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,             1997         1996         1995         1994         1993
=====================================================================================================
<S>                                    <C>          <C>          <C>          <C>          <C>
Revenues
  Water service
    Residential                        $  546,972   $  510,050   $  451,143   $  431,225   $  399,916
    Commercial                            207,126      197,314      175,792      169,532      159,335
    Industrial                             63,389       62,153       54,423       53,049       50,490
    Public and other                      112,766      101,816       92,565       90,436       84,861
  Other water revenues                      9,037        7,935        5,902        6,502        5,579
-----------------------------------------------------------------------------------------------------
                                          939,290      879,268      779,825      750,744      700,181
  Wastewater service                       14,909       15,378       14,953       13,933       12,143
  Management fees                              --           --        8,042        5,564        5,213
-----------------------------------------------------------------------------------------------------
                                       $  954,199   $  894,646   $  802,820   $  770,241   $  717,537
                                       ==============================================================
Water sales (million gallons)
    Residential                           124,339      119,900      117,128      113,950      104,721
    Commercial                             64,726       63,491       61,726       60,901       57,880
    Industrial                             36,354       36,129       34,171       34,735       33,040
    Public and other                       30,310       27,764       26,968       26,953       25,172
-----------------------------------------------------------------------------------------------------
                                          255,729      247,284      239,993      236,539      220,813
                                       ==============================================================

Net income                             $  119,128   $  101,674   $   92,061   $   78,652   $   75,387
Basic and diluted earnings per
  common share on average shares
  outstanding                               $1.45        $1.31        $1.32        $1.17        $1.15
Common dividends paid per share              $.76         $.70         $.64         $.54         $.50

AT YEAR-END
Customers (thousands)                       1,900        1,884        1,720        1,706        1,685
Total assets                           $4,314,286   $4,032,156   $3,403,141   $3,172,237   $2,948,069
Preferred stocks with mandatory
  redemption requirements
    American Water Works Company, Inc. $   40,000   $   40,000   $   40,000   $   40,000   $   40,000
    Subsidiaries                           39,734       41,060       42,326       43,737       46,515
Long-term debt
    American Water Works Company, Inc. $  116,000   $  116,000   $  116,000   $  131,000   $  131,000
    Subsidiaries                        1,754,766    1,600,394    1,268,649    1,177,043    1,056,404

MARKET DATA
Market price per share of common
  stock at year-end                        $27.31       $20.63       $19.44       $13.50       $15.00
Average shares outstanding (thousands)     79,144       74,540       66,544       63,836       62,278
Average daily trading volume               81,838       93,169       56,467       54,148       54,643
Annual trading volume (thousands)          20,705       23,673       14,230       13,645       13,825
Annual trading volume as a percentage
  of average outstanding shares               26%          32%          21%          21%          22%
P/E ratio*                                  15.80        15.14        11.73        11.94        12.41
Dividend yield*                             3.32%        3.53%        4.13%        3.86%        3.50%

*Based on average month-end closing prices on 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 Service Company
The American Water Works Service Company, a subsidiary, provides
professional services as required to affiliated companies.  These services
include accounting, engineering, finance, water quality, information
systems, human resource administration and training, purchasing, insurance
placement, workplace safety, and management services.  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 22 regulated utility subsidiaries provide water service to
approximately 7 million people in 859 communities in 21 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 Finance Companies
American International Water Services Company owns a 50% interest in
AmericanAnglian Environmental Technologies, a joint venture with Anglian
Water, North America, a North American affiliate of a British water and
wastewater utility.  AmericanAnglian provides both technical expertise and
financing resources to communities in Pennsylvania, North Carolina, New
York and Virginia to operate and upgrade their water and wastewater
systems.

    In December 1995, AmericanAnglian Environmental Technologies acquired
the Company's American Commonwealth Management Services Company subsidiary.
American Commonwealth Management Services provides management and operating
services, at a profit, to non-affiliated water and wastewater systems. 
These services are provided under contract to various authorities,
utilities, and businesses in Pennsylvania, Massachusetts and Florida. 
American Commonwealth Management Services also owns facilities to
regenerate carbon used for water filtration and those capabilities are
being marketed to water utilities throughout the country.

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

The American Water System
The combination of the company, the service company, and the utility
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]
W. TIMOTHY POHL, ESQUIRE
General Counsel and Secretary

    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 1992 -- 1997
                  Investment in subsidiaries .......  12.8%
                  Operating revenue ................   7.7%
                  Earnings per share ...............   6.9%
                  Dividends per share ..............  10.4%
                  Book value per share .............   7.9%

    The Company's investment in its subsidiaries has increased from $750
million at year-end 1992 to $1.4 billion at year-end 1997.  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 $64.1 million in 1992
to $115.1 million in 1997.

    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 $6.5 million over this five-year period.

    AmericanAnglian Environmental Technologies, the joint venture with
Anglian Water Plc. has as its mission to develop business opportunities
evolving from the consideration of privatization initiatives by government
entities.  That consideration of privatization involves provision of
contract services to municipal utilities and investment in water resource
infrastructure.  Pricing and revenues under such contracts are not
regulated.  The joint venture operates in a very competitive marketplace,
and seeks out business opportunities that are worthwhile.

    The AmericanAnglian Environmental Technologies joint venture bid
successfully and obtained operations contracts in two major competitions. 
The first resulted in a contract with the city of Buffalo, New York, for
operation of the Buffalo Water System.  The second was a contract for water
utility operations at Evansville, Indiana, and was secured by EA2 Systems,
a regional partnership between AmericanAnglian and Environmental Management
Corporation.


SYSTEM GROWTH AND DEVELOPMENT

Capital Spending Program
The investment in new facilities in 1997 totaled $352 million, which was
29% above 1996 construction expenditures of $274 million.  Construction
activity planned for 1998 totals $424 million.

[ID -- PHOTO]
GERALD C. SMITH
Vice President

    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 $1.7 billion will be
invested in new facilities between now and the end of the year 2002.  These
expenditures will support ongoing programs to comply with regulations
promulgated to ensure 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 1997 accounted for

24
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
Analysis of Growth in Investment in Subsidiaries

<TABLE>
<CAPTION>
(000)                                              1997         1996         1995       1994       1993
=======================================================================================================
<S>                                          <C>          <C>          <C>          <C>        <C>
Investment in subsidiaries at December 31    $1,366,016   $1,261,532   $1,003,088   $898,219   $810,372
Investment in subsidiaries at January 1       1,261,532    1,003,088      898,219    810,372    749,513
-------------------------------------------------------------------------------------------------------
Change during the year                       $  104,484   $  258,444   $  104,869   $ 87,847   $ 60,859
                                             ==========================================================
Sources of additional investment
  Undistributed earnings of subsidiaries     $   36,335   $   31,605   $   26,315   $ 24,532   $ 18,984
  Investment by the Company in
    subsidiary securities                        68,149      226,839       78,554     63,315     41,875
-------------------------------------------------------------------------------------------------------
  Change during the year                     $  104,484   $  258,444   $  104,869   $ 87,847   $ 60,859
                                             ==========================================================
Net income of subsidiaries                   $  132,762   $  113,760   $  103,497   $ 89,449   $ 84,248
Return on January 1 investment
  in subsidiaries                                 10.5%        11.3%        11.5%      11.0%      11.2%
Subsidiaries' common stock dividend
  payout ratio                                      73%          72%          75%        73%        77%
-------------------------------------------------------------------------------------------------------
Dividends to the Company from subsidiaries       96,427       82,155       77,182     64,917     65,264
-------------------------------------------------------------------------------------------------------
Company's use of cash
  Preferred dividends                             3,984        3,984        3,984      3,984      3,996
  Other cash requirements                        13,396       12,375        9,765     10,744      7,556
-------------------------------------------------------------------------------------------------------
                                                 17,380       16,359       13,749     14,728     11,552
-------------------------------------------------------------------------------------------------------
Available for common dividends                   79,047       65,796       63,433     50,189     53,712
Common dividends declared                        60,084       51,299       42,500     34,386     31,130
Cash payout ratio                                   76%          78%          67%        69%        58%
Available after dividends                        18,963       14,497       20,933     15,803     22,582
Cash at January 1                                    43          119       17,647     23,302         78
-------------------------------------------------------------------------------------------------------
                                                 19,006       14,616       38,580     39,105     22,660
Investment in securities of subsidiaries        (68,149)    (226,839)     (78,554)   (63,315)   (41,875)
Notes and advances to subsidiaries                   10           10           10      4,510      1,010
-------------------------------------------------------------------------------------------------------
                                                (49,133)    (212,213)     (39,964)   (19,700)   (18,205)
-------------------------------------------------------------------------------------------------------
Net bank borrowings                              21,400       34,400        3,700         --    (21,255)
Proceeds from long-term debt                         --           --           --         --     81,000
Proceeds from common stock                       28,041      192,856       36,383     37,347      5,442
Redemption of securities                             --      (15,000)          --         --    (23,680)
-------------------------------------------------------------------------------------------------------
                                                 49,441      212,256       40,083     37,347     41,507
-------------------------------------------------------------------------------------------------------
Cash at December 31                          $      308   $       43   $      119   $ 17,647   $ 23,302
                                             ==========================================================
</TABLE>


<TABLE>
<CAPTION>
Analysis of Change in Income


(000)                                              1997         1996         1995       1994       1993
=======================================================================================================
<S>                                            <C>           <C>          <C>        <C>        <C>
Net income to common stock-current year        $115,144      $97,690      $88,077    $74,668    $71,391
Net income to common stock-prior year            97,690       88,077       74,668     71,391     64,141
-------------------------------------------------------------------------------------------------------
Change in income                                 17,454        9,613       13,409      3,277      7,250
Change in Company operating cost                  1,548          650          639      1,924      1,738
-------------------------------------------------------------------------------------------------------
Change in investment income                     $19,002      $10,263      $14,048    $ 5,201    $ 8,988
                                                =======================================================
Sources of change in investment income
  Additional investment in subsidiaries         $27,198      $11,893      $10,122    $ 6,718    $ 6,317
  Change in rate of return on investment         (8,196)      (1,630)       3,926     (1,517)     2,671
-------------------------------------------------------------------------------------------------------
Total change in investment income               $19,002      $10,263      $14,048    $ 5,201    $ 8,988
                                                =======================================================
</TABLE>

                                                                            25
<PAGE>
---------------------------------------------------------------------------
Management's Discussion and Analysis


approximately 5% of the year's construction expenditures.  Projects
included groundwater development in Hampton, New Hampshire and Bel Air,
Maryland, and in several locations in Indiana to meet growing customer
demands.  Additional supply was obtained for the rapidly developing
community of St. Charles, Missouri through an interconnection with St.
Louis which was drilled under the Missouri River.  New wells in Clovis, New
Mexico, and several replacement wells in California, Illinois and Indiana
were constructed to maintain supply capabilities.  Structural and hydraulic
upgrades to the Bargh Dam in Greenwich, Connecticut were completed in 1997
to comply with more stringent regulatory requirements.

