<PAGE>








                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1997

                          Commission file number 1-7092

                        Illinois Central Railroad Company
             (Exact name of registrant as specified in its charter)

           Illinois                                          36-2728842
    (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                      Identification No.)

  455 North Cityfront Plaza Drive, Chicago, Illinois        60611-5504
  --------------------------------------------------      ---------------
      (Address of principal executive offices)               (Zip Code)

               Registrant's telephone number, including area code:
                                 (312) 755-7500

           Securities registered pursuant to Section 12(b) of the Act:
                                               Name of each exchange on which
Title of each class so registered:             each class is registered:
Illinois Central Railroad Company              New York Stock Exchange
6-3/4% Notes,
due May 15, 2003

Gulf, Mobile and Ohio Railroad Company         New York Stock Exchange
5% Income Debentures,
Series A, due December 1, 2056

           Securities registered pursuant to Section 12(g) of the Act:
                                      None

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes ..X.. No ....


     As of March 27,  1997,  there  were 100 shares of the  registrant's  common
stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         THE  REGISTRANT  IS  A  WHOLLY-OWNED  SUBSIDIARY  OF  ILLINOIS  CENTRAL
CORPORATION (SEC FILE NO. 1-10720) AND MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION  J(1)(a) and (b) of form 10-K AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.



<PAGE>





                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                                    FORM 10-K

                          Year Ended December 31, 1997

                                      INDEX

PART I                                                                 10-K Page

  Item 1.     Business.................................................       3
  Item 2.     Properties...............................................      10
  Item 3.     Legal Proceedings........................................      14
  Item 4.     Submission of Matters to a Vote of Security Holders  (A)       15

PART II

  Item 5.     Market for the Registrant's Common Equity and Related
              Stockholder Matters......................................      16
  Item 6.     Selected Financial Data (A)..............................      16
  Item 7.     Management's Discussion and Analysis of Financial
              Condition and Results of Operations......................      17
  Item 8.     Financial Statements and Supplementary Data..............      27
  Item 9.     Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure...................      27

PART III

  Item 10.    Directors and Executive Officers of the Registrant (A)...      28
  Item 11.    Executive Compensation (A)...............................      28
  Item 12.    Security Ownership of Certain Beneficial Owners and
              Management (A)...........................................      28
  Item 13.    Certain Relationships and Related Transactions (A).......      28

PART IV

  Item 14.    Exhibits, Financial Statement Schedules and Reports
              on Form 8-K..............................................      28

SIGNATURES.............................................................      29

(A)    Omitted or amended as the  registrant  is a  wholly-owned  subsidiary  of
       Illinois  Central  Corporation  and  meets  the  conditions  set forth in
       General  Instruction  J(1)(a)  and (b) of Form  10-K  and is,  therefore,
       filing this Form with the reduced disclosure format.


<PAGE>



                                     PART I

Item 1.  Business

Background

       Illinois Central Railroad Company ("ICR") traces its origin to 1851, when
ICR was  incorporated as the nation's first land grant  railroad.  ICR currently
operates 2,600 miles of main line track between  Chicago and the Gulf of Mexico,
primarily  transporting  chemicals,  coal,  paper,  grain and milled grain,  and
intermodal  trailers and  containers.  ICR is a  wholly-owned  subsidiary  and a
principal asset of Illinois Central Corporation (the "Corporation").

       The principal  executive  office of ICR is located at 455 North Cityfront
Plaza Drive,  Chicago,  Illinois  60611-5504  and its telephone  number is (312)
755-7500.

Railroad Commodities and Customers

         ICR's  customers are engaged in a wide variety of businesses and ship a
number of different products that can be classified into seven primary commodity
groupings:

     -- organic,  inorganic,  agricultural and other chemicals 
     -- grain,  milled grain such as corn syrup and soybean meal, and other 
        agricultural/food  products
     -- paper, lumber, and other forest products -- coal -- intermodal,  
        comprising a wide variety of  primarily  consumer  products  shipped in
        containers  or truck trailers on specially  designed  cars -- metals,  
        metal  products such as coiled steel, and scrap metal 
     -- bulk commodities such as sand, stone, coke, and ores

         In 1997, one customer  accounted for approximately 7% of revenues (only
one other  customer  exceeded 5%) and the ten largest  customers  accounted  for
approximately 35% of revenues.



<PAGE>



Contributions to Total Revenues by Commodity Group

         The respective percentage contributions by principal commodity group to
ICR's revenues during the past five years are set forth below:

               Contributions to Total Revenues by Commodity Group
 Commodity
 Group                              1997     1996       1995     1994      1993
 ---------                          ----     ----       ----     ----      ----
Chemicals.......................   26.7%     27.6%      25.2 %   24.8%     24.7%
Grain, mill & food products.....   17.4      18.9       21.9     18.7      23.2
Paper....& forest products......   16.9      12.6       16.9     18.1      18.6
Coal............................   12.2      14.1       12.9     15.2      12.7
Intermodal......................    8.6       8.7        7.3      6.6       4.8
All other.......................   18.2      18.1       15.8     16.6      16.0
                                   ----    ------      -----    -----     -----
Total...........................  100.0%    100.0%     100.0%   100.0%    100.0%
                                  =====     =====      =====    =====     =====

         In 1997,  approximately 64% of ICR's freight traffic  originated on its
own  lines,  of  which  approximately  20%  was  forwarded  to  other  carriers.
Approximately  20% of ICR's freight was received  from other  carriers for final
delivery by ICR,  and the balance of  approximately  16%  represented  bridge or
through traffic.

Terminal Operations

         ICR currently has facilities or terminal operations which contribute to
revenues and enhance the flow of rail  traffic.  Most of these  facilities  have
been developed since 1994. Following are descriptions of two ICR terminals.

         In  1996,  ICR  constructed  a  75-acre  intermodal  terminal  for  the
exclusive use of the Canadian  National Railway (CN). The facility has an annual
capacity of 250,000 intermodal "lifts." An intermodal "lift" is the placement of
a container  or truck  trailer on or off a railcar.  ICR owns the  facility  and
operates it on CN's behalf. ICR is compensated through fees paid for each lift.

         In 1994, ICR constructed a transload facility in Harvey, Illinois. This
facility  stores  primarily  railcars  of plastic  pellets.  These  pellets  are
subsequently  loaded into tanker  trucks  ("transloaded")  for  distribution  to
smaller,  non-rail-served  manufacturers.  ICR spent $1.0  million to double the
capacity of this terminal in 1997.


<PAGE>



Operating Statistics

         Set  forth  below is  certain  information  relating  to ICR's  freight
traffic during the past five years.

                                   1997       1996      1995      1994      1993
                                   ----       ----      ----      ----      ----

Carloads (in thousands)           1,039        927       957       915       848
Freight train miles
  (in thousands)1.............    8,078      7,950     7,758     7,179     5,659
Revenue ton miles of freight
  traffic (in millions)2 3....   22,156     22,511    23,773    20,582    20,080
Revenue tons per carload           67.6       71.7      74.7      76.3      79.1
Average length of haul
  (in miles)..................      307        309       328       286       293
Gross freight revenue per
  ton mile3 4.................    $.026      $.026    $ .026   $  .028   $  .028
Net freight ton miles per
  average route mile
  (in millions)...............      8.4        8.2       9.0       7.6       7.4
Gallons per ton mile5.........   .00235     .00236    .00234    .00248    .00251
Active locomotives............      324        331       333       328       322
Track resurfacing (miles)         1,235      1,360     1,360     1,397     1,293
Percent resurfaced............    31.0%      33.7%     32.2%     33.0%     29.8%
Ties laid in replacement
  (including switch ties).....  329,413    425,999   408,760   346,994   323,764
Slow order miles..............   58.78      100.00    209.76    275.79    152.32


1   Freight train miles equals the total number of miles traveled by all trains
    in the movement of freight.
2   Revenue ton miles of freight traffic equals the product of the weight in 
    tons of freight carried for hire and the distance in miles between origin 
    and destination.
3   Prior years have been restated to eliminate non-revenue ton miles.
4   Revenue per ton mile equals gross freight revenue divided by revenue ton 
    miles of freight traffic.
5   Gallons per ton mile equals the amount of fuel required to move one ton of
    freight one mile.

<PAGE>



    The following table summarizes  operating  expense-to-revenue  ratios of ICR
for each of the past five years.  The table  analyzes the various  components of
operating  expenses based on the line items appearing on the income  statements.
The ratio is  generally  used  within  the  railroad  industry  as a measure  of
operating efficiency;  ICR has had the lowest (best) ratio among major railroads
in the U.S.
and Canada in each of the last eight years.

    Ratio                        1997   1996    1995     1994    1993
                                 ----   ----    ----     ----    ----

Operating1...................... 63.4%  64.4%   65.6%    67.7%   68.6%
Labor and fringe benefits....... 29.8   29.5    30.2     30.9    31.2
Leases and car hire.............  8.2    9.2     9.1     10.0    12.5
Diesel fuel.....................  5.4    5.6     5.1      5.3     5.4
Materials and supplies..........  5.3    5.1     5.4      6.0     6.2
Depreciation and amortization...  5.3    5.0     4.8      4.2     4.0
Casualty, insurance and losses..  2.5    1.8     2.7      4.0     3.8
Other taxes.....................  3.2    2.7     2.8      2.9     2.9
Other...........................  3.7    5.5     5.5      4.4     2.6



1  Operating  ratio means the ratio of operating  expenses before special charge
   over operating revenues.

Employees; Labor Relations

         Labor  relations  in the  railroad  industry  are subject to  extensive
governmental  regulation under the Railway Labor Act.  Employees in the railroad
industry  are  covered  by the  Railroad  Retirement  System  instead  of Social
Security.  Employer  contribution rates under the Railroad Retirement System are
currently more than double those in other industries and may rise further as the
proportion of retired employees  receiving  benefits  increases  relative to the
number of working employees. Also, railroad employees are covered by the Federal
Employer's  Liability  Act  ("FELA")  rather  than by state  no-fault  workmen's
compensation  systems.  FELA is a  fault-based  system,  with  compensation  for
injuries determined by individual negotiation or litigation.

