UNITED STATES
                       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 ended June 30, 2005

                                       or

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



                          Commission File Number 1-7297

                                   NICOR INC.
            (Exact name of registrant as specified in its charter)



                Illinois                               36-2855175
        (State of Incorporation)                    (I.R.S. Employer
                                                  Identification Number)

           1844 Ferry Road
        Naperville, Illinois 60563-9600              (630)305-9500
   (Address of principal executive offices)  (Registrant's telephone number)


      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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes [X] No [ ].

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common stock, par value
$2.50, outstanding at July 29, 2005, were 44,148,027 shares.




<PAGE>

Nicor Inc.

Table of Contents
-----------------

Glossary .................................................................  ii

Part I - Financial Information

   Item 1. Financial Statements (Unaudited)

           Condensed Consolidated Statements of Operations:
             Three and six months ended
             June 30, 2005 and 2004 ........................................ 1

           Condensed Consolidated Statements of Cash Flows:
             Six months ended
             June 30, 2005 and 2004 ........................................ 2

           Condensed Consolidated Balance Sheets:
             June 30, 2005 and 2004, and
             December 31, 2004 ............................................. 3

           Notes to the Condensed Consolidated Financial Statements ........ 4

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations ............................ 19

   Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 33

   Item 4. Controls and Procedures ........................................ 33

Part II - Other Information

   Item 1. Legal Proceedings .............................................. 33

   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .... 33

   Item 4. Submission of Matters to a Vote of Security Holders ............ 33

   Item 6. Exhibits ....................................................... 35

           Signature ...................................................... 36


                                        i


<PAGE>

Nicor Inc.

Glossary
--------

Chicago Hub. A wholly owned venture of Northern Illinois Gas Company (Nicor Gas)
which provides natural gas storage and transmission-related services to
marketers and other gas distribution companies.

Degree day. The extent to which the daily average temperature falls below
65 degrees Fahrenheit. Normal weather for Nicor Gas service territory, for
purposes of this report, is considered to be 5,830 degree days per year for
2005 and 6,000 degree days per year for 2004.

EN Engineering. A 50-percent-owned joint venture that provides engineering and
corrosion services.

FERC. Federal Energy Regulatory Commission, the agency that regulates the
interstate transportation of natural gas, oil and electricity.

Horizon Pipeline. A 50-percent-owned joint venture that operates an interstate
regulated natural gas pipeline of approximately 70 miles, stretching from
Joliet, Illinois to near the Wisconsin/Illinois border.

HVAC. Heating, ventilation and air conditioning.

ICC. Illinois Commerce Commission, the agency that establishes the rules and
regulations governing utility rates and services in Illinois.

Mcf, MMcf, Bcf. Thousand cubic feet, million cubic feet, billion cubic feet.

Nicor Enerchange. A wholly owned business that engages in wholesale marketing of
natural gas supply services primarily in the Midwest, administers the Chicago
Hub for Nicor Gas, and manages Nicor Solutions' product risks.

Nicor Energy. A 50-percent-owned retail energy marketing joint venture which
disposed of its customer contracts and ceased operations during 2003.

Nicor Gas. Northern Illinois Gas Company (doing business as Nicor Gas Company)
is a wholly owned public utility business and one of the nation's largest
distributors of natural gas.

Nicor Services. A wholly owned business that provides product warranty
contracts, customer relationship management services, repair, maintenance and
installation services and equipment to retail markets, including residential and
small commercial customers.

Nicor Solutions. A wholly owned business that offers residential and small
commercial customers energy-related products that provide for natural gas cost
stability and management of their utility bill.

PBR. Performance-based rate, a regulatory plan which ended on January 1, 2003,
that provided economic incentives based on natural gas cost performance.


                                       ii


<PAGE>

Glossary (concluded)
--------------------

TEU. Twenty-foot equivalent unit, a measure of volume in containerized
shipping equal to one 20-foot-long container.

Triton. Triton Container Investments LLC, a cargo container leasing company in
which Nicor Inc. has an investment.

Tropical Shipping. A wholly owned business and a leading carrier of
containerized freight in the Bahamas and the Caribbean region.





                                       iii


<PAGE>

Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements
-------  --------------------

Nicor Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(millions, except per share data)
                                          Three months ended  Six months ended
                                               June 30            June 30
                                          ------------------  -----------------
                                             2005     2004      2005     2004
                                          --------- --------  -------- --------

Operating revenues
   Gas distribution (includes revenue
    taxes of $27.4, $25.2, $99.6 and
    $96.1, respectively)                  $  372.2 $  338.4  $1,451.1  $1,373.5
   Shipping                                   92.3     72.4     182.8     140.2
   Other energy ventures                      33.8     33.5      80.5      85.2
   Corporate and eliminations                (13.9)   (14.8)    (50.2)    (53.7)
                                          --------- --------  -------- --------
                                             484.4    429.5   1,664.2   1,545.2
Operating expenses
   Gas distribution
    Cost of gas                              230.6    200.5   1,067.4     992.7
    Operating and maintenance                 58.6     54.6     127.5     118.5
    Depreciation                              38.6     37.4      77.3      74.6
    Taxes, other than income taxes            31.4     29.1     107.4     103.8
    Mercury-related costs, net                   -       .2        .1        .1
    Property sale gains                        (.1)    (5.5)      (.1)     (5.5)
   Shipping                                   82.0     65.5     160.3     129.1
   Other energy ventures                      29.1     28.1      77.4      76.9
   Litigation charges (recoveries), net      (29.4)       -     (29.9)     38.5
   Other corporate expenses and
     eliminations                            (14.4)   (13.5)    (51.0)    (50.9)
                                          --------- --------  -------- --------
                                             426.4    396.4   1,536.4   1,477.8
                                          --------- --------  -------- --------
Operating income                              58.0     33.1     127.8      67.4
Interest expense, net of amounts
  capitalized                                  9.9      8.3      22.1      19.5
Equity investment income, net                  1.9      1.7       3.9       2.9
Other income (expense), net                    2.1       .9       3.1       1.3
                                          --------- --------  -------- --------
Income before income taxes                    52.1     27.4     112.7      52.1
Income tax expense                            18.7      7.9      35.6      13.1
                                          --------- --------  -------- --------
Net income                                $   33.4  $  19.5   $  77.1  $   39.0
                                          ========= ========  ======== ========

Average shares of common stock outstanding
   Basic                                      44.1    44.1       44.1      44.0
   Diluted                                    44.4    44.3       44.4      44.2

Earnings per average share of common stock
   Basic                                  $    .76 $   .44   $   1.75  $    .89
   Diluted                                     .75     .44       1.74       .88

Dividends declared per share of common
   stock                                  $   .465 $  .465   $   .930  $   .930


The accompanying notes are an integral part of these statements.

                                       1


<PAGE>

Nicor Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(millions)
                                                            Six months ended
                                                                June 30
                                                           -------------------
                                                             2005       2004
                                                           --------   --------
Operating activities
   Net income                                              $  77.1    $  39.0
   Adjustments to reconcile net income to net cash flow
     provided from operating activities:
      Depreciation                                            86.2       83.6
      Deferred income tax expense                             13.3        3.0
      Gain on sale of property, plant and equipment              -       (5.5)
      Gain on whole-life insurance policy proceeds            (1.2)         -
      Changes in assets and liabilities:
        Receivables, less allowances                         265.6      195.7
        Gas in storage                                       172.9      190.3
        Deferred/accrued gas costs                            24.5       (4.9)
        Other assets                                           6.2      (22.8)
        Accounts payable                                     (31.4)      43.3
        Temporary last-in, first-out inventory
          liquidation                                        171.4       77.8
        Other liabilities                                    (25.4)      34.0
      Other items                                              2.1        1.6
                                                           --------   --------
   Net cash flow provided from operating activities          761.3      635.1
                                                           --------   --------

Investing activities
   Capital expenditures                                      (96.7)     (80.1)
   Sales (purchases) of restricted short-term
     investments                                                 -      (38.5)
   Purchases of available-for-sale securities                    -      (17.7)
   Proceeds from sales of available-for-sale securities          -        2.7
   Net (increase) decrease in other short-term
     investments                                             (22.4)       5.7
   Net proceeds from sale of property, plant and
     equipment                                                  .2        7.4
   Receipt of whole-life insurance policy proceeds             1.4          -
   Other investing activities                                 (1.7)       (.6)
                                                           --------   --------
   Net cash flow used for investing activities              (119.2)    (121.1)
                                                           --------   --------

Financing activities
   Commercial paper issuances with maturities
     over 90 days                                                -       35.0
   Commercial paper repayments with maturities
     over 90 days                                                -     (575.0)
   Net issuances (repayments) of commercial paper with
     maturities of 90 days or less                          (490.0)      94.0
   Dividends paid                                            (41.0)     (41.0)
   Borrowings against cash surrender value of life
     insurance policies                                          -       26.1
   Repayment of loan against cash surrender value of
     life insurance policies                                     -      (11.7)
   Other financing activities                                  1.8        1.2
                                                           --------   --------
   Net cash flow used for financing activities              (529.2)    (471.4)
                                                           --------   --------

Net increase in cash and cash equivalents                    112.9       42.6

Cash and cash equivalents, beginning of period                12.9       50.3
                                                           --------   --------

Cash and cash equivalents, end of period                   $ 125.8    $  92.9
                                                           ========   ========

Supplemental schedule of noncash investing and financing activities:

In the second quarter of 2004 one of Nicor's Directors and Officers insurance
carriers paid $29.0 million into an escrow account as described in Note 4.
Assets and liabilities were recorded as follows:

    Restricted short-term investments                                $   29.0
    Obligation related to restricted investments                         29.0

During the second quarter of 2005, the escrow arrangement was terminated and
the full amount of the escrow of $29.0 million plus the earnings thereon of
$0.4 million, was distributed to the company and recorded in income.  The
release of the amount from escrow and the change in the obligation related to
restricted investment are netted in Investing activities above.


The accompanying notes are an integral part of these statements.

                                       2
<PAGE>

Nicor Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(millions)


                                           June 30    December 31    June 30
                                             2005         2004          2004
                                         -----------  -----------   -----------
            Assets
            ------
Current assets
   Cash and cash equivalents             $    125.8   $     12.9    $     92.9
   Restricted short-term investments              -         29.1          67.5
   Short-term investments, at cost which
     approximates market                       65.4         41.2          29.9
   Receivables, less allowances of $30.6,
     $21.9 and $29.3, respectively            317.6        583.2         281.1
   Gas in storage                              47.8        220.7          43.3
   Deferred income taxes                       69.9         72.3          71.8
   Other                                       68.5         61.5          70.0
                                         -----------  -----------   -----------
                                              695.0      1,020.9         656.5
                                         -----------  -----------   -----------
Property, plant and equipment, at cost
   Gas distribution                         3,897.1      3,831.6       3,753.8
   Shipping                                   304.6        300.8         299.0
   Other                                       11.9         11.2           9.0
                                         -----------  -----------   -----------
                                            4,213.6      4,143.6       4,061.8
   Less accumulated depreciation            1,631.1      1,593.8       1,557.2
                                         -----------  -----------   -----------
                                            2,582.5      2,549.8       2,504.6
                                         -----------  -----------   -----------
Prepaid pension costs                         184.6        181.5         179.3
Long-term investments                         138.6        137.6         134.7
Other assets                                   70.8         85.4          81.4
                                         -----------  -----------   -----------
                                         $  3,671.5   $  3,975.2    $  3,556.5
                                         ===========  ===========   ===========

    Liabilities and Capitalization
    ------------------------------

Current liabilities
   Short-term borrowings                 $        -   $    490.0    $    129.0
   Accounts payable                           471.5        502.9         428.7
   Temporary last-in, first-out
     inventory liquidation                    171.4            -          77.8
   Accrued gas costs                           92.8         68.3          42.1
   Dividends payable                           20.5         20.5          20.5
   Obligations related to restricted
     investments                                  -         29.1          67.5
   Other                                       44.4         60.6          29.5
                                         -----------  -----------   -----------
                                              800.6      1,171.4         795.1
                                         -----------  -----------   -----------
Deferred credits and other liabilities
   Accrued future removal costs               730.5        706.4         694.0
   Deferred income taxes                      607.7        593.4         567.9
   Regulatory income tax liability             43.2         44.8          46.5
   Unamortized investment tax credits          32.8         33.8          34.2
   Other liabilities                          169.9        179.4         167.9
                                         -----------  -----------   -----------
                                            1,584.1      1,557.8       1,510.5
                                         -----------  -----------   -----------
Capitalization
  Long-term obligations
    Long-term bonds and notes, net of
      unamortized discount                    495.5        495.3         495.0
    Mandatorily redeemable preferred stock      1.4          1.6           1.6
                                         -----------  -----------   -----------
                                              496.9        496.9         496.6
                                         -----------  -----------   -----------
   Common equity
    Common stock                              110.4        110.2         110.1
    Paid-in capital                             7.5          5.6           4.7
    Retained earnings                         676.3        640.3         645.2
    Unearned compensation                       (.1)         (.2)          (.2)
    Accumulated other comprehensive
      loss, net                                (4.2)        (6.8)         (5.5)
                                         -----------  -----------   -----------
                                              789.9        749.1         754.3
                                         -----------  -----------   -----------
                                            1,286.8      1,246.0       1,250.9
                                         -----------  -----------   -----------
                                         $  3,671.5   $  3,975.2    $  3,556.5
                                         ===========  ===========   ===========


The accompanying notes are an integral part of these statements.


