UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

(Mark One)
(X)    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1998

                                        OR

( )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

For the transition period from               to

     Commission        Registrant, State of Incorporation,    I.R.S. Employer
     File Number          Address, and Telephone Number      Identification No.

       1-11377                     CINERGY CORP.                31-1385023
                             (A Delaware Corporation)
                              139 East Fourth Street
                              Cincinnati, Ohio 45202
                                  (513) 421-9500

       1-1232          THE CINCINNATI GAS & ELECTRIC COMPANY    31-0240030
                              (An Ohio Corporation)
                             139 East Fourth Street
                             Cincinnati, Ohio 45202
                                 (513) 421-9500

       1-3543                    PSI ENERGY, INC.               35-0594457
                             (An Indiana Corporation)
                              1000 East Main Street
                            Plainfield, Indiana 46168
                                 (317) 839-9611

       2-7793        THE UNION LIGHT, HEAT AND POWER COMPANY    31-0473080
                             (A Kentucky Corporation)
                              139 East Fourth Street
                              Cincinnati, Ohio 45202
                                 (513) 421-9500

Indicate  by check mark  whether  the  registrants  (1) have  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
registrants  were required to file such  reports),  and (2) have been subject to
such filing requirements for the past 90 days. Yes X No

This combined Form 10-Q is separately filed by Cinergy Corp., The Cincinnati Gas
& Electric  Company,  PSI  Energy,  Inc.,  and The Union  Light,  Heat and Power
Company.  Information  contained herein relating to any individual registrant is
filed  by  such  registrant  on  its  own  behalf.   Each  registrant  makes  no
representation as to information relating to the other registrants.

The Union  Light,  Heat and Power  Company  meets  the  conditions  set forth in
General  Instruction  H(1)(a) and (b) of Form 10-Q and is  therefore  filing its
company specific information with the reduced disclosure format.

As of July 31, 1998, shares of Common Stock outstanding for each registrant were
as listed:

                         Company                                        Shares
Cinergy  Corp.,  par  value  $.01 per share  158,535,278  The  Cincinnati  Gas &
Electric Company, par value $8.50 per share 89,663,086 PSI Energy, Inc., without
par value,  stated value $.01 per share  53,913,701  The Union  Light,  Heat and
Power Company, par value $15.00 per share 585,333




<PAGE>



                                TABLE OF CONTENTS


 Item                                                               Page
Number                                                             Number

       Glossary of Terms . . . . . . . . . . . . . . . . . . .       3

                         PART I.  FINANCIAL INFORMATION

  1    Financial Statements
       Cinergy Corp.
         Consolidated Balance Sheets . . . . . . . . . . . . .       6
         Consolidated Statements of Income (Loss). . . . . . .       8
         Consolidated Statements of Changes in Common
           Stock Equity. . . . . . . . . . . . . . . . . . . .       9
         Consolidated Statements of Cash Flows . . . . . . . .      12
         Results of Operations . . . . . . . . . . . . . . . .      13
       The Cincinnati Gas & Electric Company
         Consolidated Balance Sheets . . . . . . . . . . . . .      24
         Consolidated Statements of Income and Comprehensive
           Income. . . . . . . . . . . . . . . . . . . . . . .      26
         Consolidated Statements of Cash Flows . . . . . . . .      27
         Results of Operations . . . . . . . . . . . . . . . .      28
       PSI Energy, Inc.
         Consolidated Balance Sheets . . . . . . . . . . . . .      34
         Consolidated Statements of Income (Loss) and
           Comprehensive Income (Loss) . . . . . . . . . . . .      36
         Consolidated Statements of Cash Flows . . . . . . . .      37
         Results of Operations . . . . . . . . . . . . . . . .      38
       The Union Light, Heat and Power Company
         Balance Sheets. . . . . . . . . . . . . . . . . . . .      43
         Statements of Income (Loss) . . . . . . . . . . . . .      45
         Statements of Cash Flows. . . . . . . . . . . . . . .      46
         Results of Operations . . . . . . . . . . . . . . . .      47
       Notes to Financial Statements . . . . . . . . . . . . .      50
  2    Management's Discussion and Analysis of Financial
         Condition and Results of Operations . . . . . . . . .      57
  3    Quantitative and Qualitative Disclosures About
         Market Risk . . . . . . . . . . . . . . . . . . . . .      62

                                            PART II. OTHER INFORMATION

  1    Legal Proceedings . . . . . . . . . . . . . . . . . . .      63
  6    Exhibits and Reports on Form 8-K. . . . . . . . . . . .      63
       Signatures. . . . . . . . . . . . . . . . . . . . . . .      65






<PAGE>



                                GLOSSARY OF TERMS

The following  abbreviations  or acronyms used in the text of this combined Form
10-Q are defined below:

    TERM                                   DEFINITION

1997 Form         Combined 1997 Annual Report on Form 10-K filed separately by
  10-K              Cinergy, CG&E, PSI, and ULH&P

Apache            Apache Corporation

Avon Energy       Avon Energy Partners Holdings, an Unlimited Liability
                    Company and its wholly-owned subsidiary Avon Energy
                    Partners PLC, a Limited Liability Company

Bcf               Billion cubic feet

Beckjord          CG&E's W. C. Beckjord Station (steam electric generating
                    plant)

CC&T              Cinergy Capital and Trading, Inc. (a subsidiary of
                    Investments)

CERCLA            Comprehensive Environmental Response, Compensation and
                    Liability Act

CFC               National Rural Utilities Cooperative Finance Corporation

CG&E              The Cincinnati Gas & Electric Company (a subsidiary of
                    Cinergy)

Cinergy or        Cinergy Corp.
  Company

Cinergy Global    Cinergy Global Power, Inc., formerly Cinergy Investments
  Power             MPI, Inc. (a subsidiary of Cinergy Global Resources, Inc.)

Cinergy Global    Cinergy Global Resources, Inc. (a subsidiary of Cinergy),
  Resources         which holds Cinergy's foreign non-regulated business

Committed Lines   Unsecured lines of credit

Conesville        CG&E's Conesville Station (steam electric generating plant)

Enertech          Enertech Associates, Inc., formerly Power International,
                    Inc. (a subsidiary of Cinergy Investments, Inc.)

EPA               United States Environmental Protection Agency

EPS               Earnings per share

Exxon             Exxon Coal and Minerals Company

FASB              Financial Accounting Standards Board

FERC              Federal Energy Regulatory Commission

HB 443            Customer choice bill introduced by the House Chairman of the
                    Tourism, Development and Energy Committee in Kentucky

HJR 95            House Joint Resolution, which calls for an executive task
                    force to study electricity restructuring in Kentucky




<PAGE>


GLOSSARY OF TERMS (Continued)

    TERM                                   DEFINITION

HB 732 and        Companion electric restructuring bills introduced into the
  SB 237            Ohio legislature during 1998

IDEM              Indiana Department of Environmental Management

IGC               Indiana Gas Company, Inc., formerly Indiana Gas and Water
                    Company, Inc.

IRS               Internal Revenue Service

IT                Information Technology

Investments       Cinergy Investments, Inc. (a subsidiary of Cinergy)

kwh               Kilowatt-hour

Mcf               Thousand cubic feet

MGP               Manufactured gas plant

Midlands          Midlands Electricity plc, a United Kingdom regional electric
                    company (a wholly-owned subsidiary of Avon Energy)

MW                Megawatts

NIPSCO            Northern Indiana Public Service Company

NOx               Nitrogen Oxide

Oryx              Oryx Energy Company

ProEnergy         Producers Energy Marketing, LLC (a subsidiary of CC&T)

PSI               PSI Energy, Inc. (a subsidiary of Cinergy)

PUCO              Public Utilities Commission of Ohio

RUS               Rural Utilities Service

SIP               State Implementation Plan

Statement 130     Statement of Financial Accounting Standards No. 130,
                    Reporting Comprehensive Income

Statement 133     Statement of Financial Accounting Standards No. 133,
                    Accounting for Derivative Instruments and Hedging
                    Activities

Teplarna          Teplarna Svit a.s. (a subsidiary of Cinergy Global Power)

ULH&P             The Union Light, Heat and Power Company (a wholly-owned
                    subsidiary of CG&E)

Uncommitted       Short-term borrowings with various banks arranged on an "as
  Lines             offered" basis

WVPA              Wabash Valley Power Association, Inc.

Zimmer            CG&E's William H. Zimmer Generating Station (steam electric
                    generating plant)



<PAGE>


                                  CINERGY CORP.
                            AND SUBSIDIARY COMPANIES


<PAGE>



                                  CINERGY CORP.
                           CONSOLIDATED BALANCE SHEETS


ASSETS
                                                       June 30    December 31
                                                        1998         1997
                                                     (unaudited)
                             (dollars in thousands)

Utility Plant - Original Cost
  In service
    Electric                                          $9,048,447   $8,981,182
    Gas                                                  759,774      746,903
    Common                                               186,236      186,078
                                                      ----------   ----------
                                                       9,994,457    9,914,163
  Accumulated depreciation                             3,922,498    3,800,322
                                                      ----------   ----------
                                                       6,071,959    6,113,841
  Construction work in progress                          219,154      183,262
                                                      ----------   ----------
      Total utility plant                              6,291,113    6,297,103

Current Assets
  Cash and temporary cash investments                     86,934       53,310
  Restricted deposits                                      1,507        2,319
  Notes receivable                                            78          110
  Accounts receivable less accumulated provision for
    doubtful accounts of $14,520 at June 30, 1998,
    and $10,382 at December 31, 1997                     528,923      413,516
  Materials, supplies, and fuel - at average cost
    Fuel for use in electric production                   72,272       57,916
    Gas stored for current use                            29,282       29,174
    Other materials and supplies                          70,475       76,066
  Prepayments and other                                   68,126       38,171
                                                      ----------   ----------
                                                         857,597      670,582

Other Assets
  Regulatory assets
    Amounts due from customers - income taxes            398,237      374,456
    Post-in-service carrying costs and deferred
      operating expenses                                 174,557      178,504
    Coal contract buyout costs                           112,936      122,485
    Deferred merger costs                                 87,684       90,346
    Deferred demand-side management costs                 91,793      109,596
    Phase-in deferred return and depreciation             82,232       89,689
    Unamortized costs of reacquiring debt                 64,443       66,242
    Other                                                 44,241       45,533
  Investments in unconsolidated subsidiaries             589,724      537,720
  Other                                                  385,746      275,897
                                                      ----------   ----------
                                                       2,031,593    1,890,468

                                                      $9,180,303   $8,858,153

The accompanying notes as they relate to Cinergy Corp. are an integral part of
these consolidated financial statements.


<PAGE>



                                  CINERGY CORP.


CAPITALIZATION AND LIABILITIES

                                                        June 30    December 31
                                                         1998         1997
                                                      (unaudited)
                             (dollars in thousands)

Common Stock Equity
  Common stock - $.01 par value;  authorized  shares - 600,000,000;  outstanding
    shares - 158,535,278 at June 30, 1998, and
    157,744,658 at December 31, 1997                     $ 1,585      $ 1,577
  Paid-in capital                                      1,599,435    1,573,064
  Retained earnings                                      905,556      967,420
  Accumulated other comprehensive income                  (3,330)      (2,861)
                                                      ----------   ----------
      Total common stock equity                        2,503,246    2,539,200

Cumulative Preferred Stock of Subsidiaries
  Not subject to mandatory redemption                     92,688      177,989

Long-term Debt                                         2,192,975    2,150,902
                                                      ----------   ----------
      Total capitalization                             4,788,909    4,868,091

Current Liabilities
  Long-term debt due within one year                     251,569       85,000
  Notes payable and other short-term obligations       1,120,559    1,114,028
  Accounts payable                                       655,241      488,716
  Accrued taxes                                          187,197      187,033
  Accrued interest                                        35,420       46,622
  Other                                                   88,405       79,193
                                                      ----------   ----------
                                                       2,338,391    2,000,592

Other Liabilities
  Deferred income taxes                                1,209,293    1,248,543
  Unamortized investment tax credits                     161,464      166,262
  Accrued pension and other postretirement
    benefit costs                                        315,348      297,142
  Other                                                  366,898      277,523
                                                      ----------   ----------
                                                       2,053,003    1,989,470

                                                      $9,180,303   $8,858,153


<PAGE>
<TABLE>
<CAPTION>

                                  CINERGY CORP.
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                                   (unaudited)

<S>                                    <C>              <C>          <C>            <C>            <C>            <C>
                                              Quarter Ended                 Year to Date              Twelve Months Ended
                                                 June 30                      June 30                       June 30
                                           1998           1997          1998           1997           1998           1997
                                                             (in thousands, except per share amounts)

Operating Revenues
  Electric                             $1,021,922       $790,576     $2,180,646     $1,608,490     $4,433,854     $3,041,642
  Gas                                      50,081         74,757        223,142        287,023        427,264        495,782
                                       ----------       --------     ----------     ----------     ----------     ----------
                                        1,072,003        865,333      2,403,788      1,895,513      4,861,118      3,537,424

Operating Expenses
  Fuel used in electric production        155,547        134,602        336,066        310,348        719,153        668,341
  Gas purchased                            21,668         35,826        118,279        159,794        224,643        275,730
  Purchased and exchanged power           439,920        195,364        911,805        355,956      1,775,207        456,371
  Other operation                         237,130        158,488        400,158        321,900        716,203        625,574
  Maintenance                              55,613         51,201         94,679         97,055        174,095        199,157
  Depreciation                             73,790         72,171        147,095        143,727        292,445        285,698
  Amortization of phase-in deferrals        5,540          3,370         11,079          6,741         17,821         13,540
  Amortization of post-in-service
    deferred operating expenses             1,090          1,090          2,181          2,181          4,362          2,379
  Income taxes                            (10,897)        39,937         59,894        103,856        204,975        215,122
  Taxes other than income taxes            68,157         67,841        137,806        136,213        266,617        261,482
                                       ----------       --------     ----------     ----------     ----------     ----------
                                        1,047,558        759,890      2,219,042      1,637,771      4,395,521      3,003,394

Operating Income                           24,445        105,443        184,746        257,742        465,597        534,030

Other Income and Expenses - Net
  Allowance for equity funds used
    during construction                       111            180            132            371           (141)           748
  Post-in-service carrying costs             -              -              -              -              -               386
  Phase-in deferred return                  1,811          2,002          3,622          4,004          7,626          8,190
  Equity in earnings of
    unconsolidated subsidiaries             9,717         12,180         21,571         38,680         43,283         61,677
  Income taxes                             12,788          3,653         26,130          4,444         57,623         18,433
  Other - net                             (12,684)        (8,080)       (31,715)       (10,707)       (52,510)       (37,545)
                                       ----------       --------     ----------     ----------     ----------     ----------
                                           11,743          9,935         19,740         36,792         55,881         51,889

Income Before Interest and Other
  Charges                                  36,188        115,378        204,486        294,534        521,478        585,919

Interest and Other Charges
  Interest on long-term debt               43,835         44,977         87,593         94,252        175,113        187,713
  Other interest                           18,845         13,430         36,839         27,297         69,489         50,274
  Allowance for borrowed funds used
    during construction                    (1,925)        (1,754)        (3,872)        (3,096)        (6,176)        (6,499)
  Preferred dividend requirements
    of subsidiaries                         1,366          3,236          3,788          6,475          9,882         16,209
                                       ----------       --------     ----------     ----------     ----------     ----------
                                           62,121         59,889        124,348        124,928        248,308        247,697

Net Income (Loss) Before
  Extraordinary Item                   $  (25,933)      $ 55,489     $   80,138     $  169,606     $  273,170     $  338,222
Extraordinary Item - Equity Share of
  Windfall Profits Tax (Less
  Applicable Income Taxes of $0)             -              -              -              -          (109,400)          -
                                       ----------       --------     ----------     ----------     ----------     -------
Net Income (Loss)                      $  (25,933)      $ 55,489     $   80,138     $  169,606     $  163,770     $  338,222

Average Common Shares Outstanding         158,018        157,679        157,892        157,679        157,790        157,679

Earnings Per Common Share
  Net income (loss) before
    extraordinary item                      $(.16)          $.35           $.51          $1.07          $1.73          $2.02
  Net income (loss)                         $(.16)          $.35           $.51          $1.07          $1.04          $2.02

Earnings Per Common Share - Assuming Dilution (Note 13)
  Net income (loss) before
    extraordinary item                      $(.16)          $.35           $.51          $1.06          $1.72          $2.01
  Net income (loss)                         $(.16)          $.35           $.51          $1.06          $1.03          $2.01

Dividends Declared Per Common Share         $ .45           $.45           $.90          $ .90          $1.80          $1.78

<FN>
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>



                                  CINERGY CORP.
            CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
                             (dollars in thousands)
                                   (unaudited)