         Approximately  90% of all  employees are  represented  by one of eleven
unions.  The general  approach to labor  negotiations by Class I railroads is to
bargain on a  collective  national  basis.  For several  years now, one of ICR's
guiding  principles  is that local -- rather  than  national,  industry-wide  --
negotiations will result in labor agreements that better address both employees'
concerns and  preferences  and ICR's actual  operating  environment.  Therefore,
beginning in late 1994, ICR began negotiating  separate distinct agreements with
each of its eleven unions.  To date, all of ICR's eleven  bargaining  units have
ratified local  agreements  that resolve wage and work-rule  issues through 1999
for shop crafts and through the  for engineers and trainmen.

         There are risks  associated with  negotiating  locally.  Presidents and
Congress  have  repeatedly  demonstrated  they  will  step in to avoid  national
strikes, while a local dispute may not generate federal intervention,  making an
extended work stoppage  potentially more likely.  ICR's management  believes the
potential mutual benefits of local bargaining outweigh the risk.



<PAGE>



The following table shows the average annual employment levels for the last five
years:

                         1997     1996    1995      1994       1993
                         ----     ----    ----      ----       ----
    Total Employees     3,295    3,238   3,268     3,250      3,306


         Management  believes  that over the next several  years  attrition  and
retirements  will be the  primary  source  of  declines  in  employment  levels.
Increases in employment levels,  particularly in train operations,  are possible
in response to growth of business.

Regulatory Matters; Freight Rates; Environmental Considerations

         ICR is subject to  significant  governmental  regulation by the Surface
Transportation  Board  ("STB")  and other  federal,  state and local  regulatory
authorities with respect to rates, service, safety and operations.

         The  jurisdiction  of the STB  encompasses,  among other things,  rates
charged for certain transportation  services,  assumption of certain liabilities
by railroads,  mergers or the  acquisition  of control of one carrier by another
carrier and extension or abandonment of rail lines or services.

         The Federal Railroad Administration, the Occupational Safety and Health
Administration and certain state transportation  agencies have jurisdiction over
railroad  safety  matters.  These  agencies  prescribe  and enforce  regulations
concerning car and locomotive safety equipment, track safety standards, employee
work conditions and other operating practices.

         ICR currently transports Southern Illinois coal which will not meet the
environmental  standards  of Phase II of the Clean Air Act unless  blended  with
lower-sulfur coal or users of the coal install air scrubbers.  As a result, this
source of  traffic  may  decline  in  advance  of or  consistent  with  Phase II
implementation  in the year 2000.  On the other hand,  ICR is  participating  in
movements of Western coal  (lower-sulfur)  and certain  Southern  Illinois  coal
which is being blended with low-sulfur Eastern coal to comply with Phase II. ICR
anticipates these sources of traffic may increase.  Overall, management believes
that  implementation  of Phase II of the  Clean  Air Act is  unlikely  to have a
material adverse effect on the results of ICR.

         Currently,  the utility  industry is undergoing  deregulation  creating
enormous  pressures for change,  innovation,  and cost  control.  In the face of
increased competition caused by deregulation, utilities are attempting to reduce
costs,  including rail transportation  costs. Methods being investigated include
"power  wheeling",  "coal-by-wire",  and for those utilities  served by a single
railroad, re-regulation of rail rates. Some analysts have suggested that utility
deregulation  may  significantly  reduce  rail  revenues  through a shift in the
pattern of coal movements forcing lower rail rates. At this point, there are too
many  variables to know if utility  deregulation  will have a neutral,  modestly
positive  or  modestly  negative  effect  on  ICR  in  the  long-term.  However,
management believes that ICR will not be materially,  adversely affected because
it already provides its utility  customers highly  competitive rates and service
as  determined  through  competitive  bids  against  other  railroads  and river
options.

         Inherent in the operations  and real estate  activities of railroads is
the risk of environmental  liabilities.  ICR is subject to extensive  regulation
under  environmental  laws  and  regulations  concerning,  among  other  things,
discharges into the environment and the handling,  storage,  transportation  and
disposal  of  waste  and  hazardous   materials.   See  Item  2.  "Properties  -
Environmental  Conditions"  for  discussion  of sites on which ICR  currently or
formerly  conducted  operations  that are  subject  to  governmental  action  in
connection with environmental degradation.

Railroad's Results Influenced by Economic Conditions

         In any given year, ICR, like other railroads, is susceptible to changes
in the economic  conditions of the industries and geographic  areas that produce
and consume the freight it transports. Many of the goods and commodities carried
by ICR's experience cyclicality in demand. The operations of ICR can be expected
to reflect this cyclicality  because of the significant  fixed costs inherent in
railroad  operations.   ICR's  revenues  are  affected  by  prevailing  economic
conditions  and should an  economic  slowdown or  recession  occur in the United
States or other key markets,  the volume of rail shipments  carried is likely to
be reduced.

Competition

         ICR faces intense  competition for freight  traffic from trucks,  river
barges,  pipeline carriers, and other railroads.  Competition is generally based
on the rates charged and the quality and reliability of the service provided. At
December 31, 1997,  there were 9 railroads in the United  States  classified  by
revenues  as  Class I  railroads.  ICR is  sixth  in  revenues  and has the best
operating ratio.

         To a greater  degree than other rail  carriers,  ICR is  vulnerable  to
barge competition  because its main routes are parallel to the Mississippi River
system.  The use of barges for some  commodities,  particularly  coal and grain,
often  represents a lower cost mode of  transportation.  Barge  competition  and
barge rates are  affected by  navigational  interruptions  from ice,  floods and
droughts  which can cause  widely  fluctuating  barge  rates.  ICR's  ability to
maintain  its market  share of the  available  freight  has  traditionally  been
affected by the navigational conditions on the river. As a result, ICR's revenue
per  ton-mile  has  generally  been  lower  than  industry  averages  for  these
commodities.

         Most of ICR's operations are conducted  between points served by one or
more competing carriers. The consolidation in recent years of major rail systems
has  resulted  in  strong  competition  in the  service  territory  of ICR.  The
mega-carriers  could use their size and pricing power to block shippers'  access
to efficient  gateways  and routing  options  that are  currently  and have been
historically  available.  Mergers have not had a material  adverse impact on the
results or financial condition of ICR. See Item 7. "Management's  Discussion and
Analysis  of  Financial   Condition  and  Results  of   Operations   Significant
Developments - Canadian National Tender Offer."

Adverse Factors Effecting Fuel Prices

         Fuel  expense  represents  an  appreciable   portion  of  ICR's  annual
operating  expenses.  ICR currently  has hedging  programs in place through June
1998, to mitigate the effects of fuel price changes on its operating margins and
overall  profitability.  ICR has  entered  into  several  collar  agreements  to
mitigate  the risk of fuel  price  volatility.  ICR also  monitors  its  hedging
positions  and credit  ratings of its counter  parties  and does not  anticipate
losses due to counterparty nonperformance.


<PAGE>



Liens on Properties

         ICR's equipment is not subject to liens.

Liability Insurance

         ICR is  self-insured  for the first $5 million  of each  loss.  ICR has
available  $245 million of liability  insurance  per  occurrence,  subject to an
annual cap of $385 million in the  aggregate  for all losses.  This  coverage is
considered  by ICR's  management  to be adequate in light of ICR's safety record
and claims experience.

Item 2.  Properties

Physical Plant and Equipment

         System.  As of December  31,  1997,  ICR's total  system  consisted  of
approximately  4,500 miles of track  comprised of 2,600 miles of main line,  200
miles of  secondary  main line and 1,700  miles of passing,  yard and  switching
track.  ICR owns all of the track except for 190 miles owned by other railroads.
ICR operates over this track by separate agreements.

         Track and Structures.  The following amounts have been spent during the
five years ended  December 31,  1997,  on track and  structure to construct  and
maintain rail lines and related  signal  equipment,  and other  facilities ($ in
millions):

                                 Capital
                              Expenditures      Maintenance           Total

1997..........................   $91.1             $16.7               $107.8
1996..........................    91.2              23.7                114.9
1995..........................    66.9              33.5                100.4
1994..........................    63.2              29.1                 92.3
1993..........................    50.3              25.1                 75.4
                                  ----              ----                 ----

           Total..............   362.7             128.1                490.8

         These   expenditures  have   concentrated   primarily  on  the  routine
maintenance  of the track roadway and bridges.  Approximately  1,200,  1,400 and
1,400  miles  of  roadway  ballast  was  resurfaced  in  1997,  1996  and  1995,
respectively.  In 1996,  a total of $20.1  million  was  spent to  construct  an
intermodal  terminal facility for the Canadian National Railway ("CN Terminal").
Other large projects include a total of $11.4 million to complete the conversion
of 198  miles of track,  known as the Yazoo  District,  to a single  track  with
centralized  traffic  control  in 1993 and 1994 and a total of $11.4  million to
construct new or expanded  intermodal  facilities in Chicago and Memphis in 1992
and 1994.

         Locomotives  and Freight Cars.  ICR's fleet has  undergone  significant
rationalization  and modernization  since 1985 when locomotives and cars were at
their peak of 862 and 28,616,  respectively.  Over the last four years leases of
61 used  SD-40-2's and 20 new SD-70's have enabled ICR to replace  older,  lower
horsepower and less efficient  locomotives.  (The 20 SD-70's  replaced 31 older,
smaller locomotives.)



<PAGE>



         Locomotive  modernization  and  acquisition  were  part of a change  in
operational  philosophy  concerning  equipment  which resulted in adoption of an
equipment  ownership  program in 1993. The program  included  lease  conversions
whereby  equipment was acquired  outright or leased under more  favorable  lease
terms by ICR. Through 1996, lease conversions involved 118 locomotives and 4,228
freight cars. As a result of the new lease terms, $4.3 million, $7.1 million and
$24.7  million  of  capital  leases  were  recorded  in  1997,  1995  and  1994,
respectively.  Most of these  leases  contain  fixed price  options  whereby the
equipment can be acquired at or below fair market value at some point during the
lease term.

         Approximately  1,840  of the  cars  leased  by ICR  are  leased  from a
separate  subsidiary of the Corporation.  The equipment  program also included a
significant  upgrade of the highway trailer fleet used in intermodal service. In
1992, the entire fleet of old leased trailers,  approximately  880, was replaced
with 800  brand new  trailers.  Expanding  intermodal  volume  necessitated  the
addition of another 100 trailers in 1994.