                                       3
<PAGE>


Nicor Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

1.   BASIS OF PRESENTATION

The following condensed unaudited consolidated financial statements of Nicor
Inc. (Nicor) have been prepared by the company pursuant to the rules and
regulations of the United States Securities and Exchange Commission (SEC).
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to SEC rules and
regulations. The condensed financial statements and notes should be read in
conjunction with the financial statements and the notes thereto included in the
company's 2004 Annual Report on Form 10-K.

The information furnished reflects, in the opinion of the company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full fiscal year due to seasonal and other factors.

2.   ACCOUNTING POLICIES

Gas in storage. Gas distribution inventory is carried at cost applying a
last-in, first-out (LIFO) method on a calendar-year basis. For interim periods,
the difference between estimated replacement cost and the LIFO cost for
quantities of gas temporarily withdrawn from storage is recorded in cost of gas
and in current liabilities as a temporary LIFO liquidation.

Regulatory assets and liabilities. Northern Illinois Gas Company (Nicor Gas), a
wholly owned subsidiary of Nicor, is regulated by the Illinois Commerce
Commission (ICC), which establishes the rules and regulations governing utility
rates and services in Illinois. The company applies accounting standards that
recognize the economic effects of rate regulation and, accordingly, has recorded
regulatory assets and liabilities. The company had regulatory assets and
liabilities as follows (in millions):

                                           June 30   December 31   June 30
                                             2005       2004         2004
                                         ----------  -----------  ----------
   Regulatory assets
   Deferred environmental costs           $   17.7    $    35.4    $   31.5
   Unamortized losses on reacquired debt      19.3         19.9        20.4
   Deferred rate case costs                    3.6          2.9         1.2
   Other noncurrent regulatory assets           .3            -           -
                                         ----------  -----------  ----------
                                          $   40.9    $    58.2    $   53.1
                                         ==========  ===========  ==========

   Regulatory liabilities
   Accrued future removal costs -
     current                              $   12.1    $    11.6    $      -
   Accrued future removal costs -
     noncurrent                              730.5        706.4       694.0
   Accrued gas costs                          92.8         68.3        42.1
   Regulatory income tax liability            43.2         44.8        46.5
   Other noncurrent regulatory liabilities     5.0           .7         2.2
                                         ----------  -----------  ----------
                                          $  883.6    $   831.8    $  784.8
                                         ==========  ===========  ==========

All regulatory assets noted above are classified in noncurrent other assets. The
current portion of the accrued future removal costs obligation is classified in
current other liabilities. Other noncurrent regulatory liabilities are
classified in noncurrent other liabilities.

                                        4


<PAGE>

Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes incurred as operating expenses. Revenue
taxes included in operating expense for the three and six months ended June 30,
2005 were $26.7 million and $97.3 million, respectively, and $24.5 million and
$94.0 million, respectively, for the same periods ending June 30, 2004.

Reclassifications. Certain reclassifications have been made to conform the prior
year's financial statements to the current year's presentation.

3.  NEW ACCOUNTING PRONOUNCEMENTS

Accounting Changes and Error Corrections. In May 2005, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 154, Accounting Changes and Error Corrections - a replacement of Accounting
Principles Board (APB) Opinion No. 20 and SFAS No. 3. The statement requires
retrospective application of voluntary changes in accounting principle and error
corrections. Retrospective application is also required for mandatory changes in
accounting principle if the transition method is not prescribed. The statement
is effective for the company beginning January 1, 2006 and will be adopted
prospectively at that time.

Accounting for Conditional Asset Retirement Obligations. In March 2005, the FASB
issued Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 indicates that an entity is required to recognize
the fair value of a liability for an asset retirement obligation in the period
in which the unconditional legal obligation is incurred, even if the nature of
the timing or method of settlement is conditional on some future event that may
or may not be within the control of the company. The interpretation is effective
for Nicor no later than December 31, 2005 and may be adopted either
retrospectively or prospectively. The company is evaluating the interpretation
and has not yet determined the impact of adopting its provisions or the method
of adoption.

Share-Based Payment. In December 2004, the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment (SFAS 123R). SFAS 123R requires entities to adopt the
fair value method of accounting for stock-based compensation plans. The fair
value method would require the amortization of the fair value of stock-based
compensation, as determined at the date of grant, over the related vesting
period. SFAS 123R also requires certain share-based liabilities, such as stock
appreciation rights, to be recorded at fair value, and most employee stock
purchase plans that offer a discount of greater than five percent will be
considered compensatory, which will require the entire discount to be charged to
expense. The provisions of SFAS 123R are effective for Nicor beginning January
1, 2006 and the company is currently assessing which method of adoption will be
used. The company continues to evaluate SFAS 123R and has not yet determined the
impact of adopting its provisions. However, the implementation of this standard
is not expected to have a material impact on the company's cash flow, financial
position or results of operations.

At June 30, 2005, Nicor continues to apply the intrinsic value method of APB
Opinion No. 25, Accounting for Stock Issued to Employees, for awards granted
under its stock-based compensation plans. The intrinsic value method does not
require compensation expense to be recognized based on Nicor's current option
terms. If compensation expense for stock options had been recognized based upon
the fair value method, the impact on the company's net income and earnings per
share would have been as follows (in millions, except per share data):


                                        5


<PAGE>

                                    Three months ended      Six months ended
                                         June 30                June 30
                                    ------------------     ------------------
                                      2005      2004         2005      2004
                                    --------  --------     --------  --------

 Net income
   As reported                      $  33.4   $  19.5      $  77.1    $ 39.0
   Less: Total stock-based
         employee compensation
         expense determined under
         the fair value method for
         all awards, net of tax          .3        .3           .6        .5
                                    --------  --------     --------  --------
   Pro forma                        $  33.1   $  19.2      $  76.5   $  38.5
                                    ========  ========     ========  ========


 Earnings per share
     Basic - As reported            $   .76   $   .44      $  1.75   $   .89
     Basic - Pro forma                  .75       .44         1.73       .88
     Diluted - As reported              .75       .44         1.74       .88
     Diluted - Pro forma                .75       .43         1.72       .87

The American Jobs Creation Act of 2004. In December 2004, the FASB issued FASB
Staff Position SFAS No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (the Act) (FSP 109-2). FSP 109-2 provides additional time and guidance for
companies to determine the Act's effects on their plans for reinvestment or
repatriation. Accordingly, these financial statements do not reflect any impact
of the Act. (See Note 6 Income and Other Taxes.)

4.   RESTRICTED SHORT-TERM INVESTMENTS

At June 30, 2004, Nicor had $67.5 million of restricted short-term investments
and a corresponding $67.5 million current liability. The amounts were comprised
of two escrow funds established in the second quarter of 2004. The first escrow
fund was established by a $38.5 million payment under an agreement to settle
securities class actions. Subsequent to final court approval of the settlement
in July 2004, lead plaintiff's counsel became the sole custodian of that escrow
fund and the fund was no longer reflected in the company's financial statements.
The second escrow fund was established through a $29.0 million deposit by one of
Nicor's Directors and Officers insurance carriers to be used to satisfy Nicor's
directors' and officers' liabilities and expenses associated with claims
asserted against them. On May 17, 2005 the restriction on this fund ceased, and
the funds were released to the company. As of June 30, 2005 no restricted
short-term investments remained. (See also Note 16 Contingencies.)

5.   SHORT-TERM DEBT

Nicor Inc. and Nicor Gas established two revolving credit facilities totaling
$900 million with major domestic and foreign banks in 2004. These facilities,
which serve as backup for the issuance of commercial paper, consist of a $500
million, three-year revolver, expiring September 2007, available to Nicor Inc.
and Nicor Gas, and a $400 million, 210-day seasonal revolver available to Nicor
Gas which expired in April 2005. The company had no commercial paper borrowings
outstanding at June 30, 2005, and $490.0 million and $129.0 million of
commercial paper borrowings outstanding at December 31, 2004 and June 30, 2004,
respectively. The company is in compliance with all debt covenants at June 30,
2005.



                                        6


<PAGE>

6.  INCOME AND OTHER TAXES

Effective Income Tax Rate. The effective income tax rate for the quarter ended
June 30, 2005 increased to 35.9 percent from 29.0 percent for the prior-year
period. The effective income tax rate for the six months ended June 30, 2005
also increased over the corresponding prior year rate to 31.6 percent from 25.1
percent. These increases reflect recording 2004 net litigation charges ($38.5
million) and 2005 net recoveries and earnings thereon ($29.9 million
year-to-date and $29.4 million quarter-to-date) at Nicor's marginal tax rate of
approximately 40 percent.

Tax Uncertainties. The company accrues income and other tax and interest related
to tax uncertainties. Tax uncertainties arise due to actual or potential
disagreements about the tax treatment of specific items between the company and
the governmental agency reviewing the company's tax returns. At June 30, 2005,
December 31, 2004 and June 30, 2004, the company had accrued approximately $8.6
million, $6.3 million and $5.7 million, respectively, for such uncertainties.

In 2003, Nicor received an income tax refund, which adjusted the deferred income
tax liability, of approximately $100 million attributable to a tax loss
carryback associated with a change in tax accounting methods, subject to
Internal Revenue Service review and approval as part of normal ongoing audits.

American Jobs Creation Act. On October 22, 2004, the American Jobs Creation Act
of 2004 was enacted. Certain provisions of the Act may impact income taxes
related to the earnings of foreign subsidiaries of Tropical Shipping. One
provision provides that a portion of a foreign subsidiary's income would no
longer be subject to current federal taxation because of its status as shipping
income, beginning in 2005, to the extent such earnings are retained by the
foreign subsidiary. Another provision of the Act allows a portion of cumulative
undistributed earnings of a foreign subsidiary to be repatriated to the United
States by the end of 2005, at an effective federal income tax rate of 5.25
percent.

Presently Nicor has recorded a $47 million deferred income tax liability, based
on a federal income tax rate of 35 percent, associated with approximately $134
million of earnings retained by its foreign subsidiaries. Nicor has not provided
deferred income taxes of approximately $15 million on approximately $43 million
of cumulative undistributed earnings of its foreign subsidiaries through June
30, 2005 that are considered to be indefinitely invested in foreign operations.
The amount of cumulative undistributed tax basis earnings of its foreign
subsidiaries is approximately $190 million at June 30, 2005. The amount of
earnings that may ultimately be repatriated in 2005, and therefore potentially
subject to the 5.25 percent effective tax rate discussed above, will be impacted
by several factors. These factors include, without limitation, a determination
of the maximum eligible repatriation amount under provisions of the Act and
other federal income tax rules and regulations, as well as the ongoing cash
requirements of Tropical Shipping, the amount of such earnings previously taxed,
and the extent of qualifying investment uses, as defined in the Act, for amounts
to be repatriated. The extent to which Tropical Shipping's ongoing earnings will
be subject to federal taxation will be dependent upon several factors,
including, without limitation, the amount of distributions, if any, to its
United States parent and the clarification of certain provisions of the Act and
its impact on other federal income tax rules and regulations. Nicor is currently
assessing the impact, if any, of the provisions of the Act on the amount, if
any, ultimately to be repatriated and is therefore unable to determine, at this
time, the impact of the Act on its financial statements. Accordingly, these
financial statements do not reflect any impact of the Act.

Any future adjustments to income tax expense that may result from the Act will
depend on the amount, if any, of foreign earnings that are repatriated or
expected to be repatriated to the United States. Such adjustments could be
material to the results of operations in the period recorded. Nicor will
complete its evaluation of the Act no later than December 31, 2005.


                                        7


<PAGE>

7.   ACCRUED UNBILLED REVENUES

Receivables include accrued unbilled revenues of $44.2 million, $205.0 million
and $46.4 million at June 30, 2005, December 31, 2004 and June 30, 2004,
respectively, related primarily to gas distribution operations. Nicor Gas
accrues revenues for estimated deliveries to customers from the date of their
last bill until the balance sheet date.

8.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded amount of short-term investments, restricted short-term investments
and short-term borrowings approximates fair value because of the short maturity
of the instruments. Long-term debt outstanding, including current maturities, is
recorded at the principal balance outstanding, net of unamortized discount and
issuance costs. The principal balance of Nicor Gas' First Mortgage Bonds
outstanding at June 30, 2005, December 31, 2004 and June 30, 2004 was $500
million. Based on quoted market interest rates, the fair value of the company's
First Mortgage Bonds outstanding, including current maturities, was
approximately $549 million, $530 million and $517 million at June 30, 2005,
December 31, 2004 and June 30, 2004, respectively.

Derivative financial instruments are recorded by various Nicor subsidiaries at
fair value as determined primarily from actively quoted prices. These
instruments had gross asset (liability) fair values of $16.0 million and $(2.9)
million, respectively, at June 30, 2005, $5.8 million and $(2.3) million,
respectively, at December 31, 2004 and $6.8 million and $(2.6) million,
respectively, at June 30, 2004. The fair value of derivative financial
instruments held on June 30, 2005 relates primarily to Nicor Gas. The derivative
financial instruments held by Nicor Gas are for the purpose of hedging natural
gas purchases, and their settlement is passed directly through to customers
without markup, subject to ICC review.

