EXHIBIT 13

                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,             1998         1997         1996         1995         1994
=====================================================================================================
<S>                                    <C>          <C>          <C>          <C>          <C>
Revenues
  Water service
    Residential                        $  575,321   $  546,972   $  510,050   $  451,143   $  431,225
    Commercial                            220,357      207,126      197,314      175,792      169,532
    Industrial                             67,471       63,389       62,153       54,423       53,049
    Public and other                      122,362      112,766      101,816       92,565       90,436
  Other water revenues                     11,481        9,037        7,935        5,902        6,502
-----------------------------------------------------------------------------------------------------
                                          996,992      939,290      879,268      779,825      750,744
  Wastewater service                       20,820       14,909       15,378       14,953       13,933
  Management fees                              --           --           --        8,042        5,564
-----------------------------------------------------------------------------------------------------
                                       $1,017,812   $  954,199   $  894,646   $  802,820   $  770,241
                                       ==============================================================
Water sales (million gallons)
    Residential                           124,419      124,339      119,900      117,128      113,950
    Commercial                             65,413       64,726       63,491       61,726       60,901
    Industrial                             36,639       36,354       36,129       34,171       34,735
    Public and other                       30,619       30,310       27,764       26,968       26,953
-----------------------------------------------------------------------------------------------------
                                          257,090      255,729      247,284      239,993      236,539
                                       ==============================================================

Net income                             $  131,048   $  119,128   $  101,674   $   92,061   $   78,652
Basic and diluted earnings per
  common share on average shares
  outstanding                               $1.58        $1.45        $1.31        $1.32        $1.17
Common dividends paid per share              $.82         $.76         $.70         $.64         $.54

AT YEAR-END
Water customers (thousands)                 1,942        1,900        1,884        1,720        1,706
Wastewater customers (thousands)               39           25           24           24           19
Total assets                           $4,708,307   $4,314,286   $4,032,156   $3,403,141   $3,172,237
Preferred stocks with mandatory
  redemption requirements
    American Water Works Company, Inc. $   40,000   $   40,000   $   40,000   $   40,000   $   40,000
    Subsidiaries                           39,161       39,734       41,060       42,326       43,737
Long-term debt
    American Water Works Company, Inc. $  201,000   $  116,000   $  116,000   $  116,000   $  131,000
    Subsidiaries                        1,905,011    1,754,766    1,600,394    1,268,649    1,177,043

MARKET DATA
Market price per share of common
  stock at year-end                        $33.75       $27.31       $20.63       $19.44       $13.50
Average shares outstanding (thousands)     80,298       79,144       74,540       66,544       63,836
Average daily trading volume               82,834       81,838       93,169       56,467       54,148
Annual trading volume (thousands)          20,874       20,705       23,673       14,230       13,645
Annual trading volume as a percentage
  of average outstanding shares               26%          26%          32%          21%          21%
P/E ratio*                                  19.22        15.80        15.14        11.73        11.94
Dividend yield*                             2.70%        3.32%        3.53%        4.13%        3.86%

*Based on average month-end closing prices of common stock
</TABLE>

22

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



DESCRIPTION OF THE BUSINESS

THE COMPANY

The principal business of American Water Works Company is the ownership
of common stock of companies providing water service.

    The water utility industry environment is changing rapidly.  Changes in
regulation, the need for significant capital replacement, low growth in
consumption within existing service territories, and continuing pressures
for increased efficiencies and productivity are changing the nature of the
industry.


THE SERVICE COMPANY

The American Water Works Service Company, a subsidiary, provides
professional services as required to affiliated companies.  These services
include accounting, administration, communication, corporate secretarial,
engineering, financial, human resources, information systems, operations,
rates and revenue, risk management and water quality.  This arrangement,
which provides these services at cost, affords affiliated companies
professional and technical talent otherwise unavailable economically or on
a timely basis.


THE UTILITY COMPANIES

The 23 utility subsidiaries provide water and/or wastewater service to
more than 7 million people in 879 communities in 22 states.

    As public utilities, each company is subject to the rules of both
federal and state environmental protection agencies, particularly with
respect to the quality of the water they distribute.  In addition, with the
exception of Michigan-American Water Company, the utility companies
function under economic regulations prescribed by state regulatory
commissions.


THE NON-REGULATED COMPANIES

American International Water Services Company (AIWSC) is a subsidiary
formed for the specific purpose of responding to the dynamic nature of the
water and wastewater industry.  The mission of the company is to seek out,
evaluate and attain investment opportunities within the governmental and
industrial markets.

    Additionally, AIWSC is a 50 percent owner of American-Anglian
Environmental Technologies, L.P. (AAET), a joint venture with a subsidiary
of British water and wastewater utility Anglian Water, Plc.  AAET provides
both technical expertise and financing resources to communities to operate
their water and wastewater systems.  These services are currently provided
to non-affiliated authorities, utilities and businesses in six states.
AAET also owns facilities to regenerate carbon used for water filtration
and those capabilities are being marketed to water systems.

    Massachusetts Capital Resources Company is a subsidiary of the Company
formed for the specific purpose of financing the construction of a water
treatment plant in Hingham, Massachusetts.  In 1996, Massachusetts Capital
Resources leased this facility to an affiliated utility subsidiary for 40
years.

    Occoquan Land Corporation owns land, buildings, and equipment, most of
which are leased to affiliated companies.

    Greenwich Water System is a subsidiary that owns the common stock of
the utility subsidiaries in Connecticut, Massachusetts, New Hampshire, New
York and a portion of the common stock of the utility subsidiary in
Pennsylvania.

    American Commonwealth Company is a subsidiary that owns a portion of
the common stock of the utility subsidiary in New Jersey.


THE AMERICAN WATER SYSTEM

The combination of the Company and its subsidiaries constitutes the
American Water System -- a system that has functioned well for over 50
years.  Each utility subsidiary functions independently, yet shares in the
benefits of size and identity afforded by the American Water System.


THE PHILOSOPHY OF AMERICAN WATER WORKS COMPANY

American Water Works Company is dedicated to providing the best
possible water service at a reasonable cost consistent with adequate
compensation for investors and reasonable wages and benefits for its
personnel.

    We believe there is an unalterable link between quality service,
responsive regulation, and financial success.

    Three basic principles are observed under this management philosophy:

1.  The preservation and efficient utilization of capital assets are
    best assured by a management approach that draws upon prudent planning,
    builds consensus and acts decisively on a timely basis.

2.  A utility subsidiary must exhibit the ability to attract the capital
    it requires as a prerequisite to the initiation of construction of
    facilities needed to meet water service demands.

3.  The ability to attract needed capital is dependent upon consistently
    achieving adequate earnings.  This dictates an aggressive pursuit of
    regulatory decisions acknowledging this principle.

    In accordance with this philosophy, the Company seeks to enhance the
value of its shareholders' investment through consistent earnings growth.

    The market value of the Company's common stock is subject to the
volatility present in the stock market, as well as to the vagaries of the
national economy.  The true worth of this stock should be measured by the
intrinsic value of the tangible assets of American Water Works and the
worth of the organization put in place by the management team.  These
assets are used to provide a service which is essential for community life.
There is no substitute for water.

                                                                         23

<PAGE>
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



THE INVESTMENT STRATEGY OF
AMERICAN WATER WORKS COMPANY

The business of the Company is the investment in common stock of water
utilities.

    The purpose of this business is to protect and enhance the value of our
shareholders' investment through growth in earnings and dividends per
share.



[ID - PHOTO WITH CAPTION]
FROM LEFT ARE W. TIMOTHY POHL, GENERAL COUNSEL AND SECRETARY, AMERICAN
WATER WORKS COMPANY AND VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY,
AMERICAN WATER WORKS SERVICE COMPANY; AND C. GLENN PIERCE, II, VICE
PRESIDENT HUMAN RESOURCES, AMERICAN WATER WORKS SERVICE COMPANY, INC.



    We seek to accomplish this purpose without diluting existing
shareholders' investment.

    Viewed over the long term, we believe this strategy has and will
continue to provide a basis for total return to our shareholders that is
attractive in comparison with other utility investment opportunities.

    The value of the investment in the Company has increased due to
earnings growth.  Earnings growth has resulted from increased investment by
the Company in its subsidiaries funded by the sale of securities and
reinvestment of income.  This reinvestment defers shareholder payment of
income taxes so earnings growth can be compounded on a larger investment
base.  It also permits consistent and reliable dividend increases.
Investors preferring a greater current yield can supplement their cash flow
by occasionally selling a portion of their enhanced investment in the
Company.

    The following chart reflects the results of this investment strategy:

                [ID -- GRAPHIC, SHOWING THE FOLLOWING VALUES]

                  COMPOUND ANNUAL GROWTH RATES 1993-1998
                  Investment in subsidiaries .......  13.2%
                  Operating revenue ................   7.2%
                  Earnings per share ...............   6.6%
                  Dividends per share ..............  10.4%
                  Book value per share .............   7.9%

    The Company's investment in its subsidiaries has increased from $810
million at year-end 1993 to $1.5 billion at year-end 1998.  The schedule at
the top of page 25 illustrates that the growth in the Company's investment
in its subsidiaries has been accomplished by subsidiary earnings
retention, the investment of a portion of the dividends received by the
Company from subsidiaries and the sale of securities and bank loans.

    Earnings to common shareholders have risen from $71.4 million in 1993
to $127.1 million in 1998.

    Income to common shareholders of the Company is influenced by three
factors:

1.  The amount of investment by the Company

2.  The rate of return on that investment

3.  The costs to operate the Company

    The schedule at the bottom of page 25 demonstrates that the growth in
earnings over this period is the direct result of new investment in
subsidiaries.  Fluctuations in the rate of return are the result of the
influence of weather conditions on sales volume and the response of utility
regulation to the economic climate.  The cost to operate the Company has
increased $8.1 million over this five-year period.


SYSTEM GROWTH AND DEVELOPMENT

CAPITAL SPENDING PROGRAM

The investment in new facilities in 1998 totaled $392 million, which is
11 percent above the 1997 construction expenditures of $352 million.
Construction activity planned for 1999 totals $407 million.

    Expenditures recorded in any given year are influenced by many factors,
including the economy, regulation, material delivery and weather
conditions.  It is anticipated that approximately $2.0 billion will be
invested in new facilities between now and the end of the year 2003.  These
expenditures will support ongoing programs to comply with regulations
promulgated to ensure proper water quality and protect the environment, to
keep pace with the development of our service territories and to replace
facilities as necessary.  We expect the full investment in this
construction program to be recognized in regulatory decisions.

    Source of supply improvements in 1998 accounted for approximately 5
percent of the year's construction expenditures.  Projects included
groundwater development in Hampton, New Hampshire; Warrensburg, Missouri;
and southern Indiana to meet growing customer demands.  New wells in
Clovis, New Mexico; Monterey, California; and Marion, Ohio were constructed
to maintain supply capabilities.  Structural upgrades to the Swimming River
Dam in New Jersey were also completed in 1998.

    Investment in treatment and pumping facilities comprised approximately
28 percent of the 1998 construction expenditures.  A new surface water
treatment plant was constructed in Weston, West Virginia to support a
regional

24

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
ANALYSIS OF GROWTH IN INVESTMENT IN SUBSIDIARIES

<TABLE>
<CAPTION>
(000)                                              1998         1997         1996         1995       1994
=========================================================================================================
<S>                                          <C>          <C>          <C>          <C>          <C>
Investment in subsidiaries at December 31    $1,506,969   $1,366,016   $1,261,532   $1,003,088   $898,219
Investment in subsidiaries at January 1       1,366,016    1,261,532    1,003,088      898,219    810,372
---------------------------------------------------------------------------------------------------------
Change during the year                       $  140,953   $  104,484   $  258,444   $  104,869   $ 87,847
                                             ============================================================
Sources of additional investment
  Undistributed earnings of subsidiaries     $   38,490   $   36,335   $   31,605   $   26,315   $ 24,532
  Investment by the Company in
    subsidiary securities                       102,463       68,149      226,839       78,554     63,315
---------------------------------------------------------------------------------------------------------
  Change during the year                     $  140,953   $  104,484   $  258,444   $  104,869   $ 87,847
                                             ============================================================
Net income of subsidiaries                   $  148,068   $  132,762   $  113,760   $  103,497   $ 89,449
Return on January 1 investment
  in subsidiaries                                 10.8%        10.5%        11.3%        11.5%      11.0%
Subsidiaries' common stock dividend
  payout ratio                                      74%          73%          72%          75%        73%
---------------------------------------------------------------------------------------------------------
Dividends to the Company from subsidiaries      109,578       96,427       82,155       77,182     64,917
---------------------------------------------------------------------------------------------------------
Company's use of cash
  Preferred dividends                             3,984        3,984        3,984        3,984      3,984
  Other cash requirements                        16,374       13,396       12,375        9,765     10,744
---------------------------------------------------------------------------------------------------------
                                                 20,358       17,380       16,359       13,749     14,728
---------------------------------------------------------------------------------------------------------
Available for common dividends                   89,220       79,047       65,796       63,433     50,189
Common dividends declared                        65,781       60,084       51,299       42,500     34,386
Cash payout ratio                                   74%          76%          78%          67%        69%
Available after dividends                        23,439       18,963       14,497       20,933     15,803
Cash at January 1                                   308           43          119       17,647     23,302
---------------------------------------------------------------------------------------------------------
                                                 23,747       19,006       14,616       38,580     39,105
Investment in securities of subsidiaries       (102,463)     (68,149)    (226,839)     (78,554)   (63,315)
Notes and advances to subsidiaries                   10           10           10           10      4,510
---------------------------------------------------------------------------------------------------------
                                                (78,706)     (49,133)    (212,213)     (39,964)   (19,700)
---------------------------------------------------------------------------------------------------------
Net bank borrowings                             (59,500)      21,400       34,400        3,700         --
Proceeds from long-term debt                    120,000           --           --           --         --
Proceeds from common stock                       36,227       28,041      192,856       36,383     37,347
Redemption of securities                             --           --      (15,000)          --         --
---------------------------------------------------------------------------------------------------------
                                                 96,727       49,441      212,256       40,083     37,347
---------------------------------------------------------------------------------------------------------
Cash at December 31                          $   18,021   $      308   $       43   $      119   $ 17,647
                                             ============================================================
</TABLE>


<TABLE>
<CAPTION>
ANALYSIS OF CHANGE IN INCOME

(000)                                              1998          1997         1996         1995       1994
==========================================================================================================
<S>                                            <C>           <C>           <C>          <C>        <C>
Net income to common stock-current year        $127,064      $115,144      $97,690      $88,077    $74,668
Net income to common stock-prior year           115,144        97,690       88,077       74,668     71,391
----------------------------------------------------------------------------------------------------------
Change in income                                 11,920        17,454        9,613       13,409      3,277
Change in Company operating cost                  3,386         1,548          650          639      1,924
----------------------------------------------------------------------------------------------------------
Change in investment income                    $ 15,306      $ 19,002      $10,263      $14,048    $ 5,201
                                               ===========================================================
Sources of change in investment income
  Additional investment in subsidiaries        $ 11,334      $ 27,198      $11,893      $10,122    $ 6,718
  Change in rate of return on investment          3,972        (8,196)      (1,630)       3,926     (1,517)
----------------------------------------------------------------------------------------------------------
Total change in investment income              $ 15,306      $ 19,002      $10,263      $14,048    $ 5,201
                                               ===========================================================
</TABLE>

                                                                         25

<PAGE>
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



[ID - PHOTO WITH CAPTION]
FROM LEFT ARE JOHN S. YOUNG, JR., VICE PRESIDENT ENGINEERING, AMERICAN
WATER WORKS SERVICE COMPANY, INC.; GERALD C. SMITH, VICE PRESIDENT,
AMERICAN WATER WORKS COMPANY, INC. AND SENIOR VICE PRESIDENT, AMERICAN
WATER WORKS SERVICE COMPANY, INC.; AND RICHARD H. MOSER, VICE PRESIDENT
WATER QUALITY, AMERICAN WATER WORKS SERVICE COMPANY, INC.



water supply project.  Significant capacity and/or reliability upgrades
were also completed for treatment plants in Huntington, West Virginia;
Parkville, Missouri; and Davenport, Iowa.  Major plant upgrades continued
or commenced in Norristown, Pennsylvania; St. Joseph, Missouri; southern
Indiana; Wilkes-Barre/Scranton, Pennsylvania; and Ashtabula, Ohio.