<S>                                <C>          <C>             <C>             <C>                <C>                <C>
                                                                                 Accumulated
                                                                                   Other              Total              Total
                                   Common         Paid-in        Retained       Comprehensive      Comprehensive      Common Stock
                                   Stock          Capital        Earnings          Income             Income             Equity

Quarter Ended June 30, 1998

Balance April 1, 1998              $1,578       $1,574,080      $1,002,495        $(3,279)                             $2,574,874
Comprehensive income
  Net income (loss)                                                (25,933)                          $(25,933)            (25,933)
  Other comprehensive income,
      net of tax
    Foreign currency translation
      adjustment                                                                                          (51)                (51)
                                                                                                     --------
    Other comprehensive income
      (loss) total                                                                    (51)                (51)
                                                                                                     --------
Comprehensive income (loss) total                                                                    $(25,984)
Issuance of 771,258 shares of
  common stock - net                    7           26,504                                                                 26,511
Treasury shares purchased              (1)          (3,502)                                                                (3,503)
Treasury shares reissued                1            2,329                                                                  2,330
Dividends on common stock (see
  page 8 for per share amounts)                                    (71,006)                                               (71,006)
Other                                                   24                                                                     24
                                   ------       ----------      ----------        -------                              ----------

Balance June 30, 1998              $1,585       $1,599,435      $  905,556        $(3,330)                             $2,503,246

Quarter Ended June 30, 1997

Balance at April 1, 1997           $1,577       $1,579,934      $1,036,643        $(2,419)                             $2,615,735
Comprehensive income
  Net income                                                        55,489                           $ 55,489              55,489
  Other comprehensive income,
      net of tax
    Foreign currency translation
      adjustment                                                                                          446                 446
                                                                                                     --------
    Other comprehensive income
      total                                                                           446                 446
                                                                                                     --------
Comprehensive income total                                                                           $ 55,935
                                                                                                     ========
Treasury shares purchased              (4)         (13,778)                                                               (13,782)
Treasury shares reissued                4            4,325                                                                  4,329
Dividends on common stock (see
  page 8 for per share amounts)                                    (70,910)                                               (70,910)
Other                                                   52             (12)                                                    40
                                   ------       ----------      ----------        -------                              ----------

Balance June 30, 1997              $1,577       $1,570,533      $1,021,210        $(1,973)                             $2,591,347


<FN>
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                  CINERGY CORP.
      CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (CONTINUED)
                             (dollars in thousands)
                                   (unaudited)


<S>                                <C>          <C>             <C>             <C>                <C>                <C>
                                                                                 Accumulated
                                                                                   Other              Total              Total
                                   Common         Paid-in        Retained       Comprehensive      Comprehensive      Common Stock
                                   Stock          Capital        Earnings          Income             Income             Equity

Six Months Ended June 30, 1998

Balance January 1, 1998            $1,577       $1,573,064      $  967,420        $(2,861)                             $2,539,200
Comprehensive income
  Net income                                                        80,138                           $ 80,138              80,138
  Other comprehensive income,
      net of tax
    Foreign currency translation
      adjustment                                                                                         (418)               (418)
    Minimum pension liability
      adjustment                                                                                          (51)                (51)
                                                                                                     --------
    Other comprehensive income
      (loss) total                                                                   (469)               (469)
                                                                                                     --------
Comprehensive income total                                                                           $ 79,669
                                                                                                     ========
Issuance of 790,620 shares of
  common stock - net                    8           26,793                                                                 26,801
Treasury shares purchased              (2)          (4,932)                                                                (4,934)
Treasury shares reissued                2            4,478                                                                  4,480
Dividends on common stock (see
  page 8 for per share amounts)                                   (142,000)                                              (142,000)
Other                                                   32              (2)                                                    30
                                   ------       ----------      ----------        -------                              ----------

Balance June 30, 1998              $1,585       $1,599,435      $  905,556        $(3,330)                             $2,503,246

Six Months Ended June 30, 1997

Balance at January 1, 1997         $1,577       $1,590,735      $  993,526        $(1,384)                             $2,584,454
Comprehensive income
  Net income                                                       169,606                           $169,606             169,606
  Other comprehensive income,
      net of tax
    Foreign currency translation
      adjustment                                                                                         (589)               (589)
                                                                                                     --------
    Other comprehensive income
      (loss) total                                                                   (589)               (589)
                                                                                                     --------
Comprehensive income total                                                                           $169,017
                                                                                                     ========
Treasury shares purchased             (11)         (45,725)                                                               (45,736)
Treasury shares reissued               11           25,459                                                                 25,470
Dividends on common stock (see
  page 8 for per share amounts)                                   (141,910)                                              (141,910)
Other                                                   64             (12)                                                    52
                                   ------       ----------      ----------        -------                              ----------

Balance June 30, 1997              $1,577       $1,570,533      $1,021,210        $(1,973)                             $2,591,347


<FN>
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>



<TABLE>
<CAPTION>
                                  CINERGY CORP.
      CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY (CONTINUED)
                             (dollars in thousands)
                                   (unaudited)

<S>                                <C>          <C>             <C>             <C>                <C>               <C>
                                                                                 Accumulated
                                                                                   Other              Total              Total
                                   Common         Paid-in        Retained       Comprehensive      Comprehensive      Common Stock
                                   Stock          Capital        Earnings          Income             Income             Equity

Twelve Months Ended June 30, 1998

Balance July 1, 1997               $1,577       $1,570,533      $1,021,210        $(1,973)                             $2,591,347
Comprehensive income
  Net income                                                       163,770                           $163,770             163,770
  Other comprehensive income,
      net of tax
    Foreign currency translation
      adjustment                                                                                         (224)               (224)
    Minimum pension liability
      adjustment                                                                                       (1,133)             (1,133)
                                                                                                     --------
    Other comprehensive income
      (loss) total                                                                 (1,357)             (1,357)
                                                                                                     --------
Comprehensive income total                                                                           $162,413
Issuance of 856,149 shares of
  common stock - net                    8           28,859                                                                 28,867
Treasury shares purchased              (2)          (5,406)                                                                (5,408)
Treasury shares reissued                2            5,748                                                                  5,750
Dividends on common stock (see
  page 8 for per share amounts)                                   (283,956)                                              (283,956)
Other                                                 (299)          4,532                                                  4,233
                                   ------       ----------      ----------       --------                              ----------

Balance June 30, 1998              $1,585       $1,599,435      $  905,556        $(3,330)                             $2,503,246

Twelve Months Ended June 30, 1997

Balance at July 1, 1996            $1,577       $1,594,920      $  982,076        $(1,640)                             $2,576,933
Comprehensive income
  Net income                                                       338,222                           $338,222             338,222
  Other comprehensive income,
      net of tax
    Foreign currency translation
      adjustment                                                                                         (153)               (153)
    Minimum pension liability
      adjustment                                                                                         (180)               (180)
                                                                                                     --------
    Other comprehensive income
      (loss) total                                                                   (333)               (333)
                                                                                                     --------
Comprehensive income total                                                                           $337,889
                                                                                                     ========
Treasury shares purchased             (14)         (54,070)                                                               (54,084)
Treasury shares reissued               14           29,647                                                                 29,661
Costs of reacquisition of
  preferred stock of subsidiary                                    (18,391)                                               (18,391)
Dividends on common stock (see
  page 8 for per share amounts)                                   (280,668)                                              (280,668)
Other                                                   36             (29)                                                     7
                                   ------       ----------     -----------        -------                              ----------

Balance June 30, 1997              $1,577       $1,570,533      $1,021,210        $(1,973)                             $2,591,347

<FN>
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                  CINERGY CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

<S>                                                  <C>          <C>          <C>          <C>
                                                          Year to Date           Twelve Months Ended
                                                             June 30                   June 30
                                                        1998         1997         1998         1997
                                                                      (in thousands)

Operating Activities
  Net income                                         $  80,138    $ 169,606    $ 163,770    $ 338,222
  Items providing (using) cash currently:
    Depreciation                                       147,095      143,727      292,445      285,698
    Reserves related to electric trading business       67,000         -          71,000         -
    WVPA settlement                                     80,000         -          80,000         -
    Deferred income taxes and investment tax
      credits - net                                    (61,871)       8,146       (2,379)      23,275
    Equity in earnings of unconsolidated subsidiaries  (21,571)     (38,680)     (18,130)     (61,677)
    Extraordinary item - equity share of windfall
      profits tax                                         -            -         109,400         -
    Allowance for equity funds used during
      construction                                        (132)        (371)         141         (748)
    Regulatory assets - net                             36,171       38,881       68,600       57,144
    Changes in current assets and current
      liabilities
        Restricted deposits                                812         (224)         438         (270)
        Accounts and notes receivable, net of
          reserves on receivables sold                  (1,456)      25,529     (244,142)     (37,429)
        Materials, supplies, and fuel                   (4,667)      20,980       (3,830)      52,803
        Accounts payable                                40,353        7,025      216,624       54,493
        Litigation settlement                             -            -            -         (80,000)
        Accrued taxes and interest                     (11,038)       9,548      (42,000)      20,008
    Other items - net                                   23,850      (56,281)     108,306       (2,345)
                                                     ---------    ---------    ---------    ---------
          Net cash provided by operating
            activities                                 374,684      327,886      800,243      653,864

Financing Activities
  Issuance of common stock                                 290         -           2,356         -
  Issuance of long-term debt                           321,921         -         421,983      150,217
  Retirement of preferred stock of subsidiaries        (85,269)        (114)    (101,424)    (197,487)
  Redemption of long-term debt                        (220,409)    (206,312)    (350,409)    (282,375)
  Change in short-term debt                                972      182,642       10,141      347,359
  Dividends on common stock                           (141,599)    (141,910)    (283,555)    (280,668)
                                                     ---------    ---------    ---------    ---------
          Net cash used in financing activities       (124,094)    (165,694)    (300,908)    (262,954)

Investing Activities
  Construction expenditures (less allowance
    for equity funds used during construction)        (144,524)    (144,372)    (328,207)    (341,600)
  Acquisition of businesses (net of cash acquired)     (46,141)        -         (46,141)        -
  Deferred demand-side management costs                 (4,703)     (10,783)     (13,787)     (37,921)
  Investments in unconsolidated subsidiaries           (21,598)        -         (50,630)     (46,351)
                                                     ---------    ---------    ---------    ---------
          Net cash used in investing activities       (216,966)    (155,155)    (438,765)    (425,872)

Net increase (decrease) in cash and
  temporary cash investments                            33,624        7,037       60,570      (34,962)

Cash and temporary cash investments at
  beginning of period                                   53,310       19,327       26,364       61,326
                                                     ---------    ---------    ---------    ---------

Cash and temporary cash investments at
  end of period                                      $  86,934    $  26,364    $  86,934    $  26,364

<FN>
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial
statements.
</FN>
</TABLE>

<PAGE>


                                  CINERGY CORP.

Below is  information  concerning  the  consolidated  results of operations  for
Cinergy for the quarter,  six months, and twelve months ended June 30, 1998. For
information  concerning  the  results  of  operations  for  each  of  the  other
registrants  for the  quarter  and six  months  ended  June  30,  1998,  see the
discussion  under the heading  "Results of  Operations"  following the financial
statements of each company.


            RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998

Kwh Sales

Kwh  sales  increased  25.5%  for the  quarter  ended  June 30,  1998,  from the
comparable  period of last year,  primarily  reflecting  increased  activity  in
Cinergy's  power marketing and trading  operations  which led to higher non-firm
power sales for resale.  Also  contributing to the higher kwh sales level was an
increase in residential  and  commercial  sales due to the return to more normal
weather  conditions for the quarter ended June 30, 1998, as compared to the same
period last year,  and an  increase in  industrial  sales  primarily  reflecting
growth  in  the   chemicals,   transportation   equipment,   and   miscellaneous
manufacturers sectors.

Mcf Sales and Transportation

Mcf gas sales and  transportation  volumes for the quarter  ended June 30, 1998,
decreased when compared to the same period in 1997. The decline in Mcf sales was
partially  offset by an  increase  in gas  transportation  volumes as  customers
continued  the  trend  of  purchasing   gas  directly  from   suppliers,   using
transportation services provided by Cinergy.

Operating Revenues

Electric Operating Revenues

Electric operating revenues for the quarter ended June 30, 1998,  increased $231
million (29%),  as compared to the same period last year,  primarily as a result
of the increased kwh sales discussed  above.  Also  contributing to the increase
was a higher average price received on non-firm power transactions.

An analysis of electric operating revenues is shown below:

                                     Quarter
                                  Ended June 30
                                  (in millions)

Electric operating revenues - June 30, 1997                  $  791
Increase (Decrease) due to change in:
  Price per kwh
    Retail                                                       (3)
    Sales for resale
      Firm power obligations                                      2
      Non-firm power transactions                                89
  Total change in price per kwh                                  88

  Kwh sales
    Retail                                                       50
    Sales for resale
      Firm power obligations                                     10
      Non-firm power transactions                                80
  Total change in kwh sales                                     140

  Other                                                           3

Electric operating revenues - June 30, 1998                  $1,022

Gas Operating Revenues

The  increasing  trend of  industrial  customers  purchasing  gas directly  from
producers  and utilizing  CG&E  facilities to transport the gas continues to put
downward  pressure on gas operating  revenues.  Since  providing  transportation
services does not necessitate recovery of the cost of gas purchased, the revenue
per Mcf transported is less than the revenue per Mcf sold. As a result, a higher
relative  volume  of gas  transported  to gas sold  translates  into  lower  gas
operating revenues.

Gas operating  revenues  decreased  $25 million  (33%) in the second  quarter of
1998,  when compared to the same period last year,  primarily due to the decline
in volume sales discussed above and the  aforementioned  trend toward  increased
transportation services.

Operating Expenses

Fuel Used in Electric Production

Electric  fuel costs  increased $21 million (16%) for the quarter ended June 30,
1998, as compared to the same period last year.

An analysis of these fuel costs is shown below:

                                                 Quarter
                                              Ended June 30
                                              (in millions)

Fuel expense - June 30, 1997 $135 Increase (Decrease) due to change in:
  Price of fuel                                     (2)
  Deferred fuel cost                                 7
  Kwh generation                                    16
                                                  ----

Fuel expense - June 30, 1998                      $156

Gas Purchased

Gas purchased for the quarter ended June 30, 1998,  decreased $14 million (40%),
when  compared to the same period last year,  primarily due to a decrease in the
volumes of gas purchased, due to lower demand.

Purchased and Exchanged Power

Purchased and exchanged  power increased $245 million for the quarter ended June
30,  1998,  when  compared to the same period  last year,  primarily  reflecting
increased  purchases  of  non-firm  power  for  resale  to others as a result of
increased  activity in Cinergy's power marketing and trading  operations and the
provision of $61 million of reserves for the electric trading business  recorded
during  the  second  quarter  of 1998  (see Note 9 of the  "Notes  to  Financial
Statements" in "Part I. Financial Information").

Other Operation

Other  operation  expenses for the quarter  ended June 30, 1998,  increased  $79
million  (50%),  as  compared  to the same  period  of 1997.  This  increase  is
primarily due to the one-time  charge of $80 million  recorded during the second
quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute
with the WVPA (see Note 14 of the "Notes to  Financial  Statements"  in "Part I.
Financial  Information").  This increase also reflects a provision of $4 million
recorded  in the  second  quarter  of 1998 for  potential  bad debts  related to
certain power marketing and trading accounts.

Maintenance

For the quarter ended June 30, 1998,  maintenance  expenses increased $4 million
(9%),  when  compared  to the  quarter  ended June 30,  1997.  This  increase is
primarily due to forced  outages at  Conesville  and Beckjord and an increase in
overhead line  maintenance  costs  resulting from storm damage during the second
quarter of 1998.

Amortization of Phase-in Deferrals

Amortization of phase-in  deferrals  reflects the PUCO ordered phase-in plan for
Zimmer.

Other Income and Expenses - Net

Equity in Earnings of Unconsolidated Subsidiaries

The  $2  million  (20%)  decrease  in  equity  in  earnings  of   unconsolidated
subsidiaries for the quarter ended June 30, 1998, as compared to the same period
of 1997, is primarily attributable to the decrease in earnings of Midlands.

Other - net

The change in other - net of $5 million  for the  quarter  ended June 30,  1998,
from the same  period of 1997,  is  primarily  due to an  increase  in  expenses
related to Cinergy  Global Power,  which was formed in September  1997, a higher
level of expenses  associated with PSI's sales of accounts receivable during the
second quarter of 1998, and expenses  related to the  acquisitions  and start-up
costs of other non-regulated entities.