9.   POSTRETIREMENT BENEFITS

Nicor Gas maintains a noncontributory defined benefit pension plan covering
substantially all employees hired prior to 1998. Pension benefits are based on
years of service and highest average salary for management employees and job
level for unionized employees. The benefit obligation related to collectively
bargained benefits considers the company's past practice of regular benefit
increases to reflect current wages. Nicor Gas also provides health care and life
insurance benefits to eligible retired employees under a plan that includes a
limit on the company's share of cost for employees hired after 1982. The
company's postretirement benefit costs have historically been considered in rate
proceedings in the period they are accrued.

About one-fourth of the net periodic benefit cost or credit related to these
plans has been capitalized as a cost of constructing gas distribution facilities
and the remainder is included in gas distribution operating and maintenance
expense. Net periodic benefit cost (credit) included the following components
(in millions):


                                        8


<PAGE>

                                             Pension        Health care and
                                             benefits       other benefits
                                          ---------------   ----------------
                                            2005    2004      2005     2004
                                          ------- -------   -------  -------

 Three months ended June 30
   Service cost                           $  2.3  $  2.2    $   .7   $   .6
   Interest cost                             3.9     3.9       2.6      2.5
   Expected return on plan assets           (8.3)   (7.9)      (.2)     (.2)
   Recognized net actuarial loss              .4      .5       1.1      1.2
   Amortization of prior service cost         .2      .2         -        -
                                          ------- -------   -------  -------
   Net periodic benefit cost (credit)     $ (1.5) $ (1.1)   $  4.2   $  4.1
                                          ======= =======   =======  =======

 Six months ended June 30
   Service cost                           $  4.7  $  4.5    $  1.3   $  1.2
   Interest cost                             7.8     7.9       5.2      5.1
   Expected return on plan assets          (16.6)  (15.9)      (.5)     (.5)
   Recognized net actuarial loss              .7     1.0       2.4      2.3
   Amortization of prior service cost         .3      .3         -        -
                                          ------- -------   -------  -------
   Net periodic benefit cost (credit)     $ (3.1) $ (2.2)   $  8.4    $ 8.1
                                          ======= =======   =======  =======

The company reflected its best estimate of the potential subsidy it may receive
under the Medicare Prescription Drug, Improvement and Modernization Act of 2003
in its October 1, 2004 measurement of the postretirement health care obligation.
The potential subsidy reduced the benefit obligation by $19.4 million. Beginning
in 2005, the company has also reflected its best estimate of the potential
subsidy in its measurement of net periodic postretirement health care costs. The
estimated subsidy reduced such costs by $0.6 million and $1.2 million for the
three and six month periods ended June 30, 2005, respectively. This reduction
was offset by general medical cost increases.

10.   EQUITY INVESTMENT INCOME, NET

Equity investment income, net totaled $1.9 million and $3.9 million,
respectively, for the three and six-month periods ended June 30, 2005 and $1.7
million and $2.9 million, respectively, for the same periods ended June 30,
2004. These amounts include investment income from Triton, a cargo container
leasing company, of $1.8 million and $3.6 million, respectively, for the three
and six-month periods ended June 30, 2005 and $1.5 million and $3.0 million,
respectively, for the periods ended June 30, 2004.

Nicor received cash distributions from equity investees for the three and
six-month periods ended June 30, 2005 of $1.4 million and $2.5 million,
respectively, and $1.9 million and $2.9 million, for the same periods ended June
30, 2004, respectively.

11.   COMPREHENSIVE INCOME

Total comprehensive income, as defined by SFAS 130, Reporting Comprehensive
Income, is equal to net income plus other comprehensive income and is as follows
(in millions):

                                        Three months ended   Six months ended
                                            June 30              June 30
                                        ------------------   ----------------
                                          2005      2004       2005     2004
                                        --------  --------   -------  -------

Net income                              $  33.4   $  19.5    $ 77.1   $ 39.0
Other comprehensive income, after tax        .2        .4       2.6       .5
                                        --------  --------   -------  -------
Total comprehensive income              $  33.6   $  19.9    $ 79.7   $ 39.5
                                        ========  ========   =======  =======


                                        9


<PAGE>

Net other comprehensive income in the six-month period ended June 30, 2005
consists primarily of unrealized gains and losses from derivative financial
instruments accounted for as cash flow hedges, including Nicor's share of such
amounts from joint ventures and other equity-method investees, coupled with the
reduction in the minimum pension liability of an unfunded supplemental
retirement plan.

12.   BUSINESS SEGMENT INFORMATION

Financial data by major business segment is presented below (in millions):



<TABLE>
<CAPTION>
                                                                   Other     Corporate
                                           Gas                    energy        and
                                      distribution   Shipping    ventures   eliminations  Consolidated
                                      ------------  ----------  ---------  -------------  ------------

<S>                                   <C>           <C>         <C>        <C>            <C>

  Three months ended June 30, 2005
   Operating revenues
    External customers                $      358.2  $     92.3  $   33.9   $          -   $      484.4
    Intersegment                              14.0           -       (.1)         (13.9)             -
                                      ------------  ----------  ---------  -------------  ------------
                                      $      372.2  $     92.3  $   33.8   $      (13.9)  $      484.4
                                      ============  ==========  =========  =============  ============

   Operating income                   $       13.1  $     10.3  $    4.7   $       29.9   $       58.0

  Three months ended June 30, 2004
   Operating revenues
    External customers                $      323.9  $     72.4  $   33.2   $          -   $      429.5
    Intersegment                              14.5           -        .3          (14.8)             -
                                      ------------  ----------  ---------  -------------  ------------
                                      $      338.4  $     72.4  $   33.5   $      (14.8)  $      429.5
                                      ============  ==========  =========  =============  ============

   Operating income (loss)            $       22.1  $      6.9  $    5.4   $       (1.3)  $       33.1

  Six months ended June 30, 2005
   Operating revenues
    External customers                $    1,405.8  $    182.8  $   75.6   $          -   $    1,664.2
    Intersegment                              45.3           -       4.9          (50.2)             -
                                      ------------  ----------  ---------  -------------  ------------
                                      $    1,451.1  $    182.8  $   80.5   $      (50.2)  $    1,664.2
                                      ============  ==========  =========  =============  ============

   Operating income                   $       71.5  $     22.5  $    3.1   $       30.7   $      127.8

  Six months ended June 30, 2004
   Operating revenues
    External customers                $    1,323.9  $    140.2  $   81.1   $          -   $    1,545.2
    Intersegment                              49.6           -       4.1          (53.7)             -
                                      ------------  ----------  ---------  -------------  ------------
                                      $    1,373.5  $    140.2  $   85.2   $      (53.7)  $    1,545.2
                                      ============  ==========  =========  =============  ============

   Operating income (loss)            $       89.3  $     11.1  $    8.3   $      (41.3)  $       67.4


</TABLE>


The majority of intersegment revenues represent gas distribution revenues
related to customers entering into utility-bill management contracts with Nicor
Solutions. Under the utility-bill management contracts, Nicor Solutions bills a
fixed amount to a customer, regardless of changes in natural gas prices or
weather, and in exchange pays the customer's utility bills from Nicor Gas.
Intersegment revenues are eliminated in the consolidated financial statements.



                                       10


<PAGE>

The $30.7 million operating income in the "Corporate and eliminations" column
for the six months ended June 30, 2005 includes $0.5 million and $29.4 million
of net recoveries in the first and second quarters, respectively, related to
reimbursements of costs incurred by Nicor. The $41.3 million operating loss in
the "Corporate and eliminations" column for the six months ended June 30, 2004
includes a $38.5 million litigation charge. Both the 2005 net recoveries and the
2004 litigation charge relate to shareholder derivative lawsuits and securities
class action lawsuits. See Note 16 Contingencies - Securities Class Actions and
Shareholder Derivative Lawsuits. Corporate operating expenses also include
unallocated legal and business development costs.

13.   RATE PROCEEDING

On November 4, 2004, Nicor Gas filed with the ICC for an overall increase in
rates of approximately $83 million (or about 16.5 percent of base rates
revenue). The company's filing provided for a rate of return on original-cost
rate base of 9.34 percent, which reflects an 11.37 percent cost of common
equity. The requested rate increase is needed to recover higher operating costs
and increased capital investments. Nicor Gas has not raised base rates since
1996.

As part of the requested rate increase, Nicor Gas has proposed that all Chicago
Hub revenues and approximately two-thirds of all bad debt expenses be passed
directly through to customers, reducing the earnings variability of both items.
In addition, the company has proposed setting rates assuming normal weather of
5,830 degree days beginning in 2005 versus the 6,000 degree days previously
considered by the company as normal.

The proposed rate increase has been suspended pending the completion of the
ICC's review. The ICC normally has 11 months, from the date of the company's
filing, to complete its review of the rate filing and to issue an order.

On April 5, 2005, Nicor Gas filed rebuttal testimony with the ICC, in response
to the direct testimony of the ICC staff and intervenors in the proceeding, and
revised its proposed rate increase of approximately $83 million to approximately
$78 million. The revised proposal reflects a 10.82 percent cost of common equity
and a rate of return on original-cost rate base of 9.03 percent.

14.   COMMITMENTS

During the first half of 2005, property, plant and equipment purchase
obligations decreased $12.6 million to $19.6 million at June 30, 2005. These
commitments are mostly related to computer system upgrades and additional
freight-handling equipment.

In the first half of 2005, Tropical Shipping's operating lease commitments
increased $51.3 million due primarily to the extension of vessel charter
agreements. Tropical Shipping has certain equipment operating leases with early
termination and renewal options. Total rent expense during the three and
six-month periods ended June 30, 2005 was $8.9 million and $17.6 million,
respectively, compared to $6.3 million and $12.1 million for the prior-year
periods.

Nicor has operating lease commitments with payments due during each calendar
year as follows (in millions):
                                                               After
                        2005    2006    2007    2008    2009    2009    Total
                       ------  ------  ------  ------  ------  ------  --------

Operating leases       $ 34.3  $ 27.1  $ 25.1  $ 24.7  $ 15.7  $ 15.8  $ 142.7



                                       11


<PAGE>

15.   GUARANTEES AND INDEMNITIES

Nicor and certain subsidiaries enter into various financial and performance
guarantees and indemnities providing assurance to third parties.

Financial guarantees. The company has issued guarantees of affiliate obligations
to vendors and other third parties, requiring Nicor to repay the obligations
should its affiliates default. The obligations of the company's wholly owned
subsidiaries are reflected in Nicor's Condensed Consolidated Balance Sheet,
while the obligations of its unconsolidated equity investments are not. As of
June 30, 2005 Nicor had guaranteed the payment of $0.8 million of lease
obligations extending through February 2007, in support of one of its
unconsolidated equity investee's operations, and no liability has been recorded
for this guarantee. Nicor believes the likelihood of payment under this
guarantee is remote.

Tropic Equipment Leasing Inc. (TEL), an indirectly wholly owned subsidiary of
Nicor, holds the company's interests in Triton. TEL has a contingent liability
to restore to zero any deficit in its equity account for income tax purposes in
the unlikely event that Triton is liquidated and a deficit balance remains. This
contingent liability continues for the life of the Triton partnerships and any
payment is effectively limited to the assets of TEL, which were approximately $6
million at June 30, 2005. Nicor believes the likelihood of any such payment by
TEL is either remote, or the fair value of the guarantee is immaterial, and no
liability has been recorded for this contingency.

Performance guarantees. Nicor Services markets separately priced product
warranty contracts that provide for the repair of heating, ventilation and air
conditioning (HVAC) equipment, natural gas lines, and other appliances within
homes. Revenues from these product warranty contracts are recognized ratably
over the coverage period, and related repair costs are charged to expense as
incurred. Repair expenses of $1.1 million and $2.2 million were incurred in the
three and six months ended June 30, 2005, respectively, and $1.1 million and
$2.0 million, respectively, for the same periods last year.

Indemnities. In certain instances, Nicor has undertaken to indemnify current
property owners and others against costs associated with the effects and/or
remediation of contaminated sites for which the company may be responsible under
applicable federal or state environmental laws, generally with no limitation as
to the amount. Aside from liabilities recorded in connection with coal tar
cleanup, as discussed in Note 16 Contingencies - Manufactured Gas Plant Sites,
Nicor believes the likelihood of payment under these indemnifications is either
remote, or the fair value of the indemnification is immaterial, and no liability
has been recorded for these indemnifications.

Nicor has also indemnified, to the fullest extent permitted under the laws of
the State of Illinois and any other applicable laws, its present and former
directors, officers and employees against expenses they may incur in connection
with litigation they are a party to by reason of their association with the
company. There is generally no limitation as to the amount. Expenses associated
with these indemnifications were insignificant in the three and six-month
periods ended June 30, 2005 and 2004. As of June 30, 2005, the company had
recorded a remaining estimated future liability of $0.4 million in connection
with these indemnifications. The company does not expect to incur significant
additional costs under these indemnifications.

16.   CONTINGENCIES

The following contingencies of Nicor are in various stages of investigation or
disposition. Although in some cases the company is unable to estimate the amount
of loss reasonably possible in addition to any amounts already recognized, it is
possible that the resolution of these contingencies, either individually or in
aggregate, will require the company to take charges against, or will result in
reductions in, future



                                       12


<PAGE>

earnings. It is the opinion of management that the resolution of these
contingencies, either individually or in aggregate, could be material to
earnings in a particular period but is not expected to have a material adverse
impact on Nicor's liquidity or financial condition.

