==============================================================================

                                  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, 2003

                                       or


      [ ]  Transition Report Pursuant to Section 13 or 15(d) of
           the Securities Exchange Act of 1934





                     Registrant, State of             I.R.S. Employer
 Commission            Incorporation,                 Identification
 File Number     Address and Telephone Number             Number
--------------  --------------------------------      ---------------

   1-7297       Nicor Inc.                               36-2855175
                (An Illinois Corporation)
                1844 Ferry Road
                Naperville, Illinois 60563-9600
                (630) 305-9500


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 [ ]

Shares of common stock, par value $2.50, outstanding at July 31, 2003, were
44,025,675.
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Nicor Inc.                                                              Page i
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Table of Contents
-----------------
Part I - Financial Information
   Item 1. Financial Statements (Unaudited) ...................... 1
           Consolidated Statements of Operations:
             Three and six months ended
             June 30, 2003 and 2002 .............................. 2
           Consolidated Statements of Cash Flows:
             Six months ended
             June 30, 2003 and 2002 .............................. 3
           Consolidated Balance Sheets:
             June 30, 2003 and 2002, and
             December 31, 2002 ................................... 4
           Notes to the Consolidated Financial Statements ........ 5

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations ...................18

   Item 3. Quantitative and Qualitative Disclosures about Market
           Risk...................................................29

   Item 4. Controls and Procedures ...............................30


Part II - Other Information
   Item 1. Legal Proceedings .....................................32

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

   Item 6. Exhibits and Reports on Form 8-K ......................33

           Signature .............................................34

           Exhibit Index .........................................35
Glossary
--------
Degree day...The extent to which the daily average temperature falls below
             65 degrees Fahrenheit. Normal weather for Nicor Gas' service
             territory is about 6,000 degree days.
ICC..........Illinois Commerce Commission, the agency that regulates
             investor-owned Illinois utilities.
FERC.........Federal Energy Regulatory Commission, the agency that regulates the
             interstate transportation of natural gas, oil and electricity.
Mcf, MMcf,
Bcf..........Thousand cubic feet, million cubic feet, billion cubic feet.
PBR..........Performance-based rate, a regulatory plan that provided economic
             incentives based on natural gas cost performance.
TEU..........Twenty-foot equivalent unit, a measure of volume in containerized
             shipping equal to one 20-foot-long container.


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Nicor Inc.                                                              Page 1
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PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

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 Securities and Exchange Commission (SEC). Certain information
and footnote 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 should be read in conjunction with the financial
statements and the notes thereto included in the company's 2002 Annual Report on
Form 10-K.

The information furnished reflects, in the opinion of the company, all
adjustments (consisting only of normal recurring adjustments and adjustments to
reflect the change in accounting policy as described in the Notes to the
Consolidated Financial Statements - Cumulative Effect of Change in Accounting on
page 6) 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.

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Nicor Inc.                                                              Page 2
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Consolidated Statements of Operations (Unaudited)
(millions, except per share data)
                                          Three months ended  Six months ended
                                               June 30            June 30
                                           ----------------   -----------------
                                             2003     2002      2003      2002
                                           -------- -------   --------  -------

Operating revenues
   Gas distribution (includes revenue taxes
    of $24.6, $20.4, $86.9 and $56.8,
    respectively)                          $ 379.5 $ 279.8  $ 1,476.2  $ 798.5
   Shipping                                   67.1    65.2      133.6    125.0
   Other                                       6.2     7.2       14.3     16.7
                                            ------- -------   --------  -------
                                             452.8   352.2    1,624.1    940.2
Operating expenses
   Gas distribution
    Cost of gas                              241.0   146.9    1,103.9    461.9
    Operating and maintenance                 54.7    45.8      113.1     95.2
    Depreciation                              36.0    22.6       72.1     79.2
    Taxes, other than income taxes            28.0    23.4       93.9     63.7
    Mercury-related costs (recoveries)       (17.4)      -      (17.8)      .2
    Property sale (gains) losses               (.4)      -        (.4)    (3.4)
   Shipping                                   62.2    61.3      123.0    117.0
   All other                                   9.8     8.5       16.0     17.7
                                           -------- -------   --------  -------
                                             413.9   308.5    1,503.8    831.5
                                           -------- -------   --------  -------

Operating income                              38.9    43.7      120.3    108.7
Equity investment income (loss), net           6.7    (2.6)       8.0     (4.9)
Other income (expense), net                     .6      .7        1.1      1.8
Interest expense, net of amounts capitalized   9.2     8.9       18.9     18.7
                                            ------- -------   --------  -------

Income before income taxes and cumulative
   effect of accounting change                37.0    32.9      110.5     86.9
Income taxes                                  13.2    10.5       36.3     28.0
                                           -------- -------   --------  -------

Income before cumulative effect of
   accounting change                          23.8    22.4       74.2     58.9
Cumulative effect of accounting change, net
   of $3.0 income tax benefit                    -       -       (4.5)       -
                                           -------- -------   --------  -------

Net income                                    23.8    22.4       69.7     58.9
Dividends on preferred stock                     -      .1          -       .1
                                           -------- -------   --------  -------

Earnings applicable to common stock         $ 23.8  $ 22.3     $ 69.7   $ 58.8
                                           ======== =======   ========  =======

Average shares of common stock outstanding
   Basic                                      44.0    44.1       44.0     44.2
   Diluted                                    44.2    44.4       44.1     44.5

Earnings per average share of common stock
   Basic
    Before cumulative effect of accounting
      change                                 $ .54   $ .51     $ 1.68   $ 1.33
    Cumulative effect of accounting change,
      net of tax                                 -       -       (.10)       -
                                           -------- -------   --------  -------
    Basic earnings per share                 $ .54   $ .51     $ 1.58   $ 1.33
                                           ======== =======   ========  =======

   Diluted
    Before cumulative effect of accounting
      change                                 $ .54   $ .50     $ 1.68   $ 1.32
    Cumulative effect of accounting change,
      net of tax                                 -       -       (.10)       -
                                           -------- -------   --------  -------
    Diluted earnings per share               $ .54   $ .50     $ 1.58   $ 1.32
                                           ======== =======   ========  =======

Dividends declared per share of common
   stock                                     $ .465  $ .46      $ .93    $ .92


The accompanying notes are an integral part of these statements.

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Nicor Inc.                                                              Page 3
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Consolidated Statements of Cash Flows (Unaudited)
(millions)
                                                       Six months ended
                                                           June 30
                                                     -------------------
                                                       2003       2002
                                                     --------  ---------
Operating activities
   Net income                                         $ 69.7     $ 58.9
   Adjustments to reconcile net income to net cash flow
     provided from operating activities:
      Depreciation                                      80.9       87.8
      Deferred income tax expense                       12.3       24.6
      Cumulative effect of accounting change             4.5          -
      Gain on sale of property, plant and equipment     (1.7)      (4.5)
      Changes in assets and liabilities:
        Receivables, less allowances                   122.2      132.2
        Gas in storage                                   5.1        2.8
        Deferred/accrued gas costs                     (73.6)     (73.5)
        Prepaid pension costs                              -       (6.4)
        Other assets                                    35.5        1.0
        Accounts payable                              (104.8)     (67.6)
        Accrued mercury-related costs (recoveries)       (.8)      (4.2)
        Temporary LIFO liquidation                      18.0       93.5
        Other liabilities                              (22.4)      13.5
      Other                                             (7.6)       6.5
                                                     --------  ---------
   Net cash flow provided from operating activities    137.3      264.6
                                                     --------  ---------

Investing activities
   Capital expenditures                                (85.1)     (91.9)
   Net (increase) decrease in short-term investments    (6.5)      13.4
   Repayments from joint ventures                        5.6       85.0
   Loans to joint ventures                                 -      (55.1)
   Investment in joint venture                             -      (16.5)
   Business acquisitions                                   -      (10.2)
   Net proceeds from sale of property, plant and
     equipment                                           2.4        7.8
   Other                                                  .7        1.1
                                                     --------  ---------
   Net cash flow used for investing activities         (82.9)     (66.4)
                                                     --------  ---------

Financing activities
   Net proceeds from issuing long-term debt                -       49.9
   Disbursements to retire long-term debt             (100.0)         -
   Short-term borrowings (repayments), net              20.0     (184.0)
   Dividends paid                                      (40.8)     (40.0)
   Disbursements to reacquire stock                     (2.3)     (25.1)
   Other                                                  .8        3.6
                                                     --------  ---------
   Net cash flow used for financing activities        (122.3)    (195.6)
                                                     --------  ---------

Net (decrease) increase in cash and cash
   equivalents                                         (67.9)       2.6

Cash and cash equivalents, beginning of period          75.2       14.0
                                                     --------  ---------

Cash and cash equivalents, end of period               $ 7.3     $ 16.6
                                                     ========  =========


The accompanying notes are an integral part of these statements.

