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 JUNE 30, 1997

                                       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 of           (I.R.S. Employer Identification No.)
 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 June 30, 1997, was 14,101,291.


                                     - 1 -
<PAGE>

                                      INDEX

                          Part I. FINANCIAL INFORMATION

                                                                          PAGE
                                                                         NUMBER
                                                                         ------

Item 1.  Financial Statements.                                              3

         Consolidated Statement of Income for the three and six months
           ended June 30, 1997 and 1996.                                    3
         Consolidated Balance Sheet as of June 30, 1997 and
           December 31, 1996.                                               4
         Consolidated Statement of Cash Flows for the three and six
           months ended June 30, 1997 and 1996.                             6

         Notes to Consolidated Financial Statements.                        7
           -   Statement of Accounting Policies                             7
           -   Capitalization                                               8
           -   Income Taxes                                                10
           -   Short-term Credit Arrangements                              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
                  - Voluntary Early Retirement and Separation Programs     14
                  - Property Taxes                                         14
                  - Site Decontamination, Demolition and Remediation Costs 15
           -   Nuclear Fuel Disposal and Nuclear Plant Decommissioning     15
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                                             24

                           Part II. OTHER INFORMATION

Item 1.  Legal Proceedings.                                                30

Item 6.  Exhibits and Reports on Form 8-K.                                 31

         SIGNATURES                                                        32



                                     - 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              Six Months Ended
                                                                                  June 30,                       June 30,
                                                                            1997           1996           1997           1996
                                                                            ----           ----           ----           ----
<S>                                                                       <C>            <C>            <C>            <C>     
OPERATING REVENUES (NOTE G)                                               $163,774       $168,790       $344,099       $339,650
                                                                      -------------  -------------   ------------   ------------
OPERATING EXPENSES
  Operation
     Fuel and energy                                                        39,020         33,759         93,941         65,395
     Capacity purchased                                                     10,922         11,309         21,839         21,948
     Early retirement program charges                                            -            860              -          8,087
     Other                                                                  39,619         40,593         76,909         76,981
  Maintenance                                                               10,659         10,043         19,894         18,942
  Depreciation                                                              23,614         16,360         40,706         32,652
  Amortization of cancelled nuclear project and deferred return              3,439          3,439          6,879          6,879
  Income taxes (Note E)                                                        712         12,661         12,027         25,273
  Other taxes (Note G)                                                      13,097         13,895         27,062         28,580
                                                                      -------------  -------------   ------------   ------------
       Total                                                               141,082        142,919        299,257        284,737
                                                                      -------------  -------------   ------------   ------------
OPERATING INCOME                                                            22,692         25,871         44,842         54,913
                                                                      -------------  -------------   ------------   ------------
OTHER INCOME AND (DEDUCTIONS)
  Allowance for equity funds used during construction                          138            200            342            382
  Other-net (Note G)                                                           725           (259)         1,506           (466)
  Non-operating income taxes                                                 1,522          1,549          2,939          2,818
                                                                      -------------  -------------   ------------   ------------
       Total                                                                 2,385          1,490          4,787          2,734
                                                                      -------------  -------------   ------------   ------------
INCOME BEFORE INTEREST CHARGES                                              25,077         27,361         49,629         57,647
                                                                      -------------  -------------   ------------   ------------
INTEREST CHARGES
  Interest on long-term debt                                                15,876         16,303         32,248         32,793
  Interest on Seabrook obligation bonds owned by the company                (1,691)             -         (3,382)             -
  Other interest (Note G)                                                      852            693          1,618          1,278
  Allowance for borrowed funds used during construction                       (353)          (352)          (839)          (744)
                                                                      -------------  -------------   ------------   ------------
                                                                            14,684         16,644         29,645         33,327
  Amortization of debt expense and redemption premiums                         648            631          1,326          1,310
                                                                      -------------  -------------   ------------   ------------
       Net Interest Charges                                                 15,332         17,275         30,971         34,637
                                                                      -------------  -------------   ------------   ------------

MINORITY INTEREST IN PREFERRED SECURITIES                                    1,203          1,203          2,406          2,406
                                                                      -------------  -------------   ------------   ------------

NET INCOME                                                                   8,542          8,883         16,252         20,604
Discount on preferred stock redemptions                                          -         (1,826)           (19)        (1,826)
Dividends on preferred stock                                                    52             96            103            227
                                                                      -------------  -------------   ------------   ------------
INCOME APPLICABLE TO COMMON STOCK                                           $8,490        $10,613        $16,168        $22,203
                                                                      =============  =============   ============   ============

AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                                 14,101         14,101         14,101         14,100

EARNINGS PER SHARE OF COMMON STOCK                                           $0.61          $0.75          $1.15          $1.57

CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK                            $0.72          $0.72          $1.44          $1.44
</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>
                                                             June 30,          December 31,
                                                               1997               1996*
                                                             -------           -----------
                                                           (Unaudited)
<S>                                                           <C>                 <C>
Utility Plant at Original Cost
  In service                                                  $1,852,251          $1,843,952
  Less, accumulated provision for depreciation                   621,602             585,646
                                                          ---------------     ---------------
                                                               1,230,649           1,258,306

Construction work in progress                                     42,575              40,998
Nuclear fuel                                                      28,249              23,010
                                                          ---------------     ---------------
     Net Utility Plant                                         1,301,473           1,322,314
                                                          ---------------     ---------------


Other Property and Investments                                    30,520              26,081
                                                          ---------------     ---------------

Current Assets
  Cash and temporary cash investments                             17,251               6,394
  Accounts receivable
   Customers, less allowance for doubtful
     accounts of $1,800 and $2,300                                56,491              63,722
   Other                                                          22,427              38,367
  Accrued utility revenues                                        28,591              29,139
  Fuel, materials and supplies, at average cost                   21,051              22,010
  Prepayments                                                      4,199               3,608
  Other                                                              202                 110
                                                          ---------------     ---------------
     Total                                                       150,212             163,350
                                                          ---------------     ---------------

Deferred Charges
  Unamortized debt issuance expenses                               6,103               6,580
  Other                                                            2,506               1,485
                                                          ---------------     ---------------
     Total                                                         8,609               8,065
                                                          ---------------     ---------------

Regulatory Assets (future amounts due from customers
                   through the ratemaking process)
  Income taxes due principally to book-tax differences           282,994             289,672
  Connecticut Yankee                                              57,894              64,851
  Deferred return - Seabrook Unit 1                               31,464              37,757
  Unamortized redemption costs                                    25,248              25,063
  Unamortized cancelled nuclear projects                          12,711              13,297
  Uranium enrichment decommissioning cost                          1,313               1,377
  Other                                                            6,894               9,068
                                                          ---------------     ---------------
     Total                                                       418,518             441,085
                                                          ---------------     ---------------

                                                              $1,909,332          $1,960,895
                                                          ===============     ===============
</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>
                                                               June 30,          December 31,
                                                                 1997                1996*
                                                                 ----                ----
                                                             (Unaudited)
<S>                                                            <C>                 <C>
Capitalization (Note B)
  Common stock equity
    Common stock                                                 $284,579            $284,579
    Paid-in capital                                                   772                 772
    Capital stock expense                                          (2,182)             (2,182)
    Retained earnings                                             152,709             156,847
                                                           ---------------     ---------------
                                                                  435,878             440,016
  Preferred stock                                                   4,421               4,461
  Minority interest in preferred securities                        50,000              50,000
  Long-term debt
    Long-term debt                                                721,937             826,527
    Investment in Seabrook obligation bonds                       (66,847)            (66,847)
                                                           ---------------     ---------------
      Net Long-term debt                                          655,090             759,680

          Total                                                 1,145,389           1,254,157
                                                           ---------------     ---------------

Noncurrent Liabilities
  Pensions accrued                                                 50,246              49,205
  Connecticut Yankee contract obligation                           47,106              54,752
  Obligations under capital leases                                 17,027              17,193
  Nuclear decommissioning obligation                               14,521              12,851
  Other                                                             5,171               4,815
                                                           ---------------     ---------------
          Total                                                   134,071             138,816
                                                           ---------------     ---------------

Current Liabilities
  Current portion of long-term debt                               142,135              69,900
  Notes payable                                                    35,641              10,965
  Accounts payable                                                 43,403              68,058
  Dividends payable                                                10,204              10,205
  Taxes accrued                                                     2,404                 503
  Interest accrued                                                 22,972              13,835
  Obligations under capital leases                                    327                 315
  Other accrued liabilities                                        32,556              36,091
                                                           ---------------     ---------------
          Total                                                   289,642             209,872
                                                           ---------------     ---------------

