SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q

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

                 FOR THE QUARTERLY PERIOD ENDING MARCH 31, 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 file number 1-6788

                         THE UNITED ILLUMINATING COMPANY

             (Exact name of registrant as specified in its charter)

           Connecticut                                    06-0571640
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)           

157 Church Street, New Haven, Connecticut                       06506
(Address of principal executive offices)                      (Zip Code)

        Registrant's telephone number, including area code: 203-499-2000


                                      None
       (Former name,  former address and former fiscal year, if changed
        since last report.)


   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                                 Yes  X   No
                                                    -----   -----

     The  number of shares  outstanding  of the  issuer's  only  class of common
stock, as of March 31, 1998, was 14,334,922.


                                     - 1 -
<PAGE>




                                      INDEX

                           Part I. FINANCIAL INFORMATION

                                                                          PAGE
                                                                         NUMBER
                                                                         ------

Item 1.  Financial Statements.                                              3

         Consolidated Statement of Income for the three months ended
           March 31, 1998 and 1997.                                         3
         Consolidated Balance Sheet as of March 31, 1998 and 
           December 31, 1997.                                               4
         Consolidated Statement of Cash Flows for the three months ended
           March 31, 1998 and 1997.                                         6

         Notes to Consolidated Financial Statements.                        7
           -   Statement of Accounting Policies                             7
           -   Capitalization                                               8
           -   Rate-Related Regulatory Proceedings                          9
           -   Short-term Credit Arrangements                               9
           -   Income Taxes                                                11
           -   Supplementary Information                                   12
           -   Fuel Financing Obligations and Other Lease Obligations      13
           -   Commitments and Contingencies                               13
               -  Capital Expenditure Program                              13
               -  Nuclear Insurance Contingencies                          13
               -  Other Commitments and Contingencies                      14
                  - Connecticut Yankee                                     14
                  - Hydro-Quebec                                           14
                  - Property Taxes                                         14
                  - Site Decontamination, Demolition and Remediation Costs 15
           -   Nuclear Fuel Disposal and Nuclear Plant Decommissioning     15
           -   Subsequent Event                                            16

Item 2.  Management's Discussion and Analysis of Financial Condition 
         and Results of Operations.                                        17

           -   Major Influences on Financial Condition                     17
           -   Capital Expenditure Program                                 19
           -   Liquidity and Capital Resources                             20
           -   Subsidiary Operations                                       21
           -   Results of Operations                                       21
           -   Looking Forward                                             23

                           Part II. OTHER INFORMATION

Item 1.  Legal Proceedings.                                                28

Item 5.  Other Information.                                                28

Item 6.  Exhibits and Reports on Form 8-K.                                 29

         SIGNATURES                                                        31



                                     - 2 -
<PAGE>
<TABLE>
                          PART I: FINANCIAL INFORMATION
                          ITEM I: FINANCIAL STATEMENTS
                         THE UNITED ILLUMINATING COMPANY
                        CONSOLIDATED STATEMENT OF INCOME
                      (Thousands except per share amounts)
                                   (Unaudited)

<CAPTION>
                                                                         Three Months Ended
                                                                              March 31,
                                                                       1998               1997
                                                                       ----               ----

<S>                                                                    <C>                <C>     
OPERATING REVENUES (NOTE G)                                            $162,474           $180,325
                                                                   -------------      -------------
OPERATING EXPENSES
  Operation
     Fuel and energy                                                     40,541             54,921
     Capacity purchased                                                   6,222             10,917
     Other                                                               33,309             37,290
  Maintenance                                                            11,033              9,235
  Depreciation                                                           20,806             17,092
  Amortization of cancelled nuclear project and deferred return           3,440              3,440
  Income taxes (Note F)                                                  11,487             11,315
  Other taxes (Note G)                                                   12,959             13,965
                                                                   -------------      -------------
       Total                                                            139,797            158,175
                                                                   -------------      -------------
OPERATING INCOME                                                         22,677             22,150
                                                                   -------------      -------------
OTHER INCOME AND (DEDUCTIONS)
  Allowance for equity funds used during construction                        30                204
  Other-net (Note G)                                                        445                781
  Non-operating income taxes                                                 83              1,417
                                                                   -------------      -------------
       Total                                                                558              2,402
                                                                   -------------      -------------
INCOME BEFORE INTEREST CHARGES                                           23,235             24,552
                                                                   -------------      -------------
INTEREST CHARGES
  Interest on long-term debt                                             13,523             16,372
  Interest on Seabrook obligation bonds owned by the company             (1,818)            (1,691)
  Other interest (Note G)                                                   844                766
  Allowance for borrowed funds used during construction                    (129)              (486)
                                                                   -------------      -------------
                                                                         12,420             14,961
  Amortization of debt expense and redemption premiums                      650                678
                                                                   -------------      -------------
       Net Interest Charges                                              13,070             15,639
                                                                   -------------      -------------

MINORITY INTEREST IN PREFERRED SECURITIES                                 1,203              1,203
                                                                   -------------      -------------

NET INCOME                                                                8,962              7,710
Discount on preferred stock redemptions                                       -                (19)
Dividends on preferred stock                                                 51                 51
                                                                   -------------      -------------
INCOME APPLICABLE TO COMMON STOCK                                        $8,911             $7,678
                                                                   =============      =============

AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC                      13,987             14,101
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED                    13,997             14,101

EARNINGS PER SHARE OF COMMON STOCK - BASIC AND DILUTED                    $0.64              $0.54

CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK                         $0.72              $0.72
</TABLE>

                  The accompanying Notes to Consolidated Financial
            Statements are an integral part of the financial statements.

                                        - 3 -

<PAGE>
<TABLE>
                         THE UNITED ILLUMINATING COMPANY
                           CONSOLIDATED BALANCE SHEET

                                     ASSETS
                             (Thousands of Dollars)

<CAPTION>
                                                            March 31,          December 31,
                                                              1998               1997*
                                                              ----               ----
                                                           (Unaudited)
<S>                                                           <C>                 <C>
Utility Plant at Original Cost
  In service                                                  $1,875,676          $1,867,145
  Less, accumulated provision for depreciation                   662,263             644,971
                                                          ---------------     ---------------
                                                               1,213,413           1,222,174

Construction work in progress                                     22,448              25,448
Nuclear fuel                                                      25,049              25,990
                                                          ---------------     ---------------
     Net Utility Plant                                         1,260,910           1,273,612
                                                          ---------------     ---------------


Other Property and Investments                                    33,119              32,451
                                                          ---------------     ---------------

Current Assets
  Cash and temporary cash investments                             16,261              32,002
  Accounts receivable
   Customers, less allowance for doubtful
     accounts of $1,800 and $1,800                                54,071              57,231
   Other                                                          24,735              27,914
  Accrued utility revenues                                        22,903              25,269
  Fuel, materials and supplies, at average cost                   22,915              19,147
  Prepayments                                                      6,365               3,397
  Other                                                               87                  67
                                                          ---------------     ---------------
     Total                                                       147,337             165,027
                                                          ---------------     ---------------

Deferred Charges
  Unamortized debt issuance expenses                               9,518               6,611
  Other                                                            4,520               5,727
                                                          ---------------     ---------------
     Total                                                        14,038              12,338
                                                          ---------------     ---------------

Regulatory Assets (future amounts due from customers
                   through the ratemaking process)
  Income taxes due principally to book-tax differences           224,387             228,992
  Connecticut Yankee                                              49,995              51,313
  Deferred return - Seabrook Unit 1                               22,024              25,171
  Unamortized redemption costs                                    22,648              23,027
  Unamortized cancelled nuclear projects                          11,832              12,125
  Uranium enrichment decommissioning cost                          1,302               1,312
  Other                                                            6,008               6,357
                                                          ---------------     ---------------
     Total                                                       338,196             348,297
                                                          ---------------     ---------------

                                                              $1,793,600          $1,831,725
                                                          ===============     ===============
</TABLE>

*Derived from audited financial statements

                    The accompanying Notes to Consolidated Financial
                Statements are an integral part of the financial statements.


                                             - 4 -

<PAGE>
<TABLE>
                         THE UNITED ILLUMINATING COMPANY
                           CONSOLIDATED BALANCE SHEET

                         CAPITALIZATION AND LIABILITIES
                             (Thousands of Dollars)

<CAPTION>
                                                              March 31,         December 31,
                                                                1998               1997*
                                                                ----               ----
                                                            (Unaudited)
<S>                                                             <C>                 <C>    
Capitalization (Note B)
  Common stock equity
    Common stock                                                 $292,006            $288,730
    Paid-in capital                                                 1,850               1,349
    Capital stock expense                                          (2,182)             (2,182)
    Unearned employee stock ownership plan equity                 (10,922)            (11,160)
    Retained earnings                                             161,047             162,226
                                                           ---------------     ---------------
                                                                  441,799             438,963
  Preferred stock                                                   4,351               4,351
  Minority interest in preferred securities                        50,000              50,000
  Long-term debt
    Long-term debt                                                737,479             746,058
    Investment in Seabrook obligation bonds                       (92,860)           (101,388)
                                                           ---------------     ---------------
      Net long-term debt                                          644,619             644,670
                                                           ---------------     ---------------

          Total                                                 1,140,769           1,137,984
                                                           ---------------     ---------------

Noncurrent Liabilities
  Connecticut Yankee contract obligation                           39,196              40,821
  Pensions accrued                                                 38,271              39,149
  Nuclear decommissioning obligation                               18,352              17,538
  Obligations under capital leases                                 16,769              16,853
  Other                                                             5,823               5,507
                                                           ---------------     ---------------
          Total                                                   118,411             119,868
                                                           ---------------     ---------------

Current Liabilities
  Current portion of long-term debt                                74,574             100,000
  Notes payable                                                    45,120              37,751
  Accounts payable                                                 42,648              68,699
  Dividends payable                                                10,140              10,051
  Taxes accrued                                                    16,085               4,166
  Interest accrued                                                 12,794              10,266
  Obligations under capital leases                                    342                 340
  Other accrued liabilities                                        34,623              37,471
                                                           ---------------     ---------------
          Total                                                   236,326             268,744
                                                           ---------------     ---------------

Customers' Advances for Construction                                1,888               1,878
                                                           ---------------     ---------------

Regulatory Liabilities  (future amounts owed to customers
                         through the ratemaking process)
  Accumulated deferred investment tax credits                      16,195              16,385
  Other                                                             2,357               2,356
                                                           ---------------     ---------------
          Total                                                    18,552              18,741
                                                           ---------------     ---------------

Deferred Income Taxes  (future tax liabilities owed              277,654             284,510
                        to taxing authorities)
Commitments and Contingencies (Note L)
                                                           ---------------     ---------------
                                                               $1,793,600          $1,831,725
                                                           ===============     ===============
</TABLE>

* Derived from audited financial statements

                  The accompanying Notes to Consolidated Financial
              Statements are an integral part of the financial statements.