    Transmission and distribution facilities accounted for approximately 38
percent of the 1998 construction expenditures.  The most prominent
individual projects included regional projects in Boone County and Fayette
County, West Virginia; southern Indiana; Bond/Madison County, Illinois; and
Clarion Township, Pennsylvania; the interconnection of several systems in
Pennsylvania; and an extension from the regional pipeline in southern New
Jersey.  Significant pipeline reinforcement projects were completed for the
systems in Morris County and Frenchtown, New Jersey; Charleston, West
Virginia; and Peoria, Illinois.  Also, pumping stations and storage tanks
were completed at a number of utility subsidiaries during the year
including tanks in Frenchtown and Cape May, New Jersey; Shelbyville and
Newburgh, Indiana; Cairo, Illinois; Monterey and the Los Angeles vicinity
in California; and several locations in West Virginia.

    The Company's formal Comprehensive Planning Study (CPS) process
involves an exhaustive evaluation at five year intervals by each utility
subsidiary of all aspects of public water supply.  This includes review of
source water supply reliability, adequacy of water treatment facilities and
distribution systems, and the potential for consolidation and acquisition.

    In 1998 CPS reports were completed for the Newburgh, Wabash and
Jefferson/New Albany systems in Indiana; the Ashtabula, Lawrence County,
Mansfield, Marion and Tiffin systems in Ohio; and the Brownsville, Clarion,
Mechanicsburg, Susquehanna County and Warren systems in Pennsylvania.
Studies are underway for utility subsidiaries in Arizona, California,
Hawaii, Indiana, New Hampshire, New Jersey and Tennessee.  These ongoing
studies will encompass 34 service areas.  In addition to the Company's CPS
program, engineering planning focused on technical analysis to support
regional water supply projects and acquisitions.


ACQUISITIONS OF UTILITY SYSTEMS

In addition to the investment of capital in facilities which are
essential to high quality reliable water service, the Company and its
subsidiaries continue to search for opportunities to acquire water and
wastewater systems that represent the prospect for enhanced shareholder
value.

    We began 1998 with 15 acquisitions that were awaiting regulatory
approval.  During the year, contract negotiations for 30 more acquisitions
were completed.  Of the total 45 transactions, 22 were finalized during
1998, adding approximately 26,700 new customers to utility subsidiaries in
Illinois, Indiana, Kentucky, New Jersey, Pennsylvania and West Virginia,
and at the new utility subsidiary, Hawaii-American.  Hawaii-American, a
suburban Honolulu wastewater utility, was acquired for $17.3 million from a
subsidiary of the Kemper Corporation.

    There are 23 pending acquisitions for which agreements have been
signed, including National Enterprises Inc.  (NEI), a privately owned
holding company with operations primarily in the water utility business.
For more information about NEI please refer to Note 3 of Notes to Financial
Statements on page 50 of this report.  The acquisition of NEI is the
largest water utility acquisition in the United States.  NEI provides water
utility service to more than 500,000 customers in Illinois, Indiana,
Missouri and New York.  NEI has annual revenues of


<TABLE>
<CAPTION>
CONSTRUCTION EXPENDITURES BY CATEGORY
(000)                                    1998       1997       1996       1995       1994
=========================================================================================
<S>                                  <C>        <C>        <C>        <C>        <C>
Water plant
  Sources of supply                  $ 18,389   $ 16,725   $ 10,798   $ 18,156   $ 11,511
  Treatment and pumping               107,986     95,709     77,071    125,350     82,700
  Transmission and distribution       150,280    131,835    107,145    110,600    108,929
  Services, meters and fire hydrants   63,678     58,349     47,946     45,835     40,506
  General structures and equipment     48,589     45,170     29,029     29,602     20,703
Wastewater plant                        3,262      4,649      1,805      1,219      1,390
-----------------------------------------------------------------------------------------
                                     $392,184   $352,437   $273,794   $330,762   $265,739
                                     ====================================================
</TABLE>

26

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



[ID - PHOTO]
FROM LEFT ARE JOHN S. YOUNG, JR., VICE PRESIDENT ENGINEERING,
AMERICAN WATER WORKS SERVICE COMPANY, INC.; GERALD C. SMITH,
VICE PRESIDENT, AMERICAN WATER WORKS COMPANY, INC. AND
SENIOR VICE PRESIDENT, AMERICAN WATER WORKS SERVICE COMPANY, INC.;
AND RICHARD H. MOSER, VICE PRESIDENT WATER QUALITY, AMERICAN
WATER WORKS SERVICE COMPANY, INC.


approximately $180 million and net income of approximately $19 million.
An agreement in principle for American Water Works to acquire NEI was
reached on October 13, 1998.  A definitive agreement for the acquisition
was signed on February 12, 1999.  The NEI acquisition, along with the other
22 acquisitions for which signed agreements are in hand, will add over 1.7
million people to the more than 7 million people served by the utility
subsidiaries of the Company.


CONDEMNATIONS OF UTILITY SYSTEMS

The mayor of the city of Chattanooga, Tennessee has publicly expressed
an intent to acquire Tennessee-American Water Company, a utility subsidiary
providing water utility service in Chattanooga and surrounding areas in
both Tennessee and Georgia.  In response, Tennessee-American has publicly
stated the company is not for sale.  The mayor has received authorization
from the Chattanooga city council to proceed with the acquisition and the
council has appropriated approximately $750,000 to pay for the costs of the
condemnation.  The mayor has also said he expects 12 to 18 months will be
required to complete the condemnation.

    In Peoria, Illinois, the city has begun a feasibility study of
acquiring the Peoria operations of Illinois-American Water Company.  The
city desires to use a buy-out provision in a franchise agreement dating
back to 1889.  The management of Illinois-American has made it clear that
the water utility operations are not for sale.  Also, Illinois-American has
asked the St. Clair County Court to declare the buy-out provision invalid.
The resolution of this matter is expected to take at least 6 months.

    Tennessee-American and Illinois-American are both prepared to
vigorously oppose these condemnations because they are not in the best
long-term interests of the customers.


CONTRACT OPERATIONS

The mission of AmericanAnglian Environmental Technologies, L.P. (AAET)
is to provide wastewater and water utility operational and management
services to clients in the United States on an unregulated basis.  The
joint venture will also invest in wastewater treatment infrastructure and
non-regulated water facilities.

    The current market for contract services to government-owned water and
wastewater utility systems is approximately $1 billion in annual revenues.
That market is expected to grow at a rate of 15 to 20 percent for the
foreseeable future.  Major domestic and international water and wastewater
service firms have entered this market and have made it extremely
competitive.

    The plan for the joint venture contemplates a concerted effort to make
AAET a key participant in this rapidly growing sector of the business.  The
joint venture employs a disciplined approach that draws on the expertise
available within its affiliated organizations.  Target measures of growth
and profitability have been established to guide these efforts.  Although
margins are comparatively low in this business segment, capital
requirements are minimal.

    In 1998, the AAET joint venture successfully obtained operations
contracts that included a wastewater service contract


[ID - GRAPHIC.  GRAYSCALE MAPS OF FOUR STATES]
PENDING AMERICAN WATER WORKS COMPANY ACQUISITION OF NATIONAL ENTERPRISES,
INC. SUBSIDIARIES, THE LARGEST WATER UTILITY ACQUISITION IN THE UNITED
STATES.

[] INDIANA-AMERICAN
   WATER COMPANY
   Wabash County
   Howard County
   Montgomery County
   Hamilton County
   Madison County
   Delaware County
   Wayne County
   Vigo County
   Johnson County
   Shelby County
   Sullivan County
   Jackson County
   Warrick County
   Floyd County
   Clark County

[] NORTHWEST INDIANA
   WATER COMPANY
   Lake County
   Porter County

[] ILLINOIS-AMERICAN
   WATER COMPANY
   Peoria County
   Tazewell County
   Jersey County
   Madison County
   Bond County
   St. Clair County
   Monroe County

[] NORTHERN ILLINOIS
   WATER COMPANY
   Champaign County
   Livingston County
   La Salle County
   Whiteside County

[] NEW YORK-AMERICAN WATER COMPANY
   Westchester County

[] LONG ISLAND WATER CORPORATION
   Nassau County

[] MISSOURI-AMERICAN
   WATER COMPANY
   Buchanan County
   Platte County
   Clarion County
   Audrain County
   Johnson County
   St. Charles County

[] ST. LOUIS COUNTY
   WATER COMPANY
   St. Louis County
   St. Louis City
   Jasper County

[] TERRITORIES OF AMERICAN WATER WORKS UTILITY SUBSIDIARIES
[] TERRITORIES OF NEI UTILITY SUBSIDIARIES

                                                                         27

<PAGE>
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



[ID - PHOTO WITH CAPTION]
FROM LEFT ARE ROBERT D. SIEVERS, COMPTROLLER, AMERICAN WATER WORKS
COMPANY, INC. AND VICE PRESIDENT AND COMPTROLLER, AMERICAN WATER WORKS
SERVICE COMPANY, INC; AND WILLIAM M. PISZKER, VICE PRESIDENT, INFORMATION
SYSTEMS, AMERICAN WATER WORKS SERVICE COMPANY, INC.


with Danville, Virginia, and a water service contract with Cohasset,
Massachusetts.  At year end, the joint venture had secured 33 water and
wastewater contracts with government agencies in Indiana, Massachusetts,
New York, North Carolina, Pennsylvania and Virginia.


RESULTS OF OPERATIONS

The Company's experience in assessing the impact of inflation on its
business indicates that with timely rate increases authorized by
regulators, revenue will likely keep pace with inflation.  Inflation did
not significantly impact the Company's financial position or results of
operations in 1996 through 1998, and it is not expected to materially
affect 1999 results.


OPERATING REVENUES
(000)                             1998          1997          1996
==================================================================
Water service               $  996,992      $939,290      $879,268
Wastewater service              20,820        14,909        15,378
------------------------------------------------------------------
                            $1,017,812      $954,199      $894,646
                            ======================================


CONSOLIDATED OPERATING REVENUES

Revenues in 1998 totaled $1.018 billion and were 7% above those for
1997, reflecting increased sales volume due to customer growth,
acquisitions and rate increases authorized for various subsidiaries in 1998
and the latter part of 1997.  The volume of water sold increased 1% to
257.1 billion gallons in 1998 compared with 1997.

    Rate authorizations adjusted the water service rates in effect for six
utility subsidiaries during 1998.  These authorizations are expected to
increase annual revenues by $10.2 million.  Operating revenues for 1998
included approximately $2.7 million which resulted from these rate orders.

    One rate adjustment has been authorized for a utility subsidiary so far
in 1999 which will generate approximately $1.0 million of additional annual
revenues.  Four applications requesting additional annual revenues of $35.8
million are awaiting regulatory decisions.  The largest of these, the New
Jersey-American rate case, was originally filed requesting $29.9 million.
Since the filing, a number of issues have been resolved and amounts have
been updated for known and measurable changes.  As a result, the Company's
currently requested revenue increase is $18.5 million.

    Revenues of $954.2 million in 1997 were 7% above those for 1996.
Twelve utility companies received rate orders in 1997, authorizing
increases in annual revenues aggregating $53.3 million.  Operating revenues
for 1997 included approximately $12.9 million which resulted from these
rate orders.  The 255.7 billion gallons of water sold in 1997 was a 3%
increase compared to 1996.

    On February 16, 1996, Pennsylvania-American Water Company acquired
water utility operations serving 400,000 people in northeastern
Pennsylvania from Pennsylvania Gas and Water Company for $409.4 million.
On October 2, 1997, the Pennsylvania Public Utility Commission approved a
settlement in a rate proceeding designed to produce additional annual
revenues of $27.5 million.  An important aspect of this rate proceeding was
the recognition of Pennsylvania-American's acquisition of the water service
assets in northeastern Pennsylvania.  The northeastern Pennsylvania
acquisition increased operating revenues by $7.4 million and added 1.8
billion gallons of water sales volume in 1997, compared to 1996.



PERCENTAGE OF WATER REVENUES BY CUSTOMER CLASS
                                1998          1997          1996
================================================================
Residential                    57.7%         58.2%         58.0%
Commercial                     22.1%         22.1%         22.4%
Industrial                      6.8%          6.7%          7.1%
Public and other               12.3%         12.0%         11.6%
Other water revenues            1.1%          1.0%           .9%
----------------------------------------------------------------
                              100.0%        100.0%        100.0%
                              ==================================

RESIDENTIAL

Residential water service revenues in 1998 amounted to $575.3 million,
an increase of 5% over those for 1997.  This 1998 revenue improvement
followed an increase of 7% in 1997.  The volume of water sold to
residential customers increased slightly in 1998 to 124.4 billion gallons.
The average unit price of residential water increased by 5% in 1998 and by
4% in 1997.


COMMERCIAL

Revenues from commercial customers in 1998 rose by 6% to $220.4
million, following an increase of 5% in 1997.

28

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



Commercial customers purchased 65.4 billion gallons of water in 1998,
1% more than in 1997.  The average unit price of water increased by 5% in
1998, up from a 3% increase in 1997.


INDUSTRIAL

Industrial water use of 36.6 billion gallons in 1998 was 1% higher than
in 1997.  Revenues from industrial sales in the amount of $67.5 million
were 6% above those recorded in 1997 due to a 5% increase in the average
unit price of water.  In 1997, revenues from industrial sales were 2% above
those for 1996 due to a 1% increase in the average unit price of water.


PUBLIC AND OTHER

Public and other revenues in 1998 increased by 9% to $122.4 million
following an increase of 11% in 1997.  Revenues derived from municipal
governments for fire protection services and customers requiring special
private fire service facilities totaled $46.4 million in 1998, exceeding
1997 revenue from these customers by 6%.  The 30.6 billion gallons of water
sold to governmental entities and resale customers was 1% greater than the
quantities sold in 1997.  Revenues generated by these sales totaled $76.0
million and exceeded 1997 revenues by 10%.


PERCENTAGE OF WATER SALES (GALLONS) BY CUSTOMER CLASS
                                1998          1997          1996
================================================================
Residential                    48.4%         48.6%         48.5%
Commercial                     25.4%         25.3%         25.7%
Industrial                     14.3%         14.2%         14.6%
Public and other               11.9%         11.9%         11.2%
----------------------------------------------------------------
                              100.0%        100.0%        100.0%
                              ==================================


WASTEWATER SERVICE REVENUES

Utility subsidiaries provided wastewater service in Hawaii and to
portions of the Company's service areas in New Jersey, Pennsylvania,
Missouri, West Virginia, Kentucky and Indiana.  Revenues from these
services amounted to $20.8 million in 1998, compared with $14.9 million in
1997 and $15.4 million in 1996.  The Hawaii acquisition increased 1998
wastewater service revenues $4.7 million beginning with operations in
April.


