<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                      ----------------------------------
                            Washington, D.C. 20549

                                   FORM 10-K

       [ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1998
                                            -----------------
                                      OR
       [   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
           For the transition period _____________ to ______________
                          Commission File No. 1-8586
                                              ------

                          UNITED WATER RESOURCES INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)

       NEW JERSEY                                                22-2441477
------------------------                                  ----------------------
(State of incorporation)                                     (I.R.S. Employer
                                                            Identification No.)
 
   200 OLD HOOK ROAD, HARRINGTON PARK, N.J.                        07640
---------------------------------------------              ---------------------
   (Address of principal executive office)                       (Zip Code)

Registrant's telephone number, including area code:  201-784-9434
                                                     ------------

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

                                                       Name of Each Exchange
         Title of Each Class                            on Which Registered
         -------------------                           ----------------------
    Common Stock (No par value)                        New York Stock Exchange
    Outstanding at February 28, 1999 -  37,973,793
                                        ----------

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes   X  .    No          .
                                             ---------        ---------

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

     At February 28, 1999, the registrant's Common Stock, no par value, held by
non-affiliates had an aggregate market value of $ 510,725,397.  See Item 13.
                                                 ------------               

     The following document is incorporated by reference in this Form 10-K:

          United Water Resources Inc. Proxy Statement to be filed in
          connection with the Registrant's Annual Meeting to be held
          on May 10, 1999 as to Part III, items 10, 11, 12, and 13.
<PAGE>
 
                               PART I
                               ------

ITEM 1.   BUSINESS
-------   --------

(A)       GENERAL DEVELOPMENT OF BUSINESS
          -------------------------------

     United Water Resources Inc. (United Water, or the Company) is a New Jersey
corporation that was incorporated on February 25, 1983 and has its principal
office at 200 Old Hook Road, Harrington Park, New Jersey 07640. On April 22,
1994, United Water completed a merger (the Merger) with GWC Corporation (GWC),
in which United Water was the surviving corporation. GWC's principal assets
included 100% of the stock of General Waterworks Corporation (now known as
United Waterworks Inc.), which currently owns regulated water and wastewater
utilities operating in 13 states. The Merger was accounted for under the
purchase method of accounting.

     United Water's principal utility subsidiaries, United Water New Jersey
Inc., United Water New York Inc. and the utility subsidiaries of United
Waterworks, provide water and wastewater services to approximately two million
people in 13 states, with more than half of the Company's utility operations
located in northeastern New Jersey and southeastern New York. United Water New
Jersey was incorporated by an act of the New Jersey Legislature in 1869. United
Water New York was incorporated under the laws of New York in 1893 and is 
wholly-owned by United Water New Jersey. United Waterworks was incorporated 
under the laws of Delaware in 1942. Other significant wholly-owned subsidiaries
of United Water include: United Properties Group (United Properties), which is
engaged in real estate activities, including commercial rentals, land
development and sales, golf course operations and consulting services; United
Water UK Limited, an equal partner with Lyonnaise Europe in the Northumbrian
Partnership (the Partnership), which has acquired a 20% interest in Northumbrian
Water Group plc (NWG), a major investor-owned water and wastewater company in
the United Kingdom; United Water Mid-Atlantic, whose subsidiaries own and
operate water and wastewater systems; United Water


________________________________________________________________________________
NOTE: In addition to the historical information contained herein, this report
contains a number of "forward-looking statements," within the meaning of the
Securities Exchange Act of 1934.  Such statements address future events and
conditions concerning, among other things, the adequacy of water supply and
utility plant, capital expenditures, earnings on assets, resolution and impact
of litigation, liquidity and capital resources and accounting matters.  Actual
results in each case could differ materially from those projected in such
statements, by reason of factors including, without limitation, general economic
conditions, competition, actions by regulators and other governmental
authorities, technological developments and Year 2000 issues affecting the
Company's operations, markets, services and prices, and other factors discussed
in the Company's filings with the Securities and Exchange Commission, including
this report.

                                       2
<PAGE>
 
USA Inc. (United Water USA) which owns a 50% stake in United Water Services LLC
(United Water Services-described below); and United Water Canada Inc. (United
Water Canada) and United Water Mexico Inc. (United Water Mexico) which own a
33.3% and 20.5% interest in United Water Services Canada (UWS Canada) and United
Water Services Mexico (UWS Mexico), respectively. In addition, the Company has
entered into "public-private partnerships" with the cities of Hoboken and Jersey
City, New Jersey, whereby the municipalities retain ownership of their systems
while the Company operates and maintains them.

     On July 28, 1997, United Water Services, a 50/50 joint venture between
United Water and Suez Lyonnaise des Eaux acquired the remaining 50% stake in JMM
Operational Services.

     United Water Services provides contract operations and maintenance services
for water and wastewater facilities and is pursuing additional contract
operations. As a result, United Water Services was awarded several contracts.
The largest awards include a ten-year contract to operate the wastewater systems
in Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner. United Water Services also operates a
meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.

     In July 1997, the Company's subsidiaries, United Water Canada and United
Water Mexico acquired a 30% and a 20% interest in UWS Canada and UWS Mexico,
respectively. In December 1998, United Water purchased additional interests and
now has a 33.3% and a 20.5% interest in UWS Canada and UWS Mexico, respectively.

     At December 31, 1998 and 1997, United Water had equity investments,
relating to contract services, of approximately $19.8 million and $20.2 million,
respectively, including investments in Canada and Mexico. This amount is
included in equity investments in the accompanying consolidated balance sheet.
United Water's share of earnings in these investments is included in equity
earnings of affiliates in the accompanying statement of consolidated income. See
Item 8, Note 2 to the consolidated financial statements for further details.

     On June 28, 1996, United Water UK Limited and Lyonnaise Europe, a wholly-
owned subsidiary of Suez Lyonnaise des Eaux, formed the Partnership, which has
acquired a 20% interest in NWG. United Water's initial $62 million investment in
the Partnership was made through its wholly-owned subsidiary in the United
Kingdom, United Water UK Limited. Investment in the Partnership was $96.3
million and $78.7 million at December 31, 1998 and 1997, respectively, and is
included in equity investments in the consolidated balance sheet. United Water's
share of the Partnership's earnings, which totaled $17.1 million and $13.6
million (excluding the windfall profits tax) in 1998 and 1997, respectively, is
included in equity 

                                       3
<PAGE>
 
earnings of affiliates in the accompanying statement of consolidated income.

     During 1997, the United Kingdom's new Labor Government imposed a one-time
"windfall profits" tax on privatized utilities. The levying of this one-time tax
negatively impacted the Company's earnings from its investment in NWG by $13.1
million, which was partially offset by a reduction in deferred taxes of $2.8
million, which resulted from a change in the UK corporate income tax rate from
33% to 31%. The result was a net loss of $10.3 million. The imposition of this
tax had been factored into the Company's financial analysis at the time of its
investment in NWG and was considered in determining the purchase price. The tax
did not have an effect on United Water's cash flow or ability to pay dividends,
nor did it affect the long-term benefit the Company expected to derive from its
investment in NWG. See Item 8, Note 2 to the consolidated financial statements
for further details.

     In December 1996, the Company announced its intention to dispose of its
environmental testing business, Laboratory Resources, a wholly-owned subsidiary
of the Company, closing its operations in Teterboro, New Jersey. Subsequently,
in January 1997, it sold its laboratory facility in Brooklyn, Connecticut. The
Company accounted for this disposal in accordance with the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of 
Operations--Reporting the Effects of Disposal of a Segment of a Business, and 
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". The
subsidiary had been operating in a very competitive environment over a prolonged
period of time and had not contributed to the Company's earnings, with a net
loss of $1.5 million in 1996. The operating results of Laboratory Resources
prior to the date of discontinuance are shown separately in the accompanying
statement of consolidated income and all of the financial statements of prior
periods have been restated to reflect the discontinuance of Laboratory
Resources' operations. See Item 8, Note 14 to the consolidated financial
statements for further details.

     In April 1995, the city of Rio Rancho, New Mexico (the City) and the
Company's utility subsidiary, which provided water and wastewater services to
customers in Rio Rancho, entered into an original stipulation in settlement of a
condemnation action and on June 30, 1995, the City assumed possession of the
operations of the utility subsidiary. The original stipulation was contested by
various parties, but the City retained possession of the utility's operations.

     On March 29, 1996, the Company fully settled the condemnation proceeding
with the City. Under the terms of the agreement, the Company accepted $67
million for the water and wastewater systems of its New Mexico operations. This
transaction resulted in an after-tax gain of $4.3 million which is included in
the Company's 1996 earnings. See Item 8, Note 3 to the consolidated financial
statements for further details. 

                                       4
<PAGE>
 
(B)       FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
          ---------------------------------------------

     See Item 1 (c) and Note 16 to the consolidated financial statements in Item
8 below for segment information.

(C)       NARRATIVE DESCRIPTION OF BUSINESS
          ---------------------------------

     As a holding company, United Water does not conduct any business
operations, except through its subsidiaries.

UTILITY INVESTMENTS
-------------------

     The Company's principal business is providing water and wastewater services
to the public at large in areas where its regulated utility subsidiaries possess
franchises or other rights to provide such services. Its utility subsidiaries
are subject to rate regulation, generally by the regulatory authorities in the
states in which they operate.

     United Water New Jersey supplies water service to over 179,000 customers in
60 municipalities in the northeastern part of New Jersey, serving most of Bergen
County and the northern part of Hudson County. The total population served is
about 750,000 persons. United Water New Jersey is subject to rate regulation by
the New Jersey Board of Public Utilities (BPU). United Water New Jersey's
principal source of water supply is the Hackensack River, with a watershed of
113 square miles, and is supplemented by water diversions from additional
streams and rivers, by ground water supplies drawn from wells and by the
purchase of water from contiguous water systems. United Water New Jersey also
obtains stream flow benefits from its wholly-owned subsidiary, United Water New
York, which owns and operates an impounding reservoir, Lake DeForest, on the
Hackensack River in Rockland County, New York, and has available additional
water supply from the Wanaque South Project. The Wanaque South Project, which
was completed in 1987, is a joint undertaking of United Water New Jersey and the
North Jersey District Water Supply Commission. United Water New Jersey has a 50%
interest in the utility plant of the Wanaque South Project and is responsible
for its proportionate share of operating expenses.

     United Water New York supplies water service to over 64,000 customers in
Rockland County, New York, and is subject to rate regulation by the New York
Public Service Commission (PSC). The total population served is approximately
250,000 persons. United Water New York's principal source of supply is derived
from wells and surface supplies, including the Lake DeForest reservoir.

     United Waterworks is a holding company that provides water and wastewater
services to a total of approximately 360,000 customers in 13 states through its
regulated water and wastewater utility subsidiaries. The utility subsidiaries of
United Waterworks serve a total population of about 1,000,000 

                                       5
<PAGE>
 
persons. Its water utilities obtain water primarily from wells and surface
supplies (lakes, ponds, reservoirs and streams), and in a few cases purchase
water wholesale from adjoining water systems, generally owned by municipalities.
United Waterworks' major water utility subsidiaries are generally not dependent
upon water purchased from others, except that United Water New Rochelle, a
wholly-owned subsidiary, purchases all of its water from an aqueduct system that
is owned by and serves the City of New York. United Waterworks believes that its
water utilities have adequate supplies of water for their present requirements,
but anticipates making future capital expenditures to expand their sources of
water supply, primarily through development of additional wells and expansion of
other facilities, to provide for projected increases in future demand because of
customer growth.

     Subsidiaries of United Water Mid-Atlantic own and operate several small
water and wastewater utility systems that provide water supply, wastewater
collection and wastewater transmission services to approximately 6,300 customers
primarily in Plainsboro, Vernon Township and Mt. Arlington, New Jersey. United
Water Mid-Atlantic's subsidiaries are subject to regulation by the BPU.

     The Company's water business is seasonal, as sales tend to be higher during
warm, dry periods. The Company's water utilities operate in some jurisdictions
in which water conservation regulations have from time to time been imposed
during periods of drought. To date, such regulations are not having a material
impact on the Company's results of operations. The Company's water utilities
have not experienced any long-term material disruption of service because of
contamination of their water supplies; however, the Company cannot predict what
effect such events, should they occur, would have on its business.

     In addition, the Company holds a 50% investment in the Northumbrian
Partnership, which acquired a 20% interest in Northumbrian Water Group, a major
investor-owned water and wastewater company in the United Kingdom.  The Company
accounts for this investment under the equity method of accounting.

                                                                               6
<PAGE>
 
     The following table sets forth information concerning United Water's water
and wastewater utility operations, particularly the operations of the nine
larger utilities which in 1998 accounted for 83.9% of United Water's utility
customers, 91.7% of United Water's utility operating revenues and 91.5% of
United Water's net investment in utility plant.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                             # of Customers at      1998
Major Utility Operations                       Dec. 31, 1998      Revenues
--------------------------------------------------------------------------------
                                                                (in thousands)
<S>                                          <C>                 <C>
   United Water New Jersey                        179,000          $125,507 
   United Water New York                           64,000            43,108 
   United Waterworks Subsidiaries:                                          
     United Water Florida                          53,516            27,826 
     United Water Idaho                            59,310            22,662 
     United Water Pennsylvania                     47,437            21,361 
     United Water New Rochelle                     30,243            18,552 
     United Water Delaware                         32,784            17,195 
     United Water Toms River                       45,614            14,563 
     United Water Arkansas                         19,299             7,572 
--------------------------------------------------------------------------------
Subtotal                                          531,203           298,346
Other utility operations                          101,680            27,129
--------------------------------------------------------------------------------
   Total utility operations                       632,883          $325,475
--------------------------------------------------------------------------------
</TABLE>

     The Company's water utility subsidiaries chemically and physically treat,
filter or otherwise improve the quality of the water. Treated water is
distributed to customers through the utility subsidiaries' distribution mains,
assisted by pumping facilities where necessary. The Company's utility operations
provide water that meets or surpasses the minimum standards of the Federal Safe
Drinking Water Act (SDWA) of 1974, as amended.

     Customers.  In 1998, the Company's utility revenues were derived as
     ---------                                                          
follows: 63% from residential customers, 26% from commercial customers, 7% from
industrial customers and 4% from fire protection customers.  Of the Company's
604,811 water utility customers at December 31, 1998, 541,813 (90%) were
residential customers, 54,846 (9%) were commercial customers and 8,152 (1%) were
industrial customers. The Company also had 28,072 wastewater customers at
December 31, 1998, many of whom were also water customers of the Company. The
Company does not depend on any single customer, because no single customer
accounted for more than 10% of the Company's consolidated utility revenues in
1998.

     Capital Expenditures.  The Company's additions to utility plant were $99.7
     --------------------                                                      
million in 1998 as compared to $83.3 million in 1997. For a discussion of the
Company's capital expenditures, see Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, below.

                                       7
<PAGE>
 
     Competition and Franchises.  Substantially all of the Company's utility
     --------------------------                                             
subsidiaries serve an area or areas in which the subsidiaries own and operate
the sole public water or wastewater system. Accordingly, the Company's utility
businesses are, in most cases, free from direct competition. The Company
believes that its utility subsidiaries possess, with relatively minor exceptions
and qualifications, such governmental franchises, water rights, licenses and
permits as are necessary for the continuation of the water and wastewater
operations as now conducted. Many such franchises, rights, licenses and permits
are perpetual and others are expected to be renewed as they expire. The
Company's utility subsidiaries derive their rights to install and maintain
distribution mains under streets and other public places from statutes,
municipal ordinances and permits from state and local authorities. In most
cases, these rights are non-exclusive.

     Governmental Acquisition.  In most of the states in which the Company has
     ------------------------                                                 
water or wastewater operations, there exists the right of governmental
acquisition. The price to be paid under condemnation is usually determined in
accordance with the eminent domain statutes of the state governing the taking of
land or other property by condemnation, which statutes generally provide for the
payment of a price which reflects the fair value of the condemned property. A
condemnation action was commenced in 1994 against United Waterworks' water and
wastewater utility subsidiary in New Mexico and was settled in 1996. See Item 8,
Note 3 to the consolidated financial statements, below.

     Rate Matters.  The Company's utility subsidiaries are subject to regulation
     ------------                                                     
by state regulatory commissions (or, in one case, by a local authority) having
jurisdiction over their respective service areas with regard to rates, services,
safety, accounting, issuance of securities, changes in ownership, control or
organization and other matters. The rates charged by the Company's utility
subsidiaries are fixed by the regulatory authority having jurisdiction over the
respective utility. The Company's present rate structure consists of various
rate and service classifications. The profitability of the Company's utility
subsidiaries is to a large extent dependent upon the timeliness and adequacy of
the rate relief allowed by regulatory authorities. Accordingly, the Company
maintains a centralized rate management staff which monitors expense increases,
capital expenditures and other factors affecting the financial performance of
its utility subsidiaries and prepares, files and litigates rate cases. In
certain jurisdictions, procedures have been established by the utility
regulatory authorities to permit a more rapid, and less costly, recovery of
certain expense increases. The Company believes that all of its regulated
utilities are in compliance in all material respects with the appropriate state
regulations. For a discussion of rate increases granted to the Company's utility
subsidiaries in 1998 as well as other rate matters, see Item 8, Note 11 to the
consolidated financial statements, below.

                                       8
<PAGE>
 
NON-REGULATED OPERATIONS
------------------------

     Several of the Company's subsidiaries are engaged in activities which are
not subject to regulation of rates, service and similar matters by state public
utility commissions.  The Company's principal non-regulated operations include
(a) United Properties, a subsidiary engaged in real estate activities, (b) a 50%
investment in United Water Services, which provides contract operations and
maintenance services for water and wastewater facilities and (c) public-private
partnerships with the cities of Jersey City and Hoboken, New Jersey.

     United Properties  United Properties is a non-regulated business engaged in
     -----------------                                                          
real estate investment and development activities, including commercial office
and retail properties, residential and commercial land development and sales,
golf course operations and consulting services.  United Properties owns and
manages a portfolio of real estate located in New Jersey, New York, Delaware,
Idaho and Florida.  United Properties also provides consulting and advisory
services in support of the real estate assets of the other United Water
companies.

     United Water Services  As mentioned above, on July 28, 1997, United Water
     ---------------------                                                    
Services acquired the remaining 50% stake in JMM Operational Services.