Customers' Advances for Construction                                1,863               1,888
                                                           ---------------     ---------------

Regulatory Liabilities (future amounts owed to customers
                        through the ratemaking process)
  Accumulated deferred investment tax credits                      16,766              17,147
  Other                                                             2,040               1,811
                                                           ---------------     ---------------
          Total                                                    18,806              18,958
                                                           ---------------     ---------------

Deferred Income Taxes  (future tax liabilities owed               319,561             337,204
                        to taxing authorities)
Commitments and Contingencies (Note L)
                                                           ---------------     ---------------
                                                               $1,909,332          $1,960,895
                                                           ===============     ===============

* Derived from audited financial statements
</TABLE>

                    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           Six  Months Ended
                                                                             June 30,                    June 30,
                                                                       1997           1996          1997           1996
                                                                       ----           ----          ----           ----
<S>                                                                   <C>          <C>            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                           $8,542       $8,883        $16,252       $20,604
                                                                  ------------   ----------   ------------  ------------
  Adjustments  to  reconcile  net  income  to net  cash  provided
    by  operating activities:
     Depreciation and amortization                                     24,701       17,469         43,055        34,819
     Deferred income taxes                                             (7,737)      (5,421)       (10,965)       (9,148)
     Deferred investment tax credits - net                               (191)        (191)          (381)         (381)
     Amortization of nuclear fuel                                       1,309        1,586          2,877         2,486
     Allowance for funds used during construction                        (491)        (552)        (1,181)       (1,126)
     Amortization of deferred return                                    3,146        3,146          6,293         6,293
     Early retirement costs accrued                                         -          860              -         8,087
     Changes in:
             Accounts receivable - net                                 10,494       (6,346)        23,171        (4,042)
             Fuel, materials and supplies                               1,034       (1,737)           959        (1,304)
             Prepayments                                               (2,623)       3,231            591        (1,285)
             Accounts payable                                          (5,512)       8,288        (24,655)       (9,113)
             Interest accrued                                           6,743        8,240          9,137         9,962
             Taxes accrued                                             (8,628)      (7,192)         1,901         5,231
             Other assets and liabilities                              (4,258)       2,104         (3,516)       (5,875)
                                                                  ------------   ----------   ------------  ------------
     Total Adjustments                                                 17,987       23,485         47,286        34,604
                                                                  ------------   ----------   ------------  ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                              26,529       32,368         63,538        55,208
                                                                  ------------   ----------   ------------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Common stock                                                             -           40              -            40
   Long-term debt                                                           -        7,500              -         7,500
   Notes payable                                                      (18,948)      15,000         24,676        35,000
   Securities redeemed and retired:
     Preferred stock                                                        -       (6,045)           (40)       (6,045)
     Long-term debt                                                         -            -        (32,585)      (10,800)
   Discount on preferred stock redemption                                   -        1,826             19         1,826
   Lease obligations                                                      (78)         (72)          (154)         (142)
   Dividends
     Preferred stock                                                      (52)        (175)          (104)         (306)
     Common stock                                                     (10,153)     (10,152)       (20,306)      (20,093)
                                                                  ------------   ----------   ------------  ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                   (29,231)       7,922        (28,494)        6,980
                                                                  ------------   ----------   ------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Plant expenditures, including nuclear fuel                         (9,735)     (10,380)       (24,187)      (21,534)
                                                                  ------------   ----------   ------------  ------------
NET CASH USED IN INVESTING ACTIVITIES                                  (9,735)     (10,380)       (24,187)      (21,534)
                                                                  ------------   ----------   ------------  ------------

CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD                                             (12,437)      29,910         10,857        40,654
BALANCE AT BEGINNING OF PERIOD                                         29,688       15,814          6,394         5,070
                                                                  ------------   ----------   ------------  ------------
BALANCE AT END OF PERIOD                                              $17,251      $45,724        $17,251       $45,724
                                                                  ============   ==========   ============  ============

CASH PAID DURING THE PERIOD FOR:
   Interest (net of amount capitalized)                                $9,754       $8,582        $20,759       $23,583
                                                                  ============   ==========   ============  ============
   Income taxes                                                       $14,073      $22,450        $17,773       $26,625
                                                                  ============   ==========   ============  ============
</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,  1996.  Such notes are  supplemented  as
follows:

(A)  STATEMENT OF ACCOUNTING POLICIES

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)

     The weighted  average  AFUDC rates  applied in the first six months of 1997
and 1996 were 8.0% and 8.5%, respectively, on a before-tax basis.

CASH AND CASH EQUIVALENTS

     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 equivalents.

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 $1,285,000 and $1,065,000 in the first six
months of 1997 and 1996, respectively,  into the decommissioning trust funds for
Seabrook Unit 1 and Millstone Unit 3. At June 30, 1997, the Company's  shares of
the trust fund balances,  which included accumulated earnings on the funds, were
$10.3  million  and $4.3  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.

     At June 30, 1997, the Company had entered into swap  agreements for 890,000
barrels of fuel oil,  for the period  July 1 through  December  31,  1997,  at a
weighted  average price of $15.71 per barrel.  The Company also has call options
for 299,997  barrels of fuel oil at $19.25 per barrel for the  remainder of 1997
and call options for 240,000 barrels of fuel oil at a weighted  average price of
$18.29 per barrel for the first quarter of 1998.



                                     - 7 -
<PAGE>


                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NEW ACCOUNTING STANDARDS

     In February 1997, the Financial  Accounting Standards Board issued SFAS No.
128,  "Earnings  per Share".  This  statement,  which is effective for financial
statements issued for periods ending after December 15, 1997,  including interim
periods,  establishes simplified standards for computing and presenting earnings
per share (EPS).  It requires dual  presentation of basic and diluted EPS on the
face of the income  statement for entities with complex  capital  structures and
disclosure  of the  calculation  of  each  EPS  amount.  The  Company  does  not
anticipate  that  adoption of the  standard  will have a  significant  impact on
reported EPS.

(B)  CAPITALIZATION

     (A) COMMON STOCK

     The number of shares  outstanding  of the Company's  common  stock,  no par
value, at June 30, 1997 was 14,101,291.

     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  17,799 shares
of stock at an exercise  price of $30 per share,  188,200  shares of stock at an
exercise price of $30.75 per share,  600 shares of stock at an exercise price of
$31.1875 per share,  4,000  shares of stock at an exercise  price of $35.625 per
share,  34,332 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 June 30, 1997.

     In October 1995, the Financial  Accounting  Standards Board issued SFAS No.
123,  "Accounting for Stock-Based  Compensation".  This statement,  which became
effective beginning in calendar year 1996,  established financial accounting and
reporting standards for stock-based  employee  compensation plans, such as stock
purchase plans, stock options,  restricted stock, and stock appreciation rights.
The statement  defines the methods of determining  the fair value of stock-based
compensation  and  requires the  recognition  of  compensation  expense for book
purposes.  The  statement  allows  entities to continue to measure  compensation
expense  in  accordance  with the prior  authoritative  literature,  APB No. 25,
"Accounting  for Stock Issued to  Employees",  but  requires  that pro forma net
income and  earnings  per share be  disclosed  for each year for which an income
statement  is  presented  as if SFAS No. 123 had been  applied.  The  accounting
requirements  of this  statement  are effective  for  transactions  entered into
beginning  January 1, 1996.  However,  pro forma  disclosures  must  include the
effects of all awards  granted after  January 1, 1995. As of June 30, 1997,  the
Company  had no  compensation  plan to which this  statement  would  apply.  The
Company has not elected to adopt the expense recognition  provisions of SFAS No.
123.

     The Company has entered into an arrangement  under which it will loan up to
$15 million to The United  Illuminating  Company  Employee Stock  Ownership Plan
("ESOP").  The trustee for the ESOP will use 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 July 31, 1997,  197,400
shares had been purchased by the ESOP.


                                     - 8 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     (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 $94.5
million were free from such limitations at June 30, 1997.

     (C) PREFERRED STOCK

     On  February  3, 1997,  the  Company  purchased  at a discount  on the open
market, and canceled, 403 shares of its $100 par value 4.35%, Series A preferred
stock.  The shares,  having a par value of $40,300,  were purchased for $21,271,
creating a net gain of $19,029.