         During 1994 ICR repaired and reconditioned  approximately 173 cars at a
cost of $2.9 million.  This  equipment is being leased on a short-term  basis to
other carriers until ICR anticipates it will need the equipment.

         In 1996,  ICR began a covered hopper fleet program under which existing
equipment was either modernized or replaced. In 1997 and 1996, approximately 800
cars,  operated under short-term car hire arrangements and various leases,  were
returned and replaced with 900 new high capacity  hoppers which are being leased
under an operating lease from an unrelated third party.

         The following is the overall fleet at December 31:

Total Units:             1997        1996      1995        1994         1993
------------             ----        ----      ----        ----         ----
Locomotives1.........     365         391       397         417          468
Freight cars.........  15,375      15,838    15,872      16,498       16,634
Work equipment.......     641         655       654         625          745
Highway trailers.....     888         889       898         898          898


1   Approximately  21  locomotives  need  repair  before they can be returned to
    service.  This equipment is either repaired,  if needed on an ongoing basis,
    or sold. ICR sold 30, 6, 40, 48 and 23 surplus  locomotives  in 1997,  1996,
    1995, 1994 and 1993,  respectively.  The active fleet was 324 as of December
    31, 1997. Also, 15 locomotives are being subleased and 5 will be returned to
    active service after repainting.



<PAGE>



    The components of the fleet by subsidiary and in total for 1997 and in total
for 1996 are shown below:

                                       Long-Term        1997           1996
Description1                Owned 2      Lease          Total          Total
------------                ------      ------          -----          -----

Locomotives:
  Multipurpose                 221          79           300             309
  Switching                     65           -            65              82
                             -----        ----          ----            ----
            Total              286          79           365             391
                             =====        ====          ====            ====

Freight Cars:
 Box (general service)         216       1,214         1,430           1,444
 Box (special purpose)       2,269         627         2,896           2,907
 Gondola                       939         678         1,617           1,555
 Hopper (open top)           1,748       1,990         3,738           4,115
 Hopper (covered)            2,698       1,914         4,612           3,945
 Flat                          213         366           579             596
 Other                         630         634         1,264           1,276
                             -----       -----         -----         -------
                  Total      8,713       7,423        16,136          15,838
                             =====       =====        ======          ======
 Work Equipment                641                       641             655
                             =====                    ======          ======
  Highway trailers             888                       888             889
                             =====                    ======          ======


1   In addition,  approximately  1,531 freight cars were being used by ICR under
    short-term car hire  agreements.  
2   Includes 53 locomotives and 761 freight cars under capital leases.

Environmental Conditions

         ICR  faces  potential   environmental  cleanup  costs  associated  with
approximately 22 contaminated  sites and various fueling  facilities for which a
total of $9.1  million  has been  reserved  as of December  31,  1997.  The most
significant of those sites are described below.

Mobile, Alabama

         ICR  owned  property  in  Mobile  prior  to 1976  upon  which a  lessee
conducted  creosoting  operations.   The  Alabama  Department  of  Environmental
Management has determined that the soil and groundwater  are  contaminated  with
creosote,  pentachlorophenol and possibly dioxins. ICR has been participating in
joint clean-up efforts with the current owner and ICR's former lessee.  See Item
3. "Legal Proceedings."

Jackson, Tennessee

         A rail  yard in  Jackson,  Tennessee,  formerly  owned  by ICR has been
placed on the federal and state "superfund" list as a result of the discovery of
Trichloroethane  (TCE) in the adjacent  municipal water well field. ICR formerly
operated a shop  facility at the site and TCE is a common  component of solvents
similar to those  believed  to have been used in the shop.  ICR  believes it has
demonstrated  that the TCE did not come from its  operation,  or from this site.
See Item 3. "Legal Proceedings."



<PAGE>



McComb, Mississippi

         ICR has  conducted a site  assessment  of a facility  where car repairs
were  formerly  performed to determine  the nature and extent of  contamination,
primarily lead from removed paint,  at the site.  Currently,  ICR is preparing a
remediation  plan under the supervision of the  Mississippi  Bureau of Pollution
Control.  Estimates of remaining  clean-up  costs range between $2.7 million and
$8.0 million.

Kegley, Illinois

         Emergency response action has been taken by ICR at this scene of a 1994
derailment  in which about 22,000  gallons of TCE were  released.  The spill has
been contained by  construction  of an impervious wall extended into the bedrock
and  encircling the site. ICR has enrolled in Illinois' Pre- Notice Site Cleanup
Program and is voluntarily remediating the site. Estimates of remaining clean-up
costs range between $1.4 million and $7.0 million.

East Hazel Crest, Illinois

         In 1994,  ICR learned  that an  underground  fuel line had leaked about
100,000 gallons of diesel fuel into the soil and  groundwater.  ICR has replaced
the fuel tank and piping,  has constructed a groundwater  remediation system and
has enrolled the site in Illinois' Pre-Notice Site Clean-up Program.
See Item 3. "Legal Proceedings."

Fueling Facilities

         ICR has  maintained  fueling  facilities  at more than 20  locations at
various  times  from the  1950's  to date.  Many of  those  sites  are or may be
contaminated  with spilled fuel.  Those  stations  currently in use are equipped
with drip pans and  treatment  facilities  and ICR has  initiated  a program  of
rebuilding all fuel lines above ground.

Waste Oil Generation

         ICR has been identified as a Potentially Responsible Party ("PRP") at a
site where waste oil was allegedly  processed  and  disposed.  ICR is alleged to
have generated some of the waste oil. ICR believes any  contribution it may have
made to the site contamination is de minimis. See Item 3. "Legal Proceedings."



<PAGE>



Item 3.  Legal Proceedings

GATX Tank Car Explosion  September 9, 1987 at New Orleans (Civil District Court,
Parish of Orleans, Louisiana No. 87-16374)

         ICR is one of several defendants in a New Orleans class action in which
a jury has  returned a verdict  against  the ICR for $125  million  in  punitive
damages as a result of a tank car fire. The Louisiana  Supreme Court has vacated
the judgment for technical  reasons and remanded the case to the trial court for
further  proceedings.  The Company believes the plaintiff's claims have no basis
and intends to continue to challenge them vigorously.

State of Alabama,  et al. v. Alabama Wood  Treating  Corporation,  Inc., et al.,
S.D. Ala. No. 85-0642-C

         The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985
seeking damages for alleged pollution of land in Mobile, Alabama,  stemming from
creosoting operations over several decades.  Defendants include ICR, which owned
the land  until  1976,  Alabama  Wood  Treating  Corporation,  Inc.,  and Reilly
Industries,  Inc. ("RII"), which leased the land from ICR and conducted creosote
operations  on the site.  In December  1976,  ICR sold the  premises to ASD. The
complaint  sought payment for the clean-up cost together with punitive and other
damages.

         In 1986, ASD, RII and ICR agreed to form a joint technical committee to
clean the site,  sharing  equally the cost of clean-up,  and in October 1986 the
court stayed  further  proceedings  in the suit.  Under the  agreement the joint
technical committee has spent approximately $6.8 million and has been authorized
to expend  up to a total of $6.9  million.  ICR has  contributed  $2.3  million.
Further clean-up activities are anticipated,  the cost of which could range from
$1.8  million  to  $5.6  million  depending  upon  the  clean-up  standards  and
remediation methods ultimately required and utilized.

         ASD  terminated  the Joint Tech  Agreement  on August 27,  1997 and has
threatened to reinstate the 1985 litigation - ICR expects its share of remaining
clean-up cost to range between $0.6 million and $1.8 million.

In the Matter of Illinois Central Railroad Company,  et al.,  Tennessee Division
of Superfund No. 94-0187

         The Tennessee  Department of Environment and  Conservation,  on June 6,
1994,  issued a Remedial Order requiring  clean-up by ICR and the current owners
of a site in Jackson,  Tennessee. ICR operated a rail yard and locomotive repair
facility  at the  site.  Trichloroethane  ("TCE")  has  been  found  in  several
municipal  water  wells near the site.  TCE is a common  component  of  solvents
similar  to  those  believed  to  have  been  used  at the  shop.  In  addition,
concentrations  of metals and  organic  chemicals  have been  identified  on the
surface of the site. A remedial  investigation  study has been  completed  which
indicates  the TCE in the water wells came from an adjacent  municipal  dump and
not from  operations  on this site.  Exclusive  of  ground-water  clean-up,  ICR
estimates  total  clean- up costs  between  $1.0  million  and $7.6  million and
expects another PRP to share in the expense.

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

         Intentionally omitted. See Index page of this report for explanation.


<PAGE>



                                     PART II

Item 5. Market for the  Registrant's  Common Equity and Related  Stockholder
        Matters

         All of the outstanding common stock of the ICR (100 shares) is owned by
the Corporation and therefore is not traded on any market.  Certain covenants of
ICR's Revolver, while not specifically restricting dividends, do require the ICR
to maintain minimum levels of tangible net worth.  While not  anticipated,  such
restrictions  could  limit  the  amount  of  dividends  paid  by the  ICR to the
Corporation.  ICR paid cash  dividends to the  Corporation  of $62.9  million in
1997,  $103.2  million in 1996 and $107.7 million in 1995. At December 31, 1997,
approximately  $32.0  million  of ICR equity  was free of such  restriction.  In
January and March 1998,  ICR declared  and paid a dividend of $19.0  million and
$15.6 million, respectively to the Corporation.


Item 6.  Selected Financial Data

         Intentionally omitted. See Index page of this Report for explanation.