     United Water Services provides contract operations and maintenance services
for water and wastewater facilities and is pursuing additional contract
operations. As a result, United Water Services was awarded several contracts.
The largest awards include a ten-year contract to operate the wastewater systems
in Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner. United Water Services also operates a
meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.

     In July 1997, the Company's subsidiaries, United Water Canada and United
Water Mexico, acquired a 30% and a 20% interest in UWS Canada and UWS Mexico,
respectively, which provide contract operations and maintenance services for
water and wastewater facilities. In December 1998, United Water purchased
additional interests and now has a 33.3% and a 20.5% interest in UWS Canada and
UWS Mexico, respectively. The Company's investments in United Water Services,
UWS Canada and UWS Mexico are accounted for under the equity method of
accounting.

     Public-Private Partnerships  United Water is forming public-private
     ---------------------------                                        
partnerships and similar arrangements in which municipalities retain ownership
of their systems while the Company operates and maintains them. The Company
entered into public-private partnerships with the cities of Jersey City and
Hoboken, New Jersey in May 1996 and July 1994, respectively.

                                       9
<PAGE>
 
EMPLOYEE RELATIONS
------------------

     The Company and its subsidiaries have approximately 1,400 employees.
Subsidiaries of the Company are parties to agreements with labor unions covering
approximately 560 employees at 10 locations. During the past five years, the
Company has experienced no work stoppages. The Company considers its employee
relations to be good.

ENVIRONMENTAL REGULATION
------------------------

     The Company and its subsidiaries are subject to environmental regulation by
state and federal agencies. The state agencies typically consist of one
responsible for public health and another responsible for environmental
protection. The United States Environmental Protection Agency (EPA) administers
numerous federal statutes which encompass both public health and environmental
protection concerns.

     At the Federal level, the SDWA provides minimum standards for potable water
quality and monitoring. State statutes and regulations, which are also
applicable, impose standards which, in some cases, are more stringent than the
Federal standards. The Company believes that all its water utilities are
currently in compliance in all material respects with, and have all permits
required by, the SDWA and other applicable Federal and state health and
environmental statutes and regulations.

     During 1996, the EPA issued revisions and a timetable for future revisions
of its regulations, which resulted in additional and more stringent standards
under the SDWA. Although the Company projects that additional expenditures for
utility plant will be required as a result of the 1996 amendments to the SDWA,
it anticipates that regulatory authorities will allow a recovery of and return
on any investment needed. Accordingly, the Company does not expect any
significant adverse financial impact from these regulations on the Company's
results of operations or financial condition.

     The Federal Water Pollution Control Act, also known as the Clean Water Act,
and state laws in a number of jurisdictions regulate certain effluent discharges
into waterways. These laws are administered by the EPA at the federal level and
by state agencies. These laws require the Company's utility subsidiaries to
obtain permits for effluent discharges associated with water and wastewater
treatment operations and these permits typically impose limitations with respect
to quality and quantity of effluent discharges. The Company believes that its
utility subsidiaries are currently in compliance in all material respects with,
and have all permits required by, these pollution control statutes.
 
                                      10
<PAGE>
 
     Of the projected $262 million (excluding the effects of inflation)
aggregate capital expenditures of United Water's utility subsidiaries over the
next five years, approximately 25% are estimated to be related to compliance
with environmental laws and regulations.

(D)  FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
     ----------------------------------------------------------------------
     SALES
     -----

     Northumbrian Partnership In June 1996, a wholly-owned subsidiary of United
     ------------------------                                                  
Water, and Lyonnaise Europe, formed the Partnership, which has acquired a 20%
interest in NWG, a major investor-owned water and wastewater company in the
United Kingdom. The Company accounts for this investment under the equity method
of accounting. See Item 8, Note 2 to the consolidated financial statements,
below.

     United Water Services  In July 1997, the Company's subsidiaries, United
     ---------------------                                                  
Water Canada and United Water Mexico, acquired a 30% and a 20% interest in UWS
Canada and UWS Mexico, respectively, which provide contract operations and
maintenance services for water and wastewater facilities. In December 1998,
United Water purchased additional interests and now has a 33.3% and a 20.5%
interest in UWS Canada and UWS Mexico. The Company accounts for these
investments under the equity method of accounting.

                                      11
<PAGE>
 
ITEM 2.   PROPERTIES
-------   ----------

REGULATED UTILITY OPERATIONS
----------------------------

     United Water's utility subsidiaries own, operate and maintain a total of
406 wells, 104 water treatment plants, with the largest plant having treatment
capacities of up to 200 million gallons per day (MGD), 16 wastewater treatment
plants, with the largest plant having treatment capacities of up to 3.25 MGD,
and 219 ground and elevated storage tanks. The Company's utility subsidiaries
also own numerous impounding basins, lift stations and purification stations,
generally located on land owned by the respective subsidiaries. In addition, the
Company's utility subsidiaries own a total of approximately 7,522 miles of water
transmission and distribution mains and 328 miles of wastewater collection
mains. The water mains and wastewater collection facilities are located in
easements and rights-of-way on or under public highways, streets, waterways and
other public places pursuant to statutes, municipal ordinances and permits from
state and local authorities, or on or under property owned by the respective
subsidiaries or occupied under property rights from the owners, which rights are
deemed adequate for the purposes for which they are used. In addition, the
Company's subsidiaries own pipelines, meters, services, fire hydrants,
transportation vehicles, construction equipment, office furniture and equipment,
and computer equipment. United Water's subsidiaries own or lease office space at
their respective locations.

     In connection with the Wanaque South Project, United Water New Jersey owns
a 17-mile aqueduct from the Wanaque Reservoir to the Oradell Reservoir, along
with a booster pumping station.  United Water New Jersey also owns 50% of the
other elements of the Wanaque South Project, including an 11-mile aqueduct and
related pump stations, a roller compacted concrete dam and reservoir, and has
contracted rights to yields derived from the Passaic and Ramapo rivers.

NON-REGULATED OPERATIONS
------------------------

     United Properties owns approximately 570 acres of land held for sale or
under development principally in New Jersey, New York and Florida, and 567,671
square feet of office and retail properties. In addition, United Properties owns
or holds interests in two golf properties in New Jersey.
 
                                      12
<PAGE>
 
ITEM 3.   LEGAL  PROCEEDINGS
-------   ------------------

     A class action lawsuit was filed in the Supreme Court of the State of New
York, New York County, on May 28, 1996 by Steven Tagliaferri and John
Ambroselli, individually and on behalf of a class of employees (Plaintiffs)
against United Metering Inc., an affiliate of United Water Services, for breach
of contract. Plaintiffs claim that United Metering failed to comply with
prevailing wage rate regulations in connection with work performed pursuant to
certain public works contracts awarded by the New York City Department of
Environmental Protection. The damages sought are in excess of $600,000. United
Metering filed a response denying Plaintiffs' claims and made a motion for
summary judgment seeking dismissal of the lawsuit. Oral argument on such motion
was held on March 14, 1997 and on April 1, 1997, a decision was issued granting
United Metering's motion to dismiss the lawsuit. Plaintiffs appealed the
decision to the Appellate Division of the Supreme Court of the State of New
York. Arguments were heard in October 1998 and a settlement in principle in the
amount of $285,000 was reached in December 1998 prior to the issuance of the
Appellate Division's decision.

     On July 20, 1994, the Townhouse at Lake Isle Home Owners Association, Inc.
filed suit against United Water New Rochelle (formerly New Rochelle Water
Company), a subsidiary of United Waterworks, in the Supreme Court of the State
of New York, Westchester County (the Westchester Court). The suit seeks to
recover for alleged property damage arising out of repeated leaks in service
lines installed in or about 1982 by the developer of a townhouse complex in
Eastchester, New York. The bulk of the relief sought by the plaintiff involves
monetary damages for the cost of replacing the service lines, which belong to
United Water New Rochelle. The plaintiff did not seek injunctive relief. A
default judgment on the issue of liability was entered against United Water New
Rochelle on December 2, 1994. United Water New Rochelle has diligently
prosecuted motions to reopen and appeal from the default judgment, on the
principal ground that the default resulted from a failure by United Water New
Rochelle's insurance carrier and claims processing service provider to timely
file an answer to the plaintiff's complaint. To date, motions to vacate the
default judgment have not been successful. Following a hearing on the issue of
damages, the Westchester Court issued a decision, dated December 20, 1996,
awarding the plaintiff $1,330,000. The Westchester Court subsequently partially
vacated its December 20, 1996 decision on the ground that the relief granted
exceeded the plaintiff's original demand and reduced the award to $805,000. On
October 7, 1997, the Westchester Court entered a judgment in favor of the
plaintiff in the amount of $862,758, which included interest from December 20,
1996. United Water New Rochelle has appealed the judgment and the prior
decisions on its motions to vacate the default judgment. United Water New
Rochelle believes that it has meritorious arguments on appeal and on the
original matter, should it be reopened. Further, United Water New Rochelle has
initiated a legal action seeking reimbursement from 

                                      13
<PAGE>
 
third parties of any ultimate liability resulting in this matter. Management
believes the resolution of this matter will not have a material adverse effect
upon the financial position or results of operations of the Company.

     United Water Toms River, a wholly-owned subsidiary of United Waterworks,
has been approached by counsel for several families in its franchise area to
notify them that counsel is considering filing a class action lawsuit naming
United Water Toms River as one of at least three defendants and alleging
personal injuries sustained as a result of contaminated water being delivered to
the potential plaintiffs. Counsel has reviewed testing data accumulated by the
New Jersey Department of Environmental Protection and United Water Toms River
which show that United Water Toms River has delivered water to its customers in
complete conformance with all applicable federal and state water quality
standards. Suit has not been filed. An agreement tolling the statute of
limitations for at least eighteen months has been signed with the potential
plaintiffs and took effect February 1998. United Water Toms River has also
entered into a joint defense agreement with other potential defendants, Ciba-
Geigy and Union Carbide. This agreement will allow the potential defendants to
work together until all disputes with the potential plaintiffs have been
resolved.

     During September 1998, David Chardavoyne, a former senior executive of the
Company, brought a lawsuit against the Company in the United States District
Court for the District of Connecticut. In the lawsuit, Chardavoyne claims that
the Company breached and wrongfully terminated his employment agreement. His
complaint seeks over $1 million in damages. Management believes it has
meritorious defenses to this lawsuit. Management further believes the resolution
of this matter will not have a material adverse effect upon the financial
position or results of operations of the Company.

     On September 22, 1998, Ramapo Land Co., Inc. commenced a lawsuit against
United Water New York (UWNY), a wholly-owned subsidiary of the Company, in the
Supreme Court of the State of New York, Rockland County, seeking specific
performance of certain provisions of a 1990 Water Release Agreement between UWNY
and Ramapo Land. The Water Release Agreement allows UWNY to release water from
Cranberry and Potake Lakes to augment flows in the Ramapo River. The lawsuit
alleges that UWNY has failed to meet certain maintenance and repair obligations
with respect to Cranberry and Potake dams and that water releases have exceeded
permitted levels. Management is vigorously defending the litigation and is
actively pursuing settlement. If the lawsuit is not resolved successfully,
UWNY's water releases from Cranberry and Potake Lakes could be affected, which
in turn could impact UWNY's operation of the Ramapo Valley Well Field during
periods when the Ramapo River is at low flow. Management believes that the
resolution of this matter will not have a material adverse effect upon the
financial position or results of operations of the Company. 

                                      14
<PAGE>
 
     On January 22, 1998, the Pierson Lakes Homeowners Association, Inc. and
various individuals (Plaintiffs) commenced a lawsuit against UWNY and Ramapo
Land Co., Inc. in the Supreme Court of the State of New York, Rockland County.
This litigation is related to the above-referenced lawsuit by Ramapo Land Co.,
Inc. against UWNY in connection with maintenance and repair obligations and
water releases from Cranberry and Potake Lakes. The Pierson Lakes lawsuit seeks
declaratory relief, injunctive relief and money damages against UWNY and Ramapo
Land Co. in amounts in excess of $25 million. In addition to claims relating to
alleged failure to maintain the dams and spillways, Plaintiffs claim that the
water releases have damaged the recreational and aesthetic value of the lakes,
as well as their docks, boats and other personal property. Management is
vigorously defending this action and is also pursuing settlement negotiations
with the various parties. Management believes that the resolution of this matter
will not have a material adverse effect upon the financial position or results
of operations of the Company.

     United Water is not a party to any other litigation other than routine
litigation incidental to the business of United Water.  None of such litigation,
either individually or in the aggregate, is material to the business of United
Water.



ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------   ---------------------------------------------------

     During the fourth quarter of 1998, there were no matters submitted to a
vote of security holders.

                                      15
<PAGE>
 
                                    PART II
                                    -------

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-------   ---------------------------------------------------------------------

     United Water's common stock is traded on the New York Stock Exchange under
the symbol UWR. The high and low sales prices for United Water's common stock
for 1998, 1997 and 1996 and the dividends paid on the common stock in each
quarter were as follows:

<TABLE>
<CAPTION>
(dollars)                             STOCK PRICE                 DIVIDEND
--------------------------------------------------------------------------------
QUARTER                           HIGH           LOW
--------------------------------------------------------------------------------
<S>                             <C>            <C>                <C> 
1998    Fourth                  $25.000        $16.500              $.24
        Third                    19.250         16.375               .23  
        Second                   18.438         15.750               .23
        First                    19.875         17.500               .23
--------------------------------------------------------------------------------
1997    Fourth                  $19.750        $16.000              $.23 
        Third                    19.813         17.000               .23
        Second                   19.375         16.375               .23
        First                    18.500         15.000               .23
--------------------------------------------------------------------------------
1996    Fourth                  $16.625        $14.625              $.23
        Third                    17.500         12.750               .23  
        Second                   13.500         12.000               .23
        First                    13.250         12.000               .23 
--------------------------------------------------------------------------------
</TABLE>

The high and low stock prices from January 1 to February 28, 1999, were $24.063
and $19.250. There were 18,059 holders of record of United Water's common stock
as of February 28, 1999.

     Dividend Policy  The Company has paid continuous cash dividends on its
     ---------------                                                       
common stock since 1886. Under the Company's current common stock dividend
policy, quarterly dividends are paid by the Company, generally on March 1, June
1, September 1 and December 1. Each future declaration of dividends, however,
shall be made at the sole discretion of the Board of Directors, and only out of
cumulative earnings available therefor.

                                      16
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA
-------   -----------------------

<TABLE> 
<CAPTION> 
                                                                     Year ended December 31,
----------------------------------------------------------------------------------------------------------------
(thousands of dollars except per share data)            1998         1997        1996        1995        1994
----------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>         <C>         <C>         <C> 
Income Statement Data
---------------------
 
Operating revenues                                $  356,210   $  351,409  $  332,045  $  319,536  $  284,767
 
Operating income                                      97,600       95,644      95,699      82,183      83,847
 
Net income applicable to
   common stock                                       43,929       29,331      34,010      17,343      27,887
 
Net income per common share                             1.19          .83        1.01         .54        1.01
 
Net income per common share-
   assuming dilution                                    1.17          .83        1.00         .54        1.01
 
Dividends paid per share                                 .93          .92         .92         .92         .92
================================================================================================================
Balance Sheet Data (at end of period)
-------------------------------------
 
Total assets                                      $1,769,122   $1,658,342  $1,582,097  $1,516,708  $1,457,427
 
Long-term debt                                       652,969      622,737     558,093     558,658     505,204
Preferred stock
   without mandatory redemption                        9,000        9,000       9,000       9,000       9,000
 
Preferred and preference stock
   with mandatory redemption                          80,282       86,579      93,261      98,091      98,173
---------------------------------------------------------------------------------------------------------------
</TABLE>

Operating revenues and operating income represent results from continuing
operations.  Prior year amounts have been restated to conform with current year
presentation.

                                      17
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
-------   ---------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------

SIGNIFICANT ITEMS

The following items had a significant impact on the financial results of United
Water Resources (United Water, or the Company):

INVESTMENT IN UNITED WATER SERVICES

     On July 28, 1997, United Water Services, a 50/50 joint venture between
United Water and Suez Lyonnaise des Eaux acquired the remaining 50% stake in JMM
Operational Services.

     United Water Services provides contract operations and maintenance services
for water and wastewater facilities and is pursuing additional contract
operations. As a result, United Water Services was awarded several contracts.
The largest awards include a ten-year contract to operate the wastewater systems
in Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner. United Water Services also operates a
meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.

     In July 1997, the Company also acquired a 30% and a 20% interest in United
Water Services Canada (UWS Canada) and United Water Services Mexico (UWS
Mexico), respectively. In December 1998, United Water purchased additional
interests and now has a 33.3% and a 20.5% interest in UWS Canada and UWS Mexico,
respectively.

     At December 31, 1998 and 1997, United Water had equity investments,
relating to contract services of approximately $19.8 million and $20.2 million,
respectively, including investments in Canada and Mexico. This amount is
included in equity investments in the accompanying consolidated balance sheet.
United Water's share of earnings in these investments is included in equity
earnings of affiliates in the accompanying statement of consolidated income.

INVESTMENT IN NORTHUMBRIAN PARTNERSHIP

     On June 28, 1996, United Water and Lyonnaise Europe (a wholly-owned
subsidiary of Suez Lyonnaise des Eaux) formed the Northumbrian Partnership (the
Partnership), an equal partnership which has acquired a 20% interest in
Northumbrian Water Group plc (NWG), a major investor-owned water and wastewater
company in the United Kingdom. United Water's initial $62 million investment in
the Partnership was made through its wholly-owned subsidiary in the United
Kingdom, United Water UK Limited. Investment in the Partnership was $96.3
million and $78.7 million at December 31, 1998 and 1997, respectively, and is
included in equity investments in the consolidated balance sheet. United Water's
share of the Partnership's earnings, which totaled $17.1 million and $13.6
million in 1998 and 1997, 

                                      18
<PAGE>
 
respectively, is included in equity earnings of affiliates in the accompanying
statement of consolidated income.

     During 1997, the United Kingdom's new Labor Government imposed a one-time
"windfall profits" tax on privatized utilities. The levying of this one-time tax
negatively impacted the Company's earnings from its investment in NWG by $13.1
million, which was partially offset by the effect of a change in the tax rate on
deferred taxes of $2.8 million. The result was a net impact of $10.3 million.
The imposition of this tax had been factored into the Company's financial
analysis at the time of its investment in NWG and was considered in determining
the purchase price. The tax did not have an effect on United Water's cash flow
or ability to pay dividends, nor did it affect the long-term benefit the Company
expected to derive from its investment in NWG.