                                        - 5 -

<PAGE>
<TABLE>
                         THE UNITED ILLUMINATING COMPANY
                       CONSOLIDATED STATEMENT OF CASH FLOWS
                             (Thousands of Dollars)
                                   (Unaudited)

<CAPTION>
                                                            Three Months Ended
                                                                March 31,
                                                           1998         1997
                                                           ----         ----
<S>                                                        <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                $8,962       $7,710
                                                      ------------- ------------
  Adjustments to reconcil net income
   to net cash provided by operating activities:
     Depreciation and amortization                          21,851       18,354
     Deferred income taxes                                  (2,251)      (3,228)
     Deferred investment tax credits - net                    (190)        (190)
     Amortization of nuclear fuel                            1,265        1,568
     Allowance for funds used during construction             (159)        (690)
     Amortization of deferred return                         3,147        3,147
     Changes in:
                   Accounts receivable - net                 6,339       12,677
                   Fuel, material and supplies              (3,768)         (75)
                   Prepayments                              (2,968)       3,214
                   Accounts payable                        (26,051)     (19,143)
                   Interest accrued                          2,528        2,394
                   Taxes accrued                            11,919       10,529
                   Other assets and liabilities             (2,792)         742
                                                      ------------- ------------
     Total Adjustments                                       8,870       29,299
                                                      ------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                   17,832       37,009
                                                      ------------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Common stock                                               4,015            -
  Long-term debt                                            99,780            -
  Notes payable                                              7,369       43,624
  Securities redeemed and retired:
    Long-term debt                                        (133,976)     (32,585)
    Preferred stock                                              -          (40)
  Discount on preferred stock redemption                         -           19
  Expense of issue                                            (800)           -
  Lease obligations                                            (82)         (76)
  Dividends
    Preferred stock                                            (51)         (52)
    Common stock                                           (10,000)     (10,153)
                                                      ------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        (33,745)         737
                                                      ------------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Plant expenditures, including nuclear fuel               (8,356)     (14,452)
   Investment in debt securities                             8,528            -
                                                      ------------- ------------
NET CASH USED IN INVESTING ACTIVITIES                          172      (14,452)
                                                      ------------- ------------

CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD                                  (15,741)      23,294
BALANCE AT BEGINNING OF PERIOD                              32,002        6,394
                                                      ------------- ------------
BALANCE AT END OF PERIOD                                   $16,261      $29,688
                                                      ============= ============

CASH PAID DURING THE PERIOD FOR:
  Interest (net of amount capitalized)                     $10,626      $11,005
                                                      ============= ============
  Income taxes                                              $2,900       $3,700
                                                      ============= ============
</TABLE>

                 The accompanying Notes to Consolidated Financial
              Statements are an integral part of the financial statements.


                                       - 6 -


<PAGE>

                         THE UNITED ILLUMINATING COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

     The consolidated  financial  statements of the Company and its wholly-owned
subsidiary, United Resources, Inc., have been prepared pursuant to the rules and
regulations of the Securities and Exchange  Commission.  The statements  reflect
all  adjustments  that are, in the opinion of  management,  necessary  to a fair
statement of the results for the periods presented.  All such adjustments are of
a normal recurring nature. 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.  The Company believes that the disclosures are adequate to make the
information  presented not misleading.  These consolidated  financial statements
should be read in conjunction with the consolidated financial statements and the
notes to consolidated financial statements included in the annual report on Form
10-K for the year  ended  December  31,  1997.  Such notes are  supplemented  as
follows:

(A)  STATEMENT OF ACCOUNTING POLICIES

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)

     The weighted  average  AFUDC rate applied in the first three months of 1998
and 1997 was 8.0% on a before-tax basis.

CASH AND TEMPORARY CASH INVESTMENTS

     For cash flow  purposes,  the  Company  considers  all highly  liquid  debt
instruments  with a maturity of three  months or less at the date of purchase to
be cash and temporary cash investments.  The Company records  outstanding checks
as accounts payable until the checks have been honored by the banks.

NUCLEAR DECOMMISSIONING TRUSTS

     External  trust  funds  are   maintained  to  fund  the  estimated   future
decommissioning  costs of the nuclear  generating units in which the Company has
an  ownership  interest.  These  costs are  accrued as a charge to  depreciation
expense over the estimated service lives of the units and are recovered in rates
on a current  basis.  The Company paid  $645,000 and $643,000 in the first three
months of 1998 and 1997, respectively,  into the decommissioning trust funds for
Seabrook Unit 1 and Millstone Unit 3. At March 31, 1998, the Company's shares of
the trust fund balances,  which included accumulated earnings on the funds, were
$13.0  million  and $5.4  million  for  Seabrook  Unit 1 and  Millstone  Unit 3,
respectively.   These  fund  balances  are  included  in  "Other   Property  and
Investments"  and  the  accrued   decommissioning   obligation  is  included  in
"Noncurrent Liabilities" on the Company's Consolidated Balance Sheet.

INTEREST RATE AND FUEL PRICE MANAGEMENT

     The  Company   utilizes   interest  rate  and  fuel  oil  price  management
instruments to manage interest rate and fuel oil price risk.  Interest rate swap
agreements have been entered into that effectively convert the interest rates on
$225 million of variable  rate term loan  borrowings  to fixed rate  borrowings.
Amounts  receivable  or payable  under  these swap  agreements  are  accrued and
charged  to  interest  expense.  The  Company  enters  into basic fuel oil price
management instruments to help minimize fuel oil price risk by fixing the future
price for fuel oil used for  generation.  Amounts  receivable  or payable  under
these instruments are recognized in income when realized.

     As of March 31, 1998, the Company had entered into swap agreements for 1998
for  950,000  barrels of fuel oil at a  weighted  average  price of $15.821  per
barrel  and had call  options  for  350,000  barrels  of fuel oil at a  weighted
average price of $18.56 per barrel.



                                     - 7 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(B)  CAPITALIZATION

     (a) COMMON STOCK

     The  Company  had  14,334,922  shares of its  common  stock,  no par value,
outstanding at March 31, 1998, of which 321,315 shares were  unallocated  shares
held by the Company's  Employee Stock Ownership Plan ("ESOP") and not recognized
as outstanding for accounting purposes.

     In 1990, the Company's  Board of Directors and the  shareowners  approved a
stock  option plan for  officers  and key  employees  of the  Company.  The plan
provides  for the  awarding of options to  purchase up to 750,000  shares of the
Company's common stock over periods of from one to ten years following the dates
when the options are  granted.  The  Connecticut  Department  of Public  Utility
Control  (DPUC) has approved the issuance of 500,000 shares of stock pursuant to
this plan.  The  exercise  price of each  option  cannot be less than the market
value of the stock on the date of the grant. Options to purchase 3,500 shares of
stock  at an  exercise  price  of $30 per  share,  7,800  shares  of stock at an
exercise  price of $39.5625 per share,  and 5,000 shares of stock at an exercise
price of $42.375  per share  have been  granted  by the Board of  Directors  and
remained  outstanding  at March 31, 1998.  Options to purchase  14,299 shares of
stock  at an  exercise  price of $30 per  share,  54,500  shares  of stock at an
exercise  price of $30.75 per share,  4,000 shares of stock at an exercise price
of  $35.625  per  share,  and  25,999  shares of stock at an  exercise  price of
$39.5625 per share were exercised during the first quarter of 1998.

     The Company has entered  into an  arrangement  under which it loaned  $11.5
million to The United  Illuminating  Company ESOP. The trustee for the ESOP used
the  funds to  purchase  shares of the  Company's  common  stock in open  market
transactions.  The shares will be allocated to employees' ESOP accounts,  as the
loan is repaid, to cover a portion of the Company's required ESOP contributions.
The loan will be repaid by the ESOP over a twelve-year period, using the Company
contributions and dividends paid on the unallocated  shares of the stock held by
the ESOP.  As of March 31,  1998,  321,315  shares,  with a fair market value of
$15.5  million,  had been purchased by the ESOP and had not been committed to be
released or allocated to ESOP participants.

     (b) RETAINED EARNINGS RESTRICTION

     The indenture under which $200 million principal amount of Notes are issued
places  limitations  on the payment of cash dividends on common stock and on the
purchase  or  redemption  of common  stock.  Retained  earnings in the amount of
$102.9 million were free from such limitations at March 31, 1998.

     (c) PREFERRED STOCK

     In April 1998, the Company purchased at a discount on the open market,  and
canceled,  524 shares of its $100 par value 4.35%, Series A preferred stock. The
shares, having a par value of $52,400 were purchased for $31,440, creating a net
gain of $20,960.

     (e) LONG-TERM DEBT

     On January 13, 1998,  the Company  issued and sold $100  million  principal
amount of 6.25% four-year and eleven-month  Notes. The yield on the Notes, which
were issued at a discount,  is 6.30%;  and the Notes will mature on December 15,
2002.  The  proceeds  from the sale of the Notes were used to repay $100 million
principal amount of 7 3/8% Notes, which matured on January 15, 1998.

     In March 1998,  the Company  repurchased  $33,798,000  principal  amount of
6.20% Notes, at a premium of $178,000, plus accrued interest.


                                     - 8 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(C) RATE-REGULATED REGULATORY PROCEEDINGS

     In April 1998,  Connecticut enacted Public Act 98-28, a massive and complex
statute  designed to restructure  the State's  electric  utility  industry.  The
business of generating and supplying  electricity to consumers will be opened to
competition and will be separated from the business of delivering electricity to
consumers,  beginning in the year 2000.  The business of delivering  electricity
will remain with the  incumbent  franchised  utility  companies  (including  the
Company).  Beginning in 2000, each retail consumer of electricity in Connecticut
(excluding  consumers  served by  municipal  electric  systems)  will be able to
choose his, her or its supplier of electricity  from among competing  suppliers,
for  delivery  over  the  wire  system  of  the  franchised   electric   utility
(Distribution  Company).   Commencing  no  later  than  mid-1999,   Distribution
Companies  will be  required  to  separate  on  consumers'  bills the charge for
electricity  generation  services from the charge for delivering the electricity
and all other  charges.  The DPUC is  directed  to issue an order,  by August 1,
1998, relative to this "unbundling" requirement.

     A  major  component  of  Connecticut's  restructuring  legislation  is  the
collection, by Distribution Companies, of a "competitive transition" assessment,
a "systems  benefits"  charge,  an  "energy  conservation  and load  management"
assessment and a "renewable energy"  assessment,  representing costs that either
have been or will be reasonably incurred by Distribution Companies to meet their
public service obligations as electric companies, and that will not otherwise be
recoverable in a competitive  generation and supply market.  These costs include
above-market  long-term purchased power contract  obligations,  regulatory asset
recovery,  above-market  investments in power plants (stranded  costs),  and the
costs of systems benefits and conservation  programs.  They will be recovered by
the Distribution  Companies from all consumers of electricity on a going-forward
basis,  commencing in 2000. Because it is expected that many fossil-fueled power
plants  may have  market  values  in excess of their  net  historic  costs,  the
restructuring  legislation requires that, in order for a Distribution Company to
recover the stranded costs associated with its power plants,  its  fossil-fueled
plants must be auctioned  prior to 2000 and the excess proceeds used to mitigate
its recoverable  stranded  costs,  and its  nuclear-fueled  power plants must be
auctioned prior to 2004.

     Another requirement of the restructuring legislation is that, by October 1,
1998,  each  Distribution  Company  must  file,  for  the  DPUC's  approval,  an
"unbundling  plan" to  transfer  into  one or more  legally  separate  corporate
affiliates,  on or before October 1, 1999, all of its power plants that have not
been sold by that date and will not be sold prior to 2000.

