Artesian Resources (ARTNA) 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from  _____  to  _____

Commission file number 000-18516

ARTESIAN RESOURCES CORPORATION

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(Exact name of registrant as specified in its charter)

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

664 Churchmans Road, Newark, Delaware 19702

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Address of principal executive offices

(302) 453 – 6900

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Registrant's telephone number, including area code

Not Applicable

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(Former name, former address and former fiscal year, if changed since last report.)

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 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 “small reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer oAccelerated filer þ Non-accelerated filer oSmall reporting company o

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

o Yes þ No

As of April 30, 2008, 6,440,423 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.

ARTESIAN RESOURCES CORPORATION

INDEX TO FORM 10-Q

Part I	-	Financial Information:
Item 1	-	Financial Statements	Page(s)
		Consolidated Balance Sheets as of
		March 31,2008 and December 31, 2007 (unaudited)	3
		Consolidated Statements of Income
		for the quarter ended March 31, 2008 and 2007 (unaudited)	4
		Consolidated Statements of Retained Earnings	5
		for the quarter ended March 31, 2008 and 2007 (unaudited)
		Consolidated Statements of Cash Flows	5 – 6
		for the quarter ended March 31, 2008 and 2007 (unaudited)
		Notes to the Consolidated Financial Statements	7 – 13
Item 2	-	Management's Discussion and Analysis of	14 – 20
		Financial ConditionandResults of Operations
Item 3	-	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4	-	Controls and Procedures	21
Part II	-	Other Information:
Item 1A	-	Risk Factors	21
Item 6	-	Exhibits	22
Signatures

PART I– FINANCIAL INFORMATION

ITEM 1– FINANCIAL STATEMENTS

ARTESIAN RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

Unaudited

(In thousands)

	March 31, 2008		December 31, 2007
ASSETS
Utility plant, at original cost less accumulated depreciation	$	285,418	$	274,140
Current assets
Cash and cash equivalents		3,349		2,520
Accounts receivable, net		4,838		5,499
Unbilled operating revenues		2,699		3,198
Materials and supplies-at cost on FIFO basis		1,127		1,192
Prepaid property taxes		550		1,058
Prepaid expenses and other		788		857
Total current assets		13,351		14,324
Other assets
Non-utility property (less accumulated depreciation 2008-$185; 2007-$177)		341		288
Other deferred assets		4,443		4,156
Total other assets		4,784		4,444
Regulatory assets, net		1,637		1,681
	$	305,190	$	294,589
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock	$	7,321	$	7,300
Additional paid-in capital		65,663		65,363
Retained earnings		12,211		12,469
Total stockholders' equity		85,195		85,132
Long-term debt, net of current portion		91,627		91,757
		176,822		176,889
Commitments and contingencies
Current liabilities
Lines of credit		2,398		898
Current portion of long-term debt		327		316
Accounts payable		4,101		3,225
Accrued expenses		3,182		2,483
Overdraft payable		2,488		1,672
Deferred income taxes		103		301
Interest accrued		494		326
Customer deposits		733		746
Other		2,076		1,877
Total current liabilities		15,902		11,844
Deferred credits and other liabilities
Net advances for construction		23,313		23,840
Postretirement benefit obligation		868		868
Deferred investment tax credits		734		740
Deferred income taxes		26,040		25,170
Total deferred credits and other liabilities		50,955		50,618
Net contributions in aid of construction		61,511		55,238
	$	305,190	$	294,589

See notes to the consolidated financial statements.

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ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts)
	For the Quarter
	Ended March 31,
	2008		2007
OPERATING REVENUES
Water sales	$	11,089	$	10,707
Other utility operating revenue		440		432
Non-utility revenue		741		465
		12,270		11,604
OPERATING EXPENSES
Utility operating expenses		6,973		6,485
Non-utility operating expenses		563		210
Depreciation and amortization		1,334		1,212
State and federal income taxes		671		741
Property and other taxes		793		688
		10,334		9,336
OPERATING INCOME		1,936		2,268
OTHER INCOME, NET
Allowance for funds used during construction		117		60
Miscellaneous		464		463
INCOME BEFORE INTEREST CHARGES		2,517		2,791
INTEREST CHARGES		1,518		1,635
NET INCOME	$	999	$	1,156
INCOME PER COMMON SHARE:
Basic	$	0.14	$	0.19
Diluted	$	0.13	$	0.18
CASH DIVIDEND PER COMMON SHARE	$	0.17	$	0.16
AVERAGE COMMON SHARES OUTSTANDING
Basic		7,313		6,111
Diluted		7,434		6,273

See notes to the consolidated financial statements.