<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Significant Developments

Canadian National Tender Offer

           On February 10, 1998, the Corporation and Canadian  National  Railway
Company  ("CN")  entered  into an  Agreement  and Plan of  Merger  (the  "Merger
Agreement"),  pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"),  a
wholly  owned  subsidiary  of CN,  commenced  a tender  offer (the  "Offer")  to
purchase approximately 75% of the outstanding shares of the Corporation's Common
Stock (the "Shares") at a price of $39.00 per share. Following completion of the
Offer and subject to satisfaction of customary conditions, the Purchaser will be
merged with and into the Corporation (the "Merger") and each Share not purchased
in the Offer will be converted  into the right to receive an amount of CN common
stock equal to the  fraction  obtained by dividing (1) $39.00 by (2) the average
closing price of the CN common stock (the "Average  Closing  Price") over the 20
day trading  period ending two trading days prior to the  effective  time of the
Merger;  provided that if such Average  Closing Price is less than $43.00,  then
the  Average  Closing  Price  will be deemed to be  $43.00  and if such  Average
Closing  Price is greater than $64.50,  then the Average  Closing  Price will be
deemed to be $64.50.  Pursuant to the Merger Agreement,  if less than 75% of the
shares  are  tendered,  the  Shares  outstanding  prior  to the  Merger  will be
converted into the right to receive a prorated amount of stock and cash in order
to ensure that the overall aggregate  consideration consists of 75% cash and 25%
stock.

           Simultaneously with the purchase of shares pursuant to the Offer, the
shares purchased will be deposited in an independent,  irrevocable  voting trust
while CN and the Corporation await review of the transaction by the STB.

           Pursuant to the Merger Agreement,  subject to consultations  with the
Corporation  and  after  giving  good  faith  consideration  to the views of the
Corporation,  CN shall have final authority over the  development,  presentation
and conduct of the STB case,  including over decisions as to whether to agree to
or acquiesce in conditions.  The  Corporation  shall take no regulatory or legal
action in  connection  with the STB without CN's  consent.  The STB could impose
conditions or restrictions  as it relates to CN's  acquisition of control of the
Corporation.  If the STB does not  approve  CN's  acquisition  of control of the
Corporation or CN deems any conditions imposed by the STB unacceptable, CN would
have the obligation to sell all the Corporation common shares held by the voting
trust.  Neither the acquisition of the Corporation shares pursuant to the tender
offer nor the merger will be subject to STB approval of the combination.

           The  Corporation's  Board of Directors has  unanimously  approved the
Merger  Agreement  and  the  transactions   contemplated  and  recommended  that
stockholders  accept  the Offer and  tender  their  shares.  See Item 3.  "Legal
Proceedings" for actions related to the Offer and Merger Agreement.

           The  Offer was  successfully  concluded  on March  13,  1998 when the
Purchaser received tenders for more than 75% of outstanding shares.

           Under change in control  provisions  of various  compensation  plans,
including   Incentive  2000  Plan  and  Employment  Security   Agreements,   the
Corporation will be required to make payments to certain employees under certain
conditions.  The  change  in  control  payment  under  Incentive  2000  Plan  is
approximately $11 million. The amount that may be paid under Employment Security
Agreements, if any, is not determinable at the time of filing.



<PAGE>



           With the change in control the Employee  Stock  Purchase Plan and the
Management Employee Discounted Stock Purchase Plan were terminated.

Results of Operations

1997 Compared to 1996

The discussion  below takes into account the financial  condition and results of
operations  of  ICR  for  the  years  presented  in the  consolidated  financial
statements.  Total  revenues  for 1997  increased  from the  prior  year by $5.3
million,  or  0.9%,  to  $622.5  million.  Modest  decreases  in the  number  of
carloadings of 0.1% and average freight revenue per carload of 0.7%, were offset
by increases in other revenues including switching and terminal services.

          Strength  in chemical  traffic  which began in the latter part of 1996
continued  as  expected  into 1997.  Strength  was  across the board  among most
chemicals, and rail rates were strong. Chemical loadings and revenues benefitted
from a  service  agreement  with  the  Burlington  Northern  Santa  Fe  Railroad
("BNSF").  Management  believes that the future annual  benefit of the agreement
will grow  although it is taking  longer than expected for BNSF to penetrate the
Union  Pacific/Southern  Pacific  ("UPSP")  markets  to which it  gained  access
through the UPSP merger case.

         Export demand for U.S.  grains  remained  weak  throughout  1997.  Very
strong  demand for grain in 1996,  coupled with meager  supply  particularly  of
corn,  resulted in  abnormally  high prices paid for grain in 1996 which in turn
stimulated abnormally high plantings of grains by other countries. Consequently,
while the 1996  harvests  of corn and  soybeans in  Illinois  were good,  export
demand for U.S.  grains was abnormally  low (including  wheat for which ICR is a
residual  carrier) as global buyers turned to other countries'  bumper crops and
lower prices.  In January 1997,  management  lowered its grain  expectations and
cautioned  that weak export  grain  markets  were  likely to curtail  ICR's 1997
revenue growth.

          Paper and forest products are economically  sensitive commodities that
respond  to  industrial  production,  housing  starts and other  basic  economic
indicators.  Fiber and pulpboard  were depressed all year as that industry found
its capacity  outstripping  demand  following  the addition of  significant  new
capacity in 1995/96.  However,  according to major  manufacturers,  capacity was
brought  into balance  with demand in the summer,  leading to a stronger  second
half of the year.  Additionally,  a plant conversion by a major ICR shipper from
short-log  to long-log  input took  several  months  longer than their  original
expectations, resulting in less rail service than planned.

         Coal  performed as expected.  However,  a mid-year mine fire of a major
coal  producer/shipper on ICR's line and, separately,  severe rail congestion in
the western U.S.,  which disrupted the movement of coal,  resulted in ICR losing
about 18,000 loads of coal it might otherwise have carried.
Underlying demand for coal remains strong.

         Base  intermodal  business,  particularly  trailer  business,  was very
strong  throughout  the  year.   However,  a  major  intermodal  customer  UPSP,
discontinued  some of their business with ICR in September.  There was also some
negative  impact from an  approximate  two-week  strike  against  another  major
intermodal customer.

          As expected, metals traffic of this commodity group fell short of 1996
all-time record year which mirrored  exceptional  strength in the steel industry
and included some large  non-recurring  spot moves.  Also, as expected,  a major
shipper took its plant down for several months in order to effectively double


<PAGE>



its  productive  capacity,  which resulted in near-term loss of business for ICR
but sets the stage  for  future  growth  with this  customer.  Birmingham  Steel
completed  construction of its new mill in Memphis in the fourth quarter of 1997
and began to take inbound product.

         Bulk commodities are primarily stone and other  construction  materials
and are closely tied to state highway  projects.  This smaller  commodity  group
fluctuates  with the timing of projects as well as the  availability  of freight
cars for this lower-margin business.

         Operating  expenses  overall  decreased  $3.1  million  or .8% in 1997.
Increased  labor and fringe costs  reflect  contract  increases  and  additional
management labor due to management services agreement with another subsidiary of
the Corporation  partially  offset by operational  efficiencies.  Leases and car
hire decreased  $5.6 million or 9.9% in 1997  reflecting a return to more normal
operating  levels and lower  export  grain  movements.  Fuel  expense  decreased
reflecting   the  decrease  in  usage  (.4%)  and  by  the  lower  cost  (3.0%).
Depreciation and amortization  expense was 6.8% higher due to increased  capital
spending in 1996 and 1997  compared to 1995.  Materials  and supplies  were 6.4%
higher in 1997  reflecting  higher  prices and increased  maintenance  costs for
locomotives and freight cars. Casualty expense increased 36.8% compared to 1996.
In 1996,  casualty  expense was lower than  expected  due to the  write-down  of
casualty  reserves  as a  result  of ICR's  improving  safety  performance.  The
increase in other taxes was primarily due to increased property tax assessments.
Other  expense  reflects the  recovery of prior  period  expenses in relation to
costs related to a derailment.

         Operating  income  for 1997  increased  $8.4  million or 3.8% to $227.9
million for the reasons cited above.

         Other income  (expense),  net, in 1997 includes a $3.3 million  pre-tax
gain related to the grant of a permanent  easement for the  marketing of outdoor
advertising on ICR  rights-of-way.  On October 3, 1996, ICR sold its investments
in an  industry-captive  insurance  company,  RAIL, which resulted in a one-time
gain, recorded as other income (expense), net, of approximately $7.0 million.

         Net interest  expense of $28.2 million for 1997 increased 6.4% compared
to $26.5 million in 1996 caused by higher debt levels year to year.

         Provision  for income taxes of $70.1  million for 1997  included a $4.1
million benefit from the donation of property.



<PAGE>



1996 Compared to 1995

           The discussion  below takes into account the financial  condition and
results  of  operations  of ICR  for the  years  presented  in the  consolidated
financial statements.

           Total  revenues  for  1996  decreased  from the  prior  year by $28.1
million or 4.4% to $617.2  million,  following a 3.1%  decrease in the number of
carloadings  coupled  with a 1.5%  decrease in the average  freight  revenue per
carload.

           Grain and grain mill  accounted for 17% of ICR's  carloads and 27% of
ton-miles in 1996. Against 1995, carloads, ton-miles and revenues were down 17%,
31% and 22%  respectively.  Grain  was  clearly  the  primary  cause of the 1996
revenue shortfall.  The comparisons were particularly difficult against a record
grain  carloading  year in 1995.  Illinois'  1995 corn and  soybean  harvest was
abnormally  small  so  that by the  third  quarter  1996  grain  elevators  were
essentially  depleted and the new harvest was still weeks away.  Rail rates were
higher on  average  this year  versus  last;  demand for grain was  strong;  the
product just was not  available to move.  The smaller crop also  affected  grain
mill  since  domestic  processors  were  forced  to  cut  back  on  their  usual
production.

           Coal  accounted  for 22% of ICR's  carloads  and 24% of  ton-miles in
1996.  Against  1995,  carloads,  ton-miles and revenues were down 6%, up 6% and
flat, respectively. A large coal contract for 25,000 carloads was not renewed in
July 1995 as a large customer wanted more aggressive pricing and went elsewhere.
Thus,  loads in the first  half of 1996  compared  with 1995 were  significantly
depressed.  However, for a second year in a row, coal margins, and the return on
the assets involved, improved.

           Chemicals accounted for 15% of ICR's carloads and 17% of ton-miles in
1996.  Compared with 1995,  ton-miles  were down 2% while  carloads and revenues
were flat. Rail rates,  under pressure in the earlier months of the year, firmed
in the second half.  The softness  observed in the  economy,  especially  in the
first two quarters,  was  reflected in the building of chemicals  manufacturers'
inventories  and softness in our  customers'  pricing.  Our  customers'  markets
firmed in the latter  half of the year so that ICR came in  essentially  flat in
both chemical loads and revenues.