Interest and Other Charges

Other Interest

Other  interest  increased $5 million  (40%) for the second  quarter of 1998, as
compared to the same period last year,  partially  due to increased  interest on
the currency swap, interest expense recognized on a settlement agreement between
PSI and WVPA (see Note 14 of the  "Notes to  Financial  Statements"  in "Part I.
Financial Information"), and increased short-term borrowings.

Preferred Dividend Requirements of Subsidiaries

The decrease in preferred  dividend  requirements  of subsidiaries of $2 million
(58%) for the quarter  ended June 30,  1998,  from the same  period of 1997,  is
primarily  attributable  to PSI's  redemption of all  outstanding  shares of its
7.15% Series Cumulative  Preferred Stock and 7.44% Series  Cumulative  Preferred
Stock on September 1, 1997, and March 1, 1998, respectively.


          RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998

Kwh Sales

Kwh sales  increased  47.3% for the six  months  ended June 30,  1998,  from the
comparable  period of last year,  primarily  reflecting  increased  activity  in
Cinergy's  power marketing and trading  operations  which led to higher non-firm
power sales for resale.  Also contributing to the higher kwh sales levels was an
increase in industrial sales primarily  reflecting growth in the  transportation
equipment and miscellaneous  manufacturers sectors, and increases in the average
number of residential and commercial customers.

Mcf Sales and Transportation

Mcf gas sales and transportation volumes for the six months ended June 30, 1998,
decreased when compared to the same period in 1997. Decreased Mcf sales reflect,
in part,  milder  weather  during the first  quarter of 1998, as compared to the
same  period of 1997,  and were  partially  offset by an increase in the average
number of residential and commercial  customers.  Industrial  sales declined and
gas  transportation  volumes  increased  as  customers  continued  the  trend of
purchasing gas directly from suppliers,  using transportation  services provided
by CG&E.

Operating Revenues

Electric Operating Revenues

Electric  operating  revenues for the six months ended June 30, 1998,  increased
$572  million  (36%),  as compared to the same period last year,  primarily as a
result of the increased kwh sales previously discussed. Also contributing to the
increase was a higher average price received on non-firm power transactions.

An analysis of electric operating revenues is shown below:

                                   Six Months
                                  Ended June 30
                                  (in millions)

Electric operating revenues - June 30, 1997                   $1,609
Increase due to change in:
  Price per kwh
    Retail                                                        13
    Sales for resale
      Non-firm power transactions                                105
  Total change in price per kwh                                  118

  Kwh sales
    Retail                                                        58
    Sales for resale
      Firm power obligations                                      10
      Non-firm power transactions                                380
  Total change in kwh sales                                      448

  Other revenues                                                   6

Electric operating revenues - June 30, 1998                   $2,181

Gas Operating Revenues

For a discussion  of the continued  trend of downward  pressure on gas operating
revenues from increased  transportation  services, refer to the discussion under
the heading "Gas  Operating  Revenues" for Cinergy in "Results of Operations for
the Quarter Ended June 30, 1998."

Gas operating revenues decreased $64 million (22%) for the six months ended June
30, 1998, when compared to the same period last year. This decrease is primarily
due to the previously discussed changes in Mcf sales and transportation volumes.

Operating Expenses

Fuel Used in Electric Production

Electric fuel costs increased $26 million (8%) for the first six months of 1998,
as compared to the same period last year.

An analysis of these fuel costs is shown below:

                                               Six Months
                                              Ended June 30
                                              (in millions)

Fuel expense - June 30, 1997 $310 Increase (Decrease) due to change in:
  Price of fuel                                      (8)
  Deferred fuel cost                                 17
  Kwh generation                                     17
                                                   ----

Fuel expense - June 30, 1998                       $336

Gas Purchased

Gas  purchased  for the six months  ended June 30, 1998,  decreased  $42 million
(26%) when  compared to the same period last year,  reflecting a decrease in the
volume of gas purchased,  due to lower demand,  and a lower average cost per Mcf
purchased.

Purchased and Exchanged Power

Purchased and exchanged  power  increased  $556 million for the six months ended
June 30, 1998, when compared to the same period last year,  primarily reflecting
increased  purchases  of  non-firm  power  for  resale  to others as a result of
increased  activity in Cinergy's power marketing and trading  operations and the
provision of $63 million of reserves for the electric trading business  recorded
during 1998 (see Note 9 of the "Notes to Financial Statements" in "Part I.
Financial Information").

Other Operation

Other  operation  expenses  for the first six  months of 1998  increased  by $78
million  (24%),  as  compared  to the same  period  of 1997.  This  increase  is
primarily due to the one-time  charge of $80 million  recorded during the second
quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute
with the WVPA (see Note 14 of the "Notes to  Financial  Statements"  in "Part I.
Financial  Information").  This increase also reflects a provision of $4 million
for potential bad debts related to certain power marketing and trading  accounts
recorded during the six months ended June 30, 1998.

Amortization of Phase-in Deferrals

Amortization of phase-in  deferrals  reflects the PUCO ordered phase-in plan for
Zimmer.

Other Income and Expenses - Net

Equity in Earnings of Unconsolidated Subsidiaries

The  $17  million  (44%)  decrease  in  equity  in  earnings  of  unconsolidated
subsidiaries  for the six months  ended June 30,  1998,  as compared to the same
period of 1997,  is  primarily  attributable  to the  decrease  in  earnings  of
Midlands,  which is due to milder weather conditions during the first quarter of
1998,  and a penalty  imposed on each electric  distribution  company due to the
delay in opening the electricity supply business to competition.

Other - net

The change in other - net of $21 million for the six months ended June 30, 1998,
from the same period of 1997, is primarily due to a litigation  settlement  (see
Note  10  of  the  "Notes  to  Financial   Statements"  in  "Part  I.  Financial
Information"),  an increase in expenses  related to Cinergy Global Power,  which
was formed in September  1997,  and  expenses  related to the  acquisitions  and
start-up costs of other non-regulated entities.

Interest and Other Charges

Interest on Long-term Debt

Interest on  long-term  debt  decreased $7 million (7%) for the six months ended
June 30, 1998,  as compared to the same period last year,  primarily  due to the
net redemption of approximately $190 million of long-term debt by CG&E and ULH&P
during the period from March 1997 through June 1998.

Other Interest

Other  interest  increased  $10  million  (35%) for the first  half of 1998,  as
compared to the same  period  last year,  primarily  due to  increased  interest
expense on the currency swap, which was initiated in mid-February 1997, interest
expense  recognized on a settlement  agreement between PSI and WVPA (see Note 14
of the "Notes to Financial Statements" in "Part I. Financial Information"),  and
increased short-term borrowings.

Preferred Dividend Requirements of Subsidiaries

The decrease in preferred  dividend  requirements  of subsidiaries of $3 million
(41%) for the six months ended June 30, 1998,  from the same period of 1997,  is
primarily  attributable  to PSI's  redemption of all  outstanding  shares of its
7.15% Series Cumulative  Preferred Stock and 7.44% Series  Cumulative  Preferred
Stock on September 1, 1997, and March 1, 1998, respectively.


         RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998

Kwh Sales

Kwh sales  increased  71.5% for the twelve months ended June 30, 1998,  from the
comparable  period of last year,  primarily  reflecting  increased  activity  in
Cinergy's  power marketing and trading  operations  which led to higher non-firm
power sales for resale.  Also contributing to the higher kwh sales levels was an
increase in residential  and commercial  sales due to an increase in the average
number of residential  and commercial  customers,  and an increase in industrial
sales primarily reflecting growth in the miscellaneous manufacturers and primary
metals sectors.

Mcf Sales and Transportation

Mcf gas sales and  transportation  volumes for the twelve  months ended June 30,
1998,  decreased  when compared to the same period in 1997.  Decreased Mcf sales
reflect,  in part,  milder  weather  during the period,  as compared to the same
period a year ago and were partially offset by an increase in the average number
of  residential  and  commercial  customers.  Industrial  sales declined and gas
transportation  volumes increased as customers continued the trend of purchasing
gas directly from suppliers, using transportation services provided by CG&E.

Operating Revenues

Electric Operating Revenues

Compared to the same  period  last year,  electric  operating  revenues  for the
twelve months ended June 30, 1998, increased $1.4 billion (46%),  reflecting the
increased kwh sales discussed above.

An analysis of electric operating revenues is shown below:

                                                   Twelve Months
                                                   Ended June 30
                                                   (in millions)

Electric operating revenues - June 30, 1997            $3,042
Increase (Decrease) due to change in:
  Price per kwh
    Retail                                                 14
    Sales for resale
      Firm power obligations                               (2)
      Non-firm power transactions                         231
  Total change in price per kwh                           243

  Kwh sales
    Retail                                                 91
    Sales for resale
      Firm power obligations                               22
      Non-firm power transactions                       1,026
  Total change in kwh sales                             1,139

  Other                                                    10

Electric operating revenues - June 30, 1998            $4,434

Gas Operating Revenues

For a discussion  of the continued  trend of downward  pressure on gas operating
revenues from increased  transportation  services, refer to the discussion under
the caption "Gas  Operating  Revenues" for Cinergy in "Results of Operations for
the Quarter Ended June 30, 1998."

Gas operating  revenues  decreased $69 million (14%) for the twelve months ended
June 30, 1998,  when  compared to the same period last year.  This  decrease was
largely  the  result  of the  previously  discussed  changes  in Mcf  sales  and
transportation volumes.

Operating Expenses

Fuel Used in Electric Production

Electric fuel costs  increased $51 million (8%) for the twelve months ended June
30, 1998, as compared to the same period last year.

An analysis of these fuel costs is shown below:

                                              Twelve Months
                                              Ended June 30
                                              (in millions)

Fuel expense - June 30, 1997                       $668
Increase due to change in:
  Price of fuel                                       4
  Kwh generation                                     47

Fuel expense - June 30, 1998                       $719

Gas Purchased

Gas purchased  for the twelve months ended June 30, 1998,  decreased $51 million
(19%) when  compared to the same period last year,  reflecting a lower volume of
gas purchased,  due to lower demand,  and a decrease in the average cost per Mcf
purchased.

Purchased and Exchanged Power

Purchased and exchanged power increased $1.3 billion for the twelve months ended
June  30,  1998,  when  compared  to the same  period  of last  year,  primarily
reflecting  increased  purchases  of  non-firm  power for  resale to others as a
result of increased activity in Cinergy's power marketing and trading operations
and the provision of $67 million of reserves for the electric  trading  business
recorded during the period (see Note 9 of the "Notes to Financial Statements" in
"Part I. Financial Information").

Other Operation

Other operation expenses increased $91 million (14%) for the twelve months ended
June 30, 1998,  as compared to the same period last year,  primarily  due to the
one-time  charge of $80  million  recorded  during the  second  quarter of 1998,
reflecting the  implementation  of a 1989  settlement of a dispute with the WVPA
(see  Note 14 of the  "Notes  to  Financial  Statements"  in "Part I.  Financial
Information"). This increase also reflects a provision of $4 million recorded in
the second  quarter of 1998 for  potential  bad debts  related to certain  power
marketing and trading accounts.

Maintenance

Maintenance  expenses  decreased  $25 million  (13%) for the twelve months ended
June 30, 1998, as compared to the twelve  months ended June 30, 1997,  primarily
due  to  decreased  outage-related  expenses  at  PSI's  and  CG&E's  production
facilities.

Amortization of Phase-in Deferrals

Amortization of phase-in  deferrals  reflects the PUCO ordered phase-in plan for
Zimmer.

Amortization of Post-in-service Deferred Operating Expenses

Amortization  of  post-in-service   deferred  operating  expenses  reflects  the
amortization and related recovery in rates of various deferrals of depreciation,
operation and maintenance expenses (exclusive of fuel costs), and property taxes
on certain  generating  units and other utility plant from the  in-service  date
until the related plant was reflected in retail rates.

Other Income and Expenses - Net

Equity in Earnings of Unconsolidated Subsidiaries

The  $18  million  (30%)  decrease  in  equity  in  earnings  of  unconsolidated
subsidiaries  for the twelve months ended June 30, 1998, as compared to the same
period of 1997,  is  partially  attributable  to the  decrease  in  earnings  of
Midlands,  which is due to milder weather  conditions  and a penalty  imposed on
each electric  distribution  company due to the delay in opening the electricity
supply business to competition.  The decrease also reflects losses recognized on
several non-utility subsidiaries.

Other - net

The change in other - net of $15  million for the twelve  months  ended June 30,
1998, from the same period of 1997, is primarily due to a litigation  settlement
(see  Note 10 of the  "Notes  to  Financial  Statements"  in "Part I.  Financial
Information").  Additionally, the change also reflects a gain in 1996 related to
the sale of certain CG&E assets.

Interest and Other Charges

Interest on Long-term Debt

Interest on long-term  debt  decreased  $13 million  (7%) for the twelve  months
ended June 30, 1998, as compared to the same period last year,  primarily due to
the net redemption of  approximately  $190 million of long-term debt by CG&E and
ULH&P during the period from March 1997 through June 1998.

Other Interest

Other interest  increased $19 million (38%) for the twelve months ended June 30,
1998,  as  compared to the same period  last year,  partially  due to  increased
interest expense on the currency swap, which was initiated in mid-February 1997,
interest expense recognized on a settlement  agreement between PSI and WVPA (see
Note  14  of  the  "Notes  to  Financial   Statements"  in  "Part  I.  Financial
Information"), and increased short-term borrowings.

Preferred Dividend Requirements of Subsidiaries

The decrease in preferred  dividend  requirements  of subsidiaries of $6 million
(39%) for the twelve  months ended June 30, 1998,  from the same period of 1997,
is primarily  attributable to the September 1996 reacquisition and retirement of
approximately   90  percent  of  the   outstanding   preferred  stock  of  CG&E.
Additionally, PSI redeemed all outstanding shares of its 7.15% Series Cumulative
Preferred  Stock and 7.44%  Series  Cumulative  Preferred  Stock on September 1,
1997, and March 1, 1998, respectively.

<PAGE>



                              THE CINCINNATI GAS &
                                ELECTRIC COMPANY
                            AND SUBSIDIARY COMPANIES



<PAGE>


                      THE CINCINNATI GAS & ELECTRIC COMPANY
                           CONSOLIDATED BALANCE SHEETS


ASSETS
                                                   June 30        December 31
                                                    1998             1997
                                                 (unaudited)
                                                    (dollars in thousands)

Utility Plant - Original Cost
  In service
    Electric                                      $4,729,327       $4,700,631
    Gas                                              759,774          746,903
    Common                                           186,236          186,078
                                                  ----------       ----------
                                                   5,675,337        5,633,612
  Accumulated depreciation                         2,082,014        2,008,005
                                                  ----------       ----------
                                                   3,593,323        3,625,607
  Construction work in progress                      143,734          118,133
                                                  ----------       ----------
        Total utility plant                        3,737,057        3,743,740

Current Assets
  Cash and temporary cash investments                 12,673            2,349
  Restricted deposits                                  1,173            1,173
  Notes receivable from affiliated companies          73,442           27,193
  Accounts receivable less accumulated
    provision for doubtful accounts of $11,799
    at June 30, 1998, and $9,199 at
    December 31, 1997                                173,035          193,549
  Accounts receivable from affiliated
    companies                                         32,216           35,507
  Materials, supplies, and fuel - at average cost
    Fuel for use in electric production               26,867           29,682
    Gas stored for current use                        25,734           29,174
    Other materials and supplies                      40,193           49,111
  Prepayments and other                               52,130           31,827
                                                  ----------       ----------
                                                     437,463          399,565

Other Assets
  Regulatory assets
    Amounts due from customers - income taxes        372,567          350,515
    Post-in-service carrying costs and
      deferred operating expenses                    131,261          134,672
    Deferred merger costs                             16,090           16,557
    Deferred demand-side management costs             37,573           38,318
    Phase-in deferred return and depreciation         82,233           89,689
    Unamortized costs of reacquiring debt             36,051           36,575
    Other                                              4,575            1,439
  Other                                               90,118          103,368
                                                  ----------       ----------
                                                     770,468          771,133

                                                  $4,944,988       $4,914,438

The  accompanying  notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.