    Investment in treatment and pumping facilities comprised approximately
27% of the 1997 construction expenditures.  Construction was completed for
three iron removal facilities in Crawfordsville, Noblesville and Franklin,
Indiana. Significant capacity and/or reliability upgrades were completed
for treatment plants in Yardley, Pennsylvania; Greenwood, Indiana; Peoria,
Illinois; Monterey, California; Marion, Ohio and Chattanooga, Tennessee. 
Multiple phased plant upgrades continued or commenced in Norristown,
Pennsylvania; Brownsville, Pennsylvania; Huntington, West Virginia; East
St. Louis, Illinois; and Davenport, Iowa.

    Transmission and distribution facilities accounted for approximately
37% of the 1997 construction expenditures.  The most predominant individual
projects included a supply to Rome, Illinois from the Peoria, Illinois
system; connecting Oxford and Washington, New Jersey; significant pipeline
installation for the southern Indiana regional water supply project and a
pipeline connecting the Monmouth and Ocean County systems in New Jersey.
Additionally, several extensions were made to the Tri-County regional
pipeline in southern New Jersey to serve additional communities. 
Significant distribution system infrastructure expansion was undertaken in
Putnam and Fayette Counties in West Virginia to further expand West
Virginia-American Water Company's role as a regional water supplier. 
Pipeline installation continued throughout the American Water System to
maintain adequate pressures, fire flows and reliability.  Also, booster
stations and storage tanks were completed at a number of utility
subsidiaries during the year including tanks in Duarte, California; Yardley
and Coolbaugh Township, Pennsylvania; Greenwood, Indiana; Joplin, Missouri;
Cape May Court House, New Jersey; and Tiffin and Lawrence County, Ohio.

    The Company's formal Comprehensive Planning Study program continued
with reports completed for the Seymour and Sullivan, Indiana systems;
Connellsville, Indiana, Kittanning, McDonald, Monongahela, Moshannon
Valley, Uniontown, Valley, Washington and White Deer systems in
Pennsylvania; and Brunswick, Mexico, Platte County, St. Charles, and
Warrensburg systems in Missouri.  Studies are underway for the utility
subsidiaries in Arizona, California, Indiana, New Jersey, Ohio,
Pennsylvania, and Tennessee, which will encompass 42 separate service
areas.

    In addition to the Company's formal Comprehensive Planning Study
program, engineering planning focused on detailed source of supply and
production analysis in those systems where existing source limitations,
projected growth, and regional opportunities point to the need for new
facilities.  These systems included Monterey, California; Greenwich,
Connecticut; Jeffersonville/New Albany, Indiana; Lexington, Kentucky; Short
Hills, New Jersey; Monmouth and Ocean Counties, New Jersey; and Paradise
Valley, Arizona.


<TABLE>
<CAPTION>
CONSTRUCTION EXPENDITURES BY CATEGORY
(000)                                    1997       1996       1995       1994       1993
=========================================================================================
<S>                                  <C>        <C>        <C>        <C>        <C>
Water plant
  Sources of supply                  $ 16,725   $ 10,798   $ 18,156   $ 11,511   $  8,054
  Treatment and pumping                95,709     77,071    125,350     82,700     51,332
  Transmission and distribution       131,835    107,145    110,600    108,929     77,998
  Services, meters and fire hydrants   58,349     47,946     45,835     40,506     34,401
  General structures and equipment     45,170     29,029     29,602     20,703     19,585
Wastewater plant                        4,649      1,805      1,219      1,390      1,746
-----------------------------------------------------------------------------------------
                                     $352,437   $273,794   $330,762   $265,739   $193,116
                                     ====================================================
</TABLE>

26
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------


Acquisitions of Water Systems
In addition to the investment of capital in facilities which are
absolutely essential to reliable water service, the Company continues to
search for opportunities to acquire water and wastewater systems that
represent the prospect for enhanced shareholder value.

    In 1997, 25 new acquisitions were initiated by utility subsidiaries. 
Of these 25, nine were concluded during the year, adding a population of
almost 15,000 served by utility subsidiaries in Kentucky and West Virginia. 
Fifteen acquisitions are awaiting regulatory approval.  When concluded,
these will add a service population of almost 50,000 people to utility
subsidiaries serving California, Illinois, New Jersey, Pennsylvania and
West Virginia.  The largest acquisition underway is in Hawaii involving the
purchase of East Honolulu Community Services, Inc., a suburban Honolulu
wastewater utility located on the eastern tip of Oahu.  This system is
being purchased from Maunalua Associates, a subsidiary of Kemper
Corporation, in a transaction valued at $18.4 million.  The acquisition has
been approved by the Public Utility Commission of Hawaii with closing
anticipated on April 1, 1998.

    East Honolulu Community Services provides wastewater treatment service
for Hawaii Kai, a community of 28,600 people.  The system includes a 5.2
million gallon per day treatment plant, which provides tertiary wastewater
treatment, seven pumping stations and approximately 100 miles of collection
pipe.

    For the latest fiscal year ended December 31, 1997, EHCS had unaudited
revenues of $6.3 million, net income of $.8 million and total assets of
$17.1 million.


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 1995 through 1997, and it is not expected to materially
affect 1998 results.

[ID -- PHOTO]
ROBERT D. SIEVERS
Comptroller

    On February 16, 1996, Pennsylvania-American Water Company, a subsidiary
of the Company, acquired the water utility operations of Pennsylvania Gas
and Water Company (now known as PG Energy Inc.) for $409.4 million.  The
acquired operations, which include 10 water treatment plants and 36
reservoirs, serve 400,000 people in Wilkes-Barre, Scranton and surrounding
communities in northeastern Pennsylvania.

    The results of operations for the Company for the year ended December
31, 1997 reflect twelve months of the results of operations of the acquired
business in northeastern Pennsylvania.  The 1996 results of operations
included ten and one-half months subsequent to the purchase date of
February 16, 1996.


OPERATING REVENUES
(000)                           1997          1996          1995
================================================================
Water service               $939,290      $879,268      $779,825
Wastewater service            14,909        15,378        14,953
Management fees                   --            --         8,042
----------------------------------------------------------------
                            $954,199      $894,646      $802,820
                            ====================================


Consolidated Operating Revenues
Revenues in 1997 totaled $954.2 million and were 7% above those for 1996,
reflecting increased sales volume, due to favorable weather conditions in
the East and California, combined with rate increases authorized for
various subsidiaries in the latter part of 1996 and in 1997.  The volume of
water sold increased over 3% to 256 billion gallons in 1997 compared with
247 billion gallons in 1996.  The northeastern Pennsylvania acquisition
increased operating revenues by $7.4 million and added 1.8 billion gallons
of water sales volume in 1997.

    Rate authorizations adjusted the water service rates in effect for 12
utility subsidiaries during 1997.  These authorizations are expected to
increase annual revenues by $53.3 million.  Operating revenues for 1997
included approximately $12.9 million which resulted from these rate orders.

    Two rate adjustments have been authorized for utility subsidiaries so
far in 1998 which will generate approximately $1.7 million of additional
annual revenues.  Four applications are awaiting regulatory decisions.  If
granted in full, they would produce additional annual revenues of $34.4
million.

    On October 2, 1997, the Pennsylvania Public Utility Commission approved
a settlement agreement among all parties in the rate proceeding initiated
by the Company's Pennsylvania subsidiary.  As a result, the subsidiary
instituted rates for service that are designed to produce additional annual
revenues of $27.5 million.  An important aspect of this rate proceeding was
the recognition of the subsidiary's February 1996 acquisition of water
service assets in northeastern Pennsylvania.

    Revenues of $894.6 million in 1996 were 11% above those for 1995. 
Eleven utility companies received rate orders in 1996, authorizing
increases in annual revenues aggregating $62.9 million.  Operating revenues
for 1996 included approximately $43.7 million which resulted from these
rate orders.  The 247 billion gallons of water sold in 1996 was a 3%
increase compared to 1995.

                                                                         27
<PAGE>
---------------------------------------------------------------------------
Management's Discussion and Analysis


PERCENTAGE OF WATER REVENUES BY CUSTOMER CLASS
                                1997          1996          1995
================================================================
Residential                    58.2%         58.0%         57.9%
Commercial                     22.1%         22.4%         22.5%
Industrial                      6.7%          7.1%          7.0%
Public and other               12.0%         11.6%         11.9%
Other water revenues            1.0%           .9%           .7%
----------------------------------------------------------------
                              100.0%        100.0%        100.0%
                              ==================================


Residential
Residential water service revenues in 1997 amounted to $547.0 million, an
increase of 7% over those for 1996.  This 1997 revenue improvement followed
an increase of 13% in 1996.  The volume of water sold to residential
customers increased by 4% in 1997 to 124.3 billion gallons.  The average
unit price of residential water increased by 4% in 1997 and by 10% in 1996.

Commercial
Revenues from commercial customers in 1997 rose by 5% to $207.1 million,
following an increase of 12% in 1996.  Commercial customers purchased 64.7
billion gallons of water in 1997, 2% more than in 1996.  The average unit
price of water increased by 3% in 1997, down from a 9% increase in 1996.