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ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Unaudited
(In thousands)
	For the Quarter
	Ended March 31,
		2008		2007
Balance, beginning of period		$	12,469	$	10,662
Net income			999		1,156
			13,468		11,818
Less: Dividends			1,257		977
Balance, end of period		$	12,211	$	10,841
See notes to the consolidated financial statements.

ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
	For the Quarter
	Ended March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME	$	999		$	1,156
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		1,334			1,212
Deferred income taxes, net		667			882
Stock compensation		41			32
Allowance for funds used during construction		(117	)		(60	)
Changes in assets and liabilities:
Accounts receivable, net		661			(365	)
Income tax payable		---			3
Unbilled operating revenues		499			206
Materials and supplies		65			32
Prepaid property taxes		508			448
Prepaid expenses and other		69			213
Other deferred assets		(315	)		(273	)
Regulatory assets		44			30
Postretirement benefit obligation		---			(15	)
Accounts payable		876			(698	)
Accrued expenses		699			(511	)
Interest accrued		168			156
Customer deposits and other, net		186			323
NET CASH PROVIDED BY OPERATING ACTIVITIES		6,384			2,771
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of AFUDC		(7,975	)		(5,045	)
Proceeds from sale of assets		16			6
NET CASH USED IN INVESTING ACTIVITIES		(7,959	)		(5,039	)

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ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Unaudited
(In thousands)
	For the Quarter
	Ended March 31,
	2008			2007
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreements		1,500			1,245
Overdraft payable		816			1,594
Net advances and contributions in aid of construction		1,158			1,378
Principal repayments of long-term debt		(118	)		(113	)
Net proceeds from issuance of common stock		280			272
Dividends		(1,257	)		(977	)
Deferred debt issuance costs		25			26
NET CASH PROVIDED BY FINANCING ACTIVITIES		2,404			3,425
NET INCREASE IN CASH AND CASH EQUIVALENTS		829			1,157
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD		2,520			1,414
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,349		$	2,571
Supplemental Disclosure of Non-Cash Activity:
Utility Plant received as Construction Advances and Contributions	$	4,853		$	---
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	1,325		$	1,438
Income taxes paid	$	---		$	---
See notes to the consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – GENERAL

Artesian Resources Corporation, or Artesian Resources, operates as a holding company, whose income is derived from the earnings of our six wholly owned subsidiaries and our one-third interest in AquaStructure Delaware, L.L.C., a limited liability corporation that is inactive.  The terms “we”, “our”, “Artesian” and the “Company” as used herein refer to Artesian Resources and its subsidiaries.

On July 20, 2007, the Maryland Public Service Commission approved Artesian Resources’ acquisition of the Carpenters Point Water Company.  The acquisition was completed on August 7, 2007 in a transaction accounted for under Statement of Financial Accounting Standards No. 141 “Business Combinations” (SFAS 141) and the results of operations are included in the Consolidated Statement of Income as of the August 7, 2007 date of acquisition.  Carpenters Point Water Company serves a 141 home community in Cecil County, Maryland 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.  Carpenters Point Water Company has been renamed Artesian Water Maryland, Inc., or Artesian Maryland.

Artesian Water Company, Inc., or Artesian Water, our principal subsidiary, is the oldest and largest public water utility on the Delmarva Peninsula, and has been providing water service since 1905.  Artesian Water distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware.  In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with 20 private and municipal water providers.

Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, began operations in 2002, and is providing water service to a residential community, consisting of 38 customers, in Chester County, Pennsylvania.  In 2005, the Pennsylvania Public Utilities Commission approved our application to increase our service area to encompass four specific planned developments.

Another subsidiary of ours, Artesian Wastewater Management, Inc., or Artesian Wastewater, is a regulated entity that owns wastewater infrastructure and provides wastewater services in Delaware.  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.

