<PAGE>
 
                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION

                           Washington, D. C.  20549
(Mark One)

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

 
For quarterly period ended June 30, 1998

                                                        OR
 
[_]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________________ to ________________
                                   
Commission file number                     1-10032
                       ----------------------------------------------

                         PROVIDENCE ENERGY CORPORATION
                         -----------------------------
            (Exact name of registrant as specified in its charter)

               Rhode Island                          05-0389170
---------------------------------------------------------------------
(State or other jurisdiction of incorporation)    (I.R.S. Employer
                                                 Identification No.)

         100 Weybosset Street, Providence, Rhode Island 02903
---------------------------------------------------------------------
                 (Address of principal executive offices)
                               (Zip Code)

                             401-272-9191
---------------------------------------------------------------------
         (Registrant's telephone number, including area code)

_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
                            last report)

   Indicate by checkmark 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 ___.
   ---        

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

   Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Common Stock, $1.00 par value; 5,950,700 shares outstanding at August 12, 1998.
------------------------------------------------------------------------------ 
<PAGE>
 
                         PROVIDENCE ENERGY CORPORATION

                                   FORM 10-Q

                                 JUNE 30, 1998



PART I:     FINANCIAL INFORMATION                                     PAGE


Item 1      Financial Statements

            Consolidated Statements of Income for the
            three, nine and twelve months ended
            June 30, 1998 and 1997                                     I-1

            Consolidated Balance Sheets as of June 30, 1998,
            June 30, 1997 and September 30, 1997                       I-2

            Consolidated Statements of Cash Flows
            for the nine months ended June 30, 1998
            and 1997                                                   I-3

            Consolidated Statements of Capitalization
            as of June 30, 1998, June 30, 1997 and
            September 30, 1997                                         I-4

            Notes to Consolidated Financial Statements                 I-5

Item 2      Management's Discussion and Analysis of
            Financial Condition and Results of Operations              I-10


PART II     OTHER INFORMATION


Item 6      Exhibits and Reports on Form 8-K                          II-1

            Signature                                                 II-2
<PAGE>
 
PART I.  FINANCIAL INFORMATION
------------------------------
ITEM I.  FINANCIAL STATEMENTS
-----------------------------

                PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
                ----------------------------------------------
                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------
                         FOR THE PERIODS ENDED JUNE 30
                         -----------------------------
                                  (Unaudited)
                                 ------------
                     (thousands, except per share amounts)
<TABLE> 
<CAPTION> 
                                 THREE MONTHS               NINE MONTHS                TWELVE MONTHS
                             ---------------------     ----------------------      ----------------------
                               1998         1997         1998          1997          1998          1997
                             -------      -------      --------      --------      --------      --------
<S>                         <C>          <C>          <C>           <C>           <C>           <C> 
Energy revenues             $ 39,462     $ 42,921     $ 195,200     $ 186,905     $ 228,715     $ 219,271
Cost of energy                20,135       22,594       109,197       106,812       126,761       124,529
                            --------     --------     ---------     ---------     ---------     --------- 
 Operating margin             19,327       20,327        86,003        80,093       101,954        94,742
                            --------     --------     ---------     ---------     ---------     --------- 
Operating expenses:                                                                              
 Operation and                                                                                   
   maintenance                13,193       11,613        38,996        35,917        51,847        47,180
 Depreciation and                                                                                
   amortization                3,660        3,259        11,029         9,655        14,248        12,729
 Taxes -                                                                                         
   State gross earnings        1,144        1,102         5,145         5,186         6,004         6,096
   Local property and                                                                            
    other                      2,163        1,990         6,435         5,855         8,267         7,676
   Federal income               (946)         153         6,355         6,133         4,830         4,779
                            --------     --------     ---------     ---------     ---------     --------- 
Total operating                                                                                  
 expenses                     19,214       18,117        67,960        62,746        85,196        78,460
                            --------     --------     ---------     ---------     ---------     --------- 
Operating income                 113        2,210        18,043        17,347        16,758        16,282

Other, net                       181          (48)          524            13           509           (26)
                            --------     --------     ---------     ---------     ---------     ---------     
Income before interest                                                                           
 expense                         294        2,162        18,567        17,360        17,267        16,256
                            --------     --------     ---------     ---------     ---------     --------- 
Interest expense:                                                                                
 Long-term debt                1,716        1,505         4,688         4,537         6,193         6,064
 Other                           355          441         1,596         1,357         2,025         1,615
 Interest capitalized            (39)         (58)         (195)         (157)         (263)         (188)
                            --------     --------     ---------     ---------     ---------     --------- 
                               2,032        1,888         6,089         5,737         7,955         7,491
                            --------     --------     ---------     ---------     ---------     --------- 
Income (loss) from                                                                                  
 continuing operations                                                                              
 after interest expense       (1,738)         274        12,478        11,623         9,312         8,765
Preferred dividends of                                                                              
 subsidiary                     (105)        (139)         (383)         (487)         (522)         (661)
                            --------     --------     ---------     ---------     ---------     --------- 
Net income (loss)           $ (1,843)    $    135     $  12,095     $  11,136     $   8,790     $   8,104
                            ========     ========     =========     =========     =========     ========= 
Dividends paid per                                                                                  
 common share               $    .27     $    .27     $     .81     $     .81     $    1.08     $    1.08
                            ========     ========     =========     =========     =========     ========= 
Net income (loss) per                                                                               
common share - basic        $   (.31)    $    .02     $    2.05     $    1.93     $    1.49     $    1.40
                            ========     ========     =========     =========     =========     ========= 
Net income (loss) per                                                                               
common share - diluted      $   (.31)    $    .02     $    2.04     $    1.93     $    1.49     $    1.40
                            ========     ========     =========     =========     =========     ========= 
Weighted average number                                                                             
of shares outstanding:                                                                              
Basic                        5,935.6      5,801.4       5,906.4       5,779.5       5,885.3       5,769.2
                            ========     ========     =========     =========     =========     ========= 
Diluted                      5,935.6      5,805.2       5,916.8       5,783.3       5,894.4       5,772.9
                            ========     ========     =========     =========     =========     =========     
</TABLE> 
                                                                    