OPERATING EXPENSES
(000)                              1998          1997          1996
===================================================================
Operation and
  maintenance expenses         $445,334      $428,779      $425,170
Depreciation and amortization   119,725       103,660        93,413
General taxes                    92,845        87,860        82,017
-------------------------------------------------------------------
                               $657,904      $620,299      $600,600
                               ====================================


CONSOLIDATED OPERATING EXPENSES

Operating expenses in 1998 increased by 6% to $657.9 million, following
a 3% increase in 1997.

    Operation and maintenance expenses totaled $445.3 million in 1998, 4%
higher than in 1997.  These expenses had increased by 1% in 1997.

    Associate-related costs, representing 44% of operation and maintenance
expenses, increased by 2% in 1998 after a decrease of 1% in 1997.

    The primary components of associate-related costs are wage and salary
expenses, which were up 1% to $159.2 million in 1998 following a 3%
increase in 1997.  The number of associates employed at year-end totaled
4,063, which was slightly above the employment level of 4,034 at the close
of 1997 and approximately equal to the 4,065 associates at the end of 1996.

    Group insurance expense, which includes the cost of providing current
health care and life insurance benefits as well as the expected cost of
providing postretirement benefits, increased by 6% to $32.2 million in 1998
after a 12% decrease in 1997.  The 1998 increase reflects recognition of
previously deferred postretirement benefit costs.  The 1997 decrease is the
result of favorable claims experience in addition to health care expenses
being moderated by cost containment measures.  In 1996, the Company
implemented plan revisions that encourage plan participants to take
advantage of a managed care plan option.  Associates and early retirees not
selecting the managed care plan option are required to make additional
contributions.

    Pension expense increased by 33% in 1998 to $4.4 million following a
42% decrease in 1997.  Pension cost is deferred by certain subsidiaries
when it is probable such costs will be recovered in future water service
rates as contributions are made to the plan.  There were no cash
contributions in 1998 or 1997.  Cash contributions of $4.3 million were
made to the pension plan in 1996.  The increased expense in 1998 reflects
higher supplemental pension plan expense.  Pension expense declined in 1997
reflecting the decrease in contributions resulting from the plan reaching
fully funded status.


OPERATION AND MAINTENANCE EXPENSES
(000)                              1998          1997          1996
===================================================================
Associate-related costs        $195,845      $191,505      $193,798
Fuel and power                   36,781        36,603        34,654
Purchased water                  43,182        44,661        45,069
Chemicals                        18,401        16,940        17,693
Waste disposal                   14,866        14,167        14,145
Maintenance materials
  and services                   28,551        26,761        24,559
Operating supplies and services  72,576        63,091        60,626
Customer billing and accounting  21,648        22,067        19,998
Other                            13,484        12,984        14,628
-------------------------------------------------------------------
                               $445,334      $428,779      $425,170
                               ====================================


    Expenses associated with the collection, treatment, and pumping of
water include the cost of fuel and power, water purchased from other
suppliers, chemicals for water treatment and purification, and waste
disposal.  These costs increased by 1% in 1998 after a 1% rise in 1997.

    The unit cost of water produced increased less than 1% in 1998 and
decreased 3% in 1997.

                                                                         29

<PAGE>
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



    Maintenance materials and services, which include emergency repairs as
well as costs for preventive maintenance, increased by 7% in 1998 following
a 9% increase in 1997.

    Operating supplies and services include the day-to-day expenses of
office operation, legal and other professional services, as well as
information systems and other office equipment rental charges.  These costs
increased by 15% in 1998 after a 4% increase in 1997.  Customer billing and
accounting expenses decreased by 2% in 1998 and increased by 10% in 1997.
Billing costs increased in 1997 because of a change from quarterly to
monthly billing in several service areas.

    Other operation and maintenance expenses include regulatory costs and
system-wide casualty and liability insurance premiums.  These expenses
increased by 4% in 1998 after decreasing by 11% in 1997.  Regulatory costs
vary from year-to-year because of changing levels of rate case activity and
different amortization periods for these costs.  Casualty insurance
premiums fluctuate as a result of claims experience.

    Depreciation and amortization increased by 15% in 1998 and 11% in 1997.
The higher depreciation expense in both years was primarily due to growth
in utility plant in service.

    General taxes, which include gross receipts, franchise, property,
capital stock, payroll and other taxes, increased by 6% in 1998 after a 7%
rise in 1997.

    Gross receipts and franchise taxes, which are a function of revenues,
increased by 5% in 1998.  Property and capital stock taxes are assessed on
the basis of tax values assigned to assets and capitalization.  These taxes
in 1998 were 6% above those in 1997 due to higher property values and tax
rate increases.


CONSOLIDATED OTHER INCOME AND INCOME DEDUCTIONS

The total allowance for funds used (equity and borrowed) during
construction recorded in 1998 was $15.3 million, which was 30% higher than
the $11.8 million recorded in 1997.  The 1998 increase was the result of
the construction of new water service assets.  The utility subsidiaries
record an allowance for funds used (equity and borrowed) during
construction to the extent permitted by the regulatory authorities.

    Interest expense rose 6% to $154.3 million in 1998 compared to 1997.
This expense had increased by 7% in 1997.  The increases in 1998 and 1997
can be attributed primarily to an increase in total debt to fund the
construction of new water service assets.

    Gains of $.8 million and $1.8 million on the dispositions of property
are included in other income in 1998 and 1996, respectively.


CONSOLIDATED INCOME TAXES

Income taxes increased by 12% in 1998, following a 17% increase in
1997.  The 1998 and 1997 increases in income taxes are due to higher
taxable income and the reversal of flow-through differences primarily
relating to depreciation.  Details regarding the components of the total
amount of state and federal income taxes, and a reconciliation of statutory
to reported income tax expense are included in Note 11 to the financial
statements.


SUMMARY OF TAXES
(000)                                   1998          1997          1996
========================================================================
Gross receipts and franchise taxes  $ 39,352      $ 37,580      $ 35,684
Property and capital stock taxes      37,460        35,466        31,971
Payroll taxes                         12,486        12,433        12,060
Other general taxes                    3,547         2,381         2,302
State income taxes                    12,219        10,269         9,227
Federal income taxes                  71,093        64,444        54,601
------------------------------------------------------------------------
                                    $176,157      $162,573      $145,845
                                    ====================================


CONSOLIDATED NET INCOME

Consolidated net income in 1998 totaled $131.0 million, a 10% increase
over net income in 1997.  Consolidated net income in 1997 was 17% above
that recorded in 1996.

    Consolidated net income to common stock of $127.1 million in 1998
increased by 10% over the amount reported in 1997.  Consolidated net income
to common stock totaled $115.1 million in 1997 and was 18% above that
reported for 1996.


CAPITALIZATION
                            COMMON    PREFERRED     LONG-TERM
(000)                       EQUITY        STOCK          DEBT
=============================================================
Company
  1998                  $1,239,174      $51,673    $  236,650
  1997                   1,142,416       51,673       116,461
  1996                   1,057,874       51,673       116,136
  1995                     818,939       51,673       131,064
  1994                     733,440       51,673       131,071
-------------------------------------------------------------
Utility Subsidiaries
  1998                  $1,451,599      $47,121    $1,886,197
  1997                   1,313,674       47,697     1,742,544
  1996                   1,212,238       49,048     1,619,948
  1995                     953,718       50,325     1,260,389
  1994                     855,961       51,738     1,251,101
-------------------------------------------------------------
Consolidated
  1998                  $1,239,174     $ 97,089    $2,159,332
  1997                   1,142,416       97,663     1,895,914
  1996                   1,057,874       99,012     1,773,538
  1995                     818,939      100,287     1,428,970
  1994                     733,440      101,698     1,381,972
-------------------------------------------------------------


CAPITALIZATION RATIOS
                            COMMON    PREFERRED     LONG-TERM
                            EQUITY        STOCK          DEBT
=============================================================
Company
  1998                         81%           3%           16%
  1997                         87%           4%            9%
  1996                         86%           4%           10%
  1995                         82%           5%           13%
  1994                         80%           6%           14%
-------------------------------------------------------------
Utility Subsidiaries
  1998                         43%           1%           56%
  1997                         42%           2%           56%
  1996                         42%           2%           56%
  1995                         42%           2%           56%
  1994                         40%           2%           58%
-------------------------------------------------------------
Note: Long-term debt includes amounts due within one year.

30

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



[ID - PHOTO WITH CAPTION]
FROM LEFT ARE EDWARD D. VALLEJO, TREASURER, AMERICAN WATER WORKS
SERVICE COMPANY, INC.; THOMAS G. MCKITRICK, VICE PRESIDENT INVESTOR
RELATIONS, AMERICAN WATER WORKS SERVICE COMPANY, INC.; AND JOSEPH F.
HARTNETT, JR., TREASURER, AMERICAN WATER WORKS COMPANY, INC. AND VICE
PRESIDENT FINANCE, AMERICAN WATER WORKS SERVICE COMPANY, INC.



LIQUIDITY AND CAPITAL RESOURCES

Internal sources of cash flow are provided by retention of a portion of
earnings, amortization of deferred charges, deferral of taxes and
depreciation expense.  Internal cash generation is influenced by weather
patterns, economic conditions and the timing of rate relief.  When internal
cash generation is not sufficient to meet corporate obligations on a timely
basis, external sources of funds are utilized.  The availability and cost
of external cash reflect the consistency and reliability of earnings.
External sources of cash consist of short-term bank loans, the sale of
securities -- bonds, preferred stock and common stock -- as well as
advances and contributions from developers.


THE PARENT COMPANY

The Company pays all of its administrative and interest expenses, and
pays dividends on all classes of stock from the dividends received from
investments in its subsidiary companies.  Remaining funds are retained for
additional investment in subsidiaries.  Investments are made when
prospective returns are expected to continue at an adequate level or the
potential for satisfactory earnings has been exhibited.

    Periodically, it is necessary to supplement cash flow with short-term
bank loans.  These loans are repaid as internal sources of cash allow and
with proceeds from the issuance of new securities.

    On July 15, 1998 the Company issued $120 million in debentures to
institutional investors.  The proceeds from the financing were used to
reduce short-term bank loans and to take advantage of extremely attractive
interest rates available to corporate issues at the time.  The Series D
debentures were sold at face value with an average coupon rate of 6.26% and
an average life of 4.2 years.

    In May 1996, the Company sold 3,643,100 shares of common stock at
$37.625 per share in a public offering.  Concurrently with the public
offering, certain members of the Ware family, who were already substantial
shareholders, agreed to purchase 556,900 shares of common stock at the
price available to the public, less underwriting discounts and commissions,
in a private offering.  Including the effect of the July 1996 stock split,
these offerings increased by 8,400,000 shares the number of the Company's
shares of common stock outstanding.  The Company used the net proceeds of
$152.7 million from the sale of the common stock to invest in the equity of
Pennsylvania-American Water Company, which in turn reduced short-term
indebtedness incurred to finance its acquisition of water utility
operations in northeastern Pennsylvania.

    The Company's Dividend Reinvestment and Stock Purchase Plan allows
shareholders and customers of the utility subsidiaries to purchase up to
$5,000 of common stock each month directly from the Company at a 2%
discount from the then prevailing market price.  Common dividends in the
amount of $7.4 million were reinvested during 1998, which resulted in the
issuance of 249,250 new shares of common stock.  Proceeds received from
optional cash purchases of 600,036 new shares of common stock totaled $18.0
million in 1998.  Another 95,499 shares of common stock were issued in
connection with the Employees' Stock Ownership Plan, 70,450 shares were
issued in connection with the Long-Term Performance-Based Incentive Plan,
and 193,943 shares of common stock were issued in connection with a 401(k)
Savings Plan for Employees in return for cash contributions from associates
totaling $3.1 million and Company contributions with a value of $2.7
million.

    The Company invested a total of $102.5 million in common stock of
subsidiaries during 1998.  It also increased its equity investment in
subsidiaries by $38.5 million from the earnings retained by them.

    The Company plans to continue to use short-term bank borrowings, as
cash requirements warrant it, to finance additional investment in
subsidiaries.  Common stock also is expected to be issued in connection
with the continuation of the Company's Dividend Reinvestment and Stock
Purchase Plan, the Employees' Stock Ownership Plan, the Savings Plan for
Employees and the Long-Term Performance-Based Incentive Plan.


THE SUBSIDIARY COMPANIES

Utility subsidiary companies fund construction programs and supplement
cash flow by borrowing from banks under individual credit lines established
annually.  Ample credit lines are available to provide funds needed for
1999 construction requirements and to maintain bank borrowings not yet
refinanced on a long-term basis.  Bank borrowings are

                                                                         31

<PAGE>
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



repaid with the proceeds obtained from selling bonds and preferred
stock either publicly or to institutional investors on a private placement
basis, and selling common stock to the Company.  Security offerings are
made when they are of marketable size, meet indenture and charter
requirements and can compete successfully in the capital market.  In order
to compete successfully, the individual company must have exhibited
satisfactory earnings.  Capitalization and dividend payout ratios are
maintained within a range found acceptable for investor-owned water
companies.

    During 1998, ten subsidiaries issued $95.2 million of mortgage bonds at
interest rates between 6.31% and 7.48%.  Three subsidiaries issued
tax-exempt debt totaling $75.5 million at interest rates between 5.0% and
5.25%.  Proceeds from the sale of the bonds were used to repay bank loans,
fund construction programs, and to refinance existing debt.

    Aggregate bank borrowings of subsidiaries at year-end 1998 amounted to
$88.6 million compared to $75.3 million at year-end 1997.  During 1998,
subsidiaries made mandatory payments to sinking funds in amounts adequate
to retire $29.3 million of debt and redeem $2.4 million of preferred
stocks.

    The subsidiary companies plan to fund construction programs, continue
acquisitions and repay bank borrowings and maturing bonds with the issuance
of approximately $157 million of long-term debt and $64 million of common
stock to the Company in 1999.  The combined amount of subsidiary bank
borrowings and bonds maturing within one year is expected to increase by
approximately $65 million in 1999.  A discussion of the subsidiary
companies' capital spending programs begins on page 24.


REGULATION

ECONOMIC

Twenty state commissions regulate the Company's utility subsidiaries.
They have broad authority to establish rates for service, prescribe service
standards, review and approve rules and regulations and, in most instances,
they must approve long-term financing programs prior to their completion.
The jurisdiction exercised by each commission is prescribed by state
legislation and therefore varies from state to state.

    Commissions range in size from three to seven members.  The
commissioners in Arizona are elected by the voting public.  The three
directors of the Tennessee Regulatory Authority are appointed by the
Governor, the Speaker of the Senate, and the Speaker of the House of
Representatives.  In Virginia, members of the State Corporation Commission
are elected by a joint vote of the two houses of the general assembly.  A
new state regulatory commission in New Mexico has been formed and
implemented as of January 1, 1999 consisting of five popularly elected
Commissioners from separate districts.  All other state commissioners
regulating subsidiaries are appointed by the governors of the respective
states and usually require approval by the state legislature.  The
background of the individuals serving in these important utility regulatory
commissioner positions covers a broad spectrum.