Our two other subsidiaries, neither of which is regulated, are Artesian Utility Development, Inc., or Artesian Utility, which designs and builds water and wastewater infrastructure and provides contract water and wastewater services on the Delmarva Peninsula, and Artesian Development Corporation, or Artesian Development, the sole activity of which is the ownership of a six-acre parcel of land zoned for office buildings located immediately adjacent to our corporate headquarters.

On May 1, 2007, Artesian Utility acquired all rights, titles and interest in operations contracts of TMH Environmental Services, Inc., or TMH.  TMH, incorporated in Pennsylvania, currently provides contract water and wastewater operation services to 25 private, municipal and governmental institutions in the southeastern part of Pennsylvania.

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Stock Compensation Plans

We maintain an equity compensation plan that provides for grants of stock options and restricted stock awards and other forms of stock compensation to our directors, officers and key employees.  Prior to May 25, 2005, we maintained three stock compensation plans.  No further equity compensation can be issued under those plans.  On May 25, 2005, the Company’s stockholders approved a new Equity Compensation Plan, or the Plan, which authorized up to 750,000 shares of Class A Non-Voting Common Stock for issuance.  The terms and vesting schedules for options granted under the Plan may vary and are set at the time of grant by the Compensation Committee of the Board of Directors.  Approximately $41,000 in compensation expense was recorded during the three months ended March 31, 2008 for stock options issued in May 2007 under the Plan.  For the three months ended March 31, 2007 an expense of approximately $32,000 was recorded for stock options granted in May 2006.

Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, and related interpretations (“SFAS No. 123R”) using the modified-prospective transition method.  Under this method, compensation cost recognized included (a) compensation cost for all share-based payments granted prior to, but not yet vested, as of January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123R and (b) compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.   All options were granted at market value with a 10 year option term with a vesting period of one year from the dates of grant, May 16, 2007 and May 12, 2006.  The fair value of the options that were granted in 2007 and 2006 were estimated using a Black-Scholes-Merton option-pricing formula, applying the following assumptions:

	2007			2006
Expected Dividend Yield		3.250	%		2.930	%
Expected Stock Price Volatility		0.272			0.238
Weighted Average Risk-Free Interest Rate		4.690	%		5.030	%
Weighted Average Expected Life of Options (in years)		6.650			3.260

For 2007 and 2006, the expected dividend yield was based on a 12 month rolling average of the 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 seven year period ended May 31, 2007, and the three year period ended June 30, 2006, for 2007 and 2006, respectively.  The expected life 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 grant for 2007 and the 3-year Treasury Constant Maturity rate as of the date of the grant for 2006.

8

The following summary reflects changes in the shares of Class A Non-Voting Common Stock under option:

	Option Shares			Weighted Average Exercise Price		Weighted Average Remaining Life (Yrs.)		Aggregate Intrinsic Value (in thousands)
Plan options
Outstanding at January 1, 2008		574,696		$	14.621
Granted		---			N/A
Exercised		(10,600	)	$	7.613
Canceled		---			N/A
Outstanding at March 31, 2008		564,096		$	14.752		4.79	$	2,383
Options exercisable at March 31, 2008		537,096		$	14.511		4.57	$	2,383

The total intrinsic value of options exercised during the three month period ended March 31, 2008 was approximately $117,000.

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

Non-vested Shares	Option Shares		Weighted Average Grant -Date Fair Value Per Option
Non-vested at January 1, 2008		27,000	$	4.847
Granted		---		N/A
Vested		---		N/A
Canceled		---		N/A
Non-vested at March 31, 2008		27,000	$	4.847

As of March 31, 2008, there was $21,000 of total unrecognized expense related to non-vested option shares granted under the Plan.  That cost will be recognized over the remaining vesting period of the unvested options.

NOTE 2 – BASIS OF PRESENTATION

The unaudited Consolidated Financial Statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required in the financial statements included in the Company's annual report on Form 10-K.  Accordingly, these financial statements and related notes should be read in conjunction with the financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2007.

In the opinion of the Company, the accompanying unaudited Consolidated Financial Statements reflect all normal recurring adjustments necessary to present fairly the Company's balance sheet position as of March 31, 2008 and the results of operations for the quarterly periods ended March 31, 2008 and 2007 and cash flows for quarter ended March 31, 2008 and 2007.

