<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, 1995
                                            -----------------
                                       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 29, 1996 - 32,954,565
                                   ----------

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 29, 1996, the registrant's Common Stock, no par value, held by
non-affiliates had an aggregate market value of $ 302,829,203.  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
             tentatively to be held on May 13, 1996 as to Part III,
             items 10, 11, 12, and 13. 

                                                                               1
<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), which currently owns regulated water and wastewater
utilities operating in 13 states, and a 25% indirect investment in JMM
Operational Services, Inc. (JMM).  JMM provides operations and management
services to government and industry for water and wastewater treatment
facilities.  The Merger was accounted for under the purchase method of
accounting.  For a discussion of the Merger, see Note 2 to the consolidated
financial statements in Item 8 below.

     United Water's principal utility subsidiaries, United Water New Jersey,
United Water New York 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; Laboratory Resources, a network of
environmental testing laboratories in New Jersey, Connecticut and Pennsylvania;
and United Water Mid-Atlantic, whose subsidiaries own and operate water and
wastewater systems.

--------------------------
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 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.

                                                                               2
<PAGE>
 
(B)  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
     ---------------------------------------------

     See Note 14 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.

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

     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 176,400 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 61,950 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 about 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 325,000 customers in 13 states through its
regulated water and wastewater utility subsidiaries.  The utility subsidiaries
of United Waterworks serve a total population of about 875,000 persons.  Its
water utilities obtain water primarily from wells and surface supplies (lakes,
ponds, reservoirs

                                                                               3
<PAGE>
 
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 3,900 customers
primarily in 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 have not had a material
impact on the Company's results of operations.  The Company's water utilities
have not experienced any long-term 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.

     The following table sets forth information concerning United Water's water
and wastewater utility operations, particularly the nine larger utilities which
in 1995 accounted for 89.4% of United Water's utility customers, 90.6% of United
Water's utility operating revenues and 86.4% of United Water's net investment in
utility plant.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------
                                    # of Customers at         1995
Major Utility Operations              Dec. 31, 1995         Revenues
-------------------------------------------------------------------------
                                                         (in thousands)
<S>                                 <C>                  <C>
   United Water New Jersey               176,425            $119,338
   United Water New York                  61,952              39,883
   United Waterworks Subsidiaries:                          
     United Water Florida                 47,551              20,492
     United Water Idaho                   54,476              19,938
     United Water Pennsylvania            45,025              18,827
     United Water New Rochelle            30,120              16,968
     United Water Delaware                31,123              14,521
     United Water Toms River              43,022              13,052
     United Water Arkansas                19,720               6,309
-------------------------------------------------------------------------
Subtotal                                 509,414             269,328
Other utility operations                  60,521              27,855
-------------------------------------------------------------------------
   Total utility operations              569,935            $297,183
-------------------------------------------------------------------------
</TABLE>

                                                                               4
<PAGE>
 
          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 in 1986.

          Customers.  In 1995, the Company's utility revenues were derived as
          ---------                                                          
follows: 62% from residential customers, 26% from commercial customers, 8% from
industrial customers and 4% from fire protection customers. Of the Company's
547,715 water utility customers at December 31, 1995, 489,025 (89%) were
residential customers, 52,132 (10%) were commercial customers and 6,558 (1%)
were industrial customers. The Company also had 22,220 wastewater customers at
December 31, 1995, many of whom were also water customers of the Company. The
Company does not have a dependence on any single utility customer, since no
single utility customer accounted for more than 10% of the Company's
consolidated utility revenues in 1995.

          Capital Expenditures.  The Company's additions to utility plant were
          --------------------                                                
$70,227,000 in 1995 as compared to $57,592,000 in 1994.  For a discussion of the
Company's capital expenditures, see Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7, below.

          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 renewable 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 in New Mexico.  See Item 3, Legal Proceedings, below.

                                                                               5
<PAGE>
 
          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 each 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 those regulations.
For a discussion of rate increases granted the Company's utility subsidiaries in
1995, see Note 11 to the consolidated financial statements in Item 8, below.

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 United Properties, a subsidiary engaged in real estate activities,
Laboratory Resources, a subsidiary that owns and operates a network of
environmental testing laboratories, and a 50% investment in a joint venture
partnership (the Partnership) with Lyonnaise American Holding (LAH) which, in
turn, holds 50% of the common stock of JMM, an environmental technology and
engineering firm.

          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 a portfolio of real estate located in New Jersey, New York,
Pennsylvania, Delaware, Idaho and Arkansas. United Properties also provides
consulting and advisory services in support of the real estate assets of the
other United Water companies.

          JMM Operational Services, Inc.  As a result of the Merger and the
          ------------------------------                                   
formation of the Partnership with LAH, the Company acquired an indirect 25%
interest in JMM.  The Partnership owns 50% of JMM's outstanding common stock and
the remaining 50% is owned by Montgomery Watson Americas, Inc., a privately held
environmental technology and engineering firm.  JMM, headquartered in  Denver,
Colorado, provides contract operations and maintenance services, principally to
municipalities, for water and

                                                                               6
<PAGE>
 
wastewater facilities in North America.  The Company's investment in the
Partnership is accounted for under the equity method of accounting.

          Laboratory Resources  Laboratory Resources performs a wide range of
          --------------------                                               
environmental analyses for consulting engineers, industry, public water
suppliers, operators of wastewater treatment facilities and governmental
agencies.

          Public-Private Partnerships  United Water is a leader in 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 a public-private partnership with the city of Hoboken,
New Jersey in July 1994. In late 1995, the Company won a bid to enter into a
service contract with Jersey City, New Jersey, which, upon consummation, will
involve the nation's largest private operation of a municipal water system.

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 540 employees at 9 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 1986, the EPA issued revisions and a timetable for future
revisions to 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 1986
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.

                                                                               7
<PAGE>
 
          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.

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

          (Not applicable)


ITEM 2.  PROPERTIES
-------  ----------

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

          United Water's utility subsidiaries own, operate and maintain a total
of 356 wells, 58 water treatment plants, with treatment capacities of up to 200
million gallons per day (MGD), 13 wastewater treatment plants, with treatment
capacities of up to 3 MGD, and 202 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 7,174 miles of water transmission and distribution mains
and 280 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
purpose 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.

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

          United Properties owns approximately 2,300 acres of land held for sale
or under development principally in New Jersey, New York and Pennsylvania and
549,050 square feet of office and retail properties.  In addition, United
Properties owns or holds interests in three golf properties in New Jersey.

          Laboratory Resources owns and operates three commercial testing
laboratories in Teterboro, New Jersey; Brooklyn, Connecticut; and Bethlehem,
Pennsylvania.

ITEM 3.  LEGAL  PROCEEDINGS
-------  ------------------

          Three suits were filed by Safas Corporation, New Regime Company and
Aircraft Engineering Products against United Water, Dundee Water Power & Land
Co. (Dundee) and United Water New Jersey in September and November 1994 and May
1995 in the Superior Court of New Jersey - Passaic County. The suits allege that
the plaintiffs suffered property damages as a result of an alleged breach in a
berm surrounding the Dundee Canal, allowing water to escape.  The Dundee Canal
is the property of Dundee, a corporation of which United Water owns 50% of the
outstanding common stock. North Jersey District Water Supply Commission, the
other 50% shareholder, has also been named as a defendant.  Initially, the
plaintiffs in the Safas and New Regime suits voluntarily dismissed United Water
and United Water New Jersey without prejudice from their actions.  In August
1995, Safas and New Regime reinstituted their suits against United Water and
United Water New Jersey.  Plaintiffs, in the aggregate, seek damages of several
million dollars.  Both United Water's and the North Jersey District Water Supply
Commission's respective policies of insurance name Dundee as an additional
insured.  The Company is of the opinion that it, United Water New Jersey and
Dundee have adequate insurance to cover claims of this nature.  United Water is
undertaking a continuing investigation of the claims in conjunction with the
North Jersey District Water Supply Commission.

          United Waterworks owns a utility subsidiary which has provided water
and wastewater services to customers in Rio Rancho, New Mexico.  The City of Rio
Rancho (the City) notified United Waterworks that it intended to acquire the
Company's utility operations in Rio Rancho, and on October 28, 1994 commenced
condemnation proceedings in the Thirteenth Judicial District, Sandoval County.
On December 15, 1994, the City filed an Application for Immediate Possession of
the Company's utility systems in Rio Rancho.  Hearings were held on the
Application, and on March 30, 1995 the court entered an Order For Immediate
Possession  (the Order).  The Order allowed the City to take possession on June
30, 1995 upon depositing $53 million with the court. On April 19, 1995, the City
and the Company's utility subsidiary entered into a Stipulation in settlement of
the condemnation action (the Stipulation).  Under the Stipulation,

                                                                               9
<PAGE>
 
the City would deposit and pay the Company $69 million plus the amount of net
capital additions made to the water and wastewater systems by the Company in
1995. The City made the deposits required pursuant to the Stipulation and Order,
and on June 30, 1995, the City assumed possession of the operations of the
utility subsidiary. As of September 1995, pursuant to the Stipulation, the
Company withdrew approximately $35 million of the $69 million deposited by the
City.  The balance was to be released to the Company upon the satisfaction of
certain conditions contained in the Stipulation, including a requirement that no
legal proceedings will exist which could interfere with the City's ownership or
operation of the utility systems. The New Mexico Public Utilities Commission
(PUC)  ruled that its approval must be obtained before the Company could
relinquish its systems to the City.  A hearing for that purpose was held on
September 28, 1995 and, following a hearing examiner's decision issued on
October 23, 1995 which recommended against allowing the relinquishment of
service by the Company, the Company sought, on October 25, 1995, a writ from the
Supreme Court of New Mexico either compelling the PUC to act by a date certain
or ordering that the PUC's action to review the condemnation transaction was
beyond the scope of the PUC's authority. While the writ application was pending,
the PUC issued a ruling on November 7, 1995, refusing to permit the Company to
relinquish service.  On November 8, 1995, the Supreme Court of New Mexico heard
oral argument on the matter and ordered that the Company's application would be
treated as a plenary appeal of the PUC's decision.