<PAGE>


                      THE CINCINNATI GAS & ELECTRIC COMPANY


CAPITALIZATION AND LIABILITIES
                                                  June 30        December 31
                                                   1998             1997
                                                (unaudited)
                                                   (dollars in thousands)

Common Stock Equity
  Common stock - $8.50 par value;  authorized shares - 120,000,000;  outstanding
    shares - 89,663,086 at June 30, 1998, and
    December 31, 1997                           $  762,136       $  762,136
  Paid-in capital                                  534,668          534,649
  Retained earnings                                312,799          314,553
  Accumulated other comprehensive income              (904)            (750)
                                                ----------       ----------
      Total common stock equity                  1,608,699        1,610,588

Cumulative Preferred Stock
  Not subject to mandatory redemption               20,735           20,793

Long-term Debt                                   1,219,487        1,324,432
                                                ----------       ----------
      Total capitalization                       2,848,921        2,955,813

Current Liabilities
  Long-term debt due within one year               110,000             -
  Notes payable and other short-term
    obligations                                    214,000          289,000
  Notes payable to affiliated companies             11,362           12,253
  Accounts payable                                 267,277          249,538
  Accounts payable to affiliated companies          13,339           10,821
  Accrued taxes                                    167,240          149,129
  Accrued interest                                  18,094           25,430
  Other                                             28,009           29,950
                                                ----------       ----------
                                                   829,321          766,121

Other Liabilities
  Deferred income taxes                            815,233          794,396
  Unamortized investment tax credits               113,898          116,966
  Accrued pension and other postretirement
    benefit costs                                  156,796          180,566
  Other                                            180,819          100,576
                                                ----------       ----------
                                                 1,266,746        1,192,504

                                                $4,944,988       $4,914,438





<PAGE>


<TABLE>
<CAPTION>
                      THE CINCINNATI GAS & ELECTRIC COMPANY
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                                   (unaudited)

<S>                                   <C>         <C>            <C>           <C>    <C>    <C>
                                          Quarter Ended                 Year to Date
                                             June 30                      June 30
                                        1998        1997            1998          1997
                                                       (in thousands)

Operating Revenues
  Electric
    Non-affiliated companies          $521,198    $404,117       $1,096,039    $  799,742
    Affiliated companies                18,444       7,785           36,908        13,860
  Gas
    Non-affiliated companies            50,082      74,757          223,142       287,023
    Affiliated companies                   388           1              790             2
                                      --------    --------       ----------    ----------
                                       590,112     486,660        1,356,879     1,100,627

Operating Expenses
  Fuel used in electric production      77,642      60,358          165,705       130,597
  Gas purchased                         21,657      35,826          118,245       159,794
  Purchased and exchanged power
    Non-affiliated companies           230,665      93,909          460,159       164,771
    Affiliated companies                10,133       3,065           17,747         4,637
  Other operation                       77,266      79,897          158,913       159,172
  Maintenance                           27,901      23,957           47,659        51,293
  Depreciation                          41,588      40,878           82,886        81,282
  Amortization of phase-in deferrals     5,540       3,370           11,079         6,741
  Amortization of post-in-service
    deferred operating expenses            822         822            1,645         1,645
  Income taxes                           8,806      27,037           53,419        70,837
  Taxes other than income taxes         53,712      52,507          108,395       106,021
                                      --------    --------       ----------    ----------
                                       555,732     421,626        1,225,852       936,790

Operating Income                        34,380      65,034          131,027       163,837

Other Income and Expenses - Net
  Allowance for equity funds used
    during construction                     97          87              107           206
  Phase-in deferred return               1,811       2,002            3,622         4,004
  Income taxes                           3,844       3,730            7,672         6,736
  Other - net                           (2,273)     (4,261)          (6,588)       (9,036)
                                      --------    --------       ----------    ----------
                                         3,479       1,558            4,813         1,910

Income Before Interest                  37,859      66,592          135,840       165,747

Interest
  Interest on long-term debt            24,415      27,831           50,467        57,876
  Other interest                         2,269       2,562            4,370         4,258
  Allowance for borrowed funds
    used during construction            (1,511)     (1,231)          (2,875)       (2,140)
                                      --------    --------       ----------    ----------
                                        25,173      29,162           51,962        59,994

Net Income                            $ 12,686    $ 37,430       $   83,878    $  105,753
Preferred Dividend Requirement             215         217              430           436
                                      --------    --------       ----------    ----------
Net Income Applicable to Common
  Stock                               $ 12,471    $ 37,213       $   83,448    $  105,317
Other Comprehensive Income, Net
  of Tax                                  -           -                (155)         -
                                      --------    --------       ----------    -------
Comprehensive Income                  $ 12,471    $ 37,213       $   83,293    $  105,317

<FN>
The  accompanying  notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>


                      THE CINCINNATI GAS & ELECTRIC COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                                      Year to Date
                                                         June 30
                                                    1998         1997
                                                      (in thousands)

Operating Activities
  Net income                                     $  83,878    $ 105,753
  Items providing (using) cash currently:
    Depreciation                                    82,886       81,282
    Reserves related to electric trading
      business                                      59,000         -
    Deferred income taxes and investment tax
      credits - net                                (14,433)      15,055
    Allowance for equity funds used during
      construction                                    (107)        (206)
    Regulatory assets - net                         15,541       15,011
    Changes in current assets and current
      liabilities
        Restricted deposits                           -              (2)
        Accounts and notes receivable, net of
          reserves on receivables sold             (22,325)      45,703
        Materials, supplies, and fuel               15,173       10,429
        Accounts payable                            20,257       (4,353)
        Accrued taxes and interest                  10,775       (2,802)
    Other items - net                               (4,146)     (29,645)
                                                 ---------    ---------
          Net cash provided by operating
            activities                             246,499      236,225

Financing Activities
  Retirement of preferred stock                        (39)        (113)
  Issuance of long-term debt                       223,020         -
  Redemption of long-term debt                    (220,409)    (160,612)
  Change in short-term debt                        (75,891)      87,398
  Dividends on preferred stock                        (430)        (438)
  Dividends on common stock                        (85,200)     (85,200)
                                                 ---------    ---------
          Net cash used in financing
            activities                            (158,949)    (158,965)

Investing Activities
  Construction expenditures (less allowance
    for equity funds used during construction)     (75,571)     (67,963)
  Deferred demand-side management costs             (1,655)      (4,708)
          Net cash used in investing
            activities                             (77,226)     (72,671)

Net increase in cash and temporary cash
  investments                                       10,324        4,589

Cash and temporary cash investments at
  beginning of period                                2,349        5,120
                                                 ---------    ---------

Cash and temporary cash investments at
  end of period                                  $  12,673    $   9,709

The  accompanying  notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.




<PAGE>

                      THE CINCINNATI GAS & ELECTRIC COMPANY
            RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998

Kwh Sales

Kwh sales for the quarter ended June 30, 1998,  increased  25.2%, as compared to
the second  quarter of 1997,  primarily due to higher  non-firm  power sales for
resale  resulting  from  increased  activity in Cinergy's  power  marketing  and
trading operations,  increased  residential and commercial sales due to a return
to more  normal  weather  in the  second  quarter of 1998,  as  compared  to the
relatively  mild weather  during the second  quarter of 1997, and an increase in
the average number of residential and commercial  customers,  and an increase in
industrial  sales  primarily   reflecting   growth  in  the  chemicals  and  the
miscellaneous  manufacturers sectors.  Nonsystem kwh sales (and related revenues
and expenses)  resulting from Cinergy's power  marketing and trading  operations
are allocated 50%/50% between CG&E and PSI pursuant to the operating  agreements
filed with the companies' regulators.

Mcf Sales and Transportation

Mcf gas sales and  transportation  volumes for the quarter  ended June 30, 1998,
decreased when compared to the same period in 1997. The decline in Mcf sales was
partially  offset by an  increase  in gas  transportation  volumes as  customers
continued  the  trend  of  purchasing   gas  directly  from   suppliers,   using
transportation services provided by CG&E.

Operating Revenues

Electric Operating Revenues

Electric  operating  revenues increased $128 million (31%) for the quarter ended
June 30, 1998, from the comparable  period of 1997. This increase is primarily a
result of the increased kwh sales  previously  discussed,  higher  average price
received on non-firm power  transactions,  and the operation of fuel  adjustment
clauses reflecting a higher average cost per kwh.

An analysis of electric operating revenues is shown below:

                                                       Quarter
                                                    Ended June 30
                                                    (in millions)

Electric operating revenues - June 30, 1997              $412
Increase due to change in:
  Price per kwh
    Retail                                                 11
    Sales for resale
      Non-firm power transactions                          49
  Total change in price per kwh                            60

  Kwh sales
    Retail                                                 25
    Sales for resale
      Firm power                                            1
      Non-firm power transactions                          41
  Total change in kwh sales                                67

  Other                                                     1

Electric operating revenues - June 30, 1998              $540

Gas Operating Revenues

The  increasing  trend of  industrial  customers  purchasing  gas directly  from
producers  and utilizing  CG&E  facilities to transport the gas continues to put
downward  pressure on gas operating  revenues.  Since  providing  transportation
services does not necessitate recovery of the cost of gas purchased, the revenue
per Mcf transported is less than the revenue per Mcf sold. As a result, a higher
relative  volume  of gas  transported  to gas sold  translates  into  lower  gas
operating revenues.

Gas operating  revenues  decreased  $24 million  (32%) in the second  quarter of
1998,  when compared to the same period last year,  primarily due to the decline
in volume sales discussed above and the  aforementioned  trend toward  increased
transportation services.

Operating Expenses

Fuel Used in Electric Production

Electric  fuel costs  increased $17 million (29%) for the quarter ended June 30,
1998, as compared to the same period last year.

An analysis of these fuel costs is shown below:

                                                    Quarter
                                                 Ended June 30
                                                 (in millions)

Fuel expense - June 30, 1997                          $60
Increase due to change in:
  Deferred fuel cost                                   14
  Kwh generation                                        3

Fuel expense - June 30, 1998                          $77

Gas Purchased

Gas purchased for the quarter ended June 30, 1998,  decreased $14 million (40%),
when  compared to the same period last year,  primarily due to a decrease in the
volumes of gas purchased, due to lower demand.

Purchased and Exchanged Power

Purchased  and exchanged  power for the quarter  ended June 30, 1998,  increased
$144 million over the comparable period of 1997,  primarily reflecting increased
purchases  of  non-firm  power for  resale  to  others as a result of  increased
activity in Cinergy's power  marketing and trading  operations and the provision
of additional reserves of $56 million for the electric trading business recorded
during  the  second  quarter  of 1998  (see Note 9 of the  "Notes  to  Financial
Statements" in "Part I. Financial Information").

Maintenance

The $4 million (16%) increase in maintenance expenses for the quarter ended June
30, 1998,  as compared to the same period of 1997,  is  primarily  due to forced
outages at Conesville and Beckjord and an increase in overhead line  maintenance
costs resulting from storm damage during the second quarter of 1998.

Amortization of Phase-in Deferrals

Amortization of phase-in deferrals  reflects the PUCO-ordered  phase-in plan for
Zimmer.

Interest

Interest on Long-term Debt

Interest on long-term debt decreased $3 million (12%) for the quarter ended June
30,  1998,  as  compared to the same  period of 1997,  primarily  due to the net
redemption  of  approximately  $174 million of long-term  debt during the period
from April 1997 through June 1998.


          RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998

Kwh Sales

Kwh sales for the six months ended June 30, 1998,  increased  50.4%, as compared
to the six months ended June 30, 1997,  primarily due to higher  non-firm  power
sales for resale resulting from increased  activity in Cinergy's power marketing
and trading  operations,  increased  residential and commercial  sales due to an
increase in the average number of  residential  and  commercial  customers,  and
increased  industrial  sales  primarily  reflecting  growth  in  the  chemicals,
miscellaneous manufacturers and primary metals sectors. Nonsystem kwh sales (and
related  revenues and expenses)  resulting  from Cinergy's  power  marketing and
trading  operations are allocated  50%/50%  between CG&E and PSI pursuant to the
operating agreements filed with the companies' regulators.

Mcf Sales and Transportation

Mcf gas sales and transportation volumes for the six months ended June 30, 1998,
decreased when compared to the same period in 1997. Decreased Mcf sales reflect,
in part,  milder  weather  during the first  quarter of 1998, as compared to the
same  period of 1997,  and were  partially  offset by an increase in the average
number of residential and commercial  customers.  Industrial  sales declined and
gas  transportation  volumes  increased  as  customers  continued  the  trend of
purchasing gas directly from suppliers,  using transportation  services provided
by CG&E.

Operating Revenues

Electric Operating Revenues

Electric  operating  revenues  increased  $319 million  (39%) for the six months
ended June 30,  1998,  from the  comparable  period of 1997.  This  increase  is
primarily a result of the increased  kwh sales  previously  discussed,  a higher
average price received on non-firm power transactions, and the operation of fuel
adjustment clauses reflecting a higher average cost per kwh.

An analysis of electric operating revenues is shown below:

                                                     Six Months
                                                    Ended June 30
                                                    (in millions)

Electric operating revenues - June 30, 1997            $  814
Increase (Decrease) due to change in:
  Price per kwh
    Retail                                                 32
    Sales for resale
      Firm power                                           (1)
      Non-firm power transactions                          71
  Total change in price per kwh                           102

  Kwh sales
    Retail                                                 23
    Sales for resale
      Non-firm power transactions                         192
  Total change in kwh sales                               215

  Other                                                     2

Electric operating revenues - June 30, 1998            $1,133

Gas Operating Revenues

For a discussion  of the continued  trend of downward  pressure on gas operating
revenues from increased  transportation  services, refer to the discussion under
the caption "Gas Operating  Revenues" for CG&E in "Results of Operations for the
Quarter Ended June 30, 1998."

Gas operating revenues decreased $63 million (22%) for the six months ended June
30, 1998, when compared to the same period last year. This decrease is primarily
due to the previously discussed changes in Mcf sales and transportation volumes.

Operating Expenses

Fuel Used in Electric Production

Electric  fuel costs  increased  $35 million (27%) for the six months ended June
30, 1998, as compared to the same period last year.

An analysis of these fuel costs is shown below:

                                                  Six Months
                                                 Ended June 30
                                                 (in millions)

Fuel expense - June 30, 1997 $131 Increase (Decrease) due to change in:
  Price of fuel                                        (1)
  Deferred fuel cost                                   35
  Kwh generation                                        1
                                                      ---

Fuel expense - June 30, 1998                         $166

Gas Purchased

Gas  purchased  for the six months  ended June 30, 1998,  decreased  $42 million
(26%) when  compared to the same period last year,  reflecting a decrease in the
volumes of gas purchased,  due to lower demand, and a lower average cost per Mcf
purchased.

Purchased and Exchanged Power

Purchased and exchanged power for the six months ended June 30, 1998,  increased
$308 million over the comparable period of 1997,  primarily reflecting increased
purchases  of  non-firm  power for  resale  to  others as a result of  increased
activity in Cinergy's power  marketing and trading  operations and the provision
of reserves of $57 million for the electric  trading  business  recorded in 1998
(see  Note 9 of the  "Notes  to  Financial  Statements"  in "Part  I.  Financial
Information").

Maintenance

The $4 million (7%)  decrease in  maintenance  expenses for the six months ended
June 30,  1998,  as  compared to the same period of 1997,  is  primarily  due to
decreased  outage-related  expenses.  These  decreases  were  offset  in part by
overhead line  maintenance  costs  resulting from storm damage during the second
quarter of 1998.

Amortization of Phase-in Deferrals

Amortization of phase-in deferrals  reflects the PUCO-ordered  phase-in plan for
Zimmer.

Other Income and Expenses - Net

Other - net

The change in other - net of $2 million for the six months  ended June 30, 1998,
as compared to the same period of 1997,  is due, in part,  to a higher  level of
expenses in the prior year  associated with CG&E's and ULH&P's sales of accounts
receivable,  an  increase  in  interest  revenue  related to an  increase in the
balance of short-term loans to affiliated companies through Cinergy's money pool
arrangement, and an adjustment recorded in the prior year related to the sale of
certain assets.

Interest

Interest on Long-term Debt

Interest on long-term  debt  decreased $7 million (13%) for the six months ended
June 30, 1998, as compared to the same period of 1997,  primarily due to the net
redemption  of $190 million of long-term  debt during the period from March 1997
through June 1998.

<PAGE>



                                PSI ENERGY, INC.
                             AND SUBSIDIARY COMPANY




<PAGE>





                                PSI ENERGY, INC.
                           CONSOLIDATED BALANCE SHEETS


ASSETS
                                                   June 30           December 31
                                                    1998                1997
                                                 (unaudited)
                             (dollars in thousands)

Electric Utility Plant - Original Cost
  In service                                     $4,319,120           $4,280,551
  Accumulated depreciation                        1,840,484            1,792,317
                                                 ----------           ----------
                                                  2,478,636            2,488,234
  Construction work in progress                      75,420               65,129
                                                 ----------           ----------
      Total electric utility plant                2,554,056            2,553,363

Current Assets
  Cash and temporary cash investments                36,744               18,169
  Restricted deposits                                   334                1,146
  Notes receivable                                       84                  110
  Notes receivable from affiliated companies         11,367               21,998
  Accounts receivable less accumulated
    provision for doubtful accounts of $2,676
    at June 30, 1998, and $1,183 at
    December 31, 1997                               227,227              197,898
  Accounts receivable from affiliated companies         621                4,516
  Materials, supplies, and fuel - at average cost
    Fuel                                             45,405               28,234
    Other materials and supplies                     29,161               26,955
  Prepayments and other                              11,619                4,405
                                                 ----------           ----------
                                                    362,562              303,431

Other Assets
  Regulatory assets
    Amounts due from customers - income taxes        25,670               23,941
    Post-in-service carrying costs and
      deferred operating expenses                    43,296               43,832
    Coal contract buyout costs                      112,936              122,485
    Deferred merger costs                            71,594               73,789
    Deferred demand-side management costs            54,220               71,278
    Unamortized costs of reacquiring debt            28,391               29,667
    Other                                            39,666               44,094
  Other                                             114,753              127,945
                                                 ----------           ----------
                                                    490,526              537,031

                                                 $3,407,144           $3,393,825

The accompanying  notes as they relate to PSI Energy,  Inc. are an integral part
of these consolidated financial statements.