DISCONTINUED OPERATIONS

     In December 1996, the Company announced its intention to dispose of its
environmental testing business, Laboratory Resources, a wholly-owned subsidiary
of the Company, closing its operations in Teterboro, New Jersey. Subsequently,
in January 1997, it sold its laboratory facility in Brooklyn, Connecticut. The
Company accounted for this disposal in accordance with the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of 
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions". The
subsidiary had been operating in a very competitive environment over a prolonged
period of time and had not contributed to the Company's earnings, with a net
loss of $1.5 million in 1996. The operating results of Laboratory Resources
prior to the date of discontinuance are shown separately in the accompanying
statement of consolidated income and all of the financial statements of prior
periods have been restated to reflect the discontinuance of Laboratory
Resources' operations. See Note 14 to the consolidated financial statements for
further details.

TRANSFER OF NEW MEXICO OPERATIONS

     United Waterworks owned a utility subsidiary which provided water and
wastewater services to customers in Rio Rancho, New Mexico. In April 1995, the
city of Rio Rancho (the City) and the Company's utility subsidiary entered into
an original stipulation in settlement of a condemnation action and on June 30,
1995, the City assumed possession of the operations of the utility subsidiary.
The original stipulation was contested by various parties, but the City retained
possession of the utility's operations.

     On March 29, 1996, the Company fully settled the condemnation proceeding
with the City. Under the terms of the agreement, the Company accepted $67
million for the water and wastewater systems of its New Mexico operations. This
transaction resulted in an after-tax gain of $4.3 million which is included 

                                      19
<PAGE>
 
in the Company's 1996 earnings.

LIQUIDITY AND CAPITAL RESOURCES

     As shown in the consolidated statement of cash flows, the Company's major
uses of cash in 1998 included: $106 million of capital expenditures and $38.5
million of common, preferred and preference dividends paid to shareholders. The
major sources of funds to meet these cash needs included: $85.2 million of
additional long-term debt; $80.2 million of cash provided by operations; $23.1
million of proceeds from the issuance of additional shares of common stock; and
an $18.5 million increase in short-term notes payable.

     Capital expenditures are generally incurred by United Water's utility
subsidiaries in connection with the normal upgrading and expansion of existing
water and wastewater facilities and to comply with existing environmental
regulations. United Water considers its utility plant to be adequate and in good
condition. These capital expenditures are necessary to meet growth requirements
and to comply with environmental laws and regulations. Excluding the effects of
inflation, the capital expenditures of United Water's utility subsidiaries are
projected to aggregate $262 million over the next five years, including $57
million and $58 million in 1999 and 2000, respectively. This total includes $165
million for United Waterworks and $92 million for United Water New Jersey and
United Water New York. The expenditures related to compliance with environmental
laws and regulations are estimated to be approximately 25% of the projected
capital expenditures over the 1999-2003 period. To the best of management's
knowledge, the Company is in compliance with all major environmental laws and
regulations.

     United Water anticipates that its future capital expenditures will be
funded by internally generated funds, external debt financings and the issuance
of additional common and preferred stock, including shares issued to existing
shareholders, bondholders, customers, and employees under the Company's dividend
reinvestment and stock purchase plans. In addition, United Water's regulated
utilities participate in a number of tax-exempt financings to fund capital
expenditures. The companies draw down funds on these financings as qualified
capital expenditures are made. As of December 31, 1998, $48.5 million of
proceeds from these financings had not yet been disbursed to the Company and are
included in the consolidated balance sheet as restricted cash. The amount and
timing of the use of these proceeds and of future financings will depend on
actual capital expenditures, the timeliness and adequacy of rate relief, the
availability and cost of capital, and the ability to meet interest and fixed
charge coverage requirements.

     In June 1997, United Water issued $40 million of 7.45%-7.9% Senior Notes
($15 million due 2007 and $25 million due 2022).  Proceeds from the notes were
used to refinance existing short-term debt of the Company.

                                      20
<PAGE>
 
     In August 1997, United Waterworks issued $20 million of 5.3% tax-exempt
Water Resource Development Revenue Bonds, due 2027, through the Idaho Water
Resource Board.  The proceeds are being used to finance a portion of the costs
of certain facilities to be owned by United Water Idaho (a subsidiary of United
Waterworks).

     In December 1994, United Waterworks entered into a medium-term note program
that enabled United Waterworks to issue up to $75 million of debt with terms
ranging from 9 months to 30 years. The interest rates are set as notes are
issued under the program. The first $10 million of notes under this program were
issued in 1995. In October 1997, United Waterworks issued $15 million of notes
under this program, at a rate of 6.8%, with the full amount maturing in 2007. In
February 1998, United Waterworks issued an additional $40 million of notes ($20
million at 6.97% due 2023, $15 million at 7.1% due 2028 and $5 million at 6.9%
due 2017). In November 1998, United Waterworks issued the final $10 million of
notes under this program ($5 million at 6.44% due 2008 and $5 million at 6.97%
due 2023). The proceeds were used to redeem outstanding notes payable.

     In June 1996, United Water entered into a $30 million long-term note
agreement with Credit Lyonnais to partially fund its investment in the
Northumbrian Partnership. The loan bears interest at a London Interbank Offered
Rate based floating rate and is payable in annual installments through June
2006. In December 1998, the Company entered into an interest rate swap agreement
which fixed the interest rate at 5.24% for 1999 and 5.34% for the years 2000
through 2003.

     In December 1998, United Water New Jersey issued $35 million of 5% Water
Facilities Revenue Bonds through the New Jersey Economic Development Authority
due 2028. The proceeds are being used to finance the cost of acquiring,
constructing and reconstructing certain water transmission, transportation,
storage, treatment, and distribution facilities located in Passaic, Bergen,
Sussex, and Hudson counties in New Jersey.

     In January 1999, United Water issued $30 million of Senior Notes ($5
million at 6.07% due 2005, $10 million at 6.43% due 2009, $10 million at 6.7%
due 2019, and $5 million at 7.04% due 2019). The proceeds were used to redeem
all remaining shares of 7 5/8% Series B cumulative preferred stock. See Note 7
to the consolidated financial statements for further details.

     At December 31, 1998, United Water had cash and cash equivalents of $8
million (excluding restricted cash) and unused short-term bank lines of credit
of $186.4 million. Management expects that cash flows provided by operations,
unused credit lines currently available and cash generated from the dividend
reinvestment and stock purchase plans will be sufficient to meet anticipated
future operational needs.

                                      21
<PAGE>
 
YEAR 2000 COMPLIANCE

OVERVIEW
--------

     United Water is implementing a Year 2000 (Y2K) program designed to
mitigate, to the fullest extent possible, the impact of the century date change
on the Company's computer systems and automated processes, including those that
affect the delivery of water and wastewater services. The Company initiated this
program in 1994 with the Information Technology Strategic Plan (the ITSP), which
addressed all areas of technology and automation within United Water. A key
component of that plan was the identification of the Y2K problem and the need to
address Y2K issues affecting all aspects of the Company's operations. With
respect to each project or initiative undertaken at United Water since 1994 that
has Y2K ramifications, the Company has addressed "Y2K readiness" as a critical
component of that project.

     United Water defines Y2K readiness as the ability of the Company to advance
into the next century with minimal effect on the Company's critical computer
systems and automated processes that control the delivery of water and
wastewater services, and affect the Company's operations, liquidity or financial
condition.

     The Y2K program addresses internal systems and processes consisting of
application software, hardware, databases, networks, personal computers, data
processing equipment and operating systems (collectively, information technology
or IT systems) and embedded technology or microprocessors in non-computer
equipment (collectively, non-IT systems). The Y2K program also addresses the
assessment and monitoring of the Y2K compliance status of third parties upon
which the Company relies. This program encompasses the following five phases: 1)
survey and inventory, 2) assessment of risk, including the identification and
survey of critical vendors and service providers, 3) remediation of non-
compliant systems, including the replacement of aging legacy applications, 4)
testing and validation of the remediation efforts, and 5) contingency planning
and related testing.

     In addition, management believes that United Water has complied with the
various Y2K requirements of the regulatory agencies that supervise its
activities. Such compliance includes responding to surveys and questionnaires,
filing status reports, participating in task forces and sub-committees for the
purpose of meeting Y2K readiness targets, and contingency planning efforts.

                                      22
<PAGE>
 
THE COMPANY'S STATE OF READINESS
--------------------------------

     Consistent with the five phases of the Y2K program, the primary element in
United Water's Y2K readiness strategy has been to replace aging IT and non-IT
systems, where necessary. This strategy evolved from ITSP which, independent of
the Y2K program, identified the need to replace technical infrastructure,
including IT and non-IT systems, in order to position United Water and its
operating affiliates for a smooth transition into the 21st century. In addition
to replacement activities, the Company has also undertaken remediation efforts
to upgrade, repair and improve existing IT and non-IT systems where appropriate.
These efforts are intended to result in the replacement and upgrading of IT and
non-IT systems critical to the operation of the Company, including the provision
of water and wastewater services, financial applications, customer information
systems and operational systems, such as the Supervisory Control and Data
Acquisition System (SCADA), which monitors and controls industrial processes.

     In addition, United Water is currently refining contingency plans and
related tests to further mitigate the risk of service interruptions at each of
its locations. These contingency plans have been developed, and the testing of
each plan is anticipated to be completed by the end of the first quarter of
1999. The major focus of the contingency plans is to address the possibility of
automation failure of critical vendors and service providers so that the Company
can sustain its operational systems in the event of any such failure.

     As of December 31, 1998, the status of the Company's progress toward
completion of the five phases of the Y2K program was as follows: 1) survey and
inventory: IT 100%, non-IT 100%; 2) assessment of risk: IT 99%, non-IT 99%; 3)
remediation: IT 93%, non-IT 93%; 4) testing: IT 50%, non-IT 50%; and 5)
contingency planning: IT 60%, non-IT 60%. All replacements and upgrades are
scheduled to be completed by the end of the second quarter of 1999.

     In addition to its own Y2K program, the Company has been involved with Y2K
compliance efforts undertaken by one of its equity investments, United Water
Services (UWS).

     UWS, which is engaged in providing contract operations to U.S. cities, is
implementing a Y2K program following the guidelines established by the Company.
This program has been applied to all UWS's project sites and has resulted in the
production of inventories, risk assessments, testing methodologies and
contingency plans for Y2K compliance.  All systems are expected to be finalized
and tested by the end of the second quarter of 1999.

                                      23
<PAGE>
 
     Where UWS has assumed responsibility for part or all of the Y2K compliance
efforts of its operating affiliates in the various cities, it is actively
coordinating Y2K corrective measures with the cities and their Y2K consultants
or representatives, where applicable, to mitigate business interruption
exposures associated with the Y2K problem.

     United Water is maintaining close contact with UWS and other entities in
which it has equity interests to ascertain that appropriate and prudent action
is being taken in order to achieve Y2K compliance.

RELATIONSHIPS WITH THIRD PARTIES
--------------------------------

     United Water has identified the following third party relationships to be
addressed as part of the Y2K program: regulatory agencies, critical vendors and
service providers.

     United Water is in continuous communication with appropriate regulatory
agencies regarding the Y2K issue. All requests for information and status
reports, as well as other specific regulatory requirements are handled on a
priority basis. Management believes that the Company is in compliance with all
regulatory matters relating to Y2K.

     The Company has contacted its critical vendors and service providers to
determine the degree of their Y2K readiness. The responses received to date
indicate that those vendors and service providers either are or will be Y2K
compliant. The status of those vendors and service providers who have either not
responded or are not yet compliant is being tracked closely. The electric power
and telecommunications industries have been identified as the most critical
service providers for the water industry. In the localities in which United
Water operates, it is closely monitoring the progress of the local electric
power and telecommunications companies and will continue to scrutinize the
progress of these providers. The Company is actively monitoring the Y2K
compliance status of its critical vendors and service providers and has received
approximately 75% of responses. The Company intends to continue monitoring these
critical vendors and service providers through its transition into the 21st
century.

COSTS
------

     United Water's Y2K readiness evolved from the strategic initiatives of the
ITSP which was budgeted as part of the Company's ongoing capital expenditures
since 1994. As a result, United Water has been able to keep to a minimum
expenses related to Y2K compliance outside of the ITSP budget. The Company's
principal technology costs to date have been associated with the planned
replacement of IT and non-IT systems, which has not been accelerated due to the
Y2K issue.

                                      24
<PAGE>
 
     United Water estimates its costs to date related to Y2K compliance efforts
that fall outside the ITSP budget are approximately $.2 million.  Additional
non-ITSP budgeted costs expected to be incurred over the remainder of the
program are estimated to be $.7 million.  These costs include SCADA upgrade as
required, internal employee time, as well as other miscellaneous costs.

RISKS
-----

     The most reasonably likely worst case scenarios due to Y2K non-compliance
issues would be fluctuations in water pressure, aesthetic water quality and
other temporary service interruptions. This would be attributable to third party
failures including electric power and telecommunications outages.

     In addition, a Y2K failure from any of the Company's large equity
investments including its investment in the Northumbrian Partnership, could have
a detrimental effect on the Company's results of operations.

     The estimates and conclusions included in the Y2K update are based on
management's best estimates of future events.  The risks involved in completing
Y2K compliance include the availability of resources, unanticipated problems
identified in the ongoing compliance review and the ability of outside vendors
and service providers to be Y2K compliant.

CONTINGENCY PLANS
-----------------

     The primary elements of contingency planning include procurement of back-up
energy sources, typically adding portable power generators where appropriate,
deployment of key personnel on critical dates relating to century date change
and providing for the efficient flow of communication both internally and
externally in the event of interruption of service during critical dates
relating to the century date change.
 
                                      25
<PAGE>
 
RATE MATTERS

     The profitability of United Water's regulated utilities is, to a large
extent, dependent upon adequate and timely rate relief. The Company anticipates
that the regulatory authorities that have jurisdiction over its utility
operations will allow the Company's regulated utilities to earn a reasonable
return on their utility investments.

     The Company continues to follow Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," for
its regulated utilities. SFAS No. 71 provides for the recognition of regulatory
assets and liabilities as allowed by state regulators that are considered
probable of recovery. See Note 1 to the consolidated financial statements.

     During 1998, the Company's regulated utilities received fourteen rate
decisions with an aggregate annual revenue increase of $8.7 million, which
includes $2.4 million in increased revenues effective on an interim basis for
United Water Delaware. An estimated $4.7 million of this amount was reflected in
1998's revenues while the remaining $4 million is expected to increase revenues
in 1999. Current year revenues also reflect the carryover impact of the rate
awards granted in 1997 in the amount of $5.1 million. See Note 11 to the
consolidated financial statements for further details.

     At the end of January 1999, the Company had five rate cases pending
requesting an aggregate annual rate increase of $10.9 million. The most
significant rate cases pending were filed by United Water Florida and United
Water Delaware. These filings were made to meet increased investment in utility
plant and higher operation and maintenance costs. In May 1998, United Water
Florida applied to the Florida Public Service Commission for rate relief in the
amount of $2.2 million, or 24.3%, in water revenues and $3.1 million, or 18.7%,
in wastewater revenues. A decision on the United Water Florida application is
expected before the end of the first quarter of 1999.

     On March 11, 1998, United Water Delaware applied to the Delaware Public
Service Commission for rate relief in the amount of $4.1 million, or 24.8%, in
water revenues. On May 11, 1998, interim rates of $2.4 million were placed in
effect, subject to refund. A decision on this application is expected before the
end of the second quarter of 1999. The Company believes the outcome of this
application will not have a material effect on earnings.

                                      26
<PAGE>
 
     On October 26, 1996, United Water Delaware placed $2.3 million in increased
revenues in effect, subject to refund. On July 15, 1997, the Delaware Public
Utility Commission granted the Company a permanent rate increase of $1.6
million. On July 16, 1997, the Company filed an appeal and application for a
stay of the Commission's Order. On July 29, 1997, the Delaware Superior Court
granted a stay of the Commission decision pending the appeal. On March 31, 1998,
the Superior Court decided in favor of the Commission. The Company appealed this
decision to the Supreme Court of Delaware and on February 11, 1999, the Supreme
Court reversed the Commission's decision which denied the $.7 million annual
revenue increase, subject to refund and remanded the matter to the Commission.
The Company expects that the Commission will enter an Order on remand which will
eliminate the prospect of refunding any part of the $2.3 million.

     The Company has requested and received recovery of its regulatory assets
for postretirement benefits other than pension as well as the recognition of the
current expense for these benefits for the majority of its regulated
subsidiaries. The regulatory assets are expected to be recovered over an average
period of 15 years. At December 31, 1998, three regulated subsidiaries were
awaiting decisions from the applicable commissions. Management believes it will
receive favorable decisions on the pending cases prior to the end of 1999.

     Generally, the rate awards actually received by the Company's operating
utilities are less than the amounts requested, primarily due to differing
positions of the parties involved and/or updated information provided during the
proceedings.

                                      27
<PAGE>
 
REAL ESTATE ACTIVITIES

     United Properties Group (United Properties) owns and manages a portfolio of
real estate located in New Jersey, New York, Delaware, Idaho, and Florida,
consisting of commercial properties, golf courses and land under development.

     United Properties expects to spend $25.9 million over the next five years
for capital expenditures on its existing real estate portfolio, including $8.3
million and $6.9 million in 1999 and 2000, respectively. Funding for United
Properties' activities is anticipated to come from sales of properties,
operations of existing commercial properties and golf courses, and proceeds from
new financings. The timing of these expenditures will depend upon market
conditions and the attainment of necessary approvals.

RESULTS OF OPERATIONS

OVERVIEW

     United Water's net income applicable to common stock for 1998 was $43.9
million, or $1.19 per common share, as compared to $29.3 million, or $.83 per
common share, earned in 1997. Earnings for 1997 included a net $10.3 million
charge resulting from the "windfall profits" tax in the United Kingdom. Income
before non-recurring items was $43.9 million, or $1.19 per common share for 1998
compared with $39.7 million, or $1.12 per common share for 1997. This increase
was attributable to improved domestic utility performance as a result of rate
awards, higher water consumption and a property tax settlement relating to a
prior year. In addition, the Company experienced higher earnings from the
Northumbrian Partnership primarily due to the effect on deferred taxes of a
decrease in the UK corporate tax rate.