          The Stipulation between the Company and the City provided that in the
event the transaction had not been completed by October 30, 1995, the
Stipulation would terminate.  In its writ application filed with the Supreme
Court, the Company requested a stay of the Stipulation's termination pending
resolution of the scope of the PUC's jurisdiction over the transaction.  On
October 30, 1995, the Supreme Court granted the Company's request for a stay,
without hearing argument, but following its decision on November 8, 1995, the
Supreme Court lifted its stay of the termination of the Stipulation.  On
November 9, 1995, the City notified the Company that it considered the
Stipulation to be of no effect in light of the lifting of the stay and the
Stipulation's having expired of its own terms.

          On November 20, 1995, in addition to filing its brief seeking a
reversal of the PUC's decision refusing to grant permission to the Company to
abandon its systems to the City, the Company filed a writ with the Supreme Court
of New Mexico again requesting that a stay of the termination of the Stipulation
be imposed.  On December 13, 1995, the Supreme Court held oral argument on the
appeal from the PUC's decision, and on January 17, 1996, in a written opinion,
reversed the decision of the PUC and held that the PUC had no jurisdiction over
the condemnation of the systems and had wrongfully refused to permit the Company
to abandon the systems to the City.  The Supreme Court did not rule on the 
Company's 

                                                                              10
<PAGE>

request to stay the termination of the Stipulation at that time, but, 
on March 21, 1996, in response to a motion by the City to dismiss the Company's 
writ application, the Supreme Court issued an order denying the Company's 
request and dismissing the case before it.  The condemnation matter will now 
proceed before the District Court in New Mexico, and the Company cannot predict 
the outcome of that transaction.  The City has applied to the District Court, in
light of the termination of the Stipulation, to withdraw the additional $16 
million which it deposited with the District Court pursuant to the Stipulation,
and that request is pending before the District Court.  Management believes that
the resolution of this matter will not have a material adverse impact upon the
financial position or results of operations of the Company.

          United Water Delaware (formerly Wilmington Suburban Water
Corporation), a subsidiary of United Waterworks, is the subject of a Criminal
Violation Notice issued by New Castle County, Delaware Department of Public
Works (the Notice).  The Notice, dated April 15, 1992, describes the violation
as being an illegal placement of  fill in a floodplain in contravention of the
New Castle County Zoning and Drainage Codes.  United Water Delaware alleges that
the illegal fill was placed on land it owns by one or more third parties without
the knowledge or approval of United Water Delaware.  The management of United
Water Delaware has responded to the Notice by engaging  hydrogeological
engineers to investigate the feasibility of a mitigation and remediation plan
which would be consistent with the appropriate County Ordinances.  Violation
notice forms also were issued to other similarly situated property owners, and
United Water Delaware has taken part in many discussions concerning  the level
of participation by all such parties in a remediation.  United Water Delaware
has met with the New Castle County authorities and presented a remediation plan.
An application for approval of this plan was submitted to the New Castle County
Department of Planning on May 26, 1995 and the County accepted this proposal on
September 1, 1995.  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.

          On October 28, 1994, IU International Corporation (IU) filed suit in
the Superior Court of the State of Delaware against United Waterworks alleging
breach of contract and seeking reimbursement from United Waterworks of more than
$3 million, as well as interest thereon.  IU's claim is based on certain tax
indemnifications that were part of a stock purchase agreement entered into by
IU, Lyonnaise American Holding, Inc. (LAH), United Waterworks and GWC in
connection with the 1982 purchase of 50% of the outstanding common stock of
United Waterworks by LAH.  On June 16, 1995, United Waterworks, LAH and IU
entered into a settlement agreement pursuant to which United Waterworks agreed
to pay IU $800,000 on the date of execution of such agreement.  In addition,
United Waterworks agreed to pay IU an additional amount of up to approximately
$1.15 million plus interest thereon (such interest commencing 

                                                                              11
<PAGE>
 
as of September 15, 1993) at United Waterworks' average short-term borrowing
rate. Such payments become due in the event and at the time that certain tax
benefits previously claimed by United Waterworks with respect to its 1992 tax
year are determined to be allowable by the Internal Revenue Service. On June 16,
1995, United Waterworks paid $800,000 to IU. Pursuant to the settlement
agreement, on June 30, 1995, the parties filed with the court a stipulation of
dismissal dismissing the lawsuit with prejudice. 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 the
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 1995, there were no matters submitted to
a vote of security holders. 

                                                                              12
<PAGE>
 
                                    PART II
                                    -------

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

     United Water Resources' 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 1995, 1994 and 1993 and the dividends paid on the common stock
each quarter were as follows:

<TABLE>
<CAPTION>
(dollars)              STOCK PRICE       DIVIDEND
-------------------------------------------------
QUARTER               HIGH      LOW   
--------------------------------------------------
<C>     <S>         <C>       <C>        <C> 
1995    Fourth      $13.000   $11.750     $.23
        Third        13.500    12.500      .23
        Second       14.125    12.875      .23
        First        14.125    12.500      .23
                                      
1994    Fourth      $14.000   $12.250     $.23
        Third        14.250    13.000      .23
        Second       14.625    12.875      .23
        First        14.750    12.875      .23
                                      
1993    Fourth      $15.750   $14.000     $.23
        Third        15.750    14.750      .23
        Second       15.875    14.750      .23
        First        15.875    14.375      .23
--------------------------------------------------
</TABLE>

The high and low stock prices from January 1 to February 29, 1996, were $13.250
and $12.000.  There were 18,806 holders of record of United Water's common stock
as of February 29, 1996.

      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.

                                                                              13
<PAGE>
 
ITEM 6.     SELECTED  FINANCIAL  DATA
-------     -------------------------

<TABLE>
<CAPTION>
                                                            Year ended December 31,
----------------------------------------------------------------------------------------------- 
(thousands except per share data)                1995        1994      1993      1992      1991
----------------------------------------------------------------------------------------------- 
<S>                                        <C>         <C>         <C>       <C>       <C> 
Income Statement Data
---------------------
 
Operating revenues                         $  327,828  $  292,996  $200,418  $164,869  $161,750
                                                       
Operating income                               78,328      83,435    55,360    46,516    45,664
                                                       
Net income                                     17,343      27,887    19,978    15,784    16,442
                                                       
Net income per share                              .54        1.01      1.03       .87       .96
                                                       
Dividends paid per share                          .92         .92       .92       .92       .91
===============================================================================================
Balance Sheet Data (at end of period)                  
-------------------------------------                  
                                                       
Total assets                               $1,516,708  $1,457,427  $740,526  $691,659  $667,933
                                                       
Long-term debt                                558,658     505,204   276,753   294,169   301,730
                                                       
Preferred stock                                        
   without mandatory redemption                 9,000       9,000     9,000     9,000     9,000
                                                       
Preferred and preference stock                         
   with mandatory redemption                   98,091      98,173    23,840    24,100     9,360
----------------------------------------------------------------------------------------------- 
</TABLE>

                                                                              14
<PAGE>
 
ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL CONDITION  AND
-------  ----------------------------------------------------------------------
         RESULTS  OF  OPERATIONS
         -----------------------

MERGER

          On April 22, 1994, United Water Resources (United Water, or the
Company) 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),
which currently owns regulated water and wastewater utilities operating in 13
states, and a 25% indirect investment in JMM Operational Services, Inc. (JMM).
JMM provides operations and management services to government and industry for
water and wastewater treatment facilities.  See Note 2 to the consolidated
financial statements for Merger discussion.

          United Water's 1994 results include the operations of United
Waterworks for the nine months from April to December 1994.  It should be noted
that the results of operations for those nine months include the warmer, high-
demand summer months and therefore represent a significant portion of the total
1994 earnings of United Waterworks' operating utilities.  Results for 1995
include a full year of combined operations.

TRANSFER OF NEW MEXICO OPERATIONS

          United Waterworks owns a utility subsidiary which provides 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
a stipulation in settlement of a condemnation action (the Stipulation) whereby
the City would deposit and eventually pay the Company $69 million for its
utility operations in New Mexico plus the amount of net capital additions made
to the water and wastewater systems by the Company in 1995.  The Stipulation
required, among other things, that the transaction be completed by October 30,
1995.  The City deposited $69 million with the court pursuant to the court order
and Stipulation, and on June 30, 1995, the City assumed possession of the
operations of the utility subsidiary.  In July 1995, the Company withdrew $35
million of the amount on deposit with the court.

          In the fourth quarter of 1995, the New Mexico Public Utility
Commission (PUC) issued a ruling refusing to permit the Company to relinquish
its systems to the City.  The Company and the City appealed the PUC ruling to
the Supreme Court of New Mexico.  In January 1996, the Supreme Court of New
Mexico ruled that the PUC has no jurisdiction over the right of a municipality
to condemn its regulated water and sewer utilities nor the right to require a
privately owned utility to seek PUC approval for the forced transfer of its
facilities.  Although the Stipulation expired by its own terms on October 30,
1995, the Company has asked the Supreme Court of New Mexico to bind the City to
the Stipulation and complete

                                                                              15
<PAGE>
 
the transaction at the agreed price and terms. In March 1996, the Supreme Court
issued an order denying the Company's request and dismissing the case before it.
The Company continues to meet with City representatives to attempt to complete
the transaction. Because the City took possession of the utility's operations on
June 30, 1995, the Company has lost revenues for the last six months of 1995.
For the first six months of 1995, the Company's Rio Rancho utility had revenues
of $6 million; for the nine months ended December 31, 1994, its revenues totaled
$9.4 million.

IMPAIRMENT OF LONG-LIVED ASSETS

          During 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121,  "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
effective for financial statements for fiscal years beginning after December 15,
1995.  The statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and specifies the criteria for the determination and measurement of
an impairment loss.  United Water has elected early adoption of SFAS No. 121
and, as a result of changes in market conditions, development plans, projections
of cash flows and other considerations, has recorded a $12.1 million pre-tax
impairment loss for various parcels of land held by its real estate subsidiary
and for its investment in the environmental testing business for the year ended
December 31, 1995.  See Note 1 to the consolidated financial statements for
further details.