<PAGE>

<TABLE>
<CAPTION>

                                PSI ENERGY, INC.


CAPITALIZATION AND LIABILITIES

<S>                                                <C>                   <C>
                                                     June 30             December 31
                                                      1998                  1997
                                                   (unaudited)
                             (dollars in thousands)

Common Stock Equity
  Common stock - without par value;  $0.01  stated  value;  authorized  shares -
    60,000,000; outstanding shares - 53,913,701
    at June 30, 1998, and December 31, 1997         $      539           $      539
  Paid-in capital                                      400,904              390,188
  Retained earnings                                    577,438              636,519
  Accumulated other comprehensive income                  (642)              (1,586)
                                                    ----------           ----------
      Total common stock equity                        978,239            1,025,660

Cumulative Preferred Stock
  Not subject to mandatory redemption                   71,953              157,196

Long-term Debt                                         950,425              826,470
                                                    ----------           ----------
      Total capitalization                           2,000,617            2,009,326

Current Liabilities
  Long-term debt due within one year                   141,569               85,000
  Notes payable and other short-term obligations       106,500              190,600
  Notes payable to affiliated companies                 88,919               16,435
  Accounts payable                                     265,035              212,833
  Accounts payable to affiliated companies              40,254               40,714
  Accrued taxes                                         48,350               69,310
  Accrued interest                                      18,026               21,369
  Other                                                  2,473                2,560
                                                    ----------           ----------
                                                       711,126              638,821

Other Liabilities
  Deferred income taxes                                381,598              403,535
  Unamortized investment tax credits                    47,566               49,296
  Accrued pension and other postretirement
    benefit costs                                      108,196              116,576
  Other                                                158,041              176,271
                                                    ----------           ----------
                                                       695,401              745,678

                                                    $3,407,144           $3,393,825

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                PSI ENERGY, INC.
    CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
                                   (unaudited)

<S>                                  <C>           <C>            <C>            <C>
                                         Quarter Ended                 Year to Date
                                            June 30                       June 30
                                       1998          1997            1998          1997
                                                       (in thousands)

Operating Revenues
  Non-affiliated companies           $500,723      $386,459       $1,084,607     $808,748
  Affiliated companies                 10,807         3,079           19,048        4,645
                                     --------      --------       ----------     --------
                                      511,530       389,538        1,103,655      813,393

Operating Expenses
  Fuel                                 77,905        74,244          170,361      179,751
  Purchased and exchanged power
    Non-affiliated companies          209,255       101,455          451,645      191,185
    Affiliated companies               17,932         7,799           35,832       13,868
  Other operation                     160,983        78,078          243,360      161,787
  Maintenance                          27,712        27,244           47,020       45,762
  Depreciation                         32,202        31,293           64,209       62,445
  Amortization of post-in-service
    deferred operating expenses           268           268              536          536
  Income taxes                        (19,543)       13,067            6,718       33,292
  Taxes other than income taxes        14,507        15,323           29,474       30,180
                                     --------      --------       ----------     --------
                                      521,221       348,771        1,049,155      718,806

Operating Income (Loss)                (9,691)       40,767           54,500       94,587

Other Income and Expenses - Net
  Allowance for equity funds used
    during construction                    14            93               25          165
  Income taxes                          1,358           117            1,675         (328)
  Other - net                             199          (133)           1,906        2,713
                                     --------      --------       ----------     --------
                                        1,571            77            3,606        2,550

Income (Loss) Before Interest          (8,120)       40,844           58,106       97,137

Interest
  Interest on long-term debt           19,420        17,146           37,126       36,376
  Other interest                        3,892         2,075            9,667        6,532
  Allowance for borrowed funds
    used during construction             (414)         (523)            (997)        (956)
                                     --------      --------       ----------     --------
                                       22,898        18,698           45,796       41,952

Net Income (Loss)                    $(31,018)     $ 22,146       $   12,310     $ 55,185

Preferred Dividend Requirement          1,150         3,019            3,358        6,039
                                     --------      --------       ----------     --------

Net Income (Loss) Applicable to
  Common Stock                       $(32,168)     $ 19,127       $    8,952     $ 49,146
Other comprehensive income,
  net of tax                             -             -                 944         -
                                     --------      --------       ----------     -----
Comprehensive Income (Loss)          $(32,168)     $ 19,127       $    9,896     $ 49,146

<FN>
The accompanying  notes as they relate to PSI Energy,  Inc. are an integral part
of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>


                                PSI ENERGY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                  Year to Date
                                     June 30
                                    1998 1997
                                 (in thousands)

Operating Activities
  Net income                                          $ 12,310     $ 55,185
  Items providing (using) cash currently:
    Depreciation                                        64,209       62,445
    Reserves related to electric trading business        8,000         -
    WVPA settlement                                     80,000         -
    Deferred income taxes and investment tax
      credits - net                                    (32,596)      (6,916)
    Allowance for equity funds used during
      construction                                         (25)        (165)
    Regulatory assets - net                             20,630       23,870
    Changes in current assets and current
      liabilities
        Restricted deposits                                812         (222)
        Accounts and notes receivable, net of
          reserves on receivables sold                 (19,676)     (52,661)
        Materials, supplies, and fuel                  (19,377)      10,552
        Accounts payable                                51,742       32,054
        Accrued taxes and interest                     (24,303)     (11,516)
    Other items - net                                   (1,142)      (5,203)
                                                      --------     --------
          Net cash provided by operating
            activities                                 140,584      107,423

Financing Activities
  Issuance of long-term debt                            98,901         -
  Retirement of preferred stock                        (85,230)          (1)
  Redemption of long-term debt                            -         (45,700)
  Change in short-term debt                            (11,616)      73,844
  Dividends on preferred stock                          (3,887)      (6,039)
  Dividends on common stock                            (56,800)     (56,800)
                                                      --------     --------
          Net cash used in financing activities        (58,632)     (34,696)

Investing Activities
  Construction expenditures (less allowance
    for equity funds used during construction)         (60,329)     (60,320)
  Deferred demand-side management costs                 (3,048)      (6,075)
          Net cash used in investing activities        (63,377)     (66,395)

Net increase in cash and temporary cash
  investments                                           18,575        6,332

Cash and temporary cash investments at
  beginning of period                                   18,169        2,911
                                                      --------     --------

Cash and temporary cash investments at
  end of period                                       $ 36,744     $  9,243

The accompanying  notes as they relate to PSI Energy,  Inc. are an integral part
of these consolidated financial statements.

<PAGE>


                                PSI ENERGY, INC.
            RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998

Kwh Sales

Kwh sales for the second  quarter of 1998  increased  29.5%,  as compared to the
same period last year,  primarily due to higher  non-firm power sales for resale
resulting  from  increased  activity in Cinergy's  power  marketing  and trading
operations.  An increase in retail sales reflects higher  industrial sales and a
higher average number of customers in all retail customer classes. The increased
industrial   sales   primarily   reflect   growth  in  the  primary  metals  and
transportation  equipment  sectors.  Also  contributing  to the higher kwh sales
levels was a return to more normal weather  conditions when compared to the same
period  last year.  Nonsystem  kwh sales (and  related  revenues  and  expenses)
resulting from Cinergy's  power  marketing and trading  operations are allocated
50%/50% between CG&E and PSI pursuant to the operating agreements filed with the
companies' regulators.

Operating Revenues

Operating  revenues  increased $122 million (31%) for the quarter ended June 30,
1998,  when compared to the same period last year,  primarily as a result of the
increased kwh sales previously  discussed and a higher average price on non-firm
power transactions.

An analysis of operating revenues is shown below:

                                                  Quarter
                                               Ended June 30
                                               (in millions)

Operating revenues - June 30, 1997 $390 Increase (Decrease) due to change in:
  Price per kwh
    Retail                                           (13)
    Sales for resale
      Firm power obligations                           2
      Non-firm power transactions                     46
  Total change in price per kwh                       35

  Kwh sales
    Retail                                            25
    Sales for resale
      Firm power obligations                           9
      Non-firm power transactions                     50
  Total change in kwh sales                           84

  Other                                                3

Operating revenues - June 30, 1998                  $512

Operating Expenses

Fuel

Fuel costs increased $4 million (5%) for the second quarter of 1998, as compared
to the same period last year.

An analysis of fuel costs is shown below:

                                                 Quarter
                                              Ended June 30
                                              (in millions)

Fuel expense - June 30, 1997 $74 Increase (Decrease) due to change in:
  Price of fuel                                     (2)
  Deferred fuel cost                                (7)
  Kwh generation                                    13
                                                   ---

Fuel expense - June 30, 1998                       $78

Purchased and Exchanged Power

For the quarter ended June 30, 1998,  purchased and  exchanged  power  increased
$118  million,  as  compared  to the same period  last year,  due  primarily  to
increased  purchases  of  non-firm  power  for  resale  to others as a result of
increased  activity in Cinergy's  power  marketing  and trading  operations.  In
addition,  a  provision  of $5  million of  reserves  for the  electric  trading
business was recorded during the second quarter of 1998 (see Note 9 of "Notes to
Financial Statements" in "Part I. Financial Information").

Other Operation

Other  operation  expenses  increased $83 million for the quarter ended June 30,
1998,  as compared to the same period last year.  This increase is primarily due
to the  one-time  charge of $80 million  recorded  during the second  quarter of
1998,  reflecting the  implementation of a 1989 settlement of a dispute with the
WVPA (see Note 14 of the "Notes to Financial  Statements"  in "Part I. Financial
Information").  This increase  also reflects a provision of $2 million  recorded
during the second  quarter of 1998 for  potential  bad debts  related to certain
power marketing and trading accounts.

Interest

Interest on Long-term Debt

Interest on long-term debt increased $2 million (13%) for the quarter ended June
30,  1998,  as  compared to the same  period of 1997,  primarily  due to the net
issuance  of $65  million of  long-term  debt  during the period from March 1997
through March 1998.

Other Interest

Other  interest  increased $2 million (88%) for the quarter ended June 30, 1998,
as  compared to the same period  last year,  primarily  due to interest  expense
recognized  on a settlement  agreement  between PSI and WVPA (see Note 14 of the
"Notes to Financial Statements" in "Part I. Financial Information").

Preferred Dividend Requirement

The  preferred  dividend  requirement  decreased $2 million (62%) for the second
quarter of 1998,  as  compared  to the same  period of 1997.  This  decrease  is
attributable to the redemption of all of the 7.15% Series  Cumulative  Preferred
Stock and 7.44% Series Cumulative Preferred Stock on September 1, 1997, and
March 1, 1998, respectively.


          RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998

Kwh Sales

For the six months ended June 30, 1998, kwh sales  increased 47.7% when compared
to the same period last year,  primarily due to increased  activity in Cinergy's
power marketing and trading operations, which led to higher non-firm power sales
for resale.  An increase in retail sales reflects higher  industrial sales and a
higher average number of customers in all retail customer classes. The increased
industrial  sales  primarily  reflect  growth  in  the  primary  metals  sector.
Nonsystem kwh sales (and related revenues and expenses) resulting from Cinergy's
power  marketing and trading  operations are allocated  50%/50% between CG&E and
PSI pursuant to the operating agreements filed with the companies' regulators.

Operating Revenues

Total operating  revenues  increased $291 million (36%) for the six months ended
June 30,  1998,  when  compared  to the same  period  last year.  This  increase
primarily  reflects the increase in kwh sales previously  discussed and a higher
average price on non-firm power transactions,  partially offset by the operation
of fuel  adjustment  clauses  reflecting  a lower  average  cost of fuel used in
electric production.

An analysis of operating revenues is shown below:

                                   Six Months
                                  Ended June 30
                                  (in millions)

Operating revenues - June 30, 1997                              $  813
Increase (Decrease) due to change in:
  Price per kwh
    Retail                                                         (18)
    Sales for resale
      Firm power obligations                                         1
      Non-firm power transactions                                   49
  Total change in price per kwh                                     32

  Kwh sales
    Retail                                                          33
    Sales for resale
      Firm power obligations                                        10
      Non-firm power transactions                                  209
  Total change in kwh sales                                        252

  Other                                                              7

Operating revenues - June 30, 1998                              $1,104

Operating Expenses

Fuel

Fuel costs for the six months  ended June 30, 1998,  decreased  $10 million (5%)
when compared to the same period last year.

An analysis of fuel costs is shown below:

                                   Six Months
                                  Ended June 30
                                  (in millions)


Fuel expense - June 30, 1997 $180 Increase (Decrease) due to change in:
  Price of fuel                                                   (8)
  Deferred fuel cost                                             (19)
  Kwh generation                                                  17
                                                                ----

Fuel expense - June 30, 1998                                    $170

Purchased and Exchanged Power

For the six months ended June 30, 1998,  purchased and exchanged power increased
$282  million,  as compared to the same period last year,  primarily  reflecting
increased  purchases  of  non-firm  power  for  resale  to others as a result of
increased  activity in Cinergy's  power  marketing and trading  operations and a
provision of $6 million of reserves for the electric trading  business  recorded
during 1998 (see Note 9 of the "Notes to Financial Statements" in "Part I.
Financial Information").

Other Operation

Other  operation  expenses  increased $82 million (50%) for the six months ended
June 30,  1998,  as  compared to the same  period  last year.  This  increase is
primarily due to the one-time  charge of $80 million  recorded during the second
quarter of 1998, reflecting the implementation of a 1989 settlement of a dispute
with the WVPA (see Note 14 of the "Notes to  Financial  Statements"  in "Part I.
Financial  Information").  This increase also reflects a provision of $2 million
for potential bad debts related to certain power marketing and trading  accounts
recorded during the second quarter of 1998.

Interest

Other Interest

Other  interest  increased  $3 million  (48%) for the six months  ended June 30,
1998,  as  compared  to the same  period  last year,  primarily  due to interest
expense  recognized on a settlement  agreement between PSI and WVPA (see Note 14
of the "Notes to  Financial  Statements"  in "Part I.  Financial  Information").
Additionally, the increase is due to interest resulting from an IRS audit of the
1989 and 1990 tax years.

Preferred Dividend Requirement

The preferred dividend requirement decreased $3 million (44%) for the first half
of 1998, as compared to the same period of 1997.  This decrease is  attributable
to the  redemption  of all of the 7.15% Series  Cumulative  Preferred  Stock and
7.44% Series Cumulative Preferred Stock on September 1, 1997, and
March 1, 1998, respectively.


<PAGE>



                              THE UNION LIGHT, HEAT
                                AND POWER COMPANY

<PAGE>

                     THE UNION LIGHT, HEAT AND POWER COMPANY
                                 BALANCE SHEETS


ASSETS
                                                    June 30         December 31
                                                     1998              1997
                                                  (unaudited)
                             (dollars in thousands)

Utility Plant - Original Cost
  In service
    Electric                                         $207,160          $204,111
    Gas                                               159,155           155,167
    Common                                             19,057            19,073
                                                     --------          --------
                                                      385,372           378,351
  Accumulated depreciation                            138,999           133,213
                                                     --------          --------
                                                      246,373           245,138

  Construction work in progress                        21,387            14,346
                                                     --------          --------
      Total utility plant                             267,760           259,484

Current Assets
  Cash and temporary cash investments                     885               546
  Accounts receivable less accumulated provision
    for doubtful accounts of $1,038 at
    June 30, 1998, and $996 at December 31, 1997        4,694             7,308
  Accounts receivable from affiliated companies            11               446
  Materials, supplies, and fuel - at average cost
    Gas stored for current use                          5,552             5,401
    Other materials and supplies                          944               693
  Prepayments and other                                   100               385
                                                     --------          --------
                                                       12,186            14,779

Other Assets
  Regulatory assets
    Deferred merger costs                               5,214             5,213
    Unamortized costs of reacquiring debt               3,608             3,590
    Other                                               2,275             2,262
  Other                                                 4,069             6,262
                                                     --------          --------
                                                       15,166            17,327

                                                     $295,112          $291,590

The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.