     United Water's net income applicable to common stock for 1997 was $29.3
million, or $.83 per common share, as compared to $34 million, or $1.01 per
common share, earned in 1996. Earnings for 1997 included a net $10.3 million
charge resulting from the "windfall profits" tax in the United Kingdom. Income
from continuing operations and before non-recurring items was $39.7 million, or
$1.12 per common share for 1997 compared with $34.1 million, or $1.01 per common
share for 1996. This increase was attributable to a $6 million increase in
equity earnings of affiliates during 1997, which resulted from a full year of
operations in the United Kingdom. Earnings for 1996 included a one-time, after-
tax gain of $4.3 million, or $.13 per common share, resulting from a
condemnation settlement in New Mexico which was offset by a charge relating to
the discontinuance of the Company's environmental testing business.

                                      28
<PAGE>
 
OPERATING REVENUES

     Operating revenues increased $4.8 million, or 1.4%, in 1998 and $19.4
million, or 5.8%, in 1997 from the prior years, as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                        1998 VS. 1997             1997 vs. 1996   
(thousands of dollars)               INCREASE (DECREASE)       Increase (Decrease)
-----------------------------------------------------------------------------------
<S>                                  <C>         <C>           <C>         <C>     
Utilities:                                                                         
   Rate awards                       $ 9,790      2.8%         $10,650      3.2%   
   Consumption                         1,346      0.4%             137      0.0%   
   Growth                                993      0.3%           3,276      1.0%   
Real estate                           (3,879)    (1.1%)          6,306      1.9%   
Other operations                      (3,449)    (1.0%)         (1,005)    (0.3%)  
-----------------------------------------------------------------------------------
                                     $ 4,801      1.4%         $19,364      5.8%   
-----------------------------------------------------------------------------------
</TABLE>

1998 VERSUS 1997

     The 2.8% increase in revenues from rate awards in 1998 includes the impact
of fifteen 1997 and fourteen current year increases for the Company's operating
utilities. Higher consumption due to favorable weather conditions in northeast
service areas resulted in an increase in revenues of $1.3 million in 1998. The
increase in revenues due to growth is partially attributable to increased
customers at several operating utilities. Real estate revenues decreased $3.9
million primarily due to lower land sale revenues as a result of a significant
land sale in the first quarter of 1997, partially offset by higher golf course
revenues. The $3.4 million decrease in operating revenues from other operations
was primarily attributable to the absence of revenues from the Company's meter
installation subsidiary, which was sold in the fourth quarter of 1997, partially
offset by an increase in revenues from the public-private partnership with
Jersey City, New Jersey.

1997 VERSUS 1996

     The 3.2% increase in revenues from rate awards in 1997 includes the impact
of ten 1996 and fifteen 1997 increases for the Company's operating utilities.
The increase in revenues due to growth is partially attributable to the
acquisitions of two utilities in New Jersey in the second quarter of 1996 as
well as increased customers at several operating utilities. Real estate revenues
were higher as compared to 1996, primarily due to a $5.8 million increase in
property sales, which included a significant land sale, in addition to higher
golf course revenues. The $1 million decrease in operating revenues from other
operations was primarily attributable to lower revenues from meter installation
contracts, partially offset by the benefit of a full year of operations from the
public-private partnership with Jersey City, which commenced in May 1996. In
December 1997, United Water sold United Metering, its meter installation
subsidiary, to United Water Services. As a result, United Water retains 50%
ownership in United Metering.

                                      29
<PAGE>
 
OPERATING EXPENSES

     Operating expenses increased $2.8 million in 1998 and $19.4 million in 1997
from the prior years, as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------
                                     1998 VS. 1997      1997 vs. 1996

(thousands of dollars)             DECREASE INCREASE       Increase
-------------------------------------------------------------------------
<S>                                <C>        <C>       <C>      <C>
Operation and maintenance          $  (560)   (0.3%)    13,069    8.4%
Depreciation and amortization        5,256    15.1%      3,842   12.5%
General taxes                       (1,851)   (3.6%)     2,508    5.1%
-------------------------------------------------------------------------
</TABLE>

1998 VERSUS 1997

     The decrease in operation and maintenance expenses was due primarily to the
absence of costs from the Company's meter installation subsidiary, which was
sold in the fourth quarter of 1997 as well as a $3.9 million decrease in the
cost of real estate properties sold, primarily due to a significant land sale in
the first quarter of 1997.  This was partially offset by the write-off of
deferred start-up charges under Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" as well as higher outside services and employee
benefits costs at several of the Company's subsidiaries.

     The $5.3 million increase in depreciation and amortization was primarily
attributable to utility plant additions by the Company's utility subsidiaries,
as well as accelerated amortization associated with the service contract in
Jersey City.

     General taxes decreased $1.9 million, or 3.6%, in 1998 primarily due to a
property tax settlement received in the fourth quarter of 1998.  This was
partially offset by higher real estate, franchise and gross receipts taxes in
utility operations.

1997 VERSUS 1996

     The increase in operation and maintenance expenses was due primarily to a
$2.6 million increase in the cost of real estate properties sold, $2.4 million
in additional operating expenses as a result of a full year of operations of the
public-private partnership with Jersey City, higher outside services and
employee benefits costs at several of the Company's subsidiaries, and additional
operating expenses incurred relating to the acquisitions of two utilities in New
Jersey in May 1996.  These increases were partially offset by lower costs from
meter installation contracts.

     The $3.8 million increase in depreciation and amortization was primarily
attributable to utility plant additions by United Waterworks' utility
subsidiaries, as well as amortization associated with the service contract in
Jersey City .

     General taxes increased $2.5 million, or 5.1%, in 1997 primarily due to
higher real estate, franchise and gross receipts taxes in utility operations.

                                      30
<PAGE>
 
INTEREST EXPENSE

     Interest expense increased $.5 million in 1998 and $.4 million in 1997
compared to prior years. See the statement of consolidated capitalization and
Note 4 to the consolidated financial statements for further details on long-term
debt and notes payable.

EQUITY EARNINGS OF AFFILIATES

     The $.8 million increase in equity earnings of affiliates in 1998 was due
mainly to a $3.5 million increase in earnings from the Northumbrian Partnership
which resulted primarily from the effect on deferred taxes of a decrease in the
UK corporate tax rate.

     This was partially offset by a $2.2 million decrease in combined earnings
from United Water Services, UWS Canada and UWS Mexico. This decrease was
primarily attributable to business development costs associated with ongoing
efforts to expand contract operations. One of the successes resulting from these
efforts came in November 1998, when United Water Services was awarded a 20-year
contract, with annual revenues of $21.4 million, to operate the water system in
Atlanta, Georgia, with a minority partner. The Company also experienced lower
equity earnings as a result of a one-time condemnation settlement by its other
equity investment, Dundee Water Power and Land.

INCOME TAXES

     The effective income tax rates on income before preferred and preference
stock dividends were 27.9% in 1998, 36.4% in 1997 and 36.5% in 1996. An analysis
of income taxes is included in Note 12 to the consolidated financial statements.

NEW ACCOUNTING STANDARDS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" effective for all fiscal
years beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income. Due to its limited use of derivative instruments,
management believes the adoption of SFAS No. 133 will not have a significant
effect on the Company's financial position or results of operations.

                                      31
<PAGE>
 
EFFECTS OF INFLATION

     Operating income from utility operations is normally not materially
affected by inflation because cost increases generally lead to proportionate
increases in revenues allowed through the regulatory process. However, there is
a lag in the recovery of higher expenses through the regulatory process, and
therefore, high inflation could have a detrimental effect on the Company until
rate increases are received. Conversely, lower inflation and lower interest
rates tend to result in reductions in the rates of return allowed by the utility
commissions, as has occurred over the last several years.

PROSPECTIVE INFORMATION

     In addition to the historical information contained herein, this report
contains a number of "forward-looking statements," within the meaning of the
Securities Exchange Act of 1934. Such statements address future events and
conditions concerning the adequacy of water supply and utility plant, capital
expenditures, earnings on assets, resolution and impact of litigation, liquidity
and capital resources and accounting matters. Actual results in each case could
differ materially from those projected in such statements, by reason of factors
including, without limitation, general economic conditions, competition, actions
by regulators and other governmental authorities, and technological developments
affecting the Company's operations, markets, services and prices, and other
factors discussed in the Company's filings with the Securities and Exchange
Commission, including this report.

                                       32
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------   -------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

<TABLE> 
<CAPTION> 
                                                                         PAGE
                                                                         ----
     <S>                                                                 <C>
     Financial Statements:
 
     Report of Independent Accountants                                        34
 
     Consolidated Balance Sheet at
        December 31, 1998 and 1997                                            35
 
     Statement of Consolidated Income for each of the
        years ended December 31, 1998, 1997 and 1996                          36
 
     Statement of Consolidated Common Equity for each of
        the years ended December 31, 1998, 1997 and 1996                      37
 
     Statement of Consolidated Cash Flows for each of the
        years ended December 31, 1998, 1997 and 1996                          38
 
     Statement of Consolidated Capitalization at
        December 31, 1998 and 1997                                            39
 
     Notes to Consolidated Financial Statements                          40 - 66

     Financial Statement Schedules:
        For the three years ended December 31, 1998
          VIII -  Consolidated Valuation and Qualifying Accounts              73
</TABLE>

All other schedules are omitted because they are not applicable, or the required
information is shown in the consolidated financial statements or notes thereto.
Financial statements of any 50%-owned investments have been omitted because the
registrant's proportionate share of net income and total assets of each is less
than 20% of the respective consolidated amounts, and the investment in and the
amount advanced to each is less than 20% of consolidated total assets.

                                       33
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS


To The Board of Directors and Shareholders of
United Water Resources

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

PRICEWATERHOUSECOOPERS LLP
New York, New York
February 25, 1999

                                       34
<PAGE>
 
                          CONSOLIDATED BALANCE SHEET
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                            December 31,
(thousands of dollars)                                                                  1998           1997
--------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>           <C>       
ASSETS                                                                                                       
UTILITY PLANT, including $47,348 and $49,301 under construction                      $1,540,564    $1,439,854
   Less accumulated depreciation                                                        328,224       296,820
                                                                                     ----------    ----------
                                                                                      1,212,340     1,143,034
UTILITY PLANT ACQUISITION ADJUSTMENTS,                                                                       
   Less accumulated amortization of $11,411 and $9,527                                   61,320        63,026

REAL ESTATE AND OTHER INVESTMENTS,                                                                           
   Less accumulated depreciation of $13,628 and $11,497                                  81,630        79,487
EQUITY INVESTMENTS                                                                      116,598        99,197
                                                                                     ----------    ----------
                                                                                        198,228       178,684

CURRENT ASSETS:                                                                                              
   Cash and cash equivalents                                                              8,011         8,546
   Restricted cash                                                                       48,495        34,581
   Accounts receivable and unbilled revenues, less allowance of $1,204 and $2,528        59,693        57,723
   Prepaid and other current assets                                                      12,235        11,705
                                                                                     ----------    ----------
                                                                                        128,434       112,555

DEFERRED CHARGES AND OTHER ASSETS:                                                                           
   Regulatory assets                                                                     76,548        79,748
   Prepaid employee benefits                                                             29,237        21,426
   Unamortized debt expense                                                              34,745        31,019
   Other deferred charges and assets                                                     28,270        28,850
                                                                                     ----------    ----------
                                                                                        168,800       161,043
                                                                                                             
                                                                                     $1,769,122    $1,658,342
                                                                                     ==========    ==========

CAPITALIZATION AND LIABILITIES                                                                               
CAPITALIZATION:                                                                                              
   Common stock and retained earnings                                                $  456,029    $  418,601
   Preferred stock without mandatory redemption                                           9,000         9,000
   Preferred stock with mandatory redemption                                             49,748        51,838
   Preference stock, convertible, with mandatory redemption                              30,534        34,741
   Long-term debt                                                                       652,969       622,737
                                                                                     ----------    ----------
                                                                                      1,198,280     1,136,917

CURRENT LIABILITIES:                                                                                         
   Notes payable                                                                         93,400        74,925
   Preferred stock and long-term debt due within one year                                 5,795         8,022
   Accounts payable and other current liabilities                                        36,525        32,833
   Accrued taxes                                                                         24,257        26,878
   Accrued interest and dividends                                                         8,023         8,117
                                                                                     ----------    ----------
                                                                                        168,000       150,775

DEFERRED CREDITS AND OTHER LIABILITIES:                                                                      
   Deferred income taxes and investment tax credits                                     195,368       183,490
   Customer advances for construction                                                    30,648        27,356
   Contributions in aid of construction                                                 143,327       133,684
   Other deferred credits and liabilities                                                33,499        26,120
                                                                                     ----------    ----------
                                                                                        402,842       370,650
   Commitments and contingencies (Notes 6 and 11)   
                                                                                     $1,769,122    $1,658,342 
                                                                                     ==========    ==========
</TABLE>

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

                                       35
<PAGE>
 
                       STATEMENT OF CONSOLIDATED INCOME
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                       Years ended December 31,  
(thousands except per share data)                                 1998           1997           1996 
-------------------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>            <C>       
OPERATING REVENUES                                             $ 356,210      $ 351,409      $ 332,045
OPERATING EXPENSES:                                                                                   
 Operation and maintenance                                       168,387        168,947        155,878
 Depreciation and amortization                                    39,950         34,694         30,852
 General taxes                                                    50,273         52,124         49,616
                                                               ---------      ---------      ---------
   TOTAL OPERATING EXPENSES                                      258,610        255,765        236,346
                                                               ---------      ---------      ---------
OPERATING INCOME                                                  97,600         95,644         95,699
INTEREST AND OTHER EXPENSES:                                                                          
 Interest expense, net of amount capitalized                      45,917         45,372         44,951
 Allowance for funds used during construction                     (4,567)        (3,397)        (3,355)
 Preferred stock dividends of subsidiaries                         2,223          2,256          2,277
 Gain on New Mexico settlement                                        --             --        (10,372)
 Windfall profits tax of affiliate                                    --         10,334             --
 Equity earnings of affiliates                                   (11,451)       (10,647)        (4,617)
 Other income, net                                                (1,959)        (2,529)        (2,083)
                                                               ---------      ---------      ---------
   TOTAL INTEREST AND OTHER EXPENSES                              30,163         41,389         26,801 
                                                               ---------      ---------      ---------
INCOME FROM CONTINUING OPERATIONS BEFORE                                                               
 INCOME TAXES                                                     67,437         54,255         68,898 
PROVISION FOR INCOME TAXES                                        19,450         20,579         25,878 
                                                               ---------      ---------      ---------
INCOME FROM CONTINUING OPERATIONS                                 47,987         33,676         43,020
Preferred and preference stock dividends                           4,058          4,345          4,613
                                                               ---------      ---------      ---------
NET INCOME APPLICABLE TO COMMON STOCK                                                                  
 FROM CONTINUING OPERATIONS                                    $  43,929      $  29,331      $  38,407 
DISCONTINUED OPERATIONS:                                                                               
 Loss from discontinued operations, net of income                                                      
   tax benefit of $824                                                 -              -         (1,532)
 Loss on disposal of discontinued business, net                                                        
   of income tax benefit of $1,543                                     -              -         (2,865)
                                                               ---------      ---------      ---------
Loss from discontinued operations                                      -              -         (4,397)
                                                               ---------      ---------      ---------
NET INCOME APPLICABLE TO COMMON STOCK                          $  43,929      $  29,331      $  34,010 
                                                               =========      =========      =========
AVERAGE COMMON SHARES OUTSTANDING                                 37,028         35,492         33,707 
NET INCOME (LOSS) PER COMMON SHARE                                                                     
 Continuing operations                                         $    1.19      $     .83      $    1.14 
 Discontinued operations                                               -              -           (.13)
                                                               ---------      ---------      ---------
   TOTAL                                                       $    1.19      $     .83      $    1.01 
                                                               =========      =========      =========

AVERAGE COMMON SHARES OUTSTANDING-ASSUMING DILUTION               39,192         37,838         36,218 
NET INCOME (LOSS) PER COMMON SHARE                                                                     
 Continuing operations                                         $    1.17      $     .83      $    1.12 
 Discontinued operations                                               -              -           (.12)
                                                               ---------      ---------      ---------
   TOTAL                                                       $    1.17      $     .83      $    1.00 
                                                               =========      =========      =========
</TABLE>

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

                                       36
<PAGE>
 
                    STATEMENT OF CONSOLIDATED COMMON EQUITY
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                               Common Stock       Cumulative
                                                             Number              Translation    Retained
(thousands)                                                of shares    Amount    Adjustment    Earnings
-----------------------------------------------------------------------------------------------------------
<S>                                                        <C>        <C>        <C>            <C>
BALANCE AT DECEMBER 31, 1995                                  32,880  $304,663           --     $ 53,639
  Dividend reinvestment and stock purchase plans               1,375    18,845           --           --
  Cumulative translation adjustment                               --        --       $6,703           --
  Conversion of 5% preference stock                              294     4,624           --           --
  Net income applicable to common stock                           --        --           --       34,010
  Cash dividends paid on common stock, $.92 per share             --        --           --      (30,994)
-----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996                                  34,549   328,132        6,703       56,655
  Dividend reinvestment and stock purchase plans               1,446    25,083           --           --
  Cumulative translation adjustment                               --        --          591           --
  Conversion of 5% preference stock                              300     4,742           --           --
  Net income applicable to common stock                           --        --           --       29,331
  Cash dividends paid on common stock, $.92 per share             --        --           --      (32,636)
-----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997                                  36,295   357,957        7,294       53,350
  Dividend reinvestment and stock purchase plans               1,264    23,068           --           --
  Cumulative translation adjustment                               --        --          464           --
  Conversion of 5% preference stock                              277     4,394           --           --
  Net income applicable to common stock                           --        --           --       43,929
  Cash dividends paid on common stock, $.93 per share             --        --           --      (34,427)
-----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998                                  37,836  $385,419       $7,758     $ 62,852 
-----------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       37
<PAGE>
 