    Economic regulation deals with many competing, if not conflicting,
public pressures.  Rate adjustments normally are initiated by the utility
entity.  Public hearings, which are basically financial fact-finding
sessions, are conducted.  The


MARKET RISK

The Company is exposed to market risk, including changes in
interest rates, certain commodity prices and equity prices.  The exposure
to changes in interest rates is a result of financing through the issuance
of fixed-rate preferred stocks and long-term debt.  The following table
provides the principal amounts by period of maturity and the weighted
average effective interest rate for all such obligations outstanding in the
period for the Company's obligations that are sensitive to interest rate
changes.

<TABLE>
<CAPTION>
INTEREST RATE RISK
                                                                                                            Fair Value at
(000)                            1999      2000       2001       2002       2003   Thereafter        Total  Dec. 31, 1998
=========================================================================================================================
<S>                           <C>       <C>       <C>        <C>        <C>        <C>          <C>            <C>
Fixed-rate long-term debt,
  including current portion   $52,643   $36,784   $157,232   $143,271   $204,666   $1,562,620   $2,157,216     $2,382,822
Average interest rate           7.29%     7.24%      7.21%      7.21%      7.21%        7.16%
Fixed-rate preferred stocks
  with mandatory redemption
  requirements                $ 3,198   $41,031   $    956   $    788   $    704   $   32,484   $   79,161     $   86,812
Average interest rate           8.11%     8.16%      8.06%      8.10%      8.13%        8.14%
</TABLE>

32

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



purpose of this process is to set rates for service which ensure the
financial viability of the utility entity while ensuring that customers
receive high quality service at reasonable cost.  A rate case focuses on
four areas:

o The amount of investment in facilities which provide public service

o The operating costs associated with providing that service

o The capital costs for the funds used to provide the facilities which
  serve the public

o The tariff design which allocates revenue requirements equitably
  across the customer base

    Prudent management dictates that a water utility anticipate the time
required for the regulatory process and file for rate adjustments which
will reflect the cost of providing service at the time the authorized rates
become effective.

    The utility subsidiaries aggressively pursue various methods of
offsetting the adverse financial impact of regulatory lag.  Certain
subsidiaries have received rate orders allowing recovery of interest and
depreciation expense related to the interim period from the time a major
construction project was placed in service until new rates reflecting the
cost of the project went into effect.  Several subsidiaries also now
recover in rates a return on utility plant before it is in service instead
of capitalizing an allowance for funds used during construction.

    Additionally, utility subsidiaries with multiple operating districts
within a state have pursued single tariff pricing.  This is a concept that
sets identical rates for service throughout the service territory.  It
allows simplification of customer service operations.  This concept also
reduces the complexity of rate proceedings.  It also permits flexibility in
timing of utility subsidiary financing.  Single tariff pricing is now in
effect in Connecticut, Illinois, Missouri, New Jersey, Ohio, Pennsylvania
and West Virginia

    During the past year, six subsidiaries were authorized by regulatory
commissions to increase rates for service by an annual amount of $10.2
million.  In most of these decisions, the primary factor for these price
increases was to reflect a return on the investment made in the essential
water service facilities.

    In Ohio, West Virginia and New York, rate awards were granted under
three phase rate case procedures permitted in those states.  The three
phase rate case format is designed to allow the utility subsidiary to earn
a return on new investments or recover increased expenses without the need
to file and process a complete rate case.  This not only benefits the
utility subsidiary with more timely recognition of investments and recovery
of increased expenses, but it benefits the customer through reduced rate
case expenses.

    The third step of a three phase rate case was placed into effect on
October 1, 1998 for Ohio-American Water Company.  This case was originally
filed in 1995.  As can be seen from the table below there has been a rate
adjustment each year under this methodology.  Ohio-American is the only
utility in Ohio utilizing this methodology.

    West Virginia-American Water Company received two rate increase
authorizations during 1998.  The first one was the third phase of a three
phase rate proceeding begun in 1995, similar to Ohio-American's.  The
second order for a rate increase was received on December 31, 1998 as the
result of a full rate filing.  The December 31, 1998 rate award is the
first of three steps for this case as well.  Two more increases will be
awarded on January 1 of each of the years 2000 and 2001.

    New York-American Water Company received a rate increase authorization
on August 1, 1998.  This authorization is the first phase of a three step
rate proceeding.  Two more increases will be awarded on August 1 of each of
the years 2000 and 2001.


ADDITIONAL ANNUAL REVENUES AUTHORIZED BY RATE DECISIONS
(000)                         1998          1997          1996
==============================================================
Arizona                    $    --       $   739       $    --
California                      --         1,354         3,556
Connecticut                     --            --         1,899
Illinois                        --         7,301           999
Indiana                         --         6,101         2,636
Iowa                         1,836            --            --
Kentucky                        --         1,050         1,515
Maryland                        --            31           202
Massachusetts                   --            --         5,376
Michigan                        80            --            --
Missouri                        --         2,707            --
New Jersey                      --         2,157        39,486
New Mexico                     790            --            --
New York                       440            --            --
Ohio                           733           952         1,106
Pennsylvania                    --        27,450            --
Tennessee                       --            --         1,405
Virginia                        --           717            --
West Virginia                6,287         2,698         4,704
--------------------------------------------------------------
                           $10,166       $53,257       $62,884
                           ===================================


    Massachusetts-American water customers will begin seeing an annual
credit with a 9-year duration on their water bills beginning in 1999.  The
credit represents a pass-through of financial assistance made available by
the Massachusetts Water Pollution Abatement Trust to mitigate the cost of a
new water treatment facility in Hingham.

                                                                         33

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



    American Water System personnel participate in regulatory conferences
and meetings, including those conducted by regional regulatory
associations.  The goal in this effort is to increase understanding of the
industry and its unique regulatory requirements.

    The Company appreciates the thoughtful work of the Water Committee of
the National Association of Regulatory Utility Commissioners.  Its
initiatives and the growing public awareness of the importance of adequate
water supply have led to progressive regulation which has allowed utility
subsidiaries to address, on a timely basis, water supply issues which
otherwise would still be unresolved.


ENVIRONMENTAL

Two areas of environmental regulation impact the water utility
industry.  The regulation of drinking water quality is legislated under the
Safe Drinking Water Act, which most recently was amended in August of 1996.
The regulation of wastes generated during the drinking water treatment
process is legislated under the Clean Water Act, Resource Conservation and
Recovery Act, and Toxic Substances Control Act.  Water utilities,
individually and through industry associations, follow the development of
these legislative mandates closely, and provide technical guidance to
Congress on areas of improvement.  By far, the Safe Drinking Water Act has
the most potential for impact on water utilities, and has as its objective
the improvement of public health.  The utility subsidiaries are, as a
matter of policy, committed to compliance with all applicable environmental
mandates and routinely support environmental protection initiatives.

    All environmental regulations promulgated under these statutes are
adopted by the United States Environmental Protection Agency (EPA).  As
part of the regulatory development process, EPA solicits comments, and the
American Water System regularly provides technical advice regarding
proposed regulations.  Its broad operating experience and current research
effort afford the American Water System the unique opportunity to assist
EPA in developing the most practical regulation possible.  EPA has been
working on several regulations, such as more stringent microbial control,
more extensive limits for disinfection by-products, limits for arsenic and
radon, and disinfection of ground waters.

    During 1998, EPA implemented several new regulations.  The Consumer
Confidence Reports regulation was finalized, which requires that an annual
report of water quality be sent to each customer detailing the quality of
the water being distributed to them.  This detailed reporting must be
initiated by all water utilities by October, 1999.  Plans have been made
for the utility subsidiaries to issue the first Consumer Confidence Reports
in the spring of 1999.  The Interim Enhanced Surface Water Treatment rule
was finalized in 1998.  This regulation requires lower turbidity in
filtered surface water than had previously been required.  All surface
water treatment plants operated by the Company's utility subsidiaries
already meet the requirements of this rule.  The final stage one
Disinfection By-Product (DBP) rule requires a lower trihalomethane level in
finished water and initiates specific limits on certain compounds.  Full
compliance is required by 2001.  Approximately 85% of the utility
subsidiaries' water systems already meet this rule, and the balance of the
systems should be brought into compliance during 1999.

    When Congress amended the Safe Drinking Water Act in 1996, it required
EPA to proceed with all these regulations and more.  For the first time,
the Safe Drinking Water Act provides funding for improvements to water
quality, forces EPA to better protect drinking water sources of supply from
contamination, requires development of a national water plant operator
certification program and prohibits non-viable water systems from going
into business.  The American Water System supported these provisions and
welcomes changes that improve service to customers and protect public
health.

    As these new regulations go into effect, it is clear that the use of
chlorine as a disinfectant in water treatment will continue to be modified.
EPA is promoting less use of chlorine because of the potential for DBPs,
which result from the use of chlorine, to be toxic.  However, in most
cases, EPA also desires greater disinfection to better protect against a
waterborne disease outbreak due to microbes that are not easily
disinfected.  For many utilities, both objectives could be reached by using
a different disinfectant, such as ozone.  However, ozone also creates some
toxic by-products.  Use of membrane filtration processes, such as reverse
osmosis, can attain both objectives, but the cost is very high.  So all
water utilities will be faced with balancing microbial risk with chemical
risk while holding down treatment costs, both capital and operating.
Clearly the future is for less chlorine, but for many utilities, by-product
limits can be reached without the need for ozone or some other very
capital-intensive technology.

    Research has continued to focus on the most important topics to public
health.  Cryptosporidium research has concentrated on developing better
test methods, better understanding of disinfection and removal
efficiencies, and monitoring the occurrence around the American Water
System.  Viruses also have been a major topic of study, as the Company is
performing a very important investigation for the industry and EPA by
looking for viruses in numerous groundwaters around the country, and
correlating that data to geology and distance to contaminant sources as
possible vulnerability measures, which will be the basis for EPA's
regulation in a few years.

34

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



    The responsibility for implementing and enforcing the regulations
promulgated by EPA rests with the individual states.  In some instances,
state regulations have established standards that are more demanding than
the federal standards.

    American Water Works water utility subsidiaries are aggressively
pursuing the standards set for The Partnership for Safe Water.  This
partnership is a voluntary cooperative effort between the EPA, American
Water Works Association, state health officials and other drinking water
organizations, and over 186 surface water utilities representing 245 water
treatment plants throughout the United States.  The Partnership's goal is
to provide a new measure of safety to millions of Americans by implementing
prevention programs where legislation or regulation does not exist.  The
preventative measures are based around optimizing treatment plant
performance and thus increasing protection against microbial contamination
in America's drinking water supply.

    All waste from the utility subsidiaries' water treatment processes are
either recycled or discharged.  Solid wastes are disposed in accordance
with current best practices, and with the proper permits from the
authorities.  Most solid wastes are disposed of in landfills, and some are
taken to local sewage plants for treatment.  In several instances, water
treatment wastes are discharged to a river in accordance with state
permits.


YEAR 2000 ISSUES

Many computer systems in use today were designed and developed without
regard to the impact of the upcoming century change.  Computer programs and
devices often use only two digits for the year to identify dates.  As a
result, computer systems may fail completely or create erroneous results
unless corrective measures are taken.

    The Company utilizes numerous computerized systems and date sensitive
devices in its operations.  If some of these key systems and devices are
not ready for the Year 2000 there will likely be adverse effects on the
Company's business, results of operations, and financial condition.  The
Company is also dependent on third parties that supply important materials
and services such as water treatment chemicals, electric power for pumps
and the processing of customer payments.  The failure of some of these
third parties to be Year 2000 compliant on a timely basis would also have
an adverse effect on the Company.  The Company has assigned a very high
priority to its Year 2000 compliance efforts, and considerable progress has
been made.  These efforts are expected to be substantially completed in the
second quarter of 1999.

    An inventory of all important computer programs and devices with
embedded technology has been prepared for each utility subsidiary.  Those
inventories are being used to track the status of any necessary upgrades or
replacements, and to log the results of testing by Company personnel to
ensure that all important systems are in fact Year 2000 compliant.  In some
instances work on other information technology projects has been delayed
because of Year 2000 remediation projects, but these delays are not
expected to have a significant impact on the Company's operations.

    Because the Company is particularly dependent on its computerized
financial, customer service and treatment plant automation systems, those
systems are the primary areas in which Year 2000 efforts are focused.

    The Company is currently implementing two new software packages for
financial and customer service applications that are Year 2000 compliant.
Although the decision to purchase and implement this software was based on
an analysis of all of the Company's current and future systems
requirements, once the decision was made, these projects became a key part
of the Company's Year 2000 compliance plan.  The enterprise software for
financial applications is already in use by many of the utility
subsidiaries, and implementation and testing is expected to be completed
during the first half of 1999.  The new customer service software is
currently being used by two of the Company's subsidiaries, and an
additional subsidiary is expected to begin using the new software in 1999.
Implementation of the new customer service software will continue beyond
1999, so the customer service software currently used by most of the
subsidiaries is also being made Year 2000 compliant.  All of the utility
subsidiaries are expected to have Year 2000 compliant customer service
software by the middle of 1999.  In conjunction with these two projects,
midrange and personal computers have been upgraded with hardware and
operating systems that are Year 2000 compliant.

    Many of the Company's water treatment plants utilize automation systems
that are controlled by personal computers.  These systems are being tested
and upgraded if necessary, and that work has been completed at most
facilities.  The Company's production and distribution facilities also
utilize many pieces of equipment with embedded microcontroller chips.
These chips, which may be time/date sensitive, are an integral part of
critical operating equipment.  Much of this equipment cannot be field
tested to evaluate Year 2000 compliance, so the Company has developed a
systematic approach to identify and resolve this issue that is expected to
be completed during the first quarter of 1999.  As a contingency, the
Company's production and distribution facilities can be operated manually
in the event of an internal Year 2000 related failure.

                                                                         35


<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS



    In addition to the work being done on the Company's internal systems,
interfaces used to exchange information with banks and other entities are
being tested to ensure Year 2000 compliance.  And where feasible, plans are
being formulated to minimize the impact of problems outside parties may
have in providing supplies and services.

    The cost of the new financial and customer service software,
implementation consulting services, and the cost of upgrading and replacing
computers and other equipment will be capitalized by the utility
subsidiaries and included in future rate increase requests.  The total cost
of these Year 2000 related capital projects is expected to be approximately
$45 million, of which approximately $35 million has been incurred to date.
Costs for specific Year 2000 remediation projects will be charged to
expense unless they meet the requirements for deferral as regulatory
assets.  However, current period expenses are not expected to be materially
different from the usual ongoing level of information systems related
expenses.


NEW ACCOUNTING STANDARDS

In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130), Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131) and Statement of Financial
Accounting Standards No. 132 "Employers' Disclosures about Pensions and
Other Postretirement Benefits (SFAS 132) that were issued by the Financial
Accounting Standards Board.  None of these new accounting standards will
have any effect on the Company's financial position or results of
operations as they require only changes or additions to current disclosure
requirements.

    SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements.  The adoption of SFAS 130 did not require additional
reporting because the Company has no charges or credits that are to be
reported as "other comprehensive income."

    SFAS 131 establishes standards for reporting information about
operating segments based upon products and services, geographic areas and
major customers.  The adoption of SFAS 131 did not require additional
reporting as the Company's utility subsidiaries represent similar entities
offering substantially identical services to similar customers.