<PAGE>


                     THE UNION LIGHT, HEAT AND POWER COMPANY


CAPITALIZATION AND LIABILITIES
                                                     June 30         December 31
                                                      1998              1997
                                                   (unaudited)
                             (dollars in thousands)

Common Stock Equity
  Common stock - $15.00 par value;  authorized  shares - 1,000,000;  outstanding
  shares -
    585,333 at June 30, 1998, and December 31, 1997   $  8,780         $  8,780
  Paid-in capital                                       18,683           18,683
  Retained earnings                                     94,595           95,450
                                                      --------         --------
      Total common stock equity                        122,058          122,913

Long-term Debt                                          54,516           44,671
                                                      --------         --------
      Total capitalization                             176,574          167,584

Current Liabilities
  Notes payable to affiliated companies                 27,323           23,487
  Accounts payable                                       7,504           11,097
  Accounts payable to affiliated companies              18,158           19,712
  Accrued taxes                                            216            6,332
  Accrued interest                                       1,361            1,286
  Other                                                  4,077            4,364
                                                      --------         --------
                                                        58,639           66,278

Other Liabilities
  Deferred income taxes                                 27,474           26,211
  Unamortized investment tax credits                     4,400            4,516
  Accrued pension and other postretirement benefit
    costs                                               12,458           14,044
  Amounts due to customers - income taxes                7,362            6,566
  Other                                                  8,205            6,391
                                                      --------         --------
                                                        59,899           57,728

                                                      $295,112         $291,590

<PAGE>

<TABLE>
<CAPTION>
                     THE UNION LIGHT, HEAT AND POWER COMPANY
                           STATEMENTS OF INCOME (LOSS)
                                   (unaudited)


<S>                                   <C>            <C>          <C>            <C>
                                          Quarter Ended                Year to Date
                                             June 30                      June 30
                                       1998           1997          1998           1997
                                                        (in thousands)

Operating Revenues
  Electric                            $41,536        $47,314      $ 88,535       $ 95,894
  Gas
    Non-affiliated companies            8,564         10,825        36,939         44,788
    Affiliated companies                   62             69           167            190
                                      -------        -------      --------       --------
                                       50,162         58,208       125,641        140,872

Operating Expenses
  Electricity purchased from parent
    company for resale                 34,421         34,626        68,511         69,755
  Gas purchased                         4,167          6,555        20,520         27,004
  Other operation                       7,527          8,203        15,662         16,737
  Maintenance                           1,375          1,496         2,670          3,059
  Depreciation                          3,209          3,111         6,441          6,181
  Income taxes                         (1,013)           903         3,204          5,645
  Taxes other than income taxes         1,029          1,115         2,034          2,214
                                      -------        -------      --------       --------
                                       50,715         56,009       119,042        130,595

Operating Income (Loss)                  (553)         2,199         6,599         10,277

Other Income and Expenses - Net
  Allowance for equity funds used
    during construction                    24             27            10             23
  Income taxes                            254            206           482            298
  Other - net                            (404)          (514)         (886)          (961)
                                      -------        -------      --------       --------
                                         (126)          (281)         (394)          (640)

Income (Loss) Before Interest            (679)         1,918         6,205          9,637

Interest
  Interest on long-term debt              951            881         1,834          1,762
  Other interest                          197            333           548            634
  Allowance for borrowed funds
    used during construction             (179)            (7)         (298)           (37)
                                      -------        -------      --------       --------
                                          969          1,207         2,084          2,359

Net Income (Loss)                     $(1,648)       $   711      $  4,121       $  7,278

<FN>
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>

                     THE UNION LIGHT, HEAT AND POWER COMPANY
                            STATEMENTS OF CASH FLOWS
                                   (unaudited)


                                                     Year to Date
                                                        June 30
                                                   1998        1997
                                                    (in thousands)

Operating Activities
  Net income                                     $  4,121    $  7,278
  Items providing (using) cash currently:
    Depreciation                                    6,441       6,181
    Deferred income taxes and investment tax
      credits - net                                 1,192         438
    Allowance for equity funds used during
      construction                                    (10)        (23)
    Regulatory assets                                 (13)        (68)
    Changes in current assets and current
      liabilities
        Accounts and notes receivable, net of
          reserves on receivables sold              4,671       6,513
        Materials, supplies, and fuel                (402)      1,604
        Accounts payable                           (5,147)     (1,877)
        Accrued taxes and interest                 (6,041)      3,421
    Other items - net                               1,481       3,334
                                                 --------    --------
          Net cash provided by operating
            activities                              6,293      26,801

Financing Activities
  Issuance of long-term debt                       20,127        -
  Redemption of long-term debt                    (10,118)       -
  Change in short-term debt                         3,836      (9,721)
  Dividends on common stock                        (4,975)     (4,975)
                                                 --------    --------
          Net cash provided by (used in)
            financing activities                    8,870     (14,696)

Investing Activities
  Construction expenditures (less allowance
    for equity funds used during construction)    (14,824)     (8,758)
          Net cash used in investing
            activities                            (14,824)     (8,758)

Net increase in cash and temporary cash
  investments                                         339       3,347

Cash and temporary cash investments at
  beginning of period                                 546       1,197
                                                 --------    --------

Cash and temporary cash investments at
  end of period                                  $    885    $  4,544

The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.

<PAGE>

                     THE UNION LIGHT, HEAT AND POWER COMPANY
            RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998

Mcf Sales and Transportation

Mcf gas sales and  transportation  volumes for the quarter  ended June 30, 1998,
decreased  when  compared  to the same period in 1997.  The  decrease in Mcf gas
sales was due, in part,  to the  continued  trend of  customers  purchasing  gas
directly from suppliers, using transportation services provided by ULH&P.

Operating Revenues

Electric Operating Revenues

Electric  operating  revenues  decreased $6 million  (12%) for the quarter ended
June 30, 1998,  from the  comparable  period of 1997.  This  decrease  primarily
reflects a revision of ULH&P's estimate of unbilled revenue in the third quarter
of 1997.  This  adjustment,  which was  recorded in the second  quarter of 1998,
resulted  in a decrease  in electric  operating  revenues of $3.6  million and a
corresponding decrease to operating income and net income of $1.7 million.

Gas Operating Revenues

The  increasing  trend of  industrial  customers  purchasing  gas directly  from
producers and utilizing  ULH&P  facilities to transport the gas continues to put
downward  pressure on gas operating  revenues.  Since  providing  transportation
services does not necessitate recovery of the cost of gas purchased, the revenue
per Mcf transported is less than the revenue per Mcf sold. As a result, a higher
relative  volume  of gas  transported  to gas sold  translates  into  lower  gas
operating revenues.

Gas operating revenues decreased $2 million (21%) in the second quarter of 1998,
when  compared  to the same period  last year,  primarily  due to the decline in
volume sales discussed above.

Operating Expenses

Gas Purchased

Gas purchased  for the quarter  ended June 30, 1998,  decreased $2 million (36%)
from the second quarter of last year,  reflecting a decrease in the average cost
per Mcf purchased and a decrease in the volumes of gas purchased.

Other Operation

The $.7 million (8%) decrease in other operation expenses for the second quarter
of 1998,  as  compared  to the same period of 1997,  is  primarily  due to lower
distribution expenses.

Maintenance

The $.1 million (8%) decrease in maintenance  expenses for the second quarter of
1998,  as  compared to 1997,  is  primarily  due to a decrease in overhead  line
maintenance.

Taxes Other Than Income Taxes

The $.1 million  (8%)  decrease in taxes other than income  taxes for the second
quarter of 1998,  as compared to the same period of 1997,  is primarily due to a
decrease in property taxes.

Other Income and Expenses - Net

Other - net

The change in other - net of $.1 million  (21%) for the  quarter  ended June 30,
1998,  as compared to the same period of 1997,  is partially  attributable  to a
higher level of expenses associated with the sales of accounts receivable in the
prior year.

Interest

Allowance for Borrowed Funds Used During Construction

The increase in allowance  for borrowed  funds used during  construction  of $.2
million is primarily due to an increase in construction  expenditures subject to
allowance during the quarter ended June 30, 1998, as compared to the same period
of 1997.


          RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998

Mcf Sales and Transportation

For the six months ended June 30, 1998, Mcf gas sales and transportation volumes
decreased,  as  compared  to the  same  period  in  1997.  Decreased  Mcf  sales
reflecting  the milder  weather  during the first  quarter of 1998 were slightly
offset by an increase in the number of  residential  and  commercial  customers.
Industrial sales declined and gas transportation  volumes increased as customers
continued  the  trend  of  purchasing   gas  directly  from   suppliers,   using
transportation services provided by ULH&P.

Operating Revenues

Electric Operating Revenues

Electric  operating  revenues decreased $7 million (8%) for the six months ended
June 30, 1998,  from the  comparable  period of 1997.  This  decrease  primarily
reflects a revision of ULH&P's estimate of unbilled revenue in the third quarter
of 1997.  This  adjustment,  which was  recorded in the second  quarter of 1998,
resulted  in a decrease  in electric  operating  revenues of $3.6  million and a
corresponding decrease to operating income and net income of $1.7 million.

Gas Operating Revenues

For a discussion  of the continued  trend of downward  pressure on gas operating
revenues from increased  transportation  services, refer to the discussion under
the heading "Gas Operating Revenues" for ULH&P in "Results of Operations for the
Quarter Ended June 30, 1998."

Gas operating  revenues decreased $8 million (18%) for the six months ended June
30, 1998,  when  compared to the same period of last year,  primarily due to the
decline in volume  sales  discussed  above and the  aforementioned  trend toward
increased transportation services.

Operating Expenses

Electricity Purchased from Parent Company for Resale

Electricity  purchased  decreased  $1 million (2%) for the six months ended June
30, 1998, as compared to the same period last year. This decrease reflects lower
volumes purchased from CG&E.

Gas Purchased

Gas  purchased  for the six months  ended June 30,  1998,  decreased  $6 million
(24%), as compared to the same period in 1997. This decrease reflects a decrease
in the  average  cost per Mcf  purchased  and a decrease  in the  volumes of gas
purchased.

Other Operation

The $1.1 million (6%)  decrease in other  operation  expenses for the six months
ended June 30, 1998, as compared to the same period of 1997, is primarily due to
lower distribution and administrative and general expenses.

Maintenance

The $.4 million (13%) decrease in  maintenance  expense for the six months ended
June 30, 1998,  as compared to the same period of 1997,  is  primarily  due to a
decrease in overhead line maintenance.

Taxes Other Than Income Taxes

The $.2 million  (8%)  decrease  in taxes  other than  income  taxes for the six
months ended June 30, 1998, as compared to the same period of 1997, is primarily
due to a decrease in property taxes.

Interest

Other Interest

Other interest charges decreased $.1 million (14%) for the six months ended June
30,  1998,  as compared to the same period of 1997,  primarily  due to increased
short-term  borrowings in the prior year. This decrease was partially  offset by
payments to the Kentucky  State  Treasurer  resulting from a sales tax audit and
underpayment of tax year 1996 income taxes.

Allowance for Borrowed Funds Used During Construction

The increase in allowance  for borrowed  funds used during  construction  of $.3
million is primarily due to an increase in construction  expenditures subject to
allowance  during the six months  ended June 30,  1998,  as compared to the same
period of 1997.

<PAGE>





                          NOTES TO FINANCIAL STATEMENTS

Cinergy, CG&E, PSI, and ULH&P
1.       These  Financial  Statements  reflect all  adjustments  (which  include
         normal,  recurring adjustments and those adjustments discussed in Notes
         9 and  14)  necessary  in the  opinion  of the  registrants  for a fair
         presentation of the interim results. These statements should be read in
         conjunction  with  the  Financial  Statements  and  the  notes  thereto
         included in the  combined  1997 Form 10-K of the  registrants.  Certain
         amounts in the 1997  Financial  Statements  have been  reclassified  to
         conform to the 1998 presentation.

Cinergy and CG&E
2.       On April 7, 1998, CG&E issued and sold $100 million principal amount of
         its 6.40%  Debentures  due April 1, 2008.  Proceeds  from the sale were
         used to repay  short-term  indebtedness  incurred  in  connection  with
         CG&E's March 1998 redemptions of $100 million principal amount of its 8
         1/2% Series  First  Mortgage  Bonds due 2022 and $60 million  principal
         amount of its 7 3/8% Series First Mortgage Bonds due 2001.

3.       On May 1, 1998, CG&E redeemed the entire $50 million  principal  amount
         of its 7 3/8%  Series  First  Mortgage  Bonds due 1999,  at the regular
         redemption price of 100.00%. This redemption effectively eliminates the
         maintenance  and  replacement  fund provisions of CG&E's First Mortgage
         Bond indenture,  which provisions  required CG&E to make cash payments,
         deposit bonds,  or pledge  unfunded  property  additions to the trustee
         each year based on an amount related to net revenues.

4.       On June 15, 1998, CG&E issued and sold $100 million principal amount of
         unsecured Reset Put Securities.  These debentures will bear interest at
         a rate of 6.35% for the first five years,  and the interest rate may be
         reset  every five years  thereafter  to final  maturity  in 2038 if the
         callholder exercises its option on any reset date to purchase the bonds
         and reset the interest  rate. If the  callholder  does not exercise the
         option on any reset  date,  the bonds will be  redeemed by CG&E at par.
         Proceeds  from the sale  were  used to  repay  short-term  indebtedness
         incurred  in  connection  with the  redemption  of CG&E's 7 3/8%  First
         Mortgage Bonds referred to above and for general corporate purposes.

Cinergy and PSI
5.       On July 23, 1998, PSI redeemed the entire $24 million  principal amount
         of its 7 5/8% First  Mortgage  Bonds,  Series Y due January 1, 2007, at
         the  redemption  price of 102.11% and the entire $26 million  principal
         amount of its 7% First Mortgage Bonds, Series S due January 1, 2002, at
         the redemption price of 100.73%.

6.       On August 5, 1998, PSI issued and sold $50 million  principal amount of
         unsecured  Synthetic  Putable Yield  Securities.  These debentures will
         bear  interest  at a rate of 6.50% for the first seven  years,  and the
         interest  rate may be  reset  every  seven  years  thereafter  to final
         maturity in 2026 if the  callholder  exercises  its option on any reset
         date to  purchase  the  bonds  and  reset  the  interest  rate.  If the
         callholder  does not exercise  the option on any reset date,  the bonds
         will be  redeemed  by PSI at par.  Proceeds  from the sale were used to
         repay  short-term  indebtedness  incurred in connection with PSI's July
         1998  redemptions  of the  above-mentioned  Series Y and Series S First
         Mortgage Bonds.

7.       On August 12, 1998, the Indiana  Development  Finance  Authority loaned
         the  proceeds  from the sale of its $23  million  principal  amount  of
         Environmental  Refunding Revenue Bonds,  Series 1998, to PSI. The bonds
         will bear interest  initially at a daily rate, will mature on August 1,
         2028,  and are  backed by an  irrevocable  direct-pay  letter of credit
         through  August 1, 2002.  Proceeds from the sale will be used to redeem
         on September  15,  1998,  the $23 million 8 1/4% First  Mortgage  Bonds
         Series QQ, due June 15, 2013 (Pollution Control), at a redemption price
         of 102% plus accrued interest.

Cinergy, CG&E, and ULH&P
8.       On April 30, 1998,  ULH&P issued and sold $20 million  principal amount
         of its 6.50% Debentures due April 30, 2008. Proceeds from the sale were
         used by ULH&P to repay short-term  indebtedness  incurred in connection
         with the redemption, on April 24, 1998, of $10 million principal amount
         of its 8% Series First Mortgage Bonds, due 2003, and in connection with
         its construction  program.  The redemption of said First Mortgage Bonds
         effectively  eliminates the maintenance and replacement fund provisions
         of ULH&P's First Mortgage Bond  indenture,  which  provisions  required
         ULH&P to make cash payments, deposit bonds, or pledge unfunded property
         additions  to the trustee  each year based on an amount  related to net
         revenues.

Cinergy, CG&E, and PSI
9.   Cinergy's power marketing and trading function  actively markets and trades
     over-the-counter  forward and option contracts for the purchase and sale of
     electricity.  The  majority of these  contracts  are  settled via  physical
     delivery of electricity or netted out in accordance  with industry  trading
     standards.  The Company  also  trades  exchange-traded  futures  contracts.
     Option  premiums  are deferred  and  included in the  Consolidated  Balance
     Sheets and amortized to "Operating  Revenues - Electric" or "Purchased  and
     exchanged power" in the Consolidated  Statements of Income over the term of
     the option  contract.  Cinergy values its portfolio of contracts  using the
     aggregate  lower of cost or  market  method.  To the  extent  there are net
     aggregate losses in the portfolio,  Cinergy  reserves for such losses.  Net
     gains are recognized  when  realized.  Due to the lack of liquidity and the
     volatility  currently   experienced  in  the  power  markets,   significant
     assumptions  must be made by the Company  when  estimating  current  market
     values for purposes of the aggregate lower of cost or market comparison. It
     is  possible  that the actual  gains and losses  from the  Company's  power
     marketing and trading activities could differ  substantially from the gains
     and losses estimated currently.