     On and after January 1, 2000 and until January 1, 2004, the Company will be
responsible  for  providing a standard  offer  service to  customers  who do not
choose an alternate electricity supplier.  The standard offer prices,  including
the fully-bundled price of generation,  transmission and distribution  services,
the  competitive  transition  assessment,  the systems  benefits  charge and the
energy  conservation  and renewable  energy  assessments,  must be 10% below the
average  fully-bundled  prices in effect on December 31,  1996.  The Company has
already delivered about 4% of this decrease through rate reductions in 1997. The
1997  through  2001 rate plan agreed to between the DPUC and the Company in 1996
anticipated  sufficient income in 2000 to accelerate  amortization of regulatory
assets  of  about  $50  million,  equivalent  to about  8% of  retail  revenues.
Substantially all of this accelerated  amortization may have to be eliminated to
provide for the additional standard offer price reduction  requirement and added
costs imposed by the  restructuring  legislation,  although the legislation does
prescribe certain bases for adjusting the price of standard offer service.

     The  Company  expects  that,  for  all  intents  and  purposes,   the  1998
restructuring  legislation  will take  precedence  over the 1996  five-year rate
plan, beginning in the year 2000.

(E)  SHORT-TERM CREDIT ARRANGEMENTS

     The Company has a revolving credit  agreement with a group of banks,  which
currently  extends to December 9, 1998. The borrowing  limit of this facility is
$75 million.  The facility  permits the Company to borrow funds at a



                                     - 9 -
<PAGE>
                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

fluctuating  interest rate  determined by the prime lending  market in New York,
and also permits the Company to borrow money for fixed periods of time specified
by the  Company at fixed  interest  rates  determined  by either the  Eurodollar
interbank  market in  London,  or by  bidding,  at the  Company's  option.  If a
material  adverse  change  in  the  business,  operations,  affairs,  assets  or
condition,  financial  or  otherwise,  or  prospects  of  the  Company  and  its
subsidiaries,  on a consolidated  basis,  should occur, the banks may decline to
lend  additional  money to the Company under this  revolving  credit  agreement,
although borrowings outstanding at the time of such an occurrence would not then
become due and  payable.  As of March 31,  1998,  the Company had $43 million of
short-term borrowings outstanding under this facility.

     In  addition,  as  of  March  31,  1998,  one  of  the  Company's  indirect
subsidiaries,  American  Payment  Systems,  Inc., had borrowings of $2.1 million
outstanding under a bank line of credit agreement.



                                     - 10 -
<PAGE>
<TABLE>
                             THE UNITED ILLUMINATING COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(F) INCOME TAXES
<CAPTION>
                                                              Three Months Ended
                                                                   March 31,
                                                              1998           1997
                                                              ----           ----
                                                                   (000's)
<S>                                                          <C>           <C>
Income tax expense consists of:

Income tax provisions:
  Current
                    Federal                                  $10,719       $10,066
                    State                                      3,126         3,250
                                                        ------------- -------------
                      Total current                           13,845        13,316
                                                        ------------- -------------
  Deferred
                    Federal                                   (1,551)       (2,054)
                    State                                       (700)       (1,174)
                                                        ------------- -------------
                      Total deferred                          (2,251)       (3,228)
                                                        ------------- -------------

  Investment tax credits                                        (190)         (190)
                                                        ------------- -------------

     Total income tax expense                                $11,404        $9,898
                                                        ============= =============

Income tax components charged as follows:
  Operating expenses                                         $11,487       $11,315
  Other income and deductions - net                              (83)       (1,417)
                                                        ------------- -------------

     Total income tax expense                                $11,404        $9,898
                                                        ============= =============


The following table details the components
 of the deferred income taxes:
     Seabrook sale/leaseback transaction                     ($2,181)      ($2,586)
     Conservation and load management                         (2,007)         (930)
     Accelerated depreciation                                  1,534         1,459
     Tax depreciation on unrecoverable plant investment        1,212         1,232
     Pension benefits                                            600            57
     Unit overhaul and replacement power costs                  (398)       (1,203)
     Postretirement benefits                                    (102)         (144)
     Deferred fossil fuel costs                                    -          (686)
     Other - net                                                (909)         (427)
                                                        ------------- -------------

Deferred income taxes - net                                  ($2,251)      ($3,228)
                                                        ============= =============
</TABLE>

                                     - 11 -
<PAGE>
<TABLE>
                               THE UNITED ILLUMINATING COMPANY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(G)  SUPPLEMENTARY INFORMATION

<CAPTION>
                                                                  Three Months Ended
                                                                      March 31,
                                                               1998               1997
                                                               ----               ----
                                                                       (000's)

<S>                                                         <C>               <C>
Operating Revenues
------------------
     Retail                                                   $146,545          $150,481
     Wholesale - capacity                                        3,426             2,257
               - energy                                         11,389            27,078
     Other                                                       1,114               509
                                                        ---------------   ---------------
          Total Operating Revenues                            $162,474          $180,325
                                                        ===============   ===============

Sales by Class(MWH's)
---------------------
    Retail
     Residential                                               488,329           498,271
     Commercial                                                564,789           540,458
     Industrial                                                265,628           269,134
     Other                                                      12,173            12,277
                                                        ---------------   ---------------
                                                             1,330,919         1,320,140
    Wholesale                                                  508,317           930,235
                                                        ---------------   ---------------
          Total Sales by Class                               1,839,236         2,250,375
                                                        ===============   ===============

Other Taxes
-----------
    Charged to:
     Operating:
        State gross earnings                                    $5,621            $5,732
        Local real estate and personal property                  5,482             6,137
        Payroll taxes                                            1,856             2,096
                                                        ---------------   ---------------
                                                                12,959            13,965
     Nonoperating and other accounts                               148                93
                                                        ---------------   ---------------
          Total Other Taxes                                    $13,107           $14,058
                                                        ===============   ===============

Other Income and (Deductions) - net
-----------------------------------
     Interest income                                              $320              $620
     Equity earnings from Connecticut Yankee                       307               446
     Earnings (Loss) from subsidiary companies                     195              (533)
     Miscellaneous other income and (deductions) - net            (377)              248
                                                        ---------------   ---------------
          Total Other Income and (Deductions) - net               $445              $781
                                                        ===============   ===============

Other Interest Charges
----------------------
     Notes Payable                                                $518              $577
     Other                                                         326               189
                                                        ---------------   ---------------
          Total Other Interest Charges                            $844              $766
                                                        ===============   ===============
</TABLE>


                                     - 12 -
<PAGE>
                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

(K)  FUEL FINANCING OBLIGATIONS AND OTHER LEASE OBLIGATIONS

     The Company has a Fossil Fuel Supply Agreement with a financial institution
providing for financing up to $37.5 million of fossil fuel purchases. Under this
agreement,  the financing  entity may acquire and/or store natural gas, coal and
fuel oil for sale to the  Company,  and the Company may  purchase  these  fossil
fuels from the financing entity at a price for each type of fuel that reimburses
the  financing  entity for the direct  costs it has incurred in  purchasing  and
storing  the  fuel,  plus a charge  for  maintaining  an  inventory  of the fuel
determined  by  reference  to  the  fluctuating  interest  rate  on  thirty-day,
dealer-placed  commercial  paper in New York. The Company is obligated to insure
the  fuel  inventories  and  to  indemnify  the  financing  entity  against  all
liabilities,  taxes and other  expenses  incurred as a result of its  ownership,
storage and sale of fossil fuel to the Company. This agreement currently extends
to May 1999.  At March 31,  1998,  approximately  $17.1  million of fossil  fuel
purchases were being financed under this agreement.

(L)  COMMITMENTS AND CONTINGENCIES

CAPITAL EXPENDITURE PROGRAM

     The Company's continuing capital expenditure program is presently estimated
at $167.7 million, excluding AFUDC, for 1998 through 2002.

NUCLEAR INSURANCE CONTINGENCIES

     The  Price-Anderson  Act, currently extended through August 1, 2002, limits
public liability  resulting from a single incident at a nuclear power plant. The
first $200 million of liability  coverage is provided by purchasing  the maximum
amount of commercially  available insurance.  Additional liability coverage will
be provided by an assessment of up to $75.5 million per incident, levied on each
of the  nuclear  units  licensed to operate in the United  States,  subject to a
maximum  assessment of $10 million per incident per nuclear unit in any year. In
addition,  if the sum of all public  liability  claims and legal costs resulting
from any nuclear  incident  exceeds the maximum amount of financial  protection,
each reactor  operator can be assessed an  additional  5% of $75.5  million,  or
$3.775 million.  The maximum assessment is adjusted at least every five years to
reflect  the impact of  inflation.  With  respect  to each of the three  nuclear
generating  units in which the Company  has an  interest,  the  Company  will be
obligated  to  pay  its  ownership  and/or  leasehold  share  of  any  statutory
assessment  resulting from a nuclear  incident at any nuclear  generating  unit.
Based on its interests in these nuclear  generating units, the Company estimates
its  maximum  liability  would be  $23.2  million  per  incident.  However,  any
assessment would be limited to $3.1 million per incident per year.

     The NRC requires each nuclear  generating unit to obtain property insurance
coverage  in a minimum  amount of $1.06  billion  and to  establish  a system of
prioritized  use of the insurance  proceeds in the event of a nuclear  incident.
The system  requires that the first $1.06 billion of insurance  proceeds be used
to  stabilize  the  nuclear  reactor to prevent any  significant  risk to public
health and safety and then for  decontamination  and  cleanup  operations.  Only
following completion of these tasks would the balance, if any, of the segregated
insurance  proceeds become available to the unit's owners. For each of the three
nuclear  generating  units in which the Company has an interest,  the Company is
required to pay its ownership  and/or  leasehold share of the cost of purchasing
such  insurance.  Although  each of these units has  purchased  $2.75 billion of
property  insurance  coverage,  representing  the limits of  coverage  currently
available  from  conventional  nuclear  insurance  pools,  the cost of a nuclear
incident could exceed available insurance proceeds.  Under those  circumstances,
the nuclear  insurance  pools that  provide this  coverage may levy  assessments
against the insured owner companies if pool losses exceed the accumulated  funds
available to the pool.  The maximum  potential  assessments  against the Company
with respect to losses occurring  during current policy years are  approximately
$5.0 million.



                                     - 13 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

OTHER COMMITMENTS AND CONTINGENCIES

                               CONNECTICUT YANKEE

     On December  4, 1996,  the Board of  Directors  of the  Connecticut  Yankee
Atomic  Power  Company  (Connecticut  Yankee)  voted  unanimously  to retire the
Connecticut  Yankee nuclear plant (the Connecticut  Yankee Unit) from commercial
operation.  The Company has a 9.5% stock ownership  share in Connecticut  Yankee
and had relied on the  Connecticut  Yankee  Unit for  approximately  3.7% of the
Company's 1995 total  generating  resources.  The power purchase  contract under
which the Company has purchased its 9.5%  entitlement to the Connecticut  Yankee
Unit's power  output  permits  Connecticut  Yankee to recover 9.5% of all of its
costs  from UI.  Connecticut  Yankee  has  filed  revised  decommissioning  cost
estimates and amendments to the power contracts with its owners with the Federal
Energy Regulatory  Commission (FERC). The estimate of the sum of future payments
for the closing, decommissioning and recovery of the remaining investment in the
Connecticut  Yankee Unit was  approximately  $606  million at December 31, 1997.
Based on regulatory  precedent,  Connecticut Yankee believes it will continue to
collect from its owners its decommissioning costs, the unrecovered investment in
the  Connecticut  Yankee  Unit and other  costs  associated  with the  permanent
shutdown of the Connecticut  Yankee Unit. UI expects that it will continue to be
allowed to recover all  FERC-approved  costs from its customers  through  retail
rates.  The  Company's  estimate  of its  remaining  share of  costs,  including
decommissioning,  less return of investment  (approximately  $10.8  million) and
return  on  investment  (approximately  $6.0  million)  at March  31,  1998,  is
approximately $39.2 million.  This estimate,  which is subject to ongoing review
and  revision,  has been  recorded by the Company as a  regulatory  asset and an
obligation on the Consolidated Balance Sheet.