The results of operations for the interim period presented are not necessarily indicative of the results for the full year or for future periods.

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NOTE 3 - REGULATORY ASSETS

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 Delaware Public Service Commission, or PSC.  Expenses related to 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 20 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.  Regulatory assets net of amortization, are comprised of the following:

	Unaudited
	(in thousands)
	March 31, 2008		December 31, 2007
Postretirement benefit obligation	$	958	$	968
Deferred income taxes		563		567
Expense of rate proceedings		114		141
Other		2		5
	$	1,637	$	1,681

Expenses related to the Net Periodic Pension Cost for the postretirement benefit obligation are as follows:

	Unaudited
	(in thousands)
For the Three Months Ended March 31,
	2008		2007
Net Periodic Pension Cost
Interest Cost	$	13	$	12
Amortization of Net Gain		---		(5	)
Amortization of Transition Obligation		2		2
Total Net Periodic Benefit Cost	$	15	$	9

Contributions

Artesian Water contributed $26,000 to its postretirement benefit plan in the first three months of 2008 and expects to contribute another $77,000 for the remainder of the year.  These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company’s eligible retired employees.

10

NOTE 4 - 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 Quarter
	Ended March 31,
	2008		2007
	(in thousands)
Average common shares outstanding during
the period for Basic computation		7,313		6,111
Dilutive effect of employee stock options		121		162
Average common shares outstanding during
the period for Diluted computation		7,434		6,273

Equity per common share was $11.64 and $10.18 at March 31, 2008 and 2007, respectively.  These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on March 31, 2008 and 2007, respectively.

NOTE 5 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, FASB issued Statement No. 157, "Fair Value Measurements".  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.  This statement applies under other accounting pronouncements that require or permit fair value measurements; however, the statement does not require any new fair value measurements.  This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those years.  On January 1, 2008, we adopted the provisions of SFAS 157, except as it applies to non-financial assets and non-financial liabilities for which the effective date has been delayed by one year as described below.  The adoption of SFAS 157 did not have a material effect on our financial position or results of operations.  The book values of cash and cash equivalents, accounts receivables, lines of credit, and accounts payable approximate their respective fair values due to the short-term nature of these instruments.  The fair value of the long term debt at March 31, 2008 is estimated at $90.2 million determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities as guided under SFAS 107.

On February 12, 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157," which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities.  The Company does not expect it to have a material effect on the financial statements.

11

In February 2007, the Financial Accounting Standards Board, FASB, issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB No.115.”  This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company adopted this statement effective January 1, 2008 and after its evaluation determined that there was no material effect on the financial statements.

In March 2008, the Financial Accounting Standards Board, FASB, issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – Including an amendment of FASB No.133.”  This statement changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (a) how and why a company used derivative instruments, (b) how derivative instuments and related hedge items are accounted for under Statement 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company expects to adopt this statement effective January 1, 2009 and does not expect it to have a material effect on the financial statements.

NOTE 6 - RATE PROCEEDINGS

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 cannot exceed 5% within any 12-month period. During the first three months of 2008, we earned approximately $65,000 in DSIC revenue. We did not have DSIC in effect during 2007.

On April 22, 2008, Artesian Water filed a petition with the PSC to implement new rates to meet a requested increase in revenue of 28.8%, or approximately $14.2 million, on an annualized basis.  This request was primarily due to the Company’s significant investment in infrastructure to improve and ensure water quality and service reliability.   This includes capital expenditures for additional supply, storage, water main replacements, hydraulic improvements, installation of automated meter reading equipment in the service territory south of the Chesapeake & Delaware canal or C&D Canal, and additional space to house our critical operations and office support functions. The rate request was also filed due to increases in various operating and maintenance costs, including increased costs associated with depreciation, purchased power, purchased water, additional building space and postage. Additional reasons for this request include, expenses related to new water system additions, the implementation of monthly billing to customers below the C&D Canal, and creation of new water consumption blocks to provide the company an opportunity to achieve a fair rate of return.

As permitted by law, on or about June 21, 2008, we anticipate placing temporary rates into effect, designated to generate an increase in annual operating revenue of approximately 5.0%, or $2.5 million on an annualized basis, until new rates are approved by the PSC.