                     STATEMENT OF CONSOLIDATED CASH FLOWS
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------------------
                                                                                    Years ended December 31,
(thousands of dollars)                                                        1998           1997         1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C> 
OPERATING ACTIVITIES:
NET INCOME                                                                 $  47,987     $  33,676      $ 38,623  
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH                                                                  
  PROVIDED BY OPERATING ACTIVITIES:                                                                              
  Depreciation and amortization                                               41,300        35,959        32,068 
  Deferred income taxes and investment tax credits, net                       11,878         8,934        18,399 
  Gain on New Mexico settlement                                                   --            --       (10,372)
  Equity earnings of affiliates                                              (11,451)         (313)       (4,617)
  Proceeds from sale of United Metering                                           --         6,223            -- 
  Proceeds from sales of properties                                            3,761        11,068         4,385 
  Gain on sales of properties                                                 (2,605)       (5,220)         (935)
  Improvements to property under development                                  (2,125)       (1,376)       (1,333)
  Loss on disposal of discontinued operations                                     --            --         4,408 
       Allowance for funds used during construction                           (4,567)       (3,397)       (3,355)
  Changes in assets and liabilities, net of effect of                                                            
    New Mexico settlement and acquisitions:                                                                      
    Accounts receivable and unbilled revenues                                 (1,970)        2,551        (3,729)
    Prepayments                                                                 (530)         (311)        3,397 
    Prepaid employee benefits                                                 (7,811)       (5,287)       (3,757)
    Regulatory assets                                                          3,200        (4,569)       (8,821)
    Accounts payable and other current liabilities                             3,692         1,131         1,520 
    Accrued taxes                                                             (2,621)        8,863        (5,727)
    Accrued interest and dividends                                               (94)         (294)           16 
    Other, net                                                                 2,110           417       (12,973)
                                                                           ---------     ---------      -------- 
NET CASH PROVIDED BY OPERATING ACTIVITIES                                     80,154        88,055        47,197 
                                                                           ---------     ---------      -------- 
                                                                                                                 
INVESTING ACTIVITIES:                                                                                            
  Additions to utility plant (excludes allowance for funds                                                       
    used during construction)                                                (99,722)      (83,321)      (74,569)
  Additions to real estate and other properties                               (4,177)       (2,080)       (5,569)
  Additions to equity investments                                             (4,784)      (15,859)      (63,042)
  Acquisitions, net of cash received                                              --            --        (6,794)
  Proceeds from New Mexico settlement                                             --            --        31,670 
  Investments in service contracts                                                --            --        (5,500)
  Change in restricted cash                                                  (13,914)       (7,378)       25,474
                                                                           ---------     ---------      --------
NET CASH USED IN INVESTING ACTIVITIES                                       (122,597)     (108,638)      (98,330)
                                                                           ---------     ---------      --------
 
FINANCING ACTIVITIES:
  Change in notes payable                                                     18,475       (18,300)       49,725
  Additional long-term debt                                                   85,233        75,565        30,538
  Reduction in preferred stock and long-term debt                            (59,318)      (34,585)      (15,550)
  Issuance of common stock                                                    23,068        25,083        18,845
  Dividends on common stock                                                  (34,427)      (32,636)      (30,994)
  Dividends on preferred and preference stock                                 (4,058)       (4,345)       (4,613)
  Net contributions and advances for construction                             12,935         9,386         7,614
                                                                           ---------     ---------      --------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                     41,908        20,168        55,565
                                                                           ---------     ---------      --------  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                            (535)         (415)        4,432
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 8,546         8,961         4,529
                                                                           ---------     ---------      --------  
CASH AND CASH EQUIVALENTS AT END OF YEAR                                   $   8,011     $   8,546      $  8,961
                                                                           =========     =========      ========  
</TABLE>

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

                                       38
<PAGE>
 
                   STATEMENT OF CONSOLIDATED CAPITALIZATION
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                               December 31,
(thousands of dollars)                                                                      1998             1997
--------------------------------------------------------------------------------------------------------------------- 
<S>                                                                                     <C>              <C>        
COMMON STOCK AND RETAINED EARNINGS:                                                                                 
 Common stock, no par value--authorized 100,000,000 shares                              $  401,370       $  373,927 
 Less treasury shares, at cost                                                             (15,951)         (15,970)
 Retained earnings                                                                          62,852           53,350 
 Cumulative translation adjustment                                                           7,758            7,294 
                                                                                        ----------       ----------
 TOTAL COMMON STOCK AND RETAINED EARNINGS                                                  456,029          418,601 
                                                                                        ----------       ----------
                                                                                                                    
CUMULATIVE PREFERRED STOCK WITHOUT MANDATORY REDEMPTION:                                                            
 United Water New Jersey, authorized 2,000,000 shares,                                                              
 stated value--$100 per share, issuable in series:                                                                  
   4 1/2% Series, authorized and outstanding 30,000 shares                                   3,000            3,000 
   4.55% Series, authorized and outstanding 60,000 shares                                    6,000            6,000 
                                                                                        ----------       ---------- 
 TOTAL PREFERRED STOCK WITHOUT MANDATORY REDEMPTION                                          9,000            9,000 
                                                                                        ----------       ---------- 
                                                                                                                    
CUMULATIVE PREFERRED AND PREFERENCE STOCK WITH MANDATORY REDEMPTION,                                                
 NET OF AMOUNT DUE WITHIN ONE YEAR:                                                                                 
  United Water New Jersey:                                                                                          
   5% Series, authorized 15,000 shares; outstanding 6,000 and 6,600 shares                     540              600 
   7 3/8% Series, authorized and outstanding 150,000 shares                                 15,000           15,000 
                                                                                                                    
  United Water New York:                                                                                            
   Authorized 100,000 shares, stated value--$100 per share issuable in series:                                      
     $8.75 Series, issued and outstanding 22,000 and 24,000 shares                           2,000            2,200 
     $9.84 Series, issued and outstanding 46,880 and 50,000 shares                           4,375            4,688 
                                                                                                                    
  United Water Idaho:  5%, authorized and outstanding 7,399 and 7,415 shares                   607              605 
                                                                                                                    
  United Water Resources:                                                                                           
   7 5/8% Series B, authorized 300,000 shares; outstanding 285,000 and 300,000 shares       27,226           28,745 
   5% Series A, convertible preference, authorized 3,983,976 shares;                                                
      outstanding 2,296,278 and 2,628,142 shares                                            30,534           34,741 
                                                                                        ----------       ----------
  TOTAL PREFERRED AND PREFERENCE STOCK WITH MANDATORY REDEMPTION                            80,282           86,579 
                                                                                        ----------       ----------
                                                                                                                    
 LONG-TERM DEBT, NET OF AMOUNT DUE WITHIN ONE YEAR:                                                                 
  United Water New Jersey:                                                                                          
   First mortgage bonds, 5.8%-5.9%, due 2024 (weighted average 5.85%)                       40,000           40,000 
   Unsecured promissory notes, variable rates, due 2025-2026                                                        
     (weighted average 3.51% and 4.54%)                                                    165,000          130,000 
                                                                                                                    
  United Water New York:                                                                                            
   First mortgage bonds, 9 3/8%, due 2001                                                      600              900 
   Unsecured promissory notes, 5.65%-8.98%, due 2023-2025 (weighted average 6.74%)          51,000           51,000 
                                                                                                                    
  United Water Resources:                                                                                           
   Promissory notes, 9.38%, due 2019                                                        25,000           25,000 
   Promissory notes, floating LIBOR-based interest rate, due 2006                           24,000           26,000 
   Promissory notes, 7.45%-7.9%, due 2007-2022 (weighted average 7.73%)                     40,000           40,000 
                                                                                                                    
  United Waterworks:                                                                                                
   Unsecured debt, 5.30%-10.05%, due 2000-2028 (weighted average 7.07% and 7.55%)          282,815          280,365 
                                                                                                                    
  United Properties Group:                                                                                          
   Mortgage notes, 8%-10%, due 1999-2006 (weighted average 9.97% and 9.92%)                 15,697           17,265 
   Floating rate LIBOR-based term loan, due 2000                                             7,211            7,251 
   New Jersey Wastewater Treatment Loans, 0%-4.2%, due 2013                                                         
      (weighted average 2.48% and 2.22%)                                                     1,646            1,931 
                                                                                                                    
  United Water Mid-Atlantic:  Promissory note at floating interest rate, due 2004                -            3,025 
                                                                                        ----------       ---------- 
     TOTAL LONG-TERM DEBT                                                                  652,969          622,737 
                                                                                        ----------       ---------- 
  TOTAL CAPITALIZATION                                                                  $1,198,280       $1,136,917  
                                                                                        ==========       ========== 
</TABLE>

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

                                      39
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:  The consolidated financial statements include the
accounts of United Water Resources (United Water, or the Company) and the
subsidiaries in which it has more than 50% ownership. The Company accounts for
investments in which it has significant influence under the equity method of
accounting. 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. Certain
prior year amounts have been reclassified to conform with current year
presentation.

DESCRIPTION OF BUSINESS:  United Water's principal utility subsidiaries include
United Water New Jersey, United Water New York and United Waterworks. These
subsidiaries provide water and wastewater services to approximately two million
people in 13 states. Other significant wholly-owned subsidiaries of United Water
include: United Properties Group (United Properties), which is engaged in real
estate activities including commercial rentals, land development and sales, golf
course operations, and consulting services; United Water UK, an equal partner
with Lyonnaise Europe (a wholly-owned subsidiary of Suez Lyonnaise des Eaux) in
the Northumbrian Partnership, which has acquired a 20% interest in Northumbrian
Water Group plc (NWG), a major investor-owned water and wastewater company in
the United Kingdom; and United Water Mid-Atlantic, which owns and operates water
and wastewater systems. In addition, the Company has entered into public-private
partnerships with the cities of Hoboken and Jersey City, New Jersey, whereby the
municipalities retain ownership of their systems while the Company operates and
maintains them. United Water also has several equity investments in the contract
services business.

United Water's domestic utility subsidiaries are subject to regulation by the
public utility commissions of the states in which they operate.  Their
accounting must comply with the applicable uniform system of accounts prescribed
by these regulatory commissions and must also conform to generally accepted
accounting principles as applied to rate-regulated public utilities.  The
Company continues to follow

                                      40
<PAGE>
 
Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the
Effects of Certain Types of Regulation" for its regulated utilities.  SFAS No.
71 provides for the recognition of regulatory assets and liabilities as allowed
by state regulators that are considered probable of recovery.

EQUITY INVESTMENTS:  The Company holds an indirect investment in NWG and has
representation on its board of directors, and owns a 50% stake in United Water
Services and a 33.3% and 20.5% interest in United Water Services Canada (UWS
Canada) and United Water Services Mexico (UWS Mexico), respectively. The Company
accounts for these investments under the equity method of accounting by
recording its proportionate share of earnings included in equity investments in
the consolidated balance sheet and equity earnings of affiliates in the
statement of consolidated income.

FOREIGN CURRENCY TRANSLATION: Financial statements for United Water UK are
translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting cumulative translation adjustment is recorded as a separate component
of stockholders' equity in the Company's statement of consolidated common
equity.

Transactions for UWS Canada and UWS Mexico are recorded in U.S. dollars.
Therefore, a foreign currency translation adjustment is not required for these
entities.

UTILITY PLANT:  Utility plant is recorded at original cost, which includes
direct and indirect labor and material costs associated with construction
activities, related operating overheads and an allowance for funds used during
construction (AFUDC).  AFUDC is a non-cash credit to income and includes both
the cost of borrowed funds and a return on equity funds attributable to plant
under construction.

The original cost of utility property retired or otherwise disposed of in the
normal course of business is charged to accumulated depreciation, and salvage
(net of removal cost) is credited thereto;  no gain or loss is recognized.  The
costs of property repairs, replacements and renewals of minor property items are
included in maintenance expense when incurred.

                                      41
<PAGE>
 
UTILITY PLANT ACQUISITION ADJUSTMENTS:  Utility plant acquisition adjustments
represent the difference between the purchase price and the book value of net
assets acquired, and are amortized, generally, on a straight-line basis over a
40-year period. Utility plant acquisition adjustments include a premium paid to
acquire operating utilities. At each balance sheet date, the Company evaluates
the realizability of utility plant acquisition adjustments on the basis of
expected future undiscounted cash flows. Based on its most recent evaluation,
the Company believes that no impairment of utility plant acquisition adjustments
exists at December 31, 1998.

ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION:  When required by the public
utility commissions of the states in which the Company's utility subsidiaries
operate, outside parties, generally customers and developers, make payments to
the Company to fund certain utility capital expenditures to provide water or
wastewater service to new customers. Non-refundable amounts received by the
Company are recorded as contributions in aid of construction, except where the
Company is required to record such amounts directly as a reduction to utility
plant. Refundable amounts received are recorded as advances, and are refundable,
for limited periods of time, generally as new customers begin to receive
service. The remaining balance of any advances received, after the Company has
made all required refunds of such advances, is transferred to contributions in
aid of construction.

The balances of advances and contributions are used to reduce utility plant in
determining rate base, and plant funded by advances and contributions is
generally not depreciated. However, the public utility commissions in several of
the states in which the Company operates permit the depreciation of plant funded
by contributions in aid of construction, but also require that contributions be
amortized, so that there is no net effect on income from the depreciation of the
contributed plant. For income tax purposes, advances and contributions received
after 1986 and through June 1996 are included as taxable income, and the related
plant is depreciated for tax purposes. In accordance with changes in the tax
law, effective June 12, 1996, advances and contributions are no longer included
in taxable income, nor is the related plant depreciated for tax purposes.

JOINTLY OWNED FACILITIES:  Utility plant includes United Water New Jersey's 50%
interest in the Wanaque South Water Supply Project, the net book value of which
was $42 million and $42.8 million at December 31, 1998 and 1997, respectively.
United Water New Jersey's share of the project's operating expenses is included
in operation and maintenance expenses.

                                      42
<PAGE>
 
REGULATORY ASSETS:  Included in deferred charges and other assets are regulatory
items that are expected to be recognized when included in future rates and
recovered from customers as directed by the state public utility commissions.
These regulatory assets include items that the public utility commissions have
ordered the Company's regulated utilities to defer and prudently incurred costs
where the Company expects that recovery is probable because of the past
practices of the public utility commissions.

Regulatory assets consisted of the following at December 31:

<TABLE>
<CAPTION>
-------------------------------------------------------------------
(thousands of dollars)                         1998        1997  
-------------------------------------------------------------------
<S>                                          <C>         <C>     
 Recoverable income taxes                    $39,328     $39,818 
 Deferred employee benefits                   20,918      22,918 
 Rate case                                     3,308       2,459 
 Tank painting                                 3,117       3,181 
 Other                                         9,877      11,372 
-------------------------------------------------------------------
Total regulatory assets                      $76,548     $79,748 
-------------------------------------------------------------------
</TABLE>

REAL ESTATE:  Real estate properties are carried at the lower of cost, which
includes original purchase price and direct development costs, discounted cash
flow value or fair value.  Real estate taxes and interest costs are capitalized
during the development period.  The amount of interest capitalized was $650,890
in 1998, $651,251 in 1997 and $620,000 in 1996.  Real estate operating revenues
include rental income from commercial  properties, proceeds from the disposition
of real estate properties, revenues from golf course operations and fees from
consulting services.

UNAMORTIZED DEBT EXPENSE:  Debt premium, debt discount and deferred debt
expenses are amortized to income or expense over the lives of the applicable
issues.

REVENUES FROM UTILITY OPERATIONS:  United Water New Jersey and United Waterworks
recognize as revenues billings to customers, plus estimated revenues for
consumption for the period from the date of the last billing to the balance
sheet date. United Water New York recognizes revenues as bills are rendered to
customers and does not accrue for unbilled revenues. United Water New York and
United Water New Rochelle have been directed by the New York Public Service
Commission to institute a Revenue Reconciliation Clause, which requires the
reconciliation of billed revenues with pro forma revenues that were used to set
rates. Any variances outside a threshold range are accrued or deferred for
subsequent recovery from or refund to customers.  At December 31, 1998 and 1997,
United Water New York and United Water New Rochelle had $4.4 million and $3.6
million, respectively, of net unamortized revenue 

                                      43
<PAGE>
 
accruals, resulting from revenues which were less than the amounts used to set
rates. These amounts are expected to be recovered over a three-year period.

REVENUES FROM REAL ESTATE ACTIVITIES:  Revenues from real estate sales are
recognized when the transaction is consummated and title has passed.  Revenues
from real estate transactions were $4.9 million, $11.2 million and $5.4 million
in 1998, 1997 and 1996, respectively.

United Properties owns several office buildings, with an aggregate net book
value of $57.7 million (net of accumulated depreciation of $11 million) at
December 31, 1998, which are leased to tenants under various operating leases.
The following is a schedule, by year, of the minimum future rental income on
non-cancelable operating leases outstanding at December 31, 1998:

<TABLE>
--------------------------------------------------------------
(thousands of dollars)
--------------------------------------------------------------
<S>                                                    <C>    
1999                                                   $ 5,827
2000                                                     6,408
2001                                                     6,359
2002                                                     6,251
2003                                                     5,532
Thereafter                                              22,901 
--------------------------------------------------------------
Total minimum future rental income                     $53,278
--------------------------------------------------------------
</TABLE>

REVENUES FROM PUBLIC-PRIVATE PARTNERSHIPS: In May 1996, United Water entered
into a five-year contract with Jersey City to operate its municipal water
system. This contract stipulates that the city can terminate the contract in the
fourth and fifth years, subject to a termination penalty. If the city terminated
the contract, this would not have a material effect on United Water's financial
position or results of operations. The contract also provides for monthly
service fees which are recorded as revenues when billed. In addition, certain
incentives based on collection and marketing goals are recognized when earned.
Service fee revenues for the years ended December 31, 1998 and 1997 and for the
eight months ended December 31, 1996 were $10 million, $9.2 million and $4.7
million, respectively.

In 1994, the Company entered into a ten-year contract with the city of Hoboken
to operate, maintain and manage its municipal water system. In 1996, this
contract was extended for an additional ten years. Under this contract, revenues
are recorded monthly based upon customer billings. Revenues for the years ended
December 31, 1998, 1997 and 1996 were $4 million, $3.9 million and $3.5 million,
respectively.

                                      44
<PAGE>
 
DEPRECIATION:  Depreciation of utility plant and real estate properties is
recognized using the straight-line method over the estimated service lives of
the properties. Utility plant depreciation rates are prescribed by the public
utility commissions. The provisions for depreciation in 1998, 1997 and 1996 were
equivalent to 2.4%, 2.3% and 2.1%, respectively, of average depreciable utility
plant in service. Real estate properties are depreciated over estimated lives
ranging between 25 and 50 years. For federal income tax purposes, depreciation
is computed using accelerated methods and, in general, shorter depreciable lives
as permitted under the Internal Revenue Code.