LIQUIDITY AND CAPITAL RESOURCES

          As shown in the consolidated statement of cash flows, the Company's
major uses of cash in 1995 included:  $78.2 million of capital expenditures;
$34.2 million of common, preferred and preference dividends paid to
shareholders; and a $33 million decrease in short-term notes payable.  The major
sources of funds to meet these cash needs included: $67 million of additional
long-term debt;  $38.8 million of cash provided by operations; $35.3 million
from the transfer of its New Mexico operations; and $19.9 million of proceeds
from the issuance of additional shares of common stock.

          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.  However, the Company is projecting higher levels of capital
expenditures during the next five years due to the addition of new, or expansion
of existing, water treatment and source of supply facilities by United
Waterworks' utility subsidiaries.  These capital expenditures are necessary to
meet growth requirements and to comply with environmental laws and regulations.
Excluding the effects of inflation,

                                                                              16
<PAGE>
 
the capital expenditures of United Water's utility subsidiaries are projected to
aggregate $290 million over the next five years, including $57 million and $63
million in 1996 and 1997, respectively.  This total includes $219 million for
United Waterworks and $68 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 1996-2000 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, additional proceeds from the transfer of
its New Mexico operations, 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 Waterworks and
United Water New York 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, 1995, $52.7 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.

          There were a number of changes in the Company's long-term debt in
1995.  In January 1995, United Water New York issued $12 million of 8.98% senior
notes and used these proceeds to reduce short-term borrowings.

          In February 1995, United Waterworks issued the first $10 million of
notes under a $75 million private placement medium-term note program, at a rate
of 8.84%, with the full amount maturing in 2025. The proceeds were used to
redeem outstanding notes payable.

          In June 1995, United Waterworks issued $25 million of 6.20% tax-exempt
Water Revenue Bonds, due 2025, through the Delaware Economic Development
Authority.  The proceeds are being used to fund capital improvements of United
Water Delaware (a subsidiary of United Waterworks) over the next three years.

          In August 1995, United Waterworks issued $20 million of 6.35% tax-
exempt Water and Sewer Revenue Bonds, due 2025, through the city of
Jacksonville, Florida. The proceeds are being used to fund capital improvements
of United Water Florida (a subsidiary of United Waterworks).

          At December 31, 1995, United Water had cash and cash equivalents of
$4.5 million (excluding

                                                                              17
<PAGE>
 
restricted cash) and unused short-term bank lines of credit of $161.2 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.

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 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 1995, the Company's regulated utilities received twelve rate
settlement awards with an aggregate annual rate revenue increase of $5.9
million.  An estimated $3.5 million of this amount was reflected in 1995's
revenues while the remaining $2.4 million of carryover impact of the rate awards
received in 1995 is expected to increase revenues in 1996.  See Note 11 to the
consolidated financial statements for further details.

          At the end of January 1996, there were two rate cases pending in which
the Company has requested an aggregate annual rate increase of $12.9 million.
United Water New Jersey applied to the New Jersey Board of Public Utilities for
an 8.8%, or $10.4 million, increase in annual revenues to meet higher operation
and maintenance costs, including postretirement benefits, as well as a proposed
change in depreciation rates.  A decision on this application is expected before
the end of the first quarter of 1996. In December 1995, United Water New
Rochelle filed with the New York Public Service Commission for a $2.5 million,
or 15.2%, increase in annual revenues to meet higher operation and maintenance
costs. A decision on this application is not expected until the fourth quarter
of 1996.  Generally, the rate awards the Company's operating utilities actually
receive are less than the amounts requested, primarily due to circumstances that
change while the rate case is being processed.  The Company expects to file
additional rate cases in 1996 but does not expect that those rate awards, if
received in 1996, will have a significant impact on revenues in 1996.

                                                                              18
<PAGE>
 
REAL ESTATE ACTIVITIES

          United Properties Group (United Properties) owns a portfolio of real
estate located in New Jersey, New York, Pennsylvania, Delaware, Idaho and
Arkansas, consisting of commercial properties, golf courses and land available
for development.  United Properties is pursuing joint ventures, sales or direct
development opportunities for the various properties in its portfolio.  In
December 1995, United Properties recorded a $9.4 million pre-tax impairment loss
(included in the $12.1 million impairment loss recorded by the Company) for
various parcels of land located in Orange and Rockland counties, New York, in
accordance with SFAS No. 121 as a result of changes in market conditions,
development plans and other considerations.

          United Properties expects to spend $18.6 million over the next five
years for capital expenditures on its existing real estate portfolio, including
$7 million and $420,000 in 1996 and 1997, respectively. Funding for United
Properties' activities is anticipated to come from sales of properties,
operations of existing commercial properties and golf courses, and proceeds of
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 1995 was
$17.3 million, a decrease of 37.8% as compared to the $27.9 million earned in
1994.  Net income per common share for 1995 was $.54 as compared to $1.01 for
1994.  These decreases were primarily attributable to the incurrence of non-
cash, pre-tax charges of $12.1 million relating to the write-down of various
assets at the Company's real estate and environmental testing businesses, a pre-
tax charge of $1.5 million for costs associated with an unconsummated business
development proposal and a 16% increase in the average number of common shares
outstanding.  Net income in 1994 included a one-time gain from a $2.8 million
pre-tax foreclosure award recognized by the Company's real estate subsidiary.
The Merger contributed positively to the Company's earnings per share in both
1995 and 1994 even though United Water issued an additional 9.3 million shares
of common stock to effect the Merger.

                                                                              19
<PAGE>
 
OPERATING REVENUES

          Operating revenues increased $34.8 million, or 11.9%, in 1995 and
$92.6 million, or 46.2%, in 1994 from the prior years, as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                                     1995 VS. 1994        1994 vs. 1993
(thousands of dollars)                            Increase (Decrease)  Increase (Decrease)
------------------------------------------------------------------------------------------
<S>                                               <C>        <C>       <C>        <C>
Utilities:
   Merger                                         $30,357     10.4%    $105,936    52.8%
   Rate awards                                      7,097      2.4%       5,210     2.6%
   Consumption                                      3,672      1.3%      (3,509)   (1.7%)
   Transfer of New Mexico operations               (6,076)    (2.1%)       ----    ----
Real estate                                        (1,421)    (0.5%)    (22,109)  (11.0%)
Other operations                                    1,203      0.4%       7,050     3.5%
                                                  -------     ----     --------   -----
                                                  $34,832     11.9%    $ 92,578    46.2%
-------------------------------------------------------------------------------------------
</TABLE>

          The increased revenues for the twelve months ended December 31, 1995,
fully reflect the Merger with GWC as compared to only nine months of combined
operations in 1994.  The 2.4% increase in revenues from rate awards includes the
impact of current year increases for eleven of the Company's operating
utilities, as well as the full year effect of a 3.8% rate increase in July 1994
for United Water New York.  Higher consumption due to the hot, dry summer in
northeast service areas resulted in an increase in revenues of $3.7 million in
1995.  The transfer of utility operations in Rio Rancho, New Mexico, partially
offset these revenue increases.  Real estate revenues were lower as compared to
1994 primarily due to a $2.2 million decrease in property sales partially offset
by increases in revenues from golf course operations and rental properties.  The
$1.2 million increase in operating revenues from other operations was primarily
attributable to the service contract with the city of Hoboken, New Jersey, which
commenced in July 1994.

          The Merger increased revenues $105.9 million, or 52.8%, in 1994 and
was the major reason for the 46.2% increase in revenues in 1994 as compared to
1993.  This includes the effect of any rate increases granted during the year to
the operating utilities of United Waterworks in 1994.  The 2.6% increase in
revenues from rate awards includes the impact of current year and prior year
rate awards for United Water New Jersey and United Water New York, and resulted
from rate increases of 5.7% and 3.8% in May 1993 and July 1994, respectively,
for United Water New York and from a 3.1% rate increase in October 1993 for
United Water New Jersey.  Lower consumption resulted in a decrease in revenues
of $3.5 million in 1994 as weather conditions returned to a more normal pattern
after a very hot, dry summer season in 1993. Real estate revenues decreased
primarily due to the $26 million land transfer from United Properties to United
Water New Jersey in 1993.  Revenues from meter installation contracts for the
city of New York and a service contract with the city of Hoboken contributed to
the increase in other operations in 1994.

                                                                              20
<PAGE>
 
OPERATING EXPENSES

          The changes in operating expenses in 1995 as compared to 1994,
including the effect of the Merger, were as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------- 
                             Total       Effect of    Net of Merger
(thousands of dollars)     Increase        Merger       Increase
--------------------------------------------------------------------
<S>                     <C>       <C>      <C>        <C>       <C>
Operation and
   maintenance          $29,139   20.6%    $16,162    $12,977   9.2%
Depreciation and
   amortization           4,956   19.7%      3,704      1,252   5.0%
General taxes             5,844   13.5%      3,753      2,091   4.8%
--------------------------------------------------------------------
</TABLE>

          The increase in operation and maintenance expenses, excluding the
impact of the Merger, was primarily due to the incurrence of $12.1 million of
non-cash charges relating to the write-down of various assets at the Company's
real estate and environmental testing businesses, a $2.6 million increase in the
operation and maintenance expenses of the Company's utility subsidiaries due to
the higher level of consumption and $1.2 million of costs related to the service
contract with the city of Hoboken.  These charges were offset in part by a $2.3
million decrease due to the transfer of New Mexico operations in June 1995 and a
$2.3 million decrease in the cost of real estate properties sold in 1995.

          The increase in depreciation and amortization, net of the effect of
the Merger, was primarily due to amortization attributable to the service
contract in Hoboken and a one-time reduction in depreciation in 1994 on
contributed plant.

          The increase in general taxes of $2.1 million, or 4.8%, in 1995 was
primarily attributable to higher real estate and franchise taxes in utility
operations due to increased property tax assessments and the settlement of an
outstanding real estate tax matter at United Water New Jersey.