                                      I-1
                                                                    
<PAGE>
 
                PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
                ----------------------------------------------
                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------
                                  (Thousands)
                                  -----------

<TABLE> 
<CAPTION> 
                                                  (Unaudited)
                                                  -----------
                                                 June 30,   June 30,   September 30,
                                                   1998      1997         1997
                                               --------------------------------------
<S>                                            <C>         <C>         <C> 
ASSETS
------
Gas plant, at original cost                    $318,369    $293,432    $300,829
  Less - accumulated depreciation and
         utility plant acquisition
         adjustments                            119,822     108,498     110,365
                                               --------    --------    --------
                                                198,547     184,934     190,464
                                               --------    --------    --------
Other property, net                               3,485       1,179       1,182
                                               --------    --------    --------
Current assets:
 Cash and temporary cash investments              8,435       1,625       1,063
 Accounts receivable
  less allowance of $4,054 at 6/30/98,
  $3,474 at 6/30/97, and $1,886 at 9/30/97       23,613      29,318      14,852
 Unbilled revenues                                1,369         690       2,683
 Deferred gas costs                                  --       1,447       7,231
 Inventories, at average cost -
  Liquefied natural gas, propane and under-
   ground storage, and oil                          734      11,623      18,217
  Materials and supplies                          1,208       1,224       1,287
 Prepaid and refundable taxes                     5,024       5,245       4,005
 Prepayments                                      1,841       1,228       1,039
                                               --------    --------    --------
                                                 42,224      52,400      50,377
                                               --------    --------    --------
Deferred charges and other assets                15,907      12,962      13,487
                                               --------    --------    --------
  Total assets                                 $260,163    $251,475    $255,510
                                               ========    ========    ========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization
(See accompanying statement)                   $187,022    $169,361    $164,433
                                               --------    --------    --------
Current liabilities:
 Notes payable                                    7,836      12,890      23,675
 Current portion of long-term debt                3,838       2,649       3,707
 Accounts payable                                 9,433      17,740      16,755
 Accrued taxes                                    6,932       6,049       2,506
 Accrued vacation                                 1,951       1,978       1,715
 Customer deposits                                3,184       3,463       3,461
 Other                                            5,704       5,204       5,531
                                               --------    --------    --------
                                                 38,878      49,973      57,350
                                               --------    --------    --------
Deferred credits and reserves:
 Accumulated deferred Federal income taxes       22,206      20,912      21,495
 Unamortized investment tax credits               2,256       2,415       2,375
 Other                                            9,801       8,814       9,857
                                               --------    --------    --------
                                                 34,263      32,141      33,727
                                               --------    --------    --------
Commitments and contingencies                        --          --          --
 
  Total capitalization and liabilities         $260,163    $251,475    $255,510
                                               ========    ========    ========
</TABLE>

                                   PAGE I-2
<PAGE>
 
                PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
                ----------------------------------------------
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------
                       FOR THE NINE MONTHS ENDED JUNE 30
                       ---------------------------------
                                  (Unaudited)
                                  -----------

<TABLE> 
<CAPTION> 
                                                            1998         1997
                                                        ---------------------
                                                              (thousands)
<S>                                                     <C>          <C> 
Cash provided by (used for)
Operating Activities:
---------------------
  Income after interest expense                         $ 12,478     $ 11,623
  Items not requiring cash -
    Depreciation and amortization-plant
    and other property                                    10,943        9,633
    Changes as a result of regulatory action               1,500           --
    Deferred Federal income taxes                            710          183
    Amortization of investment tax credits                  (119)        (118)
  Changes in assets and liabilities
     which provided (used) cash:
      Accounts receivable                                 11,950      (14,653)
      Unbilled revenues                                    1,314        1,667
      Deferred gas costs                                      78       11,825
      Inventories                                            (22)       4,435
      Prepaid and refundable taxes                          (958)      (1,153)
      Prepayments                                           (788)         312
      Accounts payable                                    (3,387)         368
      Accrued taxes                                        4,420        4,069
      Accrued vacation, customer deposits and other          118         (399)
      Deferred charges and other                             260        2,063
                                                        --------     --------
   Net cash provided by operations                        38,497       29,855
                                                        --------     --------
Investing Activities:
---------------------
  Expenditures for property, plant
    and equipment, net                                   (18,873)     (13,087)
  Expenditures for business acquisitions
    net of cash acquired                                  (2,469)          --
                                                        --------     --------
  Net cash used in investing activities                  (21,342)     (13,087)
                                                        --------     -------- 
Financing Activities:
---------------------
  Issuance of common stock                                    --           44
  Proceeds from exercise of stock options                     83           35
  Issuance of mortgage bonds                              15,000           --
  Redemption of preferred stock                           (1,600)      (1,600)
  Proceeds from other long-term debt                          --        1,345
  Payments on long-term debt                              (2,554)      (1,924)
  Decrease in notes payable, net                         (16,701)     (10,380)
  Cash dividends on preferred stock                         (383)        (487)
  Cash dividends on common stock                          (3,628)      (3,600)
                                                        --------     --------
    Net cash used by financing activities                 (9,783)     (16,567)
                                                        --------     --------
Increase in cash and temporary cash investments            7,372          201
Cash and temporary cash investments at beginning
  of period                                                1,063        1,424
                                                        --------     --------
Cash and temporary cash investments at end of period    $  8,435     $  1,625
                                                        ========     ========
Supplemental disclosures of cash flow information:
 Cash paid year-to-date for -
   Interest (net of amount capitalized)                 $  5,652     $  5,617
   Income taxes (net of refunds)                        $  1,741     $  2,033