INCOME TAXES:  The Company and its eligible subsidiaries file a consolidated
federal income tax return. Federal income taxes are deferred under the liability
method in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred income taxes are provided for all differences between
financial statement and tax basis of assets and liabilities. Additional deferred
income taxes and offsetting regulatory assets or liabilities are recorded to
recognize that income taxes will be recoverable or refundable through future
revenues.

Investment tax credits arising from property additions are deferred and
amortized over the estimated service lives of the related properties.

STATEMENT OF CASH FLOWS:  United Water considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.  The
Company made cash payments for interest (net of amounts capitalized) and federal
and state income taxes as follows:

<TABLE>
<CAPTION> 
--------------------------------------------------------------------------------
(thousands of dollars)                       1998        1997       1996
--------------------------------------------------------------------------------
<S>                                        <C>         <C>         <C>
Interest, net of amounts capitalized       $44,651     $44,400     $43,728
Income taxes                                11,520       7,413      11,921
--------------------------------------------------------------------------------
</TABLE>

The following is a supplemental schedule of non-cash transactions in 1998 and
1997:

<TABLE>
<CAPTION> 
--------------------------------------------------------------------------------
(thousands of dollars)                                  1998        1997
--------------------------------------------------------------------------------
<S>                                                    <C>        <C>
Cumulative translation adjustment                      $  464     $  591
Conversion of 5% preference stock                       4,576      4,967
--------------------------------------------------------------------------------
</TABLE>

                                       45
<PAGE>
 
NOTE 2 -EQUITY INVESTMENTS

On June 28, 1996, United Water and Lyonnaise Europe formed the Northumbrian
Partnership (the Partnership), an equal partnership which has acquired a 20%
interest in NWG, a major investor-owned water and wastewater company in the
United Kingdom. United Water's initial $62 million investment in the Partnership
was made through its wholly-owned subsidiary in the United Kingdom, United Water
UK Limited. Investment in the Partnership was $96.3 million and $78.7 million at
December 31, 1998 and 1997, respectively, and is included in equity investments
in the consolidated balance sheet. United Water's share of the Partnership's
earnings, which totaled $17.1 million and $13.6 million (excluding the windfall
profits tax) in 1998 and 1997, respectively, is included in equity earnings of
affiliates in the accompanying statement of consolidated income.
 
During 1997, the United Kingdom's new Labor Government imposed a one-time
"windfall profits" tax on privatized utilities. The levying of this one-time tax
negatively impacted the Company's earnings from its investment in NWG by $13.1
million, which was partially offset by the effect of a change in the tax rate on
deferred taxes of $2.8 million. The result was a net impact of $10.3 million.
The imposition of this tax had been factored into the Company's financial
analysis at the time of its investment in NWG and was considered in determining
the purchase price. The tax did not have an effect on United Water's cash flow
or ability to pay dividends, nor did it affect the long-term benefit the Company
expected to derive from its investment in NWG.
 
On July 28, 1997, United Water Services, a 50/50 joint venture between United
Water and Suez Lyonnaise des Eaux acquired the remaining 50% stake in JMM
Operational Services.

United Water Services provides contract operations and maintenance services for
water and wastewater facilities and is pursuing additional contract operations.
As a result, United Water Services was awarded several contracts.  The largest
awards include a ten-year contract to operate the wastewater systems in
Milwaukee, Wisconsin, and a 20-year contract to operate the water system in
Atlanta, Georgia, with a minority partner.  United Water Services also operates
a meter installation subsidiary, United Metering, which it purchased from United
Water in December 1997 for book value of $6.2 million.

In July 1997, the Company also acquired a 30% and a 20% interest in UWS Canada
and UWS Mexico, respectively.  In December 1998, United Water purchased
additional interests and now has a 33.3% and 

                                       46
<PAGE>
 
a 20.5% interest in UWS Canada and UWS Mexico, respectively.

At December 31, 1998 and 1997, United Water had equity investments, relating to
contract services of approximately $19.8 million and $20.2 million,
respectively, including investments in Canada and Mexico. This amount is
included in equity investments in the accompanying consolidated balance sheet.
United Water's share of earnings in these investments is included in equity
earnings of affiliates in the accompanying statement of consolidated income.

NOTE 3 - NEW MEXICO SETTLEMENT

On March 29, 1996, the Company settled the condemnation proceeding with the city
of Rio Rancho, New Mexico (the City). The agreement was approved on the same day
by the Thirteenth Judicial District Court in New Mexico. Under the terms of the
agreement, the Company agreed to accept $67 million for the water and wastewater
systems of its United Water New Mexico operations. Results of this transaction
are included in the Company's first quarter 1996 earnings.

NOTE 4 - NOTES PAYABLE

United Water and its subsidiaries have a number of credit lines with banks.
Borrowings under these credit lines generally bear interest at rates between the
London Interbank Offered Rate (LIBOR) and the prime lending rate.  United Water
pays commitment fees under arrangements with certain of these banks to
compensate them for services and to support these lines of credit.  There are no
legal restrictions placed on the withdrawal or other use of these bank balances.

The total credit lines available, the amounts utilized and the weighted average
interest rates at December 31 were as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------- 
(thousands of dollars)                      1998        1997
----------------------------------------------------------------- 
<S>                                      <C>          <C>
Total credit lines available             $280,500     $235,800
Utilized:
  Drawn                                    93,400       74,925
  Pledged                                     655        3,055
Weighted average interest rates               5.5%         5.9%
-----------------------------------------------------------------  
</TABLE>

                                       47
<PAGE>
 
NOTE 5 - LONG-TERM DEBT

The long-term debt repayments over each of the next five years are as follows:
1999--$3.7 million; 2000--$12.2 million; 2001--$19.7 million; 2002--$4.7 million
and 2003--$4.8 million.  United Water New Jersey, United Water New York, United
Waterworks and other subsidiaries of United Water are subject to certain
restrictive covenants related to their issued debt.

In June 1997, United Water issued $40 million of 7.45%-7.9% Senior Notes ($15
million due 2007 and $25 million due 2022).  Proceeds from the notes were used
to refinance existing short-term debt of the Company.
 
In August 1997, United Waterworks issued $20 million of 5.3% tax-exempt Water
Resource Development Revenue Bonds, due 2027, through the Idaho Water Resource
Board.  The proceeds are being used to finance a portion of the costs of certain
facilities to be owned by United Water Idaho (a subsidiary of United
Waterworks).

In December 1994, United Waterworks entered into a medium-term note program that
enabled United Waterworks to issue up to $75 million of debt with terms ranging
from 9 months to 30 years. The interest rates are set as notes are issued under
the program. The first $10 million of notes under this program were issued in
1995. In October 1997, United Waterworks issued $15 million of notes under this
program, at a rate of 6.8%, with the full amount maturing in 2007. In February
1998, United Waterworks issued an additional $40 million of notes under this
program ($20 million at 6.97% due 2023, $15 million at 7.1% due 2028 and $5
million at 6.9% due 2017). In November 1998, United Waterworks issued the final
$10 million of notes under this program ($5 million at 6.44% due 2008 and $5
million at 6.97% due 2023). The proceeds were used to redeem outstanding notes
payable.

In June 1996, United Water entered into a $30 million long-term note agreement
with Credit Lyonnais to partially fund its investment in the Northumbrian
Partnership. The loan bears interest at a LIBOR-based floating rate and is
payable in annual installments through June 2006. In December 1998, the Company
entered into an interest rate swap agreement which fixed the interest rate at
5.24% for 1999 and 5.34% for the years 2000 through 2003.

                                       48
<PAGE>
 
In December 1998, United Water New Jersey issued $35 million of 5% Water
Facilities Revenue Bonds through the New Jersey Economic Development Authority
due 2028. The proceeds are being used to finance the cost of acquiring,
constructing and reconstructing certain water transmission, transportation,
storage, treatment, and distribution facilities located in Passaic, Bergen,
Sussex, and Hudson counties in New Jersey.

In January 1999, United Water issued $30 million of Senior Notes ($5 million at
6.07% due 2005, $10 million at 6.43% due 2009, $10 million at 6.7% due 2019 and
$5 million at 7.04% due 2019).  The proceeds were used to redeem all remaining
shares of 7 5/8% Series B cumulative preferred stock.  See Note 7 to the
consolidated financial statements for further details.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Capital Expenditures

The future capital expenditures of the Company's utility subsidiaries are
projected to aggregate $262 million over the next five years, including $57
million and $58 million in 1999 and 2000, respectively. United Properties
currently projects spending $25.9 million over the next five years for capital
expenditures on its existing real estate portfolio, including $8.3 million and
$6.9 million in 1999 and 2000, respectively.

Operating Leases

United Water's total consolidated rental expense was approximately $6.5 million
in 1998, $6.2 million in 1997 and $5.1 million in 1996.   The minimum future
lease payments under all non-cancelable operating leases, which consist
primarily of buildings and automobiles, at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------  
(thousands of dollars)
----------------------------------------------------------------- 
<S>                                                      <C>
1999                                                     $ 4,828
2000                                                       3,576
2001                                                       2,106
2002                                                       1,137 
2003                                                         480
Thereafter                                                 1,840
------------------------------------------------------------------  
Total minimum future lease payments                      $13,967
------------------------------------------------------------------  
</TABLE>

                                       49
<PAGE>
 
Legal Matters

United Water has been notified that it may be one of several defendants in a
lawsuit involving cancer incidences in Dover Township, New Jersey.  A complaint
has not been filed; however, an agreement was signed on January 29, 1998 with
the potential plaintiffs that would toll the statute of limitations for a time
period of at least eighteen months.  Management believes if a lawsuit is
commenced, the Company will have meritorious defenses, and there will be a
number of parties against whom it will have recourse. Therefore, the Company
believes that the ultimate disposition of this matter will not have a material
adverse effect on the financial position or results of operations.

The Company has various purchase commitments for materials, supplies and other
services incidental to the ordinary conduct of business. In addition, the
Company is routinely involved in legal actions arising in the ordinary course of
its utility operations. In the opinion of management, none of these matters will
have a material adverse impact on the Company.

NOTE 7 - PREFERRED AND PREFERENCE STOCK

The utility subsidiaries of the Company have issued and outstanding cumulative
preferred stock, generally with mandatory redemption provisions requiring annual
sinking fund payments. These sinking fund requirements total $2,073,000 in each
of the years 1999 and 2000 and $4,216,000 in 2001 through 2003. The redemption
of cumulative preferred stock was $2,073,000 in 1998 and $260,000 in each of the
years 1997 and 1996. In addition, except as described in the next paragraph,
optional sinking fund provisions can be exercised and redemptions made at
specific prices for all preferred stock issues. Redemptions require payment of
accrued and unpaid dividends up to the date fixed for redemption.

As a result of the merger with GWC Corporation in 1994, United Water issued
3,341,078 shares ($46 million par value) of 5% Series A cumulative convertible
preference stock, valued at $43.3 million at the time of the merger and $30
million of 7 5/8% Series B cumulative preferred stock, valued at $31.1 million
at the time of the merger. Lyonnaise American Holding, Inc.(LAH) owned 97.7% of
the Series A preference stock outstanding. The Series B preferred stock has a
$1.5 million mandatory annual redemption commencing in 1998. Shares of the
Series B preferred stock could not be redeemed by the Company prior to September
1, 1997. Each share of the Series A preference stock outstanding may be
converted into .83333 shares of United Water common stock at any time commencing
April 22, 1996. However, under the Governance Agreement between United Water and
LAH, LAH may convert no more 

                                       50
<PAGE>
 
than 10% of the Series A preference stock it owns during the year commencing
April 22, 1996, and an additional 10% cumulatively per year thereafter until
April 22, 2003, at which time these conversion restrictions end. During 1998,
331,864 shares of the Series A preference stock with a value of $4.6 million
were converted into 276,543 shares of United Water common stock with a value of
$4.4 million. During 1997, 360,014 shares of the Series A preference stock with
a value of $5 million were converted into 299,958 shares of United Water common
stock with a value of $4.7 million. As a result, at December 31, 1998, LAH owned
approximately 29.5% of the issued and outstanding United Water common stock and
approximately 98.1% of the issued and outstanding United Water 5% cumulative
convertible preference stock. United Water may not redeem any of the
outstanding, unconverted Series A preference stock prior to maturity on April
22, 2004.

On December 8, 1998, the Company called for redemption of the remaining 285,000
shares of its 7 5/8% Series B cumulative preferred stock. The redemption, which
occurred on January 8, 1999, resulted in the payment of principal, accrued
dividends and premium totaling $30 million, with $1.3 million relating to the
premium paid on the early redemption. The preferred stock was redeemed with $30
million of 6.07%-7.04% Senior Notes due 2005-2019.

                                       51
<PAGE>
 
NOTE 8 - INCENTIVE STOCK PLANS

Under the Company's management incentive plan, the following options have been
granted to key employees:

<TABLE>
<CAPTION>
                                                             Weighted Average
                                             Number of        Exercise Price
                                              Options           Per Option
-----------------------------------------------------------------------------
<S>                                          <C>             <C>           
Outstanding at December 31, 1995              814,670            $14.508    
  Granted                                     204,300             12.250    
  Exercised                                  (120,813)            12.965    
  Canceled or expired                         (10,340)            14.703    
-----------------------------------------------------------------------------
Outstanding at December 31, 1996              887,817            $14.196    
  Granted                                     370,840             15.580    
  Exercised                                  (439,605)            15.032    
  Canceled or expired                         (20,062)            15.501    
-----------------------------------------------------------------------------
Outstanding at December 31, 1997              798,990            $14.345    
  Granted                                     408,480             18.625    
  Exercised                                  (186,808)            15.182    
  Canceled or expired                         (23,380)            18.626    
-----------------------------------------------------------------------------
OUTSTANDING AT                                                              
  DECEMBER 31, 1998                           997,282            $15.841    
-----------------------------------------------------------------------------
</TABLE>

All options are currently exercisable and represent the only stock options
outstanding at December 31, 1998.  A total of 2,026,175 common shares are
reserved for issuance under the management incentive plan.

In May 1993, the shareholders approved the creation of dividend units to be
issued in conjunction with stock options granted under the management incentive
plan. One dividend unit may be attached to each unexercised option to purchase a
share of United Water common stock, which entitles the option holder to accrue,
as a credit against the option exercise price, the aggregate dividends actually
paid on a share of United Water common stock while the dividend unit is in
effect. In May 1997, the shareholders amended the plan to provide that the
dividend units be granted separately and detached from the stock options and
accrue dividends for a predetermined period of time, after which, they are
distributed. United Water recorded compensation expense of $2.6 million in 1998,
$2.3 million in 1997 and $2.5 million in 1996 with respect to the management
incentive plan.

In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-

                                       52
<PAGE>
 
based employee compensation plans. The statement defines a fair value based
method of accounting for employee stock options and similar equity instruments
and encourages the use of that method of accounting for all employee stock
compensation plans. However, SFAS No. 123 also permits the measurement of
compensation costs using the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has elected to account for its employee
stock compensation plans under the guidance prescribed by APB Opinion No. 25 and
has made the required pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting defined in SFAS No. 123 had been
applied as indicated below:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars except per share data)      1998       1997       1996 
--------------------------------------------------------------------------------
<S>                                             <C>        <C>        <C>    
Net income:                                                                  
   As reported                                  $43,929    $29,331    $34,010
   Pro forma                                     44,140     29,273     34,079
                                                                             
Earnings per common share:                                                   
   As reported                                  $  1.19    $   .83    $  1.01
   Pro forma                                       1.19        .83       1.01
Earnings per common share-assuming dilution:                                 
   As reported                                  $  1.17    $   .83    $  1.00
   Pro forma                                       1.17        .83       1.01
--------------------------------------------------------------------------------
</TABLE>

The fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended December 31, 1998, 1997 and 1996, respectively:
expected volatility of 21.1%, 20.3% and 21.5%; risk-free interest rates of 5.5%,
6.4% and 5.5%;  expected life of 6 years and dividend yields of 5.0% in 1998,
5.9% in 1997 and 0.0% in 1996. The weighted average fair value of each option
granted during the years ended December 31, 1998, 1997 and 1996 was $2.99, $2.30
and $4.30, respectively.  The Black-Scholes option-pricing model requires the
input of highly subjective assumptions including the expected stock price
volatility.  Changes in the subjective input assumptions can materially affect
the fair value estimate.  In management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

In May 1988, the shareholders approved a restricted stock plan for certain key
employees.  United Water issued 1,250 shares in 1996 in connection with the
restricted stock plan.  Such shares are earned by the recipients over a five-
year period.  United Water recorded compensation expense of $69,000 in 1996 with
respect to this restricted stock plan.

                                       53
<PAGE>
 
NOTE 9 - SHAREHOLDER RIGHTS PLAN

In July 1989, the board of directors of United Water approved a Shareholder
Rights Plan designed to protect shareholders against unfair and unequal
treatment in the event of a proposed takeover. It also guards against partial
tender offers and other hostile tactics to gain control of United Water without
paying all shareholders a fair price.  Under the plan, each share of United
Water's common stock also represents one Series A Participating Preferred Stock
Purchase Right (Right) until the Rights become exercisable. The Rights attach to
all of United Water's common stock outstanding as of August 1, 1989, or
subsequently issued, and expire on August 1, 1999.

The Rights would be exercisable only if a person or group acquired 20% or more
of United Water's common stock or announced a tender offer that would lead to
ownership by a person or group of 20% or more of the common stock.

In certain cases where an acquirer purchased more than 20% of United Water's
common stock, the Rights would allow shareholders (other than the acquirer) to
purchase shares of United Water's common stock at 50% of market price,
diminishing the value of the acquirer's shares and diluting the acquirer's
equity position in United Water. If United Water were acquired in a merger or
other business combination transaction, under certain circumstances the Rights
could be used to purchase shares in the acquirer at 50% of the market price.
Subject to certain conditions, if a person or group acquired 20% or more of
United Water's common stock, United Water's board of directors may exchange each
Right held by shareholders (other than the acquirer) for one share of common
stock or 1/100 of a share of Series A Participating Preferred Stock. If an
acquirer successfully purchased 80% of United Water's common stock after
tendering for all of the stock, the Rights would not operate. If holders of a
majority of the shares of United Water's common stock approved a proposed
acquisition under specified circumstances, the Rights would be redeemed at one
cent each. They could also be redeemed by United Water's board of directors for
one cent each at any time prior to the acquisition of 20% of the common stock by
an acquirer.