                The changes in operating expenses in 1994 as compared to 1993,
including the effect of the Merger, were as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------- 
                             Total       Effect of    Net of Merger
(thousands of dollars)     Increase        Merger   Increase(Decrease)
----------------------------------------------------------------------
<S>                     <C>       <C>      <C>      <C>        <C>
Operation and                                       
   maintenance          $40,793   40.6%    $48,834  $(8,041)   (8.0%)
Depreciation and                                    
   amortization          10,921   76.5%     10,671      250     1.8%
General taxes            12,789   42.1%     10,980    1,809     6.0%
--------------------------------------------------------------------
</TABLE>

          The decrease in operation and maintenance expenses, excluding the
impact of the Merger, represents the net effect of the decrease in costs related
to the real estate transfer in 1993, offset in part by higher costs in 1994
related to the Company's utility operations, meter installations under contracts
with

                                                                              21
<PAGE>
 
the city of New York, other property sales and the service contract with the
city of Hoboken.  The operation and maintenance expenses of the Company's
utility operations increased $1.9 million, or 2.9%, in 1994.  The increase in
general taxes of $1.8 million, or 6%, in 1994 was primarily attributable to
higher real estate taxes as well as the recognition in 1993 of $755,000 of
credits in franchise and real estate taxes relating to United Water New York's
rate case.

INTEREST EXPENSE

          Interest expense increased $6.7 million, or 18.8%, predominantly due
to the Merger and additional long-term debt.  Consolidated interest expense
increased 62.6% in 1994 as compared to 1993, primarily due to the Merger.

OTHER INCOME

          Other income decreased $4.4 million, or 81.6%, primarily due to the
award of $2.8 million in escrow monies to United Properties following a
foreclosure settlement in 1994, a $1.5 million non-recurring gain from the sale
of a wastewater transmission facility in Pine Bluff, Arkansas, in 1994 and the
write-off of $1.5 million of costs associated with an unconsummated business
development proposal through the Company's participation in a partnership with
Lyonnaise des Eaux in 1995.  These were offset in part by $838,000 of interest
income generated by the remaining $34 million escrow deposit on the transfer of
New Mexico operations and a $584,000 legal settlement at United Water Toms
River.

          Other income was $4.5 million higher in 1994 as compared to 1993,
primarily due to the award of escrow monies to United Properties following a
foreclosure settlement and a gain on the sale of a wastewater transmission
facility in Pine Bluff, Arkansas.

INCOME TAXES

          The effective income tax rates on income before preferred and
preference stock dividends were 36.8% in 1995, 38% in 1994 and 36% in 1993.  The
decrease in the effective tax rate in 1995 as compared to 1994 is attributable
to the impact of the deferred tax benefit related to the write-down of various
assets at the Company's real estate and environmental testing businesses.  The
increase in the effective rate in 1994, as compared to the preceding year,
resulted from higher state income taxes and additional provisions for federal
income taxes.  The higher state income taxes in 1994 were primarily a result of
the operations acquired in the Merger.  An analysis of income taxes is included
in Note 12 to the financial statements.

NEW ACCOUNTING STANDARDS

          In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans.  The statement defines a
fair value based method of accounting for employee stock options and

                                                                              22
<PAGE>
 
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 Opinion No. 25, "Accounting
for Stock Issued to Employees."  The accounting requirements of this new
standard are effective for transactions entered into in fiscal years that begin
after December 15, 1995.  Although the Company has not made a decision as to
which method it will utilize, the adoption of this standard is not expected to
have a material effect on the financial position or results of operations of the
Company. See Note 1 to the consolidated financial statements for further
details.

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.

                                                                              23
<PAGE>
 
ITEM 8.  FINANCIAL  STATEMENTS  AND  SUPPLEMENTARY  DATA
-------  -----------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
                                                                         Page
                                                                         ----
Financial Statements:

     Report of Independent Accountants                                     25
                                                                      
     Consolidated Balance Sheet at                                    
        December 31, 1995 and 1994                                         26
                                                                      
     Statement of Consolidated Income for each of the                 
        years ended December 31, 1995, 1994 and 1993                       27
                                                                      
     Statement of Consolidated Common Equity for each of              
        the years ended December 31, 1995, 1994 and 1993                   27
                                                                      
     Statement of Consolidated Cash Flows for each of the             
        years ended December 31, 1995, 1994 and 1993                       28
                                                                      
     Statement of Consolidated Capitalization at                      
        December 31, 1995 and 1994                                         29
                                                                      
     Notes to Consolidated Financial Statements                       30 - 48
                                                                      
     Financial Statement Schedules:                                   
        For the three years ended December 31, 1995                   
                                                                      
          VIII - Consolidated Valuation and Qualifying Accounts            53

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.

                                                                              24
<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, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, 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.

     As discussed in Note 1 to the consolidated financial statements, during the
year ended December 31, 1995,  the company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of."



PRICE WATERHOUSE LLP
New York, New York
February 22, 1996

                                                                              25
<PAGE>
 
                           CONSOLIDATED BALANCE SHEET
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                             December 31,
(thousands of dollars)                                                                     1995        1994
-----------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>         <C>
ASSETS
UTILITY PLANT, including $19,899 and $24,505 under construction                      $1,334,807  $1,272,446
   Less accumulated depreciation                                                        253,529     235,962
                                                                                     ----------  ----------
                                                                                      1,081,278   1,036,484
UTILITY PLANT ACQUISITION ADJUSTMENTS,
   Less accumulated amortization of $2,955 and $1,209                                    71,898      73,444

REAL ESTATE AND OTHER INVESTMENTS,
   Less accumulated depreciation of $14,626 and $12,430                                  98,082     107,315
 
CURRENT ASSETS:
   Cash and cash equivalents                                                              4,529       9,840
   Restricted cash                                                                       52,677      30,227
   Accounts receivable and unbilled revenues, less allowance of $1,299 and $1,373        62,627      59,292
   Prepaid and other current assets                                                      15,103      13,425
                                                                                     ----------  ----------
                                                                                        134,936     112,784
 
DEFERRED CHARGES AND OTHER ASSETS:
   Regulatory assets                                                                     70,154      74,150
   Prepaid employee benefits                                                             12,319      11,458
   Unamortized debt expense                                                              26,242      25,253
   Other deferred charges and assets                                                     21,799      16,539
                                                                                     ----------  ----------
                                                                                        130,514     127,400
 
                                                                                     $1,516,708  $1,457,427
                                                                                     ==========  ==========
 
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
   Common stock and retained earnings                                                $  358,302  $  350,495
   Preferred stock without mandatory redemption                                           9,000       9,000
   Preferred stock with mandatory redemption                                             54,397      54,696
   Preference stock, convertible, with mandatory redemption                              43,694      43,477
   Long-term debt                                                                       558,658     505,204
                                                                                     ----------  ----------
                                                                                      1,024,051     962,872
 
CURRENT LIABILITIES:
   Notes payable                                                                         43,500      76,450
   Preferred stock and long-term debt due within one year                                13,575      10,246
   Accounts payable and other accruals                                                   32,650      36,541
   Accrued taxes                                                                         25,678      28,744
   Accrued interest and other current liabilities                                         8,246      13,583
                                                                                     ----------  ----------
                                                                                        123,649     165,564
 
DEFERRED CREDITS AND OTHER LIABILITIES:
   Deferred income taxes and investment tax credits                                     155,258     163,020
   Customer advances for construction                                                    27,804      30,459
   Contributions in aid of construction                                                 132,836     118,432
   Other deferred credits and liabilities                                                53,110      17,080
                                                                                     ----------  ----------
                                                                                        369,008     328,991
   Commitments and contingencies (Note 6)
                                                                                     $1,516,708  $1,457,427
                                                                                     ==========  ==========
</TABLE>

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

                                                                              26
<PAGE>
 
                        STATEMENT OF CONSOLIDATED INCOME
                    UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
 
 
                                                   Years ended December 31,
(thousands of dollars except per share data)       1995       1994       1993
-------------------------------------------------------------------------------
<S>                                              <C>        <C>        <C>
OPERATING REVENUES                               $327,828   $292,996   $200,418
OPERATING EXPENSES:
 Operation and maintenance                        170,368    141,229    100,436
 Depreciation and amortization                     30,153     25,197     14,276
 General taxes                                     48,979     43,135     30,346
                                                 --------   --------   --------
  TOTAL OPERATING EXPENSES                        249,500    209,561    145,058
                                                 --------   --------   --------
OPERATING INCOME                                   78,328     83,435     55,360
INTEREST AND OTHER EXPENSES:
 Interest expense, net of amount capitalized       42,548     35,801     22,023
 Allowance for funds used during construction      (1,855)    (1,247)      (617)
 Preferred stock dividends of subsidiaries          2,297      2,318      2,338
 Other income, net                                 (1,004)    (5,449)      (942)
                                                 --------   --------   --------
  TOTAL INTEREST AND OTHER EXPENSES                41,986     31,423     22,802
                                                 --------   --------   --------
INCOME BEFORE INCOME TAXES                         36,342     52,012     32,558
PROVISION FOR INCOME TAXES                         14,204     20,671     12,580
                                                 --------   --------   --------
NET INCOME                                         22,138     31,341     19,978
Preferred and preference stock dividends            4,795      3,454         --
                                                 --------   --------   --------
Net income applicable to common stock            $ 17,343   $ 27,887   $ 19,978
                                                 ========   ========   ========
 
AVERAGE COMMON SHARES OUTSTANDING                  31,995     27,524     19,428
Net income per common share                          $.54      $1.01      $1.03
------------------------------------------------------------------------------- 
</TABLE>


                    STATEMENT OF CONSOLIDATED COMMON EQUITY
                    UNITED WATER RESOURCES AND SUBSIDIARIES
<TABLE>
<CAPTION>
 
                                                           Common Stock
                                                        -------------------
                                                          Number              Retained
(thousands)                                              of shares   Amount   earnings
--------------------------------------------------------------------------------------
<S>                                                     <C>        <C>       <C>
BALANCE AT DECEMBER 31, 1992                               18,798  $117,948  $ 61,581
  Dividend reinvestment and stock purchase plans            1,418    20,508        --
  Net income applicable to common stock                        --        --    19,978
  Cash dividends paid on common stock, $.92 per share          --        --   (17,905)
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993                               20,216   138,456    63,654
  Dividend reinvestment and stock purchase plans            1,769    23,158        --
  Common stock issued in connection with merger             9,296   123,170        --
  Net income applicable to common stock                        --        --    27,887
  Cash dividends paid on common stock, $.92 per share          --        --   (25,830)
--------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994                               31,281   284,784    65,711
  Dividend reinvestment and stock purchase plans            1,599    19,879        --
  Net income applicable to common stock                        --        --    17,343
  Cash dividends paid on common stock, $.92 per share          --        --   (29,415)
-------------------------------------------------------------------------------------- 
BALANCE AT DECEMBER 31, 1995                               32,880  $304,663  $ 53,639
--------------------------------------------------------------------------------------
</TABLE>