                                  HYDRO-QUEBEC

     The Company is a  participant  in the  Hydro-Quebec  transmission  intertie
facility linking New England and Quebec, Canada. Phase I of this facility, which
became  operational  in 1986 and in which the Company has a 5.75%  participating
share, has a 690 megawatt  equivalent capacity value; and Phase II, in which the
Company has a 5.45% participating share, increased the equivalent capacity value
of the intertie  from 690  megawatts  to a maximum of 2000  megawatts in 1991. A
ten-year  Firm  Energy  Contract,  which  provides  for the  sale  of 7  million
megawatt-hours  per year by Hydro-Quebec to the New England  participants in the
Phase II facility,  became effective on July 1, 1991. Additionally,  the Company
is  obligated  to furnish a guarantee  for its  participating  share of the debt
financing  for the  Phase II  facility.  As of March  31,  1998,  the  Company's
guarantee liability for this debt was approximately $7.3 million.

                                 PROPERTY TAXES

     On November 2, 1993, the Company received  "updated"  personal property tax
bills  from  the  City of New  Haven  (the  City)  for the tax  year  1991-1992,
aggregating $6.6 million,  based on an audit by the City's tax assessor.  On May
7, 1994,  the Company  received a  "Certificate  of  Correction....to  correct a
clerical  omission  or  mistake"  from the City's tax  assessor  relative to the
assessed value of the Company's  personal  property for the tax year  1994-1995,
which certificate  purports to increase said assessed value by approximately 53%
above the tax assessor's  valuation at February 28, 1994,  generating tax claims
of approximately $3.5 million. On March 1, 1995, the Company received notices of
assessment  changes  relative to the assessed  value of the  Company's  personal
property for the tax year  1995-1996,  which  notices  purport to increase  said
assessed value by approximately 48% over the valuation  declared by the Company,
generating  tax claims of  approximately  $3.5  million.  On May 11,  1995,  the
Company received  notices of assessment  changes relative to the assessed values
of the Company's  personal  property for the tax years  1992-1993 and 1993-1994,
which notices purport to increase said assessed values by approximately  45% and
49%, respectively,  over the valuations declared by the Company,  generating tax
claims of approximately $4.1 million and $3.5 million, respectively. On March 8,
1996,  the  Company  received  notices of  assessment  changes  relative  to the
assessed value of the Company's  personal  property for the tax year  1996-1997,
which notices purport to increase said assessed value by approximately  57% over
the  valuations  declared by the Company and are expected to generate tax claims
of approximately $3.8


                                     - 14 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

million.  On March 7, 1997, the Company received  notices of assessment  changes
relative to the assessed  value of the Company's  personal  property for the tax
year  1997-1998,  which  notices  purport to  increase  said  assessed  value by
approximately  54% over the valuations  declared by the Company and are expected
to generate tax claims of approximately $3.7 million. The Company has vigorously
contested each of these actions by the City's tax assessor. In January 1996, the
Connecticut  Superior  Court granted the Company's  motion for summary  judgment
against the City relative to the earliest tax year at issue,  1991-1992,  ruling
that,  after  January 31, 1992,  the tax assessor had no statutory  authority to
revalue  personal  property  listed and valued on the Company's tax list for the
tax year  1991-1992.  This Superior Court  decision,  which would also have been
applicable  to and  defeated  the  assessor's  valuation  increases  for the two
subsequent  tax years,  1992-1993  and  1993-1994,  was appealed by the City. On
April 11, 1997,  the  Connecticut  Supreme Court  reversed the Superior  Court's
decisions  in this and two other  companion  cases  involving  other  taxpayers,
ruling  that the tax  assessor  had a  three-year  period  in which to audit and
revalue  personal  property  listed and valued on the Company's tax list for the
tax  year  1991-1992.  On May 8,  1998,  the  City  and the  Company  reached  a
comprehensive settlement of all of the Company's contested personal property tax
assessments and tax bills for the tax years 1991-1992  through 1997-1998 and the
Company's  personal  property tax  assessments  for the tax year  1998-1999  and
subsequent years.  Under the terms of this settlement,  the Company will pay the
City $14.025  million,  subject to Superior Court approval of the settlement and
conditioned on the Company receiving  authorization from the DPUC to recover the
settlement amount from its retail customers.

             SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS

     The  Company  has  estimated  that the total  cost of  decontaminating  and
demolishing  its Steel Point  Station  and  completing  requisite  environmental
remediation  of  the  site  will  be  approximately   $11.3  million,  of  which
approximately  $8.3 million had been incurred as of March 31, 1998, and that the
value of the property following  remediation will not exceed $6.0 million.  As a
result of a 1992 DPUC  retail  rate  decision,  beginning  January 1, 1993,  the
Company  has  been  recovering  through  retail  rates  $1.075  million  of  the
remediation costs per year. The remediation  costs,  property value and recovery
from  customers  will be subject to true-up in the  Company's  next  retail rate
proceeding  based on actual  remediation  costs and actual gain on the Company's
disposition of the property.

     The Company is  presently  remediating  an area of PCB  contamination  at a
site,  bordering  the  Mill  River  in New  Haven,  that  contains  transmission
facilities and deactivated generation  facilities.  Remediation will include the
repair and/or  replacement of approximately 560 linear feet of sheet piling. The
total cost of the remediation and sheet piling repair is presently  estimated at
$15 million.

(M)  NUCLEAR FUEL DISPOSAL AND NUCLEAR PLANT DECOMMISSIONING

     New   Hampshire   has   enacted  a  law   requiring   the   creation  of  a
government-managed  fund to finance the  decommissioning  of nuclear  generating
units  in  that  state.  The New  Hampshire  Nuclear  Decommissioning  Financing
Committee  (NDFC)  has  established  $473  million  (in  1998  dollars)  as  the
decommissioning  cost estimate for Seabrook Unit 1, of which the Company's share
would be approximately $83 million. This estimate assumes the prompt removal and
dismantling  of the unit at the end of its estimated  36-year  energy  producing
life.  Monthly  decommissioning  payments  are being  made to the  state-managed
decommissioning  trust fund.  UI's share of the  decommissioning  payments  made
during the first quarter of 1998 was  $523,000.  UI's share of the fund at March
31, 1998 was approximately $13.0 million.

     Connecticut has enacted a law requiring the operators of nuclear generating
units  to file  periodically  with  the  DPUC  their  plans  for  financing  the
decommissioning  of the units in that state.  The current  decommissioning  cost
estimate for Millstone  Unit 3 is $557 million (in 1998  dollars),  of which the
Company's share would be  approximately  $21 million.  This estimate assumes the
prompt removal and  dismantling of the unit at the end of its estimated  40-year
energy producing life.  Monthly  decommissioning  payments,  based on these cost
estimates,  are being made to a decommissioning  trust fund managed by Northeast
Utilities (NU). UI's share of the Millstone Unit 3 decommissioning


                                     - 15 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

payments made during the first  quarter of 1998 was $122,000.  UI's share of the
fund at March 31, 1998 was approximately $5.4 million. The decommissioning trust
fund for the  Connecticut  Yankee Unit is also managed by NU. For the  Company's
9.5% equity ownership in Connecticut Yankee,  decommissioning  costs of $589,000
were funded by UI during the first  quarter of 1998,  and UI's share of the fund
at March 31, 1998 was $26.8 million.  The current  decommissioning cost estimate
for the Connecticut Yankee Unit,  assuming the prompt removal and dismantling of
the unit  commencing in 1997, is $456 million,  of which UI's share would be $43
million.

(Q)  SUBSEQUENT EVENT

     The Company's largest unregulated subsidiary,  American Payment Systems, is
in the process of investigating  potential errors in its accounting records, the
extent of which cannot be accurately  determined at this time. It is the present
opinion of the Company that any  adjustments  resulting  from the  investigation
will not be  material  to the  1998  consolidated  results  of  operations.  The
investigation should be completed during the second quarter of 1998.




                                     - 16 -
<PAGE>


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


                     MAJOR INFLUENCES ON FINANCIAL CONDITION

     The  Company's  financial  condition  will  continue to be dependent on the
level of its retail and  wholesale  sales and the  Company's  ability to control
expenses.  The two  primary  factors  that  affect  sales  volume  are  economic
conditions  and  weather.  Annual  growth  in total  operation  and  maintenance
expense,  excluding  one-time items and  cogeneration  capacity  purchases,  has
averaged  less than 1.5% during the past 5 years.  The Company hopes to continue
to restrict this average to less than the rate of inflation in future years (see
"Looking Forward").

     The Company's financial status and financing capability will continue to be
sensitive to many other factors, including conditions in the securities markets,
economic conditions,  interest rates, the level of the Company's income and cash
flow,  and  legislative  and  regulatory  developments,  including  the  cost of
compliance with increasingly stringent environmental legislation and regulations
and competition within the electric utility industry.

      On December  31,  1996,  the DPUC  completed a financial  and  operational
review of the Company and ordered a five-year incentive  regulation plan for the
years 1997 through 2001. The DPUC did not change the existing  retail base rates
charged to  customers;  but its order  increased  amortization  of the Company's
conservation  and load management  program  investments  during  1997-1998,  and
accelerated the recovery of unspecified  regulatory  assets during  1999-2001 if
the  Company's  common stock equity return on utility  investment  exceeds 10.5%
after recording the increased conservation and load management amortization. The
order also reduced the level of conservation  adjustment  mechanism  revenues in
retail  prices,  provided a reduction in customer  prices through a surcredit in
each of the five plan years,  and accepted the Company's  proposal to modify the
operation of the fossil fuel clause mechanism.  The Company's  authorized return
on utility common stock equity during the period is 11.5%. Earnings above 11.5%,
on an annual basis, are to be utilized  one-third for customer price reductions,
one-third to increase  amortization of regulatory assets, and one-third retained
as earnings.  As a result of the DPUC's order,  customer prices were required to
be reduced, on average, by 3% in 1997 compared to 1996. Retail revenues actually
decreased by approximately  $30 million,  or 4.6%, in 1997 due to customer price
reductions.  Also as a result of the order,  customer  prices are required to be
reduced by an additional 1% in 2000,  and another 1% in 2001,  compared to 1996.
By its terms,  the DPUC's 1996 order should be reopened in 1998 to determine the
regulatory  assets to be subjected  to  accelerated  recovery in 1999,  2000 and
2001.

     In April 1998,  Connecticut enacted Public Act 98-28, a massive and complex
statute  designed to restructure  the State's  electric  utility  industry.  The
business of generating and supplying  electricity to consumers will be opened to
competition and will be separated from the business of delivering electricity to
consumers,  beginning in the year 2000.  The business of delivering  electricity
will remain with the  incumbent  franchised  utility  companies  (including  the
Company).  Beginning in 2000, each retail consumer of electricity in Connecticut
(excluding  consumers  served by  municipal  electric  systems)  will be able to
choose his, her or its supplier of electricity  from among competing  suppliers,
for  delivery  over  the  wire  system  of  the  franchised   electric   utility
(Distribution  Company).   Commencing  no  later  than  mid-1999,   Distribution
Companies  will be  required  to  separate  on  consumers'  bills the charge for
electricity  generation  services from the charge for delivering the electricity
and all other  charges.  The DPUC is  directed  to issue an order,  by August 1,
1998, relative to this "unbundling" requirement.