Performance-Based Rate (PBR) Plan. Nicor Gas' PBR plan for natural gas costs
went into effect in 2000 and was terminated by the company effective January 1,
2003. Under the PBR plan, Nicor Gas' total gas supply costs were compared to a
market-sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR plan is
currently under ICC review.

There are allegations that the company acted improperly in connection with the
PBR plan, and the ICC and others are reviewing these allegations. On June 27,
2002 the Citizens Utility Board (CUB) filed a motion to reopen the record in the
ICC's proceedings to review the PBR plan (the ICC Proceedings). As a result of
the motion to reopen, Nicor Gas, the Cook County State's Attorney Office
(CCSAO), the staff of the ICC and CUB entered into a stipulation providing for
additional discovery. The Illinois Attorney General's Office (IAGO) has also
intervened in this matter. In addition, the IAGO issued Civil Investigation
Demands (CIDs) to CUB and the ICC staff. The CIDs ordered that CUB and the ICC
staff produce all documents relating to any claims that Nicor Gas may have
presented, or caused to be presented, false information related to its PBR plan.
Parties who were plaintiffs in a dismissed class action proceeding against the
company could potentially intervene in these proceedings. The company has
committed to cooperate fully in the reviews of the PBR plan.

In response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation. The special committee
presented the report of its counsel (Report) to Nicor's Board of Directors on
October 28, 2002.

In response, the Nicor Board of Directors directed the company's management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in prior years' financial
statements resulting in a $24.8 million liability. Included in such $24.8
million liability is a $4.1 million loss contingency. A $1.8 million adjustment
to the previously recorded liability, which is discussed below, was made in the
third quarter of 2004 increasing the recorded liability to $26.6 million. In
addition, Nicor Gas estimates that there is $26.9 million due to the company
from the 2002 PBR plan year, which has not been recognized in the financial
statements due to uncertainties surrounding the PBR plan. The net of these items
and interest income on certain components results in a $1.0 million
reimbursement the company is seeking as of June 30, 2005, pending resolution of
the proceedings discussed below. By the end of 2003 the company completed steps
to correct the weaknesses and deficiencies identified in the detailed study of
the adequacy of internal controls.

Pursuant to the agreement of all parties, including the company, the ICC
re-opened the 1999 and 2000 purchased gas adjustment filings for review of
certain transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan review.

On February 5, 2003, the CCSAO and CUB filed a motion for $27 million in
sanctions against the company in the ICC Proceedings. In that motion, CCSAO and
CUB alleged that Nicor Gas' responses to certain CUB data requests were false.
Also on February 5, 2003, CUB stated in a press release that, in addition to $27
million in sanctions, it would seek additional refunds to consumers. On March 5,
2003, the ICC staff filed a response brief in support of CUB's motion for
sanctions. On May 1, 2003, the


                                       13


<PAGE>

Administrative Law Judges issued a ruling denying CUB and CCSAO's motion for
sanctions. CUB has filed an appeal of the motion for sanctions with the ICC, and
the ICC has indicated that it will not rule on the appeal until the final
disposition of the ICC Proceedings. It is not possible to determine how the ICC
will resolve the claims of CCSAO, CUB or other parties to the ICC Proceedings.

In November 2003, the ICC staff, CUB, CCSAO and the IAGO filed their respective
direct testimony in the ICC Proceedings. The ICC staff is seeking refunds to
customers of approximately $108 million and CUB and CCSAO were jointly seeking
refunds to customers of approximately $143 million. The IAGO direct testimony
alleges adjustments in a range from $145 million to $190 million. The IAGO
testimony as filed is presently unclear as to the amount which IAGO seeks to
have refunded to customers. On February 27, 2004 the above referenced
intervenors filed their rebuttal testimony in the ICC Proceedings. In such
rebuttal testimony, CUB and CCSAO amended the alleged amount to be refunded to
customers from approximately $143 million to $190 million. Nicor Gas filed
rebuttal testimony in January 2004, which is consistent with the findings of the
special committee Report. Nicor Gas seeks a reimbursement of approximately $1.0
million as referenced above. The parties to the ICC Proceedings have agreed to a
stay of the evidentiary hearings on this matter in order to undertake additional
third party discovery from Entergy-Koch Trading, LP (EKT), a natural gas,
storage and transportation trader and consultant with whom Nicor did business
under the PBR plan.

During the course of the SEC investigation discussed below, the company became
aware of additional information relating to the activities of individuals
affecting the PBR plan for the period from 1999 through 2002, including
information consisting of third party documents and recordings of telephone
conversations from EKT. The company continues to obtain access to and review
this information. Review of additional information completed in the third
quarter of 2004 resulted in the $1.8 million adjustment to the previously
recorded liability referenced above.

Although the Report of the special committee's counsel did not find that there
was criminal activity or fraud, a review of this additional information (which
was not available to the independent counsel who prepared the Report) and
re-interviews of certain Nicor Gas personnel indicates that certain former Nicor
Gas personnel may have engaged in potentially fraudulent conduct regarding the
PBR plan in violation of company policy, and in possible violation of SEC rules
and applicable law. Further, certain former Nicor Gas personnel also may have
attempted to conceal their conduct in connection with an ICC review of the PBR
plan. The company continues to cooperate with the SEC, the U.S. Attorney's
office and the ICC on this matter and to review and produce additional documents
as requested by these agencies. The company has reviewed all third party
information it has obtained and will continue to review any additional third
party information the company may obtain. The company terminated four employees
in connection with this matter in the third quarter of 2004.

Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Because the PBR plan and historical gas
costs are still under ICC review, the final outcome could be materially
different than the amounts reflected in the company's financial statements as of
June 30, 2005.

Nicor Energy. Nicor is a 50-percent owner of Nicor Energy, a retail energy
marketing joint venture with Dynegy Marketing and Trade.

As a result of an audit and review process in 2002, accounting irregularities
were identified at Nicor Energy. Appropriate accounting adjustments were made by
Nicor in restated financial statements previously filed with the SEC.




                                       14


<PAGE>

Nicor Energy has disposed of all of its customer accounts and continues to
liquidate its remaining assets and resolve remaining contingent liabilities.
Nicor's investment in Nicor Energy was written off in the third quarter of 2002
due to the belief at that time that Nicor ultimately would not recover its
investment balance. During 2003, Nicor recorded gains upon the receipt of cash
from Nicor Energy. No recoveries occurred during 2004 or in the first half of
2005, and any future gains or losses are not expected to be material.

On December 10, 2003, the United States Attorney for the Northern District of
Illinois indicted three former employees of Nicor Energy and an outside lawyer
for Nicor Energy. The indictments alleged that the defendants fraudulently
deprived Nicor Energy of their honest services and caused a loss to investors in
Nicor Inc. and Dynegy Inc. During the time period covered by the indictments,
Nicor Energy was a stand alone entity with its own management and was operated
independently from Nicor Inc. and Nicor Gas. None of the individuals indicted
are employees of Nicor Inc. or Nicor Gas nor were they at the time of the
charged conduct. The three former employees of Nicor Energy have pled guilty to
certain charges. Separately, on December 10, 2003, the SEC filed its own civil
enforcement action against the same three former employees and one additional
former employee of Nicor Energy. While Nicor is unable to predict the final
outcome of these matters, the resolution of such matters is not expected to have
a material adverse impact on the company's cash flow, financial condition or
results of operations.

SEC and U.S. Attorney Inquiries. In 2002, the staff of the SEC informed Nicor
and Nicor Energy that the SEC is conducting a formal inquiry regarding both the
PBR plan and Nicor Energy. A representative of the Office of the United States
Attorney for the Northern District of Illinois has notified Nicor that that
office is conducting an inquiry on the same matters that the SEC is
investigating, and a grand jury is also reviewing these matters. In April 2004,
Nicor was advised by the SEC Division of Enforcement that it intended to
recommend to the SEC that it bring a civil injunctive action against Nicor,
alleging that Nicor violated Sections 17(a) of the Securities Act of 1933 and
Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder. The SEC may also seek injunctive relief,
disgorgement and civil penalties. The SEC staff invited Nicor to make a formal
response (known as a Wells Submission) with respect to the proposed
recommendation. In June 2004, Nicor filed its Wells Submission with the SEC. In
addition, in connection with the SEC's invitation to the company to make a Wells
Submission, the SEC informed the company of additional sources of information
relating to activities affecting the PBR plan, the status of which is addressed
in detail in the PBR plan section set forth above. In August 2004, Nicor
withdrew its Wells Submission in light of its continuing review of the newly
available additional sources of information referenced above. Nicor continues in
its efforts to resolve this matter with the SEC and has requested that the SEC
allow Nicor to file an updated Wells Submission if necessary. Nicor is unable to
predict the outcome of these inquiries or Nicor's potential exposure related
thereto and has not recorded a liability associated with the outcome of these
contingencies.

Securities Class Actions. Following a July 18, 2002 Nicor press release
concerning Nicor Energy and the PBR plan, several purported class actions were
brought against Nicor, certain current and former officers of Nicor and Arthur
Andersen LLP, the company's former independent auditor. The actions were brought
in the United States District Court for the Northern District of Illinois,
Eastern Division, and were consolidated. The plaintiffs alleged that the
defendants violated Section 10(b) and Section 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. On April 16, 2004 Nicor announced that
its board of directors had approved an agreement to settle the above referenced
action. Under the terms of the settlement, all claims against Nicor and
Nicor-related defendants have been dismissed without any finding or admission of
wrongdoing or liability, for a payment of $38.5 million. In the first quarter of
2004, the company recorded a litigation charge of $38.5 million related to this
agreement. On July 13, 2004 the court granted final approval of the settlement.
All appeal rights expired on August 12, 2004.


                                       15


<PAGE>

Shareholder Derivative Lawsuits. Also following Nicor's issuance of the press
release concerning Nicor Energy and the PBR plan, three purported derivative
lawsuits were brought against Thomas Fisher (Chairman and former CEO), Kathleen
Halloran (former Executive Vice President Finance and Administration and former
Executive Vice President and Chief Risk Officer) and all of the then members of
Nicor's Board of Directors (the "individual defendants"). Nicor was named as a
nominal defendant in all three suits, which were consolidated in an amended
complaint. The actions were brought in the Circuit Court of Cook County,
Illinois, Chancery Division. The plaintiffs alleged that the individual
defendants breached their fiduciary duties to Nicor by allegedly causing or
allowing Nicor to disseminate to the market materially misleading and inaccurate
information, failing to establish and maintain adequate accounting controls and
approving the PBR plan despite allegedly knowing that the plan was unlawful or
that ICC approval would be improperly obtained. Plaintiffs also contended that
two of the defendants (Mr. Fisher and Mr. Birdsall) engaged in improper insider
selling of Nicor stock at inflated prices. The plaintiffs sought compensatory
and punitive damages, attorneys' fees and costs, and other relief against the
individual defendants on behalf of Nicor but did not seek any damages against
the company. On January 25, 2005, Nicor announced that its Board of Directors
had approved a preliminary agreement to settle the above referenced action.
Under the terms of the settlement, all claims against the defendants would be
dismissed without any finding or admission of wrongdoing or liability. The
settlement obligated Nicor to adopt certain new corporate governance policies
and required the payment of $3.5 million in attorneys' fees and expenses to
plaintiffs' counsel out of the Directors and Officers (D&O) insurance proceeds
described below. The court granted final approval of the settlement and entered
an Order of Dismissal on March 29, 2005. The settlement became final in the
second quarter of 2005, when all appeal rights expired. In connection with the
derivative settlement, in the first quarter of 2005, Nicor's excess insurance
carrier paid $4 million to Nicor to settle certain claims Nicor had asserted
against it arising out of the derivative action and related class action
securities litigation. Pursuant to the terms of the derivative settlement, Nicor
paid $3.5 million of that $4 million to plaintiffs' attorneys to reimburse them
for the fees and costs expended in pursuing the derivative action. The $0.5
million net of these payments was reflected as "Litigation charges (recoveries),
net" in the Condensed Consolidated Statement of Operations in the first quarter
of 2005.

Fixed Bill Service. On April 29, 2003, a second amended purported class action
complaint was filed in the Circuit Court of Cook County, Illinois against Nicor
Energy Services Company (Nicor Services) alleging violation of the Illinois
Consumer Fraud and Deceptive Practices Act (ICFA) by Nicor Services relating to
the fixed bill service offered by Nicor Services. Nicor Services offered a fixed
bill product under which it paid the annual gas service portion of a customer's
Nicor Gas utility bill in exchange for twelve equal monthly payments by the
customer to Nicor Services, regardless of changes in the price of natural gas or
weather. The plaintiff is seeking compensatory damages, prejudgment and
postjudgment interest, punitive damages, attorneys' fees and injunctive relief.
Nicor is unable to predict the outcome of this litigation or to reasonably
estimate its potential exposure related thereto and has not recorded a liability
associated with this contingency.

Gas Line ComfortGuard Service. On May 5, 2005, a consumer class action was filed
in the Circuit Court of Cook County, Illinois entitled Rivera v. Nicor Inc.,
Nicor Gas and Nicor Services. Nicor, Nicor Gas and Nicor Services are defendants
in the case. The plaintiff alleges deceptive practices relating to the
marketing and sale of the Gas Line ComfortGuard service offered by Nicor
Services. The plaintiff also alleges violations of the Illinois Consumer Fraud
and Deceptive Business Practices Act and unjust enrichment. The plaintiff is
seeking damages in an amount equal to the total Gas Line ComfortGuard charges
paid by the plaintiff and the putative class members, punitive damages, and
attorney's fees and costs. Nicor is unable to predict the likely outcome of this
litigation or the named defendants' potential exposure related thereto (if any).