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

                                                                              27
<PAGE>
 
                      STATEMENT OF CONSOLIDATED CASH FLOWS
                    UNITED WATER RESOURCES AND SUBSIDIARIES


<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------
                                                                  Years ended December 31,
(thousands of dollars)                                            1995      1994       1993
---------------------------------------------------------------------------------------------
<S>                                                            <C>        <C>        <C> 
OPERATING ACTIVITIES:
NET INCOME                                                     $ 22,138   $ 31,341   $ 19,978
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
 PROVIDED BY OPERATING ACTIVITIES:
  Depreciation and amortization                                  30,922     26,347     15,476
  Deferred income taxes and investment tax credits, net          (7,762)     5,865     36,651
  Gain from release of security deposit on real
   estate settlement                                                 --     (2,811)        --
  Gain on land transfer                                              --         --    (10,519)
  Impairment loss                                                12,105         --      4,111
  Allowance for funds used during construction                   (1,855)    (1,247)      (617)
  Changes in assets and liabilities, net of effect of Merger:
    Accounts receivable and unbilled revenues                    (3,335)    (9,412)    (1,027)
    Prepayments                                                    (954)     4,146     (1,757)
    Prepaid employee benefits                                      (861)    (4,404)    (2,851)
    Regulatory assets                                             3,996     (8,045)   (28,631)
    Accounts payable and other accruals                          (4,647)     6,479      2,466
    Accrued taxes                                                (2,774)     3,356      1,262
    Accrued interest and other current liabilities               (1,923)    (2,734)      (505)
    Accrued customer benefits                                    (3,414)    (3,064)      (420)  
    Other, net                                                   (2,811)    (3,492)    (5,828)
                                                               --------   --------   --------
NET CASH PROVIDED BY OPERATING ACTIVITIES                        38,825     42,325     27,789
                                                               --------   --------   --------
INVESTING ACTIVITIES:
  Additions to utility plant (excludes allowance for funds
   used during construction)                                    (70,227)   (57,592)   (15,986)
  Additions to real estate and other properties                  (7,958)    (9,317)    (6,948)
  Acquisition of GWC, net of cash received                           --     (5,059)        --
  Investment in Hoboken service contract                             --     (5,500)        --
  Change in restricted cash                                     (22,450)       510     (8,502)
  Proceeds from Rio Rancho transfer                              35,330         --         --
                                                               --------   --------   --------
NET CASH USED IN INVESTING ACTIVITIES                           (65,305)   (76,958)   (31,436)
                                                               --------   --------   --------
FINANCING ACTIVITIES:
  Change in notes payable                                       (32,950)    37,050     (3,500)
  Additional long-term debt                                      67,000     88,648     19,700   
  Reduction in preferred stock and long-term debt               (10,299)   (90,123)   (22,547)
  Issuance of common stock                                       19,879     23,158     20,508
  Dividends on common stock                                     (29,415)   (25,830)   (17,905) 
  Dividends on preferred and preference stock                    (4,795)    (3,454)        --
  Net contributions and advances for construction                11,749      6,091     (1,670)
                                                               --------   --------   --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES              21,169     35,540     (5,414)
                                                               --------   --------   --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS             (5,311)       907     (9,061)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                    9,840      8,933     17,994
                                                               --------   --------   --------
CASH AND CASH EQUIVALENTS AT END OF YEAR                       $  4,529   $  9,840   $  8,933
                                                               ========   ========   ========
</TABLE>

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

                                                                              28
<PAGE>
 
                   STATEMENT OF CONSOLIDATED CAPITALIZATION
                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
 
 
------------------------------------------------------------------------------------------------------------------
                                                                                                 December 31,
(thousands of dollars)                                                                         1995         1994
------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>          <C>
COMMON STOCK AND RETAINED EARNINGS:
  Common stock, no par value--authorized 50,000,000 shares                                  $  321,234    $301,381
  Less treasury shares, at cost                                                                (16,571)    (16,597)
  Retained earnings                                                                             53,639      65,711
                                                                                            ----------    --------
  TOTAL COMMON STOCK AND RETAINED EARNINGS                                                     358,302     350,495
                                                                                            ----------    --------
 
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 IN ONE YEAR:
  United Water New Jersey:
    5% Series, authorized and outstanding 7,800 shares                                             720         780
    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, authorized and outstanding 28,000 shares                                     2,600       2,800
      $9.84 Series, authorized and outstanding 50,000 shares                                     5,000       5,000
 
  United Water Idaho:  5%, authorized and outstanding 8,017 shares                                 797         819
 
  United Water Resources:
    7 5/8% Series B, authorized and outstanding 300,000 shares                                  30,280      30,297
    5% Series A, convertible preference, authorized and outstanding 3,341,078 shares            43,694      43,477
                                                                                            ----------    --------
  TOTAL PREFERRED AND PREFERENCE STOCK WITH MANDATORY REDEMPTION                                98,091      98,173
                                                                                            ----------    --------
LONG-TERM DEBT, NET OF AMOUNT DUE WITHIN ONE YEAR:
  United Water New Jersey:
    First mortgage bonds, 5 5/8%-7%, due 1997-2024 (weighted average 6.3%)                      75,000      75,000
    Unsecured promissory notes, 6%-7%, due 1997-2019 (weighted average 6.93%)                  100,000     100,000
 
  United Water New York:
    First mortgage bonds, 5 5/8%-9 3/8%, due 1997-2001 (weighted average 6.65%)                  5,500       5,800
    Unsecured promissory notes, 5.65%-8.98%, due 1998-2025 (weighted average 6.79%)             52,650      41,972
 
  United Water Resources:
    Promissory notes, 9.38%, due 2019                                                           25,000      25,000
 
  United Waterworks:
    Unsecured debt, 5.85%-10.2%, due 1997-2025 (weighted average 7.92%)                        264,151     220,476
 
  United Properties Group:
    Mortgage notes, 9%-10%, due 2000-2006 (weighted average 9.97%)                              17,526      17,431
    Floating rate LIBOR-based term loan due 2000                                                 7,565       7,601
    New Jersey Wastewater Treatment Loans, 0%-4.8%, due 2013 (weighted average 2.33%)            2,141       2,248
 
  United Water Services:  Promissory note, 8%, due 1997                                          5,000       5,000
 
  United Water Mid-Atlantic:  Promissory note at floating interest rate, due 2004                4,125       4,676
                                                                                            ----------    --------
    TOTAL LONG-TERM DEBT                                                                       558,658     505,204
                                                                                            ----------    --------
    TOTAL CAPITALIZATION                                                                    $1,024,051    $962,872
                                                                                            ==========    ========
</TABLE>

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

                                                                              29
<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 its more
than 50% owned subsidiaries.  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 the use of management's 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; Laboratory Resources, a network
of environmental testing laboratories; and United Water Mid-Atlantic, which owns
and operates water and wastewater systems.

United Water's 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.  This accounting
allows, among other things, the recognition of intercompany profit in situations
where it is probable such profit will be recovered in the ratemaking process and
the recording of assets and liabilities not generally recorded by non-regulated
enterprises.

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.

                                                                              30
<PAGE>
 
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.

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 are included as taxable income, and the
related plant is depreciated for tax purposes.

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 the operating utilities of GWC Corporation in the merger (see Note 2).
At each balance sheet date, the Company evaluates the realizability of utility
plant acquisition adjustments.  Based on its most recent evaluation, the Company
believes that no impairment of utility plant acquisition adjustments exists at
December 31, 1995.

                                                                              31
<PAGE>
 
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 $44 million and $45 million at December 31, 1995 and 1994, respectively.
United Water New Jersey's share of the project's operating expenses is included
in operation and maintenance expenses.

REGULATORY ASSETS AND LIABILITIES:  Included in deferred charges and other
assets and in deferred credits and other liabilities are regulatory items that
are expected to be recognized when included in future rates and recovered from
or refunded to customers as directed by the state public utility commissions.
These regulatory assets and liabilities 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)           1995     1994
-----------------------------------------------
<S>                            <C>      <C>
Regulatory assets:
 Recoverable income taxes      $39,013  $48,295
 Deferred employee benefits     17,792   12,831
 Other                          13,349   13,024
-----------------------------------------------
Total regulatory assets        $70,154  $74,150
-----------------------------------------------
</TABLE>

REAL ESTATE:  Real estate properties are carried at the lower of cost, which
includes original purchase price and direct development costs, or fair value.
Real estate taxes and interest costs are capitalized during the development
period.  The amount of interest capitalized was $1.4 million in 1995, $2.7
million in 1994 and $2.6 million in 1993.  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

                                                                              32
<PAGE>
 
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 (PSC) 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, 1995, United Water New York and United Water New
Rochelle had $906,000 of net unamortized revenue deferrals, which are available
to offset other incremental deferred costs or to be refunded to customers over a
three-year period.  These deferrals were related to revenues in excess of
amounts used to set rates, reductions in federal income taxes and reductions in
pension expense.