     A  major  component  of  Connecticut's  restructuring  legislation  is  the
collection, by Distribution Companies, of a "competitive transition" assessment,
a "systems  benefits"  charge,  an  "energy  conservation  and load  management"
assessment and a "renewable energy"  assessment,  representing costs that either
have been or will be reasonably incurred by Distribution Companies to meet their
public service obligations as electric companies, and that will not otherwise be
recoverable in a competitive  generation and supply market.  These costs include
above-market  long-term purchased power contract  obligations,  regulatory asset
recovery,  above-market  investments in power plants (stranded  costs),  and the
costs of systems benefits and conservation  programs.  They will be recovered by
the Distribution  Companies from all consumers of electricity on a going-forward
basis,  commencing in 2000. Because


                                     - 17 -
<PAGE>

it is expected  that many  fossil-fueled  power plants may have market values in
excess of their net historic costs, the restructuring legislation requires that,
in order for a  Distribution  Company to recover the stranded  costs  associated
with its power plants, its fossil-fueled  plants must be auctioned prior to 2000
and the excess  proceeds  used to mitigate its  recoverable  stranded and social
policy costs.

     Another requirement of the restructuring legislation is that, by October 1,
1998,  each  Distribution  Company  must  file,  for  the  DPUC's  approval,  an
"unbundling  plan" to  transfer  into  one or more  legally  separate  corporate
affiliates,  on or before October 1, 1999, all of its power plants that have not
been sold by that date and will not be sold prior to 2000.

     On and after January 1, 2000 and until January 1, 2004, the Company will be
responsible  for  providing a standard  offer  service to  customers  who do not
choose an alternate electricity supplier.  The standard offer prices,  including
the fully-bundled price of generation,  transmission and distribution  services,
the  competitive  transition  assessment,  the systems  benefits  charge and the
energy  conservation  and renewable  energy  assessments,  must be 10% below the
average  fully-bundled  prices in effect on December 31,  1996.  The Company has
already delivered about 4% of this decrease through rate reductions in 1997. The
DPUC's  1996  order   anticipated   sufficient  income  in  2000  to  accelerate
amortization of regulatory  assets of about $50 million,  equivalent to about 8%
of retail revenues.  Substantially all of this accelerated amortization may have
to be eliminated to provide for the additional  standard  offer price  reduction
requirement and added costs imposed by the restructuring  legislation,  although
the legislation does prescribe certain bases for adjusting the price of standard
offer service.

     The  Company  expects  that,  for  all  intents  and  purposes,   the  1998
restructuring legislation will take precedence over the 1996 order, beginning in
the year 2000.

     Currently,  the Company's  electric service rates are subject to regulation
and are based on the Company's costs. Therefore, the Company, and most regulated
utilities,  are subject to certain accounting  standards (Statement of Financial
Accounting  Standards  No. 71,  "Accounting  for the Effects of Certain Types of
Regulation"  (SFAS  No.  71)) that are not  applicable  to other  businesses  in
general. These accounting rules allow a regulated utility, where appropriate, to
defer the income  statement  impact of certain  costs  that are  expected  to be
recovered in future regulated  service rates and to establish  regulatory assets
on its balance sheet for such costs.  The effects of  competition or a change in
the cost-based  regulatory  structure could cause the operations of the Company,
or a portion of its assets or  operations,  to cease  meeting the  criteria  for
application of these accounting rules.  While the Company expects to continue to
meet these criteria in the foreseeable  future, if the Company,  or a portion of
its assets or  operations,  were to cease  meeting  these  criteria,  accounting
standards  for  businesses  in general  would become  applicable  and  immediate
recognition of any previously  deferred  costs,  or a portion of deferred costs,
would be required in the year in which the  criteria  are no longer met, if such
deferred  costs  are  not  recoverable  in that  portion  of the  business  that
continues  to meet the  criteria  for the  application  of SFAS No.  71. If this
change in accounting were to occur,  it would have a material  adverse effect on
the  Company's  earnings  and  retained  earnings  in that year and could have a
material adverse effect on the Company's ongoing financial condition as well.




                                     - 18 -
<PAGE>

                           CAPITAL EXPENDITURE PROGRAM

     The Company's  1998-2002 capital expenditure  program,  excluding allowance
for  funds  used  during   construction   (AFUDC)  and  its  effect  on  certain
capital-related items, is presently budgeted as follows:

<TABLE>
<CAPTION>
                                         1998          1999         2000        2001         2002         Total
                                         ----          ----         ----        ----         ----         -----
                                                                         (000's)
<S>                                   <C>          <C>            <C>         <C>          <C>          <C>    
Production (1)                           $7,800      $14,000       $4,500      $2,000       $2,500       $30,800
Distribution and Transmission            26,100       23,000       21,500      15,000       15,000       100,600
Other                                     3,300        3,400        1,000       1,000        1,000         9,700
                                         ------       ------       ------      ------       ------       -------
SUBTOTAL                                 37,200       40,400       27,000      18,000       18,500       141,100

Nuclear Fuel                              8,300          800        8,500       6,000        3,000        26,600
                                         ------       ------       ------      ------       ------       -------

  Total Expenditures                    $45,500      $41,200      $35,500     $24,000      $21,500      $167,700
                                         ======       ======       ======      ======       ======       =======

Rate Base and Other Selected Data:
---------------------------------
Depreciation
  Book Plant                             57,200       58,200       45,900      46,700       47,300
  Conservation Assets                    10,309        5,390            0           0            0
  Decommissioning                         2,700        2,800        2,900       3,000        3,100
Additional Required
 Amortization (pre-tax)(2)
  Conservation Assets                    13,000            0            0           0            0
  Other Regulatory Assets                     0       20,300            0           0            0
Amortization of Deferred
 Return on Seabrook Unit 1
 Phase-In (after-tax)                    12,586       12,586            0           0            0

Estimated Rate Base
 (end of period)                      1,106,000    1,043,000
</TABLE>

(1)  Reflects  divestiture of fossil fueled generation plant in 1999.  Remaining
     Production is nuclear generation plant, excluding nuclear fuel.

(2)  Additional   amortization   of  pre-1997   conservation   costs  and  other
     unspecified  regulatory  assets, as ordered by the DPUC in its December 31,
     1996 Order,  provided  that,  as expected,  common equity return on utility
     investment exceeds 10.5% after recording the additional amortization.

Note:  Capital  Expenditures and their effect on certain  capital-related  items
       are estimates  subject to change due to future events and conditions that
       may  be  substantially  different  than  those  used  in  developing  the
       projections.   In  particular,   the  recently  enacted   legislation  to
       restructure  Connecticut's  electric  utility  industry  will require the
       Company to divest itself of its fossil-fueled  generating plants prior to
       January  1,  2000  and to  attempt  to  divest  itself  of its  ownership
       interests in nuclear-fueled generating units prior to January 1, 2004.



                                     - 19 -
<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

     At March 31, 1998, the Company had $16.3 million of cash and temporary cash
investments,  a decrease of $15.7 million from the balance at December 31, 1997.
The  components  of  this  decrease,  which  are  detailed  in the  Consolidated
Statement of Cash Flows, are summarized as follows:

                                                                    (Millions)

       Balance, December 31, 1997                                      $32.0
                                                                       -----

       Net cash provided by operating activities                        17.8

       Net cash provided by (used in) financing activities:
       -   Financing activities, excluding dividend payments           (23.7)
       -   Dividend payments                                           (10.0)

       Net cash provided by investing activities, excluding
         investment in plant                                             8.5

       Cash invested in plant, including nuclear fuel                   (8.3)
                                                                        ----

             Net Change in Cash                                        (15.7)
                                                                       -----

       Balance,  March 31, 1998                                        $16.3
                                                                       =====

     The Company's capital requirements are presently projected as follows:
<TABLE>
<CAPTION>
                                                                 1998       1999       2000       2001       2002
                                                                 ----       ----       ----       ----       ----
                                                                                     (millions)
<S>                                                            <C>         <C>       <C>        <C>        <C>
Cash on Hand - Beginning of Year                               $ 32.0      $ -       $ -        $ -        $ -
Internally Generated Funds less Dividends                       114.0      120.0      89.0       90.0       95.0
                                                                -----      -----      ----       ----       ----
         Subtotal                                               146.0      120.0      89.0       90.0       95.0

Less:
Capital Expenditures                                             45.5       41.2      35.5       24.0       21.5
                                                                -----      -----      ----       ----       ----

Cash Available to pay Debt Maturities and Redemptions           100.5       78.8      53.5       66.0       73.5

Less:
Maturities and Mandatory Redemptions                            104.2       69.6     150.4       75.3      100.3
Optional Redemptions                                             33.8         -         -           -        -
                                                                -----      -----     -----       ----      -----

External Financing Requirements (Surplus)                      $ 37.5      $(9.2)    $96.9      $ 9.3     $ 26.8
                                                                =====      =====     =====       ====      =====
</TABLE>

Note:Internally  Generated  Funds  less  Dividends,   Capital  Expenditures  and
     External Financing Requirements are estimates based on current earnings and
     cash flow  projections,  including the  implementation  of the  legislative
     mandate to achieve a 10% price  reduction from 1996 average price levels by
     the year 2000.  All of these  estimates are subject to change due to future
     events and conditions that may be  substantially  different from those used
     in  developing  the  projections.   In  particular,  the  recently  enacted
     legislation to restructure  Connecticut's  electric  utility  industry will
     require the Company to divest itself of its fossil-fueled generating plants
     prior to January 1, 2000 and to attempt to divest  itself of its  ownership
     interests in nuclear-fueled generating units prior to January 1, 2004.



                                     - 20 -
<PAGE>

     All of the Company's  capital  requirements that exceed available cash will
have  to be  provided  by  external  financing.  Although  the  Company  has  no
commitment to provide such financing from any source of funds,  other than a $75
million  revolving credit agreement with a group of banks,  described below, the
Company  expects to be able to satisfy its external  financing  needs by issuing
additional  short-term  and long-term  debt, and by issuing  preferred  stock or
common stock,  if  necessary.  The  continued  availability  of these methods of
financing  will  be  dependent  on many  factors,  including  conditions  in the
securities markets,  economic conditions,  and the level of the Company's income
and cash flow.

     The Company has a revolving credit  agreement with a group of banks,  which
currently  extends to December 9, 1998. The borrowing  limit of this facility is
$75 million.  The facility  permits the Company to borrow funds at a fluctuating
interest  rate  determined  by the prime  lending  market in New York,  and also
permits the Company to borrow money for fixed  periods of time  specified by the
Company at fixed  interest rates  determined by either the Eurodollar  interbank
market in London, or by bidding,  at the Company's option. If a material adverse
change in the business,  operations,  affairs, assets or condition, financial or
otherwise,  or prospects of the Company and its subsidiaries,  on a consolidated
basis,  should  occur,  the banks may  decline to lend  additional  money to the
Company under this revolving credit agreement,  although borrowings  outstanding
at the time of such an occurrence  would not then become due and payable.  As of
March 31, 1998, the Company had $43 million of short-term borrowings outstanding
under this facility.

                              SUBSIDIARY OPERATIONS

     UI has one wholly-owned  subsidiary,  United  Resources,  Inc. (URI),  that
serves as the parent  corporation for several  unregulated  businesses,  each of
which is incorporated  separately to participate in business  ventures that will
complement and enhance UI's electric utility business and serve the interests of
the Company and its shareholders and customers.