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Nicor Inc.                                                               Page 4
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Consolidated Balance Sheets (Unaudited)
(millions)


                                            June 30   December 31     June 30
                                              2003        2002          2002
                                          -----------  -----------  -----------
            Assets
           -------
Current assets
   Cash and cash equivalents             $      7.3    $    75.2    $    16.6
   Short-term investments, at cost which
     approximates market                       32.2         25.7         20.8
   Receivables, less allowances of $24.6,
     $16.9 and $13.0, respectively            343.3        467.4        218.8
   Notes receivable - joint ventures              -            -          1.3
   Gas in storage                              35.4         52.3         40.6
   Deferred gas costs                           6.3            -            -
   Deferred income taxes                       42.9         34.9         39.7
   Other                                       39.0         52.2         31.2
                                         -----------  -----------  -----------
                                              506.4        707.7        369.0
                                         -----------  -----------  -----------
Property, plant and equipment, at cost
   Gas distribution                         3,622.6      3,558.1      3,491.9
   Shipping                                   306.2        309.1        307.7
   Other                                        6.5          5.6          3.9
                                         -----------  -----------  -----------
                                            3,935.3      3,872.8      3,803.5
   Less accumulated depreciation            2,133.1      2,076.0      2,037.8
                                         -----------  -----------  -----------
                                            1,802.2      1,796.8      1,765.7
                                         -----------  -----------  -----------
Prepaid pension costs                         177.1        177.1        170.7
Other assets                                  198.2        217.8        145.8
                                         -----------  -----------  -----------
                                          $ 2,683.9    $ 2,899.4    $ 2,451.2
                                         ===========  ===========  ===========

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

Current liabilities
   Long-term obligations due
     within one year                     $        -    $   100.0    $   100.0
   Short-term borrowings                      335.0        315.0         93.0
   Accounts payable                           445.2        556.3        387.5
   Temporary LIFO liquidation                  18.0            -         93.5
   Accrued gas costs                              -         67.3         34.7
   Accrued mercury-related costs                4.5          5.0          4.2
   Accrued dividends payable                   20.5         20.3         20.3
   Other                                       19.9         34.7         23.6
                                         -----------   ----------   ----------
                                              843.1      1,098.6        756.8
                                         -----------   ----------   ----------
Deferred credits and other liabilities
   Deferred income taxes                      407.9        386.1        344.8
   Regulatory income tax liability             60.3         62.2         64.4
   Unamortized investment tax credits          36.5         37.5         38.0
   Accrued mercury-related costs               18.1         18.4         28.6
   Other                                      161.4        167.7        115.2
                                         -----------   ----------   ----------
                                              684.2        671.9        591.0
                                         -----------   ----------   ----------
Capitalization
   Long-term debt                             396.4        396.2        395.9
   Preferred stock                              2.0          4.3          6.0
   Common equity
    Common stock                              110.1        110.0        110.1
    Paid-in capital                             1.9          1.2            -
    Retained earnings                         652.5        623.8        593.6
    Unearned compensation                       (.3)         (.3)         (.4)
    Accumulated other comprehensive loss       (6.0)        (6.3)        (1.8)
                                         -----------   ----------   ----------
                                            1,156.6      1,128.9      1,103.4
                                         -----------   ----------   ----------
                                          $ 2,683.9    $ 2,899.4    $ 2,451.2
                                         ===========   ==========   ==========

The accompanying notes are an integral part of these statements.


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Nicor Inc.                                                              Page 5
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Notes to the Consolidated Financial Statements (Unaudited)

The following notes should be read in conjunction with the consolidated
financial statement notes included in the Nicor Inc. (Nicor) 2002 Annual Report
on Form 10-K.

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 current 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
(liabilities) as follows (in millions):

                                     June 30    December 31    June 30
                                       2003        2002          2002
                                    ----------  -----------  ---------

  Deferred (accrued) gas costs        $   6.3    $  (67.3)   $ (34.7)
  Regulatory income tax liability       (60.3)      (62.2)     (64.4)
  Unamortized loss on reacquired debt    18.5        19.0       19.5
  Deferred (accrued) environmental
    costs                                33.5        54.7      (11.5)
                                    ----------  ----------  ---------
                                      $  (2.0)   $  (55.8)   $ (91.1)
                                    ==========  ==========  =========

The unamortized loss on reacquired debt is classified in other noncurrent
assets. Deferred (accrued) environmental costs are included in other noncurrent
assets and other noncurrent liabilities, respectively.

In addition, consistent with its regulatory treatment, Nicor Gas depreciates
anticipated future removal costs over the useful lives of its property, plant
and equipment. The balance of removal costs in accumulated depreciation at June
30, 2003, December 31, 2002, and June 30, 2002 was approximately $645 million,
$625 million, and $601 million, respectively.

Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes due as operating expenses. Revenue taxes
included in operating expense for the three and six months ended June 30, 2003
were $23.9 million and $85.4 million, respectively, and $19.7 million and $55.2
million, respectively, for the same periods ended June 30, 2002.

Depreciation. Property, plant and equipment are depreciated over estimated
useful lives on a straight-line basis. The annual gas distribution composite
depreciation rate is 4.1 percent, which includes estimated future removal costs.
The estimated useful lives of vessels range from 20 to 25 years.


Nicor Inc.                                                              Page 6
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

Stock Options and Awards. Statement of Financial Accounting Standards (FAS) No.
123, Accounting for Stock-Based Compensation, encourages, but does not require,
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 at the date of grant over the related
vesting period. Nicor continues to apply the intrinsic value method of
Accounting Principles Board 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. As required by FAS 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123, if compensation expense for the 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):

                                       Three months ended    Six months ended
                                            June 30               June 30
                                       -----------------    ------------------
                                         2003       2002       2003      2002
                                       --------   -------    -------   --------
Net income
   As reported                          $  23.8   $ 22.4     $ 69.7    $  58.9

   Less: Total stock-based employee
         compensation expense determined
         under the fair value method for
         all awards, net of tax              .1       .1         .3         .2
                                        --------  -------    --------  --------
   Pro forma                            $  23.7   $ 22.3     $ 69.4    $  58.7
                                        ========  =======    ========  ========

Earnings per share
   Basic - As reported                  $   .54   $  .51     $ 1.58    $  1.33
   Basic - Pro forma                        .54      .50       1.58       1.32

   Diluted - As reported                    .54      .50       1.58       1.32
   Diluted - Pro forma                      .54      .50       1.57       1.32

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING

Effective January 1, 2003, Nicor's wholesale natural gas marketing business,
Nicor Enerchange, began applying accrual accounting rather than fair value
accounting to gas in storage and certain energy-related contracts, such as
storage contracts. The change in accounting method relates to a rescission of
Emerging Issues Task Force Consensus No. 98-10, Accounting for Contracts
Involved in Energy Trading and Risk Management Activities, and a prohibition
against recording inventory at fair value. Effective with the change, Nicor
recorded a $4.5 million cumulative effect loss from the change in accounting
principle, which was net of $3.0 million in income tax benefits. Pro forma
results for the three and six months ended June 30, 2002, had the new method
been applied could not be reasonably determined and are therefore not presented.

Annual and interim results will be more volatile under the new accounting
method. Also, the industry is working to resolve certain technical accounting
application questions that remain, which could lead to further changes.


Nicor Inc.                                                             Page 7
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

OTHER ACCOUNTING CHANGES

Depreciation. Effective January 1, 2003, Nicor Gas began using the straight-line
method for allocating annual depreciation to interim periods, the predominant
method used by other companies in its industry. Nicor's 2002 results include gas
distribution depreciation allocated based upon the level of weather-normalized
gas deliveries. The following table provides a comparison of Nicor's results as
reported for the three and six months ended June 30, 2002 to pro forma results
had gas distribution depreciation been allocated on a straight-line basis (in
millions, except per share data):

                                Three months ended      Six months ended
                                   June 30, 2002         June 30, 2002
                                 ------------------    --------------------
                                    As                     As
                                Reported  Pro Forma     Reported  Pro Forma
                                -------------------    --------------------
  Gas distribution depreciation
   expense                       $ 22.6   $ 34.4         $ 79.2    $ 68.8
  Operating income                 43.7     31.9          108.7     119.1
  Income before income taxes       32.9     21.0           86.9      97.3
  Net income                       22.4     15.3           58.9      65.2
  Earnings per average share
  of common stock:
     Basic                       $  .51   $  .34         $ 1.33    $ 1.47
     Diluted                        .50      .34           1.32      1.46

Accounting for guarantees. In November 2002, the Financial Accounting Standards
Board (FASB) issued Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The interpretation expands the disclosure requirements for most
guarantees, including standby letters of credit. It also clarifies that at the
time a company issues a guarantee it must recognize an initial liability for the
fair value of the obligations it assumes under that guarantee, and it must
disclose that information in its financial statements. Nicor applied the
recognition provisions on a prospective basis, beginning January 1, 2003, and
recorded a $.2 million liability in the first quarter of 2003.

Asset retirement obligations. In August 2001, the FASB issued FAS 143,
Accounting for Asset Retirement Obligations. This standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which the obligation is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying amount of
the related long-lived asset. Over time, the liability is accreted to its
present value, and the capitalized cost is depreciated over the useful life of
the related asset. This standard became effective on January 1, 2003.

The obligation of retiring gas distribution, transmission, storage and certain
general plant assets at Nicor Gas meets the definition of a legal obligation
within the meaning of FAS 143. However, the company, like most other gas
distribution utility companies, has determined that due to the indefinite life
of such assets a liability is generally not measurable. On January 1, 2003, a
$3.5 million asset retirement obligation for the expected replacement of inside
mercury regulators was recorded at Nicor Gas. Certain costs associated with the
retirement of other items at Nicor companies, including polychlorinated
biphenyls, underground storage tanks and asbestos abatement, are determined to
be immaterial or cannot be measured at this time.


