must be recovered from
future cash flows.





CRITICAL
ACCOUNTING POLICIES





All
additions to plant are recorded at cost.  Cost includes direct labor,
materials, and indirect charges for such items as transportation, supervision,
pension, medical, and other fringe benefits related to employees engaged in
construction activities.  When depreciable units of utility plant are
retired, the cost of retired property, together with any cost associated with
retirement and less any salvage value or proceeds received, is charged to
accumulated depreciation.  Maintenance, repairs, and replacement of
minor items of plant are charged to expense as incurred.





We record
water service revenue, including amounts billed to customers on a cycle basis
and unbilled amounts, based upon estimated usage from the date of the last meter
reading to the end of the accounting period.  As actual usage amounts
are received, adjustments are made to the unbilled estimates in the next billing
cycle based on the actual results.  Estimates are made on an
individual customer basis, based on one of three methods (the previous year’s
consumption in the same period, the previous billing period’s consumption, or
trending) and are adjusted to reflect current changes in water demand on a
system-wide basis.  While actual usage for individual customers may
differ materially from the estimate, we believe the overall total estimate of
consumption and revenue for the fiscal period will not differ materially from
actual billed consumption, as the overall estimate has been adjusted to reflect
any change in overall demand on the system for the period.





24
 Table of Contents





We record
accounts receivable at the invoiced amounts.  The reserve for bad
debts is the Company's best estimate of the amount of probable credit losses in
our existing accounts receivable.  The Company reviews the reserve for
bad debts on a quarterly basis.  Account balances are written off
against the reserve when it is probable the receivable will not be
recovered.





We review
for impairment of our long-lived assets, including Utility Plant in Service, in
accordance with the requirements of FASB ASC Topic 360.  We also
review regulatory assets for the continued application of FASB ASC Topic
980.  Our review determines whether there have been changes in
circumstances or events that have occurred that require adjustments to the
carrying value of these assets.  In accordance with FASB ASC Topic
980, adjustments to the carrying value of these assets would be made in
instances where the inclusion in the rate-making process is
unlikely.





Our
regulated utilities record deferred regulatory assets under FASB ASC Topic 980,
which are costs that may be recovered over various lengths of time as prescribed
by the DEPSC, MDPSC and PAPUC.  As the utility incurs certain costs,
such as expenses related to rate case applications, a deferred regulatory asset
is created.  Adjustments to these deferred regulatory assets are made
when the DEPSC, MDPSC or PAPUC determines whether the expense is recoverable in
rates, the length of time over which an expense is recoverable, or, because of
changes in circumstances, whether a remaining balance of deferred expense is
recoverable in rates charged to customers.  Adjustments to reflect
changes in recoverability of certain deferred regulatory assets may have a
material effect on our financial results.








25
 Table of Contents





Results
of Operations





2009
Compared to 2008





Operating
Revenues





Revenues
totaled $60.9 million in 2009 and were 8.4% above revenues in 2008 of $56.2
million, which is partially due to an increase of $3.8 million, or 7.5% in total
water sales revenue.  The increase in water sales revenue in Artesian
Water reflects a 5% temporary rate increase effective June 21, 2008 and a 10%
temporary rate increase effective December 17, 2008.  These temporary
rate increases were made permanent on September 22, 2009, upon DEPSC approval of
the rate settlement agreement.  However, per capita demand declined
for the year ended December 31, 2009 in comparison to the same period a year
ago, primarily due to the effects of an unusually wet summer weather pattern,
thereby reducing the effect of the temporary rate increases.  We
realized 88.4% of our total revenue in 2009 from the sale of
water.  During 2008 we realized 89.2% of our total revenue from water
sales.  Non-utility revenue totaled $4.8 million in 2009 as compared
to $4.1 million in 2008.  This increase is attributable to an increase
of $156,000 and $376,000, respectively, in water and wastewater Service Line
Protection, “SLP,” Plan revenue earned by Artesian Resources.  The SLP
Plans provide coverage for all material and labor required to repair or replace
participants’ leaking water and leaking or clogged wastewater service lines up
to an annual limit.  Non-utility revenue also increased approximately
$164,000 in Artesian Engineers, which was acquired in June 2008, resulting in
twelve months of revenue in 2009 versus seven months in 2008.  The
increase in non-utility revenue also reflects increased contract revenues in
Artesian Utility of approximately $72,000, primarily due to design and
permitting services performed for a project in Middletown, Delaware and
increased contract services performed for municipalities in
Maryland.








Percentage
      of Operating Revenues2009
            
            
            2008
            
            
            2007Water
      SalesResidential
            
            
            54.2
            
            
            
            55.3
            
            
            
            57.6Commercial
            
            
            21.3
            
            
            
            21.4
            
            
            
            22.3Industrial
            
            
            0.3
            
            
            
            0.5
            
            
            
            0.7Government
      and Other
            
            
            12.7
            
            
            
            12.0
            
            
            
            11.7Other
      utility operating revenues
            
            
            3.6
            
            
            
            3.6
            
            
            
            3.2Non-utility
      operating revenues
            
            
            7.9
            
            
            
            7.2
            
            
            
            4.5Total
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0





Residential





Residential
water service revenues in 2009 amounted to $33.0 million, an increase of $2.0
million, or 6.3% over the $31.0 million recorded in 2008, primarily due to rate
increases effective June 21, 2008 and December 17, 2008.  However, per
capita demand declined for the year ended December 31, 2009 in comparison to the
year ended December 31, 2008, primarily due to the effects of an unusually wet
summer weather pattern, thereby reducing the effect of the rate
increases.  The increase in 2009 follows an increase of $0.8 million,
or 3.0%, in 2008.  The volume of water sold to residential customers
decreased to 3,631 million gallons in 2009 compared to 3,935 million gallons in
2008, a 7.7% decrease, as a result of the unusually wet weather experienced in
2009.  The number of residential customers served increased by 1,087,
or 1.5%, in 2009.





Commercial





Water
service revenues from commercial customers in 2009 increased by 7.9%, from $12.0
million in 2008 to $13.0 million in 2009, primarily due to rate
increases.  We sold 2,093 million gallons of water to commercial
customers in 2009, a 5.0% decrease as compared to 2,202 million gallons sold in
2008.





Industrial





Water
service revenues from industrial customers decreased by 31.9%, from $266,000 in
2008 to $181,000 in 2009.  The volume of water sold to industrial
customers decreased by 51.5%, from 74 million gallons in 2008 to 36 million
gallons in 2009, primarily as a result of decreased usage by an industrial
customer that closed its facility mid-year 2009.





26
 Table of Contents





Government
and Other





Government
and other water service revenues in 2009 increased by 14.0%, from $6.7 million
in 2008 to $7.7 million in 2009, primarily due to rate
increases.  Consumption for government and other customers decreased
slightly in 2009 compared to 2008.





Other
Utility Operating Revenue





Other
utility operating revenue, derived from contract operations, antenna leases on
water tanks, finance/service charges and wastewater customer service revenues
increased 9.4% in 2009, from $2.0 million in 2008 to $2.2 million in
2009.  The increase, approximately $189,000, is primarily the result
of increased wastewater customer service revenues.





Non-Utility
Operating Revenue





Non-utility
operating revenue, derived from non-regulated water and wastewater operations,
increased from $4.1 million in 2008 to $4.8 million in 2009.  This
increase is attributable to an increase of $156,000 and $376,000, respectively,
in water and wastewater SLP Plan revenue earned by Artesian
Resources.  Non-utility revenue also increased approximately $164,000
in Artesian Engineers, which was acquired in June 2008, resulting in twelve
months of revenue in 2009 versus seven months in 2008.  The increase
in non-utility revenue also reflects increased contract revenues in Artesian
Utility of approximately $72,000, primarily due to design and permitting
services performed for a project in Middletown, Delaware and increased contract
services performed for municipalities in Maryland.





Operating
Expenses





Operating
expenses, excluding depreciation and taxes, increased approximately $1.5
million, or 4.8%, to $32.4 million in 2009.  Payroll and benefits
increased approximately $677,000 due to increased annual merit payments,
partially offset by increased capitalized labor and benefits in
2009.  Purchased water expense increased approximately $274,000,
primarily due to a 7.8% increase in rates effective July 2008 and an 11.0%
increase in rates effective in July 2009.  Water treatment increased
approximately $271,000, primarily due to increased chemical
costs.  Repair and maintenance expense decreased approximately
$247,000, primarily the result of decreased gas and maintenance parts
expenses.  Administration expense decreased approximately $269,000,
primarily the result of a decrease in consulting services
used.  Non-utility operating expenses increased approximately
$686,000, primarily the result of more project activity in Artesian Utility as
compared to the same period in 2008.





Percentage
      of Operating and Maintenance Expenses2009
            
            
            2008
            
            
            2007Payroll
      and Associated Expenses
            
            
            46.7
            
            
            
            46.8
            
            
            
            46.7Administrative
            
            
            22.6
            
            
            
            24.1
            
            
            
            26.1Purchased
      Water
            
            
            10.0
            
            
            
            9.6
            
            
            
            9.7Repair
      and Maintenance
            
            
            6.1
            
            
            
            7.2
            
            
            
            7.6Water
      Treatment
            
            
            4.1
            
            
            
            3.4
            
            
            
            3.7Non-utility
      Operating
            
            
            10.5
            
            
            
            8.9
            
            
            
            6.2Total
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0








Depreciation
and amortization expense increased $774,000, or 13.4%, due to continuing
investment in utility plant in service providing supply, treatment, storage and
distribution of water and the addition of the new office
building.  Income tax expense increased $433,000, or 9.8%, due to
higher taxable income in 2009.  Our total effective income tax rate,
or ETR, for 2009 and 2008 was 40.0% and 40.6%, respectively.





27
 Table of Contents





Other
Income, Net





Our
Allowance for Funds Used During Construction, or AFUDC, decreased $346,000, or
45.6%, due to the general slowdown in the housing market, resulting in decreased
long-term construction activity subject to AFUDC for the year ended December 31,
2009, compared to the same period in 2008.  Miscellaneous Income
increased $56,000, primarily due to an increase in the income earned on our
temporary investments.





Interest
Charges





Interest
charges increased $605,000 or 9.1%, in 2009, primarily due to an increase in
long term debt in 2009 compared to 2008.  In December 2008, we issued
a First Mortgage Bond, Series S, in the amount of $15 million at an interest
rate of 6.73%.  Offsetting the increase in long term debt is a
decrease in short term debt interest.  The average interest rate on
our short term credit balance decreased from 3.4% in 2008 to 1.5% in 2009, while
our average outstanding balance was $5.7 million in 2009, compared to $12.7
million in 2008.





Net
Income





For the
year ended December 31, 2009, our net income applicable to common stock
increased $844,000, or 13.2%, compared to 2008.  This increase was
primarily due to higher operating income margins from our water utility business
as well as our SLP Plan business and non-utility contract
services.  However, this increase in net income was adversely affected
by decreased water demand, a result of the effects of weather associated with
the increased rainfall experienced during the second and third quarters of 2009,
therefore reducing the impact of our temporary rate increases.





2008
Compared to 2007





Operating
Revenues





Revenues
totaled $56.2 million in 2008 and were 7.0% above revenues in 2007 of $52.5
million, which is partially due to an increase of $1.6 million, or 3.4% in total
water sales revenue.  The increase in water sales revenue in Artesian
Water reflects a 1.0% increase in the number of customers served, rate increases
placed in effect in 2007 and temporary rate increases of 5% and 10% placed into
effect on June 21, 2008 and December 17, 2008, as permitted under Delaware law,
until new rates are approved by the DEPSC.  We realized 89.2% of our
total revenue in 2008 from the sale of water.  During 2007 we realized
92.2% of our total revenue from water sales.  Non-utility revenue
totaled $4.1 million in 2008 as compared to $2.4 million in
2007.  This increase is attributable to increased contract revenues in
Artesian Utility, primarily due to: increased soil evaluation and testing
services totaling $705,000; design services totaling $284,000 performed for a
developer in southern New Castle County, Delaware; additional water and
wastewater operations contract revenue in Pennsylvania of $269,000; and design
and permitting services totaling $250,000 performed for a developer in Sussex
County, Delaware.  The increase in non-utility revenue also reflects
an increase of $196,000 and $179,000, respectively, in water and wastewater
Service Line Protection Plan revenue earned by Artesian
Resources.  The Service Line Protection Plans provide coverage for all
material and labor required to repair or replace participants’ leaking water and
leaking or clogged wastewater service lines up to an annual limit.





Residential





Residential
water service revenues in 2008 amounted to $31.0 million, an increase of $0.8
million, or 3.0% over the $30.2 million recorded in 2007, primarily due to rate
increases effective January 1, 2007 and July 24, 2007 and a temporary rate
increase of 5% placed in effect on June 21, 2008.  The increase in
2008 follows an increase of $3.1 million, or 11.4%, in 2007.  The
volume of water sold to residential customers decreased slightly to 3,935
million gallons in 2008 compared to 3,947 million gallons in
2007.  The number of residential customers served increased by 690, or
1.0%, in 2008.  However, per capita demand has declined for the year
ended December 31, 2008 in comparison to the year ended December 31, 2007,
thereby reducing the effect of the temporary rate increase.





28
 Table of Contents





Commercial





Water
service revenues from commercial customers in 2008 increased by 2.8%, from $11.7
million in 2007 to $12.0 million in 2008, due to rate increases in 2007 and a
temporary rate increase in 2008.  We sold 2,202 million gallons of
water to commercial customers in 2008, a marginal increase as compared to 2,197
million gallons sold in 2007.





Industrial





Water
service revenues from industrial customers decreased by 30.0%, from $381,000 in
2007 to $266,000 in 2008.  The volume of water sold to industrial
customers decreased by 36.0%, from 116 million gallons in 2007 to 74 million
gallons in 2008, primarily as a result of decreased usage by one industrial
customer.





Government
and Other





Government
and other water service revenues in 2008 increased by 10.0%, from $6.1 million
in 2007 to $6.7 million in 2008.  This increase in revenue resulted
from increased consumption by irrigation customers, slightly offset by a
reduction in government agency consumption.





Other
Utility Operating Revenue





Other
utility operating revenue, derived from contract operations, antenna leases on
water tanks, finance/service charges and wastewater customer service revenues
increased 18.8% in 2008, from $1.7 million in 2007 to $2.0 million in
2008.  The increase, approximately $224,000, is primarily the result
of increased service charges derived from proactive policies for delinquent
paying customers, which resulted in increased charges for the restoration of
shut off service.





Non-Utility
Operating Revenue





Non-utility
operating revenue, derived from non-regulated water and wastewater operations,
increased from $2.4 million in 2007 to $4.1 million in 2008.  This
increase is attributable to increased contract revenues in Artesian Utility,
primarily due to: increased soil evaluation and testing services totaling
$705,000; design services totaling $284,000 performed for a developer in
southern New Castle County, Delaware; additional water and wastewater operations
contract revenue in Pennsylvania of $269,000; and design and permitting services
totaling $250,000 performed for a developer in Sussex County,
Delaware.  This increase in non-utility revenue also reflects an
increase of $196,000 and $179,000, respectively, in water and wastewater Service
Line Protection Plan revenue earned by Artesian Resources.





Operating
Expenses





Operating
expenses, excluding depreciation and taxes, increased approximately $2.6
million, or 8.3%, to $34.1 million in 2008.  Payroll and benefits
increased $1.1 million due to increased staffing, pay increases and increased
medical insurance premiums.  Purchased water expense increased
approximately $181,000, primarily due to a 1.1% increase in rates effective July
2007 and a 7.8% increase in rates effective in July 2008.  Non-utility
operating expenses increased approximately $957,000, primarily the result of
more project activity in Artesian Utility as compared to the same period in 2007
and the addition of Artesian Engineers, which contributed approximately $221,000
to the increase.





Depreciation
and amortization expense increased $620,000, or 12.0%, due to increases in our
utility plant in service providing supply, treatment, storage and distribution
of water and the addition of the new office building during
2008.  Income tax expense increased $293,000, or 7.1%, due to higher
taxable income in 2008.  Our total effective income tax rate, or ETR,
for 2008 and 2007 was 40.6% and 39.8%, respectively.





29
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Other
Income, Net





Our
Allowance for Funds Used During Construction, or AFUDC, increased $435,000, or
134.2%, as a result of higher long-term construction activity subject to AFUDC,
of which a large portion is related to the new office building
construction.  Miscellaneous Income decreased $112,000, primarily due
to a decrease in the income earned on our temporary investments.





Interest
Charges





Interest
charges increased $308,000 or 4.9%, in 2008, primarily due to higher short term
debt interest expense as a result of higher borrowing on our lines of credit in
2008 compared to 2007.  The average interest rate on our short term
credit balance decreased from 5.9% in 2007 to 3.4% in 2008, while our average
outstanding balance was $12.7 million in 2008, compared to $5.3 million in
2007.  In December 2008, we issued a First Mortgage Bond, Series S, in
the amount of $15 million at an interest rate of 6.73%.





Net
Income





For the
year ended December 31, 2008, our net income applicable to common stock
increased $155,000, or 2.5%, compared to 2007.  The increase in net
income was primarily due to increases in Artesian Water operating revenues
derived from the 2007 rate increases, a temporary rate increase of 5% in June
2008, an additional temporary rate increase of 10% in December 2008, revenues
generated by our regulated wastewater operations and increased activity in
contract operations of Artesian Utility.





Liquidity
and Capital Resources





Overview





Our
primary sources of liquidity for the year ended December 31, 2009 were $13.4
million provided by cash flow from operating activities, $4.8 million in
borrowing on our lines of credit, $1.9 million in net contributions and advances
from developers and $1.4 million net proceeds from the issuance of common
stock.  Cash flow from operating activities is primarily provided by
our utility operations, and is impacted by the timeliness and adequacy of rate
increases and changes in water consumption as a result of year-to-year
variations in weather conditions, particularly during the summer.  A
significant part of our ability to maintain and meet our financial objectives is
to ensure that our investments in utility plant and equipment are recovered in
the rates charged to customers.  As such, from time to time we file
rate increase requests to recover increases in operating expenses and
investments in utility plant and equipment.





The
amount outstanding on the Company’s lines of credit was $25.1 million, an
increase of $4.8 million over the amount outstanding as of December 31, 2008,
compared to an increase of $19.4 million for the year ended December 31, 2008
over the outstanding balance as of December 31, 2007.  The reduction
in overall borrowings during 2009 as compared to 2008 was primarily the result
of lower investments made in utility plant in 2009.  Decreases in
accounts payable of $0.9 million and decreases in accrued expenses of $2.2
million are also associated with the Company’s lower investment in utility
plant.





We depend
on the availability of capital for expansion, construction and
maintenance.  We rely on our sources of liquidity for investments in
our utility plant and to meet our various payment obligations.  We
expect that our aggregate investments in our utility plant and systems in 2010
will be approximately $17.4 million.  Our total obligations related to
interest and principal payments on indebtedness, rental payments and water
service interconnection agreements for 2010 are anticipated to be approximately
$12.2 million.  We expect to fund our activities for the next year
using our available cash balances, bank credit lines and projected cash
generated from operations.  Also, because of the favorable interest
rates available to regulated water utilities, we plan to fund specific project
activities for the next year using approximately $3.9 million under the State
Revolving Fund loan program in Delaware, which is discussed further
below.  We believe that internally generated funds along with existing
credit facilities will be adequate to provide sufficient working capital to
maintain normal operations and to meet our financing
requirements.  However, since part of our business strategy is to
expand through strategic acquisitions, we may seek additional debt financing or
issue additional equity securities to finance future acquisitions or for other
purposes.





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Investment
in Plant and Systems





We
invested $17.4 million in capital expenditures during 2009 compared to $45.1
million invested during the same period in 2008.  The reduction in
investment is due to the general slowdown in the housing market, resulting in
decreased long-term construction activity.  The reduction in
investments in 2009 is also due to higher capital expenditures in 2008 of
approximately $11.5 million towards the construction of a new office building
addition, another $7.0 million invested into NSRWRC for land for the regional
wastewater treatment facility and approximately $4.8 million invested in the
acquisition of Mountain Hill.  The primary focus of Artesian Water’s
investment was to continue to provide high quality reliable service to our
growing service territory.





We have
invested $1.3 million in 2009 to enhance or improve existing treatment
facilities and for the rehabilitation of pumping equipment to better serve our
customers.  We invested approximately $5.4 million in new transmission
and distribution facilities, which includes $2.3 million for new mains and $0.7
million in our rehabilitation program for transmission and distribution
facilities and replacing aging or deteriorating mains.  We invested
approximately $1.2 million in mandatory utility plant expenditures, due to
governmental highway projects, which require the relocation of water service
mains.  Developers financed $1.6 million for the installation of water
mains and hydrants in 2009 compared to $2.7 million in 2008.  We also
invested $1.8 million for renovations made to the main office building located
in New Castle County and furniture and equipment related to the
renovation.  The investment in general plant also includes an
additional investment of $0.6 million for transportation equipment upgrades and
$0.5 million for computer hardware and software upgrades.  An
additional $1.0 million was invested in wastewater projects in Sussex County,
Delaware.  Another $0.8 million was invested into NSRWRC for the
regional wastewater treatment facility.  We also invested $1.5 in
transmission and distribution facilities in Cecil County, Maryland.





The
following chart summarizes our investment in plant and systems over the past
three fiscal years.


In
      thousands
            
            2009
            
            
            2008
            
            
            2007Source
      of supply
            
            $
            295
            
            
            $
            1,665
            
            
            $
            3,173Treatment
      and pumping
            
            
            1,044
            
            
            
            6,094
            
            
            
            1,196Transmission
      and distribution
            
            
            8,023
            
            
            
            13,381
            
            
            
            8,055General
      plant and equipment
            
            
            5,118
            
            
            
            13,980
            
            
            
            6,373Developer
      financed utility plant
            
            
            1,584
            
            
            
            3,178
            
            
            
            6,182Wastewater
      facilities
            
            
            964
            
            
            
            490
            
            
            
            2,081NSRWRC
            
            
            775
            
            
            
            7,028
            
            
            
            ---Allowance
      for Funds Used During Construction, AFUDC
            
            
            (413
            )
            
            
            (759
            )
            
            
            (324
            )Total
            
            $
            17,390
            
            
            $
            45,057
            
            
            $
            26,736Mountain
      Hill
            
            
            ---
            
            
            
            4,772
            
            
            
            ---





We have
planned to invest approximately $17.4 million in utility plant in
2010.  Developers are expected to finance an additional $3.3 million
in utility plant construction.  Of the $17.4 million we expect to
invest in 2010, approximately $7.6 million will be invested in transmission and
distribution facilities.  Approximately $1.4 million of this amount
will be invested in the relocations of facilities as a result of government
mandates and renewals associated with the rehabilitation of aging
infrastructure.  We also plan to invest $2.6 million in order to
upgrade and automate our meter reading equipment.  The remaining $3.6
million of this investment in transmission and distribution facilities will
mostly be to replace facilities and address service needs in growth areas of our
service territory.  In addition, we plan to invest another $2.8
million for new treatment facilities, equipment and wells throughout Delaware
and Maryland to identify, develop, treat and protect sources of water supply to
assure uninterrupted service to our customers.