                                       16


<PAGE>

Mercury. Nicor Gas has incurred, and expects to continue to incur, costs related
to its historical use of mercury in various kinds of company equipment.

Nicor Gas is a defendant in several private lawsuits, all in the Circuit Court
of Cook County, Illinois, seeking a variety of unquantified damages (including
bodily injury, property and punitive damages) allegedly caused by
mercury-containing regulators. Under the terms of a class action settlement
agreement, Nicor Gas will continue, until 2007, to provide medical screening to
persons exposed to mercury from its equipment, and will use its best efforts to
replace any remaining inside residential mercury regulators by 2006. The class
action settlement permitted class members to "opt out" of the settlement and
pursue their claims individually. Nicor Gas is currently defending claims
brought by 28 households.

As of June 30, 2005, Nicor Gas had remaining an estimated liability of $19.0
million, representing management's best estimate of future costs, including
potential liabilities relating to remaining lawsuits, based on an evaluation of
currently available information. Actual costs may vary from this estimate. The
company will continue to reassess its estimated obligation and will record any
necessary adjustment, which could be material to operating results in the period
recorded.

Nicor Gas continues to pursue recovery from insurers and independent contractors
that had performed work for the company. When received, these recoveries are
recorded as a reduction to gas distribution operating expense. Nicor Gas
recovered approximately $18 million and $20 million of pretax mercury-related
costs, net of legal fees, from insurers and independent contractors in 2003 and
2002, respectively. Amounts recovered during 2004 and 2005 were immaterial. On
October 25, 2004 the Circuit Court of Cook County, Illinois entered judgment in
favor of Nicor and against various insurers in the amount of $10.2 million with
respect to one of Nicor's mercury-related insurance claims. The insurers have
filed an appeal of the judgment. Accordingly, the company has not reflected the
$10.2 million in its financial statements.

The final disposition of these mercury-related matters is not expected to have a
material adverse impact on the company's financial condition.

Manufactured Gas Plant Sites. Manufactured gas plants were used in the 1800's
and early to mid 1900's to produce manufactured gas from coal, creating a coal
tar byproduct. Current environmental laws may require the cleanup of coal tar at
certain former manufactured gas plant sites.

To date, Nicor Gas has identified about 40 properties for which it may, in part,
be responsible. Most of these properties are not presently owned by the company.
Information regarding preliminary site reviews has been presented to the
Illinois Environmental Protection Agency for certain properties. More detailed
investigations and remedial activities are complete, in progress or planned at
many of these sites. The results of the detailed site-by-site investigations
determine the extent additional remediation is necessary and provide a basis for
estimating additional future costs. As of June 30, 2005 the company had recorded
a liability of $23.4 million. In accordance with ICC authorization, the company
is and has been recovering these costs from its customers, subject to annual
prudence reviews.

In December 2001, a purported class action lawsuit was filed against Exelon
Corporation, Commonwealth Edison Company and Nicor Gas in the Circuit Court of
Cook County alleging, among other things, that the ongoing cleanup of a former
manufactured gas plant site in Oak Park, Illinois is inadequate. Since then,
additional lawsuits have been filed related to this same former manufactured gas
plant site. These lawsuits seek, in part, unspecified damages for property
damage, nuisance, and various personal injuries that allegedly resulted from
exposure to contaminants allegedly emanating from the site, and punitive
damages. Management cannot predict the outcome of this litigation or the
company's potential exposure thereto and has not recorded a liability associated
with this contingency.

                                       17


<PAGE>

In April 2002, Nicor Gas was named as a defendant, together with Commonwealth
Edison Company, in a lawsuit brought by the Metropolitan Water Reclamation
District of Greater Chicago (the MWRDGC) under the Federal Comprehensive
Environmental Response, Compensation and Liability Act seeking recovery of past
and future remediation costs and a declaration of the level of appropriate
cleanup for a former manufactured gas plant site in Skokie, Illinois now owned
by the MWRDGC. In January 2003, the suit was amended to include a claim under
the Federal Resource Conservation and Recovery Act. The suit was filed in the
United States District Court for the Northern District of Illinois. Management
cannot predict the outcome of this litigation or the company's potential
exposure thereto and has not recorded a liability associated with this
contingency.

Since costs and recoveries relating to the cleanup of manufactured gas plant
sites are passed directly through to customers in accordance with ICC
regulations, subject to an annual ICC prudence review, the final disposition of
manufactured gas plant matters is not expected to have a material impact on the
company's financial condition or results of operations.

Other. In an Illinois Supreme Court decision, the court affirmed the appellate
court's decision to permit proceedings to move forward against Nicor Gas
relating to a home explosion, which resulted in a fatality, allegedly caused by
a faulty gas appliance connector installed by the homeowner. The company has
reached a settlement in the above referenced proceeding, which did not have a
material adverse impact on the company's financial condition or results of
operations. The company is unable to predict any potential operational impact of
the Illinois Supreme Court decision.

On April 27, 2004 one of Nicor's D&O insurance carriers agreed to pay $29.0
million to a third party escrow agent on behalf of Nicor and its insured
directors and officers to be used to satisfy Nicor directors' and officers'
liabilities and expenses associated with claims asserted against them in a
securities class action, the related shareholder derivative lawsuit described
above and related matters, with any remaining balance to be paid to Nicor. Under
the terms of the derivative settlement, once the settlement became final
(because all appeal rights had expired), the escrow was terminated and the $29.0
million, plus earnings, held by the escrow agent was paid to Nicor in the second
quarter of 2005. The above referenced amount has been reflected in "Litigation
charges (recoveries), net" in the Condensed Consolidated Statement of Operations
for the quarter ending June 30, 2005. Nicor also continues to seek reimbursement
for other expenses from its excess insurance carrier in connection with the same
matters but is unable to predict the outcome of this matter and therefore no
additional potential insurance recoveries have been reflected in the financial
statements.

In addition to the matters set forth above, the company is involved in legal or
administrative proceedings before various courts and agencies with respect to
general claims, rates, taxes, environmental, gas costs prudence reviews and
other matters. Although unable to determine the ultimate outcome of these other
contingencies, management believes that these amounts are appropriately
reflected in the financial statements, including the recording of appropriate
liabilities when reasonably estimable.



                                       18


<PAGE>

Item 2.    Managements Discussion and Analysis of Financial Condition and
-------    --------------------------------------------------------------
           Results of Operations
           ---------------------

The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of the Nicor Inc. (Nicor) 2004 Annual Report on
Form 10-K. Results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year due to
seasonal and other factors.

SUMMARY

Nicor is a holding company with two principal business segments - gas
distribution and shipping. Northern Illinois Gas Company (Nicor Gas) is one of
the nation's largest natural gas distribution companies, and it is Nicor's
primary business. Tropical Shipping, Nicor's second largest business, is a
containerized shipping business serving the Bahamas and the Caribbean region.
Nicor also owns or has equity interests in several energy-related businesses.

Net income and diluted earnings per common share are presented below for the
three-month and six-month periods ended June 30, 2005 and 2004 (in millions,
except per share data):

                                        Three months ended  Six months ended
                                             June 30            June 30
                                        ------------------  -----------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  -------

Net income                              $  33.4   $  19.5   $  77.1   $ 39.0
Diluted earnings per average share
   of common stock                      $   .75   $   .44   $  1.74   $  .88

Net income and diluted earnings per share for the first half of 2005 versus the
corresponding period in the prior year were impacted significantly by the
absence of last year's first-quarter litigation settlement charge ($38.5 million
pretax or $0.52 per share) coupled with net 2005 year-to-date insurance
recoveries and earnings thereon ($29.9 million pretax or $0.41 per share)
related to securities class actions and derivative lawsuits. Similarly, results
for the three months ended June 30, 2005 reflect the $29.4 million pretax
portion of net 2005 recoveries (or $0.40 per share) that occurred in the second
quarter. For more information, see the Notes to the Condensed Consolidated
Financial Statements - Note 16 Contingencies - Securities Class Actions and
Shareholder Derivative Lawsuits.

Second-quarter and first-half 2005 earnings also reflect lower operating results
in the company's gas distribution business and other energy-related businesses,
offset in part by higher operating results in the company's shipping business.

Operating income (loss) by major business segment is presented below (in
millions):
                                        Three months ended  Six months ended
                                             June 30            June 30
                                        ------------------  -----------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  -------

   Gas distribution                     $  13.1   $  22.1   $  71.5   $  89.3
   Shipping                                10.3       6.9      22.5      11.1
   Other energy ventures                    4.7       5.4       3.1       8.3
   Corporate and eliminations              29.9      (1.3)     30.7     (41.3)
                                        --------  --------  --------  -------
                                        $  58.0   $  33.1   $ 127.8   $  67.4
                                        ========  ========  ========  =======


                                       19


<PAGE>

The following summarizes operating income (loss) comparisons by major business
segment:

o     Gas distribution operating income decreased $9.0 million to $13.1 million
      in the second quarter of 2005, compared to $22.1 million for the
      year-earlier period, due primarily to lower property sale gains ($5.4
      million lower), higher operating and maintenance expenses ($4.0 million
      increase) and higher depreciation ($1.2 million increase).

      The $17.8 million decrease in operating income for the six-month period
      ended June 30, 2005 compared to the year-earlier period was due primarily
      to higher operating and maintenance expenses ($9.0 million increase),
      lower gains on property sales ($5.4 million lower) and higher depreciation
      ($2.7 million increase).

o     Shipping operating income increased $3.4 million and $11.4 million for
      the three and six months ended June 30, 2005, respectively, compared
      with the year-earlier periods, due primarily to an increase in revenue
      ($19.9 million and $42.6 million, respectively) driven by higher volumes
      shipped and higher average rates across substantially all ports.  The
      three-month revenue increase was partially offset by increased operating
      expenses of $16.5 million resulting from higher inland transportation,
      payroll and benefits, fuel, voyage, vessel charter and port costs.  The
      six-month increase was partially offset by increased operating expenses
      of $31.2 million resulting from higher inland transportation, voyage,
      payroll and benefits, fuel, vessel charter and port costs.

o     Operating results from Nicor's other energy ventures decreased $0.7
      million and $5.2 million for the three and six-month periods,
      respectively. The three-month decrease reflects lower operating results at
      Nicor's energy-related products and services businesses.

      The comparative year-to-date decrease in operating results from Nicor's
      other energy ventures ($5.2 million) is due in large part to lower
      operating results at Nicor's wholesale natural gas marketing business,
      Nicor Enerchange ($7.4 million), reflecting unfavorable fair value
      adjustments related to derivative instruments used to hedge future sales
      of natural gas inventory, offset in part by higher results at Nicor's
      energy-related products and services businesses ($2.3 million). Nicor
      Enerchange purchases and holds gas in storage to earn a profit margin from
      its ultimate sale in the future. Nicor Enerchange uses derivative
      instruments to mitigate commodity price risk in order to substantially
      lock-in the profit margin that will ultimately be realized. However, gas
      stored in inventory is accounted for at the lower of average cost or
      market; the derivatives used to reduce the risk associated with a change
      in the value of the inventory are accounted for at fair value, with
      changes in fair value recorded in operating results in the period of
      change. As a result, earnings are subject to volatility as the market
      price of derivatives change, even when the underlying hedged value of the
      inventory is unchanged. The earnings volatility resulting from this
      accounting can be significant from period to period.

o     The increase in the second quarter 2005 operating income attributed to
      "Corporate and eliminations" of $31.2 million was due primarily to $29.4
      million of pretax income recorded for insurance proceeds and earnings
      thereon for the partial reimbursement of costs related to a shareholder
      class action and a related derivative lawsuit. See Note 16 Contingencies -
      Other.

      The $72.0 million increase in operating income for the six-month period
      ended June 30 attributed to "Corporate and eliminations" is due primarily
      to this net recovery of $29.4 million and a smaller first-quarter recovery
      ($4.0 million) net of a first-quarter charge for the derivative suit ($3.5
      million) and the absence of last years' securities class action settlement
      charge ($38.5 million). For more information, see the Notes to the
      Condensed Consolidated Financial Statements - Note 16 Contingencies -
      Securities Class Actions, Shareholder Derivative Lawsuits and Other.

                                         20


<PAGE>

RESULTS OF OPERATIONS

Details of various financial and operating information by segment can be found
in the tables throughout this review. The following discussion summarizes the
major items impacting Nicor's operating income.

Operating revenues. Operating revenues by major business segment are presented
below (in millions):

                                        Three months ended   Six months ended
                                             June 30             June 30
                                        ------------------  ------------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  --------

   Gas distribution                     $ 372.2   $ 338.4   $1,451.1  $1,373.5
   Shipping                                92.3      72.4      182.8     140.2
   Other energy ventures                   33.8      33.5       80.5      85.2
   Corporate and eliminations             (13.9)    (14.8)     (50.2)    (53.7)
                                        --------  --------  --------  --------
                                        $ 484.4   $ 429.5   $1,664.2  $1,545.2
                                        ========  ========  ========  ========

Gas distribution revenues are impacted by changes in natural gas costs, which
are passed directly through to customers without markup, subject to Illinois
Commerce Commission (ICC) review. For the 2005 three and six-month periods
compared with a year ago, revenues increased $33.8 million and $77.6 million due
primarily to higher natural gas costs ($51.5 million and $123.6 million
increases, respectively), partially offset by lower demand unrelated to weather
(approximately $15 million and $30 million decreases, respectively), and the
impact of warmer weather (approximately $10 million and $30 million decreases,
respectively).