           Paper  and  Forest  Products  were  15% of 1996  carloads  and 14% of
ton-miles. Total carloads were down 6% while ton-miles and revenues were down 3%
versus 1995. Rail rates held up reasonably  well throughout the year.  Paper and
forest  products  are  economically   sensitive   commodities  that  respond  to
industrial production, housing starts and other basic economic indicators. Fiber
and pulpboard were depressed all year with slight improvements only recently.

           Bulk  Commodities  contributed  6% of carloads and ton-miles in 1996.
This represents  carload and revenue growth of  approximately 4% while ton-miles
were down slightly from the 1995 level. Bulk commodities are primarily stone and
other  construction  materials and are closely tied to state  highway  projects.
This smaller  commodity group  fluctuates with the timing of projects as well as
the availability of freight cars for this lower-margin business.

           Metals  accounted  for 4% of ICR's  carloads  and 5% of  ton-miles in
1996. For 1996,  versus 1995,  carloads,  ton-miles and revenues were up 9%, 21%
and 11%,  respectively.  The steel industry had another strong year, and ICR set
another record for metals loads and revenues.

         Finally,  Intermodal  accounted  for  21%  of  ICR's  loads  and  7% of
ton-miles. Versus 1995, carloads were up 10%, with ton-miles and revenues up 9%.
These  results  were  achieved in an industry  that saw  trailer  rate  weakness
earlier in the year and some weakness in  automotive  parts traffic later in the
year.

           Operating  expenses overall  decreased $25.7 million or 6.1% in 1996.
Labor and fringe costs include the wage increases of 3% negotiated  with nine of
the ICR's unions.  The decline in this category is primarily the result of lower
traffic  levels,  particularly  grain,  and the elimination of the high overtime
caused by the congestion experienced in 1995. Leases and car hire also benefited
from the elimination of congestion to return to more normal operating levels. In
1995,  favorable  one-time  adjustments on several capital leases were recorded.
Fuel expense  reflects the increase in cost per gallon (13.8%)  partially offset
by  decreased  usage  (9.4%).  The decrease in  casualty,  insurance  and losses
reflects the emphasis on safety and improved claims  experience.  Other expenses
reflect the one-time  reversal of non-revenue  related  accruals to actual ($2.5
million) and favorable  performance payments in joint facilities that congestion
in 1995 prevented us from receiving ($.7 million).

           Operating income for 1996 decreased by $2.4 million or 1.1% to $219.5
million for the reasons cited above.

           On October 3, 1996, ICR sold its  investments in an  industry-captive
insurance  company,  RAIL, Inc., which resulted in a one-time gain,  recorded as
Other Income, Net, of approximately $7 million.

           Net interest expense of $26.5 million for 1996 increased .8% compared
to $26.3 million in 1995. The 1996 expense  includes $3.6 million from increased
borrowings to support the $109.9  million  transferred  from ICR in June 1996 in
connection with the Corporation's  acquisition of CCP Holdings,  Inc.  ("CCPH").
Overall in 1996,  average  borrowings  have been  greater than 1995 and interest
rates have been lower.

Liquidity and Capital Resources

Operating Data ($ in millions):
                                             1997         1996         1995
                                             ----         ----         ----
Cash flows provided by (used for):
     Operating activities...............    $184.3       $165.0       $168.2
     Investing activities................   (117.0)      (226.1)      (122.8)
     Financing activities................    (85.4)       104.4        (54.6)
                                           --------      ------       -------
     Net change in cash and  temporary
      cash investments...................   $(18.1)      $ 43.3      $  (9.2)
                                            =======       ======     ========

     Cash from  operating  activities  in 1997,  1996 and 1995 was primarily net
income before depreciation, deferred taxes and extraordinary item.

Investing Data



<PAGE>



     Additions to property were as follows ($ in millions):

                                           1997          1996             1995
                                           ----          ----             ----

         Communications and signals..   $  10.1      $   12.1          $ 10.7
         Equipment/rolling stock.....      19.9          27.7            30.3
         Track and bridges...........      65.7          53.9            47.0
         Other.......................      15.2          25.2             9.6
                                       --------      --------         -------
                 Total...     .......    $110.9        $118.9           $97.6
                                         ======        ======           =====

         Expenditures  for CN Terminal  were $2.0 million  included in other for
1997 and $3.3  million  and $16.8  million  included in track and  bridges,  and
other,  respectively,  in 1996. In 1996 and 1995 capital  expenditures  exceeded
original estimates as several opportunities to acquire equipment were acted upon
in  accordance  with ICR's  strategy of owning more of its  equipment.  Property
retirements and removals generated proceeds of $4.9 million,  $6.0 million,  and
$5.4 million in 1997, 1996 and 1995, respectively.

         ICR   anticipates   that   capital   expenditures   for  1998  will  be
approximately  $88.6  million.  Replacement  expenditures  of $79.3 million will
concentrate on track maintenance, bridges and freight car upgrades. Productivity
and expansion  expenditures  will total $9.3  million.  These  expenditures  are
expected to be met from current operations or other available sources.

Financing Activities

         For the three  years  ended  December  31,  1997,  ICR has paid  $273.9
million in dividends to the Corporation  ($62.9 million in 1997,  $103.3 million
in 1996 and  $107.7  million in 1995).  Included  in the 1996  dividends  to the
Corporation  is the March 1996  transfer by ICR of its  ownership in the Chicago
Intermodal  Company  ("CIC") via a dividend of CIC stock.  The book value of the
CIC investment was $5.7 million.

         ICR has a commercial  paper program whereby a total of $200 million can
be issued and  outstanding at any one time. The program is supported by the $250
million ICR Revolver (see below).
 At December 31, 1997, Standard & Poor's Corporation  ("S&P"),  Moody's Investor
Services  ("Moody's")  and Fitch  Investors  Service  ("Fitch")  have  rated the
commercial paper A2, P2 and F2,  respectively.  At December 31, 1997, no amounts
were outstanding.  The average interest rate on commercial paper outstanding for
the year  ended  December  31,  1997,  was 5.68% with a range of 5.68% to 5.69%.
ICR's public debt is rated BBB by S&P and Baa2 by Moody's.  Each of S&P, Moody's
and Fitch have  placed  ICR's debt on credit  watch  negative as a result of the
recently announced merger of the Corporation and Canadian National Railway. (See
Item 7. "Managements Discussion and Analysis of financial conditions and Results
of Operations - Significant Developments-Canadian National Tender Offer")

         In 1994,  ICR entered  into a  revolving  agreement  to sell  undivided
percentage interests in certain of its accounts receivable,  with recourse, to a
financial  institution.  This  agreement  was  terminated on January 8, 1998. At
December 31, 1997,  $45 million had been sold pursuant to the  agreement.  Costs
related to the agreement  fluctuated with changes in prevailing  interest rates.
These  costs,  which are  included in other  income  (expense),  net,  were $3.0
million,  $2.9 million and $3.2  million for the years ended  December 31, 1997,
1996 and 1995, respectively.

         ICR has a $250 million  revolver ("ICR Revolver") with its bank lending
group which expires in 2001. Fees and borrowing  spreads are predicated on ICR's
long-term credit ratings.  Currently, the annual facility fee is 15 basis points
and  borrowings  under this  agreement are at Eurodollar  offered rate plus 22.5
basis points.  The Revolver is used  primarily  for backup for ICR's  commercial
paper  program but can be used for general  corporate  purposes.  The  available
amount is reduced by the outstanding  amount of commercial  paper borrowings and
any letters of credit  issued on behalf of ICR under the  facility.  At December
31, 1997,  there were no  borrowings  or letters of credit  issued under the ICR
Revolver.

         Certain  covenants of ICR's debt agreements  require specific levels of
tangible  net worth but not a specific  dividend  restriction.  At December  31,
1997, ICR exceeded it's tangible net worth  covenants by $32.0 million.  ICR was
in compliance  with all covenants at December 31, 1997, and does not contemplate
any difficulty maintaining such compliance.

         Throughout  1996 and 1995,  ICR was active in the public  debt  market,
issuing bonds and medium-term notes ("MTN's"). In December 1996, ICR issued $125
million  aggregate amount of 100- year 7.7% debentures,  due September 15, 2096.
These  bonds may not be  redeemed  until  2026 and then only at a premium  which
declines to par in 2056. In 1995, $100 million 7.75% non-callable 10- year notes
due May 2005 ("2005 Notes") were issued. (See below.) A total of $230 million in
MTN's were issued over the two years as follows ($ in millions):

      Principal                                   Year
       Amount           Coupon           Issued           Matures

       $20              6.27%             1995             1998
        30              6.83              1995             2000
        50              6.98              1996             2007
        50              7.12              1996             2001
        30              6.85              1996             1999
        50              6.72              1996             2001

         ICR has a shelf  registration  from 1996  which can be used to issue an
additional $70 million in MTN's or other debt until 2000.  Currently,  there are
no  plans  to  issue  additional  debt but  replacing  maturing  MTN's,  capital
investments and other ventures could necessitate use.

         In 1995,  ICR prepaid the holders of its $160  million  Senior Notes at
face value plus accrued  interest and a prepayment  penalty.  The monies used to
fund the prepayment were provided by commercial  paper,  the net proceeds of the
2005  Notes and $40  million  from  existing  lines of  credit.  The  prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
line of credit borrowings were replaced with the proceeds of MTN's.

         The Company  believes that its available  cash,  cash  generated by its
operations  and cash  available  from the  facilities  described  above  will be
sufficient to meet foreseeable liquidity requirements. Additionally, the Company
believes it has access to the public debt market if needed.

Year 2000 Conversion

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits rather than four to define the applicable  year.  Many of ICR's
computer programs that have  date-sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could  result in a system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process  transactions,  send invoices, or
engage in similar normal business activities.

         Based on recent assessments, ICR determined that it will be required to
modify or replace  portions of its  software so that its  computer  systems will
properly  utilize dates beyond  December 31, 1999.  ICR presently  believes that
with  modifications  to existing  software and conversions to new software,  the
Year 2000 Issue can be mitigated. However, if such modifications and conversions
are not made, or are delayed,  the Year 2000 Issue could have a material  impact
on the operations of ICR.