An
additional expenditure of approximately $0.8 million is anticipated to complete
the renovation of our existing office building in New Castle County in
2010.  We plan to invest $4.3 million in general plant, which includes
new corporate automation and transportation and equipment
upgrades.  Additionally, $7.9 million is planned to be invested in
Artesian Water Maryland and Artesian Wastewater Maryland following the purchase
of water and wastewater assets in Maryland in 2010.  Our projected
capital expenditures and other investments are subject to periodic review and
revision to reflect changes in economic conditions and other
factors.





31
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Financing





We expect
to fund our activities for the next twelve months using our available cash
balances and bank credit lines, plus projected cash generated from
operations.





We have
several sources of liquidity to finance our investment in utility plant and
other fixed assets.  We estimate that the projected investment of
approximately $17.4 million will be financed by our operations and external
sources, including a combination of capital investment as well as short-term
borrowings under our revolving credit agreements discussed
below.  Also, because of the favorable interest rates available to
regulated water utilities, we plan to fund specific project activities for the
next year using approximately $3.9 million under the State Revolving Fund loan
program in Delaware.  Developers are expected to finance, through
contributions in aid of construction, an additional $6.1 million of capital
expenditures, which includes the installation of mains and hydrants in new
developments.





Our cash
flows from operations are primarily derived from water sales revenues and may be
materially affected by changes in water sales due to weather and the timing and
extent of increases in rates approved by state Public Service
Commissions.





Lines
of Credit





At
December 31, 2009, Artesian Water had two lines of credit of $20 million each to
meet temporary cash requirements.  These revolving credit facilities
are unsecured.  As of December 31, 2009, we had $27.1 million of
available funds under these lines.  The interest rate for borrowings
under one of these lines is the London Interbank Offering Rate, or “LIBOR,” plus
0.75%.  The interest rate for borrowings under the other line of
credit is the LIBOR plus 1.00%.  Due to the execution of the
agreements in January 2010 described below, the balances on these two lines were
transferred to the new lines of credit and these lines of credit held by
Artesian Water were terminated.





At
December 31, 2009, Artesian Utility and Artesian Wastewater had lines of credit
with a financial institution for $3.5 million and $10.0 million, respectively,
to meet temporary cash requirements.  These revolving credit
facilities are unsecured.  As of December 31, 2009, Artesian
Wastewater had $5.4 million of available funds while Artesian Utility had not
borrowed funds under its line of credit.  The interest rate for
borrowings under each of these lines is the LIBOR plus 1.75%.  Due to
the execution of the agreements in January 2010 described below, the balance on
the Artesian Wastewater line of credit was transferred to the new lines of
credit and these lines of credit held by Artesian Wastewater and Artesian
Utility were terminated.





On
January 19, 2010, Artesian Resources and each of its subsidiaries entered into a
Demand Line of Credit Agreement, or Demand Credit Agreement, with Citizens Bank,
or Citizens.  The Demand Credit Agreement provides for a $40 million
Demand Line of Credit which may be used for short-term working capital needs,
investments in facilities or equipment or letters of credit only.  As
of January 31, 2010, there was $20.4 million of available funds under this line
of credit.  The interest rate for borrowings under this line is based
on LIBOR.  The Demand Credit Agreement is a demand loan facility and
therefore Citizens may demand payment for any outstanding amounts at any
time.  The term of this line of credit expires on the earlier of
January 18, 2011 or any date on which Citizens demands payment.





On
January 19, 2010, Artesian Water Company entered into a Revolving Credit
Agreement with CoBank ACB, or CoBank.  The Revolving Credit Agreement
provides that CoBank will make loans to the Company from time to time, not to
exceed $20 million.  The Revolving Credit Agreement allows for the
financing of operations of Artesian Water and up to $10 million for the
operations of Artesian Water Maryland.  As of January 31, 2010,
Artesian Water Company had not borrowed funds under this line of
credit.  The interest rate for borrowings under this line is the LIBOR
plus 1.50%.  The term of this line of credit expires on January 18,
2011.





On June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC.  Under the terms of the
agreement, Artesian Resources acts as the guarantor of NSRWRC’s $10 million
construction loan secured by land.  As of December 31, 2009 NSRWRC had
$2.5 million of available funds under the construction loan.  The
interest rate on this guaranteed debt is variable based on the LIBOR Advantage
Rate plus 225 basis points.  In the event of a default by NSRWRC,
Artesian Resources shall pay the bank the amount due of the obligations or, on
demand of the bank, immediately deposit all amounts due under the
obligation.




32
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Line of Credit Commitments
            
            Commitment Due by PeriodIn
      thousands
            
            Less
      than
              1 Year
            
            
            1-3 Years
            
            
            4-5 Years
            
            
            Over 5 YearsLines
      of Credit
            
            $
            25,123
            
            
            $
            -----
            
            
            $
            -----
            
            
            $
            -----





Long
Term Debt





On August
1, 2008, Artesian Water Maryland executed a promissory note in the amount of
approximately $2.3 million to Sunrise Holdings, L.P., or Sunrise, in connection
with the Mountain Hill acquisition, that bears interest at a variable interest
rate based upon the LIBOR plus 150 basis points.  The note is payable
in four equal annual installments, commencing on the first anniversary of the
closing date.  The first annual installment payment of $0.6 million
was made on August 1, 2009, the remaining principal balance due on this note, as
of December 31, 2009, is $1.7 million.  The note is secured by a first
lien security interest in all of Mountain Hill’s assets in favor of Sunrise and
is guaranteed by Artesian Resources.





Artesian
Water’s trust indentures, which set certain criteria for the issuance of new
long-term debt, limit long-term debt, including the short-term portion thereof,
to 66 2⁄3% of total capitalization.  Our debt to total capitalization,
including the short term portion thereof, was 54.6% at December 31,
2009.








Contractual
      Obligations
            
            Payments
      Due by PeriodIn
      thousands
            
            Less
      than
              1 Year
            
            
            1-3
              Years
            
            
            4-5
              Years
            
            
            After
      5
              Years
            
            
            TotalFirst
      Mortgage Bonds (Principal and Interest)
            
            $
            7,108
            
            
            $
            14,104
            
            
            $
            13,929
            
            
            $
            161,497
            
            
            $
            196,638State
      revolving fund loans
            
            
            590
            
            
            
            1,180
            
            
            
            1,180
            
            
            
            4,889
            
            
            
            7,839Note
      Payable (Principal and Interest)
            
            
            600
            
            
            
            1,171
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,771Operating
      leases
            
            
            151
            
            
            
            88
            
            
            
            92
            
            
            
            1,639
            
            
            
            1,970Unconditional
      purchase obligations
            
            
            3,382
            
            
            
            6,773
            
            
            
            6,764
            
            
            
            23,692
            
            
            
            40,611Tank
      painting contractual obligation
            
            
            374
            
            
            
            250
            
            
            
            ---
            
            
            
            ---
            
            
            
            624Total
      contractual cash obligations
            
            $
            12,205
            
            
            $
            23,566
            
            
            $
            21,965
            
            
            $
            191,717
            
            
            $
            249,453





Long-term
debt obligations reflect the maturities of certain series of our first mortgage
bonds, which we intend to refinance when due.  The state revolving
fund loan obligation has an amortizing mortgage payment payable over a 20-year
period, and will be refinanced as future securities are issued.  Both
the long-term debt and the state revolving fund loan have certain financial
covenant provisions, the violation of which could result in default and require
the obligation to be immediately repaid, including all interest.  We
have not experienced conditions that would result in our default under these
agreements, and we do not anticipate any such occurrence.  Payments
for unconditional purchase obligations reflect minimum water purchase
obligations based on rates that are subject to change under our interconnection
agreement with the Chester Water Authority.





On
December 1, 2008, Artesian Water Company and CoBank, ACB, entered into a Bond
Purchase Agreement relating to the issue and sale by the Company to CoBank, ACB
of a $15 million principal amount First Mortgage Bond, or the Bond, Series S,
due December 31, 2033, at an annual interest rate of 6.73%.  The
principal amount of the Bond is subject to redemption in a principal amount
equal to $150,000 per calendar quarter, payable on the first business day of
January, April, July and October in each year, beginning with the first business
day of January, 2009, with all remaining due and payable on December 31,
2033.





On
February 12, 2010, Artesian Water entered into a Financing Agreement, or DWSRF
Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and
through the Delaware Department of Health and Social Services, Division of
Public Health, or the Department.  The Company has been given a loan
of approximately $3.9 million, or the Loan, from the Delaware Safe Drinking Water Revolving Fund to
finance all or a portion of the cost of improvements and upgrades to specific
water mains in service areas located in New Castle County, Delaware
(collectively, the “Project”).  In accordance with the DWSRF
Agreement, the Company will from time to time request funds under the Loan as it
incurs costs in connection with the Project.  The Company shall pay to
the Department, on the principal amount drawn down and outstanding from the date
drawn, interest at a rate of 1.705% per annum and an administrative fee at the
rate of 1.705% per annum.





33
 Table of Contents





Off-Balance
Sheet Arrangements





In
connection with the purchase of the treatment facility site, as of June 30,
2008, Artesian Utility agreed to commit $3.0 million to NSRWRC, payable in 10
equal annual installments, which commenced on June 30, 2008.  In April
2009, Artesian Utility agreed to accelerate two of its payments to NSRWRC in
exchange for a $450,000 reduction in the total commitment.  Artesian
Utility made a $900,000 payment to NSRWRC, which included the June 30, 2009
payment and the acceleration of two payments, or $600,000.  As a
result of the reduction in the commitment and the acceleration of the payments,
the remaining balance of $1,350,000 will be repaid over the next 5 years with a
final payment of $150,000 due on June 30, 2014.




IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS





In
January 2010, the FASB issued authoritative guidance which clarifies that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or shares with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance thus eliminating the diversity in practice.  This new
guidance is effective for interim and annual periods ending on or after December
15, 2009, and should be applied on a retrospective basis.  The Company
does not expect a material impact on the Company's financial statements due to
the adoption of this guidance.





In August
2009, the FASB issued an ASU which provides guidance on the measurement of
liabilities at fair value.  The guidance provides clarification that
in circumstances in which a quoted market price in an active market for an
identical liability is not available, an entity is required to measure fair
value using a valuation technique that uses the quoted price of an identical
liability when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets.  If none of this
information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles.  The Company
adopted this guidance in the quarter ended September 30, 2009 and there was no
material impact on the Company's financial statements.





On July
1, 2009, the FASB issued the FASB Accounting Standards Codification, or the
Codification, which establishes only two levels of U.S. GAAP, authoritative and
non-authoritative.  Therefore, as of July 1, 2009, the Codification is
the single source of authoritative non-governmental U.S. GAAP, superseding
existing FASB, American Institute of Certified Public Accountants, EITF, and
related accounting literature.  All other accounting literature will
be considered non-authoritative.  The Codification reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure.  This standard is effective for
financial statements issued for fiscal years and interim periods ending after
September 15, 2009.  As the Codification was not intended to change or
alter existing GAAP, it will not have any impact on the Company’s consolidated
financial statements.  The adoption of this standard impacted the
Company's financial statement disclosures as all references to authoritative
accounting literature are now referenced in accordance with the
Codification.





In June
2009, the FASB issued authoritative guidance to amend the manner in which
entities evaluate whether consolidation is required for variable interest
entities, or VIEs.  The model for determining which enterprise has a
controlling financial interest and is the primary beneficiary of a VIE has
changed significantly under the new guidance.  Previously, variable
interest holders had to determine whether they had a controlling financial
interest in a VIE based on a quantitative analysis of the expected gains and/or
losses of the entity.  In contrast, the new guidance requires an
enterprise with a variable interest in a VIE to qualitatively assess whether it
has a controlling financial interest in the entity, and if so, whether it is the
primary beneficiary.  Furthermore, this guidance requires that
companies continually evaluate VIEs for consolidation, rather than assessing
based upon the occurrence of triggering events.  This revised guidance
also requires enhanced disclosures about how a company’s involvement with a VIE
affects its financial statements and exposure to risks.  This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2009, with earlier adoption
prohibited.  The Company does not expect that the adoption of this
statement will have a material impact on the financial
statements.  Information regarding the Company’s involvement with
variable interest entities is included in Note 11 - Northern
Sussex Regional Water Recycling Complex, LLC.





34
 Table of Contents





In May
2009, the FASB issued authoritative guidance which is intended to establish
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued.  Specifically, this standard sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date.  This guidance is effective for financial statements
issued for fiscal years and interim periods ending June 15, 2009 and will be
applied prospectively.  The adoption of this guidance did not result
in significant changes in the subsequent events that the Company reports, either
through recognition or disclosure, in its financial statements.





In April
2009, the FASB issued revised authoritative guidance requiring disclosures about
fair value of financial instruments in interim financial statements, in addition
to the annual financial statements as already required.  This guidance
was adopted by the Company for the period ended June 30, 2009.  As
this guidance provides only disclosure requirements, the application of this
standard did not impact the Company’s financial statements.  See Note 2 — Fair Value of Financial Instruments.





In April
2009, the FASB issued authoritative guidance clarifying that fair value is
defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants under current
market conditions.  This guidance requires an evaluation of whether
there has been a significant decrease in the volume and level of activity for
the asset or liability in relation to normal market activity for the asset or
liability.  If there has, transactions or quoted prices may not be
determinative of fair value and a significant adjustment may need to be made to
those prices to estimate fair value.  Additionally, an entity must
consider whether the observed transaction was orderly (that is, not distressed
or forced).  If the transaction was orderly, the obtained price can be
considered a relevant observable input for determining fair value.  If
the transaction is not orderly, other valuation techniques must be used when
estimating fair value.  This guidance must be applied prospectively
for interim periods ending after June 15, 2009.  The adoption of this
guidance did not have a material impact on the financial
statements.






ITEM 7A. –QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





The
Company is subject to the risk of fluctuating interest rates in the normal
course of business.  Our policy is to manage interest rates through
the use of fixed rate long-term debt and, to a lesser extent, short-term
debt.  The Company's exposure to interest rate risk related to
existing fixed rate, long-term debt is due to the term of the majority of our
First Mortgage Bonds, which have final maturity dates ranging from 2019 to
2043.  We are also exposed to market risk associated with changes in
commodity prices.  Our risks associated with price increases in
chemicals, electricity and other commodities are mitigated by our ability to
recover our costs through rate increases to our customers.  We have
also sought to mitigate future significant electric price increases by signing a
two year supply contract, at a fixed price.







35
 Table of Contents








ITEM 8.
-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





CONSOLIDATED BALANCE SHEETS(In
      thousands)ASSETS
            
            December
      31, 2009
            
            
            December
      31, 2008Utility
      plant, at original cost less accumulated depreciation
            
            $
            326,899
            
            
            $
            318,243Current
      assetsCash
      and cash equivalents
            
            
            474
            
            
            
            2,894Accounts
      receivable (less allowance for doubtful accounts 2009 - $142;
      2008-$106)
            
            
            5,505
            
            
            
            4,224Unbilled
      operating revenues
            
            
            3,518
            
            
            
            3,597Materials
      and supplies
            
            
            1,220
            
            
            
            1,147Prepaid
      property taxes
            
            
            1,222
            
            
            
            1,119Prepaid
      expenses and other
            
            
            1,304
            
            
            
            491Total
      current assets
            
            
            13,243
            
            
            
            13,472Other
      assetsNon-utility
      property (less accumulated depreciation 2009-$255;
    2008-$179)
            
            
            11,241
            
            
            
            9,436Other
      deferred assets
            
            
            4,994
            
            
            
            4,992Total
      other assets
            
            
            16,235
            
            
            
            14,428Regulatory
      assets, net
            
            
            2,518
            
            
            
            2,563$
            358,895
            
            
            $
            348,706LIABILITIES AND STOCKHOLDERS'
      EQUITYStockholders'
      equityCommon
      stock
            
            $
            7,507
            
            
            $
            7,401Preferred
      stock
            
            
            ---
            
            
            
            ---Additional
      paid-in capital
            
            
            68,090
            
            
            
            66,699Retained
      earnings
            
            
            15,577
            
            
            
            13,694Total
      stockholders' equity
            
            
            91,174
            
            
            
            87,794Long-term
      debt, net of current portion
            
            
            106,025
            
            
            
            107,555197,199
            
            
            
            195,349Current
      liabilitiesLines
      of credit
            
            
            25,123
            
            
            
            20,286Current
      portion of long-term debt
            
            
            1,530
            
            
            
            1,516Accounts
      payable
            
            
            3,696
            
            
            
            4,556Accrued
      expenses
            
            
            685
            
            
            
            2,868Overdraft
      payable
            
            
            1,026
            
            
            
            784Deferred
      income taxes
            
            
            439
            
            
            
            363Accrued
      interest
            
            
            1,361
            
            
            
            1,251Customer
      deposits
            
            
            592
            
            
            
            556Other
            
            
            2,069
            
            
            
            2,197Total
      current liabilities
            
            
            36,521
            
            
            
            34,377Commitments
      and contingencies (Note 10)
            
            
            ---
            
            
            
            ---Deferred
      credits and other liabilitiesNet
      advances for construction
            
            
            18,433
            
            
            
            21,089Postretirement
      benefit obligation
            
            
            737
            
            
            
            812Deferred
      investment tax credits
            
            
            685
            
            
            
            715Deferred
      income taxes
            
            
            34,077
            
            
            
            29,523Total
      deferred credits and other liabilities
            
            
            53,932
            
            
            
            52,139Net
      contributions in aid of construction
            
            
            71,243
            
            
            
            66,841$
            358,895
            
            
            $
            348,706


The notes are an integral part of
the consolidated financial statements.





36
 Table of Contents








CONSOLIDATED STATEMENTS OF OPERATIONSIn
      thousands, except per share amountsFor
      the Year Ended December 31,2009
            
            
            2008
            
            
            2007Operating
      revenuesWater
      sales
            
            $
            53,871
            
            
            $
            50,101
            
            
            $
            48,461Other
      utility operating revenue
            
            
            2,208
            
            
            
            2,019
            
            
            
            1,699Non-utility
      operating revenue
            
            
            4,833
            
            
            
            4,065
            
            
            
            2,36460,912
            
            
            
            56,185
            
            
            
            52,524Operating
      expensesUtility
      operating expenses
            
            
            28,965
            
            
            
            28,154
            
            
            
            26,834Non-utility
      operating expenses
            
            
            3,403
            
            
            
            2,717
            
            
            
            1,760Depreciation
      and amortization
            
            
            6,556
            
            
            
            5,782
            
            
            
            5,162TaxesState
      and federal incomeCurrent
            
            
            116
            
            
            
            74
            
            
            
            608Deferred
            
            
            4,744
            
            
            
            4,353
            
            
            
            3,526Property
      and other
            
            
            3,483
            
            
            
            3,199
            
            
            
            2,86847,267
            
            
            
            44,279
            
            
            
            40,758Operating
      income
            
            
            13,645
            
            
            
            11,906
            
            
            
            11,766Other
      income, netAllowance
      for funds used during construction (AFUDC)
            
            
            413
            
            
            
            759
            
            
            
            324Miscellaneous
            
            
            422
            
            
            
            366
            
            
            
            478835
            
            
            
            1,125
            
            
            
            802Income
      before interest charges
            
            
            14,480
            
            
            
            13,031
            
            
            
            12,568Interest
      charges
            
            
            7,218
            
            
            
            6,613
            
            
            
            6,305Net
      income applicable to common stock
            
            $
            7,262
            
            
            $
            6,418
            
            
            $
            6,263Income
      per common share:Basic
            
            $
            0.97
            
            
            $
            0.87
            
            
            $
            0.92Diluted
            
            $
            0.97
            
            
            $
            0.86
            
            
            $
            0.90Weighted
      average common shares outstanding:Basic
            
            
            7,454
            
            
            
            7,353
            
            
            
            6,787Diluted
            
            
            7,512
            
            
            
            7,427
            
            
            
            6,936Cash
      dividends per share of common stock
            
            $
            0.7225
            
            
            $
            0.7136
            
            
            $
            0.6640





The
notes are an integral part of the consolidated financial
statements.








37
 Table of Contents








CONSOLIDATED STATEMENTS OF CASH FLOWSIn
      thousands
            
            For
      the Year Ended December 31,2009
            
            
            2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
            
            $
            7,262
            
            
            $
            6,418
            
            
            $
            6,263Adjustments
      to reconcile net income to net cash  provided by operating
      activities:Depreciation
      and amortization
            
            
            6,556
            
            
            
            5,782
            
            
            
            5,162Deferred
      income taxes, net
            
            
            4,600
            
            
            
            4,390
            
            
            
            3,657Stock
      compensation
            
            
            98
            
            
            
            122
            
            
            
            196Allowance
      for funds used during construction
            
            
            (413
            )
            
            
            (759
            )
            
            
            (324
            )Changes
      in assets and liabilities:Accounts
      receivable, net of reserve for bad debts
            
            
            (603
            )
            
            
            1,275
            
            
            
            (2,083
            )Unbilled
      operating revenues
            
            
            79
            
            
            
            (399
            )
            
            
            (543
            )Materials
      and supplies
            
            
            (73
            )
            
            
            45
            
            
            
            (138
            )Prepaid
      property taxes
            
            
            (103
            )
            
            
            (61
            )
            
            
            (134
            )Prepaid
      expenses and other
            
            
            (813
            )
            
            
            366
            
            
            
            (101
            )Other
      deferred assets
            
            
            (159
            )
            
            
            (836
            )
            
            
            (495
            )Regulatory
      assets
            
            
            45
            
            
            
            (882
            )
            
            
            200Accounts
      payable
            
            
            (860
            )
            
            
            1,331
            
            
            
            435Accrued
      expenses
            
            
            (2,183
            )
            
            
            385
            
            
            
            (804
            )Accrued
      interest
            
            
            110
            
            
            
            925
            
            
            
            (34
            )Customer
      deposits and other, net
            
            
            (92
            )
            
            
            129
            
            
            
            428Postretirement
      benefit obligation
            
            
            (75
            )
            
            
            (56
            )
            
            
            (59
            )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            13,376
            
            
            
            18,175
            
            
            
            11,626CASH
      FLOWS USED IN INVESTING ACTIVITIESCapital
      expenditures (net of AFUDC)
            
            
            (17,390
            )
            
            
            (45,057
            )
            
            
            (26,736
            )Investments
      in acquisitions
            
            
            ---
            
            
            
            (4,772
            )
            
            
            ---Proceeds
      from sale of assets
            
            
            43
            
            
            
            62
            
            
            
            27Investments
      from unconsolidated affiliates
            
            
            ---
            
            
            
            ---
            
            
            
            2NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (17,347
            )
            
            
            (49,767
            )
            
            
            (26,707
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      borrowings (repayments) under lines of credit agreements
            
            
            4,837
            
            
            
            19,388
            
            
            
            (7,008
            )(Decrease)
      increase in overdraft payable
            
            
            242
            
            
            
            (888
            )
            
            
            (318
            )Net
      advances and contributions in aid of construction
            
            
            1,854
            
            
            
            2,667
            
            
            
            6,839Increase
      in deferred debt issuance costs
            
            
            114
            
            
            
            1
            
            
            
            110Net
      proceeds from issuance of common stock
            
            
            1,399
            
            
            
            1,314
            
            
            
            21,329Dividends
            
            
            (5,379
            )
            
            
            (5,193
            )
            
            
            (4,455
            )Issuance
      of long-term debt
            
            
            ---
            
            
            
            15,000
            
            
            
            ---Principal
      repayments of long-term debt
            
            
            (1,516
            )
            
            
            (323
            )
            
            
            (310
            )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            1,551
            
            
            
            31,966
            
            
            
            16,187NET
      (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            (2,420
            )
            
            
            374
            
            
            
            1,106CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
            
            
            2,894
            
            
            
            2,520
            
            
            
            1,414CASH
      AND CASH EQUIVALENTS AT END OF YEAR
            
            $
            474
            
            
            $
            2,894
            
            
            $
            2,520Supplemental
      Disclosures of Cash Flow Information:Utility
      plant received as construction advances and contributions
            
            $
            845
            
            
            $
            7,101
            
            
            $
            ---Contractual
      amounts of contributions in aid of construction due from developers
      included in accounts receivable
            
            $
            678
            
            
            $
            ---
            
            
            $
            ---Artesian
      Water Maryland, Inc. acquired all the outstandingmembership
      interests of Mountain Hill Water Company, LLCfor
      approximately $7.1 million.  In conjunction with
    theacquisition,
      liabilities were assumed as follows:Fair
      value of assets acquired
            
            $
            ---
            
            
            $
            7,093
            
            
            $
            ---Cash
      paid for membership interests
            
            
            ---
            
            
            
            (4,772
            )
            
            
            ---Liabilities
      assumed
            
            $
            ---
            
            
            $
            2,321
            
            
            $
            ---Supplemental
      Disclosures of Cash Flow Information:Interest
      paid
            
            $
            7,107
            
            
            $
            5,576
            
            
            $
            6,230Income
      taxes paid
            
            $
            350
            
            
            $
            ---
            
            
            $
            725





The
notes are an integral part of the consolidated financial
statements.