    SFAS 132 revises and standardizes employers' disclosures about pension
and other postretirement benefit plans required by SFAS No. 87 "Employers'
Accounting for Pensions," SFAS No. 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits other than Pensions," but does not change the
measurement or recognition of those plans.


FORWARD LOOKING INFORMATION

Forward looking statements in this report, including, without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and adequacy of resources, are made
pursuant to the safe harbor provisions of the U.S. Private Securities
Litigation Reform Act of 1995.  These forward looking statements involve
known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be
materially different from advertising and promotional efforts; existence of
adverse publicity or litigation; changes in business strategy or plans;
quality of management; availability, terms and development of capital;
business abilities and judgment of personnel; changes in, or the failure to
comply with governmental regulations; Year 2000 issues; and other factors
described in filings of the Company with the SEC.  The Company undertakes
no obligation to publicly update or revise any forward looking statement,
whether as a result of new information, future events or otherwise.

36

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------






---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS


TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN WATER WORKS COMPANY, INC.


In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income and retained earnings, of cash
flows, of capitalization and of common stockholders' equity of American
Water Works Company, Inc. and Subsidiary Companies and the accompanying
balance sheet and the related statements of income and retained earnings
and of cash flows of American Water Works Company, Inc., present fairly, in
all material respects, the consolidated financial position of American
Water Works Company, Inc. and Subsidiary Companies and the financial
position of American Water Works Company, Inc. at December 31, 1998 and
1997, and the consolidated results of operations and cash flows of American
Water Works Company, Inc. and Subsidiary Companies for each of the three
years in the period ended December 31, 1998, and the results of operations
and cash flows of American Water Works Company, Inc. for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.  These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits.  We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable
basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Thirty South Seventeenth Street
Philadelphia, Pennsylvania

February 2, 1999, except as to
Note 16 which is as of February 4, 1999

                                                                         37

<PAGE>
---------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)


At December 31,                                           1998         1997
===========================================================================
ASSETS
Property, plant and equipment
  Utility plant -- at original cost less
    accumulated depreciation                        $4,041,819   $3,713,390
  Utility plant acquisition adjustments, net            54,739       58,976
  Nonutility property, net of accumulated
    depreciation                                        32,217       32,942
  Excess of cost of investments in subsidiaries
    over book equity at acquisition, net                24,431       22,745
---------------------------------------------------------------------------
                                                     4,153,206    3,828,053
---------------------------------------------------------------------------

Current assets
  Cash and cash equivalents                             39,059       12,661
  Customer accounts receivable                          73,774       67,318
  Allowance for uncollectible accounts                  (1,583)     
(1,249)
  Unbilled revenues                                     58,778       55,750
  Miscellaneous receivables                              8,786        5,673
  Materials and supplies                                11,943       11,415
  Deferred vacation pay                                 10,127       11,132
  Other                                                 10,888       10,158
---------------------------------------------------------------------------
                                                       211,772      172,858
---------------------------------------------------------------------------

Regulatory and other long-term assets
  Regulatory asset -- income taxes recoverable
    through rates                                      186,748      181,566
  Debt and preferred stock expense                      33,617       30,216
  Deferred pension expense                              26,345       22,163
  Deferred postretirement benefit expense               11,181       11,372
  Deferred treatment plant costs                         6,873        7,690
  Deferred water utility billings                        1,862        4,013
  Tank painting costs                                   12,599       10,531
  Funds restricted for construction                     10,935        5,340
  Other                                                 53,169       40,484
---------------------------------------------------------------------------
                                                       343,329      313,375
---------------------------------------------------------------------------
                                                    $4,708,307   $4,314,286
                                                    ==========   ==========

38

<PAGE>
                  AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------------------------




                                                          1998            1997
==============================================================================
CAPITALIZATION AND LIABILITIES
Capitalization
  Common stockholders' equity                       $1,239,174      $1,142,416
  Preferred stocks with mandatory
    redemption requirements                             40,000          40,000
  Preferred stocks without mandatory
    redemption requirements                             11,673          11,673
  Preferred stocks of subsidiaries with
    mandatory redemption requirements                   39,161          39,734
  Preferred stocks of subsidiaries without
    mandatory redemption requirements                    6,255           6,256
  Long-term debt
    American Water Works Company, Inc.                 201,000         116,000
    Subsidiaries                                     1,905,011       1,754,766
------------------------------------------------------------------------------
                                                     3,442,274       3,110,845
------------------------------------------------------------------------------
Current liabilities
  Bank debt                                             88,590         134,762
  Current portion of long-term debt                     53,321          25,148
  Accounts payable                                      56,728          42,766
  Taxes accrued, including federal income               18,867          14,409
  Interest accrued                                      38,313          33,404
  Accrued vacation pay                                  10,243          11,239
  Other                                                 35,269          44,725
------------------------------------------------------------------------------
                                                       301,331         306,453
------------------------------------------------------------------------------
Regulatory and other long-term liabilities
  Advances for construction                            138,204         127,457
  Deferred income taxes                                451,118         418,248
  Deferred investment tax credits                       35,083          36,239
  Accrued pension expense                               48,755          41,079
  Accrued postretirement benefit expense                10,034          10,034
  Other                                                  9,602           6,197
------------------------------------------------------------------------------
                                                       692,796         639,254
------------------------------------------------------------------------------
Contributions in aid of construction                   271,906         257,734
------------------------------------------------------------------------------
Commitments and contingencies                               --              --
------------------------------------------------------------------------------
                                                    $4,708,307      $4,314,286
                                                    ==========================

The accompanying notes are an integral part of these financial statements.

                                                                         39

<PAGE>
                   AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(Dollars in thousands, except per share amounts)



For the years ended December 31,                  1998        1997        1996
==============================================================================
CONSOLIDATED INCOME
Operating revenues                          $1,017,812    $954,199    $894,646
------------------------------------------------------------------------------
Operating expenses
  Operation and maintenance                    445,334     428,779     425,170
  Depreciation and amortization                119,725     103,660      93,413
  General taxes                                 92,845      87,860      82,017
------------------------------------------------------------------------------
                                               657,904     620,299     600,600
------------------------------------------------------------------------------
Operating income                               359,908     333,900     294,046
Allowance for other funds used
  during construction                            9,690       7,035       6,540
Other income                                     1,975       1,353       3,301
------------------------------------------------------------------------------
                                               371,573     342,288     303,887
------------------------------------------------------------------------------
Income deductions
  Interest                                     154,273     145,766     136,760
  Allowance for borrowed funds used
    during construction                         (5,622)     (4,715)     (5,202)
  Amortization of debt expense                   1,832       1,614       1,497
  Preferred dividends of subsidiaries            3,408       3,522       3,616
  Other deductions                               3,322       2,260       1,714
------------------------------------------------------------------------------
                                               157,213     148,447     138,385
------------------------------------------------------------------------------
Income before income taxes                     214,360     193,841     165,502
Provision for income taxes                      83,312      74,713      63,828
------------------------------------------------------------------------------
Net income                                     131,048     119,128     101,674
Dividends on preferred stocks                    3,984       3,984       3,984
------------------------------------------------------------------------------
Net income to common stock                  $  127,064    $115,144    $ 97,690
                                            ==================================
Average shares of basic common stock
  outstanding (thousands)                       80,298      79,144      74,540
Basic earnings per common share on
  average shares outstanding                $     1.58    $   1.45    $   1.31
                                            ==================================
Diluted earnings per common share on
  average shares outstanding                $     1.58    $   1.45    $   1.31
                                            ==================================

CONSOLIDATED RETAINED EARNINGS
Balance at beginning of year                $  717,243    $662,183    $622,061
Add: net income                                131,048     119,128     101,674
Deduct: adjustment for 1996 stock split
  on shares issued during the year                  --          --       6,269
------------------------------------------------------------------------------
                                               848,291     781,311     717,466
------------------------------------------------------------------------------
Deduct: dividends
  Preferred stock                                3,528       3,528       3,528
  Preference stock                                 456         456         456
  Common stock -- $.82 per share in 1998,
    $.76 per share in 1997,
    $.70 per share in 1996                      65,781      60,084      51,299
------------------------------------------------------------------------------
                                                69,765      64,068      55,283
------------------------------------------------------------------------------
Balance at end of year                      $  778,526    $717,243    $662,183
                                            ==================================

The accompanying notes are an integral part of these financial statements.

40

<PAGE>
                   AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)



For the years ended December 31,                  1998        1997        1996
==============================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                    $131,048    $119,128    $101,674
Adjustments
  Depreciation and amortization                119,725     103,660      93,413
  Provision for deferred income taxes           29,039      31,850      22,288
  Provision for losses on accounts receivable    6,172       6,650       5,479
  Allowance for other funds used
    during construction                         (9,690)     (7,035)     (6,540)
  Employee stock plan expenses                   5,648       6,301       5,165
  Employee benefit expenses greater (less)
    than funding                                (2,031)      1,243        (849)
  Deferred revenues, net                            --          --      (1,125)
  Deferred tank painting costs                  (3,950)     (1,834)     (2,544)
  Deferred rate case expense                    (1,894)     (2,219)     (1,897)
  Deferred treatment plant costs                (1,803)     (2,654)     (1,125)
  Amortization of deferred charges              10,046       8,862       8,533
  Other, net                                    (6,570)       (445)     (6,387)
  Changes in assets and liabilities,
    net of effects from acquisitions
      Accounts receivable                      (15,407)     (7,427)     (5,175)
      Unbilled revenues                         (3,028)     (1,882)     (1,543)
      Other current assets                      (1,258)     (2,516)        612
      Accounts payable                          13,962       5,980      (6,514)
      Taxes accrued, including federal income    4,458       3,606      (2,591)
      Interest accrued                           4,909       1,276       3,465
      Other current liabilities                 (9,456)      4,570       4,178
------------------------------------------------------------------------------
Net cash from operating activities             269,920     267,114     208,517
------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures                     (390,594)   (352,437)   (273,732)
Allowance for other funds used
  during construction                            9,690       7,035       6,540
Water system acquisitions                      (45,740)     (3,072)   (302,447)
Proceeds from the disposition of property,
  plant and equipment                            1,484       3,717       4,649
Removal costs from property, plant
  and equipment retirements                     (9,412)    (12,855)     (8,264)
Funds restricted for construction activity      (5,595)        451       8,136
------------------------------------------------------------------------------
Net cash used in investing activities         (440,167)   (357,161)   (565,118)
------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt                   291,174     179,700     248,459
Proceeds from common stock, net of
  issuance costs                                29,942      23,040     186,451
Net repayments under line-of-credit
  agreements                                   (46,172)    (12,628)     (1,249)
Advances and contributions for
  construction, net of refunds                  28,515      25,893      17,829
Debt issuance costs                             (5,265)     (3,530)     (4,187)
Repayment of long-term debt                    (29,346)    (57,324)    (44,887)
Redemption of preferred stocks                  (2,438)     (1,349)     (1,275)
Dividends paid                                 (69,765)    (64,068)    (55,283)
------------------------------------------------------------------------------
Net cash from financing activities             196,645      89,734     345,858
------------------------------------------------------------------------------
Net increase (decrease) in cash and
  cash equivalents                              26,398        (313)    (10,743)
Cash and cash equivalents at
  beginning of year                             12,661      12,974      23,717
------------------------------------------------------------------------------
Cash and cash equivalents at end of year      $ 39,059    $ 12,661    $ 12,974
                                              ================================
Cash paid during the year for:
  Interest, net of capitalized amount         $153,431    $146,794    $134,084
                                              ================================
  Income taxes                                $ 63,850    $ 56,269    $ 49,197
                                              ================================

Common stock issued in lieu of cash in
connection with the Employee Stock Ownership
Plan, the Savings Plan for Employees and the
Long-Term Performance-Based Incentive Plan
totaled $6,854 in 1998, $5,438 in 1997 and
$8,093 in 1996.  Capital lease obligations
of $1,590 were recorded in 1998 and
$62 in 1996.

The accompanying notes are an integral part of these financial statements.


                                                                         41

<PAGE>

------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CAPITALIZATION
(Dollars in thousands, except per share amounts)



At December 31,                                               1998        1997
==============================================================================
COMMON STOCKHOLDERS' EQUITY:
  Common stock -- $1.25 par value, authorized
    300,000,000 shares, outstanding 80,894,790 shares
    in 1998 and 79,685,612 shares in 1997               $  101,118  $   99,607
  Paid-in capital                                          360,510     326,382
  Retained earnings                                        778,526     717,243
  Unearned compensation                                       (980)       (816)
------------------------------------------------------------------------------
                                                         1,239,174   1,142,416
------------------------------------------------------------------------------

At December 31, 1998, common shares reserved for
issuance in connection with the Company's stock plans
were 60,923,162 shares for the Stockholder Rights Plan,
5,345,600 shares for the Dividend Reinvestment and
Stock Purchase Plan, 707,559 shares for the Employees'
Stock Ownership Plan, 798,078 shares for the Savings
Plan for Employees and 327,135 shares for the Long-Term
Performance-Based Incentive Plan.

PREFERRED STOCKS WITH MANDATORY REDEMPTION REQUIREMENTS:
  Cumulative preferred stock -- $25 par value, authorized
    1,770,000 shares
  8.50% series (non-voting), outstanding 1,600,000
    shares, due for redemption at par value on
    December 1, 2000                                        40,000      40,000
------------------------------------------------------------------------------

PREFERRED STOCKS WITHOUT MANDATORY REDEMPTION REQUIREMENTS:
  Cumulative preferred stock -- $25 par value
    5% series, outstanding 101,777 shares                    2,544       2,544
  Cumulative preference stock -- $25 par value,
    authorized 750,000 shares
    5% series (non-voting), outstanding
    365,158 shares                                           9,129       9,129
  Cumulative preferential stock -- $35 par value,
    authorized 3,000,000 shares,
    no outstanding shares                                       --          --
------------------------------------------------------------------------------
                                                            11,673      11,673
------------------------------------------------------------------------------

PREFERRED STOCKS OF SUBSIDIARIES:
  Dividend rate
    3.9% to less than 5%                                     5,931       6,545
    5% to less than 6%                                       5,285       5,429
    6% to less than 7%                                       1,823       1,957
    7% to less than 8%                                       4,084       2,270
    8% to less than 9%                                      24,370      24,695
    9% to less than 10%                                      3,503       4,534
    10% to less than 11%                                       420         560
------------------------------------------------------------------------------
                                                            45,416      45,990
------------------------------------------------------------------------------

Preferred stock agreements of certain subsidiaries
require annual sinking fund payments in varying amounts
and permit redemption at various prices at the option
of the subsidiaries on thirty days notice, or, in the
event of involuntary liquidation, at par value plus
accrued dividends.  Sinking fund payments for the next
five years will amount to $3,198 in 1999, $1,031 in
2000, $956 in 2001, $788 in 2002 and $728 in 2003.

Redemptions of preferred stock amounted to $2,438 in
1998 and $1,349 in 1997.