Nicor Inc.                                                              Page 8
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

Nicor Gas continues its practice of accruing for future retirement costs as
accumulated depreciation, subject to cost-of-service utility rate regulation,
even when an asset removal obligation does not exist under FAS 143. Through June
30, 2003, the company had accrued and recovered about $645 million associated
with the future removal of these long-lived assets.

No cumulative effect gain or loss was required as a result of adopting this
standard due to the economic effect of Nicor Gas' cost-of-service utility rate
regulation. The application of this standard did not have a material effect on
the company's financial position and results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

Consolidation of Variable Interest Entities. In January 2003, the FASB issued
Interpretation 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46
clarifies the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies beginning July 1, 2003 to variable interest entities in which
an enterprise holds a variable interest that it acquired before February 1,
2003. Nicor has not yet determined the impact of this interpretation on its
financial position or results of operations.

Derivative Instruments and Hedging Activities. In April 2003, the FASB issued
FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. FAS 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FAS 133. The Statement is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003 and should be
applied prospectively. The company is currently evaluating FAS 149 and has not
yet determined the impact of adopting its provisions.

Accounting for Certain Financial Instruments. In May 2003, the FASB issued FAS
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. FAS 150 requires certain freestanding financial
instruments, such as mandatorily redeemable preferred stock, to be measured at
fair value and classified as liabilities. The provisions of FAS 150 are
effective for Nicor beginning July 1, 2003. The implementation of this standard
is not expected to have a material impact on the company's financial position or
results of operations.

ACCRUED UNBILLED REVENUES

Receivables include accrued unbilled revenues of $57.4 million, $142.9 million
and $40.5 million at June 30, 2003, December 31, 2002, and June 30, 2002,
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.


Nicor Inc.                                                              Page 9
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

SHORT-TERM DEBT

In April 2003, Nicor Gas issued $50 million of 1.6 percent unsecured notes due
in October 2003 to refund the redemption of $50 million of unsecured notes at 3
percent due in April 2003.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded amount of 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. The principal balance of Nicor's First Mortgage
Bonds outstanding at June 30, 2003 was $400.0 million and at December 31, 2002
and June 30, 2002, the principal balance outstanding was $450.0 million. Based
on quoted market interest rates, the fair value of the company's First Mortgage
Bonds outstanding, including current maturities, was $445.5 million, $481.6
million and $463.9 million at June 30, 2003, December 31, 2002 and June 30,
2002, respectively.

INCOME TAXES

The company's effective income tax rate increased for the three-month period
ended June 30, 2003 due to higher anticipated annual pretax income due primarily
to the mercury-related recoveries. The higher anticipated income caused a
somewhat higher effective income tax rate since permanent differences and tax
credits are a smaller share of pretax income.

BUSINESS SEGMENT INFORMATION

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

                               Three months        Six months
                                   ended              ended
                                  June 30            June 30
                              ----------------   -----------------
                               2003     2002      2003      2002
                              -------- -------   -------  --------
Operating revenues
   Gas distribution           $ 379.5  $279.8   $1,476.2  $ 798.5
   Shipping                      67.1    65.2      133.6    125.0
   Other energy ventures         17.5    15.1       38.6     24.4
   Corporate and
    eliminations                (11.3)   (7.9)     (24.3)    (7.7)
                              -------- -------   -------  --------
                              $ 452.8  $352.2   $1,624.1  $ 940.2
                              ======== =======  ========  ========
Operating income (loss)
   Gas distribution           $  37.6  $ 41.1    $111.4   $ 101.7
   Shipping                       4.9     3.9      10.6       8.0
   Other energy ventures          (.6)    1.4       3.0       2.1
   Corporate and
    eliminations                 (3.0)   (2.7)     (4.7)     (3.1)
                              -------- -------   -------  --------
                              $  38.9  $ 43.7    $120.3   $ 108.7
                              ======== =======   =======  ========

Gas distribution operating revenues include customer charges paid, on behalf of
the customer, by a Nicor subsidiary offering a utility-bill management product.
These gas distribution revenues have been eliminated in the consolidated
financial statements.


Nicor Inc.                                                             Page 10
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Notes to the Consolidated Financial Statements (Unaudited) (continued)

EQUITY INVESTMENT INCOME (LOSS)

Equity investment income (loss) includes the following (in millions):

                                          Three months       Six months
                                             ended             ended
                                            June 30           June 30
                                       ----------------  ----------------
                                        2003     2002     2003     2002
                                       -------  -------  -------  -------
   Triton Container Investments (Triton)$ 1.3    $  .9    $ 2.6    $ 1.9
   Nicor Energy                           5.6     (3.4)     5.6     (6.3)
   All other                              (.2)     (.1)     (.2)     (.5)
                                       -------  -------  -------  -------
                                        $ 6.7    $(2.6)   $ 8.0    $(4.9)
                                       =======  =======  =======  =======

OTHER INCOME (EXPENSE), NET

Other income (expense), net includes the following (in millions):

                             Three months          Six months
                                 ended                ended
                                June 30              June 30
                            ----------------     -----------------
                             2003     2002        2003      2002
                            -------  -------     -------   -------
     Interest income        $  .5    $  .6        $ 1.1     $ 1.5
     Other income              .6       .3           .6        .7
     Other expense            (.5)     (.2)         (.6)      (.4)
                            -------  -------      -------  -------
                            $  .6    $  .7        $ 1.1     $ 1.8
                            =======  =======      =======  =======

COMPREHENSIVE INCOME

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

                               Three months       Six months
                                   ended            ended
                                  June 30          June 30
                              ----------------  -----------------
                               2003     2002     2003       2002
                              -------- -------  --------  -------
Net income                    $ 23.8   $ 22.4   $  69.7   $ 58.9
Other comprehensive income
 (loss), net of tax              (.6)    (3.3)       .3     (1.5)
                              -------- -------  --------  -------
Total comprehensive income    $ 23.2   $ 19.1   $  70.0   $ 57.4
                              ======== =======  ========  =======

Other comprehensive income (loss) for Nicor 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.

Most of the $6.0 million net loss in accumulated other comprehensive loss at
June 30, 2003, represents a net realized loss on financial derivatives
designated as hedges of interest payments on an anticipated 30-year bond
issuance. This loss will be amortized to interest expense over the life of the
bonds.

Nicor Inc.                                                             Page 11
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

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 financial guarantees extending
through 2007 on behalf of its wholly owned subsidiaries and other affiliates,
guaranteeing payment by these affiliates under the terms of various contracts
and regulations. These contracts and regulations relate primarily to physical
and financial transactions in energy commodities and related services, and
operating lease obligations. As of June 30, 2003, the maximum potential payment
under these guarantees was approximately $175 million. Except for $5.3 million
of guarantees on behalf of Nicor Energy, and $1.3 million of lease guarantees,
any related obligations underlying these guarantees are already included in
Nicor's consolidated balance sheet. Refer to the Nicor Energy section on page 13
for recent developments related to Nicor's guarantees on behalf of Nicor Energy.

Tropic Equipment Leasing Inc. (TEL), a 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 about $12 million at June
30, 2003. Nicor believes the likelihood of any such payment by TEL is remote.

Performance guarantees. Nicor Services markets separately priced product
warranty contracts that provide for the repair of heating, ventilation and air
conditioning (HVAC) equipment and natural gas lines within homes. Revenues from
these product warranty contracts are recognized ratably over the coverage
period, and repair costs are charged to expense as incurred. Repair expenses of
$.8 million and $1.5 million were incurred in the three- and six-month periods
ended June 30, 2003, respectively, and $.5 million and $.8 million for the same
prior year periods. Prior to 2002, Nicor Services was not the guarantor on these
contracts.

Indemnities. With regard to environmental matters, 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. Nicor has also indemnified its present and former officers, employees and
directors against expenses they may incur in connection with litigation they are
a party to by reason of their association with the company, subject to certain
limitations. It is not possible to estimate the maximum potential payment under
these indemnifications.

RELATED PARTY TRANSACTIONS

Horizon Pipeline is a 50/50 joint venture between Nicor and Natural Gas Pipeline
Company of America (NGPL) that operates a natural gas pipeline. In May 2002,
Horizon Pipeline repaid short-term loans outstanding from Nicor. For the three
and six months ended June 30, 2003, Horizon Pipeline charged Nicor Gas $2.5
million and $5.1 million, respectively, for natural gas transportation under
rates that have been accepted by FERC. For the three and six months ended June
30, 2002, Horizon Pipeline charged Nicor Gas $1.4 million for this service.


Nicor Inc.                                                             Page 12
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

At June 30, 2002, Nicor had $1.3 million of short-term notes receivable at
market interest rates due from Nicor Energy, a 50/50 joint venture with Dynegy
Marketing and Trade. Nicor's investment in Nicor Energy, including an $8.3
million note receivable, was written down to zero during the third quarter of
2002. During the second quarter of 2003, Nicor recovered $5.6 million of its
investment that was previously written down. Another $2 million was recovered in
July 2003, which will be reflected in equity investment income in the third
quarter of 2003. For additional important development concerning this
investment, refer to the Contingencies - Nicor Energy section on page 13.