     URI  has  four  wholly-owned  subsidiaries.  The  largest  URI  subsidiary,
American  Payment  Systems,  Inc.,  manages a national network of agents for the
processing  of bill  payments  made by  customers  of other  utilities.  Another
subsidiary of URI, Thermal  Energies,  Inc., is participating in the development
of district  heating  and cooling  facilities  in the  downtown  New Haven area,
including  the energy  center  for an office  tower and  participation  as a 52%
partner in the energy center for a city hall and office tower  complex.  A third
URI subsidiary,  Precision Power,  Inc.,  provides  power-related  equipment and
services to the owners of commercial buildings and industrial facilities.  URI's
fourth  subsidiary,  United  Bridgeport  Energy,  Inc.,  is  participating  in a
merchant wholesale electric generating facility being constructed on land leased
from UI at its Bridgeport Harbor Station generating plant.

                              RESULTS OF OPERATIONS

FIRST QUARTER OF 1998 VS. FIRST QUARTER OF 1997
-----------------------------------------------

     Earnings for the first quarter of 1998 were $8.9 million, or $.64 per share
(on both a basic and diluted basis),  up $1.2 million,  or $.10 per share,  from
the first quarter of 1997. There were no one-time items in either quarter.

     Retail  operating  revenues  decreased  by about $3.9  million in the first
quarter of 1998 compared to the first quarter of 1997:

  .   A  retail  kilowatt-hour  sales  increase  of 0.8%  from  the  prior  year
     increased  retail  revenues by $1.2 million and sales margin  (revenue less
     fuel expense and revenue-based taxes) by $1.0 million. The Company believes
     that  "real"  (i.e.  not  attributable  to  abnormal  weather,  workdays or
     holidays)  kilowatt-hour sales increased by about 2.0% in the first quarter
     of 1998  compared  to the  first  quarter  of  1997.  This  increase  seems
     unusually  high  relative to the recent  past and could  indicate a lack of
     sensitivity in the Company's weather correction methodology,  although this
     is  the  second   consecutive   quarter  of  strong  real  growth.   Retail
     kilowatt-hour  sales  decreased  by about  1.5% due to warm  weather  (both
     quarters were warmer than 


                                     - 21 -
<PAGE>

     normal,  but the first quarter of 1998 was warmer than the first quarter of
     1997). There was one less holiday in the first quarter of 1998 (Good Friday
     was in April).

  .   Reductions  in customer  prices  decreased  retail  revenues by about $5.2
     million.  About $1.9  million of this was due to  suspension  of the fossil
     fuel adjustment  clause (FAC) (this revenue  reduction was offset by a $1.8
     million expense reduction from lower fuel and energy prices). There will be
     no further FAC revenue variances in future quarters.  About $1.5 million of
     the decreased  revenues was due to customer price reductions,  as agreed to
     by the Company and the Connecticut  Department of Public Utility Control in
     December  1996; but this first quarter impact is due to timing issues (some
     of the price  reductions began in March 1997), so that this variance should
     reverse over the remaining  months of 1998.  The remaining  $1.8 million of
     decreased  revenues was due to rate mix and  individual  customer  contract
     pricing.

     Retail  fuel and energy  expenses  increased  by $0.6  million in the first
quarter of 1998  compared to the first  quarter of 1997.  Retail fuel and energy
expenses  increased by $1.0 million due to the need to purchase  more  expensive
energy to replace  generation by the Seabrook nuclear generating unit, which was
taken out of service on December 5, 1997 to repair a pipe leak and problems with
control room air conditioning and air pressure.  The unit resumed  generation on
January 17, 1998.  Other retail fuel and energy expenses  decreased due to lower
fuel prices.

     Net wholesale  margin  (wholesale  revenue less wholesale  expense) changed
only  slightly in the first  quarter of 1998  compared  to the first  quarter of
1997.

     Operating  expenses for  operations,  maintenance  and  purchased  capacity
charges  decreased by $6.9 million in the first  quarter of 1998 compared to the
first quarter of 1997:

  .   Purchased capacity expense decreased $4.7 million.  Expense decreased $2.1
     million at the Connecticut  Yankee nuclear unit as it continued a ramp down
     of expenses  into a  decommissioning  mode,  and $2.6  million from avoided
     power purchase payments due to a cogeneration facility being out of service
     for about  twenty-eight  days in the first quarter of 1998. For more on the
     status of the  operation of the  Connecticut  Yankee unit,  see the LOOKING
     FORWARD section.

  .   Operation  and  maintenance  expense  decreased by $2.2  million.  Pension
     expense decreased by $1.4 million due to investment performance and changes
     in actuarial  assumptions and  methodologies.  Personnel  reductions  saved
     about $1.3 million.  These reductions were partly offset by $0.6 million of
     increases at the Seabrook and Millstone nuclear generation units.

     Depreciation expense increased by $0.4 million in the first quarter of 1998
compared to the first quarter of 1997.

     Accelerated  amortization increased by $3.3 million in the first quarter of
1998 compared to the first quarter of 1997,  reflecting  one quarter of the 1998
accelerated amortization  requirements of the five-year rate plan implemented in
1997,  and  the  Company's  expectation  that  all of the  required  accelerated
amortization  for 1998 will be recorded and that the Company will still  achieve
at least a 10.5 percent return on utility common stock equity from earnings from
utility operations. (All of the accelerated amortization in 1997 was recorded in
the second  quarter of that year as a result of a one-time gain recorded in that
quarter.)

     Other net income  increased  slightly in the first quarter of 1998 compared
to the first quarter of 1997, due to higher unregulated subsidiary earnings that
were partly offset by lower interest income.  The Company's largest  unregulated
subsidiary, American Payment Systems (APS), earned about $161,000 (after-tax) in
the first  quarter of 1998  compared  to a loss of $241,000  (after-tax)  in the
first quarter of 1997. For more on the status of the operations of APS, see Part
II. Other Information - Item 5. Other Information.



                                     - 22 -
<PAGE>

     Interest  charges  continued on their  downward  trend,  decreasing by $2.9
million in the first quarter of 1998 compared to the first quarter of 1997, as a
result of the Company's refinancing program and strong cash flow.


                                 LOOKING FORWARD

(THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT
TO UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CURRENTLY  EXPECTED.  READERS ARE CAUTIONED  THAT THE COMPANY  REGARDS  SPECIFIC
NUMBERS AS ONLY THE "MOST LIKELY" TO OCCUR WITHIN A RANGE OF POSSIBLE VALUES.)

Five-year rate plan
-------------------

     On December 31, 1996, the Connecticut  Department of Public Utility Control
(DPUC)  issued an order (the Order)  that  implemented  a  five-year  regulatory
framework  that would reduce the  Company's  retail  prices and  accelerate  the
recovery of certain  "regulatory  assets," beginning with deferred  conservation
costs. The Order's  schedule of price  reductions and accelerated  amortizations
was based on a DPUC pro-forma  financial  analysis that  anticipated the Company
would be able to  implement  such  changes and earn an allowed  return on common
stock  equity  invested in utility  assets of 11.5% over the period 1997 through
2001. The Order established a set formula to share any income that would produce
a return  above the 11.5%  level:  one-third  would be applied to customer  bill
reductions,  one-third would be applied to additional amortization of regulatory
assets, and one-third would be retained by shareowners.

     The DPUC, in the Order,  acknowledged  that the Order could be revisited in
the light of any new legislation.  In April 1998, Connecticut enacted Public Act
98-28,  a massive  and  complex  statute  designed  to  restructure  the State's
electric utility industry.  The business of generating and supplying electricity
to  consumers  will be  opened to  competition  and will be  separated  from the
business of delivering electricity to consumers, beginning in the year 2000. The
business of delivering  electricity  will remain with the  incumbent  franchised
utility  companies  (including  the  Company),  each to be called  an  "electric
distribution  company"  (Distribution  Company).  Beginning in 2000, each retail
consumer of electricity in Connecticut  (excluding consumers served by municipal
electric systems) will be able to choose his, her or its supplier of electricity
from among the  competing  suppliers,  for delivery  over the wire system of the
Distribution Company. Commencing no later than mid-1999,  Distribution Companies
will be  required to separate  on  consumers'  bills the charge for  electricity
generation services from the charge for delivering the electricity and all other
charges.  The DPUC is directed to issue an order, by August 1, 1998, relative to
this "unbundling" requirement.

     A  major  component  of  Connecticut's  restructuring  legislation  is  the
collection, by Distribution Companies, of a "competitive transition" assessment,
a "systems  benefits"  charge,  an  "energy  conservation  and load  management"
assessment and a "renewable energy"  assessment,  representing costs that either
have been or will be reasonably incurred by Distribution Companies to meet their
public service obligations as electric companies, and that will not otherwise be
recoverable in a competitive  generation and supply market.  These costs include
above-market  long-term purchased power contract  obligations,  regulatory asset
recovery,  above-market  investments in power plants (stranded  costs),  and the
costs of systems benefits and conservation  programs.  They will be recovered by
the Distribution  Companies from all consumers of electricity on a going-forward
basis,  commencing in 2000. Because it is expected that many fossil-fueled power
plants  may have  market  values  in excess of their  net  historic  costs,  the
restructuring  legislation requires that, in order for a Distribution Company to
recover the stranded costs associated with its power plants,  its  fossil-fueled
plants must be auctioned prior to 2000, and the excess proceeds used to mitigate
its recoverable  stranded  costs,  and its  nuclear-fueled  power plants must be
auctioned prior to 2004.

     Another requirement of the restructuring legislation is that, by October 1,
1998,  each  Distribution  Company  must  file,  for  the  DPUC's  approval,  an
"unbundling  plan" to  transfer  into  one or more  legally  separate  corporate
affiliates,  on or before October 1, 1999, all of its power plants that have not
been sold by that date and will not be sold prior to 2000.



                                     - 23 -
<PAGE>

     On and after January 1, 2000 and until January 1, 2004, the Company will be
responsible  for  providing a standard  offer  service to  customers  who do not
choose an alternate electricity supplier.  The standard offer prices,  including
the fully-bundled price of generation,  transmission and distribution  services,
the  competitive  transition  assessment,  the systems  benefits  charge and the
energy  conservation  and renewable  energy  assessments,  must be 10% below the
average  fully-bundled  prices in effect on December 31,  1996.  The Company has
already delivered about 4% of this decrease through rate reductions in 1997. The
Order  anticipated  sufficient  income  in 2000 to  accelerate  amortization  of
regulatory  assets  of about  $50  million,  equivalent  to  about 8% of  retail
revenues.  Substantially  all of this  accelerated  amortization  may have to be
eliminated  to  provide  for  the  additional  standard  offer  price  reduction
requirement and added costs imposed by the restructuring  legislation,  although
the legislation does prescribe certain bases for adjusting the price of standard
offer service.

     The  Company  expects  that,  for  all  intents  and  purposes,   the  1998
restructuring  legislation will take precedence over the Order's  five-year rate
plan, beginning in the year 2000.

1998 Earnings
-------------

     The  Company's  income from its utility  business is greatly  affected  by:
retail sales that  fluctuate  with  weather  conditions  and economic  activity,
fossil fuel prices,  nuclear  generating unit  availability and operating costs,
and  interest  rates.  These are all items  over  which the  Company  has little
control,  although the Company  engages in economic  development  activities  to
increase  sales,  and hedges its  exposure to volatile  fuel costs and  interest
rates.