     (D) LONG-TERM DEBT

     On December 30, 1996,  the Company  transferred  $51.3 million to a trustee
under an escrow  agreement.  The funds,  which were invested in Treasury  Notes,
were used to pay $50  million  principal  amount  of 7% Notes  that  matured  on
January 15, 1997 plus accrued interest.

     On February 15, 1997, the Company repaid $10.8 million  principal amount of
maturing 9.44% First  Mortgage  Bonds,  Series B, and redeemed,  at a premium of
$185,328,  the remaining  $21.6 million  outstanding  principal  amount of 9.44%
First  Mortgage  Bonds,  Series B,  issued by  Bridgeport  Electric  Company,  a
wholly-owned subsidiary of the Company that was merged with and into the Company
in September 1994.

     On July 30,  1997,  the Company  borrowed  $98.5  million from the Business
Finance Authority of the State of New Hampshire (BFA), representing the proceeds
from the issuance by the BFA of $98.5  million  principal  amount of  tax-exempt
Pollution Control  Refunding  Revenue Bonds (PCRRBs).  The Company is obligated,
under its borrowing  agreement with the BFA, to pay to a trustee for the PCRRBs'
bondholders  such  amounts  as will pay,  when  due,  the  principal  of and the
premium, if any, and interest on the PCRRBs. The PCRRBs will mature in 2027, and
their interest rate can be adjusted  periodically to reflect  prevailing  market
conditions.  The PCRRBs were issued at an initial interest rate of 3.75%,  which
is being  adjusted  weekly.  The  Company  will use the  proceeds  of this $98.5
million  borrowing  to cause the  redemption  and  repayment of $25 million of 9
3/8%, 1987 Series A, Pollution Control Revenue Bonds,  $43.5 million of 10 3/4%,
1987 Series B, Pollution  Control  Revenue Bonds,  and $30 million of Adjustable
Rate,  1990 Series A, Solid Waste  Disposal  Revenue  Bonds,  three  outstanding
series of tax-exempt bonds on which the Company also has a payment obligation to
a trustee  for the  bondholders.  Expenses  associated  with  this  transaction,
including   redemption  premiums  totaling  $2,055,000  and  other  expenses  of
approximately $1,500,000, are being borne by the Company.



                                     - 9 -
<PAGE>
<TABLE>
                                        THE UNITED ILLUMINATING COMPANY

                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


<CAPTION>
                                                              Three Months Ended              Six Months Ended
(E) INCOME  TAXES                                                  June 30,                        June 30,
                                                              1997          1996             1997          1996
                                                              ----          ----             ----          ----
Income tax expense consists of:                                      (000's)                       (000's)

<S>                                                          <C>           <C>             <C>           <C>
Income tax provisions:
  Current
             Federal                                          $5,381       $12,577         $15,447       $24,045
             State                                             1,737         4,147           4,987         7,939
                                                         ------------  ------------    ------------  ------------
                Total current                                  7,118        16,724          20,434        31,984
                                                         ------------  ------------    ------------  ------------
  Deferred
             Federal                                          (5,945)       (3,494)         (7,999)       (5,680)
             State                                            (1,792)       (1,927)         (2,966)       (3,468)
                                                         ------------  ------------    ------------  ------------
                Total deferred                                (7,737)       (5,421)        (10,965)       (9,148)
                                                         ------------  ------------    ------------  ------------

  Investment tax credits                                        (191)         (191)           (381)         (381)
                                                         ------------  ------------    ------------  ------------

     Total income tax expense                                  ($810)      $11,112          $9,088       $22,455
                                                         ============  ============    ============  ============

Income tax components charged as follows:
  Operating expenses                                            $712       $12,661         $12,027       $25,273
  Other income and deductions - net                           (1,522)       (1,549)         (2,939)       (2,818)
                                                         ------------  ------------    ------------  ------------

     Total income tax expense                                  ($810)      $11,112          $9,088       $22,455
                                                         ============  ============    ============  ============


The following table details the components of the
 deferred income taxes:
     Fossil fuel decommissioning reserve                     ($7,002)            -         ($7,002)            -
     Seabrook sale/leaseback transaction                      (2,586)       (2,622)         (5,172)       (5,244)
     Conservation and load management                         (3,161)         (353)         (4,091)         (490)
     Accelerated depreciation                                  1,460         1,374           2,919         2,748
     Tax depreciation on unrecoverable plant investment        1,231         1,244           2,463         2,488
     Unit overhaul and replacement power costs                 2,589          (575)          1,386        (2,010)
     Deferred fossil fuel costs                                    -           153            (686)          665
     Postretirement benefits                                    (148)         (729)           (292)         (797)
     Pension benefits                                             52        (1,785)            109        (4,004)
     Other - net                                                (172)       (2,128)           (599)       (2,504)
                                                         ------------  ------------    ------------  ------------

Deferred income taxes - net                                  ($7,737)      ($5,421)       ($10,965)      ($9,148)
                                                         ============  ============    ============  ============
</TABLE>


                                     - 10 -
<PAGE>
                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(F)  SHORT-TERM CREDIT ARRANGEMENTS

     The  Company has a revolving  credit  agreement  with a group of banks that
currently  extends to December 10, 1997. 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 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 June 30,
1997,  the Company had $30 million of short-term  borrowings  outstanding  under
this facility.



                                     - 11 -
<PAGE>

<TABLE>
                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(G)  SUPPLEMENTARY INFORMATION


<CAPTION>
                                                                   Three Months Ended                Six Months Ended
                                                                        June 30,                         June 30,
                                                                  1997            1996             1997            1996
                                                                  ----            ----             ----            ----
                                                                         (000's)                          (000's)

<S>                                                             <C>             <C>              <C>             <C>
Operating Revenues

    Retail                                                      $146,044        $154,965         $296,525        $313,523
    Wholesale - capacity                                           2,525           1,712            4,782           3,502
              - energy                                            14,195          11,462           41,273          21,258
    Other                                                          1,010             651            1,519           1,367
                                                           --------------  --------------   --------------  --------------
         Total Operating Revenues                               $163,774        $168,790         $344,099        $339,650
                                                           ==============  ==============   ==============  ==============

Sales by Class(MWH's)

    Retail
    Residential                                                  412,503         418,063          910,774         942,084
    Commercial                                                   543,243         551,206        1,083,701       1,110,215
    Industrial                                                   292,456         283,523          561,590         554,475
    Other                                                         11,971          11,925           24,248          23,966
                                                           --------------  --------------   --------------  --------------
                                                               1,260,173       1,264,717        2,580,313       2,630,740
    Wholesale                                                    565,903         482,762        1,496,138         849,501
                                                           --------------  --------------   --------------  --------------
         Total Sales by Class                                  1,826,076       1,747,479        4,076,451       3,480,241
                                                           ==============  ==============   ==============  ==============

Other Taxes

    Charged to:
    Operating:
       State gross earnings                                       $5,496          $6,365          $11,228         $12,899
       Local real estate and personal property                     6,154           6,294           12,291          12,531
       Payroll taxes                                               1,447           1,236            3,543           3,150
                                                           --------------  --------------   --------------  --------------
                                                                  13,097          13,895           27,062          28,580
    Nonoperating and other accounts                                  139             264              232             396
                                                           --------------  --------------   --------------  --------------
         Total Other Taxes                                       $13,236         $14,159          $27,294         $28,976
                                                           ==============  ==============   ==============  ==============

Other Income and (Deductions) - net

    Interest and dividend income                                    $306            $337             $926            $641
    Equity earnings from Connecticut Yankee                          242             403              688             749
    Loss from subsidiary companies                                  (362)           (864)            (895)         (1,555)
    Miscellaneous other income and (deductions) - net                539            (135)             787            (301)
                                                           --------------  --------------   --------------  --------------
         Total Other Income and (Deductions) - net                  $725           ($259)          $1,506           ($466)
                                                           ==============  ==============   ==============  ==============

Other Interest Charges

    Notes Payable                                                   $623            $387           $1,200            $715
    Other                                                            229             306              418             563
                                                           --------------  --------------   --------------  --------------
         Total Other Interest Charges                               $852            $693           $1,618          $1,278
                                                           ==============  ==============   ==============  ==============
</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 in 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 August 1998.  At June 30, 1997,  approximately  $20.9  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 approximately $196.0 million, excluding AFUDC, for 1997 through 2001.