Industrial

Industrial water use of 36.4 billion gallons in 1997 was 1% higher than in
1996.  Revenues from industrial sales in the amount of $63.4 million were
2% above those recorded in 1996 due to a 1% increase in the average unit
price of water.  In 1996, revenues from industrial sales were 14% above
those for 1995 due to an 8% increase in the average unit price of water.

Public and Other
Public and other revenues in 1997 increased by 11% to $112.8 million
following an increase of 10% in 1996.  Revenues derived from municipal
governments for fire protection services and customers requiring special
private fire service facilities totaled $43.7 million in 1997, exceeding
1996 revenue from these customers by 6%.  The 30.3 billion gallons of water
sold to governmental entities and resale customers was 9% greater than the
quantities sold in 1996.  Revenues generated by these sales totaled $69.1
million and exceeded 1996 revenues by 14%.


PERCENTAGE OF WATER SALES (GALLONS) BY CUSTOMER CLASS
                                1997          1996          1995
================================================================
Residential                    48.6%         48.5%         48.8%
Commercial                     25.3%         25.7%         25.7%
Industrial                     14.2%         14.6%         14.3%
Public and other               11.9%         11.2%         11.2%
----------------------------------------------------------------
                              100.0%        100.0%        100.0%
                              ==================================


Wastewater Service Revenues
Utility subsidiaries provided wastewater collection service to portions of
the Company's service area in New Jersey, Pennsylvania, Missouri and
Indiana.  Revenues from these services amounted to $14.9 million in 1997,
compared with $15.4 million in 1996 and $15.0 million in 1995.

Management Fees
These fees represent charges for management services provided to public
water and wastewater systems by American Commonwealth Management Services
Company.  In late December 1995, American Commonwealth Management Services
was acquired by AmericanAnglian Environmental Technologies, a joint venture
in which a subsidiary of the Company owns a 50% interest.  In 1997 and 1996
a comparable level of management fees were received by AmericanAnglian.


OPERATING EXPENSES
(000)                              1997          1996          1995
===================================================================
Operation and
  maintenance expenses         $428,779      $425,170      $402,362
Depreciation and amortization   103,660        93,413        79,977
General taxes                    87,860        82,017        76,208
-------------------------------------------------------------------
                               $620,299      $600,600      $558,547
                               ====================================


Consolidated Operating Expenses
Operating expenses in 1997 increased by 3% to $620.3 million, following an
8% increase in 1996.  The acquisition of the water utility operations in
northeastern Pennsylvania increased operating expenses by $30.8 million
in 1996.

    Operation and maintenance expenses totaled $428.8 million in 1997, 1%
higher than in 1996.  These expenses had increased by 6% in 1996.  The
northeastern Pennsylvania acquisition increased operation and maintenance
expenses by $19.8 million in 1996.

    Employee-related costs, representing 45% of operation and maintenance
expenses, decreased by 1% in 1997 and increased by 1% in 1996.

    The primary components of employee-related costs are wage and salary
expenses, which were up 3% to $157.7 million in 1997 following a 3%
increase in 1996.  The number of employees at year-end totaled 4,034, which
was approximately equal to the employment level of 4,065 at the close of
1996 and 7% above the 3,777 employees at the end of 1995.  The Company
added 294 new employees due to the northeastern Pennsylvania acquisition in
1996.  In 1995, because of the change in ownership of American Commonwealth
Management Services Company and the sale of the assets of the Ohio Suburban
Water Company, 79 employees left the Company.  Excluding the effect of
these acquisitions and dispositions, the Company's workforce has decreased
by 173 employees or 4% since year-end 1994, as the result of continued
efforts to improve operating efficiencies.

28
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                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



    Group insurance expenses, which include the cost of providing current
health care and life insurance benefits as well as the expected cost of
providing postretirement benefits, decreased by 12% to $30.5 million in
1997 after a 3% increase in 1996.  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. Employees and early retirees not selecting the
managed care plan option are required to make additional contributions.

    The fluctuation in group insurance expense can also be attributable to
the timing of the rate recovery permitted by regulatory authorities of the
additional cost resulting from the adoption in 1993 of a new accounting
standard requiring the Company to accrue the cost of postretirement
benefits in a manner similar to that used to account for pensions. 
Postretirement benefit expense in excess of the amount recovered in rates
is deferred when it is probable that recovery of such costs will be
included in future revenues.  In 1996, this expense increased as the
portion of postretirement costs that were deferred pending future recovery
decreased in comparison to 1995.

    Pension expense decreased by 42% in 1997 to $3.3 million following a
39% decrease in 1996.  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 1997.  Cash contributions of $4.3 million in 1996 and $10
million in 1995 were made to the pension plan.  Pension expense declined in
1997 and 1996 reflecting the decrease in contributions resulting from the
plan reaching full funded status. In 1995, the plan experienced a large
gain in connection with the demutualization of an insurance company.

OPERATION AND MAINTENANCE EXPENSES
(000)                              1997          1996          1995
===================================================================
Employee-related costs         $191,505      $193,798      $191,151
Fuel and power                   36,603        34,654        33,282
Purchased water                  44,661        45,069        44,114
Chemicals                        16,940        17,693        14,974
Waste disposal                   14,167        14,145        12,234
Maintenance materials
  and services                   26,761        24,559        22,258
Operating supplies and services  63,091        60,626        54,416
Customer billing and accounting  22,067        19,998        16,917
Other                            12,984        14,628        13,016
-------------------------------------------------------------------
                               $428,779      $425,170      $402,362
                               ====================================

    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 1997 after a 7% rise in 1996.

    The unit cost of water produced decreased 3% in 1997 and increased 4%
in 1996.  The 1997 decrease in the unit cost of production reflects the
decreased purchased water and chemical costs in 1997.  Higher fuel and
power, chemicals and waste disposal costs were primarily responsible for
the rise in the 1996 unit cost of production.

    Maintenance materials and services, which include emergency repairs as
well as costs for preventive maintenance, increased by 9% in 1997 following
a 10% increase in 1996.

    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 4% in 1997 after an 11% increase in 1996.  Customer billing
and accounting charges increased by 10% in 1997 and by 18% in 1996.  These
costs increased in 1997 and 1996 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
decreased by 11% in 1997 after increasing by 12% in 1996.  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 11% in 1997 and 17% in 1996.
The higher depreciation expense in both years was primarily due to growth
in utility plant in service, including the 1996 acquisition in northeastern
Pennsylvania.

    General taxes, which include gross receipts, franchise, property,
capital stock, payroll and other taxes, increased by 7% in 1997 after an 8%
rise in 1996.

    Gross receipts and franchise taxes, which are a function of revenues,
increased by 5% in 1997.  Property and capital stock taxes are assessed on
the basis of tax values assigned to assets and capitalization.  These taxes
in 1997 were 11% above those in 1996 due to higher property values and tax
rate increases.  Payroll taxes increased by 3% in 1997.


Consolidated Other Income and Income Deductions
The total allowance for funds used during construction recorded in 1997
was $11.8 million, which was approximately the same as 1996.  The $9.6
million decrease in 1996 was due to the completion of New Jersey-American
Water Company's Tri-County Water Treatment Plant which began operation in
early 1996.

    Interest expense rose 7% to $145.8 million in 1997 compared to 1996. 
This expense had increased by 17% in 1996.  The increase in 1996 was
primarily due to an increase in total debt to fund construction of new
water service assets and the acquisition of the acquired business in
northeastern Pennsylvania.

                                                                         29
<PAGE>
---------------------------------------------------------------------------
Management's Discussion and Analysis



    During 1995 the Company resolved its litigation with the Grafton Water
District in Massachusetts to recover the fair market value of the water
utility taken through eminent domain by the District in 1988.  In 1990, a
jury awarded the Company $5.6 million for these assets.  After that, the
District pursued various appeals, all of which resulted in reaffirmation of
the jury award.  In addition to the approximately $1.1 million paid by the
District in 1988, the Company received $6.6 million in 1995 which included
the remainder of the jury award and $2.1 million in interest.

    Other income in 1996 includes a $1.8 million gain on the disposition of
a condemned parcel of property.

Consolidated Income Taxes
Income taxes increased by 17% in 1997, following an 11% increase in 1996.
The 1997 and 1996 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 12 to the financial
statements.


SUMMARY OF TAXES
(000)                                   1997          1996          1995
========================================================================
Gross receipts and franchise taxes  $ 37,580      $ 35,684      $ 33,272
Property and capital stock taxes      35,466        31,971        28,868
Payroll taxes                         12,433        12,060        11,524
Other general taxes                    2,381         2,302         2,544
State income taxes                    10,269         9,227         8,079
Federal income taxes                  64,444        54,601        49,567
------------------------------------------------------------------------
                                    $162,573      $145,845      $133,854
                                    ====================================

Consolidated Net Income
Consolidated net income in 1997 totaled $119.1 million, a 17% increase
over net income in 1996.  Consolidated net income in 1996 was 10% above
that recorded in 1995, which included an after-tax gain of $3.9 million
related to the settlement of litigation in Massachusetts.

    Consolidated net income to common stock of $115.1 million in 1997
increased by 18% over the amount reported in 1996.  Consolidated net income
to common stock totaled $97.7 million in 1996 and was 11% above that
reported for 1995.  Without the gain from the settlement of litigation in
1995, consolidated net income to common stock in 1996 increased by 16%
above that in 1995.


CAPITALIZATION
                            COMMON    PREFERRED     LONG-TERM
(000)                       EQUITY        STOCK          DEBT
=============================================================
Company
  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
  1993                     655,275       51,673       131,074
-------------------------------------------------------------
Utility Subsidiaries
  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
  1993                     768,921       54,532     1,060,776
-------------------------------------------------------------
Consolidated
  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
  1993                     655,275      104,490     1,192,809
-------------------------------------------------------------


CAPITALIZATION RATIOS
                            COMMON    PREFERRED     LONG-TERM
                            EQUITY        STOCK          DEBT
=============================================================
Company
  1997                         87%           4%            9%
  1996                         86%           4%           10%
  1995                         82%           5%           13%
  1994                         80%           6%           14%
  1993                         78%           6%           16%
-------------------------------------------------------------
Utility Subsidiaries
  1997                         42%           2%           56%
  1996                         42%           2%           56%
  1995                         42%           2%           56%
  1994                         40%           2%           58%
  1993                         41%           3%           56%
-------------------------------------------------------------
Note: Long-term debt includes amounts due within one year.