         ICR has initiated formal  communications  with all of its suppliers and
large  customers to  determine  the extent to which ICR is  vulnerable  to those
third parties'  failure to remediate their own Year 2000 Issue.  There can be no
guarantee  that the systems of other  companies on which the ICR's  systems rely
will be  converted  on a timely  basis,  or that a failure to convert by another
company, or a conversion that is incompatible with ICR's systems, would not have
material adverse effect on ICR.

         In October 1997, ICR entered into an agreement to replace approximately
40 percent of its non- Year 2000  compliant  programs with new software and will
utilize both  internal  and external  resources to replace and test the software
for Year 2000 modifications. ICR began converting its remaining computer systems
with internal resources in 1997. ICR expects to spend approximately $8.5 million
to $10.0  million  from 1997  through  1999 to modify and replace  its  computer
systems.  Of the total project cost,  approximately $3.0 million is attributable
to the purchase of new  software.  ICR plans to complete  conversion of non-Year
2000 compliant  programs  during 1998.  However,  user  acceptance  testing will
continue into 1999.  Installation  of new software  programs should be completed
during the first quarter of 1999.  The total cost of the project is being funded
through operating cash flows. Maintenance or modification costs will be expensed
as incurred,  while the costs of new software will be capitalized  and amortized
over the software's  useful life.  Accordingly,  ICR does not expect the amounts
required to be expensed over the next two years to have a material effect on its
financial position or results of operations.  The amount of spending in 1997 was
approximately $2.3 million.

         The costs of the  project  and the date on which ICR plans to  complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous  assumptions of future events including the continued
availability  of certain  resources,  third party  modification  plans and other
factors.  However,  there  can be no  guarantee  that  these  estimates  will be
achieved and actual results could differ  materially from those plans.  Specific
factors that might cause such material  differences include, but are not limited
to, the availability and cost of personnel  trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.

Miscellaneous

         ICR has entered into various diesel fuel collar agreements  designed to
mitigate  significant changes in fuel prices. As a result,  approximately 50% of
ICR's  short-term  diesel  fuel  requirements  through  June 1998 are  protected
against significant price changes.

         ICR has paid approximately $3 million in 1996 and $6 million in each of
1995 and 1994 for severance,  lump sum signing awards and other costs associated
with various labor agreements.  Under the terms of local bargaining  agreements,
wages will rise 3%-4% per year.

         In October  1996,  the  Brotherhood  of  Maintenance  of Way  Employees
membership  ratified a new  agreement  which settles wage and work rules through
1999.  In February and May 1997,  the United  Transportation  Union  ("UTU") and
Brotherhood of Locomotive Engineers, respectively, ratified new agreements which
settle wage and work rule issues through 2000. The agreements are similar to the
nationally negotiated agreements in effect with other Class I carriers. The main
distinction  is  timing of the  various  lump sum  payouts  and  scheduled  wage
increases.


Environmental Liabilities

         ICR's operations are subject to comprehensive  environmental regulation
by  federal,  state  and local  authorities.  Compliance  with  such  regulation
requires  the  Corporation  to modify  its  operations  and  expend  substantial
manpower and financial resources.

         Under the federal Comprehensive  Environmental  Response,  Compensation
and Liability Act of 1980 ("Superfund"), and similar state and federal laws, ICR
is potentially  liable for the cost of clean-up of various  contaminated  sites.
ICR  generally  participates  in the  clean-up at sites where other  substantial
parties  share  responsibility  through  cost-sharing  arrangements,  but  under
Superfund and other  similar laws ICR can be held jointly and  severally  liable
for all environmental costs associated with such sites.

         ICR is  aware of  approximately  22  contaminated  sites at which it is
probably liable for some portion of any required clean-up.  Of these, 14 involve
contamination  primarily by diesel fuel which can be remediated without material
cost.  Five other sites are expected to require more than $1 million in clean-up
costs.  At three of these sites other  parties are  expected to  contribute  the
majority of the costs incurred.  ICR paid  approximately  $.6 million toward the
investigation  and  remediation  at all sites in 1997, and  anticipates  similar
expenditures annually.

         For all known sites of  environmental  contamination  where ICR loss or
liability is probable,  ICR has recorded an estimated liability at the time when
a  reasonable  estimate  of  remediation  cost and ICR  liability  can  first be
determined.  Adjustments  to initial  estimates are recorded as necessary  based
upon additional information developed in subsequent periods.  Estimates of ICR`s
potential   financial  exposure  for  environmental   claims  or  incidents  are
necessarily  imprecise  because of the  difficulty of determining in advance the
nature and extent of contamination,  the varying costs of alternative methods of
remediation,  the regulatory  clean-up standards which will be applied,  and the
appropriate  allocation of liability  among  multiple  responsible  parties.  At
December 31, 1997,  ICR estimated the probable range of its liability to be $9.1
million to $45 million,  and in accordance with the provisions of SFAS No. 5 had
a reserve of $9.1 million for  environmental  contingencies.  This amount is not
reduced for potential insurance recoveries or third-party contributions.

         The risk of incurring  environmental  liability in connection with both
past and current  activities  is inherent  in railroad  operations.  Decades-old
railroad  housekeeping  practices were not always  consistent with  contemporary
standards, historically ICR leased substantial amounts of property to industrial
tenants,  and ICR  continues to haul  hazardous  materials  which are subject to
occasional  accidental release.  Because the ultimate cost of known contaminated
sites cannot be  definitively  established and because  additional  contaminated
sites  yet  unknown  may be  discovered  or  future  operations  may  result  in
accidental releases,  no assurance can be given that ICR will not incur material
environmental  liabilities in the future.  However,  based on its assessments of
the facts and circumstances now known,  management believes that it has recorded
adequate reserves for known liabilities and does not expect future environmental
charges or expenditures, based on these known facts and circumstances, to have a
material adverse effect on ICR`s financial position, results of operations, cash
flow or liquidity.

Litigation

         ICR is one of several defendants in a New Orleans class action in which
a jury has  returned a verdict  against  the ICR for $125  million  in  punitive
damages as a result of a tank car fire. The Louisiana  Supreme Court has vacated
the judgment for technical  reasons and remanded the case to the trial court for
further proceedings. (See Part I. Item 3 - Legal Proceedings).  ICR believes the
verdict has no basis and intends to continue to challenge it vigorously.

         While the final outcome of this proceeding cannot be determined, in the
opinion of management,  based on present information, the ultimate resolution of
this  case  will not have a  material  adverse  effect  on the  ICR's  financial
position, results of operations, cash flow or liquidity.

Recent Accounting Pronouncements

         In  June  1997,  the  Financial  Accounting  Standards  Board  ("FASB")
released  Statement  of  Financial   Accounting   Standards  ("SFAS")  No.  130,
"Reporting  Comprehensive  Income".  The new  statement is effective  for fiscal
years beginning after December 15, 1997. When adopted, SFAS No. 130 will require
restatement of prior years'  statements to report any  applicable  comprehensive
income.

         In June  1997,  the FASB  released  SFAS No.  131,  "Disclosures  about
Segments  of an  Enterprise  and  Related  Information".  The new  statement  is
effective for fiscal years beginning after December 15, 1997. When adopted, SFAS
No. 131 will require presentation of any applicable segment information for each
year that is reported.

         In  February  1998,  the  FASB  released  SFAS  No.  132,   "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The new statement
is effective for fiscal years  beginning  after December 15, 1997. When adopted,
SFAS No.  132 will  require  restatement  of  disclosures  for each year that is
reported.

Item 8.  Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements on page 30 of this Report.

Item 9.  Changes in and Disagreement with Accountants in Accounting
            Financial Disclosures
                                   NONE


<PAGE>



                                    PART III

Items 10, 11, 12 and 13

         Intentionally   omitted.   See  the  Index  page  of  this  Report  for
explanation.


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)    1.   Financial Statements:

            See Index to  Consolidated  Financial  Statements on page 30 of this
            Report.

       2.   Financial Statement Schedules:

            See  Index to  Financial  Statement  Schedules  on page F-26 of this
            Report.

       3.   Exhibits:

            See items marked with "*" on the Exhibit Index beginning on page E-1
            of this Report.  Items so marked  identify  management  contracts or
            compensatory plans or arrangements as required by Item 14.

(b)    1.   Reports on Form 8-K:

            None

(c)         Exhibits:

            The  response to this  portion of Item 14 is submitted as a separate
            section of this Report. See Exhibit Index beginning on page E-1.

(d)         Financial Statement Schedules:

            The  response to this  portion of Item 14 is submitted as a separate
section of this Report.


<PAGE>



                                   SIGNATURES

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

                                          ILLINOIS CENTRAL RAILROAD COMPANY

                                        By:  /s/ JOHN V.  MULVANEY
                                                   John V.  Mulvaney
                                      Vice President and Chief Financial Officer
                                          Date:  March 27, 1998

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
Report has been signed by the  following  persons in the  capacities  and on the
dates indicated.

         Signature                  Title(s)                        Date

/s/ GEORGE D. GOULD       Chairman of the Board and Director     March 27, 1998
-----------------------
    George D. Gould    

/s/ JOHN D. MCPHERSON    President and Chief Executive Officer   March 27, 1998
-----------------------
    John D. McPherson   (principal executive officer), Director

/s/ JOHN V.  MULVANEY           Vice President                   March 27, 1998
-----------------------    and Chief Financial Officer   
    John V.  Mulvaney     (principal financial officer), Director
                                                 

/s/ DOUGLAS A.  KOMAN           Controller                       March 27, 1998
-----------------------     (principal accounting officer)
    Douglas A.  Koman            

/s/  RONALD A. LANE              Director                        March 27, 1998
-----------------------
     Ronald A. Lane

/s/ DONALD H. SKELTON            Director                        March 27, 1998
-----------------------
    Donald H. Skelton




<PAGE>




                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES








                                  F O R M 10-K



                              FINANCIAL STATEMENTS

                         SUBMITTED IN RESPONSE TO ITEM 8


<PAGE>








                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                 Page

Report of Independent Public Accountants.......................... F-1

Consolidated Statements of Income for the three years ended
  December 31, 1997............................................... F-2

Consolidated Balance Sheets at December 31, 1997 and 1996......... F-3

Consolidated Statements of Cash Flows for the three years ended
  December 31, 1997............................................... F-4

Consolidated Statements of Stockholder's Equity and Retained
  Income for the three years ended December 31, 1997.............. F-5

Notes to Consolidated Financial Statements for the three years
  ended December 31, 1997......................................... F-6


<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Illinois Central Railroad Company:

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Illinois Central  Railroad Company (a Delaware  corporation) and subsidiaries as
of  December  31,  1997 and 1996,  and the related  consolidated  statements  of
income, cash flows and stockholder's  equity and retained income for each of the
three years in the period ended December 31, 1997.  These  financial  statements
and the  schedule  referred  to below are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the financial  position of Illinois Central
Railroad  Company and  subsidiaries  as of December  31, 1997 and 1996,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the index to
Financial Statement Schedules herein is presented for purposes of complying with
the  Securities  and  Exchange  Commission's  rules and is not part of the basic
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.