42

<PAGE>
                   AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
------------------------------------------------------------------------------




<TABLE>
<CAPTION>
                                                        CURRENT
                                                     MATURITIES        1998        1997
=======================================================================================
<S>                                                     <C>      <C>         <C>
LONG-TERM DEBT OF AMERICAN WATER
WORKS COMPANY, INC.
  9.06% Series B-2 debentures, due December 1, 1999     $35,000  $       --  $   35,000
  7.41% Series C debentures, due May 1, 2003                 --      81,000      81,000
  6.21% Series D debentures, due July 2, 2001                --      50,000          --
  6.28% Series D debentures, due July 2, 2002                --      10,000          --
  6.28% Series D debentures, due July 2, 2003                --      45,000          --
  6.32% Series D debentures, due July 2, 2004                --      15,000          --
---------------------------------------------------------------------------------------
                                                         35,000     201,000     116,000
---------------------------------------------------------------------------------------

Capital lease obligations to a subsidiary were
$650 in 1998 and $461 in 1997.

LONG-TERM DEBT OF SUBSIDIARIES:
  Interest rate                        
    1% to less than 2%                                      138       5,880       2,140
    3% to less than 4%                                       37         433          --
    4% to less than 5%                                      407       4,418       4,825
    5% to less than 6%                                       51     253,745     178,361
    6% to less than 7%                                      860     463,257     375,821
    7% to less than 8%                                    1,141     688,361     689,779
    8% to less than 9%                                    1,100     170,000     171,100
    9% to less than 10%                                   3,909     263,164     267,663
    10% to less than 11%                                 10,455      53,860      64,315
---------------------------------------------------------------------------------------
                                                         18,098   1,903,118   1,754,004
  Capital leases                                            223       1,893         762
---------------------------------------------------------------------------------------
                                                        $18,321   1,905,011   1,754,766
---------------------------------------------------------------------------------------
                                                                 $3,442,274  $3,110,845
                                                                 ======================
</TABLE>

Maturities of long-term debt of subsidiaries,
including sinking fund requirements, during the
next five years will amount to $18,321 in 1999,
$36,764 in 2000, $107,230 in 2001, $133,243 in
2002 and $78,750 in 2003.

Long-term debt of subsidiaries is substantially
secured by utility plant and by a pledge of
certain securities of subsidiaries and affiliates.


The accompanying notes are an integral part of these financial statements.

                                                                         43

<PAGE>
               AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                         Common Stock                                                   Common
                                    ---------------------    Paid-in    Retained       Unearned  Stockholders'
                                        Shares  Par Value    Capital    Earnings   Compensation         Equity
==============================================================================================================
<S>                                 <C>          <C>        <C>         <C>             <C>         <C>
BALANCE AT DECEMBER 31, 1995        67,826,670   $ 84,783   $114,161    $622,061        $(2,066)    $  818,939

   Net income                               --         --         --     101,674             --        101,674
   Common stock offering             8,400,000     10,500    147,436      (5,250)            --        152,686
   Dividend reinvestment               283,332        354      5,222         (90)            --          5,486
   Stock purchase                    1,277,765      1,597     23,211        (596)            --         24,212
   Employees' stock ownership plan     132,458        166      2,428         (83)            --          2,511
   Savings plan for employees          259,505        325      4,878         (99)            --          5,104
   Incentive plan                      241,572        302      1,112        (151)         1,282          2,545
   Dividends:
     Preferred stocks                       --         --         --      (3,984)            --         (3,984)
     Common stock, $.70 per share           --         --         --     (51,299)            --        (51,299)
--------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996        78,421,302     98,027    298,448     662,183           (784)     1,057,874

   Net income                               --         --         --     119,128             --        119,128
   Dividend reinvestment               291,236        364      6,235          --             --          6,599
   Stock purchase                      555,109        693     11,777          --             --         12,470
   Employees' stock ownership plan     134,182        168      2,761          --             --          2,929
   Savings plan for employees          222,940        279      4,741          --             --          5,020
   Incentive plan                       60,843         76      2,420          --            (32)         2,464
   Dividends:
     Preferred stocks                       --         --         --      (3,984)            --         (3,984)
     Common stock, $.76 per share           --         --         --     (60,084)            --        (60,084)
--------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997        79,685,612     99,607    326,382     717,243           (816)     1,142,416

   Net income                               --         --         --     131,048             --        131,048
   Dividend reinvestment               249,250        312      7,082          --             --          7,394
   Stock purchase                      600,036        750     17,267          --             --         18,017
   Employees' stock ownership plan      95,499        119      2,903          --             --          3,022
   Savings plan for employees          193,943        242      5,593          --             --          5,835
   Incentive plan                       70,450         88      1,283          --           (164)         1,207
   Dividends:
     Preferred stocks                       --         --         --      (3,984)            --         (3,984)
     Common stock, $.82 per share           --         --         --     (65,781)            --        (65,781)
--------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998        80,894,790    $101,118  $360,510    $778,526          $(980)    $1,239,174
                                    ==========================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

44

<PAGE>
                                            AMERICAN WATER WORKS COMPANY, INC.
------------------------------------------------------------------------------
BALANCE SHEET
(Dollars in thousands)



At December 31,                                               1998        1997
==============================================================================
ASSETS
Investments in subsidiaries
  Securities                                            $1,506,969  $1,366,016
  Notes and advances                                            80          90
------------------------------------------------------------------------------
                                                         1,507,049   1,366,106
------------------------------------------------------------------------------
Current assets
  Cash and cash equivalents                                 18,021         308
  Other receivable from subsidiaries                           990       1,767
  Other                                                        549         500
------------------------------------------------------------------------------
                                                            19,560       2,575
------------------------------------------------------------------------------
Deferred debits
  Deferred income taxes                                      5,165       4,212
  Debt expense                                                 468         191
  Preferred stock expense                                       90         137
  Other                                                          1           2
------------------------------------------------------------------------------
                                                             5,724       4,542
------------------------------------------------------------------------------
Other long-term assets                                      16,076      12,907
------------------------------------------------------------------------------
                                                        $1,548,409  $1,386,130
                                                        ======================

CAPITALIZATION AND LIABILITIES
Capitalization
  Common stockholders' equity                           $1,239,174  $1,142,416
  Preferred stocks with mandatory
    redemption requirements                                 40,000      40,000
  Preferred stocks without mandatory
    redemption requirements                                 11,673      11,673
  Long-term debt                                           201,492     116,366
------------------------------------------------------------------------------
                                                         1,492,339   1,310,455
------------------------------------------------------------------------------
Current liabilities
  Bank debt                                                     --      59,500
  Current portion of long-term debt                         35,158          95
  Interest accrued                                           5,105       1,760
  Taxes accrued, including federal income                       30          34
  Other                                                        757         760
------------------------------------------------------------------------------
                                                            41,050      62,149
------------------------------------------------------------------------------
Other long-term liabilities                                 15,020      13,526
------------------------------------------------------------------------------
Commitments and contingencies                                   --          --
------------------------------------------------------------------------------
                                                        $1,548,409  $1,386,130
                                                        ======================


The accompanying notes are an integral part of these financial statements.


                                                                         45

<PAGE>
                                            AMERICAN WATER WORKS COMPANY, INC.
------------------------------------------------------------------------------
STATEMENT OF INCOME AND RETAINED EARNINGS
(Dollars in thousands, except per share amounts)



For the years ended December 31,                  1998        1997        1996
==============================================================================
INCOME
Income from subsidiaries
  Equity in earnings of subsidiaries
    Dividends                                 $109,578    $ 96,427    $ 82,155
    Undistributed earnings                      38,490      36,335      31,605
------------------------------------------------------------------------------
                                               148,068     132,762     113,760
  Interest                                           5           6           6
Other income                                     1,254         585         503
------------------------------------------------------------------------------
                                               149,327     133,353     114,269
------------------------------------------------------------------------------
Expenses
  Operating and administrative expenses         11,791       9,431       8,003
  General taxes                                    260         266         252
  Interest                                      16,109      12,629      11,639
  Amortization of debt expense                      74          45          55
------------------------------------------------------------------------------
                                                28,234      22,371      19,949
------------------------------------------------------------------------------
Income before income taxes                     121,093     110,982      94,320
Provision for income taxes                      (9,955)     (8,146)     (7,354)
------------------------------------------------------------------------------
Net income                                     131,048     119,128     101,674
Dividends on preferred stocks                    3,984       3,984       3,984
------------------------------------------------------------------------------
Net income to common stock                    $127,064    $115,144    $ 97,690
                                              ================================
Average shares of basic common
  stock outstanding (thousands)                 80,298      79,144      74,540
Basic earnings per common share on
  average shares outstanding                     $1.58       $1.45       $1.31
                                              ================================
Diluted earnings per common share on
  average shares outstanding                     $1.58       $1.45       $1.31
                                              ================================

RETAINED EARNINGS
Balance at beginning of year                  $717,243    $662,183    $622,061
Add: net income                                131,048     119,128     101,674
Deduct: adjustment for 1996 stock
  split on shares issued during the year            --          --       6,269
------------------------------------------------------------------------------
                                               848,291     781,311     717,466
------------------------------------------------------------------------------
Deduct: dividends
  Preferred stock                                3,528       3,528       3,528
  Preference stock                                 456         456         456
  Common stock -- $.82 per share in 1998,
    $.76 per share in 1997, $.70 per share
    in 1996                                     65,781      60,084      51,299
------------------------------------------------------------------------------
                                                69,765      64,068      55,283
------------------------------------------------------------------------------
Balance at end of year                        $778,526    $717,243    $662,183
                                              ================================


The accompanying notes are an integral part of these financial statements.


46

<PAGE>
                                            AMERICAN WATER WORKS COMPANY, INC.
------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
(Dollars in thousands)



For the years ended December 31,                  1998        1997        1996
==============================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                    $131,048    $119,128    $101,674
Adjustments
  Undistributed earnings of subsidiaries       (38,490)    (36,335)    (31,605)
  Employee stock plan expenses                      98         585         451
  Other, net                                     1,325         947         863
  Changes in assets and liabilities
    Receivables from subsidiaries                   --          --           4
    Other current assets                           (49)       (310)        (82)
    Taxes accrued, including federal income         (4)          3          50
    Interest accrued                             3,345         191          67
    Other current liabilities                       (3)       (155)       (400)
------------------------------------------------------------------------------
Net cash from operating activities              97,270      84,054      71,022
------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries' common stock      (102,463)    (68,149)   (226,839)
Repayment of promissory notes by subsidiaries       10          10          10
Other                                           (3,449)       (950)     (1,209)
------------------------------------------------------------------------------
Net cash used in investing activities         (105,902)    (69,089)   (228,038)
------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock, net of
  issuance costs                                36,227      28,041     192,856
Dividends paid                                 (69,765)    (64,068)    (55,283)
Net borrowings (repayments) under
  line-of-credit agreements                    (59,500)     21,400      34,400
Proceeds from long-term debt                   120,000          --          --
Repayment of long-term debt                       (265)        (73)    (15,033)
Debt issuance costs                               (352)         --          --
------------------------------------------------------------------------------
Net cash from (used in) financing activities    26,345     (14,700)    156,940
------------------------------------------------------------------------------
Net increase (decrease) in cash and
  cash equivalents                              17,213         265         (76)
Cash and cash equivalents at
  beginning of year                                308          43         119
------------------------------------------------------------------------------
Cash and cash equivalents at end of year      $ 18,021    $    308    $     43
                                              ================================
Cash paid (received) during the year for:
  Interest                                    $ 12,663    $ 12,438    $ 11,572
                                              ================================
  Income taxes                                $ (8,652)   $ (7,105)   $ (6,905)
                                              ================================
Common stock issued in lieu of cash in
  connection with the Long-Term
  Performance-Based Incentive Plan
  totaled $111 in 1998 and $437 in 1997.


The accompanying notes are an integral part of these financial statements.

                                                                         47

<PAGE>
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)



NOTE 1:  ORGANIZATION AND OPERATION

American Water Works Company, Inc. through its utility subsidiaries
provides water and wastewater service in 22 states.  The Company however,
reflects one reportable segment for financial statement purposes as the
Company's utility subsidiaries represent similar entities offering
substantially identical services to similar customers.  Wastewater service
has not been reflected as a reportable segment as revenues, net income and
assets associated with this service are less than 10% of those for the
Company as a whole.  As public utilities, the utility companies function
under rules and regulations prescribed by state regulatory commissions.


NOTE 2:  SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the parent
company and all subsidiaries.  Intercompany accounts and transactions are
eliminated.  Parent company financial statements reflect the equity method
of accounting for investments in common stock of subsidiaries (cost plus
equity in subsidiaries' undistributed earnings since acquisition).

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from these
estimates.

REGULATION

The utility subsidiaries have incurred various costs and received various
credits which have been reflected as regulatory assets and liabilities on
the Company's consolidated balance sheet.  Accounting for such costs and
credits as regulatory assets and liabilities is in accordance with
Statement of Financial Accounting Standards No. 71 "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71).  This statement sets
forth the application of generally accepted accounting principles for those
companies whose rates are established by or are subject to approval by an
independent third-party regulator.  Under SFAS 71, utility companies defer
costs and credits on the balance sheet as regulatory assets and liabilities
when it is probable that those costs and credits will be recognized in the
rate making process in a period different from the period in which they
would have been reflected in income by an unregulated company.  These
deferred regulatory assets and liabilities are then reflected in the income
statement in the period in which the same amounts are reflected in the
rates charged for service.

PROPERTY, PLANT AND EQUIPMENT

Additions to utility plant and replacements of retirement units of property
are capitalized.  Costs include material, direct labor and such indirect
items as engineering and supervision, payroll taxes and benefits,
transportation and an allowance for funds used during construction.
Repairs, maintenance and minor replacements of property are charged to
current operations.  The cost of property units retired in the ordinary
course of business plus removal cost (less salvage) is charged to
accumulated depreciation.  The cost of property, plant and equipment is
generally depreciated using the straight-line method over the estimated
service lives of the assets.

    The costs incurred to acquire and internally develop computer software
for internal use are capitalized as a unit of property.

    Utility plant acquisition adjustments include the difference between
the purchase price of utility plant and its original cost (less accumulated
depreciation) and are being amortized over a period of 40 years.  Utility
plant acquisition adjustments and the excess of cost of investments in
subsidiaries over book equity at acquisition, prior to October 31, 1970,
are not being amortized because in the opinion of management there has been
no diminution in value.

CASH AND CASH EQUIVALENTS

Substantially all of the Company's cash is invested in interest bearing
accounts.  The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Cash equivalents consist primarily of investment grade commercial paper,
bank certificates of deposit and United States Government securities.  Cash
equivalents are stated at cost plus accrued interest which approximates
market value.

MATERIALS AND SUPPLIES

Materials and supplies are stated at average cost.

REGULATORY AND OTHER LONG-TERM ASSETS

The Company has recorded a regulatory asset for the additional revenues
expected to be realized as the tax effects of temporary differences
previously flowed through to customers reverse.  These temporary
differences are primarily related to the difference between book and tax
depreciation on property placed in service before the adoption by the
regulatory authorities of full normalization for rate making purposes.

    The regulatory asset for income taxes recoverable through rates is net
of the reduction expected in future revenues as deferred taxes previously
provided, attributable to the difference between the state and federal
income tax rates under prior law and the current statutory rates, reverse
over the average remaining service lives of the related assets.

    Debt expense is amortized over the lives of the respective issues.
Call premiums on the redemption of long-term debt, as well as unamortized
debt expense, are deferred and amortized to the extent they will be
recovered through future service rates.  Expenses of preferred stock issues
without sinking fund provisions are amortized over 30 years from date of
issue; expenses of issues with sinking fund provisions are charged to
operations as shares are retired.