Schedule of noncash investing and financing
activities:
  Capital lease obligations for equipment               $     --      $    232
  Other long-term debt for equipment                    $     --      $  1,330
</TABLE> 

                                   PAGE I-3
<PAGE>
 
                PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
                ----------------------------------------------
                   CONSOLIDATED STATEMENTS OF CAPITALIZATION
                   -----------------------------------------
                                  (THOUSANDS)
                                  -----------

<TABLE> 
<CAPTION> 
                                                 (Unaudited)
                                                 -----------
                                             June 30,  June 30,  September 30,
                                               1998      1997         1997
                                             ---------------------------------
<S>                                          <C>       <C>       <C> 
Common stock equity:
 Common stock, $1 par
  Authorized - 20,000 shares
  Outstanding - 5,949 at 6/30/98
   5,812 at 6/30/97
   5,832 at 9/30/97                          $  5,949  $  5,812    $  5,832
 Amount paid in excess of par                  58,788    56,461      56,827
 Retained earnings                             30,327    27,876      23,002
                                             --------  --------    --------
Total common stock equity                      95,064    90,149      85,661
                                             --------  --------    --------
                                                                   
Cumulative preferred stock of subsidiary:                          
                                                                   
 The Providence Gas Company -                                      
  Redeemable 8.7% Series, $100 par                                 
  Authorized -80 shares                                            
  Outstanding - 48 shares at 6/30/98                               
   and 64 shares at                                                
   6/30/97 and 9/30/97                          4,800     6,400       6,400
                                             --------  --------    --------
                                                                   
Long-term debt:                                                    
                                                                   
 First mortgage bonds                          84,600    71,200      71,200
 Other long-term debt                           5,065     2,675       3,207
 Capital leases                                 1,331     1,586       1,672
                                             --------  --------    --------
                                                                   
Total long-term debt                           90,996    75,461      76,079
                                                                   
Less current portion                            3,838     2,649       3,707
                                             --------  --------    --------
                                                                   
Long-term debt, net                            87,158    72,812      72,372
                                             --------  --------    --------
                                                                   
Total capitalization                         $187,022  $169,361    $164,433
                                             ========  ========    ======== 
</TABLE>

                                   PAGE I-4
<PAGE>
 
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


Accounting Policies
-------------------

   It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission.  However, the disclosures herein when read
with the annual report for 1997 filed on Form 10-K are adequate to make the
information presented not misleading.

Rates and Regulation
--------------------

   The Providence Gas Company (ProvGas), a wholly owned subsidiary of the
Registrant, is subject to the regulatory jurisdiction of the Rhode Island Public
Utilities Commission (RIPUC) with respect to rates and charges, standards of
service, accounting and other matters. In August 1997, the RIPUC approved the
Price Stabilization Plan Settlement Agreement, (the Plan or Energize RI) among
ProvGas, the Rhode Island Division of Public Utilities and Carriers (the
Division), The Energy Council of Rhode Island, and the George Wiley Center.
Effective October 1, 1997 through September 30, 2000, Energize RI provides
customers with an initial price decrease of approximately four percent and a
three-year price freeze. In connection with the price decrease, ProvGas will
write-off and not recover $1.5 million of previously deferred gas costs. Under
Energize RI, the Gas Charge Clause (GCC) will be suspended for the entire three-
year term of the Plan. Any excess or deficiency between amounts billed and
actual gas costs incurred will be retained or borne by ProvGas. Energize RI also
requires ProvGas to make significant capital investments to improve its
distribution system. Capital investments required by Energize RI are estimated
to total approximately $26 million over its three-year term. In addition,
ProvGas is required to fund the Demand Side Management Rebate Assistance Program
and the Low Income Weatherization Program at annual levels of $.5 million and
$.2 million, respectively. Energize RI also calls for ProvGas to fund the Low
Income Assistance Program at an annual level of $1.0 million. Finally, Energize
RI continues the process of unbundling by requiring ProvGas to provide unbundled
service offerings for up to 10 percent per year of firm system throughput.

   As part of Energize RI, ProvGas will amortize over a ten year period
approximately $4.0 million of environmental costs previously charged to the
accumulated depreciation reserve.  All environmental costs incurred during the
term of Energize RI will also be amortized over a ten year period.

   Under Energize RI ProvGas may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million and $92.0 million in
fiscal 1998, 1999, and 2000, respectively.  In addition, ProvGas may not
earn less than a seven percent return on average common equity under the Plan.
In the event that ProvGas earns in excess of 10.9 percent or less than
seven percent, ProvGas will defer revenues or costs through a deferred
revenue account over the term of the Plan.  Any balance in the deferred revenue
account at the end of the Plan will be refunded to or recovered from customers
in a manner  determined by all parties and approved by the RIPUC.

   The Integrated Resource Plan (IRP) was terminated as a result of Energize RI.
In addition to the funding for the demand side management program and low income
weatherization and assistance programs, the IRP provided for a performance-based
ratemaking mechanism. ProvGas was able to record its annual share of the
performance-based ratemaking mechanism in both 1997 and 1996, which resulted 
in a

                                      I-5
<PAGE>
 
$1.5 million increase to operating margin in each of those years. As part of the
performance-based ratemaking mechanism, ProvGas was allowed to record
approximately $3.0 million in non-firm margin, subject to ProvGas' ability to
generate sufficient gas cost savings for customers. In both fiscal 1997 and
1996, ProvGas achieved enough savings to earn $3.0 million in non-firm margin in
each of those years. As a result of Energize RI, ProvGas will only retain the
actual margin earned from non-firm customers.