     Cinergy and its subsidiaries use derivative financial  instruments to hedge
     exposures to foreign  currency  exchange  rates,  lower funding costs,  and
     manage  exposures to fluctuations in interest  rates.  Instruments  used as
     hedges must be  designated  as a hedge at the inception of the contract and
     must be effective at reducing the risk  associated  with the exposure being
     hedged.   Accordingly,   changes  in  market  values  of  designated  hedge
     instruments must be highly  correlated with changes in market values of the
     underlying  hedged items at inception of the hedge and over the life of the
     hedge contract.

     Cinergy utilizes  foreign exchange forward  contracts and currency swaps to
     hedge certain of its net  investments in foreign  operations.  Accordingly,
     any  translation  gains or losses related to the foreign  exchange  forward
     contracts or the  principal  exchange on the currency  swap are recorded in
     accumulated other  comprehensive  income,  which is a separate component of
     common  stock  equity.   Aggregate  translation  losses  related  to  these
     instruments   are   reflected  in  "Current   Liabilities   Other"  in  the
     Consolidated Balance Sheets.

     Interest  rate  swaps  are   accounted   for  under  the  accrual   method.
     Accordingly,  gains and losses based on any interest  differential  between
     fixed-rate and floating-rate  interest  amounts,  calculated on agreed upon
     notional principal amounts,  are recognized in the Consolidated  Statements
     of Income as a component of interest  expense as realized  over the life of
     the agreement.

Cinergy, CG&E, and PSI
10.  As  discussed in the 1997 Form 10-K,  in October  1995, a suit was filed in
     the  Federal  District  Court for the  Southern  District  of Ohio by three
     former  employees  of  Enertech  naming as  defendants  Enertech,  Cinergy,
     Investments,  CG&E,  PSI,  James E. Rogers,  and William J.  Grealis.  (Mr.
     Rogers and/or Mr.  Grealis are officers  and/or  directors of the foregoing
     companies.)  The lawsuit,  which stemmed from the termination of employment
     of the three former  employees,  alleged that they entered into  employment
     contracts  with  Enertech  based  on  the  opportunity  to  participate  in
     potential profits from future investments in energy projects in central and
     eastern Europe.  The suit alleged causes of action based upon,  among other
     theories,  breach  of  contract  related  to  the  events  surrounding  the
     termination of their employment and fraud and misrepresentation  related to
     the level of  financial  support  for  future  projects.  The suit  alleged
     compensatory  damages of $154 million based upon assumed  future success of
     potential  future  investments  and  punitive  damages of three  times that
     amount.

     In April  1998,  the parties  reached a  comprehensive  settlement  and all
     claims were dismissed by the Court.  The obligations of the Company arising
     out of the  settlement  are not material to its financial  condition or its
     results of operations.

Cinergy and PSI
11.      As  discussed in the 1997 Form 10-K,  PSI and IGC  submitted a proposed
         agreed order to the IDEM in 1997 related to the  Shelbyville  MGP site.
         On April 15, 1998,  the IDEM signed the proposed  agreed  order,  which
         will result in a  determination  by the IDEM of whether the  activities
         previously  undertaken at the site are sufficient to adequately protect
         human   health   and  the   environment.   Based   upon   environmental
         investigations and remediation completed to date, PSI believes that any
         further investigation and remediation required for the Shelbyville site
         will not have a material  adverse effect on its financial  condition or
         results of operations.

          In August 1997,  NIPSCO  filed suit  against PSI in the United  States
          District  Court for the  Northern  District  of  Indiana,  South  Bend
          Division,  claiming,  pursuant  to the  CERCLA,  recovery  from PSI of
          NIPSCO's past and future costs of  investigating  and  remediating MGP
          related  contamination  at  the  Goshen  MGP  site.  Recently,  NIPSCO
          increased its estimate of the cost of remediating the Goshen site from
          $2.7 million to about $3.0 million.

          As also  discussed in the 1997 Form 10-K,  PSI  previously  placed its
          insurance carriers on notice of IGC's,  NIPSCO's and the IDEM's claims
          related  to MGP sites.  In April  1998,  PSI filed  suit in  Hendricks
          County Circuit Court against its general liability insurance carriers,
          seeking,   among  other  matters,  a  declaratory  judgment  that  its
          insurance  carriers are obligated to defend MGP claims  against PSI or
          pay  PSI's  costs of  defense  and to  indemnify  PSI for its costs of
          investigating,   preventing,  mitigating  and  remediating  damage  to
          property  and paying  claims  associated  with MGP  sites.  PSI cannot
          predict the outcome of this litigation.

Cinergy, CG&E, PSI, and ULH&P
12.      Effective with the first quarter of 1998,  Cinergy and its subsidiaries
         adopted  Statement  130.   Statement  130  establishes   standards  for
         reporting and displaying  comprehensive  income and its components in a
         full set of general-purpose financial statements.  Comprehensive income
         is defined as the  change in equity of a business  enterprise  during a
         period  from  transactions  and other  events  and  circumstances  from
         nonowner sources.

         During the second quarter of 1998,  the FASB issued  Statement 133. The
         new standard requires  companies to record derivative  instruments,  as
         defined in Statement  133, as assets or  liabilities,  measured at fair
         value.  The Statement  requires that changes in the  derivative's  fair
         value  be  recognized  currently  in  earnings  unless  specific  hedge
         accounting  criteria are met. Special  accounting for qualifying hedges
         allows a derivative's gains and losses to offset related results on the
         hedged item in the income  statement,  and requires that a company must
         formally   document,   designate,   and  assess  the  effectiveness  of
         transactions that receive hedge  accounting.  The standard is effective
         for fiscal years  beginning after June 15, 1999, and Cinergy expects to
         adopt Statement 133 effective for the year beginning January 1, 2000.

         The Company has not yet  quantified  the impacts of adopting  Statement
         133 on its consolidated  financial  statements.  However, the Statement
         could increase volatility in earnings and other comprehensive income.

Cinergy
13.      Presented below is a reconciliation of earnings per common share (basic
         EPS) and earnings per common share assuming dilution (diluted EPS).

                                             Income        Shares       Earnings
                                          (Numerator)  (Denominator)   Per Share
                                        (In thousands, except per share amounts)
   Quarter ended June 30, 1998 
   Earnings per common share:
        Net loss                          $(25,933)       158,018       $(.16)

     Effect of dilutive securities:
        Common stock options                                  689
        Contingently issuable common stock                    113

     EPS--assuming dilution:
        Net loss plus assumed
          conversions                     $(25,933)       158,820       $(.16)

     Quarter ended June 30, 1997 
     Earnings per common share:
        Net income                        $ 55,489        157,679       $ .35

     Effect of dilutive securities:
        Common stock options                                  925
        Contingently issuable common stock                    204

     EPS--assuming dilution:
        Net income plus assumed
          conversions                     $ 55,489        158,808       $ .35


<PAGE>



                                             Income        Shares       Earnings
                                          (Numerator)  (Denominator)   Per Share
                                        (In thousands, except per share amounts)
   Six months ended June 30, 1998 
   Earnings per common share:
        Net income                         $ 80,138        157,892       $ .51

     Effect of dilutive securities:
        Common stock options                                   738
        Contingently issuable common stock                     118

     EPS--assuming dilution:
        Net income plus assumed
          conversions                      $ 80,138        158,748       $ .51

     Six months ended June 30, 1997
     Earnings per common share:
        Net income                         $169,606        157,679       $1.07

     Effect of dilutive securities:
        Common stock options                                   954
        Contingently issuable common stock                     204

     EPS--assuming dilution:
        Net income plus assumed 
          conversions                      $169,606        158,837       $1.06

                                            Income        Shares       Earnings
                                          (Numerator)  (Denominator)   Per Share
                                        (In thousands, except per share amounts)
   Twelve months ended June 30, 1998 
   Earnings per common share:
        Net income before extraordinary 
          item                            $273,170        157,790       $1.73

     Effect of dilutive securities:
        Common stock options                                  827
        Contingently issuable common stock                    162

     EPS--assuming dilution:
        Net income before extraordinary
         item plus assumed conversions    $273,170        158,779       $1.72

     Twelve months ended June 30, 1997
     Net income                           $338,222
     Less:  costs of reacquisition of
       preferred stock of subsidiary        18,391

     Earnings per common share:
        Net income applicable to common
          stock                            319,831        157,679       $2.02

     Effect of dilutive securities:
        Common stock options                                  938
        Contingently issuable common st                       260

     EPS--assuming dilution:
        Net income applicable to common
        stock plus assumed conversions    $319,831        158,877       $2.01


         The  after-tax  impact  of the  extraordinary  item -  equity  share of
         windfall profits tax in the twelve months ended June 30, 1998, was $.69
         for both basic and diluted earnings per share.

         Options to purchase  shares of common stock that were excluded from the
         calculation of  EPS--assuming  dilution  because the exercise prices of
         these options were greater than the average  market price of the common
         shares during the period are summarized below:

                           Quarter                       Average
                            Ended                       Exercise
                           June 30        Shares          Price

                            1998          930,600        $37.54
                            1997           10,400         34.50

                          Six Months                     Average
                            Ended                       Exercise
                           June 30        Shares          Price

                            1998          694,700        $37.83
                            1997            8,800         34.50

                         Twelve Months                   Average
                            Ended                       Exercise
                           June 30        Shares          Price

                            1998          345,000        $37.82
                             1997          188,900         33.52

Cinergy and PSI
14.  In February  1989,  PSI and WVPA  entered  into a  settlement  agreement to
     resolve all claims  related to Marble Hill, a nuclear  project  canceled in
     1984.  Implementation  of the settlement  was  contingent  upon a number of
     events,   including  the  conclusion  of  WVPA's   bankruptcy   proceeding,
     negotiation  of certain terms and  conditions  with WVPA,  the RUS, and the
     CFC, and certain  regulatory  approvals.  In December  1996,  following the
     resolution of issues associated with WVPA's bankruptcy proceeding,  PSI, on
     behalf of itself and its  officers,  paid $80  million on behalf of WVPA to
     the RUS and the CFC. The $80 million obligation, net of insurance proceeds,
     other credits,  and applicable income tax effects, was charged to income in
     1988. In January 1997, an order dismissing the WVPA litigation  against PSI
     and its officers with  prejudice was entered by the United States  District
     Court for the  Southern  District  of  Indiana  and final  negotiations  to
     implement the  settlement  agreement  were begun with WVPA, the RUS and the
     CFC. An  agreement on  substantially  all matters has been reached with the
     parties.  As a result,  PSI recorded a liability to the RUS and the CFC and
     will repay the  obligation  with interest over a 35-year term. PSI will use
     the net proceeds from a 35-year power sales agreement with WVPA to fund the
     principal  and  interest on the  obligation.  Assumption  of the  liability
     (recorded as long-term debt in the consolidated  balance sheet) resulted in
     a charge against second quarter  earnings of $80 million ($50 million after
     tax or $.32 per share basic and diluted).

Cinergy
15.      The Company's Midlands subsidiary (of which the Company owns 50%) has a
         40%  ownership  interest  in a 586 MW power  project in  Pakistan  (Uch
         project  or Uch) which was  originally  scheduled  to begin  commercial
         operation  in late 1998.  The  Pakistani  government-owned  utility has
         recently  issued a notice of intent to  terminate  certain  key project
         agreements relative to the Uch project. The notice asserts that various
         forms of  corruption  were  involved  in the  original  granting of the
         agreements  to the  Uch  investors  by a  predecessor  government.  The
         Company  believes  that this  notice is similar to notices  received by
         other independent power projects in Pakistan.

         The Uch  investors,  including a subsidiary of Midlands,  strongly deny
         the  allegations  and intend to pursue all  available  legal options to
         enforce  their  contractual  rights  under the project  agreements.  At
         present,  the  Uch  investors  continue  to  explore  remedies  to  the
         situation with officials of the Pakistani government.

         Through its ownership of Midlands,  the Company's current investment in
         the Uch project is  approximately  $30 million.  In  addition,  project
         lenders   could   require   investors   to  make   additional   capital
         contributions  to the project under certain  conditions.  The Company's
         share of these additional  contributions is approximately  $14 million.
         At the present time, the Company cannot predict the ultimate outcome of
         this matter.

Cinergy and PSI
16.      As discussed in the 1997 Form 10-K,  PSI filed a petition with the FERC
         for  recovery,  through the fuel  adjustment  clause,  of the wholesale
         jurisdictional  portion of the costs  resulting from the Exxon contract
         buyout.  During July 1998,  the FERC accepted  PSI's request to recover
         these buyout costs from its  wholesale  customers for the period August
         1996 through December 2002.


<PAGE>



            ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS

Cinergy, CG&E, PSI, and ULH&P
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Matters discussed in
this Item 2.  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" in "Part I. Financial  Information" reflect and elucidate
Cinergy's  corporate vision of the future and, as a part of that,  outline goals
and aspirations,  as well as specific  projections.  These goals and projections
are considered forward-looking statements and are based on management's beliefs,
as  well  as  certain  assumptions  made  by  management.  In  addition  to  any
assumptions  and other factors that are referred to  specifically  in connection
with these  statements,  other factors that could cause actual results to differ
materially from those indicated in any forward-looking statements include, among
others: factors generally affecting utility  operations--such as unusual weather
conditions,  unusual  maintenance or repairs,  or unanticipated  changes in fuel
costs;  increased  competition  in the  electric  and gas  utility  environment;
regulatory  factors,  including  the  failure to obtain  anticipated  regulatory
approvals;  changes in  accounting  principles  or  policies;  adverse  economic
conditions;  changing  market  conditions;  availability  or  cost  of  capital;
employee  workforce  factors;  costs and  effects  of legal  and  administrative
proceedings;   changes  in  legislative  requirements;   and  other  risks.  The
Securities  and  Exchange  Commission's  rules  do not  require  forward-looking
statements to be revised or updated, and Cinergy does not intend to do so.

FINANCIAL CONDITION

Recent Developments

Cinergy, CG&E, and PSI
Ambient Air Standards As discussed in the 1997 Form 10-K,  during 1997,  the EPA
revised  the  National  Ambient  Air  Quality   Standards  for  ozone  and  fine
particulate matter. EPA has also proposed, but not finalized, new rules for both
ozone transport and regional haze. Relative to ozone transport, during May 1998,
the EPA  supplemented  its  proposed  rule to reduce  utility NOx  emissions  by
approximately 85% by 2003 by proposing a model NOx trading program for 22 states
in the eastern half of the United  States.  On June 25, 1998, 13 midwestern  and
southern  states and numerous  industry  groups within those  states,  including
Cinergy,  filed  comments in opposition to the EPA proposed NOx rules.  These 13
states and utility commentors  proposed  alternative  reduction  strategies that
would  generally  phase in NOx  reduction  by 65  percent  by  2002-2004,  would
determine  by 2002 if  additional  reductions  are  needed,  and then  implement
necessary controls between 2005-2007. Commentors also generally opposed EPA's 22
state  trading  program  in  favor of  smaller  and  more  flexible  multi-state
programs.  The EPA is expected to finalize its ozone transport rulemaking in the
fall of 1998 and states would then have 12 to 18 months to  incorporate  utility
NOx  reductions  into their SIPs.  The EPA is scheduled to finalize new regional
haze rules in the summer of 1998. Congress,  as part of the funding bill for the
Surface  Transportation  Act,  combined the schedules for fine  particulates and
regional  haze  implementation.  The  impact of the  particulate  standards  and
regional haze rules cannot be  determined  at this time.  Since EPA guidance and
technical  studies  concerning  these new  regulations  have not been  provided,
Cinergy cannot predict the outcome or effect of the new rulemakings.

Air Toxics As discussed in the 1997 Form 10-K, the EPA was to announce, by April
15,  1998,  its  conclusions  regarding  the  need  for  additional  air  toxics
regulations.  In April 1998, the EPA announced that it would make its regulatory
determination  on the need for additional air toxics  regulation by November 15,
1998. If more air toxics  regulations  are issued,  the compliance cost could be
significant.  Cinergy  cannot  predict  the  outcome  or  effects  of the  EPA's
determination.