     The  Company's  revenues are  principally  dependent on the level of retail
sales.  The two primary  factors  that affect  retail  sales volume are economic
conditions and weather.  The Company  estimates  that mild 1997 weather  reduced
retail  kilowatt-hour  sales by about 0.5 percent for the year.  Because much of
the mild  weather  occurred  in the summer  months,  when prices are higher than
average,  the revenue impact was exacerbated.  It is estimated that mild weather
may have  reduced  revenues by as much as $5.2  million for the year,  and sales
margin  (revenue less fuel expense and  revenue-based  taxes) by as much as $4.2
million.   Weather  corrected  retail  sales  for  1997  were  probably  in  the
5,375-5,420  gigawatt-hour  range. On this basis, the Company  experienced about
1.0-1.5  percent of "real" sales  growth in 1997 (i.e.  exclusive of weather and
leap year  factors)  over  "normal"  1996  sales,  with almost all of the growth
occurring  in the last  half of the  year.  A  similar  level of  growth in 1998
compared to 1997 from all customer groups would add about $6-$8 million to sales
margin.  Although  such growth in "real" sales  occurred in the first quarter of
1998  compared to the first  quarter of 1997,  growth in future  quarters may be
tempered by other factors, some of which are noted below.

     Reductions  in revenues  could occur for several  reasons.  The Company has
dealt  with the  potential  loss of  customers  as a result of  self-generation,
relocation  or  discontinuation   of  operations  by  successfully   negotiating
multi-year contracts with major customers.  Such a contract has been signed with
Yale  University,  the  Company's  largest  customer,  which is  constructing  a
cogeneration  unit  that  will  produce  approximately  one  half of its  annual
electricity  requirements  (about 1.5 percent of the Company's total 1997 retail
sales),  commencing  sometime in mid-1998.  While  providing  cost reduction and
price stability for customers and helping the Company maintain its customer base
for the long term,  these  contracts are expected to cause future  reductions in
retail  revenues.  They  reduced  retail  revenues  by about $3  million in 1997
compared to 1996, but are not expected to approach that level of change in 1998.
Additionally,  rate  migration  (customers  switching  to  rates  that  are more
favorable because of usage patterns) reduced retail revenues by about $3 million
in 1997 compared to 1996;  but the impact of rate  migration on revenues in 1998
compared to 1997 is expected  to be less than $1 million.  Also,  as part of the
Order,  the  operation of the  Company's  long-standing  fossil fuel  adjustment
clause (FAC)  mechanism  that allowed for recovery in retail rates of changes in
fossil  fuel  costs  was  suspended  within a broad  range of fuel  prices.  FAC
revenues decreased by about $1.9 million,  to zero, in the first quarter of 1998
compared to the first quarter of 1997, due to this  suspension of the FAC. There
will be no FAC revenue variances in future quarters.



                                     - 24 -
<PAGE>

     To summarize, assuming 1997 rates of "real" growth and the expected loss of
sales due to Yale University cogeneration, little change in retail kilowatt-hour
sales is expected in 1998  compared to 1997.  Retail  revenues  will be reduced,
from what they would  otherwise  be, if the  Company is in the  "sharing"  range
above an 11.5% return on common stock equity. Currently, the Company anticipates
a revenue  reduction of about $1.0 million in 1998 under the sharing  mechanism.
The overall  average retail price  anticipated  for 1998 is about 11.6 cents per
kilowatt-hour, almost 5 percent below the average 1996 price.

     Wholesale  capacity prices  strengthened in short-term markets during 1997,
due to outages of  regional  nuclear  generating  plants and  changes in the New
England  Power Pool  (NEPOOL)  capability  responsibility  requirements  for its
participants.  The Company's  wholesale capacity and transmission sales revenues
increased  $2.1 million in 1997 compared to 1996.  The strength of these markets
for 1998 will depend on the timing of the return to service of the nuclear units
at Millstone Station, on the addition of new generation sources,  and on how the
capacity  and  energy  markets  perform  under the new NEPOOL  open  competition
system, designed to meet Federal Energy Regulatory Commission (FERC) open access
orders,  when it is  implemented.  Implementation  of this  system is  currently
expected  in  mid-1998;  but this date is subject to NEPOOL  information  system
development  and testing and further orders from the FERC. No significant  sales
margin  improvement  is expected  from  wholesale  capacity  sales  during 1998.
Wholesale  energy revenues should remain similar to wholesale energy expense and
not contribute significantly to sales margin.

     Another major factor  affecting the Company's 1998 earnings  prospects will
be the Company's  ability to control  operating  expenses.  The Company  offered
voluntary early retirement  programs and a voluntary severance program to union,
nonunion and management  employees in 1996. A portion of the resulting personnel
cost  savings  occurred in 1996 and 1997,  but the largest  increment  in annual
savings  will be  realized  in 1998.  Annual  savings of about $6  million  from
personnel  reductions  are  estimated,  and this amount was  validated  by first
quarter results.

     The  Company  is  expecting  other  significant  expense  declines  in 1998
compared to 1997 from a number of sources. From the nuclear generating units, it
is expected that operation and maintenance expenses associated with the Seabrook
and Connecticut Yankee units should decline by a total of about $8 million.  The
Seabrook unit should have no refueling  outage in 1998 and, if it operates at an
assumed 95% availability  (its availability was virtually 100% between refueling
outages in 1997), net fuel expense should decline by about $2 million.

     Millstone  Unit 3 was taken out of  service  on March  30,  1996,  and will
remain shut down pending a comprehensive  Nuclear  Regulatory  Commission  (NRC)
inquiry into the conformity of the unit and its  operations  with all applicable
NRC  regulations  and  standards.   The  Company   anticipates  that,  once  NRC
deficiencies  are corrected and Unit 3 is returned to service,  operating  costs
should ramp down to more normal levels for an efficient and safe nuclear unit of
this class.  Also,  if  Millstone  Unit 3 returns to service,  net fuel  expense
should  decline by $400,000 per month for every month of  operation,  net of the
replacement  fuel provision of about $100,000 per month...up to $2.0 million for
the year if full power is reached by July 1, 1998.

     Pension and health benefit expenses, excluding one-time items, are expected
to decrease by about $2.5 million in 1998 compared to 1997.  NEPOOL expenses are
expected to increase by about $1.0  million,  and expenses  associated  with the
"Year 2000  Issue"  could  increase  by as much as  $2.0-$3.0  million  over the
1998-99  period,  above the  original  $2.6  million  estimate  for  information
technology  systems.  This is the result of receiving  more current and detailed
information from embedded  technology  vendors.  Other operation and maintenance
expenses  may  increase or decrease by amounts  that cannot be predicted at this
time.

     Interest  costs are expected to continue to decline by about $10 million in
1998,  reaching a level of about $52 million,  a level that was last experienced
in  1984.  This  interest  cost  reduction  is  largely  a result  of 1997  debt
refinancings  and debt  paydown  (long-term  debt was  reduced by $85 million in
1997) and an expected 1998 debt paydown of more than $70 million.



                                     - 25 -
<PAGE>

     Other factors  should  increase  costs.  Other  operation  and  maintenance
expense should increase by about $6 million in 1998 compared to 1997, reflecting
increased fossil-fueled generating unit scheduled maintenance and provisions for
future outages. Base depreciation,  excluding accelerated  amortization,  should
increase about $2.0 million;  and  accelerated  amortization  per the Order will
increase  by about $7  million  ($3.3  million  per  quarter,  except for a $3.1
million  decrease  in  the  second  quarter  compared  to  1997,  as  all of the
amortization  for 1997 was  recorded,  as an offset to a one-time  gain,  in the
second  quarter.)  Other  operating  expenses will have some  increases and some
decreases that should more or less offset one another.

     In summary,  the Company expects  substantial  net expense  reductions that
should more than  compensate  for the loss of one-time  items  realized in 1997,
cover the increase in accelerated conservation and load management amortization,
and allow  utility  earnings to increase  above an 11.5%  return on common stock
equity  into the  "sharing"  range of the Order.  The 11.5%  return  level would
produce utility earnings of about $3.40-$3.45 per share, while "shared" earnings
could  add an  additional  $.05-$.10  per  share.  Non-utility  earnings  should
increase  approximately $.05 per share in 1998 compared to 1997, due principally
to the anticipated  breakeven operation of the non-regulated  subsidiaries.  The
Company  expects that 1998  quarterly  earnings  from  operations  will follow a
pattern similar to that of 1997 on a weather-normalized basis.

     Although the current $2.88 indicated annual Common Stock dividend level for
1997 represented a payout of 88% of total 1997 earnings, the Company's cash flow
remains,  and is expected to remain, very strong. Net cash provided by operating
activities  was $168 million in 1997,  over four times the Common Stock dividend
payout,  one of the highest such "coverage" levels in the utility industry.  The
Order will limit  earnings from utility  operations  such that further  dividend
increases may have to be delayed for several  years.  However,  the Order should
allow the Company to recover regulatory assets more rapidly, help it prepare for
competition in the electric utility industry, and help maintain cash flow at its
excellent current level through the end of the decade. If the Company is able to
grow income and earnings in 1998 to the extent indicated above, the Common Stock
dividend payout ratio at the current indicated annual dividend rate will decline
to approximately 80%.



Longer Term
-----------

     In addition to the effects of Connecticut's  1998 electric utility industry
restructuring  legislation  (see the  "Five-year  rate plan"  discussion  at the
beginning of the Looking Forward section),  there are several other matters that
will affect the longer-term outlook.

     The Connecticut  Yankee nuclear unit's expenses are expected to continue to
decline by substantial  amounts before leveling out at about $6 million per year
after  1998,  compared  to $11.8  million  in  1997,  until  decommissioning  is
complete.  However,  the  ability of the Company to recover  its  investment  in
Connecticut  Yankee and its ownership share of future costs  associated with the
retirement of the Connecticut  Yankee unit will be dependent upon the outcome of
pending regulatory filings with the Federal Energy Regulatory Commission.

     On August 7, 1997,  the Company and the other nine minority joint owners of
Millstone  Unit 3 that are not  subsidiaries  of Northeast  Utilities (NU) filed
lawsuits  against  NU and its  trustees,  as well as a  demand  for  arbitration
against  The  Connecticut  Light and Power  Company  and  Western  Massachusetts
Electric Company, the operating electric utility subsidiaries of NU that are the
majority  joint owners of the unit and have  contracted  with the minority joint
owners to operate it. The ten non-NU joint owners,  who together own about 19.5%
of the unit,  claim  that NU and its  subsidiaries  failed  to  comply  with NRC
regulations, failed to operate Millstone Station in accordance with good utility
operating  practice and concealed  their failures from the  non-operating  joint
owners and the NRC.  The  arbitration  and  lawsuits  seek to  recover  costs of
purchasing  replacement  power and  increased  operation and  maintenance  costs
resulting from the shutdown of Millstone Unit 3.