LIQUIDITY AND CAPITAL RESOURCES

Internal cash flow from operations is influenced by weather patterns,
economic conditions and the timing of rate relief.  When operating cash
flow is not sufficient to meet corporate obligations on a timely basis,
external sources of funds are utilized.  The availability and low cost of
external cash reflect the consistency and reliability of earnings. 
External sources of cash consist of bank loans, the sale of securities --
bonds, preferred stock and common stock -- as well as improvements funded
by developers and others, such as governmental agencies.

30
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



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

[ID -- PHOTO]
JOSEPH F. HARTNETT, JR.
Treasurer

    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 common equity.  Additionally, from
time to time the Company issues long-term debt to repay short-term loans. 
Such a refinancing is contemplated for the second quarter of 1998.

    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 the then
prevailing market price.  Common dividends in the amount of $6.6 million
were reinvested during 1997, which resulted in the issuance of 291,236 new
shares of common stock.  Proceeds received from optional cash purchases of
555,109 new shares of common stock totaled $12.5 million in 1997.  Another
134,182 shares of common stock were issued in connection with the
Employees' Stock Ownership Plan, 60,843 shares were issued in connection
with the Long-Term Performance-Based Incentive Plan, and 222,940 shares of
common stock were issued in connection with a 401(k) Savings Plan for
Employees in return for cash contributions from employees totaling $2.7
million and Company contributions with a value of $2.3 million.

    Subsidiary companies retained $36.3 million of their earnings during
1997. Additionally, the Company invested a total of $68.1 million in new
common equity in the subsidiaries during the year.

    The Company plans to continue to use short-term bank borrowings for
peak cash requirements, as necessary.  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
1998 construction requirements and to maintain bank borrowings not yet
refinanced on a long-term basis.  Bank borrowings are 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 1997, utility subsidiaries issued $119.7 million of taxable
mortgage bonds at interest rates between 6.85% and 7.80%.  One utility
subsidiary issued tax-exempt debt totaling $60 million at an interest rate
of 5.375%.  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 utility subsidiaries at year-end 1997
amounted to $75.3 million compared to $109.3 million at year end 1996. 
During 1997, subsidiaries made mandatory payments to sinking funds in
amounts adequate to retire $57.3 million of debt and redeem $1.3 million of
preferred stocks.

    The subsidiary companies plan to fund construction programs,
acquisitions and repay bank borrowings and maturing bonds with the issuance
of approximately $200 million of long-term debt to outside investors and
$100 million of common stock to the Company in 1998.  The combined amount
of subsidiary bank borrowings and bonds maturing within one year during
1998 is expected to remain at approximately the current level.  A
discussion of the subsidiary companies' capital spending programs begins on
page 24.


REGULATION

Economic
Nineteen 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.  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 positions covers a broad spectrum.

                                                                         31
<PAGE>
---------------------------------------------------------------------------
Management's Discussion and Analysis




    In November 1996, voters in New Mexico approved a constitutional
referendum abolishing the New Mexico Public Utility Commission.  A new
state regulatory commission will be implemented consisting of 5 elected
Commissioners from 5 state districts.  The New Mexico legislature has
passed enabling legislation for the new Commission, to go into effect
January 1, 1999.

    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 purpose of this process is to set rates for
service which assure the financial viability of the utility entity while
ensuring customers 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 and maintenance 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 of time from when 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 statewide uniform rates.  This is a concept
that sets identical rates for service throughout the service territory. 
This concept mitigates the impact of water system replacements and renewals
on the rates of individual operating districts.

    During the past year, 12 subsidiaries were authorized by regulatory
agencies to increase rates for service by an annual amount of $53.3
million.  In most of these decisions, the primary factor for price
increases was to reflect a return on the investment made in the essential
water service facilities.  Some of the specific regulatory decisions
received in 1997 were as follows:

o   On October 2, 1997 the Pennsylvania Public Utility Commission approved
    a settlement agreement allowing Pennsylvania-American Water Company to
    increase its rates by $27.5 million.  This order placed into effect
    rates recognizing the full investment on the water assets in
    northeastern Pennsylvania acquired in 1996 and approved a statewide
    uniform tariff for approximately 97% of Pennsylvania-American's
    customers.

         In December 1996, the Pennsylvania Legislature passed into law a
    provision allowing all regulated water utilities, including
    Pennsylvania-American, to place in effect rates to cover investments in
    infrastructure replacement.  This provision, called the Distribution
    System Improvements Charge (DSIC), will reduce the impact of regulatory
    lag.  The purpose of DSIC is to provide revenues to cover the costs of
    capital and income taxes on non-revenue producing, non-expense reducing
    distribution system infrastructure replacements placed into service
    between rate cases.

         The DSIC has been approved by the Pennsylvania Public Utility
    Commission.  It may be implemented quarterly, but may not increase
    rates more than 5% prior to being included in the base rates of the
    Company.

o   Illinois-American Water Company received a rate decision on 
    December 22, 1997 from the Illinois Commerce Commission granting
    additional revenues of $7.3 million based on a stipulation agreement. 
    Notable in the stipulation and decision was continued support for
    movement toward a statewide uniform tariff for Illinois-American.  The
    Commission also approved a large user tariff that will aid the Company
    in retaining large users over a long term.

o   The Indiana Utility Regulatory Commission authorized additional
    revenues of $6.1 million for Indiana-American Water Company on 
    December 11, 1997.  The Commission's decision approved a significant
    step toward implementing statewide uniform pricing by Indiana-American
    Water Company.  The language of the Commission's decision indicated the
    Commission's recognition of the benefits of the concept.

ADDITIONAL ANNUAL REVENUES AUTHORIZED BY RATE DECISIONS
(000)                         1997          1996          1995
==============================================================
Arizona                    $   739       $    --       $   239
California                   1,354         3,556           637
Connecticut                     --         1,899            --
Illinois                     7,301           999         3,835
Indiana                      6,101         2,636            --
Iowa                            --            --           632
Kentucky                     1,050         1,515         1,475
Maryland                        31           202            --
Massachusetts                   --         5,376           291
Michigan                        --            --           130
Missouri                     2,707            --         1,923
New Jersey                   2,157        39,486            --
New York                        --            --           295
Ohio                           952         1,106            --
Pennsylvania                27,450            --         7,831
Tennessee                       --         1,405            --
Virginia                       717            --            --
West Virginia                2,698         4,704            55
--------------------------------------------------------------
                           $53,257       $62,884       $17,343
                           ===================================

32
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



    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 acts are done 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.

    Additionally, EPA has been finalizing regulations regarding
Cryptosporidium oocysts that can occur in surface waters.  Utility
subsidiaries have already implemented appropriate steps to voluntarily
comply with pending regulations.  This included installation of
state-of-the-art monitoring equipment, which improved our ability to
ascertain water quality. Much of this work has been done in partnership
with EPA.  Thus, data is being developed that assists EPA in finalizing its
regulations.  Both the Service Company's Quality Control and Research
Laboratory in Belleville, Illinois, and laboratories at utility
subsidiaries, are expanding to address regulations EPA will adopt.  In
anticipation of EPA's Information Collection Rule which went into effect in
July, 1997, analytical resources have been put in place to provide all
required analytical work for affected utility subsidiaries.

    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, requires water quality reports to consumers, 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 public health protection.

    As these new regulations go into effect, it is expected that the use of
chlorine as a disinfectant in water treatment will be modified.  EPA is
committed to lowering chlorinated by-products, which will result in less
usage of chlorine.  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 membranes, such as reverse osmosis, can attain
both objectives, but cost is very high.

    Our research has continued to focus on the most important public health
topics.  Cryptosporidium research concentrated on developing better test
methods, better understanding of disinfection and removal efficiencies, and
monitoring the occurrence around the American Water System, which will
position us for decisions to comply with EPA's announced regulation in late
1998.  Viruses also have been a major topic of study.  Our research is
looking for viruses in groundwaters all across the country.  That data will
be correlated to both geology and distance to virus sources, such as septic
tanks.  This investigation will help form the basis for EPA's regulation in
a couple of years.  Research is also being done to identify better
treatment methods to remove organic matter in order to lower disinfection
by-products, which will prepare utility subsidiaries to implement EPA's
next set of more stringent disinfection by-product regulations, due in late
1998.

                                                                         33
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
Management's Discussion and Analysis


    Two newly found contaminants created public concern in 1997.  A
chemical used in solid rocket fuel (perchlorate) and an oxygenated gasoline
additive (MTBE) were found in some groundwater in California.  Our Quality
Control and Research Laboratory set up test methods for both contaminants
and began monitoring all wells around the American Water System.  The
results of that monitoring will be shared with EPA.  If the national
occurrence and potential health effects warrant, EPA will regulate these
two contaminants in the future.

    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.

    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 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 two projects became the core
of our year 2000 compliance plan.  Mid-range and personal computer upgrades
related to these projects also ensure that many of our computerized devices
are year 2000 compliant.  Replacement of financial and customer service
software that was developed by the Company many years ago with these two
new software packages makes the year 2000 problem less complex for the
Company to address by eliminating the need to revise large amounts of
computer code.

    In addition to the new software packages being implemented, other
critical computerized operations include treatment plant automation systems
and devices used to record meter readings.  All critical software and
devices will be tested by Company personnel in the coming months to ensure
that they will not be adversely affected by the century change.  Interfaces
used to exchange information with banks and other entities will also be
tested to ensure compliance.  This testing is expected to be completed by
the end of 1998, although the implementation of new customer service
software will continue into 1999.  Some of the Company's current customer
software will also be made year 2000 compliant in case implementation of
the replacement software is delayed.

    The cost of the new financial and customer service software,
implementation consulting services, and the related cost of upgrading and
replacing computer equipment will be capitalized by the utility
subsidiaries and included in future rate increase requests.  Costs for
specific year 2000 remediation programs will be charged to expense unless
they meet the requirements for deferral as regulatory assets.  However,
these current period expenses are not expected to be materially different
from the usual ongoing level of information systems related expenses.

New Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), and Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise
and Related Information" (SFAS 131), were issued by the Financial
Accounting Standards Board requiring implementation for periods beginning
after December 15, 1997.

    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 will require the Company to
report certain items previously reflected as charges and credits to
stockholders' equity as "other comprehensive income" in the consolidated
statement of income and retained earnings and the consolidated statement of
common stockholders' equity.  Adoption of SFAS 130 effective January 1,
1998 requires reclassification of financial statements for earlier periods
which are provided for comparative purposes.  SFAS 130 will not have any
effect on the results of operations or the financial position of the
Company.

    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 will not require significant
additional reporting as the Company's utility subsidiaries represent
similar entities offering substantially identical services to similar
customers.

Forward Looking Information
This annual report, including management's discussion and analysis,
contains certain forward looking statements regarding the Company's results
of operations and financial position.  These forward looking statements are
based on current information and expectations, and are subject to risks and
uncertainties which could cause the Company's actual results to
differmaterially from expected results.

34
<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
consolidated statement of capitalization and the related consolidated
statements of income and retained earnings, of cash flows 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, 1997 and 1996, 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,
1997, 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,
1997, 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.


PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania

February 4, 1998

                                                                         35
<PAGE>
---------------------------------------------------------------------------
Consolidated Balance Sheet
(Dollars in thousands)


At December 31,                                       1997            1996
===========================================================================
ASSETS
Property, plant and equipment
  Utility plant -- at original cost less
    accumulated depreciation                    $3,713,390      $3,453,950
  Utility plant acquisition adjustments, net        58,976          52,156
  Nonutility property, net of accumulated
    depreciation                                    32,942          31,302
  Excess of cost of investments in subsidiaries
    over book equity at acquisition                 22,745          22,690
---------------------------------------------------------------------------
                                                 3,828,053       3,560,098
---------------------------------------------------------------------------

Current assets
  Cash and cash equivalents                         12,661          12,974
  Customer accounts receivable                      67,318          67,293
  Allowance for uncollectible accounts              (1,249)         (1,115)
  Unbilled revenues                                 55,750          53,868
  Miscellaneous receivables                          5,673           4,787
  Materials and supplies                            11,415          11,063
  Deferred vacation pay                             11,132          10,400
  Other                                             10,158           7,994
---------------------------------------------------------------------------
                                                   172,858         167,264
---------------------------------------------------------------------------

Regulatory and other long-term assets
  Regulatory asset -- income taxes recoverable
    through rates                                  181,566         177,064
  Debt and preferred stock expense                  30,216          28,736
  Deferred pension expense                          22,163          18,340
  Deferred postretirement benefit expense           11,372          11,852
  Deferred treatment plant costs                     7,690           8,388
  Deferred water utility billings                    4,013           6,808
  Tank painting costs                               10,531          10,224
  Funds restricted for construction                  5,340           5,791
  Other                                             40,484          37,591
---------------------------------------------------------------------------
                                                   313,375         304,794
---------------------------------------------------------------------------
                                                $4,314,286      $4,032,156
                                                ===========================

36
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------




                                                       1997            1996
===========================================================================
CAPITALIZATION AND LIABILITIES
Capitalization
  Common stockholders' equity                    $1,142,416      $1,057,874
  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                39,734          41,060
  Preferred stocks of subsidiaries without
    mandatory redemption requirements                 6,256           6,279
  Long-term debt
    American Water Works Company, Inc.              116,000         116,000
    Subsidiaries                                  1,754,766       1,600,394
---------------------------------------------------------------------------
                                                  3,110,845       2,873,280
---------------------------------------------------------------------------
Current liabilities
  Bank debt                                         134,762         147,390
  Current portion of long-term debt                  25,148          57,144
  Accounts payable                                   42,766          36,786
  Taxes accrued, including federal income            14,409          10,803
  Interest accrued                                   33,404          32,128
  Accrued vacation pay                               11,239          10,564
  Other                                              44,725          40,155
---------------------------------------------------------------------------
                                                    306,453         334,970
---------------------------------------------------------------------------
Regulatory and other long-term liabilities
  Advances for construction                         127,457         129,466
  Deferred income taxes                             418,248         382,592
  Deferred investment tax credits                    36,239          37,345
  Accrued pension expense                            41,079          32,212
  Accrued postretirement benefit expense             10,034          10,034
  Other                                               6,197           7,571
---------------------------------------------------------------------------
                                                    639,254         599,220
---------------------------------------------------------------------------
Contributions in aid of construction                257,734         224,686
---------------------------------------------------------------------------
Commitments and contingencies                            --              --
---------------------------------------------------------------------------
                                                 $4,314,286      $4,032,156
                                                 ==========================

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

                                                                         37
<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,              1997        1996        1995
===========================================================================
CONSOLIDATED INCOME
Operating revenues                        $954,199    $894,646    $802,820
---------------------------------------------------------------------------
Operating expenses
  Operation and maintenance                428,779     425,170     402,362
  Depreciation and amortization            103,660      93,413      79,977
  General taxes                             87,860      82,017      76,208
---------------------------------------------------------------------------
                                           620,299     600,600     558,547
---------------------------------------------------------------------------
Operating income                           333,900     294,046     244,273
Allowance for other funds used
  during construction                        7,035       6,540      11,771
Gain from eminent domain litigation             --          --       6,600
Other income                                 1,353       3,301       1,844
---------------------------------------------------------------------------
                                           342,288     303,887     264,488
---------------------------------------------------------------------------
Income deductions
  Interest                                 145,766     136,760     117,042
  Allowance for borrowed funds used
    during construction                     (4,715)     (5,202)     (9,573)
  Amortization of debt expense               1,614       1,497       1,273
  Preferred dividends of subsidiaries        3,522       3,616       3,698
  Other deductions                           2,260       1,714       2,341
---------------------------------------------------------------------------
                                           148,447     138,385     114,781
---------------------------------------------------------------------------
Income before income taxes                 193,841     165,502     149,707
Provision for income taxes                  74,713      63,828      57,646
---------------------------------------------------------------------------
Net income                                 119,128     101,674      92,061
Dividends on preferred stocks                3,984       3,984       3,984
---------------------------------------------------------------------------
Net income to common stock                $115,144    $ 97,690    $ 88,077
                                          =================================
Average shares of basic common stock
  outstanding (thousands)                   79,144      74,540      66,544
Basic earnings per common share on
  average shares outstanding                 $1.45       $1.31       $1.32
                                          =================================
Diluted earnings per common share on
  average shares outstanding                 $1.45       $1.31       $1.32
                                          =================================

CONSOLIDATED RETAINED EARNINGS
Balance at beginning of year              $662,183    $622,061    $578,051
Add: net income                            119,128     101,674      92,061
Deduct: adjustment for 1996 stock split
  on shares issued during the year              --       6,269       1,567
---------------------------------------------------------------------------
                                           781,311     717,466     668,545
---------------------------------------------------------------------------
Deduct: dividends
  Preferred stock                            3,528       3,528       3,528
  Preference stock                             456         456         456
  Common stock -- $.76 per share in 1997,
    $.70 per share in 1996,
    $.64 per share in 1995                  60,084      51,299      42,500
---------------------------------------------------------------------------
                                            64,068      55,283      46,484
---------------------------------------------------------------------------
Balance at end of year                    $717,243    $662,183    $622,061
                                          =================================

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

38
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------
Consolidated Statement of Cash Flows
(Dollars in thousands)


For the years ended December 31,              1997        1996        1995
===========================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                $119,128    $101,674    $ 92,061
Adjustments
  Depreciation and amortization            103,660      93,413      79,977
  Provision for deferred income taxes       31,850      22,288      15,344
  Provision for losses on accounts
    receivable                               6,650       5,479       4,288
  Allowance for other funds used
    during construction                     (7,035)     (6,540)    (11,771)
  Employee stock plan expenses               6,301       5,165       6,800
  Employee benefit expenses greater (less)
    than funding                             1,243        (849)     (6,643)
  Deferred revenues, net                        --      (1,125)        (17)
  Deferred tank painting costs              (1,834)     (2,544)     (1,675)
  Deferred rate case expense                (2,219)     (1,897)     (3,032)
  Amortization of deferred charges           8,862       8,533       6,995
  Other, net                                (3,099)     (7,512)     (5,183)
  Changes in assets and liabilities,
    net of effects from acquisitions
      Accounts receivable                   (7,427)     (5,175)    (14,897)
      Unbilled revenues                     (1,882)     (1,543)      9,897
      Other current assets                  (2,516)        612        (785)
      Accounts payable                       5,980      (6,514)       (329)
      Taxes accrued, including federal 
        income                               3,606      (2,591)       (254)
      Interest accrued                       1,276       3,465         (33)
      Other current liabilities              4,570       4,178       8,353
---------------------------------------------------------------------------
Net cash from operating activities         267,114     208,517     179,096
---------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures                 (352,437)   (273,732)   (330,762)
Allowance for other funds used
  during construction                        7,035       6,540      11,771
Water system acquisitions                   (3,072)   (302,447)     (5,738)
Proceeds from the disposition of property,
  plant and equipment                        3,717       4,649      16,307
Removal costs from property, plant
  and equipment retirements                (12,855)     (8,264)     (7,204)
Funds restricted for construction activity     451       8,136      12,286
---------------------------------------------------------------------------
Net cash used in investing activities     (357,161)   (565,118)   (303,340)
---------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt               179,700     248,459     132,450
Proceeds from common stock, net of
  issuance costs                            23,040     186,451      33,544
Net borrowings (repayments) under
  line-of-credit agreements                (12,628)     (1,249)     66,214
Advances and contributions for
  construction, net of refunds              25,893      17,829      19,296
Debt issuance costs                         (3,530)     (4,187)     (1,735)
Repayment of long-term debt                (57,324)    (44,887)    (85,452)
Redemption of preferred stocks              (1,349)     (1,275)     (1,411)
Dividends paid                             (64,068)    (55,283)    (46,484)
---------------------------------------------------------------------------
Net cash from financing activities          89,734     345,858     116,422
---------------------------------------------------------------------------
Net decrease in cash and cash equivalents     (313)    (10,743)     (7,822)
Cash and cash equivalents at
  beginning of year                         12,974      23,717      31,539
---------------------------------------------------------------------------
Cash and cash equivalents at end of year  $ 12,661    $ 12,974    $ 23,717
                                          =================================
Cash paid during the year for:
  Interest, net of capitalized amount     $146,794    $134,084    $119,676
                                          =================================
  Income taxes                            $ 56,269    $ 49,197    $ 44,191
                                          =================================

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 $5,438 in 1997, $8,093 in 1996 and
$2,839 in 1995.  Capital lease obligations
of $62 were recorded in 1996.