In 2002, Nicor Technologies, a wholly owned subsidiary of Nicor, began
purchasing engineering services from EN Engineering, a 50-percent-owned joint
venture. EN Engineering charged Nicor Technologies $1.2 million for these
services for the three months ended June 30, 2003 and 2002, and $2.1 million and
$2.3 million for these services for the six months ended June 30, 2003 and 2002,
respectively.

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 plan is
currently under Illinois Commerce Commission (ICC) review.

There are allegations that the company acted improperly in connection with the
PBR plan, and the ICC is 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's Office (CCSAO),
the staff of the ICC and CUB entered into a stipulation providing for additional
discovery. The Illinois Attorney General's Office has also intervened in this
matter. In addition, the Illinois Attorney General's Office 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.

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.


Nicor Inc.                                                             Page 13
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

Certain parties in the PBR plan review proceeding have indicated that they
believe substantial adjustments or penalties are warranted. In addition, 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.

Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Due to the uncertainties surrounding
the PBR plan, Nicor Gas has not recognized a $26.9 million pretax gain from the
2002 PBR plan year. Because the PBR plan and historical utility gas costs are
still under ICC review, it is possible that the final outcome could be
materially different than the amounts reflected in the company's financial
statements as of June 30, 2003.

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 in
restated financial statements previously filed with the Securities and Exchange
Commission (SEC).

Nicor Energy has disposed of all of its customer accounts and is in the process
of liquidating its remaining assets and resolving remaining contingent
liabilities. Nicor's investment in Nicor Energy was written down to zero in the
third quarter of 2002 due to the likelihood at that time that Nicor ultimately
would not recover its investment balance. During the second quarter of 2003,
Nicor recovered $5.6 million of its investment that was previously written down.
In July 2003, Nicor recovered an additional $2 million of its investment, which
will be recorded as a third quarter gain. Additional recoveries of $1 million to
$3 million could be received in 2003. Nicor's maximum exposure under guarantee
commitments on behalf of Nicor Energy as of June 30, 2003 was about $5.3
million. It is unlikely that Nicor will be required to make payments under the
guarantees.

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 the PBR
plan and Nicor Energy. On January 28, 2003, Nicor Energy 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 Energy, alleging that it violated Sections
10(b) and 13(b)(5) of the Securities Exchange Act of 1934. 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.

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, Thomas Fisher (Chairman and CEO) and Kathleen Halloran
(Executive Vice President Finance and Administration). The actions were


Nicor Inc.                                                             Page 14
------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited)(continued)

brought in the United States District Court for the Northern District of
Illinois, Eastern Division, and have been consolidated. On February 14, 2003,
plaintiffs filed an amended complaint adding as defendants George Behrens (Vice
President of Administration and Treasurer), Philip Cali (former Executive Vice
President of Operations) and Arthur Andersen LLP, the company's former
independent auditor. The plaintiffs seek to represent a class consisting of all
persons or entities who purchased Nicor common stock on the open market during
the period from November 24, 1999 through and including July 19, 2002. They
allege that the defendants violated Section 10(b) and Section 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Plaintiffs allege
that during the class period defendants misrepresented the PBR plan, Nicor's
historical financial condition and results of operations, and its future
prospects. The class is seeking compensatory damages, prejudgment interest, and
attorneys' fees and costs. On March 31, 2003, Nicor filed a Motion to Dismiss.
Nicor is unable to predict the outcome of this litigation or Nicor's potential
exposure related thereto and has not recorded a liability associated with the
outcome of this contingency.

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 CEO), Kathleen
Halloran (Executive Vice President Finance and Administration) and all members
of Nicor's Board of Directors (the "individual defendants"). Nicor was named as
a nominal defendant in all three suits, which have since been consolidated in an
amended complaint. The actions were brought in the Circuit Court of Cook County,
Illinois, Chancery Division. The plaintiffs allege 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, and failing to establish and maintain adequate accounting controls.
Plaintiffs also contend that two of the defendants (Mr. Fisher and Mr. Birdsall)
engaged in improper insider selling of Nicor stock at inflated prices. The
plaintiffs seek compensatory and punitive damages, attorneys' fees and costs,
and other relief against the individual defendants on behalf of Nicor but do not
seek any damages against the company. On May 8, 2003, Nicor filed a Motion to
Dismiss. Nicor's Motion to Dismiss has been fully briefed by the parties and the
Court is presently scheduled to rule on Nicor's Motion on October 7, 2003.

Hub Services. Nicor Gas offers interstate transportation and storage services,
which are regulated by the Federal Energy Regulatory Commission (FERC), as well
as certain intrastate interruptible transportation and storage services which
are regulated by the ICC. During a periodic rate case that was filed with FERC,
Nicor Gas determined that refunds were due to certain customers of these
services. Nicor Gas accrued customer refunds and other costs totaling $1.4
million in the years 2000 to 2002. On March 14, 2003, FERC issued an order
approving a settlement with Nicor Gas. The resolution of this matter did not
have a material adverse impact on the company's financial condition or results
of operations.

Other FERC Matters. In 2002, Nicor Gas determined that it may not have complied
with regulations of FERC governing the release of certain transportation and
storage capacity that it contracts for with interstate pipelines, and the
company brought these matters to the attention of FERC. The company accrued a
$.4 million liability associated with these matters in the fourth quarter of
2002. On March 14, 2003, FERC issued an order approving a settlement with Nicor
Gas. The resolution of this matter did not have a material adverse impact on the
company's financial condition or results of operations.


Nicor Inc.                                                             Page 15
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

Fixed Bill Service. On July 17, 2002, a purported class action was filed in the
Circuit Court of Cook County, Illinois against Nicor Energy Services Company
(Nicor Services) and Nicor Gas alleging violation of the Illinois Consumer Fraud
and Deceptive Practices Act (ICFA) by Nicor Services and Nicor Gas relating to
the fixed bill service offered by Nicor Services and a conspiracy claim against
Nicor Gas arising out of marketing efforts 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. On September 6, 2002, Nicor Gas and Nicor Services filed a
Motion to Dismiss this action. On November 26, 2002, the court dismissed the
complaint without prejudice, but allowed the plaintiff to file an amended
complaint. The plaintiff filed an amended complaint on December 10, 2002, which
names only Nicor Services as a defendant, and which purports to state claims
under the ICFA and for breach of contract. The plaintiff filed a second amended
complaint on April 29, 2003. Nicor filed a Motion to Dismiss the second amended
complaint on May 15, 2003. 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.

Troy Grove Facility. On October 15, 2002, Nicor Gas voluntarily disclosed a
potential violation of certain air pollution regulations and statutes to both
the United States Environmental Protection Agency and the Illinois Environmental
Protection Agency (IEPA) related to commencement of construction of certain
compressor equipment at its Troy Grove storage field prior to the issuance of a
Prevention of Significant Deterioration Permit. On June 26, 2003, Nicor Gas
completed the installation of an alternate fuel refueling station at Nicor's
Ottawa, Illinois facility pursuant to the terms of a Compliance Commitment
Agreement proposed by Nicor Gas and approved by IEPA to resolve the matter. The
resolution of this matter did not have a material adverse impact on the
company's financial condition or results of operations.

Horizon Pipeline Lien. The general contractor on the construction of the Horizon
Pipeline (Horizon) filed a $5.7 million Notice of Claim for Lien against
Horizon. On May 23, 2003, Horizon filed a Declaratory Judgment Complaint in the
United States District Court for the District of Colorado seeking resolution of
this dispute. On June 23, 2003, the general contractor filed an answer and
counterclaim to Horizon's complaint seeking in excess of $11 million in damages
from Horizon. While Nicor is unable to predict the outcome of this matter, its
resolution is not expected to have an immediate material adverse impact on the
company's financial condition or results of operations.

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 Courts
of Cook and DuPage Counties, Illinois, claiming 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 2006, 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
2005. The class action settlement permitted class members to "opt out" of the
settlement and pursue their claims individually. Approximately 160 households
have opted out of the class. Of those, 45 households had traces of mercury, and
Nicor Gas has settled with seven households.


Nicor Inc.                                                             Page 16
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

As of June 30, 2003, Nicor Gas had remaining an estimated liability of $22.6
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, but believes that it has now collected
the majority of such recoveries. When received, these recoveries are recorded as
a reduction to gas distribution operating expense. In the second quarter of
2003, Nicor Gas recovered approximately $17.4 million of pretax mercury-related
costs, net of legal fees, from insurers and independent contractors.

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 IEPA
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 determines the extent additional
remediation is necessary and provides a basis for estimating additional future
costs which, based on industry experience, could be significant. 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, various personal injuries and one death 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.

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.


Nicor Inc.                                                             Page 17
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Notes to the Consolidated Financial Statements (Unaudited)(concluded)

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 addition to the matters set forth above, the company is involved in
legal or administrative proceedings before various courts and agencies with
respect to rates, taxes and other matters. Although unable to determine the
outcome of these other contingencies, management believes that appropriate
accruals for them have been recorded.

<PAGE>

Nicor Inc.                                                             Page 18
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Item 2. Management's 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) 2002 Annual Report on
Form 10-K.