38
 Table of Contents








CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY


In
thousands


Common
      Shares Outstanding Class A Non-Voting (1) (3)
      (4)
            
            
            Common
      Shares Outstanding Class B Voting(2)
            
            
            $1
      Par Value Class A Non-Voting
            
            
            $1
      Par Value Class B Voting
            
            
            Additional
      Paid-in Capital
            
            
            Retained
      Earnings
            
            
            TotalBalance
      as of December 31, 2006
            
            
            5,204
            
            
            
            882
            
            
            $
            5,204
            
            
            $
            882
            
            
            $
            45,052
            
            
            $
            10,662
            
            
            $
            61,800Net
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            6,263
            
            
            
            6,263Cash
      dividends declaredCommon
      stock
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (4,455
            )
            
            
            (4,455
            )Issuance
      of common stockStock
      Issuance(5)
            
            
            1,129
            
            
            
            ---
            
            
            
            1,129
            
            
            
            ---
            
            
            
            19,290
            
            
            
            (1
            )
            
            
            20,418Dividend
      reinvestment plan
            
            
            18
            
            
            
            ---
            
            
            
            18
            
            
            
            ---
            
            
            
            326
            
            
            
            ---
            
            
            
            344Employee
      stock options and awards(4)
            
            
            50
            
            
            
            ---
            
            
            
            50
            
            
            
            ---
            
            
            
            374
            
            
            
            ---
            
            
            
            424Employee
      Retirement Plan(3)
            
            
            17
            
            
            
            ---
            
            
            
            17
            
            
            
            ---
            
            
            
            321
            
            
            
            ---
            
            
            
            338Balance
      as of December 31, 2007
            
            
            6,418
            
            
            
            882
            
            
            $
            6,418
            
            
            $
            882
            
            
            $
            65,363
            
            
            $
            12,469
            
            
            $
            85,132Net
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            6,418
            
            
            
            6,418Cash
      dividends declaredCommon
      stock
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,193
            )
            
            
            (5,193
            )Issuance
      of common stockDividend
      reinvestment plan
            
            
            18
            
            
            
            ---
            
            
            
            18
            
            
            
            ---
            
            
            
            299
            
            
            
            ---
            
            
            
            317Employee
      stock options and awards(4)
            
            
            60
            
            
            
            ---
            
            
            
            60
            
            
            
            ---
            
            
            
            674
            
            
            
            ---
            
            
            
            734Employee
      Retirement Plan(3)
            
            
            23
            
            
            
            ---
            
            
            
            23
            
            
            
            ---
            
            
            
            363
            
            
            
            ---
            
            
            
            386Balance
      as of December 31, 2008
            
            
            6,519
            
            
            
            882
            
            
            $
            6,519
            
            
            $
            882
            
            
            $
            66,699
            
            
            $
            13,694
            
            
            $
            87,794Net
      income
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            7,262
            
            
            
            7,262Cash
      dividends declaredCommon
      stock
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (5,379
            )
            
            
            (5,379
            )Issuance
      of common stockDividend
      reinvestment plan
            
            
            19
            
            
            
            ---
            
            
            
            19
            
            
            
            ---
            
            
            
            289
            
            
            
            ---
            
            
            
            308Employee
      stock options and awards(4)
            
            
            65
            
            
            
            ---
            
            
            
            65
            
            
            
            ---
            
            
            
            772
            
            
            
            ---
            
            
            
            837Employee
      Retirement Plan(3)
            
            
            22
            
            
            
            ---
            
            
            
            22
            
            
            
            ---
            
            
            
            330
            
            
            
            ---
            
            
            
            352Balance
      as of December 31, 2009
            
            
            6,625
            
            
            
            882
            
            
            $
            6,625
            
            
            $
            882
            
            
            $
            68,090
            
            
            $
            15,577
            
            
            $
            91,174





(1)
            At
      December 31, 2009, 2008, and 2007, Class A Non-Voting Common Stock had
      15,000,000 shares authorized.  For the same periods, shares
      issued were 6,650,002, 6,543,606 and 6,442,805,
    respectively.(2)
            At
      December 31, 2009, 2008, and 2007, Class B Common Stock had 1,040,000
      shares authorized and 882,000 shares issued.(3)
            Artesian
      Resources Corporation registered 500,000 shares of Class A Non-Voting
      Common Stock available for purchase through the Artesian Retirement Plan
      and the Artesian Supplemental Retirement Plan.(4)
            Under
      the Equity Compensation Plan, effective May 25, 2005 Artesian Resources
      Corporation authorized up to 500,000 shares of Class A Non-Voting Common
      Stock for issuance of grants in forms of stock options, stock units,
      dividend equivalents and other stock-based awards, subject to adjustment
      in certain circumstances as discussed in the Plan.(5)
            At
      June 19, 2007 Artesian Resources Corporation completed the sale of
      1,000,000 shares and at July 10, 2007 Artesian Resources Corporation
      completed the sale of an additional 129,000 shares of its Class A
      Non-Voting Common Stock.





The
notes are an integral part of the consolidated financial
statements.








39
 Table of Contents







NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1





SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation





The
audited consolidated financial statements are presented in accordance with the
requirements of Form 10-K and consequently include all the disclosures required
in the financial statements included in the Company's annual report on Form
10-K.




In
accordance with FASB Accounting Standards Codification, or ASC, Topic 810, the
Company consolidates variable interest entities for which it is deemed to be the
primary beneficiary.  All inter-company transactions and balances have
been eliminated in consolidation (refer to Note 11 - “Northern
Sussex Regional Water Recycling Complex, LLC”).


Reclassification





Certain
accounts in the prior year financial statements have been reclassified for
comparative purposes to conform with the presentation in the current year
financial statements.  These reclassifications had no effect on net
income or stockholders' equity.





Utility
Subsidiary Accounting





The
accounting records of Artesian Water and Artesian Wastewater Management, Inc, or
Artesian Wastewater, are maintained in accordance with the uniform system of
accounts as prescribed by the Delaware Public Service Commission or the
DEPSC.  The accounting records of Artesian Water Pennsylvania, Inc.,
or Artesian Water Pennsylvania, are maintained in accordance with the uniform
system of accounts as prescribed by the Pennsylvania Public Utility Commission
or the PAPUC.  The accounting records of Artesian Water Maryland,
Inc., or Artesian Water Maryland, and Artesian Wastewater Maryland, Inc., or
Artesian Wastewater Maryland, are maintained in accordance with the uniform
system of accounts as prescribed by the Maryland Public Service Commission, or
the MDPSC.  All five subsidiaries follow the provisions of FASB ASC
Topic 980, which provides guidance for companies in regulated
industries.





Utility
Plant





All
additions to plant are recorded at cost.  Cost includes direct labor,
materials, and indirect charges for such items as transportation, supervision,
pension, and other fringe benefits related to employees engaged in construction
activities.  When depreciable units of utility plant are retired, the
cost of retired property, together with any cost associated with retirement and
less any salvage value or proceeds received, is charged to accumulated
depreciation.  Maintenance, repairs, and replacement of minor items of
plant are charged to expense as incurred.





In
accordance with a rate order issued by the DEPSC, Artesian Water accrues an
Allowance for Funds Used During Construction or AFUDC.  AFUDC, which
represents the cost of funds devoted to construction projects through the date
the project is placed in service, is capitalized as part of construction work in
progress.  The rate used for the AFUDC calculation is based on
Artesian Water's weighted average cost of debt and the rate of return on equity
authorized by the DEPSC.  The rate used to capitalize AFUDC in 2009,
2008, and 2007 was 7.7%, 7.9%, and 8.1%, respectively.





40
 Table of Contents







Utility plant
      comprises:In
      thousandsDecember
      31,Estimated
      Useful Life (In Years)
            
            
            2009
            
            
            2008Utility
      plant at original costUtility
      plant in service-WaterIntangible
      plant
            
            
            ---
            
            
            $
            140
            
            
            $
            140Source
      of supply plant
            
            
            45-85
            
            
            
            16,327
            
            
            
            15,785Pumping
      and water treatment plant
            
            
            35-62
            
            
            
            55,995
            
            
            
            53,205Transmission
      and distribution plantMains
            
            
            81
            
            
            
            175,164
            
            
            
            169,311Services
            
            
            39
            
            
            
            28,533
            
            
            
            28,016Storage
      tanks
            
            
            76
            
            
            
            22,237
            
            
            
            22,214Meters
            
            
            26
            
            
            
            14,766
            
            
            
            12,508Hydrants
            
            
            60
            
            
            
            9,283
            
            
            
            9,018General
      plant
            
            
            3-31
            
            
            
            43,716
            
            
            
            41,627Utility
      plant in service-WastewaterTreatment
      and Disposal Plant
            
            
            35-62
            
            
            
            11,495
            
            
            
            11,308Collection
      Mains & Lift Stations
            
            
            81
            
            
            
            4,575
            
            
            
            4,059General
      plant
            
            
            3-31
            
            
            
            929
            
            
            
            602Property
      held for future use
            
            
            ---
            
            
            
            1,932
            
            
            
            1,976Construction
      work in progress
            
            
            ---
            
            
            
            6,457
            
            
            
            7,082391,549
            
            
            
            376,851Less
      – accumulated depreciation
            
            
            
            
            
            
            64,650
            
            
            
            58,608$
            326,899
            
            
            $
            318,243





Depreciation
and Amortization





For
financial reporting purposes, depreciation is recorded using the straight-line
method at rates based on estimated economic useful lives, which range from 3 to
85 years.  Composite depreciation rates for water utility plant were
2.25%, 2.24% and 2.12% for 2009, 2008 and 2007, respectively.  In a
rate order issued by the DEPSC, the Company was directed effective January 1,
1998 to begin using revised depreciation rates for utility plant.  In
rate orders issued by the DEPSC, Artesian Water was directed, effective May 28,
1991 and August 25, 1992, to offset depreciation recorded on utility plant by
depreciation on utility property funded by Contributions in Aid of Construction,
or CIAC, and Advances for Construction, or Advances,
respectively.  This reduction in depreciation expense is also applied
to outstanding CIAC and Advances.  Other deferred assets are amortized
using the straight-line method over applicable lives, which range from 2 to 40
years.





41
 Table of Contents





Regulatory
Assets





FASB ASC
Topic 980 stipulates generally accepted accounting principles for companies
whose rates are established by or are subject to approval by a third-party
regulatory agency.  Certain expenses are recoverable through rates
charged to our customers, without a return on investment, and are deferred and
amortized during future periods using various methods as permitted by the DEPSC,
the MDPSC, and the PAPUC.  Depreciation and salary study expenses are
amortized on a straight-line basis over a period of five years, while all other
expenses related to rate proceedings and applications to increase rates are
amortized on a straight-line basis over a period of two years.  The
postretirement benefit obligation, which is being amortized over twenty years,
is adjusted for the difference between the net periodic postretirement benefit
costs and the cash payments.  The deferred income taxes will be
amortized over future years as the tax effects of temporary differences
previously flowed through to the customers reverse.  Goodwill is
entirely associated with the acquisition of Mountain Hill in August 2008 and is
currently being amortized on a straight-line basis over a period of fifty
years.  The purchase price of Mountain Hill included reimbursement of
all carrying costs through the date of acquisition, which resulted in the
recognition of goodwill.  Deferred acquisition costs are the result of
due diligence costs related to the proposed purchase agreements for water and
wastewater facilities in Cecil County, Maryland.  A small portion,
approximately $25,000, of the deferred acquisition costs are related to the
water asset purchase agreement with Port Deposit,
Maryland.  Amortization of these deferred acquisition costs will not
begin until the acquired assets are placed into service.  The Appleton
Alliance filed an appeal of the decision of The Circuit Court of Cecil County on
its petition for judicial review of the proposed transfer of certain Cecil
County property and assets to Artesian, delaying the closing of these
transactions until a final judicial determination is
received.  Closing on these transactions is also subject to the
approval of the MDPSC.





Regulatory
assets at December 31, net of amortization, comprise:





In
      thousands
            
            2009
            
            
            2008Postretirement
      benefit obligation
            
            $
            849
            
            
            $
            924Deferred
      income taxes recoverable in future rates
            
            
            536
            
            
            
            552Goodwill
            
            
            363
            
            
            
            370Deferred
      acquisition costs
            
            
            542
            
            
            
            341Expense
      of rate proceedings
            
            
            228
            
            
            
            376$
            2,518
            
            
            $
            2,563





Impairment
or Disposal of Long-Lived Assets





A review
of our long-lived assets, including Utility Plant in Service, is performed in
accordance with the requirements of FASB ASC Topic 360.  In addition,
the regulatory assets are reviewed for the continued application of FASB ASC
Topic 360.  The review determines whether there have been changes in
circumstances or events that have occurred requiring adjustments to the carrying
value of these assets.  FASB ASC Topic 360 stipulates that adjustments
to the carrying value of these assets would be made in instances where the
inclusion in the rate-making process is unlikely.





Other
Deferred Assets





Debt
issuance costs are amortized over the term of the related debt, which range from
10 to 30 years.  The investment in Co-Bank, which is a cooperative
bank, is related to certain outstanding First Mortgage Bonds and is a required
investment in the bank based on the underlying long term debt
agreements.  A large portion of other deferred assets, approximately
$0.5 million, is in relation to the Mountain Hill acquisition.





42
 Table of Contents





Other
deferred assets at December 31, net of amortization, comprise:





In
      thousands
            
            2009
            
            
            2008Debt
      issuance cost
            
            $
            2,356
            
            
            $
            2,471Investment
      in Co-Bank
            
            
            1,840
            
            
            
            1,660Other
            
            
            798
            
            
            
            861$
            4,994
            
            
            $
            4,992





Advances
for Construction





Water
mains, services and hydrants, or cash advances to reimburse Artesian Water for
its costs to construct water mains, services and hydrants are contributed to
Artesian Water by customers, real estate developers and builders in order to
extend water service to their properties.  The value of these
contributions is recorded as Advances for Construction.  Artesian
Water makes refunds on these advances over a specific period of time based on
operating revenues generated by the specific plant or as new customers are
connected to the mains.  After all refunds are made, any remaining
balance is transferred to CIAC.





Contributions
in Aid of Construction





CIAC
includes the non-refundable portion of advances for construction and direct
contributions of water mains, services and hydrants, and wastewater treatment
facilities and collection systems, or cash to reimburse our water and wastewater
divisions for costs to construct water mains, services and hydrants, and
wastewater treatment and disposal plant.





Income
Taxes





Deferred
income taxes are provided in accordance with FASB ASC Topic 740 on all
differences between the tax basis of assets and liabilities and the amounts at
which they are carried in the financial statements based on the enacted tax
rates expected to be in effect when such temporary differences are expected to
reverse.  Under FASB ASC Topic 740 the Company analyzed our various
tax positions and determined that no further entry, recognition or derecognition
were required.  The Company would recognize, if applicable, interest
accrued and penalties related to unrecognized tax benefits in interest expense
and in accordance with the regulations of the jurisdictions
involved.





The Tax
Reform Act of 1986 mandated that Advances and CIAC received subsequent to
December 31, 1986, generally are taxable income to Artesian
Water.  The 1996 Tax Act provided an exclusion from taxable income for
CIAC and Advances received after June 12, 1996 by our utilities except for
certain contributions for large services that are not included in rate base for
rate-making purposes.





Investment
tax credits were deferred through 1986 and are recognized as a reduction of
deferred income tax expense over the estimated economic useful lives of the
related assets.





Stock
Compensation Plans





On May
25, 2005, the Company’s stockholders approved a new Equity Compensation Plan,
which authorizes up to 500,000 shares of Class A Non-Voting Common Stock, or
Class A Stock, for issuance, referred to as the 2005 Equity Compensation Plan,
or the Plan.  Since May 25, 2005, no additional grants have been made
under the Company’s other stock-based compensation plans that were previously
available.  The Company accounts for stock options issued after
January 1, 2006 under FASB ASC Topic 718.  Compensation costs in the
amount of $98,000, $127,000 and $215,000 for awards and options granted in 2009,
2008 and 2007 respectively, were determined based on the fair value at the grant
dates and those costs are being charged to income over the service period
associated with the grants.  Of the $215,000 in 2007, $47,000 was
associated with stock awards, $19,000 was associated cash payments for taxes,
and $149,000 was the amount amortized for stock options awarded in 2007 and
2006.  Of the $127,000 in 2008, $8,000 was associated with stock
awards, $5,000 was associated cash payments for taxes, and $114,000 was the
amount amortized for stock options awarded in 2008 and 2007. The $98,000 in 2009
was the amount amortized for stock options awarded in 2009 and
2008.





There was
no stock compensation cost capitalized as part of an asset.





43
 Table of Contents





The fair
value of each option grant is estimated using the Black-Scholes-Merton option
pricing model with the following weighted-average assumptions used for grants
issued in 2009, 2008 and 2007 under the 2005 Equity Compensation Plan (See Note 8 - “Stock Compensation Plans”).








2009
            
            2008
            
            2007Dividend
      Yield
            
            
            4.5
            
            %
            
            
            3.6
            
            %
            
            
            3.3
            
            %Expected
      Volatility
            
            
            .26
            
            
            
            
            .25
            
            
            
            
            .27Risk
      Free Interest Rate
            
            
            2.81
            
            %
            
            
            3.45
            
            %
            
            
            4.69
            
            %Expected
      Term
            
            
            7.06
            
            years
            
            
            6.93
            
            years
            
            
            6.65
            
            years





The
expected dividend yield was based on a 12 month rolling average of the Company’s
current dividend yield.  The expected volatility is the standard
deviation of the change in the natural logarithm of the stock price (expressed
as an annual rate) for the expected term shown above.  The expected
term was based on historic exercise patterns for similar grants.  The
risk free interest rate is the 7-year Treasury Constant Maturity rate as of the
date of the grants for 2009, 2008 and 2007.





Shares of
Class A Stock have been reserved for future issuance under the 2005 Equity
Compensation Plan.





Revenue
Recognition and Unbilled Revenues





Water
service revenue for financial statement purposes includes amounts billed to
customers on a quarterly or monthly cycle basis, depending on class of customer,
and unbilled amounts based upon estimated usage from the date of the last meter
reading to the end of the accounting period.  As actual usage amounts
are received, adjustments are made to the unbilled estimates in the next billing
cycle based on the actual results.





Non-utility
operating revenue is primarily derived from the design, construction and
operation of contract water and wastewater projects.  The Company
recognizes non-utility operating revenue ratably over the service period with
markup for overhead and profit.  The Company records contract monthly
fees for non-utility operating revenue when billed to the customer.





Other
operating revenue includes wastewater service revenue derived from monthly fixed
fees billed to customers, and which is recorded when billed.  Service
line protection plan revenues are recognized on an accrual basis effective
January 1, 2009, as compared to 2008, in which they were billed quarterly and
the revenue recognized when billed.  This accounting policy change did
not have a material effect on the financial statements.





44
 Table of Contents





Accounts
Receivable





Accounts
receivable are recorded at the invoiced amounts.  The reserve for bad
debts is the Company's best estimate of the amount of probable credit losses in
our existing accounts receivable.  The Company reviews the allowance
for bad debts on a quarterly basis.  Account balances are written off
against the reserve when it is probable the receivable will not be
recovered.  The allowance for doubtful accounts was $0.1 million at
December 31, 2009 and 2008, respectively.  The corresponding expense
for the year ended December 31, 2009 and 2008 was $0.3 and $0.2,
respectively.  The following table summarizes the changes in the
Company’s accounts receivable balance:





December
      31,In
      thousands
            
            2009
            
            
            2008
            
            
            2007Customer
      Accounts Receivable – Water
            
            $
            3,039
            
            
            $
            2,637
            
            
            $
            4,437Other
            
            
            2,608
            
            
            
            1,693
            
            
            
            1,3455,647
            
            
            
            4,330
            
            
            
            5,782Less
      allowance for doubtful accounts
            
            
            142
            
            
            
            106
            
            
            
            283Net
      accounts receivable
            
            $
            5,505
            
            
            $
            4,224
            
            
            $
            5,499





The
activities in the allowance for doubtful accounts are as follows:




December
      31,In
      thousands
              
              2009
              
              
              2008
              
              
              2007Beginning
      Balance
              
              $
              106
              
              
              $
              283
              
              
              $
              191Allowance
      Adjustments
              
              
              291
              
              
              
              221
              
              
              
              327Recoveries
              
              
              74
              
              
              
              35
              
              
              
              19Write
      off of uncollectible accounts
              
              
              (329
              )
              
              
              (433
              )
              
              
              (254
              )Ending
      Balance
              
              $
              142
              
              
              $
              106
              
              
              $
              283





Cash
and Cash Equivalents





For
purposes of the Consolidated Statement of Cash Flows, Artesian Resources
considers all temporary cash investments with an original maturity of three
months or less to be cash equivalents.  Artesian Water, Artesian
Wastewater, and Artesian Utility utilize their bank's zero balance account
disbursement service to reduce the use of their lines of credit by funding
checks as they are presented to the bank for payment rather than at
issuance.  If the checks currently outstanding, but not yet funded,
exceed the cash balance on our books, the net liability is recorded as a current
liability on the consolidated balance sheet in the Overdraft Payable
account.