Gas Supply
----------

   ProvGas has entered into a full requirements contract with Duke Energy
Trading and Marketing, LLC (DETM) to provide all of its gas supply needs
beginning October 1, 1997 and continuing through September 30, 2000. DETM will
provide all gas supplies required by ProvGas, while ProvGas is committed to
purchase all supplies exclusively from DETM. Supplies required by ProvGas' firm
sales customers will be purchased at a single, fixed commodity price for the
entire contract period. In order to provide this service, DETM, for the contract
period, will take responsibility for ProvGas' pipeline capacity resources not
previously released, all storage contracts and all LNG capacity. Under the
contract, DETM has purchased all working gas in storage including both LNG and
contract storage as of October 1, 1997. Gas inventories purchased were valued at
approximately $18 million. All supply resources assigned to DETM will revert
back to ProvGas on October 1, 2000. The contract was entered into following a
competitive bidding process.

   As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover ProvGas' non-firm sales customer's
needs and to make up the supply imbalances of transportation customers.  DETM
will also provide various other services to ProvGas' transportation
service customers including enhanced balancing, standby and the storage and
peaking services available under ProvGas' recently approved FT-2 storage
service effective December 1, 1997.  DETM will receive the supply related
revenues from these services in exchange for providing the supply management
inherent in these services.

   Included in the DETM contract are a number of other important features. The
Registrant has retained the right to continue to make portfolio changes to
reduce supply costs. To the extent ProvGas makes such changes ProvGas must keep
DETM whole for the value lost over the remainder of the contract period. The
contract relieves ProvGas of the need to perform certain upstream supply
management functions which will make it possible for ProvGas to take on the
additional supply management workload required by the further unbundling of firm
sales customers without major staffing additions.

Environmental Matters
---------------------

   Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years.  The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively.  The Registrant continues to monitor the status of these
laws and regulations.  Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean-
up certain sites.  To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.

   At June 30, 1998, the Registrant was aware of four sites at which future
costs may be incurred.

   The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites at Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly

                                      I-6
<PAGE>
 
or indirectly by the Registrant and other PRP's.  With respect to one of the
Plympton sites, the Registrant has joined with other PRP's in entering into an
Administrative Consent Order with the Massachusetts Department of Environmental
Protection.  The costs to be borne by the Registrant, in connection with both
Plympton sites, are not anticipated to be material to the financial condition of
the Registrant.

  During 1995, the Registrant began a study at its primary gas distribution
facility located in Providence, Rhode Island. This site formerly contained a
manufactured gas plant operated by the Registrant. As of June 30, 1998,
approximately $2.0 million has been spent primarily on studies at this site. 
In accordance with state laws, such a study is monitored by the Rhode Island
Department of Environmental Management (DEM). The purpose of this study was to
determine the extent of environmental contamination at the site. The Registrant
has completed the study which indicates that remediation will be required for
two-thirds of the property. The remediation will begin in August of 1998 and
will continue for a duration of three to six months. During the remediation
process the remaining one-third of the property will also be investigated and
remediated if necessary. At June 30, 1998, the Registrant has compiled a
preliminary range of costs based on a thermal desorption remediation process,
ranging from $1.7 million to $5.0 million. However, because of the uncertainties
associated with environmental assessment and remediation activities, the future
cost of remediation could be higher than the range noted above. Based on the
proposals for remediation work, the Registrant has accrued $1.7 million at 
June 30, 1998, for anticipated future remediation costs at this site.

   Tests conducted following the discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center in
1996 confirmed the existence of contaminants at this site. The Registrant is
currently conducting tests at this site, the costs of which are being shared
equally with the prior owner, to determine the nature and extent of the
contamination.  Due to the early stages of investigation, management cannot
offer any conclusions as to whether any remediation will be required at this
site.  In addition, in 1997, contamination from scrapped meters and regulators
was discovered at this site.  The Registrant has reported this to the DEM and
the Rhode Island Department of Health and is in the process of remediation.  It
is anticipated that remediation will cost $50,000. Accordingly, the Registrant
has accrued $50,000 at June 30, 1998 for anticipated future remediation costs.

     In prior rate cases filed, the Registrant requested that environmental
investigation and remediation costs be recovered by inclusion in its
depreciation factors consistent with the rate recovery treatment for all types
of cost of removal.  Due to the magnitude of the Registrant's environmental
investigation and remediation expenditures, the Registrant sought current
recovery for these amounts.  As a result, in accordance with the Price
Stabilization Plan Settlement Agreement described in "Rates and Regulation",
                                                      --------------------  
which is effective October 1, 1997, all environmental investigation and
remediation costs incurred through September 30, 1997, as well as all costs
incurred during the three-year term of the Plan, will be amortized over a ten-
year period.  Additionally, it is the Registrant's practice to consult with the
RIPUC on a periodic basis when, in management's opinion, significant amounts
might be expended for environmental-related costs.  As of June 30, 1998, the
Registrant has charged environmental remediation costs of $2.4 million and an
estimated $1.7 million to the accumulated depreciation reserve and has amortized
$.3 million of these costs.

     Management has begun discussions with other parties who may assist the
Registrant in paying any future costs at the above sites. Management believes
that its program for managing environmental issues, combined with rate recovery
and financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.

Joint Ventures
--------------

  In May 1998, the Registrant and Southern Company mutually agreed to end their
joint efforts to develop a New England retail energy business (Providence-
Southern, LLC) due to different strategic goals. The Registrant will continue to
use its wholly-owned retail energy marketing company, Providence Energy
Services, Inc. ("ProvEnergy Services") as the vehicle to grow its natural gas
and electricity business to retail accounts in New England.