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.  In addition,  two of the
nuclear  insurance  pools  that  provide  portions  of 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 $7.5 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  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 preliminary  estimate of the amount of
future payments for the closing,  decommissioning  and recovery of the remaining
investment in the Connecticut Yankee Unit is approximately  $763 million.  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,  less return of investment
(approximately  $10  million)  and  return  on  investment  (approximately  $7.6
million) at June 30, 1997, is approximately $47.1 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 II of this facility,  in
which UI has a 5.45%  participating  share,  increased the 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. The Company is obligated to furnish
a guarantee for its  participating  share of the debt financing for the Phase II
facility.  As of June 30, 1997, the Company's  guarantee liability for this debt
was approximately $7.8 million.

               VOLUNTARY EARLY RETIREMENT AND SEPARATION PROGRAMS

     In July 1996, the Company offered a Voluntary  Early  Retirement Plan and a
Voluntary  Separation  Plan to virtually  all of its  employees.  A total of 163
employees  accepted  one or the other of these  plans.  In the third  quarter of
1996,  the  Company  recognized  a charge to  earnings  of $14.9  million  ($8.7
million,  after-tax) to reflect the cost of these plans. The employees accepting
the offer will terminate employment on or before December 30, 1997.

                                 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



                                     - 14 -
<PAGE>

                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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.  The Company is vigorously  contesting 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.  It is
currently  anticipated that all of the pending cases for all of the tax years in
dispute will now be scheduled  for trial in the Superior  Court  relative to the
Company's  claim that the tax  assessor's  increases  in personal  property  tax
assessments  for the three  earliest  years were  unlawful for other reasons and
relative to the vigorously  contested issue, for all of the tax years, as to the
reasonableness  of the tax assessor's  valuation  method,  both as to amount and
methodology.  It is the present opinion of the Company that the ultimate outcome
of this dispute will not have a significant  impact on the  long-term  financial
position of the Company.

             SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS

     The  Company  has  estimated  that the total  cost of  decontaminating  and
demolishing its decommissioned and demolished Steel Point Station and completing
requisite  environmental  remediation  of the site will be  approximately  $11.3
million,  of which  approximately  $7.8 million had been incurred as of June 30,
1997, and that the value of the property  following  remediation will not exceed
$6.0 million.  As a result of a 1992  Connecticut  Department of Public  Utility
Control  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.

(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  $451  million  (in  1997  dollars)  as  the
decommissioning  cost estimate for Seabrook Unit 1, of which the Company's share
would be approximately $79 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 half of 1997 was $1,042,000. UI's share of the fund at June 30,
1997 was approximately $10.3 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 $463 million (in 1997  dollars),  of which the
Company's share would be  approximately  $17 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 payments made
during the first half of 1997 was  $243,000.  UI's share of the fund at June 30,
1997 was  approximately  $4.3 million.  The  decommissioning  trust fund for the
Connecticut  Yankee Unit is also  managed by NU. For the


                                     - 15 -
<PAGE>
                         THE UNITED ILLUMINATING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Company's 9.5% equity ownership in Connecticut Yankee,  decommissioning costs of
$944,000 were funded by UI during the first half of 1997,  and UI's share of the
fund at June 30,  1997 was  $22.3  million.  The  current  decommissioning  cost
estimate  for the  Connecticut  Yankee  Unit,  assuming  the prompt  removal and
dismantling of the unit commencing in 1997, is $436 million, of which UI's share
would be $41 million.


                                     - 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.

     A major factor  affecting  the  Company's  earnings  prospects  will be the
success of the Company's  efforts to implement the regulatory  framework ordered
by the DPUC at the end of 1996.  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 1997-2001.  The DPUC did not change the
retail base rates charged to customers.  Its order increased amortization of the
Company's conservation and load management program investments during 1997-1998,
accelerated  the recovery of  unspecified  regulatory  assets during  1999-2001,
reduced the level of conservation adjustment mechanism revenues in retail rates,
provided a reduction in customer  bills  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 common equity
was reduced from 12.4% to 11.5%.  Earnings above 11.5%, on an annual basis,  are
to be utilized  one-third  for customer bill  reductions,  one-third to increase
amortization of regulatory assets, and one-third retained as earnings.  The DPUC
did not order the  accelerated  depreciation  of the  Company's  Seabrook Unit 1
plant investment costs and the establishment of a  performance-based  regulation
mechanism measured by customer  satisfaction  surveys and reliability of service
indices,  which the  Company  had  proposed.  As a result of the  DPUC's  order,
customer  bills are expected to be reduced on average by 3% in 1997-1999,  4% in
the year 2000,  and 5% in the year 2001 (all compared to 1996).  Also,  earnings
from  utility  operations  will be  reduced  from the  levels  requested  by the
Company,  such that it appears unlikely that the Company will be able to achieve
its 4% growth goal going forward.

     Federal  legislation  has fostered  competition  in the wholesale  electric
power market, as has a FERC rulemaking  requiring  electric utilities to furnish
transmission  service  to all  buyers and  sellers  in the  marketplace.  In its
rulemaking, the FERC stated that state regulatory commissions should address the
issue of recovery by electric utilities of the costs of existing facilities that
would be stranded by retail access. The legislatures and regulatory  commissions
in several states have considered or are considering  "retail access".  This, in
general terms,  means the transmission by an electric utility of energy produced
by another entity over the utility's  transmission and distribution  system to a
retail  customer  in the  utility's  own  service  territory.  A  retail  access
requirement  would have the effect of  permitting  retail  customers to purchase
electric  capacity  and  energy,  at the  election of such  customers,  from the
electric  utility  in whose  service  area  they are  located  or from any other
electric  utility,  independent  power producer or power marketer.  In 1995, the
Connecticut  Legislature  established a task force to review these issues and to
make recommendations on electric industry restructuring within Connecticut.  The
task force  concluded its work in December 1996, and issued a report and related
recommendations.  In its 1997 session, the Connecticut  legislature drafted, but
failed to bring to a vote, comprehensive  legislation that would have introduced
retail access in Connecticut over a period of several years,  with provision for
the recovery of stranded costs.

     Although the Company is unable to predict the future effects of competitive
forces in the electric utility industry, competition could result in a change in
the regulatory structure of the industry, and costs that have traditionally been



                                     - 17 -
<PAGE>

recoverable through the ratemaking process may not be recoverable in the future.
This  effect  could have a material  impact on the  financial  condition  and/or
results of operations of the Company.

     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 regulated utilities, 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 balance sheets 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  1997-2001 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>
                                              1997         1998        1999         2000        2001         Total
                                              ----         ----        ----         ----        ----         -----
                                                                         (000's)
<S>                                         <C>         <C>         <C>          <C>         <C>           <C>    
Production                                  $9,498      $14,153     $24,332      $10,752     $17,741       $76,476
Distribution                                13,060       12,588      13,041       13,298      13,059        65,046
Transmission                                   626        1,118       2,425        3,752       1,300         9,221
Other                                        6,939        3,219       1,196          997      13,301           949
                                            ------       ------      ------       ------      ------       -------
Subtotal                                    30,123       31,078      40,995       28,799      33,050       164,044

Nuclear Fuel                                 7,612       11,208         965       11,924         221        31,930
                                            ------       ------      ------       ------      ------       -------
 TOTAL EXPENDITURES                        $37,735      $42,286     $41,960      $40,723     $33,270      $195,974
                                            ======       ======      ======       ======      ======

Rate Base and Other Selected Data
AFUDC (Pre-tax)                              2,051        2,228       1,624        1,886       1,161
Depreciation
  Book Plant                                53,239       56,497      57,722       57,959      57,862
  Conservation                              10,223       10,223       8,906        6,312       4,332
  Decommissioning                            2,235        2,328       2,435        2,547       2,660
Additional Required
  Amortization (pre-tax) (1)
    Conservation Assets                      6,400       13,000      (3,517)      (6,312)     (4,332)
    Other Regulatory Assets                      0            0      20,300       49,500      54,500
Amortization of Deferred
  Return on Seabrook Unit 1
  Phase-In (after tax)                      12,586       12,586      12,586            0           0

Estimated Rate Base
  (end of period)                        1,183,674    1,132,169   1,067,561    1,026,295     958,657
</TABLE>

         (1)  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 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.