Use
of Estimates in the Preparation of Consolidated Financial
Statements





The
consolidated financial statements were prepared in conformity with generally
accepted accounting principles in the U.S., which require management to make
estimates about the reported amounts of assets and liabilities including
unbilled revenues, reserve for a portion of revenues received under temporary
rates and regulatory asset recovery and contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from management's estimate.







45
 Table of Contents




NOTE 2





FAIR
VALUE OF FINANCIAL INSTRUMENTS





The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value.





Current
Assets and Liabilities





For those
current assets and liabilities that are considered financial instruments, the
carrying amounts approximate fair value because of the short maturity of those
instruments.





Long-term
Financial Liabilities





The fair
value of Artesian Resources' long-term debt as of December 31, 2009 and
2008, determined by discounting their future cash flows using current market
interest rates on similar instruments with comparable maturities as guided under
FASB ASC 825 are shown as below:





In
      thousands
            December
      31,2009
            
            2008Carrying
      amount
            
            $
            106,025
            
            
            $
            107,555Estimated
      fair value
            
            
            103,650
            
            
            
            113,214





The fair
value of Advances for Construction cannot be reasonably estimated due to the
inability to accurately estimate future refunds expected to be paid over the
life of the contracts.  Refund payments are based on the water sales
to new customers in the particular development constructed.  The fair
value of Advances for Construction would be less than the carrying amount
because these financial instruments are non-interest bearing.





NOTE
3





INCOME
TAXES





Deferred
income taxes reflect temporary differences between the valuation of assets and
liabilities for financial and tax reporting.





As of
December 31, 2009, Artesian Resources has federal net operating loss
carry-forwards aggregating approximately $11.3 million, which will expire if
unused by 2029.  As of December 31, 2009, Artesian Resources has
separate company state net operating loss carry-forwards aggregating
approximately $18.8 million.  These net operating loss carry-forwards
will expire if unused between 2019 and 2029.  Artesian Resources has
recorded a valuation allowance to reflect the estimated amount of deferred tax
assets that may not be realized due to the expiration of the state net operating
loss carry-forwards.  Management believes that it is more likely than
not that the Company will realize the benefits of these net deferred tax
assets.  The valuation allowance decreased from approximately $71,000
in 2008 to approximately $37,000 in 2009.





At
December 31, 2009, for federal income tax purposes, there were alternative
minimum tax credit carry-forwards aggregating $2.5 million resulting from the
payment of alternative minimum tax in prior years.  These alternative
minimum tax credit carry-forwards may be carried forward indefinitely to offset
future regular federal income taxes.





46
 Table of Contents





Under
FASB ASC Topic 740 the Company analyzed Artesian’s various tax positions and
determined that no further entry, recognition or derecognition was
required.  The Company would recognize, if applicable, interest
accrued and penalties related to unrecognized tax benefits in interest expense
and in accordance with the regulations of the jurisdictions
involved.  There were no such interest and penalty charges for the
period ended December 31, 2009 or December 31, 2008.  The Company
remains subject to examination by federal and state authorities for tax years
2006 through 2009.







Components
      of Income Tax ExpenseIn
      thousands
            For
      the Year Ended December 31,State
      income taxes
            
            2009
            
            
            2008
            
            
            2007Current
            
            $
            64
            
            
            $
            74
            
            
            $
            ---Deferred
            
            
            996
            
            
            
            887
            
            
            
            866Total
      state income tax expense
            
            $
            1,060
            
            
            $
            961
            
            
            $
            866For
      the Year Ended December 31,Federal
      income taxes
            
            
            2009
            
            
            
            2008
            
            
            
            2007Current
            
            $
            52
            
            
            $
            ---
            
            
            $
            608Deferred
            
            
            3,748
            
            
            
            3,466
            
            
            
            2,660Total
      federal income tax expense
            
            $
            3,800
            
            
            $
            3,466
            
            
            $
            3,268











Reconciliation
      of effective tax rate:For
      the Year Ended December 31,In
      thousands
            
            2009
            
            
            2009
            
            
            2008
            
            
            2008
            
            
            2007
            
            
            2007Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentReconciliation
      of effective tax rateIncome
      before federal and state income taxes
            
            $
            12,153
            
            
            
            100.0
            
            
            $
            10,899
            
            
            
            100.0
            
            
            $
            10,397
            
            
            
            100.0Amount
      computed at statutory rate
            
            
            4,132
            
            
            
            34.0
            
            
            
            3,706
            
            
            
            34.0
            
            
            
            3,535
            
            
            
            34.0Reconciling
      itemsState
      income tax-net of federal tax benefit
            
            
            683
            
            
            
            5.6
            
            
            
            678
            
            
            
            6.2
            
            
            
            571
            
            
            
            5.5Other
            
            
            45
            
            
            
            0.4
            
            
            
            43
            
            
            
            0.4
            
            
            
            28
            
            
            
            0.3Total
      income tax expense and effective rate
            
            $
            4,860
            
            
            
            40.0
            
            
            $
            4,427
            
            
            
            40.6
            
            
            $
            4,134
            
            
            
            39.8








47
 Table of Contents


Deferred
income taxes at December 31, 2009, 2008, and 2007 were comprised of the
following:





For
      the Year Ended December 31,In
      thousands
            
            2009
            
            
            2008
            
            
            2007Deferred
      tax assets related to:Federal
      alternative minimum tax credit carry-forwards
            
            $
            2,547
            
            
            $
            2,495
            
            
            $
            2,550Federal
      and state operating loss carry-forwards
            
            
            4,899
            
            
            
            5,330
            
            
            
            3,500Bad
      debt allowance
            
            
            97
            
            
            
            83
            
            
            
            120Valuation
      allowance
            
            
            (37
            )
            
            
            (71
            )
            
            
            (88
            )Stock
      options
            
            
            ---
            
            
            
            ---
            
            
            
            ---Other
            
            
            214
            
            
            
            242
            
            
            
            234Total
      deferred tax assets
            
            $
            7,720
            
            
            $
            8,079
            
            
            $
            6,316Deferred
      tax liabilities related to:Property
      plant and equipment basis differences
            
            $
            (41,410
            )
            
            $
            (37,151
            )
            
            $
            (31,087
            )Expenses
      of rate proceedings
            
            
            (91
            )
            
            
            (149
            )
            
            
            (56
            )Property
      taxes
            
            
            (486
            )
            
            
            (445
            )
            
            
            (420
            )Other
            
            
            (249
            )
            
            
            (220
            )
            
            
            (224
            )Total
      deferred tax liabilities
            
            $
            (42,236
            )
            
            $
            (37,965
            )
            
            $
            (31,787
            )Net
      deferred tax liability
            
            $
            (34,516
            )
            
            $
            (29,886
            )
            
            $
            (25,471
            )Deferred
      taxes, which are classified into a net current and non-current balance,
      are presented in the balance sheet as follows:Current
      deferred tax liability
            
            $
            (439
            )
            
            $
            (363
            )
            
            $
            (301
            )Non-current
      deferred tax liability
            
            
            (34,077
            )
            
            
            (29,523
            )
            
            
            (25,170
            )Net
      deferred tax liability
            
            $
            (34,516
            )
            
            $
            (29,886
            )
            
            $
            (25,471
            )











Schedule
      of Valuation AllowanceAdditionsBalance
      at Beginning Of Period
            
            
            Charged
      to Costs and Expenses
            
            
            Deductions
            
            
            Balance
      at End of PeriodIn
      thousandsClassificationFor
      the Year Ended December 31, 2009 -Valuation
      allowance for deferred tax assets
            
            $
            71
            
            
            
            ---
            
            
            $
            34
            
            
            $
            37For
      the Year Ended December 31, 2008 -Valuation
      allowance for deferred tax assets
            
            $
            88
            
            
            
            ---
            
            
            $
            17
            
            
            $
            71For
      the Year Ended December 31, 2007 -Valuation
      allowance for deferred tax assets
            
            $
            121
            
            
            
            ---
            
            
            $
            33
            
            
            $
            88







48
 Table of Contents





NOTE
4





PREFERRED
STOCK





As of
December 31, 2009 and 2008, Artesian Resources had no preferred stock
outstanding.  The Company has 100,000 shares of $1.00 par value Series
Preferred stock authorized but unissued.





NOTE
5





COMMON
STOCK AND ADDITIONAL PAID-IN CAPITAL





The Class
A Non-Voting Common Stock, Class A Stock, of Artesian Resources trades on the
NASDAQ Global Select Market under the symbol ARTNA.  The Class B
Common Stock, or Class B Stock, of Artesian Resources trades on the NASDAQ's OTC
Bulletin Board under the symbol ARTNB.OB.  The rights of the holders
of the Class A Stock and the Class B Stock are identical, except with respect to
voting.  One primary source of liquidity in 2007 was $20.4 million in
net proceeds from the issuance of approximately 1,129,000 shares of Class A
Non-Voting Common Stock.





Under
Artesian Resources' dividend reinvestment plan, which allows for reinvestment of
cash dividends and optional cash payments, stockholders were issued 19,277,
18,209 and 17,791 shares at fair market value for the investment of $308,000,
$317,000, and $344,000 of their monies in the years 2009, 2008, and 2007,
respectively.





NOTE
6





DEBT





At
December 31, 2009, Artesian Water had two lines of credit of $20 million each to
meet temporary cash requirements.  These revolving credit facilities
are unsecured.  As of December 31, 2009, we had $27.1 million of
available funds under these lines.  The interest rate for borrowings
under one of these lines is the London Interbank Offering Rate, or “LIBOR,” plus
0.75%.  The interest rate for borrowings under the other line of
credit is the LIBOR plus 1.00%.  Due to the execution of the
agreements in January 2010 described below, the balances on these two lines were
transferred to the new lines of credit and these lines of credit held by
Artesian Water were terminated.





At
December 31, 2009, Artesian Utility and Artesian Wastewater had lines of credit
with a financial institution for $3.5 million and $10.0 million, respectively,
to meet temporary cash requirements.  These revolving credit
facilities are unsecured.  As of December 31, 2009, Artesian
Wastewater had $5.4 million of available funds while Artesian Utility had not
borrowed funds under its line of credit.  The interest rate for
borrowings under each of these lines is the LIBOR plus 1.75%.  Due to
the execution of the agreements in January 2010 described below, the balance on
the Artesian Wastewater line of credit was transferred to the new lines of
credit and these lines of credit held by Artesian Wastewater and Artesian
Utility were terminated.





On
January 19, 2010, Artesian Resources and each of its subsidiaries entered into a
Demand Line of Credit Agreement, or Demand Credit Agreement, with Citizens Bank,
or Citizens.  The Demand Credit Agreement provides for a $40 million
Demand Line of Credit which may be used for short-term working capital needs,
investments in facilities or equipment or letters of credit only.  The
interest rate for borrowings under this line is based on LIBOR.  The
Demand Credit Agreement is a demand loan facility and therefore Citizens may
demand payment for any outstanding amounts at any time.  The term of
this line of credit expires on the earlier of January 18, 2011 or any date on
which Citizens demands payment.  See Note 18 –
Subsequent Events for further information regarding the Demand Credit
Agreement.





On
January 19, 2010, Artesian Water Company entered into a Revolving Credit
Agreement with CoBank ACB.  The Revolving Credit Agreement provides
that the financial institution will make loans to the Company from time to time,
not to exceed $20 million.  The Revolving Credit Agreement allows for
the financing of operations of Artesian Water and up to $10 million for the
operations of Artesian Water Maryland.  The interest rate for
borrowings under this line is the LIBOR plus 1.50%.  The term of this
line of credit expires on January 18, 2011.  See Note 18 – Subsequent Events for further information regarding the
Revolving Credit Agreement.





49
 Table of Contents





On June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC.  Under the terms of the
agreement, Artesian Resources acts as the guarantor of NSRWRC’s $10 million
construction loan secured by land.  As of December 31, 2009 NSRWRC had
$2.5 million of available funds under the construction loan.  The
interest rate on this guaranteed debt is variable based on the LIBOR Advantage
Rate plus 225 basis points.  In the event of a default by NSRWRC,
Artesian Resources shall pay the bank the amount due of the obligations or, on
demand of the bank, immediately deposit all amounts due under the
obligation.





On August
1, 2008, Artesian Water Maryland executed a promissory note in the amount of
approximately $2.3 million to Sunrise in connection with the Mountain Hill
acquisition that bears interest at a variable interest rate based upon the LIBOR
plus 150 basis points.  The note is payable in four equal annual
installments, commencing on the first anniversary of the closing
date.  The first annual installment payment of $0.6 million was made
on August 1, 2009, the remaining principal balance due on this note, as of
December 31, 2009, is $1.7 million.  The note is secured by a first
lien security interest in all of Mountain Hill’s assets in favor of Sunrise and
is guaranteed by Artesian Resources.





On
December 1, 2008, Artesian Water Company and CoBank, ACB, entered into a Bond
Purchase Agreement relating to the issue and sale by the Company to CoBank, ACB
of a $15 million principal amount First Mortgage Bond, or the Bond, Series S,
due December 31, 2033, at an annual interest rate of 6.73%.  The
principal amount of the Bond is subject to redemption in a principal amount
equal to $150,000 per calendar quarter, payable on the first business day of
January, April, July and October in each year, beginning with the first business
day of January, 2009, with all remaining due and payable on December 31,
2033.





Long-term
debt consists of:





December
      31,In
      thousands
            
            2009
            
            
            2008First
      mortgage bondsSeries
      O, 8.17%, due December 29, 2020
            
            $
            20,000
            
            
            $
            20,000Series
      P, 6.58%, due January 31, 2018
            
            
            25,000
            
            
            
            25,000Series
      Q, 4.75%, due December 1, 2043
            
            
            15,400
            
            
            
            15,400Series
      R, 5.96%, due December 31, 2028
            
            
            25,000
            
            
            
            25,000Series
      S, 6.73%, due December 31, 2033
            
            
            14,400
            
            
            
            15,00099,800
            
            
            
            100,400State
      revolving fund loans4.48%,
      due August 1, 2021
            
            
            3,022
            
            
            
            3,2093.57%,
      due September 1, 2023
            
            
            1,140
            
            
            
            1,2013.64%,
      due May 1, 2024
            
            
            1,852
            
            
            
            1,9406,014
            
            
            
            6,350Notes
      PayablePromissory
      Note, variable interest, due August 1, 2012
            
            
            1,741
            
            
            
            2,3211,741
            
            
            
            2,321Sub-total
            
            
            107,555
            
            
            
            109,071Less:
      current maturities (principal amount)
            
            
            1,530
            
            
            
            1,516Total
      long-term debt
            
            $
            106,025
            
            
            $
            107,555





Payments
      of principal due during the next five years and
thereafter:In
      thousands
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            2014
            
            
            ThereafterFirst
      Mortgage bonds
            
            $
            600
            
            
            
            600
            
            
            
            600
            
            
            
            600
            
            
            
            600
            
            
            
            96,800State
      revolving fund loans
            
            
            350
            
            
            
            364
            
            
            
            379
            
            
            
            395
            
            
            
            412
            
            
            
            4,114Notes
      Payable
            
            
            580
            
            
            
            580
            
            
            
            581
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total
      payments
            
            $
            1,530
            
            
            
            1,544
            
            
            
            1,560
            
            
            
            995
            
            
            
            1,012
            
            
            
            100,914




50
 Table of Contents





NOTE
7





NON-UTILITY
OPERATING REVENUE AND EXPENSES





Non-utility
operating revenue consisted of $3,007,000, $2,937,000, and $1,942,000 recognized
by Artesian Utility in 2009, 2008 and 2007, respectively.  In
addition, $1,330,000, $796,000 and $422,000 was from Artesian Resource's water
and wastewater Service Line Protection Plans in 2009, 2008 and 2007
respectively.  The Service Line Protection Plans provide coverage for
all material and labor required to repair or replace participants’ leaking water
and leaking or clogged wastewater service lines up to an annual
limit.  An additional $496,000 and $332,000 in revenue was recognized
in 2009 and 2008, respectively, from Artesian Engineers, which was acquired in
June 2008, for design and engineering services to developers for residential and
commercial development.





Non-utility
operating expenses are as follows:





In
      thousands
            
            2009
            
            
            2008
            
            
            2007Artesian
      Utility
            
            $
            2,308
            
            
            $
            1,934
            
            
            $
            1,528Artesian
      Resources
            
            
            660
            
            
            
            562
            
            
            
            232Artesian
      Engineers
            
            
            435
            
            
            
            221
            
            
            
            ---Total
            
            $
            3,403
            
            
            $
            2,717
            
            
            $
            1,760





NOTE 8





STOCK
COMPENSATION PLANS





In 1992,
the Company instituted the 1992 Non-Qualified Stock Option Plan, which was
subsequently amended in 1998.  The number of authorized shares was
375,000.  Options to purchase shares of Class A Stock were granted to
employees and directors of the Company.  Employees who were not
executive officers or directors were eligible to receive options priced at not
less than 85% of the fair market value on the date of grant, option prices for
directors and officers of the Company was 90% of the fair market
value.  Effective May 25, 2005, no additional grants have been made
from this plan.





In 1996,
the Company instituted the Incentive Stock Option Plan under which the Company
was authorized to grant options up to 150,000 shares of Class A Stock to its key
employees and officers.  Options were granted at the fair market value
on the date of grant.  The Company accelerated vesting for certain
incentive stock options held by officers and directors in anticipation of FASB
ASC Topic 718, which applies to stock options issued after January 1,
2006.  Effective May 25, 2005, no additional grants have been made
from this plan.





On May
25, 2005, the Company adopted the 2005 Equity Compensation Plan, or the
Plan.  The Plan provides that grants may be in any of the following
forms: incentive stock options, nonqualified stock options, stock units, stock
awards, dividend equivalents and other stock-based awards.  The Plan
is administered and interpreted by the Compensation Committee of the Board of
Directors, or the Committee.  The Committee has the authority to
determine the individuals to whom grants will be made under the Plan, determine
the type, size and terms of the grants, determine the time when grants will be
made and the duration of any applicable exercise or restriction period (subject
to the limitations of the Plan) and deal with any other matters arising under
the Plan.  The Committee presently consists of three directors, each
of whom is a non-employee director of the Company.  All of the
employees of the Company and its subsidiaries are eligible for grants under the
Plan.  Non-employee directors of the Company are also eligible to
receive grants under the Plan.




51
 Table of Contents





The
following summary reflects changes in the shares of Class A Stock under
option:





2009
      Shares
              
              
              2009
      Weighted Average Exercise Price
              
              
              2008
      Shares
              
              
              2008
      Weighted Average Exercise Price
              
              
              2007
      Shares
              
              
              2007
      Weighted Average Exercise PricePlan
      optionsOutstanding
      at beginning of year
              
              
              530,921
              
              
              $
              15.14
              
              
              
              574,696
              
              
              $
              14.62
              
              
              
              595,699
              
              
              $
              13.83Granted
              
              
              33,750
              
              
              
              15.26
              
              
              
              33,750
              
              
              
              18.43
              
              
              
              33,750
              
              
              
              19.56Exercised
              
              
              (65,132
              )
              
              
              9.48
              
              
              
              (59,525
              )
              
              
              10.46
              
              
              
              (48,003
              )
              
              
              7.61Expired
              
              
              (1,650
              )
              
              
              9.33
              
              
              
              (18,000
              )
              
              
              20.23
              
              
              
              (6,750
              )
              
              
              19.56Outstanding
      at end of year
              
              
              497,889
              
              
              $
              15.91
              
              
              
              530,921
              
              
              $
              15.14
              
              
              
              574,696
              
              
              $
              14.62Options
      exercisable at year end
              
              
              464,139
              
              
              $
              15.95
              
              
              
              497,171
              
              
              $
              14.92
              
              
              
              547,696
              
              
              $
              14.38




The fair
value per share of options granted during 2009, 2008, and 2007 were $2.56, $3.60
and $4.85 respectively, as estimated using the Black-Scholes Merton option
pricing model.  The total intrinsic value of options exercised during
2009, 2008 and 2007 were $427,000, $432,300 and $564,922
respectively.  There were no fully vested shares granted during
2009.  During 2009, we received $617,000 in cash from the exercise of
options, with a $404,000 tax benefit realized during the period.





The
following tables summarize information about employee and director stock options
outstanding at December 31, 2009:





Options
      OutstandingRange
      of Exercise Price
            Shares
      Outstanding at December 31, 2009
            Weighted
      Average Remaining Life
            Weighted
      Average Exercise Price
            Aggregate
      Intrinsic Value$9.28
      - $16.13
            297,639
            3.57
      Years
            $13.38
            $1,465,973$18.43
      - $21.11
            200,250
            6.62
      Years
            $19.66
            $0Options
      ExercisableRange
      of Exercise Price
            Shares
      Exercisable at December 31, 2009
            Weighted
      Average Remaining Life
            Weighted
      Average Exercise Price
            Aggregate
      Intrinsic Value$9.28
      - $16.13
            263,889
            2.83
      Years
            $13.14
            $1,363,036$18.43
      - $21.11
            200,250
            6.62
      Years
            $19.66
            $0





As of
December 31, 2009, there was $32,900 of total unrecognized expense related to
non-vested option shares granted under the Plan.  The cost will be
recognized over the remaining 0.4 years vesting period of the unvested
options.





52
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NOTE
9





EMPLOYEE
BENEFIT PLANS





401(k)
Plan





Artesian
Resources has a defined contribution 401(k) Salary Deduction Plan, or the
“401(k) Plan,” which covers substantially all employees.  Under the
terms of the 401(k) Plan, Artesian Resources contributed 2% of eligible salaries
and wages and matches employee contributions up to 6% of gross pay at a rate of
50%.  Artesian Resources may, at its option, make additional
contributions of up to 3% of eligible salaries and wages.  No such
additional contributions were made in 2009, 2008 and 2007.  The 401(k)
Plan expenses, which include Company contributions and administrative fees, for
the years 2009, 2008 and 2007, were approximately $618,000, $617,000, and $541,000,
respectively.