                                      I-7
<PAGE>
 
To strengthen its position in the evolving energy market, the Registrant is
negotiating with Duke Energy Trading and Marketing, LLC for DETM to provide
wholesale natural gas and electricity to support ProvEnergy Services' retail
marketing efforts.

  In July 1998, the Registrant and ERI Services, Inc. ("ERI Services") agreed to
form a joint venture, Capital Center Energy Company, LLC ("CCEC").  The Joint
venture will be owned 50% by the Registrant and 50% by ERI Services.  CCEC's
wholly-owned subsidiary, DownCity Energy Company, LLC was selected as the
exclusive electric, heat, air conditioning ("HVAC") and related services
provider for most of the Providence Place Mall (the "Mall") for the next thirty
years.

   DownCity will serve more than 3,000,000 square feet of retail stores, common
areas, offices and parking facilities. Currently, the three anchor stores and
the cinema are not included in the plan. The electric demand to be met by
DownCity is expected to be 12 megawatts, the approximate consumption of more
than 6,500 households. The system being developed for the mall includes three
on-site natural gas-powered electric generators.

   Under the agreement with Commonwealth Development (developers of the Mall),
DownCity will perform the following:

 .  Own, operate and maintain the HVAC systems
 .  Provide electric supply and emergency power
 .  Own, operate and maintain a six megawatt on-site generation plant to provide
   electric and emergency supply
 .  Provide metering services for each of the tenants
 .  Manage all energy billing to the tenants and the developer

   Construction of the energy systems is expected to begin this summer. The
entire energy project will be operational in advance of the scheduled August,
1999, opening of the Mall.  DownCity will not have a significant impact on the
Registrant's results of operations in fiscal 1998.


Acquisitions
------------

   In November 1997, the Registrant acquired all of the outstanding capital
stock of the Super Service Companies. These companies provide a full service
distribution of oil products, selling fuel oil, diesel, gasoline and lubricants.
Also, in November 1997, the Registrant acquired all of the assets of the Mohawk
Companies. Mohawk Oil Company is a full service oil company. In addition to its
oil business, Mohawk installs and services air conditioning and heating
equipment through its affiliate, Mohawk Environmental Technologies.  The amounts
related to the purchases of these companies are not material to the financial
position of the Registrant. These acquisitions have been accounted for as
purchases and, accordingly, operating results of these businesses subsequent to
the date of acquisition have been consolidated in the financial statements of
the Registrant. Pro forma results of operations, which include the operating
results of these acquisitions, are not materially different than the operating
results presented.

  These acquisitions are part of the Registrant's vision to be the "First
Choice" energy provider. The Registrant believes these acquisitions will offer a
valuable entry into the heating-oil business segment.

   The Registrant continues to assess the energy market for potential
acquisitions to fulfill this vision.

New Accounting Pronouncements
-----------------------------

   In October 1997 the Registrant adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share".  Under the
provisions of SFAS No. 128, basic earnings per share replaces primary earnings
per share and the dilutive effect of stock options are excluded from the
calculation.  Fully diluted earnings per share are replaced by diluted earnings
per share and include the dilutive effect of stock options and warrants, using
the treasury stock method.  All prior period earnings per share data have been
restated to conform to the requirements of SFAS No. 128.

                                      I-8
<PAGE>
 
   A reconciliation of the weighted average number of shares outstanding used in
the computation of the basic and diluted earnings per share for each of the
periods ended June 30 is as follows:

<TABLE>
<CAPTION> 
                                Three Months     Nine Months       Twelve Months
                                1998     1997    1998     1997     1998      1997
                                ----     ----    ----     ----     ----      ----
<S>                           <C>      <C>      <C>      <C>      <C>      <C> 
Weighted average
shares (basic)                5,935.6  5,801.4  5,906.4  5,779.5  5,885.3  5,769.2
 
Effect of dilutive stock
options                            --      3.8     10.4      3.8      9.1      3.7
                              -------  -------  -------  -------  -------  -------
 
Weighted average
shares (diluted)              5,935.6  5,805.2  5,916.8  5,783.3  5,894.4  5,772.9
                              =======  =======  =======  =======  =======  =======
</TABLE>

   The net income used in the calculation for basic and diluted earnings per
share calculations agrees with the net income appearing in the financial
statements.

   Effective October 1, 1997, the Registrant adopted the provisions of Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities". This Statement
provides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
The Registrant has recorded environmental remediation liabilities of
approximately $1.7 million at June 30, 1998.  SOP 96-1 did not have an impact on
the Registrant's financial position or results of operations upon adoption.
Also see "Environmental Matters".
          ---------------------  

   In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information".  SFAS No. 130, which is
effective for fiscal years beginning after December 15, 1997, requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.  SFAS No.
131, which is effective for fiscal years beginning after December 15, 1997,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments.  These statements require
additional disclosure only and will not affect the financial position or results
of operations of the Registrant.

  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities".  This Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.  SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.

   SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.  A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter).  SFAS No. 133 cannot be applied retroactively.  SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).

   The Registrant has not yet quantified the impact of adopting SFAS No. 133 on
the financial statements and has not determined the timing of or method of
adoption of SFAS No. 133.

                                      I-9
                                        
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------  -------------------------------------------------
         CONDITION AND RESULTS OF OPERATIONS
         -----------------------------------

   Providence Energy Corporation (the Registrant) and its subsidiaries and their
representatives may from time to time make written or oral statements, including
statements contained in the Registrant's filings with the Securities and
Exchange Commission (SEC) and in its reports to shareholders, including this
quarterly report, which constitute "forward-looking" statements as that term is
defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in
its rules, regulations and releases.