                                                          ARTHUR ANDERSEN LLP


Chicago, Illinois
January 19, 1998
(except with respect to
 the matter discussed in
 Note 2, as to which the
 date is February 10, 1998)


<PAGE>



               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
                       Consolidated Statements of Income
                                ($ in millions)



                                             Years Ended December 31,
                                             1997       1996       1995
 Revenues                                  $622.5    $ 617.2    $ 645.3

 Operating expenses:
    Labor and fringe benefits               185.6      181.9      194.8
    Leases and car hire                      51.1       56.7       58.8
    Diesel fuel                              33.3       34.6       33.2
    Materials and supplies                   33.2       31.2       35.0
    Depreciation and amortization            33.1       31.0       30.9
    Casualty, insurance and losses           15.6       11.4       17.4
    Other taxes                              19.6       16.9       18.2
    Other                                    23.1       34.0       35.1
 Operating expenses                         394.6      397.7      423.4

 Operating income                           227.9      219.5      221.9

 Other income, net                            6.6        9.9        2.7
 Interest expense, net                      (28.2)     (26.5)     (26.3)

 Income before income taxes and 
  extraordinary item                        206.3      202.9      198.3
 Provision for income taxes                  70.1       76.3       67.1

 Income before extraordinary item           136.2      126.6      131.2
 Extraordinary item, net                      -          -        (11.4)
 Net income                                $136.2    $ 126.6    $ 119.8




The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.


<PAGE>



               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
                          Consolidated Balance Sheets
                                ($ in millions)

                                                  December 31,     December 31,
                       ASSETS                        1997             1996
  Current assets:
       Cash and temporary cash investment      $   28.2            $   46.3
       Receivables, net of allowance for 
         doubtful accounts
         of $.9 in 1997 and $1.3 in 1996          100.6                84.4
       Loans to affiliates                          4.9                14.9
       Materials and supplies, at average cost     15.3                17.3
       Deferred income taxes - current             17.5                18.1
       Other current assets                         5.0                 7.8
            Total current assets                  171.5               188.8

  Investments                                      12.1                11.7

  Loans to affiliates                             160.9               138.2

  Properties:
     Transportation:
        Road and structures, including land     1,193.7             1,118.0
        Equipment                                 173.7               165.2
     Other, principally land                       41.3                41.5
        Total properties                        1,408.7             1,324.7
     Accumulated depreciation                     (45.8)              (38.4)
        Net properties                          1,362.9             1,286.3

  Other assets                                     23.6                20.9
            Total assets                       $1,731.0            $1,645.9

                  LIABILITIES AND STOCKHOLDER'S EQUITY
  Current liabilities:
       Current maturities of long-term debt    $   22.7            $    2.8
       Accounts payable                            53.1                56.3
       Dividends payable                            -                   -
       Income taxes payable                         -                   1.2
       Casualty and freight claims                 12.7                20.9
       Employee compensation and vacations         19.1                18.4
       Taxes other than income taxes               16.4                15.4
       Accrued redundancy reserves                  3.9                 4.3
       Other accrued expenses                      80.1                72.6
            Total current liabilities             208.0               191.9

  Long-term debt                                  552.4               590.3
  Deferred income taxes                           302.9               263.5
  Other liabilities and reserves                  111.7               117.5

  Contingencies and commitments (Note 13)


<PAGE>



  Stockholder's equity:
       Common stock authorized, issued 
          and outstanding
         100 shares, $1 par value                   -                   -
       Additional paid-in capital                 129.6               129.6
       Retained income                            426.4               353.1
           Total stockholder's equity             556.0               482.7
           Total liabilities and stock-
           holder's equity                    $ 1,731.0            $ 1,645.9

The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.


<PAGE>



               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
                           Consolidated Statements of
                                   Cash Flows
                                ($ in millions)


                                                     Years Ended December 31,
                                                  1997        1996        1995
 Cash flows from operating activities :
    Net income                                 $ 136.2     $ 126.6     $ 119.8
    Reconciliation of net income to net cash
       provided by (used for) operating activities :
          Extraordinary item, net                  -           -          11.4
          Depreciation and amortization           33.1        31.0        30.9
          Deferred income taxes                   39.9        31.5        24.5
          Equity in undistributed earnings of 
             affiliates,
             net of dividends received            (0.9)       (0.5)       (0.8)
          Net gains on sales of real estate       (0.6)       (1.6)       (0.1)
          Cash changes in working capital        (15.1)       (9.0)       (8.3)
          Changes in other assets                 (2.8)       (6.4)       (2.0)
          Changes in other liabilities and 
             reserves                             (5.5)       (6.6)       (7.2)
             Net cash provided by operating 
             activities                          184.3       165.0       168.2

 Cash flows from investing activities :
    Additions to properties                     (110.9)     (118.9)     (97.6)
    Proceeds from sales of real estate             2.4         3.0         2.5
    Proceeds from equipment sales                  2.5         3.0         2.9
    Proceeds from sales of investments             0.6         2.3         0.7
    Loans to affiliates                          (12.7)     (114.5)      (26.9)
    Other                                          1.1        (1.0)       (4.4)
             Net cash (used for) investing 
             activities                         (117.0)     (226.1)     (122.8)

 Cash flows from financing activities :
    Proceeds from issuance of debt                 0.9       255.0       250.0
    Principal payments on debt                    (3.4)       (9.6)     (238.7)
    Net proceeds (payments)  -  Commercial Paper (20.0)      (37.0)       42.0
    Dividends paid                               (62.9)     (103.3)     (107.7)
    Purchase of subsidiary's common stock          -          (0.7)       (0.2)
             Net cash provided by (used for) 
              financing activities               (85.4)      104.4       (54.6)
 Changes in cash and temporary cash investments  (18.1)       43.3        (9.2)
 Cash and temporary cash investments at 
   beginning of year                              46.3         3.0        12.2
 Cash and temporary cash investments at end
   of year                                     $  28.2     $  46.3     $   3.0

 Supplemental  disclosure  of cash flow  information : Cash paid during the year
    for:
       Interest (net of amount capitalized)    $  38.1     $  28.5     $  30.8
       Income taxes                            $  32.5     $  53.2     $  31.0

The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.

<PAGE>



               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
      Consolidated Statements of Stockholder's Equity and Retained Income


                              Shares               Equity ($ in millions)
                                                                     Total
                                                 Additional          Stock-
                               Common   Common   Paid-in   Retained  holder's
                               Share    Stock    Capital   Income    Equity

  Balance December 31, 1994     100   $   -     $ 129.1   $ 263.3   $ 392.4

  Capital contribution                              0.5                 0.5

  Dividends                                                 (47.7)    (47.7)

  Net income                                                119.8     119.8

  Balance December 31, 1995     100         -     129.6     335.4     465.0


  Dividends                                                (108.9)   (108.9)

  Net income                                                126.6     126.6

  Balance December 31, 1996     100         -     129.6     353.1     482.7

  Dividends                                                 (62.9)    (62.9)

  Net income                                                136.2     136.2

  Balance December 31, 1997     100   $     -   $ 129.6   $ 426.4   $ 556.0



The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.


<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


1.       ICR

         Illinois Central  Corporation (the  "Corporation"),  a holding company,
was  incorporated  under the laws of  Delaware.  The  Corporation,  through  its
wholly-owned  subsidiaries,  including  the Illinois  Central  Railroad  Company
("ICR"), is principally engaged in the rail freight transportation business. ICR
operates 2,600 miles of main line track between  Chicago and the Gulf of Mexico,
primarily  transporting  chemicals,  grain and  milled  grain,  coal,  paper and
intermodal commodities.

2.       Subsequent Event

         On February 10, 1998, the  Corporation  and Canadian  National  Railway
Company  ("CN")  entered  into an  Agreement  and Plan of  Merger  (the  "Merger
Agreement"),  pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"),  a
wholly  owned  subsidiary  of CN,  commenced  a tender  offer (the  "Offer")  to
purchase approximately 75% of the outstanding shares of the Corporation's Common
Stock (the "Shares") at a price of $39.00 per share. Following completion of the
Offer and subject to satisfaction of customary conditions, the Purchaser will be
merged with and into the Corporation (the "Merger") and each Share not purchased
in the Offer will be converted  into the right to receive an amount of CN common
stock equal to the  fraction  obtained by dividing (1) $39.00 by (2) the average
closing price of the CN common stock (the "Average  Closing  Price") over the 20
day trading  period ending two trading days prior to the  effective  time of the
Merger;  provided that if such Average  Closing Price is less than $43.00,  then
the  Average  Closing  Price  will be deemed to be  $43.00  and if such  Average
Closing  Price is greater than $64.50,  then the Average  Closing  Price will be
deemed to be $64.50.  Pursuant to the Merger Agreement,  if less than 75% of the
shares  are  tendered,  the  Shares  outstanding  prior  to the  Merger  will be
converted into the right to receive a prorated amount of stock and cash in order
to ensure that the overall aggregate  consideration consists of 75% cash and 25%
stock.

         Simultaneously  with the purchase of shares pursuant to the Offer,  the
shares purchased will be deposited in an independent,  irrevocable  voting trust
while CN and the Corporation await review of the transaction by the STB.