Supplemental
Pension Plan





Effective
October 1, 1994, Artesian Water established a Supplemental Pension Plan, or the
“Supplemental Plan,” to provide additional retirement benefits to full-time
employees hired prior to April 26, 1994.  The Supplemental Plan is a
defined contribution plan that enables employees to save for future retiree
medical costs, which will be paid by employees.  The Supplemental Plan
accomplishes this objective by providing additional cash resources to employees
upon a termination of employment or retirement, to meet the cost of future
medical expenses.  Artesian Water has established a contribution based
upon each employee's years of service ranging from 2% to 6% of eligible salaries
and wages.  Artesian Water also provides additional benefits to
individuals who were over age 50 as of January 1, 1994.  These
individuals are referred to as the "Transition Group."  Effective
November 1, 1994, individuals eligible for the Transition Group had the
opportunity to defer compensation to the Supplemental Plan, and to receive a
transition matching contribution for 5 years.  Each one-dollar of
eligible salaries and wages deferred by the Transition Group was matched with
three, four, or five dollars by Artesian Water based on the employee's years of
service subject to certain limitations under the federal tax
rules.  Plan expenses, which include Company contributions and
administrative fees, for the years 2009, 2008 and 2007, were approximately
$268,000, $276,000, and $288,000, respectively.





Postretirement
Benefit Plan





Artesian
Water has a Postretirement Benefit Plan, or the “Benefit Plan,” which provides
medical and life insurance benefits to certain retired
employees.  Prior to the amendment of the Benefit Plan, substantially
all employees could become eligible for these benefits if they reached
retirement age while still working for Artesian Water.





FASB ASC
Topic 715 stipulates that Artesian Water accrue the expected cost of providing
postretirement health care and life insurance benefits as employees render the
services necessary to earn the benefits.  Artesian Resources elected
to defer recognition and amortize its transition obligation over twenty years
beginning in 1993.





Artesian
Water recognized an offsetting regulatory asset with respect to its post
retirement liability.  This asset is recorded based on the DEPSC
order, which permits Artesian Water to continue recovery of postretirement
health care and life insurance expense on a pay-as-you-go basis for the
remaining eligible employees.  Artesian Water expects its post
retirement obligation and related expense recovery to cover a period of
approximately 20 years (based on the age and life expectancy of the remaining
eligible participants).  Further, expense recovery as a percentage of
rates is expected to remain generally constant over the initial years, and then
decline until the obligation is liquidated.  Amounts charged to
expense were $75,000, $44,000, and $59,000 for 2009, 2008 and 2007,
respectively.





The
Company uses December 31 as the measurement date to determine the postretirement
benefit obligation.  According to our actuarial report, the funded
status of our defined benefit postretirement plan was calculated contemplating
FASB ASC Topic 715 and the obligation is recorded at that
amount.  There was no other comprehensive income impact because we
record a regulatory asset as provided by FASB ASC Topic
980.  Additional disclosures required for our postretirement benefit
obligation are presented below.







53
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Benefit
      Obligations and Funded StatusIn
      thousands
            
            Year
      EndingDecember
      312009
            
            
            2008Change
      in Accumulated Postretirement Benefit ObligationAccumulated
      Postretirement Benefit Obligation at the Beginning of the
    Year
            
            $
            801
            
            
            $
            944Service
      Cost
            
            
            ---
            
            
            
            ---Interest
      Cost
            
            
            45
            
            
            
            53Actuarial
      (Gain) or Loss
            
            
            53
            
            
            
            (91
            )Benefits
      Paid
            
            
            (118
            )
            
            
            (109
            )Plan
      Participant's Contributions
            
            
            4
            
            
            
            4Accumulated
      Postretirement Benefit Obligation at the End of the Year
            
            
            785
            
            
            
            801Change
      in Plan AssetsFair
      Value of Plan Assets at the Beginning of the Year
            
            
            ---
            
            
            
            ---Benefits
      Paid
            
            
            (118
            )
            
            
            (109
            )Employer
      Contributions
            
            
            114
            
            
            
            105Plan
      Participant's Contributions
            
            
            4
            
            
            
            4Fair
      Value of Assets at the End of the Year
            
            
            ---
            
            
            
            ---Net
      Amount RecognizedFunded
      Status
            
            
            (785
            )
            
            
            (801
            )Unrecognized
      Transition Obligation Asset
            
            
            34
            
            
            
            43Unrecognized
      Net Gain or Loss
            
            
            (98
            )
            
            
            (166
            )Net
      Amount Recognized:
            
            
            (849
            )
            
            
            (924
            )Amounts
      Recognized in the Statement of Financial PositionAccrued
      Benefit Liability-Current
            
            
            (112
            )
            
            
            (112
            )Accrued
      Benefit Liability-Noncurrent
            
            
            (737
            )
            
            
            (812
            )Net
      Amount Recognized
            
            $
            (849
            )
            
            $
            (924
            )Weighted
      Average Assumptions at the End of the YearDiscount
      Rate
            
            
            6.00
            %
            
            
            6.00
            %Assumed
      Health Care Cost Trend RatesHealth
      Care Cost Trend Rate Assumed for Next Year
            
            
            10.00
            %
            
            
            11.00
            %Ultimate
      Rate
            
            
            5.00
            %
            
            
            5.00
            %Year
      that the Ultimate Rate is Reached
            
            
            2015
            
            
            
            2015





Net
      Periodic Benefit CostYear
      EndingDecember
      31In
      thousands
            
            2009
            
            
            2008
            
            
            2007Interest
      Cost
            
            $
            45
            
            
            $
            53
            
            
            $
            48Amortization
      of Net (Gain) or Loss
            
            
            (15
            )
            
            
            ---
            
            
            
            (23
            )Amortization
      of Transition Obligation/(Asset)
            
            
            9
            
            
            
            9
            
            
            
            9Total
      Net Periodic Benefit Cost
            
            $
            39
            
            
            $
            62
            
            
            $
            34Weighted
      Average AssumptionsDiscount
      Rate
            
            
            6.00
            %
            
            
            6.00
            %
            
            
            6.00
            %Assumed
      Health Care Cost Trend RatesHealth
      Care Cost Trend Rate Assumed for Current Year
            
            
            11.00
            %
            
            
            11.00
            %
            
            
            11.00
            %Ultimate
      Rate
            
            
            5.00
            %
            
            
            5.00
            %
            
            
            5.00
            %Year
      that the Ultimate Rate is Reached
            
            
            2015
            
            
            
            2015
            
            
            
            2014





Impact
      of One-Percentage-Point Change in Assumed Health Care Cost Trend
      RatesIncrease
            
            
            DecreaseEffect
      on Service Cost & Interest Cost
            
            $
            2
            
            
            $
            (2
            )Effect
      on Postretirement Benefit Obligation
            
            $
            33
            
            
            $
            (31
            )








54
 Table of Contents





Contributions


Artesian
Water expects to contribute $108,000 to its postretirement benefit plan in
2010.


The
following table represents the benefits expected to be paid:





In
      thousands
            
            Other
      Benefits2010
            
            $
            1082011
            
            
            1052012
            
            
            1002013
            
            
            942014
            
            
            872015
      through 2019
            
            
            311$
            805





NOTE 10





COMMITMENTS
AND CONTINGENCIES





Leases





In
October 1997, Artesian Water entered into a 33-year operating lease for a parcel
of land with improvements located in South Bethany, a municipality in Sussex
County, Delaware.  The annual lease payments increase each year by the
most recent increase in the Consumer Price Index for Urban Workers, CPI-U, as
published by the U.S. Department of Labor, Bureau of Labor
Statistics.  Rental payments for 2009, 2008 and 2007 were $12,600,
$12,600, and $11,900, respectively.  The future minimum rental payment
as disclosed in the following table is calculated using CPI-U as of October 31,
2009.





During
2003, Artesian Resources entered into a 40-year easement agreement to acquire an
easement to access, operate, maintain, repair, improve, replace and connect
Artesian’s water system to a well, including a parcel of land around the
well.  Easement payments for 2009, 2008 and 2007 were $29,000, $29,000
and $28,000, respectively.





In
October 2006, Artesian Water entered into a 3-year contract for office space
located in Sussex County, Delaware.  In October 2009 the contract term
was extended for an additional year.  Rent payments for 2009, 2008 and
2007 were $48,000, $46,000 and $43,000, respectively.





Artesian
Wastewater entered into a perpetual agreement for the use of approximately 460
acres of land in Sussex County, Delaware for wastewater
disposal.  Beginning January 2007, Artesian Wastewater is required to
pay a minimum of $40,000 per year for the use of this land.  Once
disposal operations begin, the monthly fee will be contingent on the average
number of gallons of wastewater disposed on the properties.  Payments
for 2009, 2008 and 2007 were $40,000 each year.  The agreement can be
terminated by giving 180-day notice prior to the termination date.





During
September 2007, Artesian Water entered into a 3-year contract for office space
located in New Castle County, Delaware.  This location is used as
general office space while the Artesian Water main office space is being
renovated.  Rent payments during 2009, 2008 and 2007 were $79,000,
$77,000 and $25,000, respectively.





55
 Table of Contents





Future
minimum annual rental payments under the above mentioned lease obligations for
the years subsequent to 2009 are as follows:





In
      thousands2010
            
            $
            1512011
            
            
            442012
            
            
            442013
            
            
            462014
            
            
            462015
      through 2042
            
            
            1,639$
            1,970








Interconnections





Artesian
Water has one water service interconnection agreement with a neighboring
utility, Chester Water Authority, which requires minimum annual
purchases.  Rates charged under this agreement are subject to
change.  Effective August 1, 1997, Artesian Water renegotiated the
contract with the Chester Water Authority to, among other things, reduce the
minimum purchase requirements from 1,459 million gallons to 1,095 million
gallons annually, calculated as 3 mgd times the number of calendar days in a
year. The agreement is extended through the year 2021.





The
Chester Water Authority sent us a notice on February 19, 2008 of a rate
increase, effective July 1, 2008.  We received a second notice of a
rate increase on March 16, 2009, effective July 1, 2009.  The minimum
annual purchase commitments for all interconnection agreements for 2010 through
2014 and the aggregate total for the years 2015 through 2021, calculated at the
noticed rates, are as follows:








In
      thousands2010
            
            $
            3,3822011
            
            
            3,3822012
            
            
            3,3912013
            
            
            3,3822014
            
            
            3,3822015
      through 2021
            
            
            23,692$
            40,611





Expenses
for purchased water were $3,234,000, $2,960,000, and $2,775,000 for the years
ended December 31, 2009, 2008 and 2007, respectively.





Other
Commitments





In 2005,
Artesian Water entered into a 6-year agreement with Utility Service Co., Inc. to
clean and paint tanks from 2006 to 2011 for $1,872,000.  The tank
painting expense for 2009, 2008 and 2007 was $358,000, $425,000, and
$416,000.  The expenditures committed for the years subsequent to 2009
are as follows:





In
      thousands2010
            
            $
            3742011
            
            
            250$
            624





56
 Table of Contents





Budgeted
mandatory utility plant expenditures, due to planned governmental highway
projects, which require the relocation of Artesian Water's water service mains,
expected to be incurred in 2010 through 2014 are as follows:





In
      thousands2010
            
            $
            1,4102011
            
            
            2,2502012
            
            
            1,3252013
            
            
            1,0002014
            
            
            400$
            6,385





The exact
timing and extent of these relocation projects is controlled primarily by the
Delaware Department of Transportation.





NOTE 11





NORTHERN
SUSSEX REGIONAL WATER RECYCLING COMPLEX, LLC





On June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC, for the design, construction and
operation of the Northern Sussex Regional Water Recycling Complex, a wastewater
treatment facility to be located in Sussex County, Delaware.  NSRWRC
was created for the sole purpose of developing the treatment facility site,
which once constructed, will be operated by Artesian Wastewater.  The
Company has determined that NSRWRC constitutes a variable interest entity, or
VIE, as defined by FASB ASC Topic 810.  See Note 1 –
Summary of Significant Accounting Policies-Basis of
Presentation.





The
Company, by contract, has control over the design and construction of the
treatment facility.  NSRWRC is financially responsible for designing
and building the treatment facility.  Under the terms of the
agreement, Artesian Resources acts as the guarantor of a $10 million
construction loan, secured by a 75 acre parcel purchased by NSRWRC on July 1,
2008 for approximately $5 million.  The interest rate on the
construction loan is variable based on LIBOR Advantage Rate plus 225 basis
points.  The construction loan includes provisions that require
Artesian Resources to assume the debt and all liabilities arising from that debt
under certain circumstances, including the bankruptcy of NSRWRC.  In
the event of default by NSRWRC, Artesian Resources shall pay NSRWRC's
obligations due to the financial institution; or on demand of the financial
institution immediately deposit all amounts due under the
obligation.  As of December 31, 2009, approximately $7.5 million has
been drawn on the loan, which is included in the Lines of Credit on our
Consolidated Balance Sheet.  As of December 31, 2009, approximately
$7.8 million is included in non-utility property and was comprised of the land
and construction in progress of the facility.  The entire
capitalization of NSRWRC is comprised of the amounts borrowed against the $10
million construction loan.  In connection with the purchase of the
treatment facility site, as of June 30, 2008, Artesian Utility agreed to commit
$3.0 million to NSRWRC, payable in 10 equal annual installments, which commenced
on June 30, 2008.  In April 2009, Artesian Utility agreed to
accelerate two of its payments to NSRWRC in exchange for a $450,000 reduction in
the total commitment.  Artesian Utility made a $900,000 payment to
NSRWRC, which included the June 30, 2009 payment and the acceleration of two
payments, or $600,000.  As a result of the reduction in the commitment
and the acceleration of the payments, the remaining balance of $1,350,000 will
be repaid over the next 5 years with a final payment of $150,000 due on June 30,
2014.  There has been a nominal investment in NSRWRC by the owner of
NSRWRC.  The treatment facility will be owned by NSRWRC until the
initial loan for the construction of the treatment facility is
repaid.  At that time, the treatment facility will be transferred to
the Company for nominal value as contributed property.  Immediately
following the transfer of the treatment facility and extinguishment of debt,
NSRWRC will be dissolved.





57
 Table of Contents





NOTE
12





RELATED
PARTY TRANSACTIONS





The
Company has entered into transactions in the normal course of business with
related parties.  The owner of NSRWRC is the sole owner of Meridian
Architects and Engineers, LLC, or Meridian Architects, Meridian Enterprises,
LLC, or Meridian Enterprises, and Meridian Consulting, LLC, or Meridian
Consulting.  The Company has utilized Meridian Architects, Meridian
Enterprises and Meridian Consulting for various consulting services during the
year ended December 31, 2009.  For the year ended December 31, 2009,
approximately $100,000 was paid to Meridian Architects, approximately $100,000
was paid to Meridian Enterprises and approximately $31,000 was paid to Meridian
Consulting.  For the year ended December 31, 2008, approximately
$450,000 was paid to Meridian Architects and approximately $478,000 was paid to
Meridian Enterprises in connection with these consulting
services.  Approximately $60,000 and $35,000 was paid to Meridian
Enterprises for the years ended December 31, 2009 and December 31, 2008,
respectively, for office space rental.  Also, for the years ended
December 31, 2009 and December 31, 2008, the Company had accounts receivable
balances for engineering services due from the following entities, all of which
are owned by the owner of NSRWRC:  Meridian Architects of
approximately $58,000 and $51,000, Landlock, LLC of approximately $228,000 and
$109,000, Triple D Double S, LLC of approximately $70,000 and $30,000 and
Peninsula Square, LLC of approximately $32,000 and $9,000.  A portion
of the accounts receivable balance, approximately $187,000, is over one year
old.  In addition, for the years ended December 31, 2009 and December
31, 2008, related party revenue for engineering services is as
follows:  Meridian Architects of approximately $10,000 and $48,000,
Landlock, LLC of approximately $119,000 and $123,000, Triple D Double S, LLC of
approximately $40,000 and $30,000 and Peninsula Square, LLC of approximately
$24,000 and $9,000.  All services were provided in the ordinary course
of business at fees and on terms and conditions that the Company believes are
the same as those that would result from arm’s-length negotiations between
unrelated parties.





NOTE
13





GEOGRAPHIC
CONCENTRATION OF CUSTOMERS





Artesian
Water, Artesian Water Pennsylvania and Artesian Maryland provide water utility
service to customers within their established service territory in all three
counties of Delaware and in portions of Pennsylvania and Maryland, pursuant to
rates filed with and approved by the DEPSC, the PAPUC and the
MDPSC.  As of December 31, 2009, Artesian Water was serving 76,900
customers, Artesian Water Pennsylvania was serving 38 customers and Artesian
Maryland was serving 173 customers.





Artesian
Wastewater began providing wastewater services to a community in Sussex County,
Delaware in July 2005.  The DEPSC approved the temporary rates for
this community on July 15, 2005, and on January 24, 2006, approved the rates and
tariff.  As of December 31, 2009, Artesian Wastewater was serving 729
customers, the majority of which is located in Sussex County,
Delaware.





NOTE
14





RATE
PROCEEDINGS





Our water
and wastewater utilities generate operating revenue from customers based on
rates that are established by state Public Service Commissions through a rate
setting process that may include public hearings, evidentiary hearings and the
submission of evidence and testimony in support of the requested level of rates
by our company.





On April
22, 2008, Artesian Water filed a petition with the DEPSC to implement new rates
to meet a requested increase in revenue of 28.8%, or approximately $14.2
million, on an annualized basis.  On July, 11, 2008, pursuant to the
DEPSC’s minimum filing requirements, Artesian filed a supplemental filing with
the DEPSC to update financial schedules for actual experience through March 31,
2008 and to reflect additional changes affecting the requested
increase.  The overall result was a reduction to the requested
increase in revenue of 1.5%, to 27.3% or approximately $13.5 million, on an
annualized basis.





58
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As
permitted by law, on June 21, 2008, we placed temporary rates into effect,
designed to generate an increase in annual operating revenue of approximately
5.0%, or $2.5 million on an annualized basis, until new rates were approved by
the DEPSC.  Also pursuant to law, on December 17, 2008, we placed
temporary rates into effect, designed to generate an additional increase in
annual operating revenue of approximately 10% or $5.0 million on an annualized
basis, given that the rate case had not been concluded in a seven month
period.





On August
19, 2009, Artesian Water, DEPSC, the Division of the Public Advocate and
Christiana Care Health Services, Inc. entered into an agreement to settle
Artesian Water’s April 2008 application for an increase in rates.  PSC
Order No. 7657 was signed by the DEPSC on September 22, 2009, approving the
settlement agreement, which made the existing 15% temporary increase in base
rates permanent.  Since the rate was equal to the 15% temporary
increase in rates charged to customers since December 17, 2008, Artesian Water
was not required to refund any amounts to customers.  This settlement
also included the agreement that Artesian Water will not apply for a further
rate increase for an 18-month period from the date of the DEPSC’s order closing
this application.  It was also agreed that the revenue recovered by
the Company pursuant to the settlement does not include any recovery of funds
attributable to state income tax expense, as it is unlikely that any state
income tax will be paid by Artesian Water during the rate effective
period.





In March
2009, Artesian Wastewater filed an application with the DEPSC for approval of a
uniform tariff applicable to all of our wastewater territories in
Delaware.  Previously, each time we added a new service territory, an
application was required to be submitted to the DEPSC for rate
approval.  As a result of the July 7, 2009 DEPSC approval of our
application, Artesian Wastewater is now permitted to apply its tariffed rates to
any new service territories without prior DEPSC approval.





NOTE
15





NET
INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE





Basic net
income per share is based on the weighted average number of common shares
outstanding.  Diluted net income per share is based on the weighted
average number of common shares outstanding and the potentially dilutive effect
of employee stock options.  The following table summarizes the shares
used in computing basic and diluted net income per share:




For
      the YearEnded
      December 31,2009
              
              
              2008
              
              
              2007(in
      thousands)Average
      common shares outstanding during the period for Basic
      computation
              
              
              7,454
              
              
              
              7,353
              
              
              
              6,787Dilutive
      effect of employee stock options
              
              
              58
              
              
              
              74
              
              
              
              149Average
      common shares outstanding during the period for Diluted
      computation
              
              
              7,512
              
              
              
              7,427
              
              
              
              6,936




For the
year ended December 31, 2009, employee stock options to purchase 288,740 shares
of common stock were excluded from the calculations of diluted net income per
share as the calculated proceeds from the options’ exercise were greater than
the average market price of the Company’s common stock during this
period.





The
Company has 15,000,000 authorized shares of Class A Common Stock, or Class A
Stock, and 1,040,000 shares of Class B Common Stock, or Class B
Stock.  As of December 31, 2009, 6,625,778 shares of Class A Stock and
881,452 shares of Class B Stock were issued and outstanding.  As of
December 31, 2008, 6,519,382 shares of Class A Stock and 881,452 shares of Class
B Stock were issued and outstanding.  As of December 31, 2007,
6,418,581 shares of Class A Stock and 881,452 shares of Class B Stock were
issued and outstanding.  The par value for both classes is $1.00 per
share.  For the years ended December 31, 2009, December 31, 2008 and
December 31, 2007, the Company issued 106,396, 100,801 and 1,214,521 shares of
Class A Stock, respectively.





Equity
per common share was $12.23, $11.94 and $12.54 at December 31, 2009, December
31, 2008 and December 31, 2007, respectively.  These amounts were
computed by dividing common stockholders' equity by the weighted average number
of shares of common stock outstanding on December 31, 2009, December 31, 2008
and December 31, 2007, respectively.





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NOTE
16





SELECTED
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)





The
following table is derived from quarterly unaudited consolidated statements of
operations for the years ended December 31, 2009 and 2008.  Quarterly
basic per share amounts do not add to the full year total due to
rounding.





First
      Quarter
            
            
            Second
      Quarter
            
            
            Third
      Quarter
            
            
            Fourth
      QuarterIn
      thousands (except per share data)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Operating
      revenues
            
            $
            13,876
            
            
            $
            12,270
            
            
            $
            15,370
            
            
            $
            13,903
            
            
            $
            16,161
            
            
            $
            15,656
            
            
            $
            15,505
            
            
            $
            14,356Operating
      income
            
            $
            2,828
            
            
            $
            1,936
            
            
            $
            3,676
            
            
            $
            2,917
            
            
            $
            3,851
            
            
            $
            4,030
            
            
            $
            3,291
            
            
            $
            3,023Net
      income applicable to common stock
            
            $
            1,607
            
            
            $
            999
            
            
            $
            1,997
            
            
            $
            1,529
            
            
            $
            2,112
            
            
            $
            2,593
            
            
            $
            1,546
            
            
            $
            1,297Income
      per common shareBasic
            
            $
            0.22
            
            
            $
            0.14
            
            
            $
            0.27
            
            
            $
            0.21
            
            
            $
            0.28
            
            
            $
            0.35
            
            
            $
            0.21
            
            
            $
            0.18Diluted
            
            $
            0.22
            
            
            $
            0.13
            
            
            $
            0.27
            
            
            $
            0.21
            
            
            $
            0.28
            
            
            $
            0.35
            
            
            $
            0.20
            
            
            $
            0.17








NOTE
17





IMPACT
OF RECENT ACCOUNTING PRONOUNCEMENTS





In
January 2010, the FASB issued authoritative guidance which clarifies that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or shares with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance thus eliminating the diversity in practice.  This new
guidance is effective for interim and annual periods ending on or after December
15, 2009, and should be applied on a retrospective basis.  The Company
does not expect a material impact on the Company's financial statements due to
the adoption of this guidance.