   All statements other than statements of historical facts included in this
quarterly report regarding the Registrant's financial position and strategic
initiatives and addressing industry developments are forward-looking statements.
Where, in any forward-looking statement, the Registrant, or its management,
expresses an expectation or belief as to future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished. Factors which could cause actual results
to differ materially from those anticipated include, but are not limited to:
general economic, financial and business conditions; changes in government
regulations; competition in the energy services sector; regional weather
conditions; the availability and cost of natural gas; development and operating
costs; the success and costs of advertising and promotional efforts; the
availability and terms of capital; the business abilities and judgment of
personnel; the ability of the Registrant to acquire and implement computer
software that will be Year 2000 capable as well as Year 2000 readiness by key
customers, vendors and service providers; unanticipated environmental
liabilities; ability of the Registrant to form alliances and establish joint
ventures outside of the traditional utility business and the success of any
alliances or joint ventures; the costs and effects of unanticipated legal
proceedings; the impacts of unusual items resulting from ongoing evaluations of
business strategies and asset valuations; and changes in business strategy.

RESULTS OF OPERATIONS

   The Registrant's energy revenues, operating margin and net income for the
three, nine and twelve months ended June 30, 1998 and for comparable periods
ended June 30, 1997 are as follows:

(thousands where applicable)

<TABLE>
<CAPTION>
                     Three Months       Nine Months         Twelve Months
                     Ended June 30      Ended June 30       Ended June 30
                     1998     1997      1998      1997      1998      1997
                     ----     ----      ----      ----      ----      ----
<S>                 <C>      <C>      <C>       <C>       <C>       <C>
Energy revenues     $39,462  $42,921  $195,200  $186,905  $228,715  $219,271
                    =======  =======  ========  ========  ========  ========
 
Operating margin    $19,327  $20,327  $ 86,003  $ 80,093  $101,954  $ 94,742
                    =======  =======  ========  ========  ========  ========

Net income (loss)   $(1,843) $   135  $ 12,095  $ 11,136  $  8,790  $  8,104
                    =======  =======  ========  ========  ========  ========
</TABLE>

Operating Margin
----------------

During the latest quarter, the Registrant experienced weather that was 26.0
percent warmer than the same quarter last year. The warmer temperatures resulted
in decreased margin of approximately $1.1 million compared to the same quarter
last year. Offsetting the warmer than normal weather is $1.9 million of margin
generated by Energize RI, which became effective October 1, 1997. This
additional margin resulted from freezing the Gas Charge Clause ("GCC") mechanism
used previously to adjust for the over or underrecovery of gas costs which was
approximately $2.3 million and was offset by the funding of the Integrated
Resource Plan ("IRP") programs of approximately $400,000. The implementation

                                     I-10
<PAGE>
 
this year of Energize RI changed how the Registrant records its gas costs
resulting in higher margin reflected in the first half of the fiscal year and
lower margin in the second half.  While this change does not impact annual
earnings it reduced margin in the quarter by $1.3 million compared to the same
period last year. An additional $1.5 million decrease in margin in the current
quarter in comparison to the same quarter last year is a result of  not
recording the performance-based ratemaking mechanism under the IRP which was
terminated in September 1997 as a result of Energize RI.

   Additionally, non-firm margin decreased $0.6 million during the current
quarter of fiscal year 1998 when compared with the same quarter of fiscal 1997.
Prior to Energize RI, the Registrant was allowed to record approximately $3.0
million in non-firm margin under the terms of the IRP, subject to the
Registrant's ability to generate sufficient gas cost savings for customers.  As
a result of Energize RI, the Registrant retains the actual non-firm margin
earned.  Due to an unfavorable pricing difference between natural gas and
alternate fuels, the Registrant experienced a decrease in non-firm sales and
transportation margin.  This decrease is expected to continue during the
remainder of the fiscal year.

   The Registrant's acquisition of two oil distribution companies in November
1997 also resulted in additional margin of approximately $.7 million for the
current quarter compared to the same period last year.

   An increase in the natural gas business volume of Providence Energy Services,
Inc. from approximately 40 customers in fiscal year 1997 to approximately 1,000
in fiscal year 1998 contributed $.7 million for the current quarter compared to
the same period last year.

   During the current fiscal year, weather has been 7.4 percent warmer than the
same period last year.  The warmer temperatures resulted in decreased margin of
approximately $3.7 million compared to last year.  Offsetting the warmer than
normal weather is $8.2 million of margin generated by Energize RI.  The
additional margin which resulted from freezing the GCC mechanism used previously
to adjust for the over or unerrecovery of gas costs was approximately $10.9
million and was offset by the write-off of $1.5 million of previously deferred
gas costs and funding of the IRP programs of approximately $1.2 million.  When
compared to the same period last year when seasonal gas cost factors were being
used, operating margin has increased approximately $1.8 million.  The effect of
this increase, however, will reverse in the subsequent quarter and will have no
impact on annual earnings.

   Additionally, non-firm margin decreased $1.7 million during the current
fiscal year when compared with the prior year as explained above.

   An additional $1.5 million decrease in margin during the current year in
comparison to the prior year is a result of not recording the performance-based
ratemaking mechanism under the IRP which was terminated in September 1997 as a
result of Energize RI.

   The Registrant's acquisition of two oil distribution companies in November
1997 also resulted in additional margin of approximately $2.5 million for the
current year when compared to the prior year.

   The increase in operating margin for the twelve month periods presented is
primarily due to the reasons stated above.