                                     - 19 -
<PAGE>



                         LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 1997,  the Company had $17.3 million of cash and temporary cash
investments, an increase of $10.9 million from the balance at December 31, 1996.
The  components  of  this  increase,  which  are  detailed  in the  Consolidated
Statement of Cash Flows, are summarized as follows:

                                                                    (Millions)
                                                                     --------

       Balance, December 31, 1996                                       $ 6.4
                                                                         ----

       Net cash provided by operating activities                         63.6

       Net cash provided by (used in) financing activities:
       -   Financing activities, excluding dividend payments             (8.1)
       -   Dividend payments                                            (20.4)

       Cash invested in plant, including nuclear fuel                   (24.2)
                                                                         ----

             Net increase                                                10.9
                                                                         ----

       Balance,  June 30, 1997                                          $17.3
                                                                         ====


     The Company's capital requirements are presently projected as follows:

<TABLE>
<CAPTION>
                                                                   1997       1998      1999       2000       2001
                                                                   ----       ----      ----       ----       ----
                                                                                     (millions)
<S>                                                               <C>        <C>      <C>        <C>         <C>   
Cash on Hand - Beginning of Year                                  $ 6.4      $ 24.2   $  -       $  -        $ -
Internally Generated Funds less Dividends                          87.9       111.0    110.9      113.5      105.9
                                                                   ----       -----    -----      -----      -----
         Subtotal                                                  94.3       135.2    110.9      113.5      105.9

Less:
Capital Expenditures                                               37.7        42.3     41.9       40.7       33.3
                                                                   ----       -----    -----      -----      -----

Cash Available to pay Debt Maturities and Redemptions              56.6        92.9     69.0       72.8       72.6

Less:
Maturities and Mandatory Redemptions                               10.8       104.6    105.0      155.5       81.0
Optional Redemptions                                               21.6         -         -          -          -
                                                                   ----       -----    -----      -----       ----

External Financing Requirements                                  $(24.2)     $ 11.3   $ 36.0     $ 82.7       $8.4
                                                                  =====       =====    =====      =====       ====
</TABLE>

Note:  Internally  Generated  Funds less  Dividends,  Capital  Expenditures  and
       External  Financing  Requirements are estimates based on current earnings
       and cash flow  projections and are subject to change due to future events
       and  conditions  that may be  substantially  different from those used in
       developing the projections.

     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  


                                     - 20 -
<PAGE>

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 10, 1997. 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 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 June 30,
1997,  the Company had $30 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  three  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
wholly-owned 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 62%
partner in the energy  center for a city hall and office  tower  complex.  A URI
subsidiary, Precision Power, Inc., provides power-related equipment and services
to the owners of commercial buildings and industrial facilities.

     The Board of Directors of the Company has  authorized  the  investment of a
maximum of $27  million,  in the  aggregate,  of the  Company's  assets into its
unregulated subsidiary ventures,  and, at June 30, 1997, $27 million had been so
invested.

                              RESULTS OF OPERATIONS

SECOND QUARTER OF 1997 VS. SECOND QUARTER OF 1996
-------------------------------------------------

     Earnings  for the  second  quarter of 1997 were $8.5  million,  or $.61 per
share,  down $2.1 million,  or $.14 per share,  from the second quarter of 1996.
Earnings  from   operations,   which  exclude  one-time  items  and  accelerated
amortization of costs attributable to one-time items, decreased by $4.2 million,
or $.30 per share,  in the second quarter of 1997 compared to the second quarter
of 1996.  The one-time item recorded in the second quarter of 1997, is an income
tax expense  reduction of $6.7 million,  or $.48 per share, that makes provision
for  the   cumulative   deferred  tax  benefits   associated   with  the  future
decommissioning of fossil fuel generating plants.

     In an order by the Connecticut  Department of Public Utility Control (DPUC)
issued on December  31,  1996,  the Company was  instructed  to  accelerate  the
amortization  of regulatory  assets by as much as $4.1 million  (after-tax),  or
$.29 per share, in 1997, provided that the return on utility common stock equity
exceeds 10.5 percent for the year. The Company currently projects that, with the
one-time tax benefit mentioned above, the full 1997  amortization  amount can be
charged and the 1997 return on utility  common  stock equity will still equal or
exceed  10.5  percent.  Therefore,  the full  amount  was  charged in the second
quarter of 1997.

     Retail  operating  revenues  decreased  by about $8.9 million in the second
quarter of 1997 compared to the second quarter of 1996:



                                     - 21 -
<PAGE>

  .   A retail  kilowatt-hour sales decrease of 0.4% from the prior year reduced
     retail revenues by $0.9 million and sales margin (revenue less fuel expense
     and revenue-based  taxes) by $0.8 million. The kilowatt-hour sales decrease
     was due to a mild 1997 second quarter compared to a warmer than normal 1996
     second  quarter  partly offset by one less holiday in the second quarter of
     1997.  There was no discernible  "real" (i.e. not  attributable to abnormal
     weather,  or holidays)  kilowatt-hour sales change in the second quarter of
     1997 compared to the second quarter of 1996.

  .   Reductions in customer  bills, as agreed to by the Company and the DPUC in
     December 1996,  decreased retail revenues by about $6.8 million,  including
     suspension  of the fuel  adjustment  clause  (FAC)  mechanism  that reduced
     revenues  by  $2.2  million.   This  was  consistent   with  the  Company's
     expectations,  as  previously  reported in the Company's  Quarterly  Report
     (Form 10-Q) for the fiscal quarter ended March 31, 1997.  Other  reductions
     in customer bills, due to rate mix and contract  pricing,  amounted to $1.2
     million.

     Wholesale  "capacity" revenues increased $0.8 million in the second quarter
of 1997 compared to the second  quarter of 1996.  Wholesale  "energy"  revenues,
which increased during the second quarter of 1997 compared to the second quarter
of 1996 as a result of nuclear  generating  unit  outages in the  region,  are a
direct offset to wholesale energy expense and do not contribute to sales margin.

     Retail fuel and energy  expenses  increased  by $2.5  million in the second
quarter of 1997 compared to the second quarter of 1996. These expenses increased
by $3.7  million due to the need to purchase  more  expensive  energy to replace
generation by the  Connecticut  Yankee  nuclear  generating  unit,  which ran at
nearly full capacity in the second quarter of 1996,  and an unplanned  eight-day
extension of a Seabrook nuclear  generating unit refueling outage that increased
the  Company's  cost by about $0.7  million.  The Seabrook  unit was returned to
service on June 28, 1997. For more on the status of the  Connecticut  Yankee and
Millstone Unit 3 nuclear  generating  units,  see the LOOKING  FORWARD  section.
Retail fuel and energy expenses decreased in the second quarter of 1997 compared
to the second  quarter of 1996 by about $1.2  million,  due primarily to reduced
fossil fuel prices.  Under current DPUC regulations,  these reductions were used
to  mitigate  the  adverse  impact  on  revenues  of the  suspension  of the FAC
mechanism.

     Operating  expenses for  operations,  maintenance  and  purchased  capacity
charges  increased by $0.6 million in the second quarter of 1997 compared to the
second quarter of 1996:

  .   Purchased capacity expense decreased $0.4 million due to lower expenses at
     the retired Connecticut Yankee nuclear generating unit.

  .   Operation  and  maintenance  expense  increased by $1.0  million.  General
     increases at the Seabrook and Millstone 3 nuclear  generating  units,  $1.0
     million and $1.5  million  respectively,  were partly  offset by about $0.7
     million in savings from a reduction in the number of Company employees. The
     increase  at  Millstone  Unit 3 was,  additionally,  partly  offset  by the
     reversal of a portion of a 1996 provision in "Other income (deductions)".

     Depreciation  expense,  exclusive of any  accelerated  amortization of CL&M
costs,  increased by $0.9 million in the second  quarter of 1997 compared to the
second  quarter of 1996.  Income  taxes,  exclusive  of the  effects of one-time
items, changed based on changes in taxable income and tax rates.

     Other net income increased  slightly in the second quarter of 1997 compared
to the second quarter of 1996, due to a small improvement in earnings (reduction
in losses) from  unregulated  subsidiaries.  The Company's  largest  unregulated
subsidiary,  American  Payment Systems,  lost about $185,000  (after-tax) in the
second  quarter of 1997, an  improvement  of $104,000  over second  quarter 1996
losses of about $289,000,  and an improvement  over first quarter 1997 losses of
about $241,000.



                                     - 22 -
<PAGE>

     Interest charges continued their downward trend, decreasing by $1.9 million
in the second quarter of 1997 compared to the second quarter of 1996 as a result
of the Company's refinancing program and strong cash flow. Also, total preferred
dividends (net-of-tax) decreased slightly in the second quarter of 1997 compared
to the second quarter of 1996 as a result of purchases of preferred stock by the
Company in 1996.