SUMMARY

Nicor's 2003 quarterly and year-to-date earnings were significantly impacted by
a change in the method of allocating annual depreciation to interim periods in
the gas distribution segment. Effective January 1, 2003, the gas distribution
segment began using a straight-line method to allocate annual depreciation to
interim periods, a method used predominantly by others in the industry. While
this change has a significant impact on quarterly and year-to-date results, it
has no impact on depreciation for the full year. Nicor's 2002 interim period
results include gas distribution depreciation allocated based upon the level of
weather-normalized gas deliveries. The following table provides a comparison of
Nicor's results as reported for the second quarter and year-to-date periods of
2003 and 2002, and the pro forma results for 2002 had gas distribution
depreciation been allocated on a straight-line basis (in millions, except per
share data):

                                        Three months ended June 30
                                     ---------------------------------
                                                    2002
                                                     As        2002
                                      2003        Reported   Pro Forma
                                     --------    ----------  ----------
Net income                           $ 23.8        $ 22.4     $ 15.3

Diluted earnings per average share
of common stock                      $  .54        $  .50     $  .34

                                         Six months ended June 30
                                     ---------------------------------
                                                    2002
                                                     As        2002
                                      2003        Reported   Pro Forma
                                     --------    ----------  ----------
Income before cumulative effect of
 accounting change                   $ 74.2       $ 58.9      $ 65.2
Net income                             69.7         58.9        65.2

Earnings per average share of common stock:
  Diluted - before cumulative effect
   of accounting change              $ 1.68       $ 1.32      $ 1.46
  Diluted                              1.58         1.32        1.46

Second quarter net income and diluted earnings per share for 2003 increased
compared to the reported 2002 amounts due primarily to mercury-related
recoveries, higher equity investment income relating to cash recoveries of a
previously written off investment in Nicor Energy, a 50-percent-owned retail
energy marketing joint venture, and higher operating income in the shipping
segment. These positive factors more than offset increased operating and
maintenance expenses in the gas distribution segment and decreased operating
income at Nicor's other energy ventures.

Net income and diluted earnings per share for the 2003 year-to-date period
increased compared to the reported 2002 amounts due primarily to higher
operating income in the gas distribution and shipping segments and the
investment recoveries related to Nicor Energy. Net income for the 2003
year-to-date period was negatively affected by a $4.5 million cumulative effect
loss from an accounting change at Nicor Enerchange, Nicor's wholesale natural
gas marketing company. With the change, Nicor Enerchange now applies accrual
accounting rather than fair value accounting to gas in storage and certain
energy-related contracts.


Nicor Inc.                                                             Page 19
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

Both quarter and year-to-date operating results for the gas distribution segment
were significantly affected by the 2003 change in interim depreciation method
and the favorable impact of significant recoveries from third parties in the
second quarter of 2003 related to the mercury inspection and repair program.

Operating income. Operating income (loss) by major business segment is presented
below (in millions):

                           Three months        Six months
                               ended              ended
                              June 30            June 30
                          ----------------   ----------------
                           2003     2002      2003    2002
                          -------- -------   ------- --------

   Gas distribution       $  37.6  $ 41.1    $111.4  $ 101.7
   Shipping                   4.9     3.9      10.6      8.0
   Other energy ventures      (.6)    1.4       3.0      2.1
   Corporate and
    eliminations             (3.0)   (2.7)     (4.7)    (3.1)
                          -------- -------   ------- --------
                          $  38.9  $ 43.7    $120.3  $ 108.7
                          ======== =======   ======= ========

The following summarizes operating income comparisons for major business
segments:

o  Gas distribution operating income decreased $3.5 million in the 2003 quarter
   due to increased depreciation ($13.4 million) and higher operating and
   maintenance expenses ($8.9 million). These negative factors were largely
   offset by the favorable impact of significant recoveries relating to the
   mercury inspection and repair program in the 2003 quarter ($17.4 million, net
   of recovery costs). The $9.7 million increase in operating income for the
   six-month period was due primarily to increased net recoveries ($18.0
   million) and lower depreciation ($7.1 million). These positive factors were
   partially offset by higher operating and maintenance expenses in 2003 ($17.9
   million). The year-to-year fluctuation in depreciation expense for both
   periods was due primarily to the change in the interim depreciation
   accounting method. These factors are discussed in more detail in the Results
   of Operations section beginning on the following page.

o  Shipping segment operating income increased in the 2003 three-month period
   compared to the corresponding 2002 period due to higher revenue from
   increased average rates ($3.4 million) and the chartering of company-owned
   vessels ($.9 million). These improvements were partially offset by lower
   revenue resulting from lower volumes shipped ($2.4 million) and increased
   operating expenses ($.9 million). The six-month period improvement was due to
   higher revenues resulting from higher average rates ($4.3 million), higher
   volumes shipped ($3.1 million) and increased charter activity ($1.1 million).
   These improvements were partially offset by higher operating expenses ($6.0
   million) in 2003.

o  Operating income at Nicor's other energy ventures decreased in the second
   quarter of 2003 compared to the 2002 quarter by $2.0 million due to lower
   results from Nicor's energy-related products and services businesses ($1.3
   million) and Nicor's wholesale natural gas marketing business, Nicor
   Enerchange ($1.0 million). Operating income for the year-to-date period
   increased by $.9 million due to decreased losses from Nicor's former energy
   system development activities ($.9 million) and higher operating results at
   Nicor Enerchange ($.3 million). Operating income from Nicor's energy-related
   products and services businesses was slightly lower in the 2003 year-to-date
   period compared with the corresponding 2002 period due primarily to up front
   marketing costs.


Nicor Inc.                                                             Page 20
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

Equity investment income (loss). Quarterly equity investment income (loss)
increased from a $(2.6) million loss in 2002 to a $6.7 million gain in 2003 and
increased for the six-month period from a $(4.9) million loss in 2002 to an $8.0
million gain in 2003 due primarily to $5.6 million of cash received on the
previously written off investment in Nicor Energy. The $5.6 million of Nicor
Energy gains included in both 2003 periods compares with losses of $(3.4)
million and $(6.3) million for the three- and six-month periods of 2002,
respectively. Developments related to this investment are more fully described
in the Notes to the Consolidated Financial Statements - Contingencies - Nicor
Energy on page 13.

Interest expense. Interest expense for the three and six months ended June 30,
2003 essentially remained unchanged compared to the same prior year periods. The
impact of higher average borrowing levels were offset by the positive effect of
lower interest rates.

Income taxes. The company's effective income tax rate increased for the
three-month period ended June 30, 2003 due to higher anticipated annual pretax
income due primarily to the mercury-related recoveries. The higher anticipated
income caused a somewhat higher effective income tax rate since permanent
differences and tax credits are a smaller share of pretax income.

Cumulative effect of accounting change. The cumulative effect of an accounting
change related to the application of accrual accounting, rather than fair value
accounting, to gas in storage and certain energy-related contracts, such as
storage and transportation contracts, at Nicor Enerchange on January 1, 2003.
Annual and interim results are subject to greater volatility under the new
accounting method.

RESULTS OF OPERATIONS

The following discussion provides additional information about the major items
impacting Nicor's results of operations.

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

                           Three months        Six months
                               ended              ended
                              June 30            June 30
                          ----------------   ----------------
                           2003     2002      2003    2002
                          -------- -------   ------- --------

   Gas distribution       $ 379.5  $279.8   $1,476.2   $ 798.5
   Shipping                  67.1    65.2      133.6     125.0
   Other energy ventures     17.5    15.1       38.6      24.4
   Corporate and
    eliminations            (11.3)   (7.9)     (24.3)     (7.7)
                          -------- -------  ---------  --------
                          $ 452.8  $352.2   $1,624.1   $ 940.2
                          ======== =======  =========  ========

Gas distribution revenues increased significantly in the quarter and
year-to-date periods of 2003 compared with a year ago due primarily to higher
natural gas costs, which are passed directly through to customers without
markup. Colder weather also contributed to increased revenues for the six-month
period. The revenue effect of higher natural gas costs was approximately $120
million and $540 million for the three- and six-month periods, respectively, and
the colder weather increased revenues by about $85 million for the 2003
year-to-date period. Industrial deliveries fell in both periods, despite colder
weather in the year-to-date period, due largely to lower power-generation load.


Nicor Inc.                                                             Page 21
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

The $1.9 million revenue increase in the second quarter for the shipping segment
was the result of higher average rates ($3.4 million) and increased charter
revenue ($.9 million) partially offset by a slight decrease in volumes shipped
($2.4 million) in 2003. The $8.6 million increase for the six-month period
related primarily to increased average rates ($4.3 million), increased volumes
($3.1 million) stemming from an acquisition that occurred in April 2002, and
increased charter activity ($1.1 million).

The increase in second quarter and year-to-date revenues for other energy
ventures is due primarily to a new utility-bill management product introduced in
early 2002 at Nicor's energy-related products and services businesses. For the
quarter, the increased revenues from the new product ($9.5 million) were
partially offset by decreased revenue from Nicor's former energy system
development activities ($3.9 million) and former technology business ($1.4
million). For the year-to-date period, increased revenues from the new product
($21.4 million) were partially offset by decreased revenue from Nicor's former
energy system development activities ($5.9 million) and former technology
business ($2.6 million). Corporate and eliminations reflects primarily the
elimination of gas distribution revenues against other energy venture expenses
for customers purchasing the new utility-bill management product.

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 gas costs, which are passed directly
through to customers without markup, and revenue taxes, for which Nicor Gas
earns only 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. Therefore, Nicor Gas and many other
gas utility companies exclude these items in evaluating performance.