In August
2009, the FASB issued an ASU which provides guidance on the measurement of
liabilities at fair value.  The guidance provides clarification that
in circumstances in which a quoted market price in an active market for an
identical liability is not available, an entity is required to measure fair
value using a valuation technique that uses the quoted price of an identical
liability when traded as an asset or, if unavailable, quoted prices for similar
liabilities or similar assets when traded as assets.  If none of this
information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles.  The Company
adopted this guidance in the quarter ended September 30, 2009 and there was no
material impact on the Company's financial statements.





On July
1, 2009, the FASB issued the FASB Accounting Standards Codification, or the
Codification, which establishes only two levels of U.S. GAAP, authoritative and
non-authoritative.  Therefore, as of July 1, 2009, the Codification is
the single source of authoritative non-governmental U.S. GAAP, superseding
existing FASB, American Institute of Certified Public Accountants, EITF, and
related accounting literature.  All other accounting literature will
be considered non-authoritative.  The Codification reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure.  This standard is effective for
financial statements issued for fiscal years and interim periods ending after
September 15, 2009.  As the Codification was not intended to change or
alter existing GAAP, it will not have any impact on the Company’s consolidated
financial statements.  The adoption of this standard impacted the
Company's financial statement disclosures as all references to authoritative
accounting literature are now referenced in accordance with the
Codification.





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In June
2009, the FASB issued authoritative guidance to amend the manner in which
entities evaluate whether consolidation is required for variable interest
entities, or VIEs.  The model for determining which enterprise has a
controlling financial interest and is the primary beneficiary of a VIE has
changed significantly under the new guidance.  Previously, variable
interest holders had to determine whether they had a controlling financial
interest in a VIE based on a quantitative analysis of the expected gains and/or
losses of the entity.  In contrast, the new guidance requires an
enterprise with a variable interest in a VIE to qualitatively assess whether it
has a controlling financial interest in the entity, and if so, whether it is the
primary beneficiary.  Furthermore, this guidance requires that
companies continually evaluate VIEs for consolidation, rather than assessing
based upon the occurrence of triggering events.  This revised guidance
also requires enhanced disclosures about how a company’s involvement with a VIE
affects its financial statements and exposure to risks.  This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2009, with earlier adoption
prohibited.  The Company does not expect that the adoption of this
statement will have a material impact on the financial
statements.  Information regarding the Company’s involvement with
variable interest entities is included in Note 11 - Northern
Sussex Regional Water Recycling Complex, LLC.





In May
2009, the FASB issued authoritative guidance which is intended to establish
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued.  Specifically, this standard sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date.  This guidance is effective for financial statements
issued for fiscal years and interim periods ending June 15, 2009 and will be
applied prospectively.  The adoption of this guidance did not result
in significant changes in the subsequent events that the Company reports, either
through recognition or disclosure, in its financial statements.





In April
2009, the FASB issued revised authoritative guidance requiring disclosures about
fair value of financial instruments in interim financial statements, in addition
to the annual financial statements as already required.  This guidance
was adopted by the Company for the period ended June 30, 2009.  As
this guidance provides only disclosure requirements, the application of this
standard did not impact the Company’s financial statements.  See Note 2 — Fair Value of Financial Instruments.





In April
2009, the FASB issued authoritative guidance clarifying that fair value is
defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants under current
market conditions.  This guidance requires an evaluation of whether
there has been a significant decrease in the volume and level of activity for
the asset or liability in relation to normal market activity for the asset or
liability.  If there has, transactions or quoted prices may not be
determinative of fair value and a significant adjustment may need to be made to
those prices to estimate fair value.  Additionally, an entity must
consider whether the observed transaction was orderly (that is, not distressed
or forced).  If the transaction was orderly, the obtained price can be
considered a relevant observable input for determining fair value.  If
the transaction is not orderly, other valuation techniques must be used when
estimating fair value.  This guidance must be applied prospectively
for interim periods ending after June 15, 2009.  The adoption of this
guidance did not have a material impact on the financial
statements.





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NOTE 18





SUBSEQUENT
EVENTS





Revolving Credit Agreement
with CoBank, ACB:





On
January 19, 2010, Artesian Water entered into a Revolving Credit Agreement, or
the CoBank Agreement, with CoBank, ACB, or CoBank.  The CoBank
Agreement provides that CoBank will make loans to the Company from time to time,
not to exceed $20 million, expiring on January 18, 2011, or the Maturity
Date.  The CoBank Agreement allows for the financing of operations of
Artesian Water and up to $10 million for the operations of Artesian Water
Maryland, Inc.  Interest rates on the CoBank Agreement are based on
one of the following interest rate options.


(1)
            At
      a rate per annum equal to the rate of interest established by CoBank on
      the first business day of each
week.


(2)
            At
      a fixed rate per annum to be quoted by CoBank in its sole discretion in
      each instance.


(3)
            At
      a fixed rate per annum equal to the LIBOR plus
  1.50%.


Subject
to certain limited exceptions, the Company shall select the applicable rate
option each time a loan is requested.  Interest payments are due
monthly and the principal amount outstanding can be repaid at any time, subject
to a prepayment surcharge if paid prior to the Maturity Date.





The
Company’s obligations are secured by a first priority lien on all equity of
CoBank currently owned or acquired in the future by the Company and any proceeds
thereof.  The CoBank Agreement contains certain covenants, including
but not limited to, covenants committing the Company to purchase equity in
CoBank as required by CoBank from time to time, restricting the Company’s
ability to incur additional indebtedness, make certain investments, and pay
dividends or other distributions above a specified threshold and requiring the
Company to have an EBITDA to total interest expense ratio of not greater than
2.5 to 1 at the end of each fiscal year.  The CoBank Agreement
contains customary events of default, including, but not limited to, the
occurrence of payment default, a covenant default, a failure to pay when due any
other indebtedness of the Company and an event of default under certain other
indebtedness of the Company.  In the event of a default by the
Company, the interest rate will be increased to the specified default rate,
CoBank may stop making additional credit available, and require the Company to
repay its entire debt immediately.





Demand Line of Credit
Agreement with Citizens Bank of Pennsylvania:





On
January 19, 2010, Artesian Resources and each of its subsidiaries entered into a
Demand Line of Credit Agreement, or the Citizens Agreement, with Citizens Bank
of Pennsylvania, or Citizens.  The Citizens Agreement provides for a
$40 million Demand Line of Credit, or Line of Credit, which may be used by the
Company for short-term working capital needs, investments in facilities or
equipment or letters of credit only.  The Citizens Agreement provides
that Citizens will make loans to the Company from time to time, not to exceed
$40 million, expiring on the earlier of January 18, 2011 or any date on which
Citizens demands payment.  The Citizens Agreement is a demand loan
facility and therefore Citizens may demand payment under the Citizens Agreement
for any outstanding amounts at any time.  In the event that Citizens
makes a demand for payment, Citizens may increase the interest rate to the
specified default rate, stop making additional credit available and require the
Company to repay the entire principal balance and any accrued interest
immediately.  Interest rates on the Citizens Agreement are based on
LIBOR.  Interest payments are due monthly and the principal amount
outstanding can be repaid at anytime.





The
Company is required to maintain its primary operating account with Citizens and
the Company’s obligations are secured by a lien on all of the property of the
Company or its affiliates in the possession of Citizens or any of its
affiliates, including but not limited to any deposit, trust or agency account or
any other bank account with Citizens or any of its affiliates.  The
Citizens Agreement also contains certain customary operating
covenants.





Due to
the execution of the CoBank Agreement and the Citizens Agreement, the previously
existing lines of credit held by Artesian Water, Artesian Utility Development,
Inc. and Artesian Wastewater Management, Inc. were terminated.





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Financing Agreement with the
Delaware Drinking Water State Revolving Fund





On
February 12, 2010, Artesian Water entered into a Financing Agreement, or DWSRF
Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and
through the Delaware Department of Health and Social Services, Division of
Public Health, or the Department.





The
Department makes loans to and acquires obligations from eligible persons in
Delaware to finance the costs of drinking water facilities in accordance with
the Federal Safe Drinking Water Act using funds
from the Delaware Safe Drinking Water Revolving Fund, or the
Fund.  The Company has been given a loan of approximately $3.9
million, or the Loan from the Fund to finance all or a portion of the cost of
improvements and upgrades to specific water mains in service areas located in
New Castle County, Delaware (collectively, the “Project”).  In
accordance with the DWSRF Agreement, the Company will from time to time request
funds under the Loan as it incurs costs in connection with the
Project.  The Company shall pay to the Department, on the principal
amount drawn down and outstanding from the date drawn, interest at a rate of
1.705% per annum and an administrative fee at the rate of 1.705% per
annum.  Interest and administrative fees accrue starting on the
closing date, with initial payment commencing in August 1, 2010 and semiannually
thereafter.  Upon completion of the Project, the Company will begin
making semiannual principal payments on the outstanding principal amount, in
addition to the interest and administrative fees, with unpaid balances due and
payable in full on February 1, 2031.





The DWSRF
Agreement contains customary events of default, including, but not limited to,
the occurrence of payment default and a covenant default.  In the
event of a default by the Company, the Department may stop making additional
funds available, and require the Company to repay its entire debt
immediately.











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Report of Independent Registered Public Accounting
Firm









Board of
Directors and Shareholders


Artesian
Resources Corporation


Newark,
Delaware







We have
audited the accompanying consolidated balance sheets of Artesian Resources
Corporation as of December 31, 2009 and 2008 and the related consolidated
statements of operations, cash flows, and changes in stockholders’ equity for
each of the three years in the period ended December 31, 2009.  These
consolidated financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements.  We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Artesian Resources
Corporation at December 31, 2009 and 2008, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2009, in conformity with
accounting principles generally accepted in the United States of
America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Artesian Resources Corporation's internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control – Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 11,
2010 expressed an unqualified opinion thereon.








/s/BDO
Seidman, LLP


Bethesda,
Maryland


March 11,
2010











64
 Table of Contents





ITEM 9. –CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES





None.





ITEM 9A. -CONTROLS
AND PROCEDURES





(a)  Evaluation
of Disclosure Controls and Procedures





Our
management carried out an evaluation, under the supervision and with the
participation of the chief executive officer and the chief financial officer, of
the effectiveness of the design and operation of Artesian Resources
Corporation’s disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934) as of December 31, 2009, pursuant to the evaluation of these
controls and procedures required by Rule 13a-15 of the Securities Exchange
Act of 1934.  Based upon that evaluation, the chief executive officer
along with the chief financial officer concluded that Artesian Resources
Corporation’s disclosure controls and procedures as of December 31, 2009
were (1) designed to ensure that material information relating to the
Company and its subsidiaries is made known to the chief executive officer and
the chief financial officer by others within those entities, and
(2) effective, in that they provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms.  A control system cannot provide absolute assurance, however,
that the objectives of the control system are met and no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected.





(b)  Management’s
Annual Report on Internal Control Over Financial Reporting





The
Management of Artesian Resources Corporation is responsible for establishing and
maintaining adequate internal control over its financial
reporting.  Artesian Resources Corporation’s internal control over
financial reporting is a process designed under the supervision of the
Corporation’s chief executive officer and chief financial officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting
principles.





Artesian
Resources Corporation’s Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009 based on
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control Integrated
Framework.”  Based on this assessment, Management determined that at
December 31, 2009, the Corporation’s internal control over financial
reporting was effective.





(c)  Attestation
Report of the Registered Public Accounting Firm





The
effectiveness of Artesian’s internal control over financial reporting as of
December 31, 2009 has been audited by BDO Seidman LLP, an independent registered
public accounting firm, as stated in their report, which is included
herein.





(d)  Change
in Internal Control over Financial Reporting





No change
in the Company’s internal control over financial reporting, occurred during the
fiscal quarter ended December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, the Company’s  internal
control over financial reporting.





Date:
March 11, 2010








CHIEF
      EXECUTIVE OFFICER:
            
            
            CHIEF
      FINANCIAL OFFICER:/s/
      DIAN C. TAYLOR
            
            
            /s/
      DAVID B. SPACHTDian
      C. Taylor
            
            
            David
      B. Spacht








65
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ITEM 9B. –OTHER
INFORMATION





None.








66
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Report
of Independent Registered Public Accounting Firm


On
Internal Control Over Financial Reporting




Board of
Directors and Shareholders


Artesian
Resources Corporation


Newark,
Delaware




We have
audited Artesian Resources Corporation’s (“the Company”) internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria).  Artesian Resources
Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Item 9A,
Management’s Annual Report on Internal Control Over Financial
Reporting.  Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audit also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.




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




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




In our
opinion, Artesian Resources Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on the COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Artesian
Resources Corporation as of December 31, 2009 and 2008, and the related
consolidated statements of operations, cash flows, and changes in stockholders’
equity for each of the three years in the period ended December 31, 2009 and our
report dated March 11, 2010 expressed an unqualified opinion
thereon.






/s/BDO
Seidman LLP


Bethesda,
Maryland





March 11,
2010








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PART III





ITEM 10. –DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Name
            Age
            PositionDian
      C. Taylor
            64
            Director
      since 1991 - Chair of the Board since July 1993, and Chief Executive
      Officer and President of Artesian Resources Corporation and its
      subsidiaries since September 1992.  Ms. Taylor has been employed
      by the Company since August 1991.  She was formerly a consultant
      to the Small Business Development Center at the University of Delaware
      from February 1991 to August 1991 and Owner and President of Achievement
      Resources Inc. from 1977 to 1991.  Achievement Resources, Inc.
      specialized in strategic planning, marketing, entrepreneurial and human
      resources development consulting.  Ms. Taylor was a marketing
      director for SMI, Inc. from 1982 to 1985.  Ms. Taylor is the
      aunt of John R. Eisenbrey, Jr. and Nicholle R. Taylor.  She
      serves on the Executive and Strategic Planning, Budget and Finance
      Committees.Kenneth
      R. Biederman
            66
            Director
      since 1991 - Professor of Finance at the College of Business and Economics
      of the University of Delaware, Lerner College of Business and Economics
      since May 1996.  Interim Dean of the College of Business and
      Economics of the University of Delaware from February 1999 to June
      2000.  Dean of the College of Business and Economics of the
      University of Delaware from 1990 to 1996.  Currently a Director
      of the Mid -Atlantic Farm Credit Association.  Director of Chase
      Manhattan Bank USA from 1993 to 1996.  Formerly a financial and
      banking consultant from 1989 to 1990 and President of Gibraltar Bank from
      1987 to 1989.  Previously Chief Executive Officer and Chairman
      of the Board of West Chester Savings Bank; Economist and former Treasurer
      of the State of New Jersey and Staff Economist for the United States
      Senate Budget Committee.  He serves on the Executive; Audit;
      Strategic Planning, Budget and Finance; Governance and Nominating; and
      Compensation Committees.John
      R. Eisenbrey, Jr.
            54
            Director
      since 1993 - Small Business Executive.  Owner and President of
      Bear Industries, Inc., a privately held contracting firm, for more than
      twenty-five years.  Mr. Eisenbrey is also co-owner and President
      of Peninsula Masonry Inc.   Mr. Eisenbrey is the nephew of
      Dian C. Taylor and the cousin of Nicholle R. Taylor.  He serves
      on the Audit; Governance and Nominating; and Compensation
      Committees.Nicholle
      R. Taylor
            42
            Director
      since 2007 - Vice President of Artesian Resources Corporation and its
      subsidiaries - Ms. Taylor has served as an officer since May
      2004.  Ms. Taylor has been employed by the Company since 1991
      and has held various management level and operational positions within the
      Company.  Ms. Taylor is the niece of Dian C. Taylor and the
      cousin of John R. Eisenbrey, Jr.






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William
      C. Wyer
            63
            Director
      since 1991 - Business Consultant with Wyer Group, Inc. since September
      2005.  Previously, Mr. Wyer served as Managing Director of
      Wilmington Renaissance Corporation (formerly Wilmington 2000) from January
      1998 to August 2005.  Wilmington Renaissance Corporation is a
      private organization seeking to revitalize the City of Wilmington,
      Delaware.  Mr. Wyer served as a Director and member of the Audit
      Committee of GMAC Bank and its’ successor National Motors Bank, FBS since
      August 2001 through 2008.  President of All Nation Life
      Insurance and Senior Vice President of Blue Cross/Blue Shield of Delaware
      from September 1995 to January 1998.  Managing Director of
      Wilmington 2000 from May 1993 to September 1995.  Formerly
      President of Wyer Group, Inc. from 1991 to 1993 and Commerce Enterprise
      Group from 1989 to 1991, both of which are management-consulting firms
      specializing in operations reviews designed to increase productivity, cut
      overhead and increase competitiveness, and President of the Delaware State
      Chamber of Commerce from 1978 to 1989.  He serves on the
      Executive; Audit; Strategic Planning, Budget and Finance; Governance and
      Nominating; and Compensation Committees.Joseph
      A. DiNunzio
            47
            Executive
      Vice President and Corporate Secretary of Artesian Resources Corporation
      and its subsidiaries since May 2007.  Mr. DiNunzio previously
      served as Senior Vice President and Corporate Secretary of Artesian
      Resources Corporation and its subsidiaries since March 2000 and as Vice
      President and Secretary of Artesian Resources Corporation and its
      subsidiaries since January 1995.  Mr. DiNunzio has been employed
      by the Company since 1989 and has held various executive and management
      level positions within the Company.  Prior to joining Artesian,
      Mr. DiNunzio was employed by PriceWaterhouseCoopers LLP from 1984 to
      1989.Bruce
      P. Kraeuter
            60
            Senior
      Vice President of Engineering and Planning since May 2007.  Mr.
      Kraeuter previously served as Vice President of Engineering and Planning
      since March 1995.  He currently serves as an officer of Artesian
      Water Company, Inc., Artesian Water Maryland, Inc., Artesian Wastewater
      Management, Inc., Artesian Utility Development, Inc. and Artesian Water
      Pennsylvania, Inc.  Mr. Kraeuter has been employed by the
      Company since July 1989 and has held various executive and operational
      positions within the Company.  Mr. Kraeuter served as Senior
      Engineer with the Water Resources Agency for New Castle County, Delaware
      from 1974 to 1989.Jennifer
      L. Finch
            41
            Vice
      President and Assistant Treasurer since February 2010.  Ms.
      Finch previously served as Chief Accounting Director for the Company and
      its subsidiaries since August 2008.  She currently serves as
      Chief Financial Officer of Artesian Consulting Engineers, Inc., one of the
      Company’s eight wholly owned subsidiaries.  Prior to joining the
      Company, Ms. Finch served as Chief Financial Officer of Handler
      Corporation, a home builder company located in Wilmington,
      Delaware.  Ms. Finch was employed by the Handler Corporation
      from 1994 through 2008.  During that time she held various
      accounting positions.John
      J. Schreppler, II
            53
            Vice
      President, Assistant Secretary and General Counsel of Artesian Resources
      Corporation and its subsidiaries since July 2000.  Prior to
      joining the Company, he practiced law in Wilmington, Delaware as John J.
      Schreppler, II P.A. from February 1999, and before that as a partner in
      The Bayard Firm from 1988 to 1999.


David
      B. Spacht
            50
            Chief
      Financial Officer and Treasurer of Artesian Resources Corporation and its
      subsidiaries since January 1995, except that he has not been Chief
      Financial Officer of the wholly owned subsidiary Artesian Consulting
      Engineers, Inc. since May 2009.  The Company has employed Mr.
      Spacht since 1980 and he has held various executive and management level
      positions within the Company.John
      M. Thaeder
            52
            Senior
      Vice President of Operations since May 2007.  Mr. Thaeder
      previous served as Vice President of Operations since February
      1998.  He currently serves as an officer of Artesian Water
      Company, Inc., Artesian Wastewater Management, Inc., Artesian Water
      Maryland, Inc., Artesian Water Pennsylvania, Inc. and Artesian Utility
      Development, Inc.  Prior to joining the Company, Mr. Thaeder was
      employed by Hydro Group, Inc. from 1996 to 1998 as Southeastern District
      Manager of Sales and Operations from Maryland to
      Florida.  During 1995 and 1996, Mr. Thaeder was Hydro Group's
      Sales Manager of the Northeast Division with sales responsibilities from
      Maine to Florida.  From 1988 to 1995, he served as District
      Manager of the Layne Well and Pump Division of Hydro
  Group.





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Corporate
Governance





The
executive officers are elected or approved by our Board or our appropriate
subsidiary to serve until his or her successor is appointed or shall have been
qualified or until earlier death, resignation or removal.





In
accordance with the provisions of the Company's By-laws, the Board is divided
into three classes.  Members of each class serve for three years and
one class is elected each year to serve a term until his or her successor shall
have been elected and qualified or until earlier resignation or
removal.  Nicholle R. Taylor and William C. Wyer have been nominated
for election to the Board of Directors at the shareholders Annual Meeting to be
held May 18, 2010.





Director
Compensation





In May
2009, Directors received an annual retainer fee of $12,500 paid in
advance.  The chair of the Audit Committee received an annual retainer
of $3,500.  The other members of the Audit Committee received an
annual retainer fee of $2,500.  The chairs of the remaining standing
committees received an annual retainer of $1,000.  Each director
received $1,500 for each Board meeting attended, $1,000 for each committee
meeting attended on the day of a regular board meeting and $1,500 for each
committee meeting attended on any other day.   The Chair of the
Audit Committee received $1,500 for each committee meeting attended on the day
of a regular board meeting and $2,000 for each committee meeting attended on any
other day.  Each director received $450 per diem for
workshops.





Effective
January 1, 2010 each director will receive $2,000 for each Board meeting
attended, $1,500 for each committee meeting attended on the day of a regular
board meeting and $2,000 for each committee meeting attended on any other
day.  In May 2010, Directors will receive an annual retainer fee of
$16,000 paid in advance.  The chair of the Audit Committee will
receive an annual retainer of $5,000.  The other members of the Audit
Committee will receive an annual retainer fee of $3,000.  The chairs
of the remaining standing committees will receive an annual retainer of
$3,000.   Each director will receive $450 per diem for
workshops.