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NOTE 7 – INCOME TAXES

In June 2006, FASB issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, an Interpretation of FASB Statement No. 109 “Accounting for Income Taxes”.  The Company adopted this statement effective January 1, 2007 and after analyzing Artesian’s various tax positions 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.  There were no such charges for the period ended March 31, 2008.  Additionally, there were no accruals relating to interest or penalties as of March 31, 2008.  The Company remains subject to examination by federal and state authorities for the tax years 2004 through 2008.

NOTE 8 – SUBSEQUENT EVENT

On May 5, 2008, Artesian Water Maryland signed an agreement to acquire Mountain Hill Water Company with assets valued at approximately $6.0 million payable over 5 years, which currently serves two commercial accounts in the Principio Business Park which is located within Cecil County’s designated growth corridor.  The proposed acquisition is expected to provide water service to customers in portions of the Principio Business Park and the proposed 660 home residential development of Charlestown Crossing as well as the surrounding area.  The purchase is subject to approval by the Maryland Public Service Commission.  We expect the acquisition will be completed by the end of the third quarter of 2008.

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ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2008

Overview

Strategic Direction

Our profitability is primarily attributable to the sale of water by Artesian Water, the amount of which is dependent on seasonal fluctuations in weather, particularly during the summer months when water demand may vary with rainfall and temperature.  In the event that 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.  We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives.

Our initiatives south of the C&D Canal that began in 1992 are now providing the greatest portion of our customer growth.  This shift in growth is primarily the result of the build out of our service area in northern New Castle County, Delaware.

While customer growth in our water utility subsidiaries continued to be a major focus in the first three months of 2008, we aggressively seek opportunities that produce revenue streams that are not as directly affected by weather.  These opportunities include the efforts of Artesian Utility, which is actively pursuing opportunities to design, build and operate water and wastewater facilities throughout Delaware and surrounding areas on the Delmarva Peninsula. In addition, Artesian Utility acquired all rights, titles and interest in the operations contracts of TMH. We currently provide contract water and wastewater operation services to 25 private, municipal and governmental institutions in the southeastern part of Pennsylvania. Artesian Wastewater began providing wastewater services to customers in Delaware as a regulated public wastewater service company in July 2005.  The opportunities generated through our wastewater service company may provide additional service territory for the regulated water subsidiary or may provide contract operations services for municipalities or other regulated entities.  We will continue to focus attention on expanding our contract operations opportunities with municipalities and private water providers on the Delmarva Peninsula.

Our strategy is to focus on total resource management covering 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; educating customers on the wise use of water; and providing responsible wastewater management to assist with recharge of the aquifers.  Our strategy includes focusing our efforts to expand in new regions added to our service territory over the last 10 years, where growth is strong and demand is increasing.  We also foresee significant growth opportunities in wastewater service and will continue to seek strategic partnerships and relationships with developers and municipalities to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula.

In addition to services discussed above, Artesian Resources initiated a Service Line Protection Plan, or SLP Plan, in March 2005.  The SLP Plan covers all parts, material and labor required to repair or replace participants’ leaking water service lines up to an annual limit.  As of March 31, 2008, approximately 9,900, or 16%, of our 60,000 eligible water customers had signed up for the SLP Plan.   The SLP Plan will be expanded in the second quarter of 2008 to include maintenance or repair to customers’ sewer lines.  This plan will cover all parts, material and labor required to repair or replace participants’ leaking or clogged sewer lines up to an annual limit.

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Regulatory Matters and Inflation

As of March 31, 2008, we had approximately 75,400 metered water customers, approximately 560 wastewater customers, and served a population of approximately 254,000 (including contract services), representing approximately 30% of Delaware's total population.  Increases in the number of customers served by Artesian Water and Artesian Wastewater contributed to increases in our operating revenues.  The Delaware Public Service Commission, or PSC, regulates both Artesian Water's and Artesian Wastewater’s rates charged for service, the sale and issuance of securities and other matters.  Artesian Maryland is subject to the regulatory jurisdiction of the Maryland Public Service Commission.