A reconciliation of gas distribution revenues and margin follows (in millions):

                            Three months ended      Six months ended
                                June 30                  June 30
                            ----------------        -----------------
                             2003     2002           2003     2002
                            ------- --------       -------- --------
Gas distribution revenues   $ 379.5 $ 279.8      $ 1,476.2  $ 798.5
Cost of gas                  (241.0) (146.9)      (1,103.9)  (461.9)
Revenue tax expense           (23.9)  (19.7)         (85.4)   (55.2)
                            ------- --------      --------- --------
Gas distribution margin     $ 114.6 $ 113.2      $   286.9  $ 281.4
                            ======= ========     ========== ========

For the quarter, gas distribution margin increased slightly due primarily to
increased customer finance charges ($3.0 million), related to larger customer
bills in 2003, and the absence of unfavorable weather hedge results and PBR plan
losses that occurred in the second quarter of 2002 ($2.9 million and $2.2
million, respectively). These positive factors were partially offset by lower
customer demand unrelated to weather ($2.4 million), reduced deliveries for
power generation ($1.0 million) and a smaller contribution from nontraditional
gas supply-related services ($3.2 million), such as the Chicago Hub, in 2003.

For the six-month period, gas distribution margin was positively impacted by
increased customer deliveries due to colder weather than the prior year ($10.1
million), partially offset by an unfavorable variance from the company's weather
hedge in 2003 compared to 2002 ($4.1 million). Increased customer finance
charges ($4.8 million) related to larger 2003 customer bills also contributed to
the increase. These improvements were partially offset by a smaller contribution
from nontraditional gas supply-related services ($4.0 million) and lower
deliveries for power generation ($1.0 million).


Nicor Inc.                                                             Page 22
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

Gas distribution operating and maintenance expense. Gas distribution operating
and maintenance expense increased $8.9 million and $17.9 million in the three-
and six-month periods ended June 30, 2003, respectively, compared to the same
periods of 2002. The quarterly increase was due to a number of factors including
lower pension credits ($2.4 million), higher health care and insurance costs
($1.8 million), increased legal and accounting costs primarily related to the
PBR plan review ($1.3 million), and increased natural gas costs to operate
company equipment and facilities ($.9 million). These increased costs were
partially offset by lower bad debt expense ($2.2 million) in the 2003 quarter
compared with the 2002 quarter, which included a charge to increase the
receivables allowance.

The $17.9 million increase in the six-month period was due primarily to lower
pension credits ($4.8 million), higher health care and insurance costs ($3.5
million), increased natural gas costs to operate company equipment and
facilities ($2.3 million), and increased costs related to the review of the
company's performance-based rate (PBR) plan ($1.3 million).

Gas distribution operating and maintenance expense included $.3 million and $.6
million of pension expense in the 2003 three- and six-month periods,
respectively, compared with $2.1 million and $4.2 million of pension credits in
the same 2002 periods. The higher company-use gas expenses are related to higher
average natural gas costs in 2003 compared to 2002.

Gas distribution depreciation. Both the quarter and year-to-date results for the
gas distribution segment were significantly affected by the change to a
straight-line interim depreciation allocation method. Previously, Nicor Gas
allocated depreciation to interim periods based upon the level of
weather-normalized gas deliveries each quarter. If a straight-line allocation
method had been used in 2002, depreciation in both 2003 periods would have
increased slightly compared to the 2002 periods as a result of property
additions.

Mercury-related costs (recoveries). In the second quarter of 2003, Nicor Gas
recovered approximately $17.4 million of mercury-related costs, net of legal
fees, from insurers and independent contractors.

Gas distribution property sale (gains) losses. Property sale gains and losses
vary from year-to-year depending upon property sales activity. The company
continues to assess its ownership of real estate holdings.

Shipping operating expenses. Shipping segment operating expenses increased by
$.9 million in the second quarter of 2003 compared to 2002 due primarily to
increases in fuel costs ($.4 million) and operating, general and administrative
expenses ($.4 million). For the 2003 six-month period, shipping operating
expenses increased $6.0 million to $123.0 million due primarily to increased
volume-related costs, such as increased transportation and voyage expenses ($2.4
million), fuel ($1.9 million) and higher wage and benefit costs ($1.3 million).
Increased fuel costs for both periods also reflect the impact of higher fuel
prices in 2003.


Nicor Inc.                                                             Page 23
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

All other operating expenses. A $1.3 million quarter-to-quarter increase in all
other operating expenses was due primarily to higher operating expenses at
Nicor's energy-related products and services businesses ($9.5 million) due
primarily to an increased number of customers. These expenses are largely
eliminated in Nicor's consolidated financial statements. On a consolidated
basis, remaining cost increases at Nicor's energy-related products and services
businesses ($4.0 million) and an increase in corporate operating expenses ($2.5
million) were more than enough to offset decreased operating expenses related to
Nicor's former energy system development activities ($4.2 million) and former
technology business ($1.2 million).

A $1.7 million decrease in the 2003 year-to-date operating expenses compared to
2002 was primarily due to lower operating expenses from the company's former
energy system and design activities ($6.7 million) and former technology
business ($2.3 million). Operating expenses at Nicor's energy-related products
and services businesses increased $21.6 million due to a new product and
additional customers. However, these increased expenses are largely eliminated
in Nicor's consolidated financial statements. On a consolidated basis, operating
expenses at Nicor's energy-related products and services businesses increased
$3.1 million in 2003 and Nicor's corporate operating expenses also increased
$3.6 million in the 2003 six-month period.

The increase in corporate operating expenses in both periods related primarily
to increased legal costs.

<PAGE>

Nicor Inc.                                                         Page 24
----------------------------------------------------------------------------

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

GAS DISTRIBUTION STATISTICS

Operating revenues, deliveries, customers and other statistics are
presented below.

                                   Three months ended     Six months ended
                                         June 30               June 30
                                   ------------------    -------------------
                                     2003      2002         2003      2002
                                   --------  --------    ---------  --------
Operating revenues (millions):
   Sales
    Residential                     $ 250.5   $ 179.2    $ 1,016.3   $ 519.3
    Commercial                         53.0      35.4        224.9      99.8
    Industrial                          6.6       6.9         33.4      17.6
                                   --------  --------    ---------  --------
                                      310.1     221.5      1,274.6     636.7
                                   --------  --------    ---------  --------
   Transportation
    Residential                         4.7       2.9         11.8       6.0
    Commercial                         14.6      16.0         40.6      41.7
    Industrial                         10.0      11.1         21.3      22.1
    Other                               4.1       2.0          9.1       4.5
                                   --------  --------    ---------  --------
                                       33.4      32.0         82.8      74.3
                                   --------  --------    ---------  --------

   Other revenues
    Revenue taxes                      24.6      20.4         86.9      56.8
    Environmental cost recovery         4.0       3.4         19.7      15.4
    Performance-based rate plan           -      (2.2)           -         -
    Chicago Hub                         1.1       3.3          3.5       6.5
    Weather insurance                     -      (2.9)        (3.5)       .6
    Other                               6.3       4.3         12.2       8.2
                                   --------  --------    ---------  --------
                                       36.0      26.3        118.8      87.5
                                   --------  --------    ---------  --------
                                    $ 379.5   $ 279.8    $ 1,476.2   $ 798.5
                                   ========  ========    =========  ========

Deliveries (Bcf):
   Sales
    Residential                        28.4      31.2        136.0     125.9
    Commercial                          6.3       6.5         29.7      23.7
    Industrial                           .8       1.3          4.5       4.5
                                   --------  --------    ---------  --------
                                       35.5      39.0        170.2     154.1
                                   --------  --------    ---------  --------
   Transportation
    Residential                         2.1       1.3         10.3       4.5
    Commercial                         13.4      14.6         53.1      54.3
    Industrial                         25.5      36.2         62.0      73.9
                                   --------  --------    ---------  --------
                                       41.0      52.1        125.4     132.7
                                   --------  --------    ---------  --------
                                       76.5      91.1        295.6     286.8
                                   ========  ========    =========  ========

Customers at end of period (thousands):
   Sales
    Residential                     1,740.7   1,733.7
    Commercial                        111.5     106.6
    Industrial                          7.1       6.9
                                   --------  --------
                                    1,859.3   1,847.2
                                   --------  --------
   Transportation
    Residential                       127.5     103.7
    Commercial                         59.2      62.4
    Industrial                          6.4       6.8
                                   --------  --------
                                      193.1     172.9
                                   --------  --------
                                    2,052.4   2,020.1
                                   ========  ========

Other statistics:
   Degree days                          743       774        3,997     3,497
   Percent colder (warmer)
     than normal                        10%       15%           6%      (7)%
   Average gas cost per Mcf sold     $ 6.64    $ 3.69       $ 6.42    $ 2.96

<PAGE>

Nicor Inc.                                                             Page 25
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

SHIPPING STATISTICS

                           Three months ended   Six months ended
                                June 30             June 30
                            ----------------   -----------------
                             2003    2002       2003     2002
                            ------- --------   -------- --------
TEUs shipped (thousands)       42.2    43.7       84.9     82.8
Revenue per TEU             $ 1,570 $ 1,489     $1,559  $ 1,509
Ports served                     24      26
Vessels operated                 16      19

FINANCIAL CONDITION AND LIQUIDITY

Operating cash flows. Net cash flow provided from operating activities decreased
$127.3 million to $137.3 million in the 2003 six-month period from $264.6
million in the year-earlier period. Year-to-year changes in operating cash flow
result largely from fluctuations in working capital items occurring mainly in
the gas distribution segment due to factors such as weather, the price of
natural gas, the timing of collections from customers and gas purchasing
practices. The company generally relies on short-term financing to meet
temporary increases in working capital needs.