                                     - 26 -
<PAGE>

     The Company's  planning and  operations  functions,  and its cash flow, are
dependent  on the  timely  flow of  electronic  data to and from its  customers,
suppliers and other electric utility system managers and operators.  In order to
assure that this data flow will not be disturbed by the problems  emanating from
the fact that many existing computer programs were designed without  considering
the impact of the year 2000 and use only two digits to identify  the year in the
date field of the  programs  (the Year 2000  Issue),  the Company  initiated  in
mid-1997,  and is  pursuing,  an  aggressive  program to  identify  and  correct
deficiencies in its computer systems.  The Company is also identifying  critical
suppliers  and other  persons with whom data must be exchanged and is asking for
assurance of their Year 2000  compliance.  An inventory  and  assessment  of the
Company's  computer  system  applications,   hardware,   software  and  embedded
technologies  has been completed,  and  recommended  solutions to all identified
risks and exposures have been generated. A remediation,  retirement,  renovation
and testing program has commenced.  Necessary upgrades to mainframe hardware and
software  are expected to be completed  and tested  during 1998,  and a parallel
program  with  respect to  desktop  hardware  and  application  software  on all
platforms is currently  projected to be completed  and tested,  for all critical
systems, by March 31, 1999. Requests for documented compliance  information have
been sent to all critical  suppliers,  data sharers and facility building owners
and, as responses are received,  appropriate  solutions and testing programs are
being  developed  and  executed.   The  Company  believes  that  the  successful
implementation  of  this  program,   which  was  originally  estimated  to  cost
approximately $2.6 million for existing information  systems,  will preclude any
adverse impact of the Year 2000 Issue on its operations and financial condition.
However,  embedded technology issues may increase the originally  estimated $2.6
million dollar  resolution cost by as much as $2.0-$3.0 million dollars over the
1998-99  period.  As more embedded  technology  vendor  product  information  is
forthcoming and business decisions made, the extent of any such increase will be
determined.




                                     - 27 -
<PAGE>



                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     On November 2, 1993, the Company received  "updated"  personal property tax
bills  from  the  City of New  Haven  (the  City)  for the tax  year  1991-1992,
aggregating $6.6 million,  based on an audit by the City's tax assessor.  On May
7, 1994,  the Company  received a  "Certificate  of  Correction....to  correct a
clerical  omission  or  mistake"  from the City's tax  assessor  relative to the
assessed value of the Company's  personal  property for the tax year  1994-1995,
which certificate  purports to increase said assessed value by approximately 53%
above the tax assessor's  valuation at February 28, 1994,  generating tax claims
of approximately $3.5 million. On March 1, 1995, the Company received notices of
assessment  changes  relative to the assessed  value of the  Company's  personal
property for the tax year  1995-1996,  which  notices  purport to increase  said
assessed value by approximately 48% over the valuation  declared by the Company,
generating  tax claims of  approximately  $3.5  million.  On May 11,  1995,  the
Company received  notices of assessment  changes relative to the assessed values
of the Company's  personal  property for the tax years  1992-1993 and 1993-1994,
which notices purport to increase said assessed values by approximately  45% and
49%, respectively,  over the valuations declared by the Company,  generating tax
claims of approximately $4.1 million and $3.5 million, respectively. On March 8,
1996,  the  Company  received  notices of  assessment  changes  relative  to the
assessed value of the Company's  personal  property for the tax year  1996-1997,
which notices purport to increase said assessed value by approximately  57% over
the  valuations  declared by the Company and are expected to generate tax claims
of approximately $3.8 million. On March 7, 1997, the Company received notices of
assessment  changes  relative to the assessed  value of the  Company's  personal
property for the tax year  1997-1998,  which  notices  purport to increase  said
assessed value by approximately 54% over the valuations  declared by the Company
and are  expected to generate  tax claims of  approximately  $3.7  million.  The
Company  has  vigorously  contested  each of these  actions  by the  City's  tax
assessor.  In January 1996, the Connecticut Superior Court granted the Company's
motion for summary  judgment  against the City relative to the earliest tax year
at issue,  1991-1992,  ruling that, after January 31, 1992, the tax assessor had
no statutory  authority to revalue  personal  property  listed and valued on the
Company's tax list for the tax year  1991-1992.  This Superior  Court  decision,
which would also have been  applicable to and defeated the assessor's  valuation
increases  for the two  subsequent  tax  years,  1992-1993  and  1993-1994,  was
appealed by the City. On April 11, 1997, the Connecticut  Supreme Court reversed
the Superior  Court's  decisions in this and two other companion cases involving
other taxpayers,  ruling that the tax assessor had a three-year  period in which
to audit and revalue  personal  property  listed and valued on the Company's tax
list for the tax  year  1991-1992.  On May 8,  1998,  the  City and the  Company
reached a comprehensive  settlement of all of the Company's  contested  personal
property  tax  assessments  and tax bills for the tax  years  1991-1992  through
1997-1998 and the Company's  personal  property tax assessments for the tax year
1998-1999 and subsequent years. Under the terms of this settlement,  the Company
will pay the City $14.025  million,  subject to Superior  Court  approval of the
settlement and conditioned on the Company receiving  authorization from the DPUC
to recover the settlement amount from its retail customers.

ITEM 5.  OTHER INFORMATION.

     The Company's largest unregulated subsidiary,  American Payment Systems, is
in the process of investigating  potential errors in its accounting records, the
extent of which cannot be accurately  determined at this time. It is the present
opinion of the Company that any  adjustments  resulting  from the  investigation
will not be  material  to the  1998  consolidated  results  of  operations.  The
investigation should be completed during the second quarter of 1998.




                                     - 28 -
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits.

<TABLE>
<CAPTION>
 Exhibit
Table Item  Exhibit
 Number     Number                                Description
----------  -------                               -----------

                                                                        
  <S>        <C>      <C>                                                                           
  (10)       10.6g    Copy of Restated New England Power Pool  Agreement,  amending and
                      restating Exhibits 10.6a+,  10.6b++,  10.6c+,  10.6d+,  10.6e+++,
                      and 10.6f+++.

  (10)       10.13a*  Copy of  First  Amendment  to  Amended  and  Restated  Employment
                      Agreement between The United Illuminating  Company and Richard J.
                      Grossi, dated as of February 1, 1998, amending Exhibit 10.13++++.

  (10)       10.14a*  Copy of  First  Amendment  to  Amended  and  Restated  Employment
                      Agreement between The United  Illuminating  Company and Robert L.
                      Fiscus, dated as of February 1, 1998, amending Exhibit 10.14++++.

  (10)       10.15a*  Copy of  First  Amendment  to  Amended  and  Restated  Employment
                      Agreement   between   The   United   Illuminating   Company   and
                      James F. Crowe,   dated   as  of   February 1,   1998,   amending
                      Exhibit 10.15++++.

  (10)       10.16a*  Copy of First  Amendment  to  Employment  Agreement  between  The
                      United  Illuminating  Company and Albert N. Henricksen,  dated as
                      of February 1, 1998, amending Exhibit 10.16++++.

  (10)       10.17a*  Copy of First  Amendment  to  Employment  Agreement  between  The
                      United Illuminating Company and Anthony J. Vallillo,  dated as of
                      February 1, 1998, amending Exhibit 10.17++++.

  (10)       10.28*   Copy of  Employment  Agreement,  dated as of  February 23,  1998,
                      between The United Illuminating Company and Nathaniel D. Woodson.

  (10)       10.29*   Copy of The United  Illuminating  Company  Phantom  Stock  Option
                      Agreement,  dated as of  February 23,  1998,  between  The United
                      Illuminating Company and Nathaniel D. Woodson.

</TABLE>


                                     - 29 -
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
Table Item  Exhibit
  Number    Number                               Description
----------  -------                              -----------

<S>          <C>      <C>                                                                           
(12), (99)   12       Statement  Showing  Computation  of Ratios of  Earnings  to Fixed
                      Charges  and Ratios of Earnings  to  Combined  Fixed  Charges and
                      Preferred Stock Dividend  Requirements (Twelve Months Ended March
                      31, 1998 and Twelve Months Ended  December 31,  1997, 1996, 1995,
                      1994 and 1993).

(27)         27       Financial Data Schedule
</TABLE>

------------------------

+    Filed with Annual Report (Form 10-K) for fiscal year ended
     December 31, 1991.

++   Filed with Registration Statement No. 2-49669, effective December 11, 1973.

++   Filed with Annual Report (Form 10-K) for fiscal year ended 
     December 31, 1993.

++++ Filed with Quarterly  Report (Form 10-Q) for fiscal quarter ended
     September 30, 1997.

*     Management contract or compensatory arrangement.



     (b) Reports on Form 8-K.

          None



                                     - 30 -
<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                         THE UNITED ILLUMINATING COMPANY




Date    5/14/98                Signature         /s/ Robert L. Fiscus
    --------------------                ---------------------------------------
                                                  Robert L. Fiscus
                                        Vice Chairman of the Board of Directors
                                               and Chief Financial Officer



                                     - 31 -
<PAGE>

                                     EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
Table Item Exhibit
  Number   Number                              Description
---------- -------                             -----------

  <S>       <C>       <C>                                                                 
  (10)      10.6g     Copy of Restated New England Power Pool  Agreement,  amending and
                      restating Exhibits 10.6a+,  10.6b++,  10.6c+,  10.6d+,  10.6e+++,
                      and 10.6f+++.

  (10)      10.13a*   Copy of  First  Amendment  to  Amended  and  Restated  Employment
                      Agreement between The United Illuminating  Company and Richard J.
                      Grossi, dated as of February 1, 1998, amending Exhibit 10.13++++.

  (10)      10.14a*   Copy of  First  Amendment  to  Amended  and  Restated  Employment
                      Agreement between The United  Illuminating  Company and Robert L.
                      Fiscus, dated as of February 1, 1998, amending Exhibit 10.14++++.

  (10)      10.15a*   Copy of  First  Amendment  to  Amended  and  Restated  Employment
                      Agreement   between   The   United   Illuminating   Company   and
                      James F. Crowe,   dated   as  of   February 1,   1998,   amending
                      Exhibit 10.15++++.

  (10)      10.16a*   Copy of First  Amendment  to  Employment  Agreement  between  The
                      United  Illuminating  Company and Albert N. Henricksen,  dated as
                      of February 1, 1998, amending Exhibit 10.16++++.

  (10)      10.17a*   Copy of First  Amendment  to  Employment  Agreement  between  The
                      United Illuminating Company and Anthony J. Vallillo,  dated as of
                      February 1, 1998, amending Exhibit 10.17++++.

  (10)      10.28*    Copy of  Employment  Agreement,  dated as of  February 23,  1998,
                      between The United Illuminating Company and Nathaniel D. Woodson.

  (10)      10.29*    Copy of The United  Illuminating  Company  Phantom  Stock  Option
                      Agreement,  dated as of  February 23,  1998,  between  The United
                      Illuminating Company and Nathaniel D. Woodson.
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
 Exhibit
Table Item  Exhibit
 Number     Number                           Description
----------  -------                          -----------

<S>           <C>  <C>                                                                   
(12), (99)    12   Statement  Showing  Computation  of Ratios of  Earnings  to Fixed
                   Charges  and Ratios of Earnings  to  Combined  Fixed  Charges and
                   Preferred Stock Dividend  Requirements (Twelve Months Ended March
                   31, 1998 and Twelve Months Ended  December 31,  1997, 1996, 1995,
                   1994 and 1993).

(27)          27   Financial Data Schedule
</TABLE>

------------------------

+    Filed with Annual Report (Form 10-K) for fiscal year ended
     December 31, 1991.

++   Filed with Registration Statement No. 2-49669, effective December 11, 1973.

+++  Filed with Annual Report (Form 10-K) for fiscal year ended
     December 31, 1993.

++++ Filed with Quarterly Report (Form 10-Q) for fiscal quarter ended
     September 30, 1997.

*     Management contract or compensatory arrangement.