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.  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 annual gross water sales.  Should the rate case not be completed within seven months, by law, the utility may put the lesser of the entire requested rate relief or 15% of annual gross water sales in effect, under bond, until a final resolution is ordered and placed into effect.  If such rates are found to be in excess of rates the PSC finds to be appropriate, we must refund the portion found 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 the 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.  On April 22, 2008, Artesian Water filed a petition with the PSC to implement new rates to meet a requested increase in revenue of 28.8%, or approximately $14.2 million, on an annualized basis.

 In 2003, legislation was enacted in Delaware requiring all water utilities serving within northern New Castle County to certify by July 2006 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 PSC accepted our certification of sufficient water supply.

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.

Delaware statute permits utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through 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 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 cannot exceed 5% within any 12-month period.  In December 2007, Artesian Water filed an application with the PSC 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 case in 2006.  The PSC approved the DSIC effective January 1, 2008 subject to audit at a later date. During the first three months of 2008, we earned approximately $65,000 in DSIC revenue. We did not have DSIC in effect during 2007.

On April 10, 2006, the PSC 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.

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Price caps instituted by electric restructuring legislation in Delaware in 1999 were lifted in 2006, resulting in extreme price increases for all of Delmarva Power's customers.  Artesian was able to mitigate these increases by signing a two-year fixed price supply contract with Pepco Holdings, Inc, or Pepco, in May of 2006.  We entered a new two-year electric supply contract with Pepco in April of 2008, which pricing is included in our request for rate relief filed with the PSC.

Results of Operations – Analysis of the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007

Operating Revenues

Revenues totaled $12.3 million for the three months ended March 31, 2008, $0.7 million, or 5.7% above revenues for the three months ended March 31, 2007 of $11.6 million.  Water sales revenues increased 3.6% for the three months ended March 31, 2008, over the corresponding period in 2007. Water sales revenue for the three months ended March 31, 2008 was positively impacted by the implementation of the second step of the rate increase on July 24, 2007 of 3.0% as approved by the PSC upon completion of our issuance of common stock. In addition, a portion of the increase in water sales revenue reflects an increase of 1,203 in the number of customers served as compared to the same period in 2007.  We realized 90.4% of our total operating revenue for the three months ended March 31, 2008 from the sale of water.   In 2007, 92.3% of our total revenue was from water sales.

Non-utility operating revenue increased $276,000 for the three months ended March 31, 2008, or 59.4%, from $465,000 in 2007 to $741,000 for the same period in 2008.  This increase was primarily due to design and permitting services totaling $250,000 performed for a developer in Sussex County, Delaware. The increase in revenue also includes a $37,000 increase in SLP Plan revenue. The SLP Plan provides coverage for all material and labor required to repair or replace participants’ leaking water service lines up to an annual limit.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.9 million, or 12.8%, to $8.3 million for the three months ended March 31, 2008, compared to $7.4 million for the same period in 2007.  The components of the increase in operating expenses included an increase in utility operating expenses of $488,000 and an increase in property taxes of $105,000.  Non-utility operating expenses increased $353,000 in the first quarter of 2008, or 168.2%, compared to the same period last year.

The increase in utility operating expense of $488,000 for the quarter ended March 31, 2008, or 7.5%, over the same period in 2007, is comprised of increases in payroll and employee benefits costs, administration costs, purchased water, purchased power and water treatment expense.  These increases were partially offset by a reduction in repair and maintenance expense.

Payroll and employee benefit expense increased $290,000, or 8.9%, compared to the same period in 2007, primarily due to increases in employee count, employee wages from merit increases, and increased medical insurance expense.

Administration expense increased $134,000, or 13.3%, compared to the same period in 2007, primarily due to increased employment recruitment services.

Purchased water expense increased $51,000, or 7.7%, compared to the same period in 2007, primarily due to the timing of purchases from Chester Water Authority and an increase in Chester Water Authority’s rates effective in July 2007.

Purchased Power expense increased $50,000, or 7.8%, compared to the same period in 2007 due to increased usage.

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Water Treatment expense increased $49,000, or 27.3%, compared to the same period in 2007 due to increased water testing as a result of increases in the number of plants we operate and increased water quality monitoring.

The increases were partially offset by a reduction of $80,000, or 15.1%, in repair and maintenance expense.  The decrease was the result of the timing of carbon filter media replacements.