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

                                                                         39
<PAGE>
---------------------------------------------------------------------------
Consolidated Statement of Capitalization
(Dollars in thousands, except per share amounts)


At December 31,                                           1997        1996
===========================================================================
COMMON STOCKHOLDERS' EQUITY:
  Common stock -- $1.25 par value, authorized
    300,000,000 shares, outstanding 79,685,612 shares
    in 1997 and 78,421,302 shares in 1996           $   99,607  $   98,027
  Paid-in capital                                      326,382     298,448
  Retained earnings                                    717,243     662,183
  Unearned compensation                                   (816)       (784)
---------------------------------------------------------------------------
                                                     1,142,416   1,057,874
---------------------------------------------------------------------------

At December 31, 1997, common shares reserved for
issuance in connection with the Company's stock plans
were 60,923,162 shares for the Stockholder Rights Plan,
6,194,886 shares for the Dividend Reinvestment and
Stock Purchase Plan, 803,058 shares for the Employees'
Stock Ownership Plan, 92,021 shares for the Savings
Plan for Employees and 397,585 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%                                 6,545       7,029
    5% to less than 6%                                   5,429       5,573
    6% to less than 7%                                   1,957       2,091
    7% to less than 8%                                   2,270       2,320
    8% to less than 9%                                  24,695      24,874
    9% to less than 10%                                  4,534       4,752
    10% to less than 11%                                   560         700
---------------------------------------------------------------------------
                                                        45,990      47,339
---------------------------------------------------------------------------

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 $1,465 in 1998, $1,397 in
1999, $1,299 in 2000, $1,224 in 2001 and $1,032
in 2002.

Redemptions of preferred stock amounted to $1,349 in
1997 and $1,275 in 1996.

40
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



                                            CURRENT
                                         MATURITIES        1997        1996
===========================================================================
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
---------------------------------------------------------------------------
                                                 --     116,000     116,000
---------------------------------------------------------------------------

Capital lease obligations to a subsidiary
were $366 in 1997 and $95 in 1996.

LONG-TERM DEBT OF SUBSIDIARIES:
  Interest rate                        
    1% to less than 2%                      $   118       2,140       2,258
    4% to less than 5%                          391       4,825       5,217
    5% to less than 6%                           49     178,361     118,599
    6% to less than 7%                          249     375,821     356,070
    7% to less than 8%                        2,149     689,779     592,218
    8% to less than 9%                        1,100     171,100     172,200
    9% to less than 10%                      20,354     267,663     288,017
    10% to less than 11%                        455      64,315      64,770
---------------------------------------------------------------------------
                                             24,865   1,754,004   1,599,349
  Capital leases                                283         762       1,045
---------------------------------------------------------------------------
                                            $25,148   1,754,766   1,600,394
---------------------------------------------------------------------------
                                                     $3,110,845  $2,873,280
                                                     ======================

Maturities of long-term debt of subsidiaries,
including sinking fund requirements, during the
next five years will amount to $25,148 in 1998,
$18,026 in 1999, $37,057 in 2000, $107,531 in
2001 and $133,556 in 2002.

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.

                                                                         41
<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, 1994        65,318,374    $81,648   $ 76,003    $578,051        $(2,262)    $  733,440

   Net income                               --         --         --      92,061             --         92,061
   Dividend reinvestment               339,086        424      4,576        (212)            --          4,788
   Stock purchase                    1,809,872      2,262     24,936      (1,131)            --         26,067
   Employees' stock ownership plan     154,730        193      2,363         (96)            --          2,460
   Savings plan for employees          204,608        256      2,940        (128)            --          3,068
   Incentive plan                           --         --      3,343          --            196          3,539
   Dividends:
     Preferred stocks                       --         --         --      (3,984)            --         (3,984)
     Common stock, $.64 per share           --         --         --     (42,500)            --        (42,500)
---------------------------------------------------------------------------------------------------------------
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
                                    ===========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                                                           
42
<PAGE>
                                         AMERICAN WATER WORKS COMPANY, INC.
---------------------------------------------------------------------------
Balance Sheet
(Dollars in thousands)


At December 31,                                            1997        1996
===========================================================================
ASSETS
Investments in subsidiaries
  Securities                                         $1,366,016  $1,261,532
  Notes and advances                                         90         100
---------------------------------------------------------------------------
                                                      1,366,106   1,261,632
---------------------------------------------------------------------------
Current assets
  Cash and cash equivalents                                 308          43
  Other receivable from subsidiaries                      1,767         907
  Other                                                     500         190
---------------------------------------------------------------------------
                                                          2,575       1,140
---------------------------------------------------------------------------
Deferred debits
  Deferred income taxes                                   4,212       3,377
  Debt expense                                              191         236
  Preferred stock expense                                   137         184
  Other                                                       2           6
---------------------------------------------------------------------------
                                                          4,542       3,803
---------------------------------------------------------------------------
Other long-term assets                                   12,907       9,788
---------------------------------------------------------------------------
                                                     $1,386,130  $1,276,363
                                                     ======================

CAPITALIZATION AND LIABILITIES
Capitalization
  Common stockholders' equity                        $1,142,416  $1,057,874
  Preferred stocks with mandatory
    redemption requirements                              40,000      40,000
  Preferred stocks without mandatory
    redemption requirements                              11,673      11,673
  Long-term debt                                        116,366     116,095
---------------------------------------------------------------------------
                                                      1,310,455   1,225,642
---------------------------------------------------------------------------
Current liabilities
  Bank debt                                              59,500      38,100
  Current portion of long-term debt                          95          41
  Interest accrued                                        1,760       1,569
  Taxes accrued, including federal income                    34          31
  Other                                                     760         915
---------------------------------------------------------------------------
                                                         62,149      40,656
---------------------------------------------------------------------------
Other long-term liabilities                              13,526      10,065
---------------------------------------------------------------------------
Commitments and contingencies                                --          --
---------------------------------------------------------------------------
                                                     $1,386,130  $1,276,363
                                                     ======================


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

                                                                         43
<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,              1997        1996        1995
===========================================================================
INCOME
Income from subsidiaries
  Equity in earnings of subsidiaries
    Dividends                             $ 96,427    $ 82,155    $ 77,182
    Undistributed earnings                  36,335      31,605      26,315
---------------------------------------------------------------------------
                                           132,762     113,760     103,497
  Interest                                       6           6           7
Other income                                   585         503       1,147
---------------------------------------------------------------------------
                                           133,353     114,269     104,651
---------------------------------------------------------------------------
Expenses
  Operating and administrative expenses      9,431       8,003       8,086
  General taxes                                266         252         239
  Interest                                  12,629      11,639      11,027
  Amortization of debt expense                  45          55          56
---------------------------------------------------------------------------
                                            22,371      19,949      19,408
---------------------------------------------------------------------------
Income before income taxes                 110,982      94,320      85,243
Provision for income taxes                  (8,146)     (7,354)     (6,818)
---------------------------------------------------------------------------
Net income                                 119,128     101,674      92,061
Dividends on preferred stocks                3,984       3,984       3,984
---------------------------------------------------------------------------
Net income to common stock                $115,144    $ 97,690    $ 88,077
                                          =================================
Average shares of basic common
  stock outstanding (thousands)             79,144      74,540      66,544
Basic earnings per common share on
  average shares outstanding                 $1.45       $1.31       $1.32
                                          =================================
Diluted earnings per common share on
  average shares outstanding                 $1.45       $1.31       $1.32
                                          =================================

RETAINED EARNINGS
Balance at beginning of year              $662,183    $622,061    $578,051
Add: net income                            119,128     101,674      92,061
Deduct: adjustment for 1996 stock
  split on shares issued during the year        --       6,269       1,567
---------------------------------------------------------------------------
                                           781,311     717,466     668,545
---------------------------------------------------------------------------
Deduct: dividends
  Preferred stock                            3,528       3,528       3,528
  Preference stock                             456         456         456
  Common stock -- $.76 per share in 1997,
    $.70 per share in 1996, $.64 per share
    in 1995                                 60,084      51,299      42,500
---------------------------------------------------------------------------
                                            64,068      55,283      46,484
---------------------------------------------------------------------------
Balance at end of year                    $717,243    $662,183    $622,061
                                         =================================


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

44
<PAGE>
                                         AMERICAN WATER WORKS COMPANY, INC.
---------------------------------------------------------------------------
Statement of Cash Flows
(Dollars in thousands)


For the years ended December 31,              1997        1996        1995
===========================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                $119,128    $101,674    $ 92,061
Adjustments
  Undistributed earnings of subsidiaries   (36,335)    (31,605)    (26,315)
  Employee stock plan expenses                 585         451       1,673
  Other, net                                   961         877         (53)
  Changes in assets and liabilities
    Receivables from subsidiaries               --           4           4
    Other current assets                      (310)        (82)        (28)
    Taxes accrued, including federal income      3          50         (71)
    Interest accrued                           191          67          88
    Other current liabilities                 (155)       (400)        595
---------------------------------------------------------------------------
Net cash from operating activities          84,068      71,036      67,954
---------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries' common stock   (68,149)   (226,839)    (78,554)
Repayment of promissory notes by subsidiaries   10          10          10
Other                                         (950)     (1,209)       (501)
---------------------------------------------------------------------------
Net cash used in investing activities      (69,089)   (228,038)    (79,045)
---------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock, net of
  issuance costs                            28,041     192,856      36,383
Dividends paid                             (64,068)    (55,283)    (46,484)
Net borrowings under line-of-credit
  agreements                                21,400      34,400       3,700
Repayment of long-term debt                    (73)    (15,033)        (23)
Other                                          (14)        (14)        (13)
---------------------------------------------------------------------------
Net cash from (used in) financing 
  activities                               (14,714)    156,926      (6,437)
---------------------------------------------------------------------------
Net increase (decrease) in cash and
  cash equivalents                             265         (76)    (17,528)
Cash and cash equivalents at
  beginning of year                             43         119      17,647
---------------------------------------------------------------------------
Cash and cash equivalents at end of year  $    308    $     43    $    119
                                          =================================
Cash paid (received) during the year for:
  Interest                                $ 12,438    $ 11,572    $ 10,939
                                          =================================
  Income taxes                            $ (7,105)   $ (6,905)   $ (5,844)
                                          =================================
Common stock issued in lieu of cash in
  connection with the Long-Term
  Performance-Based Incentive Plan
  totaled $437 in 1997 and $1,688 in 1996.