Second quarter and year-to-date 2005 shipping revenues increased $19.9 million
and $42.6 million respectively, due to increased volumes shipped and higher
average rates across substantially all ports, reflecting higher volumes driven
by economic investment, increased tourism and post-hurricane construction
activity in the Caribbean region and the Bahamas. Rates were higher due to
general rate increases across most markets and higher cost-recovery surcharges
for fuel and security.

Year-to-date 2005 revenues for other energy ventures decreased compared to the
year-earlier revenues as a result of lower revenues at Nicor Enerchange ($8.4
million) due primarily to unfavorable fair value adjustments related to the
aforementioned Enerchange derivative contracts. This reduction was partially
offset by $3.8 million of improved revenues at Nicor's energy-related products
and services businesses.

"Corporate and eliminations" reflects primarily the elimination of gas
distribution revenues against Nicor Solutions' expenses for customers purchasing
utility-bill management products.

Gas distribution margin. Nicor utilizes a measure it refers to as "gas
distribution margin" to evaluate the operating income impact of gas distribution
revenues. Gas distribution revenues include natural gas costs, which are passed
directly through to customers without markup, subject to ICC review, and revenue
taxes, for which Nicor Gas earns a small administrative fee. These items often
cause significant fluctuations in gas distribution revenues, and yet they have
virtually no direct impact on gas distribution operating income.

For the quarter and the six-month period, gas distribution margin was relatively
flat compared to the prior-year periods. A reconciliation of gas distribution
revenues and margin follows (in millions):


                                       21


<PAGE>

                                        Three months ended   Six months ended
                                             June 30             June 30
                                        ------------------  ------------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  --------

   Gas distribution revenues            $ 372.2   $ 338.4   $1,451.1  $1,373.5
   Cost of gas                           (230.6)   (200.5)  (1,067.4)   (992.7)
   Revenue tax expense                    (26.7)    (24.5)     (97.3)    (94.0)
                                        --------  --------  --------  --------
   Gas distribution margin              $ 114.9   $ 113.4   $  286.4  $  286.8
                                        ========  ========  ========  ========

Gas distribution operating and maintenance expense. Gas distribution operating
and maintenance expense increased $4.0 million to $58.6 million in the second
quarter of 2005 from $54.6 million in the prior-year period due primarily to
increases in bad debt expenses ($1.1 million increase), natural gas costs to
operate company equipment and facilities ($1.0 million increase) and labor and
employee benefit-related costs ($1.0 million increase). The $9.0 million
increase in the six-month period was due primarily to increases in bad debt
expenses ($2.8 million increase), labor and employee benefit-related costs ($2.8
million increase), general claims ($2.1 million increase) and natural gas costs
to operate company equipment and facilities ($1.5 million increase).

Shipping operating expenses. Shipping segment operating expenses increased $16.5
million in the second quarter of 2005 due primarily to higher inland
transportation, fuel, voyage and port costs ($9.0 million increase), payroll and
benefits costs ($2.8 million increase), and vessel charter costs ($2.1 million
increase) driven largely by higher volumes shipped.

For the 2005 six-month period, shipping segment operating expenses increased
$31.2 million to $160.3 million due primarily to higher inland transportation,
voyage, fuel and port costs ($17.2 million increase), payroll and benefits costs
($4.7 million increase), and vessel charter costs ($4.5 million increase) driven
largely by higher volumes shipped.

Litigation charges (recoveries), net. During the second quarter 2005, the
company recorded $29.4 million of pretax income related to the recovery from an
insurance carrier related to costs previously incurred by Nicor in connection
with a securities class action and a related shareholder derivative action which
were previously settled. The $0.5 million pretax net recovery in the first
quarter of 2005 included a shareholder derivative action settlement ($3.5
million pretax) and a related Directors and Officers insurance recovery ($4.0
million). In the first quarter of 2004, the company recorded a $38.5 million
pretax litigation charge related to an agreement to settle the securities class
actions. For more information, see the Notes to the Condensed Consolidated
Financial Statements - Note 16 Contingencies - Securities Class Actions,
Shareholder Derivative Lawsuits and Other.

Interest expense, net of amounts capitalized. Interest expense for the quarter
ended June 30, 2005 increased $1.6 million over the comparative period,
primarily reflecting interest on tax deficiencies ($2.2 million increase)
mostly related to the current year absence of a favorable IRS settlement in
2004 coupled with higher average rates on corporate borrowings ($1.5 million
increase). This increase was partially offset by the impact of lower interest
expense due to a reduction in corporate borrowing levels ($2.0 million
decrease).

Interest expense for the comparative period ended June 30, 2005 increased $2.6
million over the year-earlier period, primarily reflecting interest on tax
deficiencies ($2.2 million increase) mostly related to the current year
absence of a favorable IRS settlement in 2004 coupled with the net impact of
higher interest expense due to an increase in average rates ($3.2 million
increase) on lower borrowing levels ($2.8 million decrease).


                                       22


<PAGE>

Equity investment income, net. Equity investment income was relatively flat
quarter-over-quarter but year-to-date increased $1.0 million to $3.9 million due
primarily to higher income from Triton Container Investments LLC (Triton), a
cargo container leasing business.

Other income (expense), net. Other income increased $1.2 million and $1.8
million, respectively, for the 2005 three and six-month periods compared with a
year ago reflecting primarily earnings on higher investment balances.

Income taxes. The effective income tax rate for the quarter ended June 30, 2005
increased to 35.9 percent from 29.0 percent for the prior-year period. The
effective income tax rate for the six months ended June 30, 2005 also increased
over the corresponding prior-year rate to 31.6 percent from 25.1 percent. These
increases reflect recording 2004 net litigation charges ($38.5 million) and 2005
net recoveries and earnings thereon ($29.9 million year-to-date and $29.4
million quarter-to-date) at Nicor's marginal tax rate of approximately 40
percent.



                                       23


<PAGE>

Nicor Inc.
Gas Distribution Statistics


                                   Three months ended     Six months ended
                                        June 30               June 30
                                   ------------------   --------------------
                                     2005      2004        2005      2004
                                   --------  --------   ---------  ---------
Operating revenues (millions)
   Sales
    Residential                    $  239.7  $  216.2   $   988.3  $   936.2
    Commercial                         52.9      48.3       219.0      206.3
    Industrial                          6.7       5.8        30.6       28.5
                                   --------  --------   ---------  ---------
                                      299.3     270.3     1,237.9    1,171.0
                                   --------  --------   ---------  ---------
   Transportation
    Residential                         6.2       5.0        14.3       13.1
    Commercial                         14.8      13.8        39.5       38.9
    Industrial                          8.6       9.4        19.0       20.3
    Other                               2.5       2.2         7.6        7.4
                                   --------  --------   ---------  ---------
                                       32.1      30.4        80.4       79.7
                                   --------  --------   ---------  ---------

   Other revenues
    Revenue taxes                      27.4      25.2        99.6       96.1
    Environmental cost recovery         2.7       3.3        14.5        9.9
    Chicago Hub                         3.3       2.6         5.2        4.0
    Other                               7.4       6.6        13.5       12.8
                                   --------  --------   ---------  ---------
                                       40.8      37.7       132.8      122.8
                                   --------  --------   ---------  ---------
                                   $  372.2  $  338.4   $ 1,451.1  $ 1,373.5
                                   ========  ========   =========  =========

Deliveries (Bcf)
   Sales
    Residential                        22.9      24.9       119.2      124.9
    Commercial                          5.3       5.8        26.4       27.4
    Industrial                           .7        .7         3.7        3.9
                                   --------  --------   ---------   --------
                                       28.9      31.4       149.3      156.2
                                   --------  --------   ---------   --------
   Transportation
    Residential                         2.9       2.1        11.6       10.9
    Commercial                         13.2      12.3        52.0       49.7
    Industrial                         25.7      26.2        59.6       63.1
                                   --------  --------   ---------   --------
                                       41.8      40.6       123.2      123.7
                                   --------  --------   ---------   --------
                                       70.7      72.0       272.5      279.9
                                   ========  ========   =========   ========

Customers at end of period (thousands)
   Sales
    Residential                     1,774.7   1,769.5
    Commercial                        117.9     115.9
    Industrial                          7.3       7.4
                                   --------  --------
                                    1,899.9   1,892.8
                                   --------  --------
   Transportation
    Residential                       160.9     133.9
    Commercial                         58.1      57.3
    Industrial                          6.0       6.0
                                   --------  --------
                                      225.0     197.2
                                   --------  --------
                                    2,124.9   2,090.0
                                   ========  ========

Other statistics
   Degree days                          580       591       3,546      3,621
   Colder (warmer) than normal*       (16)%     (12)%        (4)%       (4)%
   Average gas cost per Mcf sold     $ 7.85    $ 6.28      $ 7.08     $ 6.30

   *Normal weather for Nicor Gas' service territory, for purposes of this
    report, is considered to be 5,830 degree days per year for 2005 and 6,000
    degree days for 2004.  On a 6,000 degree day basis, the three and six month
    periods ended June 30, 2005, were 14% and 6% warmer than the prior-year
    periods, respectively.


                                      24


<PAGE>

Shipping Statistics

                                        Three months ended   Six months ended
                                             June 30             June 30
                                        ------------------  ------------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  --------

  TEUs shipped (thousands)                 54.2      46.8     107.8      92.5
  Revenue per TEU                       $ 1,702   $ 1,546   $ 1,696   $ 1,516

  At end of period
    Ports served                             25       25
    Vessels operated                         19       17

FINANCIAL CONDITION AND LIQUIDITY

Operating cash flows. The gas distribution business is highly seasonal and
operating cash flow may fluctuate significantly during the year and from
year-to-year due to factors such as weather, natural gas prices, the timing of
collections from customers, natural gas purchasing, and storage and hedging
practices. The company relies on short-term financing to meet seasonal increases
in working capital needs. Cash requirements generally increase over the third
and fourth quarters due to increases in natural gas purchases, gas in storage
and accounts receivable. Over the first and second quarters, positive cash flow
generally results from the sale of gas in storage and the collection of accounts
receivable. This cash is typically used to substantially reduce short-term debt
during the first half of the year. Net cash flow provided from operating
activities increased $126.2 million to $761.3 million for 2005 year-to-date from
$635.1 million in the prior-year period.

Investing activities. Cash used for investing activity was relatively flat
year-over-year. For the six month periods ended June 30, 2005 and 2004, cash
used for investing activities was $119.2 million and $121.1 million,
respectively.

Financing activities. Nicor Inc. and Nicor Gas established two revolving credit
facilities totaling $900 million with major domestic and foreign banks in 2004.
These facilities, which serve as backup for the issuance of commercial paper,
consist of a $500 million, three-year revolver, expiring September 2007,
available to Nicor Inc. and Nicor Gas, and a $400 million, 210-day seasonal
revolver available to Nicor Gas, which expired in April 2005. The company had no
commercial paper borrowings outstanding at June 30, 2005, and $490.0 million and
$129.0 million of commercial paper borrowings outstanding at December 31, 2004
and June 30, 2004, respectively. As mid to late-year seasonal purchases of
natural gas are made to replenish gas in storage, the company intends to rely on
existing and or new credit agreements, which the company is in the process of
establishing. The company expects that funding from commercial paper and related
backup line-of-credit agreements will continue to be available in the
foreseeable future and sufficient to meet estimated cash requirements. The
company is in compliance with all debt covenants at June 30, 2005.

Nicor maintains margin accounts related to financial derivative transactions.
These margin accounts may cause large fluctuations in cash needs or sources in a
relatively short period of time due to daily settlements resulting from changes
in natural gas futures prices. The company manages these fluctuations with
short-term borrowings and investments.

On April 21, 2005, Nicor announced a quarterly dividend on common stock of 46.5
cents per share payable August 1, 2005. On July 21, 2005, Nicor announced a
quarterly dividend on common stock of 46.5 cents per share payable November 1,
2005. The dividend declared in April 2005 was accrued as a liability as of June
30, 2005.


                                       25


<PAGE>

Contractual obligations. Nicor Gas' natural gas purchase obligations increased
approximately $300 million from year-end due to the execution of additional
natural gas purchase agreements and expected higher future natural gas prices
partially offset by payments made in connection with natural gas purchases
completed under such agreements. The company contracts for its winter purchase
requirements several months preceding the heating season. Pricing for these
agreements is generally based on future market prices. See Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
2004 Annual Report on Form 10-K for further discussion of the company's
contractual obligations.

In the first half of 2005, Tropical Shipping's operating leases increased $51.3
million due primarily to the extension of vessel charter agreements. Tropical
Shipping has certain equipment operating leases with early termination and
renewal options. Total rent expense during the three and six-month periods
ended June 30, 2005 was $8.9 million and $17.6 million, respectively, compared
to $6.3 million and $12.1 million for the corresponding prior-year periods.