Non-utility expense increased approximately $353,000, or 168.2% for the three months ended March 31, 2008, compared to the three months ended March 31, 2007, as a result of increased contract projects as compared to the same period in 2007.

Property and other taxes increased by $105,000, or 15.2%, compared to the same period in 2007, reflecting increases in tax rates charged for public schools in various areas where Artesian holds property and increases in the number of plants owned by Artesian.  Property taxes are assessed on land, buildings and certain utility plants, which includes the footage and size of pipe, hydrants and wells primarily owned by Artesian Water.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 67.9% for the three months ended March 31, 2008, compared to 63.6% for the three months ended March 31, 2007.

Depreciation and amortization expense increased $122,000, or 10.1%, over the three months ended March 31, 2008 as compared to the same period in 2007, due to continuing investment in utility plant in service providing supply, treatment, storage and distribution of water.

Federal and state income tax expense decreased $70,000 due to lower profitability for the three months ended March 31, 2008, compared to the three months ended March 31, 2007.

Other Income, Net

Our Allowance for Funds Used During Construction, or AFUDC, increased $57,000, or 95.0%, compared to the same period in 2007, as a result of increased long-term construction activity subject to AFUDC for the first quarter of 2008 compared to the same period in 2007.

Interest Charges

Interest charges decreased $117,000, or 7.2%, for the three months ended March 31, 2008, compared to the three months ended March 31, 2007, primarily due to less short-term debt interest as a result of lower borrowing on our lines of credit in 2008 compared to 2007.

Net Income

Our net income decreased $157,000, or 13.6%, for the three months ended March 31, 2008, compared to the same period a year ago.  The decrease in net income for the three months was primarily due to lower operating income margins from both our water and wastewater utility business as well as our non-utility subsidiaries in the first quarter compared to the same period a year ago. The lower operating margins are primarily the result of increased operating costs as described in the Operating Expenses section above.

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LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity for the three months ended March 31, 2008 were $6.4 million provided by cash flow from operating activities, $1.2 million in net contributions and advances from developers and $1.5 million in borrowing on our line of credit. 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 assure 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.

We invested $8.0 million in capital expenditures during the first three months of 2008, which includes $1.2 million of net advances and contribution in aid of construction, compared to $5.0 million invested during the same period in 2007. 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 $0.7 million through the three months ended March 31, 2008, for the construction of new treatment facilities, to enhance or improve existing treatment facilities, and for the rehabilitation of pumping equipment to better serve our customers. In addition, we are continuing our regional approach to building infrastructure through connecting existing supply infrastructure to new developments and at the same time providing redundancy to existing developments by connecting them to the regional system.  These efforts resulted in an investment of $3.5 million in the first three months of 2008. Artesian invested $2.0 million in general plant in the first three months of 2008. This included $1.0 million towards the construction of a new office building addition to our corporate headquarters in New Castle County and $0.3 million for our financial software additions.

At March 31, 2008, Artesian Water had lines of credit totaling $40.0 million to meet temporary cash requirements.  These revolving credit facilities are unsecured.  As of March 31, 2008, we had $37.6 million of available funds under these lines.  The interest rate for borrowings under each of these lines is the London Interbank Offering Rate, or “LIBOR,” plus 1.0% or, at our discretion, the banks’ federal funds rate plus 1.0%.  Each bank reviews all of their facilities annually for renewal.

Line of Credit Commitments	Commitment Due by Period
In thousands	Less than 1 Year		1-3 Years		4-5 Years		Over 5 Years
Lines of Credit (in thousands)	$	2,398	$	-----	$	-----	$	-----

At March 31, 2008, 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 March 31, 2008, we had not borrowed funds under either of these lines. The interest rate for borrowings under each of these lines is the LIBOR plus 1.75%.  The bank reviews its facilities annually for renewal.

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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 and the capital markets.