Operating and Maintenance Expenses
----------------------------------

   Overall, operating and maintenance expenses increased approximately $1.6
million or 13.6 percent for the three months, approximately $3.1 million or 8.6
percent for the nine months and approximately $4.7 million or 9.9 percent for
the twelve months ended June 30, 1998, respectively, versus the same periods
last year.  The Registrant's natural gas distribution expenses were stable for
the periods presented.  The increases are primarily attributable to the
Registrant's acquisition of two oil companies during the current fiscal year.

                                     I-11
<PAGE>
 
Depreciation and Amortization Expenses
--------------------------------------

   Depreciation and amortization expense increased approximately $.4 million or
12.3 percent for the three months, approximately $1.4 million or 14.2 percent
for the nine months and approximately $1.5 million or 11.9 percent for the
twelve months ended June 30, 1998, respectively, versus the same periods last
year.  This increase is the result of capital spending and the amortization of
previously deferred environmental costs. Effective October 1, 1997 the
Registrant began amortizing environmental costs over a ten-year period in
accordance with Energize RI.

Taxes
-----

   Taxes decreased approximately $900,000 or 27.2 percent for the three months
ended, increased approximately $800,000 or 4.4 percent for the nine months ended
and approximately $600,000 or 3.0 percent for the twelve months ended June 30,
1998, respectively, versus the same periods last year.  The overall change in
taxes is primarily due to changes in Federal income taxes as a result of the
changes in pretax income this year compared to last year.  Additionally, local
property and other taxes have increased as a result of capital spending.

Other, net
----------

   Other, net has increased approximately $500,000 for the nine months ended and
twelve months ended June 30, 1998 versus the same periods last year. The
increase is primarily the result of fees earned by the Registrant for providing
energy management services to Salve Regina University.

Interest Expense
----------------

   Interest expense increased approximately $100,000 or 7.6 percent for the
three months ended, approximately $400,000 or 6.1 percent for the nine months
ended and approximately $500,000 or 6.2 percent for the twelve months ended June
30, 1998, respectively, versus the same periods last year.  During the prior
year, interest expense was impacted by accrued interest on the over or under
recovery of gas costs that was due to or from ratepayers.  Effective October 1,
1997, the Registrant froze the GCC mechanism in connection with Energize RI.
During the three-year term of the Plan, the Registrant will no longer accrue
interest on the over or under collection of gas costs from ratepayers.  The
Registrant's acquisition of two oil distribution companies in November, 1997
also resulted in additional interest expense of approximately $129,000 and
$280,000 for the three and nine months ended June 30, 1998, respectively.

Future Outlook
--------------

A) Regulatory

   Under Energize RI, the Providence Gas Company (ProvGas) a wholly-owned
subsidiary of the Registrant, may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999 and 2000, respectively. In addition, ProvGas may not earn
less than a seven percent return on average common equity. In the event that
ProvGas earns in excess of 10.9 percent or less than seven percent, the
Registrant will defer revenues or costs through a deferred revenue account. Any
balance in the deferred revenue account at the end of the Plan will be refunded
to or recovered from customers in a manner to be approved by the RIPUC.

   The implementation this year of Energize RI changed how ProvGas 
records its gas costs, resulting in higher margin reflected in the first half of
the fiscal year and lower margin in the second half.  While this change does not
impact annual earnings, it reduced margin in the third quarter by $1.3 million
compared to last year's third quarter.

   In May 1996, the RIPUC approved a Rate Design Settlement Agreement among 
ProvGas, the Division, TEC-RI, and a consortium of oil heat organizations.
The Agreement began a process of unbundling natural gas service in Rhode Island,
enabling customers to choose their gas suppliers.

                                     I-12
<PAGE>
 
   The Agreement went into effect in June 1996. The initial step was available
to approximately 120 of the largest commercial and industrial customers. In
August 1997, the RIPUC approved a plan, called "Business Choice", to further
unbundle services to an additional 3,400 medium and large commercial and
industrial customers. The Registrant commenced Business Choice in December 1997.
At June 30, 1998, the Registrant had approximately 1,000 firm transportation
customers.

   Energize RI continues the process of unbundling by requiring ProvGas
to provide unbundled service offerings for up to 10 percent per year of firm
system throughput.

   In 1998, North Attleboro Gas Company, a small distribution company with over
3,500 customers located in Massachusetts that is owned and operated by the
Registrant, expects to file plans with the Massachusetts Department of Public
Utilities for a comprehensive unbundling of rates in collaboration with other
local distribution companies.

B) Business Opportunities

   There are virtually unlimited opportunities to unbundle services, form
alliances, custom-tailor services for customers, and compete with other energy
suppliers.  To facilitate the transition to a diversified energy marketer and
service provider, the Registrant is planning to form business alliances outside
of its traditional utility business. The Registrant is also seeking investment
opportunities in non-regulated energy ventures.

   In November 1997, as part of the Registrant's strategic plan to strengthen
its position in the energy industry, the Registrant purchased two Rhode Island -
based oil distribution companies, which together serve over 4,000 customers.
These acquisitions continue the Registrant's transition to a diversified energy
marketer.

   In May 1998, the Registrant and Southern mutually agreed to end their joint
efforts to develop a New England retail energy business under the name
Providence-Southern, LLC due to different strategic goals.  The Registrant will
continue to use its wholly-owned retail energy marketing company Providence
Energy Services, Inc. ("ProvEnergy Services") as the vehicle to grow its natural
gas and electricity business to retail accounts in New England.  To strengthen
its position in the evolving energy market, the Registrant is negotiating with
Duke Energy Trading and Marketing, LLC for DETM to provide wholesale natural gas
and electricity to support ProvEnergy Services' retail marketing efforts.