Nicor has operating lease commitments with payments due during each calendar
year as follows (in millions):
                                                               After
                        2005    2006    2007    2008    2009    2009    Total
                       ------  ------  ------  ------  ------  ------  --------

Operating leases       $ 34.3  $ 27.1  $ 25.1  $ 24.7  $ 15.7  $ 15.8  $ 142.7

OTHER FACTORS THAT MAY AFFECT BUSINESS PERFORMANCE

Regulation. Nicor Gas is regulated by the ICC, which establishes the rules and
regulations governing utility rates and services in Illinois. Certain rates are
updated monthly and designed to recover specific past costs, such as gas supply
and environmental costs, subject to an annual prudence review. Base rates, on
the other hand, are only changed through a rate case proceeding with the ICC and
are designed to allow the company an opportunity to recover its costs and to
earn a fair return for its investors. Significant changes in the regulations
applicable to Nicor Gas or its affiliates, or the regulatory environment in
general, could affect the performance of Nicor Gas. Information regarding
certain ICC proceedings is presented below and within the Notes to the Condensed
Consolidated Financial Statements - Note 16 Contingencies - Performance-Based
Rate Plan.

Rate Proceeding. On November 4, 2004, Nicor Gas filed with the ICC for an
overall increase in rates of approximately $83 million (or about 16.5 percent of
base rates revenue). The company's filing provided for a rate of return on
original-cost rate base of 9.34 percent, which reflects an 11.37 percent cost of
common equity. The requested rate increase is needed to recover higher operating
costs and increased capital investments. Nicor Gas has not raised base rates
since 1996.

As part of the requested rate increase, Nicor Gas has proposed that all Chicago
Hub revenues and approximately two-thirds of all bad debt expenses be passed
directly through to customers, reducing the earnings variability of both items.
In addition, the company has proposed setting rates assuming normal weather of
5,830 degree days beginning in 2005 versus the 6,000 degree days previously
considered by the company as normal.

The proposed rate increase has been suspended pending the completion of the
ICC's review. The ICC normally has 11 months, from the date of the company's
filing, to complete its review of the rate filing and to issue an order.

On April 5, 2005, Nicor Gas filed rebuttal testimony with the ICC, in response
to the direct testimony of the ICC staff and intervenors in the proceeding, and
revised its proposed rate increase of approximately


                                       26


<PAGE>

$83 million to approximately $78 million. The revised proposal reflects a 10.82
percent cost of commonequity resulting in a rate of return on original-cost
rate base of 9.03 percent.

Weather. Natural gas deliveries are temperature-sensitive and seasonal since
about one-half of all deliveries are used for space heating. Typically, about 70
percent of deliveries and revenues occur from October through March.
Fluctuations in weather have the potential to significantly impact year-to-year
comparisons of operating income and cash flow.

It is estimated that a 100-degree day variation from normal weather affects
Nicor's gas distribution earnings by about 2-1/2 cents per share. External
weather protection has not been purchased by the company because it also bears
the partially offsetting weather risk associated with the utility-bill
management products marketed by Nicor Solutions. The amount of this offset will
vary depending upon the time of year, weather patterns, the number of customers
for these products and the market price for natural gas. For the six months
ended June 30, 2005, the offset was about one-third and for the prior-year
period the amount was insignificant.

American Jobs Creation Act. On October 22, 2004, the American Jobs Creation Act
of 2004 (the Act) was enacted. Certain provisions of the Act may impact income
taxes related to the earnings of foreign subsidiaries of Tropical Shipping. One
provision provides that a portion of a foreign subsidiary's income would no
longer be subject to current federal taxation because of its status as shipping
income, beginning in 2005, to the extent such earnings are retained by the
foreign subsidiary. Another provision of the Act allows a portion of cumulative
undistributed earnings of a foreign subsidiary to be repatriated to the United
States by the end of 2005 at an effective federal income tax rate of 5.25
percent.

Presently Nicor has recorded a $47 million deferred income tax liability, based
on a federal income tax rate of 35 percent, associated with approximately $134
million of earnings retained by its foreign subsidiaries. Nicor has not provided
deferred income taxes of approximately $15 million on approximately $43 million
of cumulative undistributed earnings of its foreign subsidiaries through June
30, 2005 that are considered to be indefinitely invested in foreign operations.
The amount of cumulative undistributed tax basis earnings of its foreign
subsidiaries is approximately $190 million at June 30, 2005. The amount of
earnings that may ultimately be repatriated in 2005, and therefore potentially
subject to the 5.25 percent effective tax rate discussed above, will be impacted
by several factors. These factors include, without limitation, a determination
of the maximum eligible repatriation amount under provisions of the Act and
other federal income tax rules and regulations, as well as the ongoing cash
requirements of Tropical Shipping, the amount of such earnings previously taxed,
and the extent of qualifying investment uses, as defined in the Act, for amounts
to be repatriated. The extent to which Tropical Shipping's ongoing earnings will
be subject to federal taxation will be dependent upon several factors,
including, without limitation, the amount of distributions, if any, to its
United States parent and the clarification of certain provisions of the Act and
its impact on other federal income tax rules and regulations. Nicor is currently
assessing the impact, if any, of the provisions of the Act on the amount, if
any, ultimately to be repatriated and is therefore unable to determine, at this
time, the impact of the Act on its financial statements. Accordingly, these
financial statements do not reflect any impact of the Act.

Any future adjustments to income tax expense that may result from the Act will
depend on the amount, if any, of foreign earnings that are repatriated or
expected to be repatriated to the United States. Such adjustments could be
material to the results of operations in the period recorded. Nicor expects to
complete its evaluation of the Act no later than December 31, 2005.

Other Tax Related Item. In 2003, Nicor received an income tax refund, which
adjusted the deferred income tax liability, of approximately $100 million. The
refund was attributable to a tax loss carryback associated with a change in tax
accounting method, and it remains subject to Internal Revenue Service review and
approval as part of normal ongoing audits.


                                       27


<PAGE>

Contingencies. The following contingencies of Nicor are in various stages of
investigation or disposition. Although in some cases the company is unable to
estimate the amount of loss reasonably possible in addition to any amounts
already recognized, it is possible that the resolution of these contingencies,
either individually or in aggregate, will require the company to take charges
against, or will result in reductions in, future earnings. It is the opinion of
management that the resolution of these contingencies, either individually or in
aggregate, could be material to earnings in a particular period but is not
expected to have a material adverse impact on Nicor's liquidity or financial
condition.

Performance-based rate (PBR) plan. Nicor Gas' PBR plan for natural gas costs
went into effect in 2000 and was terminated by the company effective January 1,
2003. Under the PBR plan, Nicor Gas' total gas supply costs were compared to a
market-sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR is
currently under ICC review.

There are allegations that the company acted improperly in connection with the
PBR plan, and the ICC and others are reviewing these allegations. On June 27,
2002 the Citizens Utility Board (CUB) filed a motion to reopen the record in the
ICC's proceedings to review the PBR plan (the ICC Proceedings). As a result of
the motion to reopen, Nicor Gas, the Cook County State's Attorney Office
(CCSAO), the staff of the ICC and CUB entered into a stipulation providing for
additional discovery. The Illinois Attorney General's Office (IAGO) has also
intervened in this matter. In addition, the IAGO issued Civil Investigation
Demands (CIDs) to CUB and the ICC staff. The CIDs ordered that CUB and the ICC
staff produce all documents relating to any claims that Nicor Gas may have
presented, or caused to be presented, false information related to its PBR plan.
Parties who were plaintiffs in a dismissed class action proceeding against the
company could potentially intervene in these proceedings. The company has
committed to cooperate fully in the reviews of the PBR plan.

In response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation. The special committee
presented the report of its counsel (Report) to Nicor's Board of Directors on
October 28, 2002. A copy of the report is available at the Nicor website and has
been previously produced to all parties in the ICC Proceedings.

In response, the Nicor Board of Directors directed the company's management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in prior years' financial
statements resulting in a $24.8 million liability. Included in such $24.8
million liability is a $4.1 million loss contingency. A $1.8 million adjustment
to the previously recorded liability, which is discussed below, was made in the
third quarter of 2004 increasing the recorded liability to $26.6 million. In
addition, Nicor Gas estimates that there is $26.9 million due to the company
from the 2002 PBR plan year, which has not been recognized in the financial
statements due to uncertainties surrounding the PBR plan. The net of these items
and interest income on certain components results in a $1.0 million
reimbursement the company is seeking as of June 30, 2005, pending resolution of
the proceedings discussed below. By the end of 2003 the company completed steps
to correct the weaknesses and deficiencies identified in the detailed study of
the adequacy of internal controls.

Pursuant to the agreement of all parties, including the company, the ICC
re-opened the 1999 and 2000 purchased gas adjustment filings for review of
certain transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan review.



                                       28


<PAGE>

On February 5, 2003, the CCSAO and CUB filed a motion for $27 million in
sanctions against the company in the ICC Proceedings. In that motion, CCSAO and
CUB alleged that Nicor Gas' responses to certain CUB data requests were false.
Also on February 5, 2003, CUB stated in a press release that, in addition to $27
million in sanctions, it would seek additional refunds to consumers. On March 5,
2003, the ICC staff filed a response brief in support of CUB's motion for
sanctions. On May 1, 2003, the Administrative Law Judges issued a ruling denying
CUB and CCSAO's motion for sanctions. CUB has filed an appeal of the motion for
sanctions with the ICC, and the ICC has indicated that it will not rule on the
appeal until the final disposition of the ICC Proceedings. It is not possible to
determine how the ICC will resolve the claims of CCSAO, CUB or other parties to
the ICC Proceedings.

In November 2003, the ICC staff, CUB, CCSAO and the IAGO filed their respective
direct testimony in the ICC Proceedings. The ICC staff is seeking refunds to
customers of approximately $108 million and CUB and CCSAO were jointly seeking
refunds to customers of approximately $143 million. The IAGO direct testimony
alleges adjustments in a range from $145 million to $190 million. The IAGO
testimony as filed is presently unclear as to the amount which IAGO seeks to
have refunded to customers. On February 27, 2004 the above referenced
intervenors filed their rebuttal testimony in the ICC Proceedings. In such
rebuttal testimony, CUB and CCSAO amended the alleged amount to be refunded to
customers from approximately $143 million to $190 million. Nicor Gas filed
rebuttal testimony in January 2004, which is consistent with the findings of the
special committee Report. Nicor Gas seeks a reimbursement of approximately $1.0
million as referenced above. The parties to the ICC Proceedings have agreed to a
stay of the evidentiary hearings on this matter in order to undertake additional
third party discovery from Entergy-Koch Trading, LP (EKT), a natural gas,
storage and transportation trader and consultant with whom Nicor did business
under the PBR plan.

During the course of the SEC investigation discussed below, the company became
aware of additional information relating to the activities of individuals
affecting the PBR plan for the period from 1999 through 2002, including
information consisting of third party documents and recordings of telephone
conversations from EKT. The company continues to obtain access to and review
this information. Review of additional information completed in the third
quarter of 2004 resulted in the $1.8 million adjustment to the previously
recorded liability referenced above.

Although the Report of the special committee's counsel did not find that there
was criminal activity or fraud, a review of this additional information (which
was not available to the independent counsel who prepared the Report) and
re-interviews of certain Nicor Gas personnel indicates that certain former Nicor
Gas personnel may have engaged in potentially fraudulent conduct regarding the
PBR plan in violation of company policy, and in possible violation of SEC rules
and applicable law. Further, certain former Nicor Gas personnel also may have
attempted to conceal their conduct in connection with an ICC review of the PBR
plan. The company continues to cooperate with the SEC, the U.S. Attorney's
office and the ICC on this matter and to review and produce additional documents
as requested by these agencies. The company has reviewed all third party
information it has obtained and will continue to review any additional third
party information the company may obtain. The company terminated four employees
in connection with this matter in the third quarter of 2004.

Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Because the PBR plan and historical gas
costs are still under ICC review, the final outcome could be materially
different than the amounts reflected in the company's financial statements as of
June 30, 2005.

Nicor Energy. Significant events occurred in 2002 and 2003 relating to Nicor's
50-percent interest in Nicor Energy. Information about these events is
presented within the Notes to the Condensed Consolidated Financial Statements -
Note 16 Contingencies - Nicor Energy.


                                       29


<PAGE>

On December 10, 2003, the United States Attorney for the Northern District of
Illinois indicted three former employees of Nicor Energy and an outside lawyer
for Nicor Energy. The indictments alleged that the defendants fraudulently
deprived Nicor Energy of their honest services and caused a loss to investors in
Nicor Inc. and Dynegy Inc. During the time period covered by the indictments,
Nicor Energy was a stand alone entity with its own management and was operated
independently from Nicor Inc. and Nicor Gas. None of the individuals indicted
are employees of Nicor Inc. or Nicor Gas nor were they at the time of the
charged conduct. The three former employees of Nicor Energy have pled guilty to
certain charges. Separately, on December 10, 2003, the SEC filed its own civil
enforcement action against the same three former employees and one additional
former employee of Nicor Energy. While Nicor is unable to predict the final
outcome of these matters, the resolution of such matters is not expected to have
a material adverse impact on the company's cash flow, financial condition or
results of operations.