SIX MONTHS OF 1997 VS. SIX MONTHS OF 1996
-----------------------------------------

     Earnings for the first six months of 1997 were $16.2 million,  or $1.15 per
share, down $6.0 million,  or $.42 per share, from the first six months of 1996.
Earnings  from   operations,   which  exclude  one-time  items  and  accelerated
amortization  of  costs  attributable  to  one-time  items,  decreased  by $12.3
million,  or $.88 per  share,  in the first six months of 1997  compared  to the
first six months of 1996.  The one-time item recorded in the first six months of
1997, an income tax expense reduction of $6.7 million,  or $.48 per share, makes
provision for the cumulative  deferred tax benefits  associated  with the future
decommissioning of fossil fuel generating plants. The one-time items recorded in
the first six months of 1996 were: a gain of $1.8 million  (after-tax),  or $.13
per share,  from the  repurchase of preferred  stock at a discount to par value,
charges of $8.1 million ($4.7 million after-tax),  or $.34 per share, reflecting
the  estimated  costs of early  retirements  as part of the  Company's  on-going
organization  review and cost  reduction  program,  and a charge of $1.4 million
($0.8  million  after-tax),  or $.06 per share,  for the  cumulative  loss on an
office space sublease.

     In an order by the Connecticut  Department of Public Utility Control (DPUC)
issued on December  31,  1996,  the Company was  instructed  to  accelerate  the
amortization  of regulatory  assets by as much as $4.1 million  (after-tax),  or
$.29 per share, in 1997, provided that the return on utility common stock equity
exceeds 10.5 percent for the year. The Company currently projects that, with the
one-time tax benefit mentioned above, the full 1997  amortization  amount can be
charged and the 1997 return on utility  common  stock equity will still equal or
exceed  10.5  percent.  Therefore,  the full  amount  was  charged in the second
quarter of 1997.

     Retail operating revenues decreased by about $17.0 million in the first six
months of 1997 compared to the first six months of 1996:

  .   A  retail  kilowatt-hour  sales  decrease  of 1.9%  from  the  prior  year
     decreased  retail  revenues by $6.0 million and sales margin  (revenue less
     fuel expense and  revenue-based  taxes) by $4.8  million.  Sales  decreased
     about 1.2% from milder than normal  weather  during the first six months of
     1997 compared to the more severe than normal weather experienced during the
     first six months of 1996,  and about 0.6% due to the leap year day in 1996.
     There was no discernible  "real" (i.e. not attributable to abnormal weather
     or leap year)  kilowatt-hour  sales  change in the first six months of 1997
     compared to the first six months of 1996.

  .   Reductions in customer  bills, as agreed to by the Company and the DPUC in
     December 1996,  decreased retail revenues by about $8.8 million,  including
     suspension  of the fuel  adjustment  clause  (FAC)  mechanism  that reduced
     revenues  by  $1.3  million.   This  was  consistent   with  the  Company's
     expectations,  as  previously  reported in the Company's  Quarterly  Report
     (Form 10-Q) for the fiscal quarter ended March 31, 1997.  Other  reductions
     in customer bills, due to rate mix and contract  pricing,  decreased retail
     revenues by about $2.2 million.

     Wholesale "capacity" revenues increased slightly in the first six months of
1997  compared  to the first six months of 1996.  Wholesale  "energy"  revenues,
which  increased  during the first six months of 1997  compared to the first six
months of 1996 as a result of nuclear generating unit outages in the region, are
a direct  offset to  wholesale  energy  expense and do not  contribute  to sales
margin.

     Retail fuel and energy expenses  increased by $8.5 million in the first six
months  of 1997  compared  to the  first  six  months  of 1996.  These  expenses
increased by $7.6 million due to the need to purchase more  expensive  energy to
replace  generation by nuclear generating units: by the Connecticut Yankee unit,
which ran at nearly full capacity


                                     - 23 -
<PAGE>

in the first six months of 1996,  by Millstone  Unit 3, which ran at nearly full
capacity in the first quarter of 1996, and from an unplanned eight-day extension
of a Seabrook nuclear  generating unit refueling outage in the second quarter of
1997 that increased the Company's cost by about $0.7 million.  The Seabrook unit
was  returned  to service on June 28,  1997.  Millstone  Unit 3 was taken out of
service  on March 30,  1996 and  Connecticut  Yankee was taken out of service on
July 23, 1996.  For more on the status of the  Connecticut  Yankee and Millstone
Unit 3 units, see the LOOKING FORWARD  section.  Retail fuel and energy expenses
increased  in the first six months of 1997  compared  to the first six months of
1996 by about $2.0 million,  due primarily to higher fossil fuel prices over the
six-month period. Under current DPUC regulations,  these costs are not passed on
to customers through the FAC.

     Operating  expenses for  operations,  maintenance  and  purchased  capacity
charges  increased by $2.2  million in the first six months of 1997  compared to
the first six months of 1996:

  .   Purchased capacity expense was slightly lower.

  .   Operation  and  maintenance  expense  increased by $2.3  million.  General
     increases at the Seabrook and Millstone 3 nuclear  generating  units,  $1.5
     million and $2.5  million  respectively,  were partly  offset by about $1.7
     million in savings from a reduction in the number of Company employees. The
     increase  at  Millstone  Unit 3 was,  additionally,  partly  offset  by the
     reversal of a portion of a 1996 provision in "Other income (deductions)".

    Depreciation  expense,  exclusive of any  accelerated  amortization  of CL&M
costs, increased by $1.7 million in the first six months of 1997 compared to the
first six months of 1996.  Income  taxes,  exclusive  of the effects of one-time
items, changed based on changes in taxable income and tax rates.

     Other net income  increased by $0.9 million in the first six months of 1997
compared to the first six months of 1996 due to a small  improvement in earnings
(reduction  in losses) from  unregulated  subsidiaries.  The  Company's  largest
unregulated   subsidiary,   American  Payment   Systems,   lost  about  $426,000
(after-tax) in the first six months of 1997, an improvement of $103,000 over the
first six months 1996 losses of about $529,000.

     Interest charges  continued their significant  decline,  decreasing by $3.6
million,  or 10 percent,  in the first six months of 1997  compared to the first
six months of 1996 as a result of the Company's  refinancing  program and strong
cash flow. Also, total preferred  dividends  (net-of-tax)  decreased slightly in
the  first  six  months of 1997  compared  to the first six  months of 1996 as a
result of purchases of preferred stock by the Company in 1996.


                                 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.)

     On December 31, 1996, the DPUC issued an order (the Order) that implemented
a 5-year  rate plan that would  reduce  rates and  accelerate  the  recovery  of
certain  "regulatory"  assets  beginning with deferred  conservation  costs. The
Order's schedule of rate reductions and accelerated amortizations was based on a
DPUC pro forma  financial  analysis that  anticipated  the Company would earn an
allowed  return on common  stock  equity  invested in utility rate base of 11.5%
over the  period  1997 to 2001.  The Order  established  a set  formula to share
income  that  produces  a return  above the 11.5%  level:  one-third  applied to
customer  bill  reductions,  one-third  applied  to more rapid  amortization  of
regulatory assets, and one-third retained by shareowners. If the Company were to
achieve an 11.5% return on common stock equity from its utility investment, then
earnings from utility  operations would be in the $3.30-$3.40 range for 1997 and
succeeding years as well.



                                     - 24 -
<PAGE>

     There is no  assurance  that the Company  will  achieve the 11.5% return on
common  stock  equity  from its  utility  investment  allowed by the DPUC in the
Order. Utility income is greatly affected by weather-related  sales, fossil fuel
prices,  nuclear  generating unit availability,  and interest  rates...all items
over which the  Company  has little  control,  although  the Company is actively
engaged in hedging its exposure to fluctuating fuel costs and interest rates. If
the Company's return on utility equity were to fall below 10.5%, it would not be
required to implement any accelerated amortization of regulatory assets.

     As a result of the Order,  it is anticipated  that retail revenues for 1997
will decrease from 1996 levels.  A reduction of about $15 million will be due to
reductions  in  customer  bills  as  agreed  to by the  Company  and the DPUC in
December 1996. (These reductions will be partially offset by about $3 million in
conservation  spending  reductions.  New  conservation  spending  is  no  longer
capitalized,  and changes in conservation  expense,  relative to the assumptions
used by the DPUC in the Order,  will be reflected  in retail  rates  through the
operation of the Conservation Adjustment Mechanism.)