Contractual Obligations	Payments Due by Period
In thousands	Less than 1 Year		1-3 Years		4-5 Years		After 5 Years		Total
First Mortgage Bonds (Principal and Interest)	$	5,553	$	11,088	$	11,097	$	155,487	$	183,225
State revolving fund loans		374		1,180		1,180		6,068		8,802
Operating leases		142		252		90		1,851		2,335
Unconditional purchase obligations		2,127		5,656		5,664		27,968		41,415
Tank painting contractual obligation		281		749		0		0		1,030
Total contractual cash obligations	$	8,477	$	18,925	$	18,031	$	191,373	$	236,807

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.  For information about these financial covenant provisions, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2007.  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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.

Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Standards

This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2007 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2007.  The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods.  Actual amounts or results could differ from those based on such assumptions and estimates.

Our critical accounting policies are described in Management's Discussion and Analysis included in our annual

report on Form 10-K for the year ended December 31, 2007.  There have been no changes in these accounting policies.  Our significant accounting policies are described in our 2007 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.

Information concerning our implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in the notes to our 2007 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007 and also in the notes to our consolidated financial statements contained in this quarterly report on Form 10-Q.  We did not adopt any accounting policy in the first three months of 2008 that had a material impact on our financial condition, liquidity or results of operations.

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CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q 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 for our water and wastewater subsidiaries, customer base growth opportunities in 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, the impact of weather on our operations and the execution of our strategic initiatives, 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, plans to increase our wastewater treatment operations and other revenue streams less affected by weather, plans to expand our service line protection plan program offerings, expected contributions in 2008 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 including 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 discussed in our annual report on Form 10-K for the year ended December 31, 2007 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 other than as required by under the federal securities laws 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 Quarterly Report on Form 10-Q.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are 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 interest rate risk related to existing fixed rate, long-term debt is not material due to the terms of our First Mortgage Bonds, which have maturity dates ranging from 2018 to 2043.

At March 31, 2008, Artesian Water had lines of credit of $20.0 million each with two separate financial institutions totaling $40.0 million to meet temporary cash requirements.  These revolving credit facilities are unsecured.  As of March 31, 2008, we had $37.6 million of available funds under these lines.  The interest rate for borrowings under each of these lines is the London Interbank Offering Rate, or “LIBOR,” plus 1.0% or, at our discretion, the banks’ federal funds rate plus 1.0%.  Each bank reviews all of their facilities annually for renewal.

At March 31, 2008, 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 March 31, 2008, we had not borrowed funds under these lines.  The interest rate for borrowings under each of these lines is the LIBOR plus 1.75%. The bank reviews its facilities annually for renewal.  Consequently, our interest expense for short-term debt could be materially affected should interest rates change materially and we have material balances outstanding on our lines of credit

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ITEM 4– CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.

On May 8, 2008, BDO Seidman, LLP, our independent registered public accounting firm, advised our Audit Committee that they had identified a material weakness in internal control over financial reporting relating to the recordation of contributed plant assets and related contributions in aid of construction (CIAC) in the proper accounting periods.  A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.  The Company has initiated remediation measures for immediate implementation regarding the recording of contributed plant transactions. 

(b) Change in Internal Control over Financial Reporting

Other than described above, no change in our internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results.  Although there have been no material changes to the risk factors described in such Annual Report on Form 10-K, the risks described therein are not the only risks facing us.  We depend on the availability of capital for expansion, construction and maintenance.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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ITEM 6 - EXHIBITS

31.1	Certification of Chief Executive Officer of the Registrant required by Rule 13a – 14 (a)
	under the Securities Exchange Act of 1934, as amended.*
31.2	Certification of Chief Financial Officer of the Registrant required by Rule 13a – 14 (a)
	under the Securities Exchange Act of 1934, as amended.*
32	Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)*

*   Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ARTESIAN RESOURCES CORPORATION

Date:  May 12, 2008	By:	/s/ DIAN C. TAYLOR
		Dian C. Taylor (Principal Executive Officer)

Date:  May 12, 2008	By:	/s/ DAVID B. SPACHT
		David B. Spacht (Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

Exhibit Number	Description
31.1	Certification of Chief Executive Officer of the Registrant required by Rule 13a – 14(a) under the Securities Exchange Act of 1934, as amended.*
31.2	Certification of Chief Financial Officer of the Registrant required by Rule 13a – 14(a) under the Securities Exchange Act of 1934, as amended.*
32	Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United StatesCode (18 U.S.C. Section 1350)*

*   Filed herewith

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