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

                                                                         45
<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 21 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.

    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.

    Pension expense in excess of the amount contributed to the pension plan
is deferred by certain subsidiaries.  These 

46
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------





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
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 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, 1997 and 1996 include payables
to banks of $14,307 and $10,468, 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
of 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.

                                                                         47
<PAGE>
---------------------------------------------------------------------------
Notes to Financial Statements
(Dollars in thousands, except per share amounts)




Earnings Per Share
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."  This statement is
effective for financial statements for both interim and annual periods
ending after December 15, 1997.  The average number of shares used to
calculate diluted earnings per share includes 76,996 and 68,802 of
potential common shares issuable in connection with the Company's Long-Term
Performance-Based Incentive Plan (see note 9) in 1997 and 1996,
respectively.

New Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), and Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise
and Related Information" (SFAS 131), were issued by the Financial
Accounting Standards Board requiring implementation for periods beginning
after December 15, 1997.

    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 will require the Company to
report certain items previously reflected as charges and credits to
stockholders' equity as "other comprehensive income" in the consolidated
statement of income and retained earnings and the consolidated statement of
common stockholders' equity.  Adoption of SFAS 130 effective January 1,
1998 requires reclassification of financial statements for earlier periods
which are provided for comparative purposes.  SFAS 130 will not have any
effect on the results of operations or the financial position of the
Company.

    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 will not require significant
additional reporting as the Company's utility subsidiaries represent
similar entities offering substantially identical services to similar
customers.

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


NOTE 3: ACQUISITIONS AND DISPOSITIONS
East Honolulu, Hawaii Acquisition
On August 26, 1997, the Company agreed to acquire the common stock of East
Honolulu Community Services, Inc. (EHCS) from Maunalua Associates, Inc., a
subsidiary of Kemper Corporation, for $18,400.  EHCS is a suburban Honolulu
wastewater utility that serves 10,000 customers.  For the latest fiscal
year ended December 31, 1997, EHCS had unaudited revenues of $6,275, net
income of $789 and total assets of $17,117.  The Company expects to
complete this transaction on or about April 1, 1998.

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 7) and a portion of the proceeds
from Pennsylvania-American's offering of $150,000 of 30-year, 7.8% General
Mortgage Bonds in 1996.

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.

Grafton, Massachusetts Eminent Domain Proceeding
During the second quarter of 1995, the Company resolved its litigation
with the Grafton Water District in Massachusetts to recover the fair market
value of the water utility taken through eminent domain by the District in
1988.  In 1990, a jury awarded the Company $5,600 for these assets that had
served 2,300 customers.  After that the District pursued various appeals,
all of which resulted in reaffirmation of the jury award.  In addition to
the $1,100 paid by the District in 1988, the Company received $6,600 which
includes the remainder of the jury award and $2,100 in interest.  This
produced a gain in 1995 of $3,900, or $.06 per share, after applicable
income taxes.

Ohio Suburban Water Company Eminent Domain Proceeding
On September 29, 1995, the City of Huber Heights acquired, under threat of
taking through eminent domain, the assets of the Ohio Suburban Water
Company for $14,400.  Ohio Suburban, which had served 14,600 customers, was
acquired by the Company's subsidiary in Ohio as part of an acquisition of
Midwestern water utilities in 1993.  The sale of these assets, in
accordance with a sales agreement providing for the Company to recoup the
entire investment that it made only two years before, did not have an
adverse financial effect on the Company.

48
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------




NOTE 4: JOINT VENTURE
A subsidiary of the Company owns a 50 percent interest in AmericanAnglian
Environmental Technologies, a joint venture with Anglian Water Plc., a
British water and wastewater utility.  AmericanAnglian provides both
technical expertise and financing resources to communities to operate and
upgrade their water and wastewater systems.  The results of the joint
venture are accounted for by the Company under the equity method.  In
December 1995, half of the common stock of the Company's American
Commonwealth Management Services Company subsidiary was sold to Anglian
Water Plc. for $1,174 in cash.  The Company and Anglian then transferred
ownership of American Commonwealth Management Services to their
AmericanAnglian joint venture.  American Commonwealth Management Services
provides management and operating services, at a profit, to non-affiliated
water and wastewater systems.  It also owns facilities to regenerate carbon
used for water filtration and those capabilities are being marketed to
affiliated and non-affiliated water utilities.


NOTE 5: UTILITY PLANT
The components of utility plant by category at December 31 are as follows:

                                                        1997         1996
=========================================================================
Water plant
  Sources of supply                               $  215,321   $  187,358
  Treatment and pumping                            1,052,944      956,858
  Transmission and distribution                    2,016,300    1,890,080
  Services, meters and fire hydrants                 757,729      702,906
  General structures and equipment                   281,523      266,440
Wastewater plant                                      33,124       31,267
Construction work in progress                        111,808      101,874
-------------------------------------------------------------------------
                                                   4,468,749    4,136,783
Less-accumulated depreciation                        755,359      682,833
-------------------------------------------------------------------------
                                                  $3,713,390   $3,453,950
                                                  =======================


NOTE 6: 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 7: 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 6), 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 Lewis and Paul W. Ware, who
are directors of the Company.


NOTE 8: COMMON STOCKHOLDERS' EQUITY
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 1, 1996, to provide for new shares
purchased under the plan to be priced at the applicable average market
price. Until March 1, 1996, shares purchased with reinvested dividends or
optional cash purchases were priced at 95% of the applicable average market
price.

Stockholder Rights Plan
Each share of the Company's common stock has one Flip-Over Right and one
Flip-In Right (the "Rights") attached.  The Rights will not be exercisable
until such time as a person or group (an "Acquiring Person") acquires or
announces an offer for 25% or more of the Company's common stock.  The
Rights will then entitle the holder to buy from the Company one-half share
of the Company's common stock for twenty dollars.

    Thereafter, if the Company is acquired in a merger or business
combination in which the Company does not survive, or if 50% or more of the
Company's assets or earning power are sold or transferred, each Flip-Over
Right will become the right to buy, at twice its then current exercise
price, that number of shares of the acquiring person's common stock which
at that time have a market value of four times the then current exercise
price of the Flip-Over Right.  If an Acquiring Person (i) acquires
beneficial ownership of 35% or more of the Company's common stock, (ii)
acquires the Company in a merger or business combination transaction in
which

                                                                         49
<PAGE>
---------------------------------------------------------------------------
Notes to Financial Statements
(Dollars in thousands, except per share amounts)



the Company survives and its stock is not changed or (iii) engages in
certain self-dealing transactions, each Flip-In Right not owned by the
acquiror will become the right to buy, at twice its then current exercise
price, that number of shares of the Company's common stock which at that
time have a market value of four times the then current price of the
Flip-In Right.

    The Rights are redeemable, in whole, but not in part, by the Company at
a price of $.00025 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 9: 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
employees who are not included in a bargaining unit.  Each participating
employee can elect to contribute an amount that does not exceed 2% of their
wages for the preceding year.  In addition to the employee'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
$1,674 for 1997, $1,427 for 1996 and $1,408 for 1995 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 employees who have more than six months of service.  Employee
contributions are invested at the direction of the employee in one or more
funds including a fund consisting entirely of common stock of the Company.
Effective January 1, 1998 the Company will match 50% of the first 4% of
each employee's wages contributed to the plan.  The Company expensed
matching contributions to the plan totaling $2,304 for 1997, $2,198 for
1996 and $1,429 for 1995.  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.

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
employees 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 $2,715 in 1997, $1,950 in 1996 and $5,386 in 1995.  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 10: POSTRETIREMENT BENEFITS
Pension Benefits
The Company and its subsidiaries have a noncontributory defined benefit
pension plan covering substantially all employees.  Benefits under the plan
are based on the employee's years of service and average annual
compensation for those 60 consecutive months of employment which yield the
highest average.

    The following table provides pension cost components and the expected
long-term rate of return on plan assets used in determining net pension
cost:

                                             1997         1996        1995
===========================================================================
Service cost-benefits
  earned during the year                 $ 11,657     $ 12,820    $  8,332
Interest cost on projected
  benefit obligation                       29,887       28,189      25,560
Actual return on plan assets              (52,721)     (35,343)    (94,167)
Net amortization and deferral              16,829        1,311      67,768
---------------------------------------------------------------------------
Net pension cost                         $  5,652     $  6,977    $  7,493
Assumed asset earnings rate                 8.50%        8.50%       8.50%

    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
1997.  The Company made contributions of $4,307 in 1996 and $9,993 in 1995. 
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.  In
November 1995, the plan received 2,000,000 shares of common stock from
Allmerica Financial Corporation in connection with the demutualization of
its State Mutual Life Assurance Company subsidiary.  State Mutual, as a
mutual insurance company, was owned by its policyholders.  The shares of
Allmerica Financial received by the plan were subsequently sold, resulting
in a net gain of approximately $47,000 to the plan.  The actual return on
plan assets also reflects the higher than expected returns in the general
capital markets over the last three years.