In 2009,
our Directors, other than Dian C. Taylor, whose fees as Director are included in
the Summary Compensation Table, received the following
compensation:





Director
Compensation Table – 2009





Name
            Fees
      Earned or
              Paid
      in
              Cash
              ($)
            Option
              Awards
              ($)
              (1)
            All
      other Compensation
              ($)(2)
            Total
              ($)Kenneth
      R. Biederman
            66,400
            17,290
            ---
            83,690John
      R. Eisenbrey, Jr.
            58,400
            17,290
            ---
            75,690Nicholle
      R. Taylor
            31,400
            17,290
            ---
            48,690William
      C. Wyer
            64,900
            17,290
            14,571
            96,761







(1)
            On
      May 19, 2009 each Director received option grants of 6,750 shares of Class
      A Non-voting Common stock at exercise prices equal to the fair market
      value on the date of grant (last reported sale price on the date of grant)
      or $15.26.  All options are exercisable one year from the date
      of grant and with terms of ten years.  The grant date fair
      market value, computed in accordance with Financial Accounting Standard
      Board, Accounting Standards Codification Topic 718, or ASC718, based upon
      the assumptions made in the valuations as described in Note 1 of the 2009 Financial Statements, is reflected in
      the “Option Awards” column in the table above.  The aggregate
      number of option awards outstanding at December 31, 2009 for each Director
      is:




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Option
      Shares Outstanding at December 31, 2009Kenneth
      R. Biederman
            65,250John
      R. Eisenbrey, Jr.
            69,139Nicholle
      R. Taylor
            31,500William
      C. Wyer
            65,250


(2)
            $14,527
      was paid for medical insurance premiums for Mr. Wyer and his
      spouse.  In addition, Mr. Wyer receives a life insurance benefit
      from the Company.









Compensation Committee
Interlocks and Insider Participation





During
the year ended December 31, 2009, the members of our Compensation Committee were
Kenneth R. Biederman, John R. Eisenbrey, Jr. and William C.
Wyer.  None of our executive officers serves as a director or as a
member of the compensation committee, or any other committee serving an
equivalent function, of any entity that has one or more of its executive
officers serving as members of our Compensation Committee or as a director of
our Board.  No member of our Compensation Committee has ever been our
employee.





Independence





In 2009,
the Board of Directors determined that a majority of the Board of Directors met
the independence requirements prescribed by the listing standards of the NASDAQ
Global Select Market.





Audit
Committee





The Audit
Committee reviews the procedures and policies relating to the internal
accounting procedures and controls of the Company, and provides general
oversight with respect to the accounting principles employed in the Company’s
financial reporting.  As part of its activities, the Audit Committee
meets with representatives of the Company’s management and independent
accountants.  The Audit Committee has considered the extent and scope
of non-audit services provided to the Company by its outside accountants and has
determined that such services are compatible with maintaining the independence
of the outside accountants. The Audit Committee appoints and retains the
Company’s independent accountants.  The Audit Committee has a charter
delineating its purpose and functions.  The Audit Committee consists
of Kenneth R. Biederman, John R. Eisenbrey, Jr. and William C.
Wyer.  The Board of Directors has also determined that each member of
the Audit Committee meets the independence requirements prescribed by the
listing standards of the NASDAQ Global Select Market and the rules and
regulations of the Securities and Exchange Commission.  The Board of
Directors has further determined that Mr. Biederman, a member of the Audit
Committee, is an "audit committee financial expert" as such term is defined in
Item 407(d)(5)(ii) of Regulation S-K promulgated by the SEC.  During
2009, the Audit Committee met five times.





Compensation
Committee





The
Compensation Committee reviews the compensation and benefits provided to key
management employees, officers and directors and makes recommendations as
appropriate to the Board.  The Committee also determines whether and
what amounts should be granted under the Equity Compensation Plan and may make
recommendations for amendments to the Plan.  The Compensation
Committee has a charter delineating its purpose and functions.  The
Compensation Committee is comprised of Kenneth R. Biederman, John R. Eisenbrey,
Jr. and William C. Wyer, three independent directors.  During 2009,
the Compensation Committee met five times.





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Consideration of Director
Candidates





The
Governance and Nominating Committee is comprised of three independent
directors.  As part of the formalized nominating procedures, the
committee makes recommendations for Director Nominations to the full
Board.  Director candidates nominated by stockholders are considered
in the same manner, provided the nominations are submitted to the Secretary and
copied to the Chairman of the committee on a timely basis and in accordance with
the Company’s by-laws.  Nominations for the election of directors for
the 2010 Annual Stockholders’ Meeting were approved by the Governance and
Nominating Committee.





When
considering whether directors and nominees have the experience, qualifications,
attributes and skills, taken as a whole, to enable the Board of Directors to
satisfy its oversight responsibilities effectively in light of the Company’s
business and structure, the Corporate Governance and Nominating Committee and
the Board of Directors focused primarily on the information discussed in each of
the Directors’ individual biographies.  In particular, in regards to
Ms. Nicholle R. Taylor, the Board of Directors considered her extensive
experience with the Company in a variety of positions thus giving her a clear
perception of how the Company operates since this will enable the Board to know
the Company’s current capabilities and limitations.  With regard to
Mr. Wyer, the Board of Directors considered his extensive management experience
with both local and national organizations which will help the Company as it
grows from a local to a regional provider of water and wastewater
services.  With regard to Ms. Dian C. Taylor, the Board of Directors
considered her 18 years of experience as Chief Executive Officer and President
of the Company, during which the Company has continuously expanded its service
area, her knowledge of the complex issues facing smaller companies and strategic
planning expertise.  With regard to Mr. Eisenbrey the Board of
Directors considered the experience of a Small Business Executive that he brings
to the organization.  Finally, with regard to Mr. Biederman, the Board
of Directors considered his experience as a former State Treasurer of New Jersey
and the former Dean of the College of Business and Economics at the University
of Delaware, which gives him an unparalleled level of business
knowledge.





Code of
Ethics





The
Company adopted a code of ethics applicable to its chief executive officer,
chief financial officer, controller or principal accounting officer, and any
person who performs a similar function, which is a "code of ethics" as defined
by applicable rules of the Securities and Exchange Commission.  This
code is publicly available on the Company's website at
www.artesianwater.com.  If the Company makes any amendments to this
code other than technical, administrative, or other non-substantive amendments,
or grants any waivers, including implicit waivers, from a provision of this code
to the Company's chief executive officer, chief financial officer, controller or
principal accounting officer, and any person who performs a similar function,
the Company will disclose the nature of the amendment or waiver, its effective
date and to whom it applies on its website.  The information on the
website listed above is not and should not be considered part of this Annual
Report on Form 10-K and is intended to be an inactive textual reference
only.







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SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Under
Section 16(a) of the Securities Exchange Act of 1934, as amended, directors,
officers and certain beneficial owners of the Company’s equity securities are
required to file reports of their transactions in the Company’s equity
securities with the Securities and Exchange Commission on specified due
dates.  With respect to the fiscal year 2009, reports of transactions
by all directors, officers and such beneficial holders were timely
filed.  In making this statement, the Company has relied on the
written representations of its directors, officers and holders of more than ten
percent (10%) of either class of our outstanding common stock ten percent (10%)
stockholders and copies of the reports that they filed with the Securities and
Exchange Commission.





ITEM 11. –EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis





This
discussion describes Artesian Resources Corporation’s (“Company” or “Artesian”)
compensation program for its executive officers listed in the Summary
Compensation Table that immediately follows this discussion.





Objectives
of Artesian’s Compensation Program





The
Compensation Committee believes that the compensation for Artesian’s executives
should serve to attract, motivate and retain seasoned and talented executives
responsible for successfully guiding and implementing the Company’s
strategy.  Our strategy is to increase our customer base, revenues,
earnings and dividends by expanding our water and wastewater services across the
Delmarva Peninsula, thereby providing our shareholders with a long-term,
satisfactory return on their investment.





To
implement our strategy, it is critical that our executives remain focused
on:





Ø
            ensuring
      superior customer service;




Ø
            continuously
      improving our efficiency and
performance;




Ø
            managing
      risk appropriately;




Ø
            expanding
      our franchised service territory and customer base at a consistent and
      sustainable rate - including by acquisitions - where growth is strong and
      demand is increasing;




Ø
            identifying
      and developing dependable sources of
supply;




Ø
            constructing
      and maintaining reliable treatment facilities and water delivery and
      wastewater collection systems;




Ø
            developing
      and continuing positive relationships with regulators, municipalities,
      developers and customers in both existing and prospective service areas;
      and




Ø
            developing
      a skilled and motivated work force that is adaptive to
    change.






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To
accomplish our strategy, our compensation program’s objectives are
to:





Ø
            provide
      compensation levels that are competitive with those provided by other
      companies with which we may compete for executive
  talent;




Ø
            motivate
      and reward contributions and performance aligned with the Company’s
      objectives; and




Ø
            attract
      and retain qualified, seasoned
executives.




The
compensation program rewards overall qualitative contributions and performance
of each individual towards the Company’s strategy.





Elements
of Artesian’s Compensation Program





The
elements of Artesian’s compensation program include:


Ø
            Base
      Salary




Ø
            Cash
      Bonus Award




Ø
            Equity
      Compensation as may be awarded under the 2005 Equity Compensation
      Plan




The
Company’s executive compensation program does not provide for:


Ø
            Severance
      or post-termination agreements




Ø
            Post-retirement
      benefits




Ø
            Defined
      benefit pension benefits or any supplemental executive retirement plan
      benefits




Ø
            Non-qualified
      deferred compensation




Ø
            Change-in-Control
      agreements







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Compensation
Process





In
determining competitive levels of compensation, the Compensation Committee
considers publicly available information regarding the compensation of
executives of other U.S. investor-owned water utilities and information
available from studies periodically performed by compensation consultants for
the Company.





Recognizing
the severe economic disruptions impacting the country, the Compensation
Committee decided to make no change to executive compensation in 2009 and the
Company’s compensation consultant was not requested to update their last
compensation analysis.





In their
last analysis dated April 14, 2008, the Company’s compensation consultant,
Astron Solutions, analyzed the base pay of comparative executive positions in
three different labor markets to determine the Company’s competitive
position.  Salary survey data for water utilities of a similar size to
Artesian were selected for use by the compensation consultant for a first market
analysis.  For a second market analysis, salary survey data for all
organizations of a similar size to Artesian in the local Newark, Delaware area
were selected for use by the compensation consultant.  For a third
market analysis, the compensation consultant selected salary survey data for the
Mid-Atlantic region for use.





The
compensation consultant selected four surveys for use in their market
analysis:


Ø
            AWWA
      Water Utility
      Compensation Survey


Ø
            ERI
      Salary
      Assessor


Ø
            Watson
      Wyatt Report on Top
      Management Compensation


Ø
            William
      M. Mercer Benchmark Database, Executive
      Positions





Matches
to the salary surveys were based on job duties and experience requirements, not
job titles.  The market average of the 25th,
50th and
75th
percentiles of base pay were reported by the compensation consultant, with
minimum, midpoint and maximum pay ranges set for each executive based upon the
50th
percentile average base pay market data.  Base pay compensation
falling within 10% of the target market level was considered market competitive
by the compensation consultant, noting that the market data do not take into
account years of experience of incumbents in their position or their job
performance.  The compensation consultant found Artesian’s executive
compensation to be competitive at the 50th
percentile of the market.





The
Compensation Committee uses the ranges provided by the consultant as a guide in
determining the individual compensation levels of the executive
officers.  In addition, the Committee qualitatively considers the
overall contributions made by the Chief Executive Officer and each other
executive towards the Company’s strategic objectives.  The
Compensation Committee also considers recommendations made by the Chief
Executive Officer regarding compensation for other executives based upon her
determination of individual contribution and performance.





Base
Salary





Base
salaries for Company executives are set at levels considered appropriate to
attract and retain seasoned and talented personnel.  The Compensation
Committee determines actual base salaries for each executive other than the
Chief Executive Officer based upon:


Ø
            recommendations
      provided by the Chief Executive
Officer;




Ø
            market
      rate for the position as provided by the Company’s compensation
      consultant;




Ø
            internal
      equity with other executives and Company
  personnel;




Ø
            individual
      executive performance; and




Ø
            individual
      contributions to the Company’s strategic
  objectives.






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The
Compensation Committee considers the same factors in determining the base salary
of the Chief Executive Officer, without any recommendation by the Chief
Executive Officer.





Recognizing
the severe economic disruptions impacting the country, the Compensation
Committee made no changes to any executive’s base salary in 2009.





Cash
Bonus and Equity Compensation Awards





Generally
each spring, the Compensation Committee determines whether any Cash Bonus and/or
Equity Compensation Award should be granted to any of the
executives.  The Cash Bonus and Equity Compensation Awards are
intended to reward executives for their contributions towards meeting the
Company’s strategic objectives.  Cash Bonus and Equity Compensation
Awards are entirely discretionary and are based upon a qualitative assessment
conducted by the Compensation Committee in the case of the Chief Executive
Officer and by the Compensation Committee and the Chief Executive Officer in the
case of other executives.  The bonus compensation awarded to the
executives was determined based on their performance as a team and each
executive other than the Chief Executive Officer was awarded the same level of
cash bonus in each of the last three years.





Equity
compensation may be awarded by the Board of Directors under the Company’s 2005
Equity Compensation Plan, which provides for the grants of stock options, stock
units, stock awards, dividend equivalents and other stock-based
awards.  The 2005 Equity Compensation Plan is meant to encourage
recipients of such grants to contribute materially to the growth of the Company,
for the benefit of the Company’s shareholders, and to align the economic
interests of the recipients with those of shareholders.  Stock bonuses
under the Plan were granted to executives in 2006.  In addition, as
reported in the Outstanding Equity Awards at Year End table, the Company’s
executives have stock options available for exercise that were granted in prior
years.  Based upon these factors, additional compensation in each of
the last three years was awarded to executives in the form of cash bonuses, with
the 2009 bonus delayed until December.  Based on the efforts of the
executives to maintain financial performance and continue progress on our
strategic objectives during difficult economic conditions, the Compensation
Committee determined that a cash bonus award was warranted, but that it should
not be in an amount greater than awarded in the prior year.





Generally
each May, the Compensation Committee of the Board of Directors considers the
grant of stock options for Directors.  Consistent with the grant made
to all Directors, Dian C. Taylor and Nicholle R. Taylor on May 19, 2009 each
received grants of 6,750 shares of Class A Non-voting stock at an exercise price
equal to the fair market value on the date of grant (last reported sale price on
that date), exercisable one year from the date of grant and with terms of ten
years from the date of grant.  Dian C. Taylor and Nicholle R. Taylor
also each received grants of 6,750 shares of Class A Non-voting Common stock on
May 14, 2008 under the same terms as the 2009 options.  Dian C. Taylor
also received a grant of 6,750 shares of Class A Non-voting Common stock on May
16, 2007 under the same terms as the 2009 option.  Nicholle R. Taylor
was appointed to the Board of Directors in December 2007.  Nicholle R.
Taylor is an executive officer not included in the summary compensation
table.







Other
Compensation





Both Dian
C. Taylor and Nicholle R. Taylor receive compensation for their services as
Directors, which compensation is equivalent to that provided to all other
Directors, for retainers and Board and Committee meeting fees.  See
“Director Compensation.”





Artesian’s
executives are eligible to participate in the same employee benefit plans and on
the same basis as other Artesian employees, with the exception that executive
officers are reimbursed for eligible medical expenses not otherwise covered by
the Company’s medical insurance plan under the Officer’s Medical Reimbursement
Plan.  Amounts reimbursed are included in the “All Other Compensation”
column in the Summary Compensation Table that follows this
discussion.





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The
Role of Management in the Executive Compensation Process





Our
Director of Human Resources assists the Compensation Committee by preparing and
providing information showing:


Ø
            current
      executive compensation levels;




Ø
            executive
      compensation recommendations made by the Chief Executive
      Officer;




Ø
            salary
      grade minimum, midpoint and maximums for each executive as recommended by
      the Company’s compensation
consultant;




Ø
            actual
      base salary, cash bonus and equity compensation for each of the prior
      three years for each executive;




Ø
            copy
      of the most recent compensation study performed by Astron
      Solutions;




Ø
            copies
      of proxies for the investor-owned water companies of Aqua America, Inc.,
      California Water Company, Connecticut Water Company, Middlesex Water
      Company, Pennichuck Water Company, Southwest Water Company and York Water
      Company; and




Ø
            analysis
      of water industry entities comparing Artesian to those water companies in
      terms of market capitalization, number of customers, number of employees,
      total assets and revenues.




Our Chief
Executive Officer meets with the Compensation Committee and provides input
regarding the contributions of each executive towards the Company’s strategic
objectives and each executive’s overall performance that formed the basis for
her recommendations to the Compensation Committee.  The final
decisions regarding compensation for each executive are made by the Compensation
Committee.





Compensation
Committee Report





The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with management and, based on the review and discussions, the
Compensation Committee recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in the Company’s Annual Report
on Form 10-K.







The
Compensation Committee,





William
C. Wyer, Chairman


Kenneth
R. Biederman


John R.
Eisenbrey, Jr.











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The
following table sets forth a summary of the compensation earned by the Chief
Executive Officer, Chief Financial Officer and the next three highest paid
executive officers whose annual salaries and bonuses exceeded $100,000 for the
fiscal year 2009.





Summary Compensation Table
for 2009:


Name
      and Principal Position
              Year
              Salary
      ($)
              Bonus
      ($)
              Stock
      Awards ($)
              Option
      Awards ($)(1)
              All
      Other Compensation ($)(2),(3),(4)
              Total
      ($)Dian
      C. Taylor, Chair, CEO & President
              2009
              390,225
              81,750
              N/A
              17,290
              82,866
              572,1312008
              380,801
              72,300
              N/A
              24,299
              97,149
              574,5492007
              353,076
              81,450
              N/A
              32,715
              75,044
              542,285David
      B. Spacht, Vice President, Chief Financial
      Officer & Treasurer
              2009
              236,250
              38,000
              N/A
              N/A
              28,197
              302,4472008
              232,356
              37,300
              N/A
              N/A
              28,019
              297,6752007
              211,999
              36,450
              N/A
              N/A
              25,492
              273,941Joseph
      A. DiNunzio, Executive Vice President
      & Secretary
              2009
              270,300
              37,250
              N/A
              N/A
              26,840
              334,3902008
              265,004
              35,700
              N/A
              N/A
              26,606
              327,3092007
              249,629
              35,700
              N/A
              N/A
              23,015
              308,344Bruce
      P. Kraeuter, Vice President of Planning
      and Engineering
              2009
              236,250
              37,250
              N/A
              N/A
              28,987
              302,4872008
              211,858
              37,300
              N/A
              N/A
              26,679
              275,8372007
              214,460
              36,450
              N/A
              N/A
              22,917
              273,827John
      M. Thaeder, Senior Vice President of
      Operations
              2009
              254,400
              37,250
              N/A
              N/A
              17,044
              308,6942008
              249,415
              35,700
              N/A
              N/A
              18,508
              303,6242007
              227,922
              35,700
              N/A
              N/A
              13,524
              277,146


(1)
              On
      May 19, 2009 Dian C. Taylor received option grants of 6,750 shares of
      Class A Non-voting Common stock at exercise prices equal to fair market
      value on the date of grant (last reported sale price on the date of
      grant), exercisable one year from the date of grant and with a term of ten
      years.  On May 14, 2008 and May 16, 2007, Ms. Taylor received
      option grants of 6,750 shares of Class A Non-voting Common stock under the
      same terms as the 2009 options.  The fair market value, computed
      in accordance with ASC 718, based upon the assumptions made in the
      valuation as described in Note 1 of the 2009
      Financial Statements, is reflected in the “Option Awards” column in the
      table above.
 
 
 (2)
              Under the
      Company’s defined contribution 401(k) Plan, the Company contributes two
      percent of an eligible employee's gross earnings.  The Company
      also matches fifty percent of the first six percent of the employee's
      gross earnings that the employee contributes to the 401(k)
      Plan.  In addition, all employees hired before April 26, 1994
      and under the age of sixty at that date are eligible for additional
      contributions to the 401(k) Plan.  Employees over the age of
      sixty at that date receive Company paid medical, dental and life insurance
      benefits upon retirement.  The Company will not provide such
      benefits to any other current or future employees.  In 2009,
      Company contributions to the 401(k) Plan under terms available to all
      other employees based upon their years of service and plan eligibility
      were made in the amounts of:
 
 Dian
      C. Taylor
              $24,500David
      B. Spacht
              $26,000Joseph
      A. DiNunzio
              $24,800Bruce
      P. Kraeuter
              $23,600John
      M. Thaeder
              $12,250
 
 (3)
              Executive
      officers are reimbursed for eligible medical expenses not otherwise
      covered by the Company’s medical insurance plan under the Officer’s
      Medical Reimbursement Plan.  Amounts reimbursed are included in
      the “All Other Compensation” column in the table above.  Dian C.
      Taylor received reimbursements of $11,982 in
  2009.
  
 (4)
              Also
      included in the “All Other Compensation” column in the table above are
      amounts received by Dian C. Taylor as compensation for attendance at
      meetings of the Board and its committees in 2009 totaling $35,900, golf
      club dues of $3,206, security provided at her personal residence of $5,653
      and personal use of a company-owned
vehicle.
 
 78
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Grants of
Plan-Based Awards Table – 2009





Name
            Grant
      Date
            All
      Other Stock Awards: Number of Shares of Stock or Units (#)
            All
      Other Option Awards: Number of Securities Underlying Options
      (#)
            Exercise
      or Base Price of Option Awards ($/share)
            Grant
      Date Fair Value of Stock & Option Awards ($)Dian
      C. Taylor
            May
      19, 2009
            N/A
            6,750
            15.26
            17,290





Ms. Dian
C. Taylor and was granted an option award on May 19, 2009 as noted in the table
above.  The Class A Non-Voting Common stock shares available under the
grant have an exercise price equal to fair value on the date of grant (last
reported sale price on the date of grant), become exercisable one year after the
date of grant, are for a term of ten years from the date of grant, and
automatically terminate upon the first occurrence of:




(i)
            The
      expiration of the 90-day period after the Grantee ceases to provide
      service to the Company, if the termination of service is for any reason
      other than Disability, death or Cause (as defined in the
      award);




(ii)
            The
      expiration of the one year period after Grantee ceases to provide service
      to the Company on account of her
Disability;




(iii)
            The
      expiration of the one year period after Grantee ceases to provide service
      to the Company, if she dies while providing service to the Company or
      within 90 days after the she ceases to provide such services on account of
      a termination described in (i) above;
or




(iv)
            The
      date on which Grantee ceases to provide service to the Company for
      Cause.  In addition, notwithstanding the prior provisions, if
      Grantee engages in conduct that constitutes Cause after her employment or
      service terminates, the Option shall immediately
  terminate.