   In July 1998, the Registrant and ERI Services, Inc. ("ERI Services") agreed
to form a joint venture, Capital Center Energy Company, LLC ("CCEC").  The Joint
venture will be owned 50% by the Registrant and 50% by ERI Services.  CCEC's
wholly-owned subsidiary DownCity Energy Company, LLC ("DownCity")was selected as
the exclusive electric, heat, air conditioning ("HVAC") and related services
provider for most of the Providence Place Mall (the "Mall") for the next thirty
years.

   DownCity will serve more than 3,000,000 square feet of retail stores, common
areas, offices and parking facilities. Currently, the three anchor stores and
the cinema are not included in the plan. The electric demand to be met by
DownCity is expected to be 12 megawatts, the approximate consumption of more
than 6,500 households. The system being developed for the Mall includes three 
on-site natural gas-powered electric generators.

   Under the agreement with Commonwealth Development(developers of the Mall),
Downcity will perform the following:


 .  Own, operate and maintain the HVAC systems
 .  Provide electric supply and emergency power
 .  Own, operate and maintain a six megawatt on-site generation plant to provide
   electric and emergency supply
 .  Provide metering services for each of the tenants
 .  Manage all energy billing to the tenants and the developer
 
                                     I-13
<PAGE>
 
   Construction of the energy systems is expected to begin this summer. The
entire energy project will be operational in advance of the scheduled August,
1999, opening of the Mall. DownCity will not have a significant impact on the
Registrant's results of operations in fiscal 1998.

Liquidity and Capital Resources
-------------------------------

   The Registrant meets seasonal cash requirements and finances its capital
expenditures program on an interim basis through short-term borrowings.
Management believes its available financings are sufficient to meet these
seasonal needs.

   During the current nine month period, the Registrant's cash flow from
operations increased approximately $8.6 million compared to the same period last
year.  This increase is primarily due to the sale of the Registrant's working
gas in storage to Duke Energy Trading and Marketing as well as additional margin
generated by Energize RI.  The additional cash flows resulting from Energize RI
have enabled the Registrant to avoid its pattern of traditional seasonal short-
term borrowings during the current fiscal year.

   Capital expenditures for the year to date period of $18.9 million increased
$5.8 million or 44.2 percent when compared to the $13.1 million last year. As a
result of Energize RI, the Registrant is committed to making significant capital
improvements to its distribution system during the Plan's three-year term. These
improvements will expand the distribution system into economically developing
areas of Rhode Island as well as accelerate the replacement of older mains and
services. Additionally, technology expenditures relating to the Registrant's
decision to move to a client server environment have also contributed to this
increase. Capital expenditures for the remainder of the fiscal year are expected
to be approximately $9.7 million. Anticipated capital expenditures during this
and the next two fiscal years are expected to total approximately $83.2 million.

   To finance capital expenditures, the Registrant issued $15 million in First
Mortgage bonds in April 1998 at 6.82 percent.  These bonds require semi-annual
interest payments and a lump sum repayment of principal in 20 years.

   The Registrant continues to focus on addressing Year 2000 implications in its
technology systems, embedded technologies, and with its significant suppliers 
and key customers.

   Year 2000 readiness will in large part be achieved in the course of the 
Registrant's implementation of its long range technology plan to migrate from a 
mainframe environment to a client server environment. Pursuant to this plan 
significant portions of the Registrant's software, including its customer 
billing and financial reporting systems, are currently being replaced. The new 
client server systems will lower operating costs, increase functionality and 
provide flexibility, as well as be Year 2000 ready. The implementation date for 
these systems is scheduled for the first quarter in calendar 1999.
   
   The Registrant has partnered with a major engineering and consulting firm to 
address embedded technology. The system identification phase of this assessment 
is expected to be completed by September 1998.

   Also, the Registrant will commence its assessment of Year 2000 readiness of 
its significant suppliers and key customers no later than the end of calendar 
1998 and will continue this assessment on an ongoing basis.

   Failure of the Registrant or any of its significant vendors to complete any 
necessary modifications and conversions in a timely manner could have a material
adverse impact on the operations of the Registrant.

                                     I-14
<PAGE>
 
PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
----------------------------------------------

PART II.  OTHER INFORMATION
-------   -----------------

Item 6 (a).  Exhibits
---------------------

   10a.  Management contract dated May 26, 1998 between Susann G. Mark, Vice
President, General Counsel and Corporate Secretary and the Registrant.

   10b.  Redacted gas supply contract dated October 1, 1997 between Duke Energy
Trading and Marketing, LLC and the Registrant. (Filed as exibit 10 to the report
of The Providence Gas Company in Form 10-Q for the quarter ended June 30, 1998,
incorporated herein by this reference.)

   27.  Financial Data Schedule

Item 6 (b).  Reports on Form 8-K
--------------------------------

  On May 22, 1998 the Registrant filed a report on Form 8-K regarding
termination of the Registrant's joint venture agreement with Southern Energy,
Inc.

   On July 29, 1998 the Registrant filed a report on Form 8-K regarding a new
common stock rights agreement.

                                     II-1
<PAGE>
 
                PROVIDENCE ENERGY CORPORATION AND SUBSIDIARIES
                ----------------------------------------------



   It is the opinion of management that the financial information contained in
this report reflects all adjustments necessary for a fair statement of results
for the period reported, but such results are not necessarily indicative of
results to be expected for the year due to the seasonal nature of the
Registrant's gas operations.  All accounting policies and practices have been
applied in a manner consistent with prior periods.



                                   SIGNATURE
                                   ---------

   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.



                                   Providence Energy Corporation
                                   (Registrant)



                                   BY:/s/  Gary S. Gillheeney
                                      -----------------------------
                                           Gary S. Gillheeney
                                           Senior Vice President,
                                           Chief Financial Officer,
                                           Treasurer and Assistant
                                           Secretary


Dated:  August 14, 1998
        ---------------

                                     II-2