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 1995, 1994 and 1993
were equivalent to 2.1%, 2.1% and 2.2%, 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 Statement of Financial Accounting Standards (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:

                                                                              33
<PAGE>
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------
(thousands of dollars)                    1995     1994     1993
-----------------------------------------------------------------
<S>                                     <C>      <C>      <C>
Interest, net of amounts capitalized    $43,701  $37,386  $21,328
Income taxes                             15,415   11,205    2,915
----------------------------------------------------------------- 
</TABLE>

The following is a supplemental schedule of non-cash transactions related to the
Merger (see Note 2):

<TABLE>
<CAPTION>
---------------------------------------------------------- 
(thousands of dollars)                              1994
---------------------------------------------------------- 
<S>                                               <C>
Fair value of assets purchased                    $667,435
Less:                                          
 Liabilities assumed                               464,749
 Common stock issued                               123,170
 Fair value of preferred stock assumed              31,135
 Fair value of preference stock issued              43,322
---------------------------------------------------------- 
 Cash paid for GWC, net of cash received          $  5,059
---------------------------------------------------------- 
</TABLE>
 
NEW ACCOUNTING STANDARDS:  In March 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."  The statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and specifies the criteria
for the determination and measurement of an impairment loss.  United Water has
elected early adoption of  SFAS No. 121.  As a result of changes in market
conditions, development plans, projections of cash flows and other
considerations, the Company revalued certain investments in its real estate and
environmental testing subsidiaries.  Measurements of value used by the Company
included market prices and the use of discounted cash flows.  The Company has
recorded a $12.1 million non-cash impairment loss in the fourth quarter of 1995,
included as part of operation and maintenance expenses in the statement of
consolidated income, in accordance with the provisions of SFAS No. 121.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock-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."  If the Company elects to account for its employee
stock

                                                                              34
<PAGE>
 
compensation plans under the guidance prescribed by APB Opinion No. 25, the
Company will be required to make 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.  The accounting requirements of this new standard
are effective for transactions entered into in fiscal years that begin after
December 15, 1995.  Although the Company has not made a decision as to which
method it will utilize, the adoption of this standard is not expected to have a
material effect on the financial position or results of operations of the
Company. See Note 8 for further disclosure on employee stock compensation plans.

NOTE 2 - MERGER

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
(presently known as United Waterworks), which currently owns regulated water and
wastewater utilities operating in 13 states, and a 25% indirect investment in
JMM Operational Services, Inc. (JMM).  JMM provides operations and management
services to government and industry for water and wastewater treatment
facilities.  The Merger was accounted for under the purchase method and resulted
in the recording of a utility plant acquisition adjustment of $67 million.  In
exchange for the common stock of GWC that was issued and outstanding immediately
preceding the Merger, United Water (i) issued 9,295,860 shares of United Water
common stock, (ii) issued 3,341,078 shares of United Water 5% cumulative
convertible preference stock, with a liquidation price of $13.794 per share, and
(iii) paid former shareholders of GWC $8.9 million in cash.  In addition, each
share of GWC 7 5/8% cumulative preferred stock outstanding at the time of the
Merger was converted into one fully paid non-assessable share of United Water
7 5/8% cumulative preferred stock, with equal stated dividends and substantially
similar rights, privileges, qualifications and restrictions.

Prior to the Merger, Lyonnaise American Holding, Inc. (LAH), a Delaware
corporation and a wholly-owned subsidiary of Lyonnaise des Eaux, a French
societe anonyme, owned approximately 81.9% of GWC's common stock.  The remaining
18.1% of GWC's common stock was publicly traded.  On the date of the Merger, LAH
converted 70% of its shares of GWC common stock into United Water common stock
and the remainder of its shares of GWC common stock into United Water 5%
cumulative convertible preference stock.  Immediately after the Merger, LAH
owned approximately 25.4% of the issued and outstanding United Water common
stock and approximately 97.7% of the issued and outstanding United Water 5%
cumulative convertible preference stock.  A twelve year Governance Agreement
between LAH

                                                                              35
<PAGE>
 
and United Water contains a number of restrictions, including restrictions on
when LAH can convert its preference shares into United Water common stock and on
LAH's ability to buy or sell United Water common stock or preference stock.

The financial results of the former subsidiaries of GWC are included in United
Water's financial results beginning April 1, 1994.  The following unaudited pro
forma condensed income statement information gives effect to the Merger as if it
had occurred at the beginning of 1994.  Pro forma results are not necessarily
indicative of what actually would have occurred had the acquisition been in
effect for the periods presented.  In addition, the pro forma results are not
intended to be a projection of future results.

<TABLE>
<CAPTION>
-------------------------------------------------------------------- 
(thousands of dollars except per share data)       1995       1994
--------------------------------------------------------------------
                                                  Actual   Unaudited
<S>                                              <C>       <C>
Operating revenues                               $327,828  $322,192
Operating income                                   78,328    89,442
Net income applicable to common stock              17,343    27,724
Net income per common share                      $    .54  $    .91
-------------------------------------------------------------------- 
</TABLE>

As disclosed in Note 1, the Company recorded a $12.1 million non-cash, pre-tax
impairment loss in the fourth quarter of 1995 for various parcels of land held
by its real estate subsidiary and for its investment in the environmental
testing business.

NOTE 3 - TRANSFER OF NEW MEXICO OPERATIONS

United Waterworks owns a utility subsidiary which provides water and wastewater
services to customers in Rio Rancho, New Mexico.  In December 1994, the city of
Rio Rancho (the City) filed an application for immediate possession of the
Company's utility system in Rio Rancho through condemnation.  In April 1995, the
City and the Company's utility subsidiary entered into a stipulation in
settlement of the condemnation action (the Stipulation) whereby the City would
deposit and eventually pay the Company $69 million for its utility operations in
New Mexico plus the amount of net capital additions made to the water and
wastewater systems by the Company in 1995.  A court order allowed the City to
take possession on June 30, 1995, upon making a deposit with the court.  The
City deposited $69 million with the court pursuant to the court order and
Stipulation, and on June 30, 1995, the City assumed possession of the operations
of the utility subsidiary.  The Stipulation required, among other things, that
the transaction be completed and approved by October 30, 1995.

                                                                              36
<PAGE>
 
In the fourth quarter of 1995, the New Mexico Public Utility Commission (PUC)
issued a ruling refusing to permit the Company to relinquish its systems to the
City.  The Company and the City appealed the PUC ruling to the Supreme Court of
New Mexico.  In January 1996, the Supreme Court of New Mexico ruled that the PUC
has no jurisdiction over the right of a municipality to condemn its regulated
water and sewer utilities nor the right to require a privately owned utility to
seek PUC approval for the forced transfer of its facilities.  Although the
Stipulation expired by its own terms on October 30, 1995, the Company has asked
the Supreme Court of New Mexico to bind the City to the Stipulation and complete
the transaction at the agreed price and terms. In March 1996, the Supreme Court
issued an order denying the Company's request and dismissing the case before
it.  The Company continues to meet with City representatives to attempt to
complete the transaction. For financial reporting purposes, this transfer has
not been recognized as of December 31, 1995. In July 1995, in accordance with
the court order and Stipulation, the Company withdrew approximately $35 million
of the $69 million on deposit with the court. The Company used the proceeds to
repay a portion of its outstanding notes payable. The remaining deposit of $34
million with the court is not included in the Company's assets. The $35 million
received by the Company has been included in other deferred credits and
liabilities in its consolidated balance sheet at December 31, 1995.

Management believes that neither the resolution of this matter nor the absence
of the Company's utility operations in Rio Rancho will have a material adverse
effect upon the financial position or results of operations of the Company.
Because the City took possession of the utility's operations on June 30, 1995,
the Company has lost revenues for the last six months of 1995.  For the first
six months of 1995, the Company's Rio Rancho utility had revenues of $6 million;
for the nine months ended December 31, 1994, its revenues totaled $9.4 million.

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 outstanding and the range of
interest rates at December 31 were as follows:

                                                                              37
<PAGE>
 
<TABLE>
<CAPTION>
 
--------------------------------------------------------- 
(thousands of dollars)               1995          1994
---------------------------------------------------------
<S>                             <C>           <C>
Total credit lines available       $204,695      $189,200
Outstanding                          43,500        76,450
Interest rates                  5.8% to 6.4%  6.2% to 6.9%
---------------------------------------------------------
</TABLE>

NOTE 5 - LONG-TERM DEBT

The long-term debt repayments over each of the next five years are as follows:
1996--$13.3 million; 1997--$34.4 million; 1998--$24 million; 1999--$25 million
and 2000--$6.5 million.  Substantially all of the utility plant of United Water
New Jersey and United Water New York is subject to first mortgage liens, and
both companies, as well as United Waterworks and other subsidiaries of United
Water, are subject to certain restrictive covenants related to debt issued by
those subsidiaries.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

The future capital expenditures of the Company's utility subsidiaries are
projected to aggregate $290 million over the next five years, including $57
million and $63 million in 1996 and 1997, respectively. United Properties
currently projects spending $18.6 million over the next five years for capital
expenditures on its existing real estate portfolio, including $7 million and
$420,000 in 1996 and 1997, respectively.

United Properties owns several office buildings, with an aggregate net book
value of $46 million (net of accumulated depreciation of $7.6 million), 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, 1995:

<TABLE>
<CAPTION>
---------------------------------------------
(thousands of dollars)
---------------------------------------------
<S>                                   <C>
1996                                  $ 6,354
1997                                    6,325
1998                                    5,789
1999                                    4,510
2000                                    2,840
Thereafter                              1,297
--------------------------------------------- 
Total minimum future rental income    $27,115
--------------------------------------------- 
</TABLE>

United Water's total consolidated rental expense was approximately $4.1 million
in 1995, $2.9 million in 1994 and $1.7 million in 1993.   The minimum future
lease payments under all non-cancelable operating leases, which consist
primarily of buildings and automobiles, at December 31, 1995 are as follows:

                                                                              38
<PAGE>
 
<TABLE>
<CAPTION>
----------------------------------------------
(thousands of dollars)
----------------------------------------------
<S>                                    <C>
1996                                   $ 3,862
1997                                     3,330
1998                                     1,988
1999                                     1,013
2000                                       400
Thereafter                                 340
----------------------------------------------
Total minimum future lease payments    $10,933
----------------------------------------------
</TABLE>

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 $260,000 in each
of the years 1996 and 1997 and $2,073,000 in 1998 through 2000. The redemption
of cumulative preferred stock was $260,000 in each of the years 1995, 1994 and
1993. 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 discussed in Note 2, the Merger resulted in the issuance by United Water of
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. LAH owns 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 may 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 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. United Water may not redeem any of
the outstanding,

                                                                              39
<PAGE>
 
unconverted Series A preference stock prior to maturity on April 22, 2004.