SEC and U.S. Attorney Inquiries. In 2002, the staff of the SEC informed Nicor
and Nicor Energy that the SEC is conducting a formal inquiry regarding both the
PBR plan and Nicor Energy. A representative of the Office of the United States
Attorney for the Northern District of Illinois has notified Nicor that that
office is conducting an inquiry on the same matters that the SEC is
investigating, and a grand jury is also reviewing these matters. In April 2004,
Nicor was advised by the SEC Division of Enforcement that it intended to
recommend to the SEC that it bring a civil injunctive action against Nicor,
alleging that Nicor violated Sections 17(a) of the Securities Act of 1933 and
Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder. The SEC may also seek injunctive relief,
disgorgement and civil penalties. The SEC staff invited Nicor to make a formal
response (known as a Wells Submission) with respect to the proposed
recommendation. In June 2004, Nicor filed its Wells Submission with the SEC. In
addition, in connection with the SEC's invitation to the company to make a Wells
Submission, the SEC informed the company of additional sources of information
relating to activities affecting the PBR plan, the status of which is addressed
in detail in the PBR section set forth above. In August 2004, Nicor withdrew its
Wells Submission in light of its continuing review of the additional sources of
newly available information referenced above. Nicor continues in its efforts to
resolve this matter with the SEC and has requested that the SEC allow Nicor to
file an updated Wells Submission if necessary. Nicor is unable to predict the
outcome of these inquiries or Nicor's potential exposure related thereto and has
not recorded a liability associated with the outcome of these contingencies.

Securities Class Actions. Nicor and certain of its executives were defendants in
a consolidated class action lawsuit. Information about the settlement of this
action is presented within the Notes to the Condensed Consolidated Financial
Statements - Note 16 Contingencies - Securities Class Actions.

Shareholder Derivative Lawsuits. Certain Nicor executives and members of its
Board of Directors were defendants in a consolidated derivative lawsuit. The
parties reached an agreement to settle the action which was approved by the
court presiding over the matter on March 29, 2005. The settlement became final
in the second quarter of 2005, when all appeal rights expired. In connection
with the derivative settlement, in the first quarter of 2005, Nicor's excess
insurance carrier paid $4 million to Nicor to settle certain claims Nicor had
asserted against it arising out of the derivative action and related class
action securities litigation. Pursuant to the terms of the derivative
settlement, Nicor paid $3.5 million of that $4 million to plaintiff's attorneys
to reimburse them for the fees and costs expended in pursuing the derivative
action. The $0.5 million net of these payments was reflected in the Condensed
Consolidated Statement of Operations in the first quarter of 2005. Further
information about this lawsuit is presented within the Notes to the Condensed
Consolidated Financial Statements - Note 16 Contingencies - Shareholder
Derivative Lawsuits. See also the "Other contingencies" section for information
on additional insurance recoveries.



                                       30


<PAGE>

Mercury. Future operating results may be impacted by adjustments to the
company's estimated mercury liability or by related recoveries. Additional
information about mercury contingencies is presented in the Notes to the
Condensed Consolidated Financial Statements - Note 16 Contingencies - Mercury.

Manufactured gas plant sites. The company is conducting environmental
investigations and remedial activities at former manufactured gas plant sites.
Additional information about these sites is presented in the Notes to the
Condensed Consolidated Financial Statements - Note 16 Contingencies -
Manufactured Gas Plant Sites.

Fixed Bill Service. Nicor Services is a defendant in a purported class action.
Information about this lawsuit is presented within the Notes to the Condensed
Consolidated Financial Statements - Note 16 Contingencies - Fixed Bill Service.

Gas Line ComfortGuard Service. Nicor, Nicor Gas and Nicor Services are
defendants in a purported class action. Information about this lawsuit is
presented within the Notes to the Condensed Consolidated Financial Statements -
Note 16 Contingencies - Gas Line ComfortGuard Service.

Other contingencies. The company is involved in legal or administrative
proceedings before various courts and agencies with respect to general claims,
rates, taxes, environmental, gas costs prudence reviews and other matters. See
the Notes to the Condensed Consolidated Financial Statements - Note 6 Income and
Other Taxes and Note 16 Contingencies.

On April 27, 2004 one of Nicor's Directors and Officers (D&O) insurance carriers
agreed to pay $29.0 million to a third party escrow agent on behalf of Nicor and
its insured directors and officers to be used to satisfy Nicor directors' and
officers' liabilities and expenses associated with claims asserted against them
in a securities class action, the shareholder derivative lawsuit described above
and related matters, with any remaining balance to be paid to Nicor. Under the
terms of the derivative settlement, once the settlement became final (because
all appeal rights had expired), the escrow was terminated and the $29.0 million,
plus earnings, held by the escrow agent was paid to Nicor in the second quarter
of 2005. The above referenced amount has been reflected in "Litigation charges
(recoveries), net" in the Condensed Consolidated Statement of Operations for the
quarter ending June 30, 2005. Nicor also continues to seek reimbursement for
other expenses from its excess insurance carrier in connection with the same
matters but is unable to predict the outcome of this matter and therefore no
potential insurance recoveries have been reflected in the financial statements.

Market risks. Nicor is exposed to market risk in the normal course of its
business operations, including the risk of loss arising from adverse changes in
natural gas and fuel commodity prices, and interest rates.

There has been no material change in the company's exposure to market risk since
the filing of the 2004 Annual Report on Form 10-K.

Energy trading activities. At June 30, 2005, Nicor Enerchange held derivative
contracts with the following asset (liability) fair values, net (in millions):

                                                              Maturity
                                                    ---------------------------
                                           Total    Less than   1 to 3   3 to 5
Source of Fair Value                    Fair Value   1 Year     Years    Years
-----------------------------           ----------  ---------  -------  -------

Prices actively quoted                  $   (1.6)   $  (1.5)   $  (.1)  $    -
Prices based on pricing models                .3          -        .3        -
                                        ----------  ---------  -------  -------
Total                                   $   (1.3)   $  (1.5)   $   .2   $    -
                                        ==========  =========  =======  =======


                                       31

<PAGE>

Other. See Management's Discussion and Analysis of Financial Condition and
Results of Operations - Other Factors That May Affect Business Performance in
the 2004 Annual Report on Form 10-K for a detailed discussion of additional
factors that may affect the company's business performance.

CRITICAL ACCOUNTING ESTIMATES

See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Estimates in the 2004 Annual Report on Form
10-K for a discussion of the company's critical accounting estimates.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued the following new
pronouncements that have not yet been adopted by Nicor as of June 30, 2005.

In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, Accounting Changes and Error Corrections - a replacement of Accounting
Principles Board (APB) Opinion No. 20 and SFAS No. 3. In March 2005, the FASB
issued Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations. In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R) and Staff Position SFAS No. 109-2 Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. These pronouncements are currently under
review by the company. For more information, see the Notes to the Condensed
Consolidated Financial Statements - Note 3 New Accounting Pronouncements.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This document includes certain forward-looking statements about the expectations
of Nicor and its subsidiaries and affiliates. Although Nicor believes these
statements are based on reasonable assumptions, actual results may vary
materially from stated expectations. Such forward-looking statements may be
identified by the use of forward-looking words or phrases such as "anticipate,"
"believe," "expect," "intend," "may," "planned," "potential," "should," "will,"
"would," "project," "estimate," or similar phrases. Actual results may differ
materially from those indicated in the company's forward-looking statements due
to the direct or indirect effects of legal contingencies (including litigation)
and the resolution of those issues, including the effects of an ICC review and
SEC and U.S. Attorney inquiries, and undue reliance should not be placed on
such statements.

Other factors that could cause materially different results include, but are not
limited to, weather conditions; natural gas and other fuel prices; fair value
accounting adjustments; inventory valuation; health care costs; insurance costs
or recoveries; legal costs; borrowing needs; interest rates; credit conditions;
economic and market conditions; tourism and construction in the Bahamas and
Caribbean region; energy conservation; legislative and regulatory actions; tax
rulings or audit results; asset sales; significant unplanned capital needs;
future mercury-related charges or credits; changes in accounting principles,
interpretations, methods, judgments or estimates; performance of major suppliers
and contractors; labor relations; and acts of terrorism.

Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this filing. Nicor undertakes no
obligation to publicly release any revision to these forward-looking statements
to reflect events or circumstances after the date of this filing.



                                       32


<PAGE>

Item 3.    Quantitative and Qualitative Disclosures about Market Risk
-------    ----------------------------------------------------------

For disclosures about market risk, see Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risks, which is
incorporated herein by reference.

Item 4.    Controls and Procedures
-------    ------------------------

The company carried out an evaluation under the supervision and with the
participation of the company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the company's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q (the Evaluation).

In designing and evaluating the disclosure controls and procedures, management
recognizes that any disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. Based on the Evaluation, the company's Chief Executive Officer and
Chief Financial Officer concluded that the company's disclosure controls and
procedures, as of the end of the period covered by this Quarterly Report on Form
10-Q, were effective at the reasonable assurance level to ensure that
information required to be disclosed by the company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.

There has been no change in the company's internal controls over financial
reporting during the company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the company's internal
control over financial reporting.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings
-------    -----------------

See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Contingencies and the Notes to the Condensed Consolidated Financial
Statements - Note 13 Rate Proceeding and Note 16 Contingencies, which are
incorporated herein by reference.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
-------    -----------------------------------------------------------

(c)  Issuer Purchases of Equity Securities

In September 2001, Nicor announced a $50 million common stock repurchase
program, under which Nicor may purchase its common stock as market conditions
permit through open market transactions and to the extent cash flow is available
after other cash needs and investment opportunities. There have been no
repurchases under this program during 2005 or 2004. As of June 30, 2005,
$21,513,176 remained authorized for the repurchase of common stock.

Item 4.    Submission of Matters to a Vote of Securities Holders
-------    -----------------------------------------------------

The Annual Meeting of Stockholders of the company was held on April 21, 2005 for
the purpose of electing the Board of Directors. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and
there has been no solicitation in opposition to the board of directors'
solicitation. Voting results reported below are for shares eligible to vote as
of the record date, February 22, 2005.


                                       33


<PAGE>

Nominees for directors, as listed in the proxy statement, were elected as
indicated below. There were no "broker nonvotes." Votes were cast as follows:

                   Nominee                     For         Withheld
           -----------------------         ----------     ----------
           Robert M. Beavers, Jr.          37,198,219      1,064,845
           Bruce P. Bickner                36,550,008      1,713,056
           John H. Birdsall, III           34,863,410      3,399,654
           Thomas A. Donahoe               36,484,691      1,778,373
           Thomas L. Fisher                37,074,413      1,188,651
           John E. Jones                   36,280,063      1,983,001
           Dennis J. Keller                37,233,781      1,029,283
           R. Eden Martin                  37,402,813        860,251
           William A. Osborn               32,599,869      5,663,195
           John Rau                        36,482,711      1,780,353
           John F. Riordan                 37,154,470      1,108,594
           Russ M. Strobel                 37,211,138      1,051,926

The stockholders ratified the appointment of Deloitte & Touche LLP as
independent public accountants of the company for 2005. Votes were cast as
follows:

                 For             Against         Abstain
            --------------    -------------   -------------
              37,589,255         308,458         365,349





                                       34


<PAGE>

Item 6.    Exhibits
-------    --------

  Exhibit
  Number                           Description of Document
  -------     -----------------------------------------------------------------

     3.01  *  Articles of Incorporation of the company.  (File No. 2-55451,
              Form S-14, Nicor Inc., Exhibit 1-03 and Exhibit B of Amendment
              No. 1 thereto.)

     3.02  *  Amendment to Articles of Incorporation of the company.  (Proxy
              Statement dated April 20, 1979, Nicor Inc., Item 3 thereto.)

     3.03  *  Amendment to Articles of Incorporation of the company.  (File
              No. 2-68777, Form S-16, Nicor Inc., Exhibit 2-01.)

     3.04  *  Amendment to Articles of Incorporation of the company.  (File
              No. 1-7297, Form 10-K for 1985, Nicor Inc., Exhibit 3-03.)

     3.05  *  Amendment to Articles of Incorporation of the company.  (Proxy
              Statement dated March 12, 1987, Nicor Inc., Exhibit A and
              Exhibit B thereto.)

     3.06  *  Amendment to Articles of Incorporation of the company.  (File
              No. 1-7297, Form 10-K for 1992, Nicor Inc., Exhibit 3-06.)

     3.07  *  Amendments to Articles of Incorporation of the company.
              (Proxy Statement dated March 9, 1994, Nicor Inc., Exhibit A-1 and
              Exhibit B thereto.)

     3.08  *  Amendment to Articles of Incorporation of the company.  (Proxy
              Statement dated March 6, 1998, Nicor Inc., Item 2 thereto.)

     3.09  *  By-Laws of the company as amended by the company's Board of
              Directors on January 15, 2004.  (File No. 1-7297, Form 10-K for
              2003, Nicor Inc., Exhibit 3.09.)

    31.01     Rule 13a-14(a)/15d-14(a) Certification.

    31.02     Rule 13a-14(a)/15d-14(a) Certification.

    32.01     Section 1350 Certification.

    32.02     Section 1350 Certification.

*    These exhibits have been previously filed with the United States Securities
     and Exchange Commission (SEC) as exhibits to registration statements or to
     other filings with the SEC and are incorporated herein as exhibits by
     reference. The file number and exhibit number of each such exhibit, where
     applicable, are stated, in parentheses, in the description of such exhibit.

   Upon written request, the company will furnish free of charge a copy of any
   exhibit. Requests should be sent to Investor Relations at the corporate
   headquarters.



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<PAGE>

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.




                                     Nicor Inc.

    August 4, 2005                   /s/ RICHARD L. HAWLEY
    --------------                   --------------------------
       (Date)                        Richard L. Hawley
                                     Executive Vice President and
                                     Chief Financial Officer






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