79
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Outstanding
Equity Awards at Fiscal Year-End Table – 2009









Option
      AwardsName
            Number
      of Securities Underlying Unexercised
      Options(#) Exercisable
            Number
      of Securities Underlying Unexercised Options
              (#) Unexercisable
            Option
      Exercise Price($)
            Option
      Expiration DateDian
      C. Taylor
            6,750
            0
            9.28
            5/31/20106,750
            0
            9.76
            5/30/20116,750
            0
            12.40
            6/5/20126,750
            0
            13.30
            5/21/20136,750
            0
            16.13
            5/26/201411,250
            0
            19.70
            12/20/20156,750
            0
            21.11
            5/12/20166,750
            0
            19.59
            5/16/20176,750
            0
            18.43
            5/14/20180
            6,750(1)
            15.26
            5/19/2019David
      B. Spacht
            6,750
            0
            10.85
            5/30/20116,750
            0
            12.40
            6/5/20126,750
            0
            14.85
            5/21/20136,750
            0
            16.13
            5/26/201411,250
            0
            19.70
            12/20/2015Joseph
      A. DiNunzio
            11,250
            0
            10.85
            5/30/20116,750
            0
            12.40
            6/5/20126,750
            0
            14.85
            5/21/20136,750
            0
            16.13
            5/26/201411,250
            0
            19.70
            12/20/2015Bruce
      P. Kraeuter
            5,750
            0
            10.85
            5/30/20116,750
            0
            12.40
            6/5/20126,750
            0
            14.85
            5/21/20136,750
            0
            16.13
            5/26/201411,250
            0
            19.70
            12/20/2015John
      M. Thaeder
            6,750
            0
            10.85
            5/30/20116,750
            0
            12.40
            6/5/20126,750
            0
            14.85
            5/21/20136,750
            0
            16.13
            5/26/201411,250
            0
            19.70
            12/20/2015







(1)              The
option grant for 6,750 will vest on May 19, 2010.







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Option
Exercises and Stock Vested Table – 2009




Option
      Awards
              
              Stock
      AwardsName
              Number
      of Shares Acquired on Exercise (#)
              Value
      Realized on Exercise ($)
              
              Number
      of Shares Acquired on Vesting (#)
              Value
      Realized on Vesting ($)Dian
      C. Taylor
              3,925
              23,516
              
              N/A
              N/ADavid
      B. Spacht
              9,175
              54,137
              
              N/A
              N/AJoseph
      A. DiNunzio
              6,750
              48,891
              
              N/A
              N/ABruce
      P. Kraeuter
              7,850
              52,246
              
              N/A
              N/AJohn
      M. Thaeder
              4,207
              25,219
              
              N/A
              N/A




ITEM 12. –SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





The
following table sets forth the beneficial ownership of the equity securities of
the Company, as of March 2, 2010 for each director, each executive officer named
in the Summary Compensation Table, each beneficial owner of more than five
percent (5%) of the outstanding shares of any class of the Company's voting
securities and all directors and executive officers as a group, based in each
case on information furnished to the Company.  Addresses are provided
for each beneficial owner of more than five percent (5%) of the Company’s voting
securities.





Class
      A Non-VotingCommon
      Stock(1)
            
            Class
      B CommonStock(1)Shares
            Percent(2)
            
            Shares
            Percent(2)Dian
      C. Taylor(3)
              664
      Churchmans Road
              Newark,
      Delaware 19702
            156,416
            2.3
            
            159,364
            18.1Kenneth
      R. Biederman (3)(4)
            73,375
            1.1
            
            ---
            ---John
      R. Eisenbrey, Jr. (3)(5)(6)
              15
      Albe Drive
              Newark,
      Delaware 19702
            108,140
            1.6
            
            45,707
            5.2Nicholle
      R. Taylor (3)(7)(8)
              206
      Rothwell Drive
              Wilmington,
      Delaware 19804
            30,774
            *
            
            279,476
            31.7William
      C. Wyer (3)
            72,000
            1.1
            
            ---
            ---Joseph
      A. DiNunzio (3)(9)
            57,610
            *
            
            103
            *Bruce
      P. Kraeuter
            66,416
            1.0
            
            ---
            ---David
      B. Spacht (3)
            46,743
            *
            
            189
            *John
      M. Thaeder (3)
            62,936
            *
            
            1,350
            *Louisa
      Taylor Welcher(10)
              219
      Laurel Avenue
              Newark,
      DE  19711
            56,467
            *
            
            136,006
            15.4Directors
      and Executive Officers as a Group (11 Individuals)(3)
            718,210
            10.1
            
            486,189
            55.2*
      less than 1%





(1)
            The
      nature of ownership consists of sole voting and investment power unless
      otherwise indicated.  The amount also includes all shares
      issuable to such person or group upon the exercise of options held by such
      person or group to the extent such options are exercisable within 60 days
      after March 2, 2010.(2)
            The
      percentage of the total number of shares of the class outstanding is shown
      where that percentage is one percent or greater.  Percentages
      for each person are based on the aggregate number of shares of the
      applicable class outstanding as of March 2, 2010, and all shares issuable
      to such person upon the exercise of options held by such person to the
      extent such options are exercisable within 60 days of that
      date.(3)
            Includes
      options to purchase shares of the Company’s Class A Stock, as follows: Ms.
      D. Taylor (63,250 shares); Mr. Biederman (58,500 shares);
      Mr. Eisenbrey (62,389 shares); Ms. N. Taylor (24,750 shares);Mr. Wyer
      (58,500 shares); Mr. DiNunzio (42,750 shares); Mr. Spacht (38,250
      shares); and Mr. Thaeder (38,250 shares).(4)
            16,875
      shares were pledged as collateral for Mr. Biederman’s margin
      account.(5)
            39,611
      shares were pledged by Mr. Eisenbrey, Jr. as collateral for a
      loan.(6)
            Includes
      780 shares of the Class B Stock owned by a trust, of which Mr. Eisenbrey,
      Jr. is a trustee and has a beneficial ownership interest, and 1,555 shares
      of the Class B Stock held in custodial accounts for Mr. Eisenbrey, Jr.’s
      daughters.(7)
            100,202
      shares were pledged by Ms. Taylor as collateral for a loan.(8)
            Includes
      5 shares of the Class A Stock held in a custodial account for Ms. Taylor’s
      daughter.(9)
            Includes
      17 shares of the Class A Stock held in a custodial account for Mr.
      DiNunzio’s son.(10)
            Includes
      144 shares of the Class B Stock held jointly by Ms. Welcher’s husband and
      son, and 409 shares of the Class A Stock held by Ms. Welcher’s husband for
      which Ms. Welcher disclaims beneficial ownership.





81
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ITEM 13. –CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





We have
three directors who are considered independent under the NASDAQ listing
standards:  Kenneth R. Biederman, William C. Wyer, and John R.
Eisenbrey, Jr.





ITEM 14. –PRINCIPAL ACCOUNTANT FEES AND SERVICES





Fees
Billed by Independent Registered Public Accounting Firm





The
following table sets forth the aggregate fees billed to the Company for the
fiscal year 2009 and 2008 by the independent registered public accounting firm,
BDO Seidman LLP:





(In
      thousands)
            
            2009
            
            
            2008Audit
      Fees
            
            $
            444
            
            
            $
            395Audit-Related
      Fees
            
            
            ---
            
            
            
            ---Tax
      Fees
            
            
            ---
            
            
            
            ---All
      Other Fees
            
            
            ---
            
            
            
            ---Total
      Fees
            
            $
            444
            
            
            $
            395





Approximately
60% of the total hours spent on audit services for the Company for the year
ended December 31, 2009 was spent by McBride, Shopa and Company, one of the
members of the BDO Alliance network of firms.  Such members are not
full time, permanent employees of BDO.  McBride, Shopa and Company
was, however, directly engaged to perform the Company’s 401(k) Plan audit for
the fiscal years ended 2009 and 2008.  The fees billed to the Company
for the 401(k) Plan’s audit was $18,700 and $16,400 for 2009 and 2008
respectively.





Audit Fees: consist primarily
of fees for year-end audit including audit of the Company’s internal control
over financial reportingand the review of the
financial statements included in the registrant’s Form 10-Qs.





Audit-Related Fees: consist
primarily of fees billed for assurance, compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and related services that are reasonably related to
the performance of the audit or review of the registrant’s financial
statements.





Tax Fees: consist of fees for
professional services for tax compliance, tax advice and tax
planning.  These services include assistance regarding federal and
state tax compliance, return preparation and tax audits.





All Other Fees:consist of
fees for services other than described above.  The independent
registered public accounting firm did not provide any other services to the
Company in 2009 and 2008.





Pursuant
to policy, the Audit Committee pre-approves audit and tax services for the year
as well as non-audit services to be provided by the independent registered
public accounting firm.  Any changes in the amounts quoted are also
subject to pre-approval by the committee.  Any tax fees paid are
pre-approved by the committee.





The Audit
Committee of the Company’s Board of Directors has considered whether BDO’s
provision of the services described above for the fiscal year ended December 31,
2009, is compatible with maintaining its independence.  In addition,
the Audit Committee also considered services performed by McBride, Shopa and
Company to determine its compatibility with maintaining
independence.








82
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PART IV





ITEM 15.
–EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


The
      following documents are filed as part of this report:
            Page(s)*(1)
            Financial
      Statements:Reports of Independent Registered Public
      Accountants
            64Consolidated Balance Sheets at December 31, 2009 and
      2008
            36Consolidated Statements of Operations for the three years
      ended December 31, 2009
            37Consolidated Statements of Cash Flows for the three years
      ended December 31, 2009
            38Consolidated Statements of Changes in
      Stockholders’ Equity for the three years ended December 31,
      2009
            39Notes to Consolidated Financial
    Statements
            40
      - 63(2)
            Exhibits:  see
      the exhibit list below
            84*
      Page number shown refers to page number in this Report on Form
      10-K








83
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ARTESIAN
RESOURCES CORPORATION


FORM 10-K
ANNUAL REPORT


YEAR
ENDED DECEMBER 31, 2009





EXHIBIT
      LISTExhibit
              Number
            Description3.1
            Restated
      Certificate of Incorporation of the Company effective April 28, 2004
      incorporated by reference to Exhibit 3.1 filed with the Company’s Form
      10-Q for the quarterly period ended March 31, 2004.3.2
            By-laws
      of the Company effective March 26, 2004 incorporated by reference to
      Exhibit 3.3 filed with
              the
      Company’s Form 10-Q for the quarterly period ended March 31,
      2004.4.1
            Twentieth
      Supplemental Indenture dated as of December 1, 2008, between Artesian
      Water Company, Inc., subsidiary of the Company, and Wilmington Trust
      Company, as Trustee.  Incorporated by reference to Exhibit 4.1
      filed with the Company's Form 8-K filed on December 4,
    2008.4.2
            Eighteenth
      Supplemental Indenture dated as of August 1, 2005, between Artesian Water
      Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as
      Trustee.  Incorporated by reference to Exhibit 10.1 to the
      Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      2005.4.3
            Seventeenth
      supplemental Indenture dated as of December 1, 2003 between
      Artesian Water Company, Inc., subsidiary of the Company, and the
      Wilmington Trust Company, as Trustee.  Incorporated by reference
      to Exhibit 4.1 filed with the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2003.4.4
            Sixteenth
      supplemental Indenture dated as of January 31, 2003 between Artesian Water
      Company, Inc., subsidiary of the Company, and the Wilmington Trust
      Company, as Trustee. Incorporated by reference to Exhibit 4.2 filed with
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2003.4.5
            Fifteenth
      supplemental Indenture dated as of December 1, 2000 between Artesian Water
      Company, Inc.,
              subsidiary
      of the Company, and the Wilmington Trust Company, as
      Trustee.  Incorporated by reference to Exhibit 4.1 filed with
      the Company's Form 10-Q for the quarterly period ended March 31,
      2002.4.6
            Bond
      Purchase Agreement, dated December 1, 2008 by and between Artesian Water
      Company, Inc., subsidiary of the Company, and CoBank,
      ACB.  Incorporated by reference to exhibit 4.2 filed with the
      Company’s form 8-K filed on December 4, 2008.10.1
            Financing
      Agreement and General Obligation Note dated February 12, 2010 between
      Artesian Water Company, Inc. and Delaware Drinking Water State Revolving
      Fund Delaware Department of Health and Social Services, Division of Public
      Health.  Incorporated by reference to exhibit 10.1 filed with
      the Company’s form 8-K filed on February 17, 2010.10.2
            Revolving Credit Agreement dated
      January 19, 2010 between Artesian Water Company, Inc. and CoBank,
      ACB.Incorporated by reference to exhibit 10.1 filed
      with the Company’s form 8-K filed on January 25, 2010.10.3
            Demand Line of Credit Agreement
      dated January 19, 2010 between Artesian Resources Corporation and each of
      its subsidiaries and Citizens Bank of
      Pennsylvania.Incorporated by reference to exhibit 10.2
      filed with the Company’s form 8-K filed on January 25,
    2010.10.4
            Water
      Asset Purchase Agreement, dated December 1, 2009 by and among Artesian
      Water Maryland, Inc., a Delaware Corporation, Artesian Resources
      Corporation, a Delaware Corporation and the Mayor and Town Council of Port
      Deposit, Maryland, a body corporate and politic organized under the laws
      of the State of Maryland.  Incorporated by reference to exhibit
      10.1 filed with the Company’s form 8-K filed on December 2,
      2009.10.5
            Asset
      Purchase Agreement between Artesian Water Maryland, Inc., subsidiary of
      the Company, and Cecil County, Maryland, dated October 7,
      2008.  Incorporated by reference to exhibit 10.1 filed with the
      Company’s form 8-K filed on October 10, 2008.10.6
            Asset
      Purchase Agreement between Artesian Wastewater Maryland, Inc., subsidiary
      of the Company, and Cecil County, Maryland, dated October 7,
      2008.  Incorporated by reference to exhibit 10.2 filed with the
      Company’s form 8-K filed on October 10, 2008.10.7
            Asset
      Purchase Agreement between Artesian Wastewater Maryland, Inc., subsidiary
      of the Company, and Cecil County, Maryland, dated October 7,
      2008.  Incorporated by reference to exhibit 10.3 filed with the
      Company’s form 8-K filed on October 10, 2008.10.8
            Limited
      Liability Interest Purchase Agreement between Artesian Water Maryland,
      Inc., subsidiary of the Company, and Mountain Hill Water Company, LLC,
      dated May 5, 2008.  Incorporated by reference to exhibit 10.1
      filed with the Company’s form 8-K filed on May 9, 2008.10.9
            Wastewater
      Services Agreement between Artesian Utility Development, Inc., subsidiary
      of the Company, and Northern Sussex Regional Water Recharge Complex, LLC,
      dated June 30, 2008.  This exhibit is subject to an order
      granting confidential treatment issued by the SEC and therefore certain
      confidential portions have been omitted as indicated by the bracketed
      language [CONFIDENTIAL PORTION DELETED].  Incorporated by
      reference to exhibit 10.1 filed with the Company’s form 10-Q for the
      quarter ended June 30, 2008.10.10
            Artesian
      Resources Corporation 2005 Equity Compensation
      Plan.  Incorporated by reference to Exhibit 4.1 to the Company's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
      **10.11
            Amended
      and Restated Artesian Resources Corporation 1992 Non-Qualified Stock
      Option Plan, as amended.  Incorporated by reference to Exhibit
      10.4 filed with the Company’s Form 10-Q for the quarterly period ended
      June 30, 2003.**10.12
            Artesian
      Resources Corporation Incentive Stock Option Plan.  Incorporated
      by reference to Exhibit 10(e) filed with the Company's Annual Report on
      Form 10-K for the year ended December 31, 1995.**10.13
            Officer's
      Medical Reimbursement Plan dated May 27, 1992.  Incorporated by
      reference to Exhibit 10.6 filed with the Company’s Annual Report on Form
      10-K/A for the year ended December 31, 2001.**21
            Subsidiaries
      of the Company as of December 31, 2009. *23.1
            Consent
      of BDO Seidman LLP *31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. *31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. *32
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002. **
            Filed
      herewith.**
            Compensation
      plan or arrangement required to be filed or incorporated as an
      exhibit.











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SIGNATURES


ARTESIAN
RESOURCES CORPORATION





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has


duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Date
      March 11, 2010
            By:
      /s/ DAVID B. SPACHTDavid
      B. SpachtChief
      Financial Officer and Treasurer





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











Signature
            Title
            DatePrincipal
      Executive Officer:/s/
      DIAN C. TAYLORDian
      C. Taylor
            President
      and Chief Executive Officer
            March
      11, 2010Principal
      Financial and Accounting Officer:/s/
      DAVID B. SPACHTDavid
      B. Spacht
            Chief
      Financial Officer and Treasurer
            March
      11, 2010Directors:/s/
      DIAN C. TAYLORDian
      C. Taylor
            Director
            March
      11, 2010/s/
      KENNETH R. BIEDERMANKenneth
      R. Biederman
            Director
            March
      11, 2010/s/
      WILLIAM C. WYERWilliam
      C. Wyer
            Director
            March
      11, 2010/s/
      JOHN R. EISENBREY, JR.John
      R. Eisenbrey, Jr.
            Director
            March
      11, 2010/s/
      NICHOLLE R. TAYLORNicholle
      R. Taylor
            Director
            March
      11, 2010








85
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ARTESIAN
RESOURCES CORPORATION


FORM 10-K
ANNUAL REPORT


YEAR
ENDED DECEMBER 31, 2009





EXHIBIT
      LISTExhibit
              Number
            Description3.1
            Restated
      Certificate of Incorporation of the Company effective April 28, 2004
      incorporated by reference to Exhibit 3.1 filed with the Company’s Form
      10-Q for the quarterly period ended March 31, 2004.3.2
            By-laws
      of the Company effective March 26, 2004 incorporated by reference to
      Exhibit 3.3 filed with
              the
      Company’s Form 10-Q for the quarterly period ended March 31,
      2004.4.1
            Twentieth
      Supplemental Indenture dated as of December 1, 2008, between Artesian
      Water Company, Inc., subsidiary of the Company, and Wilmington Trust
      Company, as Trustee.  Incorporated by reference to Exhibit 4.1
      filed with the Company's Form 8-K filed on December 4,
    2008.4.2
            Eighteenth
      Supplemental Indenture dated as of August 1, 2005, between Artesian Water
      Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as
      Trustee.  Incorporated by reference to Exhibit 10.1 to the
      Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      2005.4.3
            Seventeenth
      supplemental Indenture dated as of December 1, 2003 between
      Artesian Water Company, Inc., subsidiary of the Company, and the
      Wilmington Trust Company, as Trustee.  Incorporated by reference
      to Exhibit 4.1 filed with the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2003.4.4
            Sixteenth
      supplemental Indenture dated as of January 31, 2003 between Artesian Water
      Company, Inc., subsidiary of the Company, and the Wilmington Trust
      Company, as Trustee. Incorporated by reference to Exhibit 4.2 filed with
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2003.4.5
            Fifteenth
      supplemental Indenture dated as of December 1, 2000 between Artesian Water
      Company, Inc.,
              subsidiary
      of the Company, and the Wilmington Trust Company, as
      Trustee.  Incorporated by reference to Exhibit 4.1 filed with
      the Company's Form 10-Q for the quarterly period ended March 31,
      2002.4.6
            Bond
      Purchase Agreement, dated December 1, 2008 by and between Artesian Water
      Company, Inc., subsidiary of the Company, and CoBank,
      ACB.  Incorporated by reference to exhibit 4.2 filed with the
      Company’s form 8-K filed on December 4, 2008.10.1
            Financing
      Agreement and General Obligation Note dated February 12, 2010 between
      Artesian Water Company, Inc. and Delaware Drinking Water State Revolving
      Fund Delaware Department of Health and Social Services, Division of Public
      Health.  Incorporated by reference to exhibit 10.1 filed with
      the Company’s form 8-K filed on February 17, 2010.10.2
            Revolving Credit Agreement dated
      January 19, 2010 between Artesian Water Company, Inc. and CoBank,
      ACB.Incorporated by reference to exhibit 10.1 filed
      with the Company’s form 8-K filed on January 25, 2010.10.3
            Demand Line of Credit Agreement
      dated January 19, 2010 between Artesian Resources Corporation and each of
      its subsidiaries and Citizens Bank of
      Pennsylvania.Incorporated by reference to exhibit 10.2
      filed with the Company’s form 8-K filed on January 25,
    2010.10.4
            Water
      Asset Purchase Agreement, dated December 1, 2009 by and among Artesian
      Water Maryland, Inc., a Delaware Corporation, Artesian Resources
      Corporation, a Delaware Corporation and the Mayor and Town Council of Port
      Deposit, Maryland, a body corporate and politic organized under the laws
      of the State of Maryland.  Incorporated by reference to exhibit
      10.1 filed with the Company’s form 8-K filed on December 2,
      2009.10.5
            Asset
      Purchase Agreement between Artesian Water Maryland, Inc., subsidiary of
      the Company, and Cecil County, Maryland, dated October 7,
      2008.  Incorporated by reference to exhibit 10.1 filed with the
      Company’s form 8-K filed on October 10, 2008.10.6
            Asset
      Purchase Agreement between Artesian Wastewater Maryland, Inc., subsidiary
      of the Company, and Cecil County, Maryland, dated October 7,
      2008.  Incorporated by reference to exhibit 10.2 filed with the
      Company’s form 8-K filed on October 10, 2008.10.7
            Asset
      Purchase Agreement between Artesian Wastewater Maryland, Inc., subsidiary
      of the Company, and Cecil County, Maryland, dated October 7,
      2008.  Incorporated by reference to exhibit 10.3 filed with the
      Company’s form 8-K filed on October 10, 2008.10.8
            Limited
      Liability Interest Purchase Agreement between Artesian Water Maryland,
      Inc., subsidiary of the Company, and Mountain Hill Water Company, LLC,
      dated May 5, 2008.  Incorporated by reference to exhibit 10.1
      filed with the Company’s form 8-K filed on May 9, 2008.10.9
            Wastewater
      Services Agreement between Artesian Utility Development, Inc., subsidiary
      of the Company, and Northern Sussex Regional Water Recharge Complex, LLC,
      dated June 30, 2008.  This exhibit is subject to an order
      granting confidential treatment issued by the SEC and therefore certain
      confidential portions have been omitted as indicated by the bracketed
      language [CONFIDENTIAL PORTION DELETED].  Incorporated by
      reference to exhibit 10.1 filed with the Company’s form 10-Q for the
      quarter ended June 30, 2008.10.10
            Artesian
      Resources Corporation 2005 Equity Compensation
      Plan.  Incorporated by reference to Exhibit 4.1 to the Company's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
      **10.11
            Amended
      and Restated Artesian Resources Corporation 1992 Non-Qualified Stock
      Option Plan, as amended.  Incorporated by reference to Exhibit
      10.4 filed with the Company’s Form 10-Q for the quarterly period ended
      June 30, 2003.**10.12
            Artesian
      Resources Corporation Incentive Stock Option Plan.  Incorporated
      by reference to Exhibit 10(e) filed with the Company's Annual Report on
      Form 10-K for the year ended December 31, 1995.**10.13
            Officer's
      Medical Reimbursement Plan dated May 27, 1992.  Incorporated by
      reference to Exhibit 10.6 filed with the Company’s Annual Report on Form
      10-K/A for the year ended December 31, 2001.**21
            Subsidiaries
      of the Company as of December 31, 2009. *23.1
            Consent
      of BDO Seidman LLP *31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. *31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002. *32
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002. **
            Filed
      herewith.**
            Compensation
      plan or arrangement required to be filed or incorporated as an
      exhibit.







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