NOTE 8 - INCENTIVE STOCK PLANS

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

<TABLE>
<CAPTION>
--------------------------------------------------------------
                                   Number of   Exercise price
                                    options      per option
-------------------------------------------------------------- 
<S>                                 <C>      <C>   
Outstanding at December 31, 1992    439,512  $11.375 to 17.000
  Granted                           114,960   14.500 to 15.500
  Exercised                         (18,654)  11.375 to 12.270
  Canceled or expired                (1,255)       17.000
--------------------------------------------------------------
Outstanding at December 31, 1993    534,563  $11.375 to 17.000
  Granted                           183,910   13.750 to 14.500
  Exercised                          (2,900)       11.375
  Canceled or expired               (10,781)  11.375 to 17.000
--------------------------------------------------------------
Outstanding at December 31, 1994    704,792  $11.375 to 17.000
  Granted                           210,020        13.250   
  Exercised                         (12,047)  11.375 to 12.270
  Canceled or expired               (88,095)  11.375 to 17.000
--------------------------------------------------------------
OUTSTANDING AT
DECEMBER 31, 1995                   814,670  $11.375 to 17.000
--------------------------------------------------------------
</TABLE>

All options are currently exercisable and represent the only stock options
outstanding at December 31, 1995.  A total of 1,140,625 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.  The dividend units are designed to create an incentive for option
holders to exercise their options and tie that incentive to the dividend
payments on the common stock.  United Water recorded compensation expense of
$228,000 in 1995, $274,000 in 1994 and $47,000 in 1993 with respect to the
management incentive plan.

In May 1988, the shareholders approved a restricted stock plan for certain key
employees.  United Water

                                                                              40
<PAGE>
 
issued 2,500 shares in 1995, 3,750 shares in 1994 and 7,500 shares in 1993 in
connection with the restricted stock plan.  Such shares are earned by the
recipients over a 5-year period.  United Water recorded compensation expense of
$67,000 in 1995, $93,000 in 1994 and $301,000 in 1993 with respect to this
restricted stock plan.

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.

                                                                              41
<PAGE>
 
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 GWC
Corporation 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.

NOTE 10 - EMPLOYEE BENEFITS

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 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.

Effective January 1, 1995, the Company made a number of changes to its medical
plan for active employees and retirees.  These amendments include the
requirement that active employees and retirees pay a greater share of the cost
of their medical coverage.

The following sets forth the plan's funded status and reconciles that funded
status to the amounts recognized in the Company's balance sheet as of December
31:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
(thousands of dollars)                                      1995       1994
-----------------------------------------------------------------------------
<S>                                                      <C>        <C>
Accumulated postretirement benefit obligation (APBO):
   Retirees                                              $(13,967)  $(11,983)
   Fully eligible actives                                 (15,122)   (11,461)
   Other actives                                          (18,980)   (16,593)
----------------------------------------------------------------------------- 
      Total                                               (48,069)   (40,037)
   Plan assets at fair value                               12,320      7,123
----------------------------------------------------------------------------- 
      Funded status                                       (35,749)   (32,914)
Unrecognized transition obligation                         25,018     23,503
Unrecognized gain                                          (1,801)      (600)
----------------------------------------------------------------------------- 
Accrued postretirement benefit cost                      $(12,532)  $(10,011)
----------------------------------------------------------------------------- 
</TABLE>

                                                                              42
<PAGE>
 
Net periodic postretirement benefit cost components were as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------
(thousands of dollars)                        1995      1994      1993
------------------------------------------------------------------------
<S>                                         <C>       <C>       <C>
Service cost                                 $2,521    $1,362    $  761
Interest cost                                 3,578     3,226     2,455
Actual return on plan assets                     88       103      (106)
Amortization of transition obligation         1,453     1,512     1,517
Net amortization and deferral                  (649)     (476)      (65)
------------------------------------------------------------------------
Net periodic postretirement benefit cost     $6,991    $5,727    $4,562
------------------------------------------------------------------------
</TABLE>

The assumed discount rate and expected return on assets used in determining the
APBO were as follows:

<TABLE>
<CAPTION>
------------------------------------------------- 
                              1995   1994   1993
-------------------------------------------------
<S>                          <C>     <C>    <C>
Assumed discount rate        7.375%   9.0%  7.75%
Expected return on assets     8.25%  8.25%  8.25%
------------------------------------------------- 
</TABLE>

The associated health care cost trend rate used in measuring the postretirement
benefit obligation at December 31, 1995 was 12.0%, gradually declining to 5.0%
in 2002 and thereafter.  Increasing the assumed health care cost trend rate by
one percentage point in each year would increase the APBO as of December 31,
1995, by $7.2 million, to a total of $55.3 million, and the aggregate net
periodic postretirement benefit cost for 1995 by $983,000, to a total of $8
million.  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, 1995 and 1994, United Water had regulatory
assets of $17.8 million and $12.8 million, respectively, for recovery in future
rates.

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 1995.

                                                                              43
<PAGE>
 
The components of net periodic pension cost were as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------
(thousands of dollars)             1995       1994       1993
---------------------------------------------------------------
<S>                              <C>        <C>         <C>
Current year service cost        $  2,959   $  3,456    $ 1,941
Interest cost                       9,144      7,829      4,564
Actual return on plan assets      (32,235)       818     (5,043)
Net amortization and deferral      19,632    (12,552)    (3,535)
---------------------------------------------------------------
Net periodic pension income      $   (500)  $   (449)   $(2,073)
---------------------------------------------------------------
</TABLE>

The status of the funded plans at December 31 was as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------
(thousands of dollars)                            1995        1994
--------------------------------------------------------------------
<S>                                            <C>         <C>
Accumulated benefit obligation:
 Vested                                         $104,832    $ 80,643
 Non-vested                                        6,010       5,674
--------------------------------------------------------------------
  Total                                         $110,842    $ 86,317
--------------------------------------------------------------------
Fair value of plan assets (primarily
 stocks and bonds, including
 $6.9 million and $7.2 million,
 respectively, in common stock
 of United Water)                               $160,391    $134,522
Projected benefit obligation (PBO)               133,670     103,617
--------------------------------------------------------------------
Plan assets in excess of PBO                      26,721      30,905
Unrecognized prior service cost                    2,121         775
Unrecognized net gain                            (11,073)    (14,146)
Remaining unrecognized net transition asset
 from applying the standard in
 1987 (amortized over 18 years)                   (5,450)     (6,076)
--------------------------------------------------------------------
Prepaid pension cost recognized
 in the consolidated balance sheet              $ 12,319    $ 11,458
--------------------------------------------------------------------
</TABLE>

The major actuarial assumptions used in the foregoing calculations were as
follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------
                                           1995     1994    1993
-----------------------------------------------------------------
<S>                                       <C>      <C>     <C>
Assumed discount rate                       7.25%    9.0%    7.5%
Assumed range of compensation increase    3.75-5%  4.5-5%  4.5-5%
Expected long-term rate of return on
    plan assets                             8.75%   8.75%   8.75%
-----------------------------------------------------------------' 
</TABLE>

                                                                              44
<PAGE>
 
SUPPLEMENTAL BENEFIT PLANS:  Certain categories of employees are covered by non-
funded supplemental plans.  The projected benefit obligations of these plans at
December 31, 1995 totaled $7.2 million.  The unfunded accumulated benefit
obligation of $5.8 million has been recorded in other deferred credits and
liabilities and an intangible pension asset of $1.4 million is included in
deferred charges and other assets at December 31, 1995.

United Water made contributions of $1,093,000, $921,000 and $552,000 in 1995,
1994 and 1993, respectively, to defined contribution savings plans.

NOTE 11 - RATE MATTERS

The following rate increases were awarded to the Company's regulated utilities
during 1995:

<TABLE>
<CAPTION>
--------------------------------------------------------------------
                             Effective  Allowed   Annual       %
(thousands of dollars)          Date      ROE    Increase   Increase
--------------------------------------------------------------------
<S>                          <C>        <C>      <C>        <C>
UW Illinois                     1/10     11.90    $  324      13.7
UW Vernon Hills                 2/22     12.00        23      10.2
UW Pennsylvania                 2/11     11.00       900       5.1
UW Missouri                     2/22     11.75       335      12.6
UW New Rochelle                 3/15     10.70      (218)     (1.4)
UW Arkansas                     4/06     11.60       950      16.7
UW Delaware                     5/09     11.45     1,350      10.2
UW New York                     8/08     11.00       622       1.5
UW Florida - Water              7/17      ---        144 *     2.2
UW Florida - Wastewater         7/17      ---        331 *     2.3
UW South Gate                  10/01      ---        148 *     8.3
UW Toms River                  11/22     11.25       975       7.9
--------------------------------------------------------------------
      Totals                                      $5,884
-------------------------------------------------------------------- 
</TABLE>

* Rate awards represent annual adjustment clause increases based on inflation
and other factors.

On July 10, 1995, United Water New Jersey applied to the New Jersey Board of
Public Utilities for an 8.8%, or $10.4 million, increase in annual revenues to
meet higher operation and maintenance costs, including postretirement benefits,
as well as a proposed change in depreciation rates.    A decision on this
application is expected before the end of the first quarter of 1996.  In
December 1995, United Water New Rochelle filed with the New York PSC for a $2.5
million, or 15.2%, increase in annual revenues to meet higher operation and
maintenance costs.  A decision on this application is not expected until the
fourth

                                                                              45
<PAGE>
 
quarter of 1996.  Generally, the rate awards the Company's operating utilities
actually receive are less than the amounts requested, primarily due to
circumstances that change while the rate case is being processed.