Financing activities. Nicor Inc. and Nicor Gas maintain short-term line of
credit agreements with major domestic and foreign banks. At June 30, 2003, these
agreements, which serve as backup for the issuance of commercial paper, allowed
for borrowings up to $334 million, and the company had $285 million of
commercial paper borrowings outstanding.

In July 2003, the amount Nicor and Nicor Gas could borrow under their short-term
line of credit agreements increased by $150 million bringing the amount allowed
for borrowings under the terms of these agreements up to $484 million at July
31, 2003.

In April 2003, Nicor Gas issued $50 million of 1.6 percent unsecured notes due
in October 2003 to refund the redemption of $50 million of unsecured notes at 3
percent due in April 2003.

Nicor expects natural gas prices to remain high throughout the next few
quarters. This is expected to require a substantial increase in the amount of
short-term financing needed to procure natural gas, particularly to fill storage
fields. Nicor's current short-term lines of credit expire in September 2003. To
meet its projected borrowing needs, Nicor is working to establish new short-term
lines of credit to serve as backup for commercial paper and pursuing other
financing facilities. Nicor believes that it will have adequate access to
short-term financing to meet this need.

In April 2003, Moody's Investors Service downgraded the long-term debt ratings
of Nicor and Nicor Gas from Aa1 to Aa3, while affirming their short-term
ratings. Standard and Poor's Rating Services and Fitch Ratings affirmed Nicor
and Nicor Gas' short-term and long-term debt ratings, which continue to be among
the highest in the gas distribution industry. All three rating agencies removed
the debt ratings from negative ratings watch.


Nicor Inc.                                                             Page 26
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

On April 30, 2003, Nicor announced a quarterly dividend on common stock of 46.5
cents per share payable August 1, 2003. On July 17, 2003, Nicor announced a
quarterly dividend on common stock of 46.5 cents per share payable November 1,
2003.

FACTORS AFFECTING BUSINESS PERFORMANCE

Critical accounting policies. Nicor made several changes to its accounting
policies in the first quarter of 2003, including a change to the method of
allocating annual depreciation to interim periods. This creates a significant
favorable impact on first- and fourth- quarter results and an adverse impact on
second- and third- quarter results. As a result, depreciation is expected to be
about $19 million higher and $5 million lower in the third and fourth quarters
of 2003, respectively, than for the same quarters of 2002. For further
information about Nicor's accounting changes, see the Notes to the Consolidated
Financial Statements - Cumulative Effect of Change in Accounting and - Other
Accounting Changes beginning on page 6, which explain all material changes to
the company's critical accounting policies since December 31, 2002.

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 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 Illinois Commerce Commission (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 has also intervened
in this matter. In addition, the Illinois Attorney General's Office 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.


Nicor Inc.                                                             Page 27
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

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. The findings of the Report include:

o  Certain transactions increased customer costs in the aggregate amount of
   approximately $15 million.
o  No improper Nicor affiliated-party transactions or improper hedging
   activities were identified.
o  Inadvertent accounting errors occurred, sometimes to the benefit of customers
   and sometimes to the benefit of Nicor Gas.
o  No criminal activity or fraud was identified.

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 restated financial statements
previously filed with the SEC, and substantial progress has been made in the
ongoing study 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.

Certain parties in the PBR plan review proceeding have indicated disagreement
with the findings in the Report or have indicated that they believe
substantially greater adjustments or penalties are warranted. In addition, 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 refunds to consumers in an amount much
greater than the $15 million of adjustments identified in the Report. 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.

Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Due to the uncertainties surrounding
the PBR plan, Nicor Gas has not recognized a $26.9 million pretax gain from the
2002 PBR plan year. Because the PBR plan and historical utility gas costs are
still under ICC review, it is possible that the final outcome could be
materially different than the amounts reflected in the company's financial
statements as of June 30, 2003.

Nicor Energy. Significant developments have occurred relating to Nicor's
50-percent interest in Nicor Energy. Accounting irregularities at Nicor Energy
were identified in 2002. Information about these developments is presented
within the Notes to the Consolidated Financial Statements - Contingencies -
Nicor Energy on page 13.


Nicor Inc.                                                             Page 28
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (continued)

SEC and U.S. Attorney Inquiries. In 2002, the staff of the Securities and
Exchange Commission (SEC) informed Nicor and Nicor Energy that the SEC is
conducting a formal inquiry regarding the PBR plan and Nicor Energy. On January
28, 2003, Nicor Energy 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 Energy, alleging that it violated Sections 10(b) and 13(b)(5) of the
Securities Exchange Act of 1934. 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.

Securities Class Actions. Nicor and certain of its executives are defendants in
a consolidated class action lawsuit. Information about this action is presented
within the Notes to the Consolidated Financial Statements - Contingencies -
Securities Class Actions beginning on page 13.

Shareholder Derivative Lawsuits. Certain Nicor executives and all members of its
Board of Directors are defendants in a consolidated derivative lawsuit. Further
information about this lawsuit is presented within the Notes to the Consolidated
Financial Statements - Contingencies - Shareholder Derivative Lawsuits on page
14.

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
Consolidated Financial Statements - Contingencies - Mercury beginning on page
15.

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
Consolidated Financial Statements - Contingencies - Manufactured Gas Plant Sites
beginning on page 16.

Other contingencies. The company is involved in legal or administrative
proceedings before various courts and agencies with respect to rates, taxes and
other matters. See the Notes to the Consolidated Financial Statements -
Contingencies beginning on page 12.

Market risk. 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
2002 Annual Report on Form 10-K, except as noted below.

Energy trading activities. At June 30, 2003, Nicor Enerchange, Nicor's wholesale
natural gas marketing business, held financial derivative contracts with the
following fair values (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)     $   .8   $   (.9) $    -
Prices based on pricing models     1.7         1.7         -       -
                               ---------  ---------  ------- --------
                               $   1.6      $  2.5   $   (.9) $    -
                               =========  =========  ======= ========


Nicor Inc.                                                             Page 29
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Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations (concluded)

Credit risk. The company is exposed to credit risk in the event a counterparty,
customer or supplier defaults on a contract to pay for or deliver product at
agreed-upon terms and conditions. To manage this risk, the company has
established procedures to determine and monitor the creditworthiness of
counterparties, to require guarantees or collateral back-up, and to limit its
exposure to any one counterparty. Nicor, in some instances, uses and is entering
into additional master netting arrangements to mitigate counterparty credit
risk.

On December 2, 2001 Enron North America Corporation (Enron) filed a voluntary
petition for relief under Chapter 11 of Title XI of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Southern District of New
York. At the date of Enron's bankruptcy filing, the net amount due to Enron from
Nicor Gas was $2.8 million, and the net amount due to Enron from Nicor
Enerchange was $.9 million. In February of 2003 Enron and Nicor Enerchange
entered into a settlement and mutual release whereby Nicor Enerchange agreed to
pay to Enron an amount of $.9 million in full settlement and release of all
amounts due Enron. This settlement agreement was approved on February 11, 2003
by the U.S. Bankruptcy Court and the settlement payment by Nicor Enerchange has
been made. In May of 2003 Enron and Nicor Gas entered into a settlement and
mutual release whereby Nicor Gas agreed to pay Enron an amount of $2.8 million
in full settlement and release of all amounts due Enron. This settlement
agreement was approved on May 30, 2003 by the U.S Bankruptcy Court and the
settlement payment by Nicor Gas has been made.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This document includes certain forward-looking statements about the expectations
of Nicor and its subsidiaries. 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," 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
the results of legal contingencies (including litigation) and the resolution of
those issues, including the effects of an ICC review, 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; health care costs;
insurance costs; legal costs; borrowing needs; interest rates; credit
conditions; economic and market conditions; Caribbean tourism; energy
conservation; legislative and regulatory actions, results, or adjustments;
additional adjustments related to Nicor's retail energy marketing joint venture;
asset sales; significant unplanned capital needs; future mercury-related charges
or credits; changes in accounting principles; performance of major suppliers and
contractors, 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For disclosures about market risk, see Management's Discussion and Analysis -
Market Risk beginning on page 28 which is incorporated herein by reference.


Nicor Inc.                                                             Page 30
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Item 4.  Controls and Procedures

Attached as exhibits 31.1 and 31.2 to this Quarterly Report are certifications
of the company's CEO and the CFO required in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This portion of
our Quarterly Report on Form 10-Q is our disclosure of the results of our
controls evaluation referred to in paragraphs (4) and (5) of the Section 302
Certification and should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.

In July 2002, in response to allegations that Nicor Gas acted improperly in
connection with its performance-based rate plan for natural gas costs, 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 and storage, and certain other matters. In addition,
following up on the work of the committee, the Nicor Board of Directors later
directed Nicor's management to, among other things, (a) undertake a reaudit of
the Nicor and Nicor Gas financial statements for the years 1999 through 2001 and
a review of subsequent quarterly periods, (b) amend any filings with the SEC as
necessary, and (c) conduct a detailed study of the adequacy of internal
accounting and regulatory controls. See Notes to Consolidated Financial
Statements - Contingencies.