On September 15, 1993, United Water's Shareholder Rights Plan was amended in
connection with United Water's execution of a merger agreement with GWC
Corporation. The amendment generally excepts the majority stockholder of United
Water (Suez Lyonnaise des Eaux) and its affiliates and associates from
triggering the Rights through the execution of the merger agreement, the
performance of the transactions contemplated therein or otherwise.

                                       54
<PAGE>
 
NOTE 10 - EMPLOYEE BENEFITS

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement addresses disclosure
only. It does not address measurement or recognition. United Water adopted SFAS
No. 132 in 1998.

DEFINED BENEFIT PENSION PLANS:  Most of United Water's employees are covered by
trusteed, non-contributory, defined benefit pension plans. Benefits under these
plans are based upon years of service and the employee's compensation during the
last five years of employment. United Water's policy is to fund amounts accrued
for pension expense to the extent deductible for federal income tax purposes. It
is expected that no funding will be made for 1998.

POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS: The Company sponsors a defined
benefit postretirement plan that covers hospitalization, major medical benefits
and life insurance benefits for retired salaried and non-salaried employees.
The Company is funding a portion of its postretirement health care benefits
through contributions to Voluntary Employees' Beneficiary Association (VEBA)
Trusts.

                                       55
<PAGE>
 
The following sets forth the qualified plans' funded status and reconciles that
funded status to the amounts recognized in the Company's balance sheet as of
December 31:

PENSION

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars)                                 1998          1997
--------------------------------------------------------------------------------
<S>                                                 <C>            <C> 
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year             $138,092       $124,342 
Service cost                                           4,367          3,553 
Interest cost                                          9,971          9,439 
Actuarial loss                                         5,119          7,492 
Benefits paid                                         (6,970)        (6,734)
--------------------------------------------------------------------------------
Benefit obligation at end of year                    150,579        138,092
--------------------------------------------------------------------------------
 
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year       200,853        174,560  
Actual return on plan assets                          33,118         33,027  
Benefits paid                                         (6,970)        (6,734) 
--------------------------------------------------------------------------------
Fair value of plan assets at end of year*            227,001        200,853
--------------------------------------------------------------------------------
 
Funded status                                         76,422         62,761 
Unrecognized transition obligation                    (3,569)        (4,196)
Unrecognized actuarial gain                          (45,483)       (39,154)
Unrecognized prior service cost                        1,867          2,015 
--------------------------------------------------------------------------------
PREPAID BENEFIT COST                                $ 29,237       $ 21,426
--------------------------------------------------------------------------------
</TABLE>

*Primarily stocks and bonds, including $13.7 million and $11.2 million,
respectively, in common stock of United Water.

                                       56
<PAGE>
 
OTHER BENEFITS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars)                                 1998          1997
--------------------------------------------------------------------------------
<S>                                                 <C>            <C> 
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year             $ 51,900       $ 42,903
Service cost                                           2,953          2,091
Interest cost                                          3,954          3,299
Actuarial loss                                         2,620          5,312
Benefits paid                                         (1,044)        (1,705)
--------------------------------------------------------------------------------
Benefit obligation at end of year                     60,383         51,900
--------------------------------------------------------------------------------
 
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year        21,704         16,695
Actual return on plan assets                           4,207          3,562
Employer contribution                                  2,223          3,152
Benefits paid                                         (1,044)        (1,705)
--------------------------------------------------------------------------------
Fair value of plan assets at end of year              27,090         21,704
--------------------------------------------------------------------------------
 
Funded status                                        (33,293)       (30,196) 
Unrecognized transition obligation                    20,470         21,911 
Unrecognized actuarial gain                           (7,419)        (7,818)
--------------------------------------------------------------------------------
ACCRUED BENEFIT COST                                $(20,242)      $(16,103)
--------------------------------------------------------------------------------
</TABLE>


The components of net periodic pension income for the Company's qualified and
supplemental plans were as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars)                           1998       1997       1996
--------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>
Service cost                                   $  4,600   $  3,726   $  3,945
Interest cost                                    10,438      9,842      9,379
Expected return on plan assets                  (19,748)   (16,275)   (14,950)
Amortization of transition obligation              (583)      (583)      (543)
Amortization of gain                             (1,941)    (1,549)      (967)
Amortization of prior service cost                  226        268        400 
--------------------------------------------------------------------------------
NET PERIODIC PENSION INCOME                    $ (7,008)  $ (4,571)  $ (2,736)
--------------------------------------------------------------------------------
</TABLE>

Assumptions as of December 31:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                  1998       1997       1996
--------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>
Assumed discount rate                             7.125%     7.375%      7.75%
Expected return on assets                          10.0%       9.5%       9.5%
Range of compensation increase                 3.75-4.5%  3.75-4.5%  3.75-4.5%
--------------------------------------------------------------------------------
</TABLE>

                                       57
<PAGE>
 
Net periodic postretirement benefit cost components were as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars)                           1998       1997       1996
--------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>
Service cost                                   $ 2,953    $ 2,091    $ 2,404 
Interest cost                                    3,954      3,299      3,095 
Expected return on plan assets                  (1,896)    (1,396)    (1,098)
Amortization of transition obligation            1,441      1,441      1,441 
Amortization of gain                               (90)      (462)      (114)
--------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST                      $ 6,362    $ 4,973    $ 5,728  
--------------------------------------------------------------------------------
</TABLE>

Assumptions as of December 31:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                 1998       1997       1996
--------------------------------------------------------------------------------
<S>                                             <C>        <C>        <C>
Assumed discount rate                           7.375%     7.625%      8.0%
Expected return on assets                         9.5%       9.5%      9.5%
--------------------------------------------------------------------------------
</TABLE>


The associated health care cost trend rate used in measuring the postretirement
benefit obligation at December 31, 1998 was 7.1%, gradually declining to 5.5% in
2002 and thereafter.  Changing the assumed health care cost trend rate by one
percentage point in each year results in changes in service cost and interest,
and plan obligation as follows:

<TABLE> 
<CAPTION> 
                                                      1-PERCENTAGE      1-PERCENTAGE
                                                     POINT INCREASE    POINT DECREASE
--------------------------------------------------------------------------------------
(in millions)
<S>                                                  <C>               <C> 
Effect on total service and interest cost components     $ 1.5              $( 1.1)
Effect on postretirement benefit obligation                9.6                (7.7) 
</TABLE> 

Postretirement health care costs in excess of those currently included in rates
have been deferred in those jurisdictions where their recovery is deemed
probable.  At December 31, 1998 and 1997, United Water had regulatory assets
relating to deferred employee benefits of $20.9 million and $22.9 million,
respectively, for recovery in future rates.

SUPPLEMENTAL BENEFIT PLANS: Certain categories of employees are covered by non-
funded supplemental plans. The projected benefit obligations of these plans at
December 31, 1998 and 1997 totaled $6.5 million 

                                       58
<PAGE>
 
and $6.2 million, respectively. At December 31, 1998 and 1997, the unfunded
accumulated benefit obligations of $6 million and $5.9 million, respectively,
have been recorded in other deferred credits and liabilities and intangible
pension assets of $372,000 and $678,000, respectively, are included in deferred
charges and other assets.

United Water maintains defined contribution savings plans which permit employees
to make voluntary contributions with Company matching as defined by the plan
agreements. United Water made contributions of $1,764,000, $1,155,000 and
$1,167,000 in 1998, 1997 and 1996, respectively, to defined contribution savings
plans.

NOTE 11 - RATE MATTERS

The following rate decisions were rendered to United Water's regulated utilities
during 1998:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                        Effective   Allowed      Annual         %
(thousands of dollars)                    Date        ROE       Increase     Increase
---------------------------------------------------------------------------------------
<S>                                     <C>         <C>        <C>           <C>        
Pennsylvania                             2/03/98     11.00     $2,140          11.0
Pennsylvania-DSIC*                       4/01/98        --         32           0.2
Delaware (1998 case)                     5/11/98       N/A      2,385  (a)     14.4
Pennsylvania-STAS**                      6/01/98        --        (23) (b)      0.1
Pennsylvania-DSIC*                       7/01/98        --         41           0.2
Idaho                                    7/06/98     10.75      1,916           8.7
Indiana (4 rate cases)                   7/08/98     10.50      1,041          18.3
New York (Sloatsburg/Pothat)             7/18/98        --         29           8.8
New Rochelle (Purchased Water)           8/24/98        --        453  (c)      2.6  
Pennsylvania-DSIC*                      10/01/98        --         30          0.22
New Rochelle (Revenue Rec.)             11/01/98        --         81  (d)      0.5
New Rochelle (3rd Stage)                11/19/98        --        491  (e)      2.8
Owego                                    1/01/99     10.00         21          2.33
Pennsylvania-DSIC*                       1/01/99        --         54           0.3
--------------------------------------------------------------------------------------- 
     Totals                                                    $8,691
--------------------------------------------------------------------------------------- 
</TABLE>

*    Distribution System Improvement Charge
**   State Tax Adjustment Surcharge

(a)  Interim increase, granted subject to refund.  Decision pending.
(b)  Reduction on the Capital Stock and Franchise Tax.
(c)  Pass-through for purchased water expense increase.
(d)  One-third of a three-year recovery.
(e)  Third-stage increase of a three-year settlement.

                                       59
<PAGE>
 
At December 31, 1998, the most significant rate cases pending were filed by
United Water Florida and United Water Delaware. The increases were requested
primarily to fund capital investments and meet higher operation and maintenance
costs. In May 1998, United Water Florida applied for rate relief in the amount
of $2.2 million, or 24.3%, in water revenues and $3.1 million, or 18.7%, in
wastewater revenues.

In March 1998, United Water Delaware applied for rate relief in the amount of
$4.1 million or 24.8%, in water revenues.  On May 11, 1998, United Water
Delaware placed $2.4 million in increased revenues in effect, subject to refund.
Management believes that any potential refunds will not have a material effect
on earnings.

On October 26, 1996, United Water Delaware placed $2.3 million in increased
revenues in effect, subject to refund.  On July 15, 1997, the Delaware Public
Utility Commission granted the Company a permanent rate increase of $1.6
million. On July 16, 1997, the Company filed an appeal and application for a
stay of the Commission's Order. On July 29, 1997, the Delaware Superior Court
granted a stay of the Commission decision pending the appeal. On March 31, 1998,
the Superior Court decided in favor of the Commission. The Company appealed this
decision to the Supreme Court of Delaware and on February 11, 1999, the Supreme
Court reversed the Commission's decision which denied the $.7 million annual
revenue increase, subject to refund and remanded the matter to the Commission.
The Company expects that the Commission will enter an Order on remand which will
eliminate the prospect of refunding any part of the $2.3 million.

The Company has requested and received recovery of its regulatory assets for
postretirement benefits other than pension as well as the recognition of the
current expense for these benefits for the majority of its regulated
subsidiaries. The regulatory assets are expected to be recovered over an average
period of 15 years. At December 31, 1998, three regulated subsidiaries were
awaiting decisions from the applicable commissions. Management believes it will
receive favorable decisions on the pending cases prior to the end of 1999.

Generally, the rate awards the Company's operating utilities actually receive
are less than the amounts requested, primarily due to differing positions of the
parties involved and/or updated information provided during the proceedings.

                                       60
<PAGE>
 
NOTE 12 - INCOME TAXES

DEFERRED INCOME TAX ASSETS AND LIABILITIES: Deferred tax liabilities (assets)
and deferred investment tax credits consisted of the following at December 31:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------
(thousands of dollars)                                 1998        1997
---------------------------------------------------------------------------
<S>                                                 <C>         <C>
Basis differences of property, plant
   and equipment                                    $140,094    $130,891
Real estate transactions and                                            
   capitalized costs                                  15,726      15,586
Prepaid employee benefits                             10,941       8,550
Other liabilities                                     24,151      23,052
---------------------------------------------------------------------------
   Gross deferred tax liabilities                    190,912     178,079
---------------------------------------------------------------------------
Alternative minimum tax credit                                          
   carryforwards                                     (12,754)    (11,223)
Other assets                                          (4,763)     (5,862)
---------------------------------------------------------------------------
   Gross deferred tax assets                         (17,517)    (17,085)
---------------------------------------------------------------------------
   Deferred investment tax credits                    21,973      22,496
---------------------------------------------------------------------------
Total deferred income taxes                                             
   and investment tax credits                       $195,368    $183,490
---------------------------------------------------------------------------
</TABLE>

INCOME TAX PROVISION:  A reconciliation of income tax expense at the statutory
federal income tax rate to the actual income tax expense for 1998, 1997 and 1996
is as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars)                            1998       1997       1996
--------------------------------------------------------------------------------
<S>                                             <C>        <C>        <C>
Statutory tax rate                                   35%        35%        35%
Federal taxes at statutory rates on pretax
  income before preferred stock
  dividends of subsidiaries                     $24,389    $19,779    $22,544
Utility plant acquisition adjustment                733        641      1,725
State income taxes, net of federal benefit          985        835      1,823
Deferred investment tax credits                    (523)      (510)      (499)
Equity in foreign investments                    (5,985)    (1,135)    (2,476)
Other                                              (149)       969        394
--------------------------------------------------------------------------------
Provision for income taxes                      $19,450    $20,579    $23,511
--------------------------------------------------------------------------------
</TABLE>

                                       61
<PAGE>
 
Income tax expense for 1998, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars)                             1998       1997       1996
--------------------------------------------------------------------------------
<S>                                              <C>        <C>        <C>
Current:
  Federal                                        $ 7,146    $10,668    $ 5,919
  State                                            1,349        969      1,310
--------------------------------------------------------------------------------
  Total current                                  $ 8,495    $11,637    $ 7,229
--------------------------------------------------------------------------------
Deferred (prepaid):
  Accelerated depreciation                       $ 8,305    $ 7,437    $ 7,612
  Contributions and advances for
     construction                                    401        200     (1,855)
  Prepaid employee benefits                        2,391      1,400      1,931
  UWNJ debt refinancing                                -          -      3,053
  Real estate transactions
     and capitalized costs                           117       (181)        64
  Alternative minimum tax                         (1,531)    (1,507)      (741)
  Investment tax credits                            (523)      (510)      (499)
  State income taxes, net of federal benefit         192        316        972
  Transfer of New Mexico operations                    -          -      5,365
  Other                                            1,603      1,787        380
--------------------------------------------------------------------------------
  Total deferred                                 $10,955    $ 8,942    $16,282
--------------------------------------------------------------------------------
Total provision for income taxes                 $19,450    $20,579    $23,511
--------------------------------------------------------------------------------
</TABLE>

The Company considers the undistributed earnings of United Water UK to be
permanently reinvested and has not provided deferred taxes on these earnings.
At December 31, 1998 and 1997, cumulative undistributed earnings were $18.8
million and $5.4 million, respectively. These undistributed earnings could
become subject to additional tax if remitted, or deemed remitted, as a dividend.
Management believes it is not practicable to determine the amount of the
unrecognized deferred tax liability.

NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts at December 31, 1998 and 1997, of those current assets and
liabilities that are considered financial instruments approximates their fair
values at those dates because of the short maturity of those instruments.  Such
current assets and liabilities include cash and cash equivalents, restricted
cash, accounts receivable and unbilled revenues, notes payable, accounts payable
and other current liabilities, and accrued interest and dividends. Real estate
and other investments consist primarily of real estate and equity investments in
affiliates and are not financial instruments. The Company understands that there
are no quoted market prices for the Company's preferred stock, preference stock
or long-term debt. The fair values of the Company's long-term debt and preferred
and preference stock have been determined by discounting their future cash flows
using approximate current market interest rates for securities of a 

                                       62
<PAGE>
 
similar nature and duration.

The estimated fair values of United Water's financial instruments at December 31
were as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                       Carrying      Fair
(thousands of dollars)                                  amount       value
--------------------------------------------------------------------------------
<S>                                                    <C>         <C>
1998
Long-term debt                                         $652,969    $715,993
Preferred and preference stock with
   mandatory redemption                                  80,282      87,601
--------------------------------------------------------------------------------
1997
Long-term debt                                         $622,737    $673,321
Preferred and preference stock with
   mandatory redemption                                  86,579      96,425
--------------------------------------------------------------------------------
</TABLE>

The Company's customer advances for construction have a carrying value of $30.6
million and $27.4 million at December 31, 1998 and 1997, respectively.  Their
relative fair values cannot be accurately estimated since future refund payments
depend on several variables, including new customer connections, customer
consumption levels and future rate increases. The Company holds an interest rate
cap to limit its exposure to a maximum interest rate of 7% on the United Water
New Jersey Variable Rate Demand Water Facilities Refunding Bonds aggregating
$130 million. In addition, United Water entered into an interest rate swap
agreement on the $30 million long-term note agreement with Credit Lyonnais which
fixed the interest rate at 5.24% for 1999 and 5.34% for the years 2000 through
2003. The fair values and carrying amounts of these financial instruments were
not material at December 31, 1998.

NOTE 14 - DISCONTINUED OPERATIONS

In December 1996, the Company announced its intention to dispose of its
environmental testing business, closing its Laboratory Resources' operation in
Teterboro, New Jersey. Subsequently, in January 1997, it sold its laboratory
facility in Brooklyn, Connecticut. The subsidiary had been operating in a very
competitive environment over a prolonged period of time and had not contributed
to the Company's earnings, with a net loss of $1.5 million in 1996. The Company
recorded an estimated provision of $1.1 million, net of income taxes, for
severance, future lease obligations and other related costs, included in the
loss on disposal of discontinued business in the accompanying statement of
consolidated income. The operating results of Laboratory Resources prior to the
date of discontinuance are shown separately in the accompanying statement of
consolidated income and all of the financial statements of prior periods have
been restated to reflect the discontinuance of Laboratory Resources' operations.