48

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



    Pension expense in excess of the amount contributed to the pension plan
is deferred by certain subsidiaries.  These costs will be recovered in
future service rates as contributions are made to the pension plan.

    Postretirement benefit expense in excess of the amount recovered in
rates through 1997 has been deferred by certain subsidiaries.  These costs
are now recognized in the rates charged for water service and will be fully
recovered over a 20-year period ending in 2012 as authorized by the
regulatory authorities.

    Deferred treatment plant costs consist of operating expenses, including
depreciation and property taxes, and the carrying charges associated with
several water treatment plants and related facilities acquired in 1996 (see
Northeastern Pennsylvania Acquisition in note 3) from the time the assets
were placed in service until recovery of such costs is allowed in future
service rates.  These costs have been recognized in the rates charged for
water service and are being amortized over a 10-year period as authorized
by the regulatory authorities.

    Deferred water utility billings represent revenue which will be
recovered from customers in future years under the terms of qualified
phase-in plans pursuant to the provisions of Statement of Financial
Accounting Standards No. 92 "Utility Enterprises -- Accounting for Phase-In
Plans."  These regulatory assets have been recorded in accordance with the
terms of rate orders received by the previous owners of water utility
assets that were acquired in 1996 (see Northeastern Pennsylvania
Acquisition in note 3).  The deferred billings are scheduled to conclude
in 2001.

    Tank painting costs are generally deferred and amortized to current
operations on a straight-line basis over periods ranging from 4 to 20
years, as authorized by the regulatory authorities in their determination
of rates charged for service.

OTHER CURRENT LIABILITIES

Other current liabilities at December 31, 1998 and 1997 include payables to
banks of $10,882 and $14,307 respectively, which represent checks issued
but not presented to the banks for payment, net of the related bank
balance.

ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION

Utility subsidiaries may receive advances and contributions to fund
construction necessary to extend service to new areas.  As determined by
the regulatory authorities, advances for construction are refundable for
limited periods of time as new customers begin to receive service.  Amounts
which are no longer refundable are reclassified to contributions in aid of
construction.  Utility plant funded by advances and contributions is
excluded from rate base and is generally not depreciated for rate making
purposes.  Generally, advances and contributions received during the period
January 1, 1987 through June 12, 1996 have been included in taxable income
and the related property is depreciable for tax purposes.  As a result of a
tax law change advances and contributions received subsequent to June 12,
1996 are excluded from taxable income.

RECOGNITION OF REVENUES

Service revenues for financial reporting purposes include amounts billed to
customers on a cycle basis and unbilled amounts based on estimated usage
from the date of the latest meter reading to the end of the accounting
period.

INCOME TAXES

The Company and its subsidiaries participate in a consolidated federal
income tax return.  Federal income tax expense for financial reporting
purposes is provided on a separate return basis, except that the federal
income tax rate applicable to the consolidated group is applied to separate
company taxable income and the benefit of net operating losses, principally
at the parent company level, is recognized currently.

    Certain income and expense items are accounted for in different time
periods for financial reporting than for income tax reporting purposes.
Deferred income taxes have been provided on the difference between the tax
bases of assets and liabilities and the amounts at which they are carried
in the financial statements.  These deferred income taxes are based on the
enacted tax rates to be in effect when such temporary differences are
expected to reverse.  The utility subsidiaries also recognize regulatory
assets and liabilities for the effect on revenues expected to be realized
as the tax effects of temporary differences previously flowed through to
customers reverse.

    Investment tax credits have been deferred and are being amortized to
income over the average estimated service lives of the related assets.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)

AFUDC is a non-cash credit to income with a corresponding charge to utility
plant which represents the cost of borrowed funds and a return on equity
funds devoted to plant under construction.  The utility subsidiaries record
AFUDC to the extent permitted by the regulatory authorities.

ENVIRONMENTAL COSTS

Environmental expenditures that relate to current operations or provide a
future benefit are expensed or capitalized as appropriate.  Remediation
costs that relate to an existing condition caused by past operations are
accrued when it is probable that these costs will be incurred and can be
reasonably estimated.

ASSET IMPAIRMENT

Long-lived assets and certain identifiable intangible assets held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, on a
separate entity basis, may not be recoverable.  If the sum of the future
cash flows expected to result from the use of the assets and their eventual
disposition is less than the carrying amount of the assets, an impairment
loss is recognized.  Measurement of an impairment loss is based on the fair
value of the assets.  A regulatory asset is charged to earnings if and when
future recovery in rates of that asset is no longer probable.

                                                                         49

<PAGE>
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)



EARNINGS PER SHARE

The average number of shares used to calculate diluted earnings per share
includes 57,831, 76,996 and 68,802 of potential common shares issuable in
connection with the Company's Long-Term Performance-Based Incentive Plan
(see note 8) in 1998, 1997 and 1996, respectively.

NEW ACCOUNTING STANDARDS

In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" (SFAS 130), Statement of Financial
Accounting Standards No. 131 "Disclosures About Segments of an Enterprise
and Related Information" (SFAS 131) and Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132) that were issued by the Financial
Accounting Standards Board.  None of these new accounting standards will
have any effect on the Company's financial position or results of
operations as they require only changes or additions to current disclosure
requirements.

    SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements.  The adoption of SFAS 130 did not require additional
reporting because the Company has no charges or credits that are to be
reported as "other comprehensive income."

    SFAS 131 establishes standards for reporting information about
operating segments based upon products and services, geographic areas and
major customers.  The adoption of SFAS 131 did not require additional
reporting as the Company's utility subsidiaries represent similar entities
offering substantially identical services to similar customers.

    SFAS 132 revises and standardizes employers' disclosures about pension
and other postretirement benefit plans required by SFAS No. 87 "Employers'
Accounting for Pensions," SFAS No. 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits other than Pensions," but does not change the
measurement or recognition of those plans.

RECLASSIFICATION

Certain reclassifications have been made to conform previously reported
data to the current presentation.


NOTE 3:  ACQUISITIONS

NATIONAL ENTERPRISES INC. ACQUISITION,

On October 13, 1998, the Company announced that an agreement in principle
had been reached to acquire National Enterprises Inc.  (NEI) in a
transaction valued at $700,000.  Subsidiaries of NEI, a privately owned
company, provide water service to 504,000 customers in Missouri, Illinois,
Indiana and New York.

    The transaction, which will be accounted for as a pooling of interests,
will be accomplished through a tax free exchange of 14,937,000 shares of
the Company's stock valued at $475,000, for all of the outstanding shares
of NEI and $225,000 of assumed debt.  For the latest fiscal year ended
December 31, 1998, NEI had revenues of $182,225, net income of $19,391 and
total assets of $750,376.  It is anticipated that the transaction will be
completed in 1999, following regulatory approvals, termination of the
waiting period under Federal anti-trust laws and completion of other
requirements.

NEI is the parent company of Continental Water Company, which in turn
owns: St. Louis County Water Company serving suburban St. Louis,
Missouri; Northwest Indiana Water Company serving Gary, Hobart and
surrounding areas; Northern Illinois Water Company serving Champaign,
Urbana and surrounding areas; and Long Island Water Corporation serving the
southwest portion of Nassau County on Long Island, New York.  NEI also has
passive investments in the telecommunications industry owning approximately
4 million shares of ITC Deltacom and .6 million shares of Powertel as well
as an interest in privately held ITC Holdings.

    All of the common stock of NEI is currently owned by descendants of the
Charles Stewart Mott family.  Upon completion of this transaction, the Mott
family will hold approximately 16% of the outstanding shares of American
Water Works common stock.  It is expected that two representatives of the
Mott family will be elected to the Board of Directors of the Company.

HAWAII ACQUISITION

On April 1, 1998, the Company acquired East Honolulu Community Services,
Inc. ("EHCS"), a suburban Honolulu wastewater utility located on the
eastern tip of Oahu, Hawaii.  The Company was acquired for $17,300 from
Maunalua Associates, Inc., a subsidiary of Kemper Corporation.  EHCS
provides wastewater service to approximately 10,000 customers in the
community of Hawaii Kai.

NORTHEASTERN PENNSYLVANIA ACQUISITION

On February 16, 1996, the Company's subsidiary, Pennsylvania-American Water
Company, acquired the water utility operations of Pennsylvania Gas and
Water Company (now known as PG Energy Inc.) for $409,400.  The acquired
operations, which include 10 water treatment plants and 36 reservoirs,
serve 132,000 customers in northeastern Pennsylvania.  The acquisition was
accounted for as a purchase, and the accompanying financial statements
reflect the results of operations of the acquired business subsequent to
the purchase date.  The purchase price consisted of $262,500 in cash and
the assumption of $146,900 of PG Energy Inc.'s liabilities, including
$141,000 of its long-term debt.  The cash payment was funded with
short-term debt that was subsequently repaid with the proceeds from the
Company's common stock offering (see note 6) and a portion of the proceeds
from Pennsylvania-American's offering of $150,000 of 30-year, 7.8% General
Mortgage Bonds in 1996.

50

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



HOWELL TOWNSHIP, NEW JERSEY ACQUISITION

On December 23, 1996, the Company's subsidiary, New Jersey-American Water
Company, acquired the water utility assets of Howell Township, New Jersey,
at a total cost of $35,400.  The system which serves 6,000 customers is
located between New Jersey-American's existing Monmouth County and Lakewood
operations.


NOTE 4:  UTILITY PLANT

The components of utility plant by category at December 31 are as follows:

                                             1998           1997
================================================================
Water plant
  Sources of supply                    $  226,376     $  215,321
  Treatment and pumping                 1,081,971      1,052,944
  Transmission and distribution         2,174,467      2,016,300
  Services, meters and fire hydrants      817,462        757,729
  General structures and equipment        303,160        281,523
Wastewater plant                           67,928         33,124
Construction work in progress             218,912        111,808
----------------------------------------------------------------
                                        4,890,276      4,468,749
Less-accumulated depreciation             848,457        755,359
----------------------------------------------------------------
                                       $4,041,819     $3,713,390
                                       =========================


NOTE 5:  STOCK SPLIT

On July 3, 1996, the Board of Directors declared a two-for-one common stock
split, in conjunction with an increase in the number of shares of common
stock the Company is authorized to issue from 100,000,000 shares to
300,000,000 shares approved at the Company's Annual Meeting of Stockholders
held May 2, 1996.  The stock split was paid in the form of a 100% stock
dividend whereby each holder of shares of common stock received one
additional share of common stock for each share owned.  The stock dividend
was paid on July 25, 1996 to shareholders of record on July 15, 1996.  The
transaction had no effect on total stockholders' equity.  The number of
shares and the amounts for common stock, retained earnings, net income per
share, and dividends paid per share of common stock have been restated to
reflect the effect of the stock split.


NOTE 6:  COMMON STOCK OFFERING

On May 9, 1996, the Company sold 3,643,100 shares of common stock at
$37.625 per share in a public common stock offering.  Concurrently with,
and conditioned upon the completion of this offering, certain members of
families that are existing large holders of common stock (the "Ware Family
Buyers") agreed to purchase from the Company and the Company agreed to sell
to the Ware Family Buyers 556,900 shares of common stock at the price
available to the public, less underwriting discounts and commissions, in a
private offering.  Including the effect of the July 1996 stock split (see
note 5), these offerings increased by 8,400,000 shares the number of the
Company's shares of common stock outstanding.  The net proceeds from the
offerings were $152,700, after deducting the underwriting discounts and
commissions and offering expenses payable by the Company.  The Ware Family
Buyers include William R. Cobb, Marilyn Ware and Paul W. Ware, who are
directors of the Company.


NOTE 7:  DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN

The Company's Dividend Reinvestment and Stock Purchase Plan provides for
optional cash purchases of newly issued common stock of the Company.  In
addition to permitting record holders of common stock to have all or part
of their dividends automatically reinvested in additional shares of common
stock, the plan permits stockholders to purchase up to five thousand
dollars of common stock each month directly from the Company.

    The plan was amended, as of March 15, 1998, to provide for new shares
purchased under the plan to be priced at a 2% discount from the applicable
average market price.  Previously shares purchased with reinvested
dividends or optional cash purchases were priced at the applicable average
market price.


NOTE 8:  EMPLOYEE STOCK PLANS

EMPLOYEES' STOCK OWNERSHIP PLAN

The Company and its subsidiaries have an Employees' Stock Ownership Plan
which provides for beneficial ownership of Company common stock by all
associates who are not included in a bargaining unit.  Each participating
associate can elect to contribute an amount that does not exceed 2% of
their wages for the preceding year.  In addition to the associate's
participation, the Company makes a contribution equivalent to 1/2% of each
participant's qualified compensation for the preceding year, and matches
100% of the contribution by each participant.  The Company expensed
contributions of $1,706 for 1998, $1,674 for 1997 and $1,427 for 1996 that
it made to the plan.  The trustee of the plan may purchase shares of the
Company's common stock from the Company, in the open market, or in a
private transaction.

SAVINGS PLAN FOR EMPLOYEES

The Company and its subsidiaries have a 401(k) Savings Plan for Employees
for all associates who have more than six months of service.  Associate
contributions are invested at the direction of the associate in one or more
funds including a fund consisting entirely of common stock of the Company.
The Company matches 50% of the first 4% of each associate's wages
contributed to the plan.  The Company expensed matching contributions to
the plan totaling $2,705 for 1998, $2,304 for 1997 and $2,198 for 1996.
All of the Company's matching contributions are invested in the fund of
Company common stock.  The trustee of the plan may purchase shares of the
Company's common stock at the prevailing market price from the Company, in
the open market, or in a private transaction.

                                                                         51

<PAGE>
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)



LONG-TERM PERFORMANCE-BASED INCENTIVE PLAN

The Company and its subsidiaries have a Long-Term Performance-Based
Incentive Plan.  Under the plan, designated executives and other key
associates are eligible to receive awards if performance cycle goals based
on earnings-per-share growth and total return to Company stockholders, in
comparison to a designated peer group of water companies, are met.  The
plan is administered by the Compensation and Management Development
Committee of the Board of Directors.  The Committee will determine the
value or range of values, including the maximum value, of awards to each
participant.  Awards may be paid in the form of cash, restricted shares of
common stock, or a combination of both.  The cost of the plan is being
charged to expense over each three-year performance cycle.  Such expense
was $1,541 in 1998, $2,715 in 1997 and $1,950 in 1996.  The market value of
common stock expected to be awarded under the plan has been recorded as
unearned compensation and is shown as a separate component of common
stockholders' equity.


NOTE 9:  PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION BENEFITS

The Company and its subsidiaries have a noncontributory defined benefit
pension plan covering substantially all associates.  Benefits under the
plan are based on the associate's years of service and average annual
compensation for those 60 consecutive months of the final 120 months of
employment which yield the highest average.

    The Company's funding policy is to contribute at least the minimum
amount required by the Employee Retirement Income Security Act of 1974.
Due to the funded status of the plan there were no contributions made in
1998 and 1997.  Pension plan assets are invested in a number of investments
including a guaranteed interest contract with a major insurance company,
equity mutual funds, United States Government securities and publicly
traded bonds.  The actual return on plan assets over the last three years
reflects the higher than expected returns in the general capital markets.

    The Company also has two unfunded noncontributory supplemental
non-qualified pension plans that provide additional retirement benefits to
certain associates of the Company and its subsidiaries.