     Also, as part of the Order,  the  operation of the Company's  long-standing
fuel adjustment clause mechanism (FAC) that allowed for recovery in retail rates
of  changes  in fossil  fuel costs was  suspended  within a broad  range of fuel
prices.  Revenues  will decline by about $6 million in 1997 compared to 1996 due
to this suspension of the FAC. While the Company stands to benefit if the prices
that the  Company  pays for its oil  purchases  fall  below  about $15 a barrel,
current  prices are above that level.  Although the Company  cannot  predict the
direction  that  fossil fuel prices will take in 1997 or 1998 and whether it can
mitigate entirely this loss of FAC revenue, it is actively engaged in hedging to
limit the Company's exposure to increases in fossil fuel prices.

     It should be noted that,  although the Order was for the  five-year  period
1997-2001 and the Company agreed that it would begin to implement the multi-year
plan, it did not agree to commit to the five-year period. In addition, the DPUC,
in the Order, acknowledged that the Order could be revisited in the light of any
new  legislation.  The Connecticut  legislature did not pass an electric utility
restructuring  bill in the 1997  legislative  session,  but it is expected  such
legislation will be reintroduced in 1998.

     The Company's revenues are also dependent on the level of retail sales. The
two primary factors that affect retail sales volume are economic  conditions and
weather.  Overall, 1996 weather was milder than normal; however, 1996 also had a
leap year day. These two factors were offsetting in their impact on retail sales
and, therefore,  the actual retail sales for 1996 of 5,340 gigawatt-hours should
be  considered  about  "normal"  for  that  year.  On this  basis,  the  Company
experienced  about 1% of "real" sales growth in 1996 (i.e.  exclusive of weather
and leap year factors)  over  "normal" 1995 sales.  A similar level of growth in
1997  from all  customer  groups  would  add about $6  million  to sales  margin
(revenue less fuel expense and revenue-based taxes) and would offset the revenue
loss  expected  from the ramping  down and  eventual  shutdown of Allied  Signal
Company's  manufacturing  facilities (approx. .8 % of 1996 sales).  Year-to-date
net retail sales are less than those in 1996, due principally to weather-related
factors. It cannot be assumed that 1997 retail sales will match those of 1996.

     No significant  change in wholesale  capacity sales revenue was anticipated
for 1997. However,  price has strengthened in short-term markets due to regional
outages of nuclear  generating  plants, and the Company has increased revenue by
$1.3  million  from such sales in the first half of 1997.  The strength of these
markets for the remainder of the year and into 1998 will depend on the timing of
the return to service of the  nuclear  units at  Millstone  Station  and how the
capacity and energy  markets of the new New England  Power Pool  bidding  system
perform.

     The Company has dealt with the  potential  loss of customers as a result of
self-generation,  relocation or  discontinuation  of operations by  successfully
negotiating 55 multi-year contracts with major customers,  including its largest
customer,  Yale University,  which is constructing a cogeneration unit that will
produce  approximately  one  half of this  customer's  electricity  requirements
(about  1% of total  1997  retail  sales)  commencing  sometime  in early  1998.
Additional  multi-year  customer  contracts  may be signed in the future.  While
providing  cost  reduction  and price  stability  for  customers and helping the
Company  maintain  its  customer  base for the long term,  these  contracts


                                     - 25 -
<PAGE>

are expected to cause  reductions  in retail  revenue that have  averaged  $2-$3
million per year, incrementally, in the recent past.

     The Company  expects that  generating  output from its ownership  shares in
nuclear  generating  units  (Seabrook Unit 1, Millstone Unit 3, and  Connecticut
Yankee)  will be  significantly  less in 1997  than  in  1996.  Seabrook  Unit 1
operated  at a nearly  97%  capacity  factor in 1996,  well  above  the  assumed
"normal" 90% level between  refueling  outages.  A more normal level of Seabrook
Unit 1 operation in 1997, and the downtime for a 50-day  refueling outage in the
second  quarter of 1997,  will cause the Company to purchase or generate  energy
using higher cost fuels,  leading to about a $3 million increase in fuel expense
for the year,  net of  replacement  fuel  provision  accrued  between  scheduled
refueling outages.  The costs of the refueling outage will also contribute to an
expected $4 million increase in operations and maintenance  expense for Seabrook
in 1997 over 1996  levels,  which is less than the  Company's  total cost of the
outage  because the  Company  accrues an on-going  provision  for routine  plant
outage costs.

     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.  Relative to 1996, the loss of low cost energy
from this unit for all of 1997  should add about $1.5  million to the  Company's
fuel  expense.  It is not  likely  that  Unit 3 will  return to  service  before
year-end 1997, but when it does commence generating,  the Company's sales margin
will improve from a fuel expense  decline of about  $500,000,  partly  offset by
replacement  fuel  provision  of about  $100,000,  for  every  month  of  normal
operation.  The increased  costs of correcting  deficiencies  resulting from the
NRC's inquiry are now estimated to add $3.5 million to the Company's expenses in
1997 for its 3.7% ownership share, according to Northeast Utilities,  the Unit's
majority and operating owner. This amount is in addition to an already escalated
expense level for 1996. 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.  On
August 7, 1997, the Company and eight of the other nine minority,  non-operating
joint  owners of  Millstone  Unit 3 filed a demand for  arbitration  against The
Connecticut Light and Power Company and Western Massachusetts  Electric Company,
the  subsidiaries  of Northeast  Utilities (NU) who are joint owners of the unit
and have  contracted  with the  minority  joint owners to operate it, as well as
lawsuits against NU and its trustees.  The nine non-operating  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.

     The Connecticut  Yankee unit was taken out of service on July 23, 1996 and,
by decision of the Board of Directors  of that company in December of 1996,  has
been retired.  Relative to 1996,  the loss of low cost energy from this unit for
all of 1997 (it operated at virtually 100% output in 1996 before  shutting down)
should add about $4.5 million to the Company's fuel expense. This increased fuel
expense  is  expected  to be offset by a ramping  down of  Connecticut  Yankee's
operating  expenses  that are now expected to decrease by about $5.5 million for
the  entire  year 1997 ( from $18.3  million in 1996 to $12.8  million in 1997).
These expenses are expected to continue to decline by substantial amounts before
leveling  out at $5-$6  million  per year after 1999  until  decommissioning  is
complete.  However, the ability of the Company to recover 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.

     To  summarize,  the total  incremental  impact of nuclear  generating  unit
outages on the Company's expense levels anticipated for 1997 relative to 1996 is
currently  estimated  as an increase of about $9 million in fuel  expense and $2
million in  operation  and  purchased  capacity  expense.  This amount  would be
equivalent to about $.45 per share.



                                     - 26 -
<PAGE>

     Another major factor affecting the Company's 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. The cost of these programs resulted in a 1996
pre-tax  charge of $23 million and should lead to a 1997  employee  reduction of
230 employees from a level of approximately  1,300 employees at year-end 1995. A
portion of the  resulting  personnel  cost  savings  occurred  in 1996,  but the
majority of the savings will be realized as the Company's process re-engineering
efforts are  completed  over the next several  years.  Incremental  savings from
personnel  reductions of $4 million in 1997 ($1.7 million  realized in the first
six  months)  and  another  $6  million  in 1998 are  estimated.  Other  process
re-engineering savings are anticipated over this time frame as well.

     On  June  30,  1997,  the  Company's  unionized  employees  accepted  a new
five-year  agreement,  amending and  extending the existing  agreement  that was
scheduled to remain in effect through May 15, 1998.  The new agreement  provides
for,  among other things,  2% annual wage  increases  beginning in May 1998, and
annual  lump  sum  bonuses  of 2.5% of base  annual  straight  time  wages  (not
cumulative).  These  provisions  will  restrict  the  growth  of  the  Company's
bargaining unit base wage expense to about $500,000 per year. The agreement also
provides for job security for longer term bargaining  unit  employees,  and will
allow the Company some  flexibility  in adjusting  work methods,  as part of its
ongoing process re-engineering efforts.

     Anticipated  depreciation  expense should  increase by $2-3 million in 1997
from 1996  levels,  a slower rate of increase  than in prior years  because 1996
capital spending of $45 million (excluding nuclear fuel) was at its lowest level
in over 15  years,  and also  because  new  conservation  spending  is no longer
capitalized and depreciated.

     The Company  expects  continued  reductions in annual  interest  expense of
about $8-9 million to a 1997 level of $61-62  million,  at current  rates.  This
reduction is due to  refinancings of Company debt in 1996 and 1997, as well as a
significant  repayment of debt in 1996 and 1997 made  possible by the  Company's
excellent cash flow position. In fact, although the Company had no net change in
retained earnings in 1996, it was able to improve its equity ratio from 31.7% to
33.2% as a result of debt reduction. The anticipated 1997 interest expense level
is about 45% below the 1989 level and would mark the eighth  consecutive year of
net interest expense decline.