To assist management in assessing the control environment and related issues
associated with Nicor's natural gas supply, transport, storage and marketing
activities, including Nicor Gas Hub administration and Nicor Enerchange trading
("gas supply activities"), Nicor retained a consulting firm with experience in
internal controls and the energy industry that is not and has not been the
company's external auditor.

Through this review of gas supply activities ("gas supply review"), it was
observed that:

o  Although key controls have been designed to facilitate the complete and
   accurate capture and processing of gas supply activities, many control
   activities are not standardized. As such, the reliability and effectiveness
   of these control processes are dependent on interpretation and execution by
   business unit personnel.
o  Existing processes provide limited oversight and monitoring to ensure that
   transaction activities and control procedures are performed reliably and
   consistent with management expectations.
o  As a result, gas supply activities are not adequately documented, overly
   dependent on people, and not supported by formal training or communication of
   controls.

In light of the foregoing, and reflecting the consultant's work related to gas
supply activities, management concluded that the following steps related to gas
supply activities should be undertaken:

o  Enhance the effectiveness of corporate governance and independent oversight
   of gas supply activities by creating a formal risk management function and
   expanding senior management oversight through the company's risk management
   committee.
o  Enhance senior management monitoring and oversight of gas supply activities
   by creating formal reporting frameworks designed to effectively communicate
   performance, existing risk profile/position, and compliance with
   policies/procedures.
o  Enhance the communication of senior management's expectations regarding
   objectives, risk tolerances, and business practices in connection with gas
   supply activities by creating codified and standardized policies and
   procedures for these activities.
o  Given the high degree of regulatory oversight and review over gas supply
   activities, develop formal documentation and retention standards for key
   decision-making and transaction activities that are subject to regulatory
   review.


Nicor Inc.                                                             Page 31
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Item 4.  Controls and Procedures (continued)

o  For each business unit responsible for gas supply contract negotiation and
   execution, establish a dedicated contract administration function as well as
   a contract compliance program.
o  Develop formal contracting standards, including practices and procedures
   surrounding contract execution, contract review and approval and contract
   modification.

In May 2002, the company engaged new accountants, Deloitte & Touche LLP ("D&T"),
who were asked in October 2002 to audit the company's 1999, 2000 and 2001
restated financial statements in addition to its audit of the company's 2002
financial statements. In connection with the completion of its audit of, and the
issuance of an unqualified report on Nicor's and Nicor Gas' restated financial
statements for the years ended December 31, 1999, 2000 and 2001, D&T issued a
letter dated February 28, 2003 (the "D&T Letter"), in which it identified to
management and the Audit Committee of the Board of Directors certain
deficiencies that existed in the design or operation of Nicor Gas' internal
accounting controls which, considered collectively, constituted a material
weakness in Nicor Gas' internal controls pursuant to standards established by
the American Institute of Certified Public Accountants. Such deficiencies at
Nicor Gas' regulated gas purchasing operations included significant weaknesses
in the design of controls surrounding execution, monitoring and accounting for
gas commodity, transportation, storage and related contracts due, in part, to
the lack of a centralized independent back office for these activities. D&T also
concluded that these weaknesses had resulted in errors that affected gas
purchase costs, inventory, regulatory assets and liabilities, and results of the
performance-based rate plan, and led to a restatement of Nicor's and Nicor Gas'
financial statements. D&T made the following recommendations to Nicor and Nicor
Gas with respect to these deficiencies:

o  Establish a centralized, independent back office function for gas supply
   activities, staffed with an adequate number of appropriately skilled
   individuals.
o  Charge the gas supply back office function with responsibility for, among
   other matters, contract analysis to determine correct accounting treatment,
   ensuring that contract terms are followed, overseeing the contract approval
   process and contract administration.

The company carried out an evaluation under the supervision and with the
participation of the company's management, including its principal executive
officer and principal 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").

During the course of the Evaluation, the company's principal executive officer
and principal financial officer took note of, and considered as part of the
company's disclosure controls and procedures (as defined in Rule 13a-15 under
the Securities Exchange Act of 1934), additional procedures performed and
controls instituted by the company subsequent to the receipt of the D&T Letter
(the "Additional Procedures") to supplement its internal controls in order to
mitigate the effect of the weaknesses and deficiencies identified in the gas
supply review and the D&T Letter and to prevent misstatements or omissions in
its consolidated financial statements resulting from such factors. In designing
and evaluating the disclosure controls and procedures, management recognizes
that any 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 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, including the Additional
Procedures, 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


Nicor Inc.                                                             Page 32
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Item 4.  Controls and Procedures (concluded)

Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.

Management has considered the matters referred to above, D&T's recommendations
with respect thereto and the gas supply review in connection with management's
general evaluation of the company's internal controls in particular and its
disclosure controls and procedures generally. The company has accepted the
recommendations identified in the D&T Letter and in the gas supply review. The
company's management assigned a high priority to the short-term and long-term
correction of the internal control weaknesses and deficiencies identified by D&T
and in the gas supply review, and has implemented changes to the company's
policies, procedures, systems and personnel to address these issues. The
company's management has implemented the following changes based upon the D&T
Letter and the gas supply review:

o  The company has dedicated additional internal audit and external resources to
   the assessment of the internal controls of the company.
o  New policies with respect to the approval and authorization of all
   transactions related to gas supply activities and affiliated transactions are
   being developed and adopted, many of which are now in place.
o  Additional gas supply purchasing testing is being regularly performed to
   verify that prices are consistent with market rates.
o  Personnel in gas supply accounting now report directly to the company's
   Controller.
o  The company's Risk Management Committee has increased its oversight level,
   and a new Chief Risk Officer position is being established.
o  Substantial effort has been put forth on documentation and implementation of
   appropriate processes, procedures and controls.
o  The company has implemented, and will continue to implement, controls
   designed to ensure compliance with regulatory rules and mandates.
o  Changes in contract administration processes are underway to implement a more
   effective method of contract administration, including documentation of
   related policies and procedures.

The company will continue to evaluate and implement corrective actions to
improve the effectiveness of its disclosure controls and procedures and will
take further actions as dictated by such continuing reviews. These actions will
include additional procedures to supplement its internal controls. The steps
taken and to be taken to correct the weaknesses and deficiencies identified in
the gas supply review and the D&T Letter constitute significant changes in
internal controls over financial reporting in the period covered by this
Quarterly Report on Form 10-Q.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

For information concerning legal proceedings, see the Notes to the Consolidated
Financial Statements - Contingencies beginning on page 12 and Management's
Discussion and Analysis - Contingencies beginning on page 26, which are
incorporated herein by reference.


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

The Annual Meeting of Stockholders of the company was held on April 30, 2003,
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, March 3, 2003. There were no "broker nonvotes."

Nominees for directors, as listed in the proxy statement, were elected as
indicated below:

                                          Shares        Shares
                                          Voted          Voted
                Nominee                    FOR          WITHHELD
         ----------------------         -----------    ----------
         Robert M. Beavers, Jr.         36,705,783     1,041,369
         Bruce P. Bickner               36,692,897     1,054,255
         John H. Birdsall, III          30,074,277     7,672,875
         Thomas A. Donahoe              36,576,825     1,170,327
         Thomas L. Fisher               36,090,702     1,656,450
         John E. Jones                  36,684,028     1,063,124
         Dennis J. Keller               36,718,030     1,029,122
         William A. Osborn              36,734,742     1,012,410
         John Rau                       36,725,489     1,021,663
         John F. Riordan                36,696,461     1,050,691
         Patricia A. Wier               36,676,916     1,070,236

Item 6. Exhibits and Reports on Form 8-K

(a)     See Exhibit Index beginning on page 35 filed herewith.

(b)     On April 3, 2003, Nicor filed a Form 8-K, under Item 9, regarding an
        analyst presentation dated April 3, 2003.

        On April 30, 2003, Nicor filed a Form 8-K, under Items 7 and 9,
        regarding remarks of Thomas L. Fisher, Chairman and Chief Executive
        Officer, to be made at the Annual Meeting of Stockholders on April 30,
        2003.

        On May 2, 2003, Nicor filed a Form 8-K, under Items 7 and 9, regarding a
        press release dated May 1, 2003 announcing earnings for the quarter
        ended March 31, 2003.

        On May 2, 2003, Nicor filed a Form 8-K, under Items 7 and 9, regarding a
        press release dated May 1, 2003 announcing the Illinois Commerce
        Commission Administrative Law Judges' ruling denying a motion for
        sanctions.

        On June 2, 2003, Nicor filed a Form 8-K, under Item 9, regarding analyst
        presentations of June 2 and June 3, 2003.

<PAGE>

Nicor Inc.                                                             Page 34
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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.



Date   August 4, 2003                          /s/ KATHLEEN L. HALLORAN
      ------------------                       ------------------------
                                               Kathleen L. Halloran
                                               Executive Vice President
                                               Finance and Administration

<PAGE>


Nicor Inc.                                                             Page 35
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Exhibit Index
-------------
  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 May 3, 1995.  (File No. 1-7297,
           Form 10-Q for March 1995, Nicor Inc., Exhibit 3(ii).01.)

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

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

    32.1   Certification Pursuant to 18 U.S.C. Section 1350, as
           adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

    32.2   Certification Pursuant to 18 U.S.C. Section 1350, as
           adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*    These exhibits have been previously filed with the Securities and Exchange
     Commission as exhibits to registration statements or to other filings with
     the Commission 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.