OTHER POSTRETIREMENT BENEFITS

The Company and its subsidiaries provide certain life insurance benefits
for retired associates and certain health care benefits for retired
associates and their dependents.  Substantially all associates may become
eligible for these benefits if they reach retirement age while still
working for the Company.  Retirees and their dependents under age 65 can
elect either a comprehensive medical plan under which covered expenses are
paid at 80% after an annual deductible has been satisfied or a managed care
plan that requires copayments.  Associates who elect to retire prior to
attaining age 65 are generally required to make contributions towards their
medical coverage until attaining age 65.  Retirees and their dependents age
65 and over are covered by a Medicare supplement plan.

    The adoption of a new accounting standard for other postretirement
benefits caused a transition obligation of $122,115 at January 1, 1993
which is being amortized over 20 years.

    The Company's policy is to fund postretirement benefit costs accrued.
Plan assets are invested in equity and bond mutual funds.

                                                                Other
                                        Pension             Postretirement
                                        Benefits               Benefits
                                    1998        1997       1998       1997
==========================================================================
CHANGE IN BENEFIT OBLIGATION
Benefit obligation
  at January 1                  $465,120    $407,075   $167,355   $149,935
Service cost                      13,618      11,952      5,746      4,992
Interest cost                     32,874      30,792     11,598     11,230
Plan participants' contributions      --          --        625        489
Amendments                            82         626     (2,276)    (2,409)
Actuarial loss                    10,532      31,016      5,656     10,371
Benefits paid                    (18,221)    (16,341)    (8,611)    (7,253)
--------------------------------------------------------------------------
Benefit obligation
  at December 31                $504,005    $465,120   $180,093   $167,355
                                ==========================================

CHANGE IN PLAN ASSETS
Fair value of plan
  assets at January 1           $441,218    $404,321   $ 85,452   $ 63,664
Actual return on
  plan assets                     41,073      52,721     14,692     12,156
Employer contribution                 --          --     15,960     16,396
Plan participants' contributions      --          --        625        489
Benefits paid                    (17,441)    (15,824)    (8,611)    (7,253)
--------------------------------------------------------------------------
Fair value of plan assets
  at December 31                $464,850    $441,218   $108,118   $ 85,452
                                ==========================================

Funded status at December 31    $(39,155)   $(23,902)  $(71,975)  $(81,903)
Unrecognized net actuarial gain   (3,680)     (9,921)   (26,337)   (22,591)
Unrecognized prior service cost    5,952       7,681      8,101      8,556
Unrecognized net transition
  obligation (asset)              (9,123)    (11,380)    80,177     85,904
--------------------------------------------------------------------------
Net amount recognized           $(46,006)   $(37,522)  $(10,034)  $(10,034)
                                ==========================================
Amounts recognized in the
  balance sheet consist of:
Accrued benefit cost            $(46,006)   $(37,522)  $(10,034)  $(10,034)
Additional minimum liability      (2,749)     (3,557)        --         --
Intangible asset                   2,749       3,557         --         --
--------------------------------------------------------------------------
Net amount recognized           $(46,006)   $(37,522)  $(10,034)  $(10,034)
                                ==========================================

52

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



The projected benefit obligation and accumulated benefit obligation for
pension plans with accumulated benefit obligations in excess of plan assets
(these two supplemental plans are unfunded) were $16,386 and $13,377,
respectively, as of December 31, 1998, and $15,295 and $12,235,
respectively, as of December 31, 1997.

                                         1998         1997         1996
=======================================================================
COMPONENTS OF NET PERIODIC
  PENSION BENEFIT COST
Service cost                          $13,618      $11,952      $13,007
Interest cost                          32,874       30,792       28,845
Expected return on plan assets        (36,780)     (33,712)     (31,763)
Amortization of transition asset       (2,257)      (2,257)      (2,257)
Amortization of prior
  service cost                          1,810        1,077          249
Recognized net actuarial loss              --           --          195
-----------------------------------------------------------------------
Net periodic pension benefit cost     $ 9,265      $ 7,852      $ 8,276
                                      =================================

COMPONENTS OF NET PERIODIC OTHER
  POSTRETIREMENT BENEFIT COST
Service cost                          $ 5,746      $ 4,992      $ 5,848
Interest cost                          11,598       11,230       11,545
Expected return on plan assets         (7,097)      (5,419)      (4,230)
Amortization of transition obligation   5,727        5,727        5,727
Amortization of prior service cost        455          620          283
Recognized net actuarial gain            (469)        (754)          --
-----------------------------------------------------------------------
Net periodic other
 postretirement benefit cost          $15,960      $16,396      $19,173
                                      =================================



                                                                Other
                                         Pension            Postretirement
                                         Benefits              Benefits
                                      1998       1997       1998       1997
===========================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
  AS OF DECEMBER 31
Discount rate                        6.75%      7.00%      6.75%      7.00%
Expected return on plan assets       8.50%      8.50%      7.90%      7.90%
Rate of compensation increase        4.75%      5.00%      4.75%      5.00%


The health care cost trend rate, used to calculate the Company's cost
for postretirement health care benefits, is a 6.0% annual rate in 1999 that
is assumed to decrease to a 5.5% annual rate in 2000 and remain at that
level thereafter for the comprehensive plan, a constant 5.5% annual rate
for the managed care plan and an 7.5% annual rate in 1998 that is assumed
to decrease gradually to a 5.5% annual rate in 2003 and remain at that
level thereafter for pre-acquisition retirees of the Pennsylvania water
utility operations acquired in 1996 (see Northeastern Pennsylvania
Acquisition in note 3).

Assumed health care cost trend rates have a significant effect on
the amounts reported for the other postretirement benefit plan.  A
one-percentage-point change in assumed health care cost trend rates
would have the following effects:


                                   One-Percentage-    One-Percentage-
                                   Point Increase     Point Decrease
=====================================================================
Effect on total of service and
 interest cost components              $ 2,589           $ (2,218)
Effect on other postretirement
 benefit obligation                    $18,788           $(17,013)


NOTE 10:  GENERAL TAXES

Components of general tax expense for the years presented in the
consolidated statement of income are as follows:


                                     1998         1997         1996
===================================================================
Gross receipts and franchise      $39,352      $37,580      $35,684
Property and capital stock         37,460       35,466       31,971
Payroll                            12,486       12,433       12,060
Other general                       3,547        2,381        2,302
-------------------------------------------------------------------
                                  $92,845      $87,860      $82,017
                                  =================================


NOTE 11:  INCOME TAXES

Components of income tax expense for the years presented in the
consolidated statement of income are as follows:


                                     1998         1997         1996
===================================================================
STATE INCOME TAXES:
Current                           $ 9,370      $ 7,514      $ 8,291
Deferred
 Current                              (24)         146           99
 Non-current                        2,873        2,609          837
-------------------------------------------------------------------
                                  $12,219      $10,269      $ 9,227
                                  =================================

FEDERAL INCOME TAXES:
Current                           $44,755      $35,259      $33,219
Deferred
 Current                              172          (56)         (69)
 Non-current                       27,409       30,484       22,694
 Amortization of deferred
  investment tax credits           (1,243)      (1,243)      (1,243)
-------------------------------------------------------------------
                                  $71,093      $64,444      $54,601
                                  =================================


A reconciliation of income tax expense at the statutory federal income
tax rate to actual income tax expense is as follows:

                                     1998         1997         1996
===================================================================
Income tax at statutory rate      $75,026      $67,845      $57,926
Increases (decreases)
 resulting from --
  State taxes, net of
   federal taxes                    7,942        6,675        5,998
  Flow through differences          1,273        1,143          742
  Amortization of investment
   tax credits                     (1,243)      (1,243)      (1,243)
  Subsidiary preferred dividends    1,177        1,198        1,230
  Other, net                         (863)        (905)        (825)
-------------------------------------------------------------------
Actual income tax expense         $83,312      $74,713      $63,828
                                  =================================

                                                                         53

<PAGE>
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)



    The following table provides the components of the net deferred tax
liability at December 31:


                                           1998          1997
=============================================================
DEFERRED TAX ASSETS:
 Advances and contributions            $158,531      $149,058
 Deferred investment tax credits         12,857        13,862
 Other                                   17,704        14,205
-------------------------------------------------------------
                                        189,092       177,125
-------------------------------------------------------------

DEFERRED TAX LIABILITIES:
 Utility plant, principally due
  to depreciation differences           537,591       496,827
 Income taxes recoverable
  through rates                          72,968        71,475
 Other                                   29,651        27,071
-------------------------------------------------------------
                                        640,210       595,373
-------------------------------------------------------------
                                       $451,118      $418,248
                                       ======================


As of December 31, 1998 and 1997, the parent company had no material
temporary differences.  No material valuation allowances were required on
deferred tax assets at December 31, 1998 and 1997.


NOTE 12:  LEASES

The Company has entered into operating leases involving certain facilities
and equipment.  Rental expenses under operating leases were $9,524 for
1998, $9,199 for 1997 and $8,973 for 1996.  Capital leases currently in
effect are not significant.

    At December 31, 1998, the minimum annual future rental commitment under
operating leases that have initial or remaining noncancellable lease terms
in excess of one year are $10,241 in 1999, $9,057 in 2000, $6,694 in 2001,
$5,265 in 2002 and $4,772 on 2003.


NOTE 13:  COMMITMENTS AND CONTINGENCIES

Construction programs of subsidiaries for 1999 are estimated to cost
approximately $407,000.  Commitments have been made in connection with
certain construction programs.

    The Company is routinely involved in condemnation proceedings and legal
actions relating to several utility subsidiaries.  In the opinion of
management, none of these matters will have a material adverse effect, if
any, on the financial position or results of operations of the Company.


NOTE 14:  COMPENSATING BALANCES AND BANK DEBT

During 1998 the Company and its subsidiaries maintained lines of credit
with various banks.  The total of the unused lines of credit at December
31, 1998 was $34,000 for the Company and $235,726 for the subsidiaries.

    Borrowings under such lines of credit generally are payable on demand
and bear interest at variable rates.  None of the agreements with lending
banks have compensating balance requirements.

    The maximum amount of short-term bank borrowings outstanding during
1998 was $230,410, and the average amount outstanding during the year was
$134,187.  The weighted average annual interest rate on these borrowings
during 1998 was 6.13%, and the interest rate at December 31, 1998 was
5.89%.


NOTE 15:  FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

    Current assets and current liabilities: The carrying amount reported in
the balance sheet for current assets and current liabilities, including
bank debt, approximates their fair values.

    Preferred stocks with mandatory redemption requirements and long-term
debt: The fair values of the Company's preferred stocks with mandatory
redemption requirements and long-term debt are estimated using discounted
cash flow analyses based on the Company's current incremental financing
rates for similar types of securities.

    The carrying amounts and fair values of the Company's financial
instruments at December 31 are as follows:

                                            CARRYING
1998                                          AMOUNT   FAIR VALUE
=================================================================
Preferred stocks of the Company with
  mandatory redemption requirements       $   40,000   $   44,298
Preferred stocks of subsidiaries with
  mandatory redemption requirements           39,161       42,514
Long-term debt of the Company                236,000      249,296
Long-term debt of subsidiaries             1,921,216    2,133,526

                                            CARRYING
1997                                          AMOUNT   FAIR VALUE
=================================================================
Preferred stocks of the Company with
  mandatory redemption requirements       $   40,000   $   42,879
Preferred stocks of subsidiaries with
  mandatory redemption requirements           39,734       43,069
Long-term debt of the Company                116,000      120,116
Long-term debt of subsidiaries             1,778,869    1,919,923

54

<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



NOTE 16:  SUBSEQUENT EVENT

On February 4, 1999 the Company's Board of Directors adopted a new
Shareholder Rights Plan to replace the Rights Plan adopted 10 years ago
which expired on March 2, 1999.

    Each Right under the new plan will entitle stockholders to buy one
share of the Company's Common Stock at an exercise price of $150.  Each
Right will entitle its holder to purchase, at the Right's then-current
exercise price, shares of American Water Works Common Stock, or a number of
shares of an acquiring company's stock, which would have a market value of
two times the exercise price.  The Rights become exercisable if there is a
public announcement that a person or group acquires, or commences a tender
offer to acquire, 25% or more of the outstanding shares of American Water
Works.  The Rights also become exercisable if American Water Works is
acquired in a merger or a person or group acquires 35% or more of the
outstanding shares of American Water Works.

    The Rights are redeemable, in whole, but not in part, by the Company at
a price of $.0005 per Right under certain circumstances.  The Rights do not
have voting or dividend rights and, until they become exercisable, have no
dilutive effect on the earnings per share of the Company.


NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 1998 and 1997 are as follows:

                                  FIRST    SECOND     THIRD    FOURTH
1998                            QUARTER   QUARTER   QUARTER   QUARTER
=====================================================================

Operating revenues             $226,000  $255,980  $282,548  $253,284
Operating income                 71,916    93,621   112,913    81,458
Net income                       21,588    35,062    46,645    27,753
Net income to common stock       20,592    34,066    45,649    26,757
Basic and diluted
  net income per common share     $0.26     $0.42     $0.57     $0.33


                                  FIRST    SECOND     THIRD    FOURTH
1997                            QUARTER   QUARTER   QUARTER   QUARTER
=====================================================================

Operating revenues             $213,357  $237,915  $266,012  $236,915
Operating income                 64,903    86,574   104,908    77,515
Net income                       18,030    31,640    43,491    25,967
Net income to common stock       17,034    30,644    42,495    24,971
Basic and diluted
  net income per common share      $.22      $.39      $.54      $.31

                                                                         55

<PAGE>

RANGE OF MARKET PRICES
AWK is the trading symbol of American Water Works Company, Inc. on the
New York Stock Exchange on which the Common Stock, 5% Preferred Stock and
5% Preference Stock of the Company are traded.

                 Common Stock       5% Preferred Stock    5% Preference
Stock
---------------------------------------------------------------------------
Newspaper listing  AmWtrWks              A Wat pr              A Wat pf
---------------------------------------------------------------------------
1998             High      Low      High        Low       High         Low
===========================================================================
1st quarter   $33-5/16   $25-1/4     $22       $19        $22     $19-15/16
2nd quarter    33-3/16    28-1/8      23        20-1/2     24      20
3rd quarter    33-1/4     27-3/8      23-1/2    21-11/16   24      21-5/16
4th quarter    33-3/4     30-1/4      24-3/4    23-1/2     24-3/4  23


Quarterly dividend
 paid per share      $.205                $.3125                $.3125
Number of
 shareholders at
 December 31, 1998  43,256                  203                   688
---------------------------------------------------------------------------


1997
===========================================================================
1st quarter   $24-1/2    $19-7/8    $22        $18-3/4    $19-1/2 $18
2nd quarter    22-3/8     20-5/8     20-1/4     18-1/2     20      18-1/4
3rd quarter    22-1/2     20-3/4     20-1/2     19-1/4     21      19
4th quarter    29-11/16   20-11/16   21-3/4     19-1/4     21      19-1/4


Quarterly dividend
 paid per share      $.19                 $.3125                $.3125
Number of
 shareholders at
 December 31, 1997  41,123                  226                   769
---------------------------------------------------------------------------

The common and 5% preferred stocks have voting rights.


OPTIONS TRADING   Options for Company stock (AWK) are traded on the
Philadelphia Stock Exchange (Newspaper listing: PB).



Design/Production: The Creative Department, Inc.
Copywriting: Gerard F. Reimel
Photography: Jack Andersen, cover; H. Mark Weidman, editorial section;
  Mimi Janosy, portraits