     In the fall of 1996,  using  proceeds  of a lower cost bank term loan,  the
Company was  successful  in  purchasing  $67 million of the  approximately  $200
million principal amount of outstanding Seabrook Lease Obligation Bonds, to hold
in its own account.  The interest income that the Company  receives from its $67
million investment in these bonds appears on the income statement as a credit to
interest  expense,  partially  offsetting the interest  expense  incurred on the
Seabrook Lease Obligation Bonds.

     The Company  expects an improvement in unregulated  subsidiary  earnings in
1997 compared to the results of 1996, due partly to  non-recurrence  of one-time
pre-tax  charges   incurred  in  1996  totaling  $4.3  million  and,  also,  the
achievement of a near "break-even" level in earnings from subsidiary operations,
which would  result in an increase in pre-tax  income of $3-$4  million.  In the
near term, the Company's  investments in these subsidiaries are unlikely to have
a major positive effect on earnings,  but the Company  continues to believe that
these investments will contribute to future earnings growth.

     As announced in a press release  dated July 1, 1997,  the Company will loan
up to $15 million to the Company's  Employee  Stock  Ownership Plan ("ESOP") for
the purpose of purchasing  shares of the Company's  common stock in  open-market
transactions.  As of July  31,  1997,  approximately  200,000  shares  had  been
purchased by the ESOP. Based on this number of shares purchased,  the net effect
will be to  increase  earnings  per  share  by  about  $.01  in  1997  and by an
additional  $.02 per share in 1998. At the current price of about $35 per share,
the Company's ESOP could purchase about 230,000 additional shares, approximately
doubling  the  earnings  per share  impacts.  The earnings per share impact will
gradually  reverse,  to no net change at the end of the 12-year  period,  as the
shares are allocated to employees' ESOP accounts and the loan is repaid.



                                     - 27 -
<PAGE>

     The Company  expects that 1997  quarterly  earnings  from  operations  will
follow  a  pattern  similar  to  that  of  1996,  with  third  quarter  earnings
contributing  over half of the annual total.  Summer  seasonal  retail sales and
summer pricing are the predominant factors contributing to this pattern.

     In order to achieve the  DPUC-allowed  11.5%  return on common stock equity
from utility operations, the Company will have to compensate in the last half of
1997 for increased nuclear generation costs and lower first half sales. Although
sales in the third quarter are highly weather-sensitive and could add greatly to
annual earnings,  and although  management has intensified its efforts to reduce
costs in the  second-half  of 1997, it will be difficult to achieve a $3.30-3.40
level in earnings per share from  operations.  The one-time tax benefit taken in
the  second  quarter  of  1997,  however,  makes  this  earnings  target  a more
reasonable prospect for total earnings for the year.

     Looking  forward to 1998,  the  Company is  expecting  significant  expense
declines  from a number of sources.  From the nuclear  generating  units,  it is
expected that operation and maintenance expenses associated with Seabrook Unit 1
and  Connecticut  Yankee  should  decline  by a total of about $10  million;  if
Millstone  Unit 3 returns to  service,  the  expense  associated  with that unit
should decline as well.  Seabrook Unit 1 should have no refueling outage in 1998
and, if it operates at normal 90%  availability,  fuel expense should decline by
about $1.4 million,  net of replacement fuel provision accrual between scheduled
refueling outages;  if Millstone Unit 3 returns to service,  fuel expense should
decline by  $400,000  for every month of  operation,  net of fuel  provision  of
$100,000 per  month...up to $5 million for the year.  As noted above,  personnel
costs should decline by about $6 million from reductions in personnel.  Interest
costs are expected to continue to decline by about $7 million from reductions in
interest rates and repayment of debt,  reaching a level (about $54 million) last
experienced  in 1984.  While there will  probably be some decline in 1997 retail
revenues due to bill  reductions  (no net sales growth is  anticipated,  as Yale
University begins to cogenerate a portion of its electricity requirements),  and
while other factors may increase costs (e.g. wage increases,  depreciation), the
substantial  expense  reductions  identified  above should allow  earnings  from
operations  to  increase  into the  above-11.5%  return on common  stock  equity
"sharing" range of the DPUC Order and above the $3.40 per share level.

     Although  the  $2.88  indicated  annual  common  dividend  level  for  1996
represented a payout of 100% of total 1996  earnings,  the  Company's  cash flow
remains,  and is expected to remain, very strong. Net cash provided by operating
activities  was  $144.8  million in 1996,  nearly 3.6 times the common  dividend
payout,  one of the highest such "coverage" levels in the utility industry.  The
DPUC  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 some of its regulatory  assets more rapidly,
help it prepare for competition in the electric industry,  and help maintain its
cash flow at its excellent  current level through the end of the decade.  If the
Company is able to grow income and earnings  into the  "sharing"  range in 1998,
the common stock  dividend  payout ratio at the current  dividend  rate would be
close to 80%.

     On February 5, 1997,  the Board of Directors  of the Company,  at a special
meeting,  reaffirmed the quarterly common stock dividend at the indicated annual
rate of $2.88 per share,  seeking to assure  investors  of the  security of that
dividend  level.  However,  the ability to maintain this dividend  level,  or to
declare future dividend  increases,  will depend upon the level of the Company's
future earnings and cash flow,  which are dependent upon many factors and events
affecting the Company's  financial condition and outlook that cannot be known or
predicted at this time.

     One such event concerns legal proceedings involving a personal property tax
dispute with the City of New Haven (the City). An April 1997 Connecticut Supreme
Court  ruling  allows  the City to  reassess  property  values on the  Company's
equipment in each tax year from 1990 to 1996.  The  decision  did not,  however,
approve  any  assessment  valuation  methodology  or amount,  and the Company is
vigorously  contesting  these issues,  for all of the tax years,  in lower court
proceedings.  It remains the present  opinion of the Company  that the  ultimate
outcome of this  dispute  will not have a  significant  impact on the  long-term
financial position of the Company.


                                     - 28 -
<PAGE>



                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     See the Company's Quarterly Report (Form 10-Q) for the fiscal quarter ended
March 31, 1997.




                                     - 29 -
<PAGE>


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

     (a) Exhibits.
<TABLE>
<CAPTION>
           Exhibit
          Table Item            Exhibit
           Number               Number                                   Description
          ----------            -------                                  -----------

            <C>                  <C>          <C>                                  
            (10)                 10.9d        Notice,   dated  April  22,  1997,  of  The  United  Illuminating
                                              Company's   intention  to  extend  term  of   Transmission   Line
                                              Agreement dated January 13,  1966 Exhibit 10.9a*, as supplemented
                                              and modified by Letter  Agreement  dated  March 28,  1985 Exhibit
                                              10.9c**

            (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 June
                                              30, 1997 and Twelve Months Ended  December 31,  1996, 1995, 1994,
                                              1993 and 1992).

            (27)                 27           Financial Data Schedule
</TABLE>

-----------------------
*    Filed with Registration Statement No. 2-60849, effective July 24, 1978.
**   Filed with Annual Report (Form 10-K) for fiscal year ended December 31,
     1991.

     (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     08/12/97                    Signature      /s/ Robert L. Fiscus
     ----------------------                     -------------------------------
                                                        Robert L. Fiscus
                                                         President and
                                                     Chief Financial Officer



                                     - 31 -
<PAGE>


                                  EXHIBIT INDEX
<TABLE>
<CAPTION>



        Exhibit
      Table Item    Exhibit
        Number      Number                        Description                                   Page No.
      ----------    -------                       -----------

      <C>           <C>           <C>            
         (10)       10.9d         Notice,  dated April 22,  1997,  of The
                                  United  Illuminating  Company's  intention  to
                                  extend  term of  Transmission  Line  Agreement
                                  dated  January 13,  1966  Exhibit  10.9a*,  as
                                  supplemented  and modified by Letter Agreement
                                  dated March 28, 1985 Exhibit 10.9c**

      (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 June 30, 1997 and
                                  Twelve Months Ended December 31, 1996, 1995,
                                  1994, 1993 and 1992).

         (27)       27            Financial Data Schedule
</TABLE>

-----------------------
*    Filed with Registration Statement No. 2-60849, effective July 24, 1978.
**   Filed with Annual Report (Form 10-K) for fiscal year ended December 31,
     1991.