50
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------



The following table reconciles plan assets and liabilities to the funded
status of the plan at December 31:

                                                        1997          1996
===========================================================================
Plan assets at fair value                           $441,218      $404,321
                                                    =======================
Actuarial present value
  of benefit obligations:
    Vested benefits                                 $345,872      $304,800
    Non-vested benefits                                8,377         6,895
---------------------------------------------------------------------------
    Accumulated benefit obligation                   354,249       311,695
    Effect of projected
      future salary increases                         95,576        82,870
---------------------------------------------------------------------------
    Total projected benefit obligation              $449,825      $394,565
                                                    ======================
Projected benefit obligation less than
  (in excess) of plan assets                        $ (8,607)     $  9,756
Unrecognized net transition asset                    (11,763)      (14,116)
Unrecognized prior service cost                        2,008         2,180
Unrecognized net gain                                (10,482)      (21,012)
---------------------------------------------------------------------------
Accrued pension cost                                $(28,844)     $(23,192)
                                                    =======================
Discount rate assumption                               7.00%         7.50%
Compensation growth rate assumption                    5.00%         5.00%

    The Company also has two unfunded supplemental non-qualified pension
plans that provide additional retirement benefits to certain employees of
the Company and its subsidiaries.  Pension costs for the supplemental plans
were $2,200 for 1997, $1,299 for 1996 and $1,163 for 1995.  At December 31,
1997, the projected benefit obligation for these plans totaled $15,295. 
Accrued as a pension liability on the balance sheet is $12,235 representing
$8,678 of accrued pension cost and an unfunded accumulated benefit
obligation in excess of accrued pension cost of $3,557.

Postretirement Benefits other than Pensions
The Company and its subsidiaries provide certain life insurance benefits
for retired employees and certain health care benefits for retired
employees and their dependents.  Substantially all employees 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.  Employees 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 following table provides postretirement benefit cost components and
the expected long-term rate of return used in determining net
postretirement benefit cost:

                                                1997       1996       1995
===========================================================================
Service cost-benefits
  earned during the year                     $ 4,992    $ 5,848    $ 4,641
Interest cost on accumulated
  postretirement benefit obligation           11,230     11,545     11,637
Actual return on plan assets                 (12,232)    (3,545)    (2,450)
Net amortization and deferral                 12,406      5,325      5,196
---------------------------------------------------------------------------
Net postretirement benefit cost              $16,396    $19,173    $19,024
                                             ==============================
Assumed asset earnings rate                    7.90%      7.90%      7.70%

    The transition obligation of $122,115 at January 1, 1993 is being
amortized over 20 years.

    The Company made contributions to trust funds established for its
postretirement benefit plans of $16,396 in 1997, $17,892 in 1996 and
$19,024 in 1995.  The Company's policy is to fund postretirement benefit
costs accrued.  Plan assets are invested in a mutual fund comprised of high
quality debt securities, equity mutual funds and a bond money market fund. 
The following table reconciles the funded status of the plan with the
liability included in the consolidated balance sheet at December 31:


                                                        1997          1996
===========================================================================
Plan assets at fair value                           $ 85,452      $ 63,664
                                                    =======================
Actuarial present value of
  postretirement benefit obligations:
    Retirees and dependents                         $ 70,954      $ 64,718
    Fully eligible active plan participants            5,241         4,633
    Other active plan participants                    91,160        80,584
---------------------------------------------------------------------------
Total accumulated postretirement
  benefit obligation                                $167,355      $149,935
                                                    =======================
Accumulated postretirement benefit
  obligation in excess of plan assets               $(81,903)     $(86,271)
Unrecognized transition obligation                    85,904        91,631
Unrecognized prior service costs                       8,556        11,585
Unrecognized net gain                                (22,591)      (26,979)
---------------------------------------------------------------------------
Accrued postretirement benefit cost                 $(10,034)     $(10,034)
                                                    =======================
Discount rate assumption                               7.00%         7.50%
Compensation growth rate assumption                    5.00%         5.00%

    The health care cost trend rate, used to calculate the Company's cost
for postretirement health care benefits, is a 6.5% annual rate in 1998 that
is assumed to decrease gradually 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 8.0% 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 Pennsylvania Acquisition in
note 3).  A one-percentage-point increase in the health care cost trend
rate would have increased the accumulated 

                                                                         51
<PAGE>
---------------------------------------------------------------------------
Notes to Financial Statements
(Dollars in thousands, except per share amounts)




postretirement benefit obligation by $22,700 at January 1, 1998 and the
aggregate of the service and interest cost components of postretirement
benefit costs for 1997 by $2,800.


NOTE 11: GENERAL TAXES
Components of general tax expense for the years presented in the
consolidated statement of income are as follows:

                                                1997       1996       1995
==========================================================================
Gross receipts and franchise                 $37,580    $35,684    $33,272
Property and capital stock                    35,466     31,971     28,868
Payroll                                       12,433     12,060     11,524
Other general                                  2,381      2,302      2,544
--------------------------------------------------------------------------
                                             $87,860    $82,017    $76,208
                                             =============================


NOTE 12: INCOME TAXES
Components of income tax expense for the years presented in the
consolidated statement of income are as follows:

                                                1997       1996       1995
===========================================================================
STATE INCOME TAXES:
Current                                      $ 7,514    $ 8,291    $ 7,938
Deferred
  Current                                        146         99         59
  Non-current                                  2,609        837         82
---------------------------------------------------------------------------
                                             $10,269    $ 9,227    $ 8,079
                                             ==============================
FEDERAL INCOME TAXES:
Current                                      $35,259    $33,219    $34,485
Deferred
  Current                                        (56)       (69)      (180)
  Non-current                                 30,484     22,694     16,505
  Amortization of deferred
    investment tax credits                    (1,243)    (1,243)    (1,243)
---------------------------------------------------------------------------
                                             $64,444    $54,601    $49,567
                                             ==============================

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

                                                1997       1996       1995
===========================================================================
Income tax at statutory rate                 $67,845    $57,926    $52,397
Increases (decreases)
  resulting from --
    State taxes, net of
      federal taxes                            6,675      5,998      5,252
    Flow through differences                   1,143        742        556
    Amortization of investment
      tax credits                             (1,243)    (1,243)    (1,243)
    Subsidiary preferred dividends             1,198      1,230      1,258
    Other, net                                  (905)      (825)      (574)
---------------------------------------------------------------------------
Actual income tax expense                    $74,713    $63,828    $57,646
                                             ==============================

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

                                                        1997          1996
===========================================================================
DEFERRED TAX ASSETS:
  Advances and contributions                        $149,058      $137,904
  Deferred investment tax credits                     13,862        14,355
  Other                                               14,205        19,001
---------------------------------------------------------------------------
                                                     177,125       171,260
---------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
  Utility plant, principally due
    to depreciation differences                      496,827       452,824
  Income taxes recoverable
    through rates                                     71,475        70,410
  Other                                               27,071        30,618
---------------------------------------------------------------------------
                                                     595,373       553,852
---------------------------------------------------------------------------
                                                    $418,248      $382,592
                                                    =======================

    As of December 31, 1997 and 1996, the parent company had no material
temporary differences.  No valuation allowances were required on deferred
tax assets at December 31, 1997 and 1996.


NOTE 13: LEASES
The Company has entered into operating leases involving certain facilities
and equipment.  Rental expenses under operating leases were $9,199 for
1997, $8,973 for 1996 and $8,985 for 1995.  Capital leases currently in
effect are not significant.

    At December 31, 1997, the minimum annual future rental commitment under
operating leases that have initial or remaining noncancellable lease terms
in excess of one year are $5,765 in 1998, $4,744 in 1999, $3,660 in 2000,
$2,418 in 2001 and $1,613 in 2002.

52
<PAGE>
                AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
---------------------------------------------------------------------------





NOTE 14: COMMITMENTS AND CONTINGENCIES
Construction programs of subsidiaries for 1998 are estimated to cost
approximately $424,000.  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 15: COMPENSATING BALANCES AND BANK DEBT
During 1997 the Company and its subsidiaries maintained lines of credit
with various banks.  The total of the unused lines of credit at December
31, 1997 was $55,500 for the Company and $252,085 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
1997 was $171,337, and the average amount outstanding during the year was
$155,629.
The weighted average annual interest rate on these borrowings during 1997
was 6.17%, and the interest rate at December 31, 1997 was 5.89%.


NOTE 16: 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
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

                                                CARRYING
1996                                              AMOUNT      FAIR VALUE
========================================================================
Preferred stocks of the Company with
  mandatory redemption requirements              $40,000         $43,197
Preferred stocks of subsidiaries with
  mandatory redemption requirements               41,060          44,977
Long-term debt of the Company                    116,000         120,783
Long-term debt of subsidiaries                 1,656,175       1,772,384


NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 are as follows:

                                  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

                                  FIRST    SECOND     THIRD    FOURTH
1996                            QUARTER   QUARTER   QUARTER   QUARTER
=====================================================================
Operating revenues             $198,189  $228,621  $247,616  $220,220
Operating income                 55,425    76,797    91,545    70,279
Net income                       17,031    26,505    36,306    21,832
Net income to common stock       16,035    25,509    35,310    20,836
Basic and diluted
  net income per common share      $.23      $.35      $.45      $.27

                                                                         53
<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
---------------------------------------------------------------------------
1997            High       Low       High      Low        High       Low
===========================================================================
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
---------------------------------------------------------------------------



1996            High       Low       High       Low       High        Low
===========================================================================
1st quarter   $20-1/4   $18-1/4    $20       $18-1/2    $21-1/2     $18-1/2
2nd quarter    20-1/8    17-3/4     19-3/4    17         21-5/8      18
3rd quarter    22        19-1/2     19-1/2    17-3/4     20-1/2      17-1/2
4th quarter    21-3/4    18-7/8     18-1/4    18         22-1/2      18


Quarterly dividend
 paid per share      $.175                $.3125               $.3125
Number of
 shareholders at
 December 31, 1996  39,002                  251                  840

---------------------------------------------------------------------------
The common and 5% preferred stocks have voting rights.


[RECYCLE LOGO]
This Annual Report is printed on recycled paper.

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

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