Cinergy, CG&E, and ULH&P
Competitive Pressures - State Developments  As discussed in the 1997 Form
10-K,  competition  legislation  was to be  introduced  in the Ohio  legislature
during  1998.  This  legislation,  SB  237  and  HB  732,  "companion"  electric
restructuring  bills  that  propose  to  afford  choice to all  retail  electric
customers in Ohio beginning January 1, 2000, was introduced in 1998. Legislative
hearings on these bills  occurred in the spring.  In  addition,  legislation  to
provide  for  securitization  of  transition  costs  through  issuance  of  rate
reduction  bonds has been pending in Ohio since 1997.  It is  uncertain  whether
these pieces of legislation will be passed in Ohio in 1998.

As also discussed in the 1997 Form 10-K, HB 443 was introduced into the Kentucky
General  Assembly in January  1998.  HB 443 was not brought to a vote during the
1998 legislative  session.  Rather,  HJR 95, which calls for the formation of an
executive  task force  comprised of members from the  governor's  office and the
General Assembly to further study electricity  restructuring,  was passed by the
General  Assembly.  HJR 95  was  signed  by  the  governor  during  April  1998.
Kentucky's General Assembly does not reconvene until the year 2000.

Cinergy
Acquisitions In June 1998, Cinergy, through its subsidiaries, acquired ProEnergy
and Teplarna.  Through CC&T,  Cinergy  acquired  ProEnergy from Apache and Oryx.
ProEnergy has had and will continue to have exclusive  marketing rights to North
American gas production owned or controlled by Apache and Oryx, which represents
approximately 1.1 Bcf per day of dedicated  natural gas supply.  These supplies,
combined  with the  active  marketing  of third  party gas,  are  geographically
diverse and are spread through the Southwest,  Rocky Mountains, Gulf Coast, Gulf
of Mexico,  and Michigan.  The acquisition was funded with cash and the issuance
of 771,258 new shares of Cinergy common stock.

A  subsidiary  of Cinergy  Global  Power  acquired  Teplarna,  a 410 MW district
heating  plant in the Czech  Republic.  In addition to hot water and steam,  the
plant produces 36 MW of electric capacity.

The purchase  prices for  ProEnergy  and Teplarna were not material to Cinergy's
financial condition or results of operations.

Regulatory Matters

Cinergy  and PSI  Coal  Contract  Buyout  Costs  See  Note 16 of the  "Notes  to
Financial Statements" in "Part I. Financial Information."

Market Risk Sensitive Instruments and Positions

Cinergy, CG&E, PSI, and ULH&P
The following  discussions about Cinergy's market risk sensitive instruments and
positions and risk management activities include forward-looking information and
statements that involve risks and uncertainties. The forward-looking information
and  statements  presented  are only  estimates of what may occur in the future,
assuming  certain adverse market  conditions,  due to their  dependence on model
characteristics and assumptions.  As a result,  actual future results may differ
materially from those presented. These disclosures are not precise indicators of
expected  future losses,  rather they merely  present  indications of reasonably
possible losses.

Cinergy, CG&E, and PSI
Energy Commodities  Sensitivity The Company markets and trades  over-the-counter
forward and option  contracts  for the  purchase  and sale of  electricity.  The
Company also trades exchange-traded futures contracts.  See Note 9 of the "Notes
to Financial  Statements" in "Part I. Financial  Information"  for the Company's
accounting policies for certain derivative instruments.

During a few days late in the second quarter,  wholesale  electric power markets
in the Midwest  exhibited  unprecedented  price volatility due to several market
factors including an extended period of unseasonably hot weather,  scheduled and
unplanned  generating unit outages,  transmission  constraints,  and defaults by
certain  power  marketers  on  their  supply   obligations.   The   simultaneous
culmination  of these events  resulted in temporary  but extreme price spikes in
the  hourly  and daily  markets  and very  little  trading  liquidity  and price
transparency in the term markets. During this period of extreme price volatility
and  trading  illiquidity,   Cinergy's  power  marketing  and  trading  function
maintained its ability to provide trading-based services, including the physical
delivery of power to fulfill all of its contractual obligations.  As of June 30,
1998,  Cinergy's  daily  value-at-risk  for  its  power  marketing  and  trading
activities  increased by 80% from December 31, 1997. The daily  value-at-risk as
of June 30, 1998 was less than 3% of Cinergy's "Income Before Interest And Other
Charges" for the twelve months then ended.  The value-at  risk model  utilizes a
95% confidence interval and uses the  variance-covariance  statistical  modeling
technique and historical  volatilities  and  correlations  over the past 200 day
period.  The  estimated  market  prices  used to value  these  transactions  for
value-at-risk purposes reflect the use of established pricing models and various
factors including quotations from exchanges and over-the-counter  markets, price
volatility  factors,  the time value of money, and location  differentials.  The
variables used for value-at-risk  purposes at June 30, 1998, reflect the impacts
of the events which  transpired in the Midwestern  electric power markets during
late June 1998.

The Company  provided  reserves of $65 million ($41 million  after tax), or $.26
per share (basic and  diluted),  in the second  quarter for its  electric  power
marketing and trading  business.  The reserve  represents  potential  unrealized
losses in the fair value of its  portfolio of open  forward and option  contract
positions  and  potential  unrealized  losses due to  nonperformance  of certain
counterparties pursuant to contractual supply obligations.  Despite the volatile
activity at the end of June, the Company  experienced  modest net realized gains
from its  electric  power  marketing  and trading  operations  during the second
quarter.  Due to the basic lack of liquidity,  price  transparency,  and extreme
price   volatility   currently   experienced  in  the  electric  power  markets,
significant   assumptions   regarding  estimated  market  prices  and  potential
counterparty  credit  risk  must be  made by the  Company  for the  purposes  of
providing appropriate reserves. It is possible that actual realized results from
the Company's power marketing and trading activities could differ  substantially
from those currently estimated.

As of June 30, 1998,  approximately 62% of Cinergy's power marketing and trading
activity  represents  commitments with 10 counterparties.  The majority of these
contracts  are for terms of one year or less.  The  temporary  but extreme price
volatility and trading  illiquidity  exhibited in the Midwestern  electric power
markets late in the second quarter resulted in a few power marketers  defaulting
on contractual  supply  obligations and industry-wide  uncertainty as to whether
others  will be able to fulfill  existing  contractual  supply  obligations  for
future delivery of  electricity.  As of June 30, 1998,  Cinergy  believes it has
adequately  reserved for credit  exposure  relating to its portfolio of existing
contracts.

Cinergy  remains  committed  to being a long-term  participant  in the  evolving
competitive  wholesale  electric  power  market and will  continue to manage its
power  marketing  and trading  portfolio to maximize  its  existing  value while
creating additional value. The New York Mercantile Exchange  electricity futures
contracts for delivery into Cinergy's  transmission  grid, which started trading
on July  10,  1998,  should  provide  additional  liquidity  and  greater  price
transparency  as well as additional  risk  management  capabilities in Cinergy's
core  service  territory  and trading  region.  Cinergy  continues to review and
enhance its current risk management  practices to ensure their responsiveness to
evolving and changing market and business conditions.  In addition,  efforts are
ongoing to develop and enhance  systems to improve the timeliness and quality of
market and credit risk information.

Cinergy
Exchange Rate Sensitivity  Cinergy  utilizes foreign exchange forward  contracts
and  currency  swaps  to  hedge  certain  of  its  net  investments  in  foreign
operations.  See  Note 9 of the  "Notes  to  Financial  Statements"  in "Part I.
Financial  Information" for Cinergy's accounting policies for certain derivative
instruments.  Cinergy's market risks have not changed materially from the market
risks reported in the 1997 Form 10-K.

Cinergy, CG&E, PSI, and ULH&P
Interest  Rate  Sensitivity  The  Company's  net exposure to changes in interest
rates primarily  consists of debt instruments with floating  interest rates that
are benchmarked to various market indices.  To manage the Company's  exposure to
fluctuations  in  interest  rates  and  to  lower  funding  costs,  the  Company
constantly  evaluates the use of, and has entered into, interest rate swaps. See
Note 9 of the "Notes to Financial Statements" in "Part I. Financial Information"
for the Company's  accounting policies for certain derivative  instruments.  The
Company's  market  risks  have not  changed  materially  from the  market  risks
reported in the 1997 Form 10-K.

Accounting Issues

Cinergy, CG&E, PSI, and ULH&P New Accounting Standards See Note 12 of the "Notes
to Financial Statements" in "Part I. Financial Information."

Other Commitments

Cinergy,  CG&E,  and  PSI  Enertech  See  Note  10 of the  "Notes  to  Financial
Statements" in "Part I. Financial Information."

Cinergy,  CG&E,  and PSI  MGP  Sites  See  Note 11 of the  "Notes  to  Financial
Statements" in "Part I. Financial Information."

Cinergy and PSI WVPA See Note 14 of the "Notes to Financial Statements" in "Part
I. Financial Information."

CAPITAL RESOURCES AND REQUIREMENTS

Cinergy,  CG&E, PSI, and ULH&P Long-term Debt For information  regarding  recent
issuances and redemptions of long-term debt securities, see Notes 2, 3, 4, 5, 6,
7,  and  8 of  the  "Notes  to  Financial  Statements"  in  "Part  I.  Financial
Information."

Cinergy, CG&E, PSI, and ULH&P
Short-term  Debt  Obligations  representing  notes payable and other  short-term
obligations  (excluding notes payable to affiliated companies) at June 30, 1998,
were as follows:

Cinergy

                                  Established
                                     Lines         Outstanding
                                          (in millions)
Cinergy
  Committed lines
    Acquisition line                $  350          $  350
    Revolving line                     400             160
  Commercial paper                      -              189
Utility subsidiaries
  Committed lines                      300              10
  Uncommitted lines                    360              67
  Pollution control notes              244             244
Non-utility subsidiaries               118             101

Total                               $1,772          $1,121

CG&E

                                  Established
                                     Lines         Outstanding
                                          (in millions)
Committed lines                      $100             $ -
Uncommitted lines                     190               30
Pollution control notes               184              184

Total                                $474             $214

PSI
                                  Established
                                     Lines         Outstanding
                                          (in millions)
Committed lines                      $200             $ 10
Uncommitted lines                     170               37
Pollution control notes                60               60

Total                                $430             $107

Cinergy, CG&E, and PSI
Cinergy's  committed lines are comprised of an acquisition  line and a revolving
line. The established revolving line (as shown in the above table) also provides
credit support for Cinergy's commercial paper program. As of June 30, 1998, this
program was limited to a maximum  outstanding  principal amount of $200 million.
During  July 1998,  the  commercial  paper  program was  increased  to a maximum
principal  amount of $400  million.  This increase is supported by an additional
revolving  line of $200 million,  which was also  established  in July 1998. The
majority of the proceeds from the commercial paper sales were used to reduce the
acquisition  line to the year-end level of $350 million.  CG&E and PSI also have
the capacity to issue commercial paper that must be supported by committed lines
(unsecured  lines of credit) of the  respective  company.  Neither  CG&E nor PSI
issued commercial paper during the second quarter of 1998.

Cinergy, CG&E, PSI, and ULH&P
Cinergy's  utility  subsidiaries  had regulatory  authority to borrow up to $853
million ($453 million for CG&E and its  subsidiaries,  including $50 million for
ULH&P,  and $400 million for PSI) as of June 30, 1998. In  connection  with this
authority,  committed lines, as well as uncommitted  lines,  have been arranged.
The  established  committed  lines (as shown in the above  table)  include  $100
million  designated as backup for certain of the  uncommitted  lines at June 30,
1998. Further, the committed lines are maintained by commitment fees.

Cinergy, CG&E, PSI, and ULH&P
Year 2000 Cinergy, like most owners and users of IT systems, will be impacted by
what has  become  known as Year 2000  issues.  Cinergy is  currently  working to
resolve  the   potential   impact  of  the  Year  2000  on  the   processing  of
date-sensitive  information by the Company's  computerized  information systems.
The Year 2000 issues are the result of computer programs being written using two
digits,  rather  than four,  to define the  applicable  year.  Any of  Cinergy's
programs which have  date-sensitive  software may recognize a date using "00" as
the  year  1900  rather  than  the year  2000,  which  could  result  in  system
malfunctions.  The Year 2000 issue  impacts  not only IT systems but also non-IT
systems (i.e., systems incorporating "embedded processors").

Cinergy is  addressing  the  impacts of the Year 2000  issues by  focusing on IT
systems,  non-IT  systems  associated  with  its  generating  stations  and  its
transmission and distribution  systems,  and an assessment of the ability of its
critical vendors to provide an uninterrupted  supply of goods and/or services to
Cinergy.

Cinergy  anticipates  that its Year 2000 plan will be completed by June 1999. As
of July 31, 1998, the extent of completion ranged from  approximately 75% for IT
systems to approximately 25% regarding assessment of critical vendors.

Cinergy  estimates  the  total  cost  related  to the  Year  2000  plan  will be
approximately $13 million,  of which approximately $10 million has been incurred
through  June 30,  1998.  These costs are being funded  through  operating  cash
flows.

The Company is in the process of developing a Year 2000 contingency plan.

Cinergy
Other   Commitments  In  connection  with  its  energy   marketing  and  trading
activities, Cinergy has issued performance guarantees to numerous counterparties
totaling approximately $170 million.

RESULTS OF OPERATIONS

Cinergy, CG&E, PSI, and ULH&P
Reference  is made to  "Item 1.  Financial  Statements"  in  "Part I.  Financial
Information."

       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Cinergy,  CG&E,  PSI, and ULH&P  Reference is made to the "Market Risk Sensitive
Instruments  and  Positions"  section in "Item 2.  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations" in "Part I. Financial
Information."



<PAGE>



                           PART II. OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS

Cinergy, CG&E, and PSI

See Notes 10, 11, 14, and 15 of the "Notes to Financial Statements" in "Part
I. Financial Information."

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)         Exhibits  identified  with a pound sign (#) are being filed herewith
            by the registrant identified in the exhibit discussion below and are
            incorporated   herein  by  reference   with  respect  to  any  other
            designated   registrant.   Exhibits  not  so  identified  are  filed
            herewith:

         Exhibit
       Designation                        Nature of Exhibit

    Cinergy and CG&E

         4-A                  #Fifth Supplemental  Indenture dated as of June 9,
                              1998,  between  CG&E and The Fifth Third Bank,  as
                              Trustee.  (Exhibit to CG&E's June 30,  1998,  Form
                              10-Q in File No. 1-1232.)

    Cinergy and PSI

         4-B                  #Fourth Supplemental  Indenture dated as of August
                              5, 1998,  between PSI and The Fifth Third Bank, as
                              Trustee.  (Exhibit  to PSI's June 30,  1998,  Form
                              10-Q in File No. 1-3543.)

         4-C                  #Loan  Agreement   between  PSI  and  the  Indiana
                              Department  Finance Authority dated as of July 15,
                              1998.  (Exhibit to PSI's June 30, 1998,  Form 10-Q
                              in File No. 1-3543.)

  Cinergy, CG&E, and PSI

         10-A                 #Third Amendment to Employment Agreement dated May
                              1, 1998, between Cinergy, Cinergy Services, Inc.,
                              CG&E, PSI and Larry E. Thomas. (Exhibit to
                              Cinergy's June 30, 1998, Form 10-Q in File No. 1-
                              11377.)

  Cinergy, CG&E, PSI, and ULH&P

           27                 Financial Data Schedules (included in
                              electronic submission only).

     The following reports on Form 8-K were filed during the quarter or prior to
     the filing of the Form 10-Q for the quarter ended June 30, 1998.

      Date of Report                         Item Filed

Cinergy

        July 15, 1998       Item 5.  Other Events
                            Item 7.  Financial Statements and Exhibits

CG&E

        July 15, 1998       Item 5.  Other Events

  PSI

        July 15, 1998       Item 5.  Other Events


<PAGE>



                                   SIGNATURES

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted pursuant to such rules and regulations,  although
Cinergy,  CG&E, PSI, and ULH&P believe that the disclosures are adequate to make
the information presented not misleading.  In the opinion of Cinergy, CG&E, PSI,
and ULH&P,  these statements reflect all adjustments (which include only normal,
recurring  adjustments)  necessary to reflect the results of operations  for the
respective periods.  The unaudited statements are subject to such adjustments as
the annual audit by independent public accountants may disclose to be necessary.

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrants  have duly  caused this report to be signed by an
officer  and the chief  accounting  officer on their  behalf by the  undersigned
thereunto duly authorized.

                                                     CINERGY CORP.
                                          THE CINCINNATI GAS & ELECTRIC COMPANY
                                                    PSI ENERGY, INC.
                                         THE UNION LIGHT, HEAT AND POWER COMPANY
                                                     Registrants






Date:  August 13, 1998                           /s/John P. Steffen         
                                       ---------------------------------------
                                                  John P. Steffen
                                              Duly Authorized Officer
                                                        and
                                              Chief Accounting Officer