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)                     1995        1994
-------------------------------------------------------------
<S>                                     <C>         <C>
Basis differences of property, plant
   and equipment                         $106,764    $110,254
Real estate transactions and
   capitalized costs                       15,845      19,083
Other liabilities                          26,260      27,760
-------------------------------------------------------------
   Gross deferred tax liabilities         148,869     157,097
-------------------------------------------------------------
Alternative minimum tax credit
   carryforwards                           (8,975)     (7,968)
Other assets                               (8,141)    (10,104)
-------------------------------------------------------------
   Gross deferred tax assets              (17,116)    (18,072)
-------------------------------------------------------------
   Deferred investment tax credits         23,505      23,995
-------------------------------------------------------------
Total deferred tax liability
   and investment tax credits            $155,258    $163,020
-------------------------------------------------------------
</TABLE>

INCOME TAX PROVISION:  A reconciliation of income tax expense at the statutory
federal income tax rate to the actual income tax expense for 1995, 1994 and 1993
is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
(thousands of dollars)                             1995       1994       1993
-----------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>
Statutory tax rate                                  35%        35%        35%
Federal taxes at statutory rates on pretax
    income before preferred stock
    dividends of subsidiaries                  $13,523    $19,015    $12,214
Utility plant acquisition adjustment               682        644         --
State income taxes, net of federal benefit         290        521        487
Deferred investment tax credits                   (489)      (477)      (298)
Other                                              198        968        177
-----------------------------------------------------------------------------
Provision for income taxes                     $14,204    $20,671    $12,580
-----------------------------------------------------------------------------
</TABLE>

                                                                              46
<PAGE>
 
Income tax expense for 1995, 1994 and 1993 consisted of the following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(thousands of dollars)                             1995       1994       1993
--------------------------------------------------------------------------------
<S>                                              <C>        <C>        <C>
Current:
    Federal                                       $11,518    $ 9,897    $ 1,562
    State                                           1,731        890        751
--------------------------------------------------------------------------------
    Total current                                 $13,249    $10,787    $ 2,313
--------------------------------------------------------------------------------
Deferred (prepaid):
   Accelerated depreciation                       $ 8,420    $ 7,779    $ 5,144
   Contributions and advances for
      construction                                 (3,228)    (4,148)       509
   Prepaid employee benefits                        1,626      1,775      1,772
   Real estate transactions
      and capitalized costs                        (3,383)     1,466      3,613
   Alternative minimum tax                         (1,007)    (1,261)    (2,184)
   Investment tax credits                            (489)      (477)      (298)
   State income taxes, net of federal benefit        (718)        37       (258)
   Other                                             (266)     4,713      1,969
--------------------------------------------------------------------------------
   Total deferred                                 $   955    $ 9,884    $10,267
--------------------------------------------------------------------------------
Total provision for income taxes                  $14,204    $20,671    $12,580
--------------------------------------------------------------------------------
</TABLE>

NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts at December 31, 1995 and 1994, 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 accrued interest and other current liabilities.  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
similar nature and duration.

                                                                              47
<PAGE>
 
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>
1995
Long-term debt                         $558,658  $639,311
Preferred and preference stock with
   mandatory redemption                  98,091   102,837
--------------------------------------------------------- 
1994
Long-term debt                         $505,204  $514,200
Preferred and preference stock with
   mandatory redemption                  98,173    92,700
--------------------------------------------------------- 
</TABLE>

The Company's customer advances for construction have a carrying value of $27.8
million and $30.5 million at December 31, 1995 and 1994, 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.

NOTE 14 - SEGMENT INFORMATION

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                                               Parent, Other
                                                     Real     Operations and
(thousands of dollars)           Utilities          Estate     Eliminations   Consolidated
------------------------------------------------------------------------------------------
<S>                              <C>            <C>            <C>            <C>
1995
Operating revenues               $  297,183        $ 10,433       $ 20,212     $  327,828
Income before income taxes           55,084          (7,228)       (11,514)        36,342
Depreciation and amortization        27,148           1,299          1,706         30,153
Capital expenditures                 70,854           3,789          3,542         78,185
Identifiable assets               1,361,492          92,265         62,951      1,516,708
------------------------------------------------------------------------------------------
1994
Operating revenues               $  262,133        $ 11,854       $ 19,009     $  292,996
Income before income taxes           51,035           3,552         (2,575)        52,012
Depreciation and amortization        22,522           1,210          1,465         25,197
Capital expenditures                 57,959           6,828          2,122         66,909
Identifiable assets               1,328,020          97,555         31,852      1,457,427
------------------------------------------------------------------------------------------
1993
Operating revenues               $  154,497        $ 33,963       $ 11,958     $  200,418
Income before income taxes           29,073           6,024         (2,539)        32,558
Depreciation and amortization        11,854           1,272          1,150         14,276
Capital expenditures                 15,993           5,240          1,701         22,934
Identifiable assets                 614,766         106,342         19,418        740,526
------------------------------------------------------------------------------------------
</TABLE>

                                                                              48
<PAGE>
 
                  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
                  -------------------------------------------

                    UNITED WATER RESOURCES AND SUBSIDIARIES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------
                                                      QUARTER
(thousands except per share data)         FIRST   SECOND    THIRD    FOURTH
---------------------------------------------------------------------------
<S>                                      <C>      <C>      <C>      <C>
1995
Operating revenues                       $71,405  $83,570  $96,384  $76,469
Operating income                          14,146   24,253   35,111    4,818
Net income applicable to common stock        831    7,571   14,394   (5,453)
Net income per common share              $   .03  $   .24  $   .45 ($   .17)
---------------------------------------------------------------------------
1994
Operating revenues                       $39,015  $82,397  $93,487  $78,097
Operating income                           7,069   23,665   33,534   19,168
Net income applicable to common stock      2,367    7,739   14,094    3,687
Net income per common share              $   .12  $   .28  $   .46  $   .12
---------------------------------------------------------------------------
1993
Operating revenues                       $35,895  $43,341  $78,225  $42,957
Operating income                           6,930   12,567   24,791   11,072
Net income applicable to common stock        706    3,924   11,206    4,142
Net income per common share              $   .04  $   .20  $   .57  $   .21
---------------------------------------------------------------------------
</TABLE>

As disclosed in Note 1 to the consolidated financial statements, the Company
recorded a $12.1 million non-cash, pre-tax impairment loss in the fourth quarter
of 1995 for various parcels of land held by its real estate subsidiary and for
its investment in the environmental testing business.

                                                                              49
<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 1995.

                                                                              50
<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 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.

          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.

                                                                              51
<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 1995:   None
(c)  Exhibits:

    3(i) (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(i) (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(ii)     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)      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.

    10(a)     Employment Agreement between and among United Water Resources Inc.
              its Subsidiaries and Affiliates and Donald L. Correll (filed as
              Exhibit 10(a) to Form 10-K for the fiscal year ended December 31,
              1994)

    10(b)     Employment Agreement by and between General Waterworks Corporation
              and Ronald S. Dungan (filed as Exhibit 10(b) to Form 10-K for the
              fiscal year ended December 31, 1994)

    10(c)     Executive Employment Agreement by and between United Water 
              Resources 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

                                                                              52
<PAGE>
 
            U N I T E D    W A T E R    R E S O U R C E S    I N C.


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


<TABLE>
<CAPTION> 
                                                    DECEMBER 31,
                                          -------------------------------
                                            1995        1994        1993
-------------------------------------------------------------------------
<S>                                       <C>        <C>         <C> 
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
   Balance at beginning of period         $ 1,373    $  1,273    $  1,272


   Charges to costs and expenses            1,967       1,970       1,278


   Accounts written off                    (2,275)     (2,071)     (1,460)


   Recoveries of accounts written off         234         201         183
                                          -------    --------    --------

   BALANCE AT END OF PERIOD               $ 1,299    $  1,373    $  1,273
                                          =======    ========    ========


REAL ESTATE VALUATION RESERVE:
   Balance at beginning of period         $ 3,266    $  4,111    $    ---


   Charges to costs and expenses            9,430         ---       4,111


   Sales of properties                        ---        (845)        ---
                                          -------    --------    --------

   BALANCE AT END OF PERIOD               $12,696    $  3,266    $  4,111
                                          =======    ========    ========
</TABLE> 

                                                                              53
<PAGE>
 
                              S I G N A T U R E S

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

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




       March 7, 1996                  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.

         SIGNATURE                    TITLE                   DATE
         ---------                    -----                   ----

    DONALD  L.  CORRELL         Chairman, President
---------------------------     and Chief Executive        March 7, 1996
    (Donald L. Correll)              Officer       


    DOUGLAS  W.  HAWES               Secretary             March 7, 1996
---------------------------        and Director
    (Douglas W. Hawes)

 
     JOHN  J.  TURNER                Treasurer             March 7, 1996
---------------------------
     (John J. Turner)
 
                                   DIRECTORS
                                   ---------

 
EDWARD  E.  BARR         3/7/96      ROBERT  L.  DUNCAN,  JR.   3/7/96
-----------------------  ------      ------------------------   ------
(Edward E. Barr)         Date        (Robert L. Duncan, Jr.)    Date

                                          
FRANK  J.  BORELLI       3/7/96      JON  F.  HANSON            3/7/96
-----------------------  ------      ------------------------   ------
(Frank J. Borelli)       Date        (Jon F. Hanson)            Date

                                          
PHILIPPE  BRONGNIART     3/7/96      GEORGE  M.  HASKEW,  JR.   3/7/96
-----------------------  ------      ------------------------   ------
(Philippe Brongniart)    Date        (George M. Haskew, Jr.)    Date

                                          
LAWRENCE  R.  CODEY      3/7/96      DOUGLAS  W.  HAWES         3/7/96
-----------------------  ------      ------------------------   ------
(Lawrence R. Codey)      Date        (Douglas W. Hawes)         Date

                                          
DONALD  L.  CORRELL      3/7/96      DENNIS  M.  NEWNHAM        3/7/96
-----------------------  ------      ------------------------   ------
(Donald L. Correll)      Date        (Dennis M. Newnham)        Date
                                          

PETER  DEL  COL          3/7/96      JACQUES  F.  PETRY         3/7/96
-----------------------  ------      ------------------------   ------
(Peter Del Col)          Date        (Jacques F. Petry)         Date

                                          
ALLAN  R.  DRAGONE       3/7/96      MARCIA  L.  WORTHING       3/7/96
-----------------------  ------      ------------------------   ------
(Allan R. Dragone)       Date        (Marcia L. Worthing)       Date

                                                                              54