                                       63
<PAGE>
 
NOTE 15 - EARNINGS PER SHARE

In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" (EPS),
which specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. The statement defines two earnings per share calculations, basic
and diluted. The following table is a reconciliation of the numerator and
denominator under each method:

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                     Per Share
(thousands except per share data)                 Income    Shares     Amount
--------------------------------------------------------------------------------
<S>                                              <C>        <C>      <C>        
BASIC EPS:                                                                     
Net income applicable to common                                                
 stock from continuing operations                $43,929    37,028      $1.19
Net income applicable to common stock            $43,929    37,028      $1.19
                                                                              
ASSUMING DILUTION:                                                            
Net income applicable to common                                               
 stock from continuing operations                $43,929    37,028 
   Stock options                                       -       165            
   Convertible preference stock                    1,829     1,999            
                                                 -------    ------            
                                                                              
Net income applicable to common stock            $45,758    39,192      $1.17  
--------------------------------------------------------------------------------
</TABLE>

FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                     Per Share
(thousands except per share data)                 Income    Shares     Amount
--------------------------------------------------------------------------------
<S>                                              <C>        <C>      <C>        
BASIC EPS:
Net income applicable to common
 stock from continuing operations                $29,331    35,492      $.83
Net income applicable to common stock            $29,331    35,492      $.83
                                                                              
ASSUMING DILUTION:                                                            
Net income applicable to common                                               
 stock from continuing operations                $29,331    35,492            
   Stock options                                       -       156            
   Convertible preference stock                    2,076     2,190            
                                                 -------    ------            
                                                                              
Net income applicable to common stock            $31,407    37,838      $.83 
--------------------------------------------------------------------------------
</TABLE>

                                       64
<PAGE>
 
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                     Per Share
(thousands except per share data)                 Income    Shares     Amount
--------------------------------------------------------------------------------
<S>                                              <C>        <C>      <C>        
BASIC EPS:
Net income applicable to common
 stock from continuing operations                $38,407    33,707      $1.14  
Loss from discontinued operations                 (4,397)   33,707       (.13) 
Net income applicable to common stock            $34,010    33,707      $1.01  
                                                                               
ASSUMING DILUTION:                                                             
Net income applicable to common                                                
 stock from continuing operations                $38,407    33,707            
  Stock options                                        -        21             
  Convertible preference stock                     2,342     2,490            
                                                 -------    ------             
                                                 $40,749    36,218      $1.12  
                                                                               
Loss from discontinued operations                 (4,397)   36,218       (.12) 
 
Net income applicable to common stock            $36,352    36,218      $1.00
--------------------------------------------------------------------------------
</TABLE>


NOTE 16 - SEGMENT INFORMATION

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires that business segment
financial information be reported in the financial statements utilizing the
management approach.  Those segments include utility investments, real estate
and non-regulated business.
 
United Water's utility investments include its regulated, domestic subsidiaries,
United Water New Jersey, United Water New York, and the utility subsidiaries of
United Waterworks and United Water Mid-Atlantic. These regulated utilities
provide water and wastewater services to the public at large in areas where they
possess franchises or other rights to provide such services. The utility
subsidiaries are subject to rate regulation, generally by the regulatory
authorities in the states in which they operate. In addition, the Company holds
a 50% investment in the Northumbrian Partnership, which acquired a 20% interest
in Northumbrian Water Group, a major investor-owned water and wastewater company
in the United Kingdom.
 
United Properties Group is a non-regulated business engaged in real estate
investment and development activities, including commercial office and retail
properties, residential and commercial land development and sales, golf course
operations and consulting services.  United Properties Group owns a portfolio of
real estate located in New Jersey, New York, Delaware, Idaho and Florida.

                                       65
<PAGE>
 
The Company's non-regulated sector consists primarily of a 50% investment in
United Water Services, a 50/50 joint venture with Suez Lyonnaise des Eaux, which
provides contract operations and maintenance services for water and wastewater
facilities. In addition, United Water entered into public-private partnerships
with the cities of Jersey City and Hoboken, New Jersey. Under these
arrangements, the municipalities retain ownership of their systems while the
Company operates and maintains them. Parent and elimination companies are also
included in this segment.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                        Parent, Non-Regulated
                                   Utility      Real     Water Services and
(thousands of dollars)           Investments   Estate        Eliminations     Consolidated
--------------------------------------------------------------------------------------------
<S>                              <C>           <C>      <C>                   <C>
1998
Operating revenues                $  325,475   $16,196         $14,539          $  356,210
Depreciation and amortization         35,594     1,593           2,763              39,950
Interest expense                      39,361     1,742           4,814              45,917
Equity earnings of affiliates         17,103         -          (5,652)             11,451
Provision for income taxes            23,288     1,985          (5,823)             19,450
Capital expenditures                 100,034     5,038             952             106,024
Identifiable assets                1,626,876    91,739          50,507           1,769,122
--------------------------------------------------------------------------------------------
1997                                                                                      
Operating revenues                $  313,346   $20,075         $17,988          $  351,409
Depreciation and amortization         31,519     1,419           1,756              34,694
Interest expense                      38,936     1,750           4,686              45,372
Equity earnings of affiliates          3,304         -          (2,991)                313
Provision for income taxes            21,546     2,439          (3,406)             20,579
Capital expenditures                  83,342     2,431           1,004              86,777
Identifiable assets                1,512,966    88,388          56,988           1,658,342
--------------------------------------------------------------------------------------------
1996                                                                                      
Operating revenues                $  299,283   $13,769         $18,993          $  332,045
Depreciation and amortization         28,157     1,296           1,399              30,852
Interest expense                      39,161     1,750           4,040              44,951
Equity earnings of affiliates          5,991         -          (1,374)              4,617
Provision for income taxes            26,924     1,066          (2,112)             25,878
Capital expenditures                  75,726     2,831           2,914              81,471
Identifiable assets                1,461,302    90,212          30,583           1,582,097 
--------------------------------------------------------------------------------------------
</TABLE>

                                       66
<PAGE>
 
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------- 
                                                                      QUARTER
(thousands of dollars, except per share data)      FIRST     SECOND      THIRD      FOURTH  
---------------------------------------------------------------------------------------------
<S>                                              <C>        <C>        <C>         <C>    
1998                                                                  
Operating revenues                               $75,442    $86,219    $108,748    $85,801
Operating income                                  13,720     22,271      39,482     22,127
Net income applicable to common stock              3,134     11,042      19,500     10,253
Net income per common share                      $   .09    $   .30    $    .52    $   .27
Net income per common share-diluted              $   .09    $   .30    $    .51    $   .27
---------------------------------------------------------------------------------------------
1997                                                                                      
Operating revenues                               $80,006    $87,761    $ 99,690    $83,952
Operating income                                  14,644     24,991      34,169     21,840
Net income applicable to common stock              4,102     11,244       6,464      7,521
Net income per common share                      $   .12    $   .32    $    .18    $   .21
Net income per common share-diluted              $   .12    $   .31    $    .18    $   .21
---------------------------------------------------------------------------------------------
1996                                                                                      
Operating revenues                               $69,759    $82,581    $ 97,871    $81,834
Operating income                                  14,092     24,415      33,920     23,272
Net income applicable to common stock              4,881      7,363      15,521      6,245
Net income per common share                      $   .15    $   .22    $    .46    $   .18
Net income per common share-diluted              $   .15    $   .22    $    .44    $   .18
---------------------------------------------------------------------------------------------
</TABLE>

As disclosed in Note 2 to the consolidated financial statements, the Company
recorded a net $10.3 million charge resulting from the "windfall profits" tax in
the United Kingdom during the third quarter of 1997.

As disclosed in Note 3 to the consolidated financial statements, the Company
settled the condemnation proceeding with the city of Rio Rancho. As a result, an
after-tax gain of $4.3 million is included in the Company's 1996 first quarter
earnings.

                                       67
<PAGE>
 
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------   ---------------------------------------------------------------
               FINANCIAL DISCLOSURE
               --------------------
 
     There were no changes in or disagreements with accountants on accounting
and financial disclosure in 1998.

                                       68
<PAGE>
 
                                   PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------   --------------------------------------------------

ITEM 11.   EXECUTIVE COMPENSATION
--------   ----------------------

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------   --------------------------------------------------------------

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------   ----------------------------------------------

     The information called for by Items 10 (including any information relating
to delinquent filers under Section 16 of the Securities Exchange Act of 1934),
11, 12 and 13 is omitted because the registrant will file with the Securities
and Exchange Commission, not later than 120 days after the close of the year
covered by this Form 10-K, a definitive proxy statement pursuant to Regulation
14A involving the election of directors which is hereby incorporated by
reference.

     In determining which persons may be affiliates of the registrant for the
purpose of disclosing on the cover page of this Form 10-K the market value of
voting shares held by non-affiliates, the registrant has excluded shares held by
the members of its Board of Directors, executive officers and beneficial owners
of more than 10% of the common stock outstanding to the extent that they have
not disclaimed beneficial ownership. No determination has been made that any
director or person connected with a director is an affiliate or that any other
person is not an affiliate. The registrant specifically disclaims any intent to
characterize any person as being or not being an affiliate.

                                       69
<PAGE>
 
                                    PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------   ----------------------------------------------------------------

      The following documents are filed as part of this report:

(a)   Financial Statements and Supplementary Data:   See Item 8
(b)   Reports on Form 8-K filed in the fourth quarter of 1998:  None
(c)   Exhibits:

  3(a)    Restated Certificate of Incorporation (Articles of Incorporation) of
          United Water Resources Inc., dated July 14, 1987 (Filed as Exhibit
          4(b) to Registration Statement No. 33-20067)

  3(b)    Certificate of Correction to Restated Certificate of Incorporation of
          United Water Resources Inc., dated August 13, 1987 (Filed as Exhibit
          4(c) to Registration Statement No. 33-20067)

  3(c)    Certificate of Amendment to the Restated Articles of Incorporation of
          United Water Resources Inc., dated April 22, 1994, amending Articles
          5, 6, 7 and 9 (Filed as Exhibit 3(c) to Registration Statement No. 33-
          61617)

  3(d)    Certificate of Amendment to the Restated Certificate of Incorporation
          of United Water Resources Inc., dated June 3, 1997, amending Articles
          5(a) (Filed as Exhibit 3(d) to Registration Statement No. 333-30229)

  3(e)    Amended By-laws of United Water Resources, dated as of March 10, 1994
          (Filed as Exhibit 4(l) to Form 10-K for year ended December 31, 1993)

  4(a)    Specimen of United Water Resources Common Stock (Filed as Exhibit 4(d)
          to Registration Statement No. 2-90540)
 
  4(b)    Governance Agreement between United Water Resources and Lyonnaise
          American Holding Inc., dated April 22, 1994 (Filed in Appendix A to
          Registration Statement No. 33-51703)

  4(c)    Amendment No. 1 to Governance Agreement between United Water Resources
          and Lyonnaise American Holding, Inc., dated June 27, 1996 (Filed as
          Exhibit 4(g) to Registration Statement No. 333-30229)

  4(d)    Amendment No. 2 to Governance Agreement between United Water Resources
          and Lyonnaise American Holding, Inc., dated July 14, 1997

                                       70
<PAGE>
 
  4(e)    Additional instruments defining rights of holders of the Company's
          long-term debt are not being filed because the securities authorized
          under each such agreement do not exceed 10% of the total assets of the
          Company and its subsidiaries on a consolidated basis. The Company
          agrees to furnish to the Commission a copy of each such agreement upon
          request.

  4(f)    Certificate of Amendment to the Restated Articles of Incorporation of
          United Water Resources Inc., dated April 22, 1994 for Series A
          Cumulative Convertible Preference Stock of United Water Resources Inc.
          (Filed as Exhibit 4(a) to Registration Statement No. 33-61617) 
 
  4(g)    Certificate of Amendment to the Restated Articles of Incorporation of
          United Water Resources Inc., dated April 22, 1994 for Series B 7 5/8%
          Cumulative Preferred Stock of United Water Resources Inc. (Filed as
          Exhibit 4(b) to Registration Statement No. 33-61617)    
 
  4(h)    Rights Agreement dated July 12, 1989, amended September 15, 1993,
          between United Water Resources Inc. and ChaseMellon Shareholders
          Services, L.L.C. (as successor to First Interstate Bank of California)
          (Filed originally as Exhibit 4(c) to Registration Statement No. 33-
          32672)

  10(a)   Executive Employment Agreement, effective January 1, 1998, between and
          among United Water Resources Inc. and Michael C.J. Fallon

  10(b)   Executive Employment Agreement, effective January 1, 1999, between and
          among United Water Resources Inc. and W. Marie Zanavich

  10(c)   Executive Employment Agreement, effective January 1, 1999, between and
          among United Water Resources Inc. and Walton F. Hill

  10(d)   Executive Employment Agreement between and among United Water
          Resources Inc. and Donald L. Correll (Filed as Exhibit 10(a) to Form
          10-K for the fiscal year ended December 31, 1997)

  10(e)   Executive Employment Agreement between and among United Water
          Resources Inc. and David E. Chardavoyne (Filed as Exhibit 10(b) to
          Form 10-K for the fiscal year ended December 31, 1997)

  10(f)   Executive Employment Agreement between and among United Water
          Resources Inc. and Frank DeMicco (Filed as Exhibit 10(c) to Form 10-K
          for the fiscal year ended December 31, 1997)

  10(g)   Executive Employment Agreement between and among United Water
          Resources Inc. and Joseph Simunovich (Filed as Exhibit 10(d) to Form
          10-K for the fiscal year ended December 31, 1997)

                                       71
<PAGE>
 
  10(h)   Executive Employment Agreement between and among United Water
          Resources Inc. and John J. Turner (Filed as Exhibit 10(e) to Form 10-K
          for the fiscal year ended December 31, 1997)

  10(i)   Executive Employment Agreement between and among United Water
          Resources Inc. and William Colford (Filed as Exhibit 10(f) to Form 10-
          K for the fiscal year ended December 31, 1997)

  10(j)   Executive Employment Agreement between and among United Water
          Resources Inc. and Robert Iacullo (Filed as Exhibit 10(g) to Form 10-K
          for the fiscal year ended December 31, 1997)

  10(k)   Executive Employment Agreement between and among United Water
          Resources Inc. and John Marino (Filed as Exhibit 10(h) to Form 10-K
          for the fiscal year ended December 31, 1997)

  10(l)   Executive Employment Agreement between and among United Water
          Resources Inc. and John Martinowich (Filed as Exhibit 10(i) to Form 
          10-K for the fiscal year ended December 31, 1997)

  10(m)   Executive Employment Agreement between and among United Water
          Resources Inc. and Richard B. McGlynn (Filed as Exhibit 10(c) to Form
          10-K for the fiscal year ended December 31, 1994)

  21      Subsidiaries of registrant

  23      Consent of Independent Accountants

  27      Financial Data Schedule

                                       72
<PAGE>
 
                          UNITED WATER RESOURCES INC.

                  SCHEDULE VIII - CONSOLIDATED VALUATION AND
                             QUALIFYING ACCOUNTS
                            (THOUSANDS OF DOLLARS)

<TABLE> 
<CAPTION> 
                                                    DECEMBER 31,
                                          -----------------------------
                                            1998       1997       1996
                                            ----       ----       ----
<S>                                           
ALLOWANCE FOR DOUBTFUL ACCOUNTS:          <C>        <C>        <C> 
   Balance at beginning of period         $ 2,528    $ 2,549    $  1,299 
                                                                         
                                                                         
   Charges to costs and expenses            1,613      1,587       3,162 
                                                                         
                                                                         
   Accounts written off                    (3,128)    (1,770)     (2,116) 


   Recoveries of accounts written off         191        162         204
                                          -------    -------     ------- 

   BALANCE AT END OF PERIOD               $ 1,204    $ 2,528     $ 2,549
                                          =======    =======     ======= 
                                                                       
                                                                       
REAL ESTATE VALUATION RESERVE:                                         
   Balance at beginning of period         $ 3,201    $ 3,465     $12,696
                                                                       
                                                                       
      Sales of properties                  (1,036)      (264)     (9,231)
                                          -------    -------     ------- 
                                                                       
   BALANCE AT END OF PERIOD               $ 2,165    $ 3,201     $ 3,465
                                          =======    =======     ======= 
</TABLE> 

                                      73
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.


                                         UNITED WATER RESOURCES INC.
                                         ---------------------------
                                                 (Registrant)


    March 18, 1999                      By     DONALD L. CORRELL
---------------------                     -----------------------------
                                                Donald L. Correll
                                               Chairman, President
                                           and Chief Executive Officer

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

<TABLE> 
<CAPTION> 
          SIGNATURE                                TITLE                          DATE     
          ---------                                -----                          ----     
<S>                                     <C>                                   <C>           
                                            Chairman, President                            
        DONALD L. CORRELL               and Chief Executive Officer           March 18, 1999 
-------------------------------- 
       (Donald L. Correll)


                                                Secretary
         DOUGLAS W. HAWES                     and Director                    March 18, 1999
-------------------------------- 
         (Douglas W. Hawes)

 
          JOHN J. TURNER                        Treasurer                     March 18, 1999
-------------------------------- 
         (John J. Turner)
</TABLE> 

                                   DIRECTORS
                                   ---------

<TABLE> 
<S>                                     <C>            <C>                                          <C>     
EDWARD E. BARR                          3/18/99        ROBERT L. DUNCAN, JR.                        3/18/99
----------------------------------      -------        -------------------------------------        -------
(Edward E. Barr)                        Date           (Robert L. Duncan, Jr.)                      Date   
                                                                                                           
FRANK J. BORELLI                        3/18/99        JON F. HANSON                                3/18/99
----------------------------------      -------        -------------------------------------        -------
(Frank J. Borelli)                      Date           (Jon F. Hanson)                              Date    
 
THIERRY BOURBIE                         3/18/99        DOUGLAS W. HAWES                             3/18/99
----------------------------------      -------        -------------------------------------        ------- 
(Thierry Bourbie)                       Date           (Douglas W. Hawes)                           Date
 
CHARLES CHAUMIN                         3/18/99        GEORGE F. KEANE                              3/18/99
----------------------------------      -------        -------------------------------------        ------- 
(Charles Chaumin)                       Date           (George F. Keane)                            Date
 
LAWRENCE R. CODEY                       3/18/99        DENNIS M. NEWNHAM                            3/18/99
----------------------------------      -------        -------------------------------------        ------- 
(Lawrence R. Codey)                     Date           (Dennis M. Newnham)                          Date
 
DONALD L. CORRELL                       3/18/99        MARCIA L. WORTHING                           3/18/99
----------------------------------      -------        -------------------------------------        ------- 
(Donald L. Correll)                     Date           (Marcia L. Worthing)                         Date
 
PETER DEL COL                           3/18/99
----------------------------------      -------        
(Peter Del Col)                         Date
</TABLE>