         Pursuant to the Merger  Agreement,  subject to  consultations  with the
Corporation  and  after  giving  good  faith  consideration  to the views of the
Corporation,  CN shall have final authority over the  development,  presentation
and conduct of the STB case,  including over decisions as to whether to agree to
or acquiesce in conditions.  The  Corporation  shall take no regulatory or legal
action in  connection  with the STB without CN's  consent.  The STB could impose
conditions or restrictions  as it relates to CN's  acquisition of control of the
Corporation.  If the STB does not  approve  CN's  acquisition  of control of the
Corporation or CN deems any conditions imposed by the STB unacceptable, CN would
have the obligation to sell all the Corporation common shares held by the voting
trust.  Neither the acquisition of the Corporation shares pursuant to the tender
offer nor the merger will be subject to STB approval of the combination.





<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         The  Corporation's  Board of  Directors  has  unanimously  approved the
Merger  Agreement  and  the  transactions   contemplated  and  recommended  that
stockholders accept the Offer and tender their shares.

         The  Offer  was  successfully  concluded  on March  13,  1998  when the
Purchaser  received  tenders  for in excess of 75% of  outstanding  shares.  

         Under  change in  control  provisions  of various  compensation  plans,
including   Incentive  2000  Plan  and  Employment  Security   Agreements,   the
Corporation will be required to make payments to certain employees under certain
conditions.  The  change  in  control  payment  under  Incentive  2000  Plan  is
approximately $11 million. The amount that may be paid under Employment Security
Agreements, if any, is not determinable at the time of filing.

         With the change in control the  Employee  Stock  Purchase  Plan and the
Management Employee Discounted Stock Purchase Plan were terminated.

3.       Summary of Significant Accounting Policies

         Principles of Consolidation

         The consolidated  financial  statements include the accounts of the ICR
and its  subsidiaries.  Significant  investments  in  affiliated  companies  are
accounted for by the equity method.  Transactions between consolidated companies
have been eliminated in the accompanying consolidated financial statements.

         Properties

         Depreciation  is  computed  by the  straight-line  method and  includes
depreciation on properties  under capital leases.  ICR uses the composite method
of depreciation for track structure,  other road property, and equipment. In the
case of routine retirements,  removal costs less salvage recovery are charged to
accumulated  depreciation.  Expenditures for maintenance and repairs are charged
to operating expense.

         The approximate ranges of annual  depreciation rates for major property
classifications railroads are as follows:

         Road properties.............................         1%-8%
         Transportation equipment....................         2%-5%

         ICR's  rates  were   approved  by  the   predecessor   of  the  Surface
Transportation  Board  ("STB"),  an  independent  agency  of the  Department  of
Transportation.



<PAGE>

                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

         Revenues

         Revenues  are  recognized  based  on  services  performed  and  include
estimated  amounts  relating to movements  in progress for which the  settlement
process is not complete. Estimated revenue amounts for movements in progress are
not significant.

         Income Taxes

         Deferred  income  taxes are  accounted  for on the asset and  liability
method by  applying  enacted  statutory  tax rates to  differences  between  the
financial   statement   carrying  amounts  and  the  tax  bases  of  assets  and
liabilities.  The resulting  deferred tax liabilities and assets represent taxes
to be paid or  collected in the future when the related  assets and  liabilities
are recovered and settled, respectively.

         Cash and Temporary Cash Investments

         Cash in excess of operating  requirements  is invested in certain funds
having original maturities of three months or less. These investments are stated
at cost, which approximates market value.

         Income Per Share

         Income per share has been omitted as ICR is a  wholly-owned  subsidiary
of IC.

         Derivative Financial Instruments

         ICR has only limited involvement with derivative financial  instruments
and does not use them for trading purposes.  ICR has entered into various diesel
fuel collar agreements with the objective of mitigating significant fluctuations
in fuel prices. Premiums paid for the purchase of these agreements are amortized
to fuel  expense  over the terms of the  agreements.  Unamortized  premiums  are
included in Other Assets in the Consolidated Balance Sheets.  Amounts receivable
or payable under the collar  agreements are accrued as increases or decreases to
Diesel Fuel Expense. See Note 7.

         Casualty Claims

         ICR  accrues  for  injury  and  damage  claims  based  on   actuarially
determined  estimates of the ultimate costs  associated with asserted claims and
claims incurred but not reported.

         Stock-Based Compensation

         ICR has  elected to adopt SFAS No.  123,  "Accounting  for  Stock-Based
Compensation"  ("SFAS No. 123"), for disclosure  purposes only. ICR accounts for
compensation  under its  Long-Term  Incentive  Plan  under APB  Opinion  No. 25,
"Accounting for Stock Issued to Employees." See Note 14.

         Use of Estimates

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

         Reclassifications

         Certain items relating to prior years have been reclassified to conform
to the presentation in the current year.


4.       Extraordinary Item

         In 1995,  ICR prepaid the holders of its $160  million  Senior Notes at
face value plus  accrued  interest  and a  prepayment  penalty.  The  prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
loss resulted from the premium paid, the write-off of unamortized financing fees
and costs associated with the prepayment. See Note 9.

5.       Other Income (Expense), Net

         Other income (expense), net consisted of the following ($ in millions):

                                                       Years Ended December 31,
                                                      1997       1996      1995
                                                      ----       ----      ----

Rental income, net...............................     $2.5       $2.3      $3.5
Net gains  (losses) on sales of real estate......       .6        1.6       (.1)
Equity in undistributed
   earnings of affiliates........................      1.6         .8        .9
Sales of accounts receivable   (see Note 10).....     (3.0)      (2.9)     (3.2)
Grant of permanent easement (see below)..........      3.3        -         -
Sale of RAIL (see below).........................      -          7.3       -
Other, net.......................................      1.6         .8      (1.6)
                                                      ----       ----      ----
   Other income (expense), net...................     $6.6       $9.9      $2.7
                                                      =====      =====     ====

          On  September  30,  1997,   ICR  granted  a  permanent   easement  for
development  of right of way property for signboard use. On October 3, 1996, ICR
sold its investment in an industry captive insurance company which resulted in a
one-time gain of approximately $.07 per share.



<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

6.       Supplemental Cash Flow Information

         Cash changes in  components  of working  capital,  exclusive of current
maturities of long-term debt,  included in the  Consolidated  Statements of Cash
Flows were as follows ($ in millions):

                                                   Years Ended December 31,
                                               1997         1996           1995
                                               ----         ----           ----

Receivables, net.......................      $(16.2)      $ (5.1)       $(14.1)
Materials and supplies.................         1.9         (2.4)           .8
Other current assets...................         3.4         (5.3)           .6
Accounts payable.......................        (3.2)         4.9          (3.5)
Income taxes payable...................        (1.8)        (8.4)         13.3
Accrued redundancy reserve.............         (.4)          -           (2.5)
Other current liabilities..............         1.2          7.3          (2.9)
                                              -----        -----        -------
    Cash changes in working capital....      $(15.1)       $(9.0)      $  (8.3)
                                             =======       ======      ========

        ICR recorded capital leases of $4.3 million and $7.1 million covering 40
locomotives and 328 freight cars in 1997 and 1995, respectively.  See Note 8 for
the present value of the minimum lease payments.

7.      Materials and Supplies

        Materials and supplies,  valued using the average cost method, primarily
consist of track material, switches, car and locomotive parts and fuel.

        As of  December  31,  1997,  ICR was party to three  diesel  fuel collar
agreements  under which the Company  receives or makes monthly payments based on
the  monthly  average  price  for  Heating  Oil Gulf  Coast  (Pipeline)  Platt's
Oilgram("Contract  Price"),  which was $.482 per gallon for December 1997. Under
the  agreement,  ICR receives or makes  monthly  payments on 3,000,000  notional
gallons  based on the excess of the  Contract  Price over $.60 per gallon or the
deficiency of the Contract Price under $.4825 to .4690 per gallon.

8.      Leases

        As of December  31,  1997,  ICR leased 7,423 and 132 of its freight cars
and locomotives,  respectively. These leases expire between 1998 and 2007. Under
the terms of many of its lease agreements, ICR has the right of first refusal to
purchase, at the end of the lease term, certain cars and locomotives at or below
fair market value.  ICR also leases office  facilities,  computer  equipment and
vehicles.

        Net  obligations  under  capital  leases at December  31, 1997 and 1996,
included  in the  Consolidated  Balance  Sheets  were  $15.7  million  and $14.4
million,  respectively.  The gross  assets under  capitalized  leases were $32.6
million and $30.0 million at December 31, 1997 and 1996,  respectively,  and are
included in properties in the Consolidated Balance Sheets.



<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

         At  December  31,  1997,  minimum  rental  payments  under  capital and
operating leases that have initial or remaining  noncancellable  terms in excess
of one year were as follows ($ in millions):

                                                 Capital      Operating
                                                 Leases        Leases

1998...................................          $ 3.7          $ 38.2
1999...................................            3.7            33.3
2000...................................            3.2            19.2
2001...................................            3.0            16.9
2002...................................            2.3            15.3
Thereafter.............................            4.6            76.9
                                                 -----          ------
    Total minimum lease payments.......          $20.5          $199.8
                                                                ======

Less: Imputed interest.................            4.8
                                                ------
    Present value of minimum payments..          $15.7
                                                ======

        Total  rent  expense  applicable  to  noncancellable   operating  leases
amounted to $32.6  million in 1997,  $38.8  million in 1996 and $32.4 million in
1995. Most of the leases provide that ICR pay taxes, maintenance,  insurance and
certain other operating expenses.

9.      Long-Term Debt and Interest Expense

        Long-term  debt  at  December  31,  consisted  of  the  following  ($ in
millions):

                                                                   1997    1996

Equipment obligations, due annually to 2007, 6.11% to 7.7%.... $     .9  $   -
Debentures and other debt, due 1998 to 2056, 4.5% to 5.0%.....      9.6     9.9
Debentures, due 2096, 7.7%....................................    125.0   125.0
Commercial paper, at average interest rate 5.67 in 1997 
and 5.61% in 1996                                                    -     20.0
Notes, due 2003, 6.75%........................................    100.0   100.0
Notes, due 2005, 7.75%........................................    100.0   100.0
Medium term notes, due 1998 to 2007, 6.72% to 7.12%...........    210.0   230.0
Capitalized leases (see Note 8)...............................     13.2    11.9
Unamortized discount, net ...................................     (6.3)    (6.5)
                                                                -------  -------

             Total long-term debt.............................   $552.4  $590.3
                                                                 ======  ======

        At December 31, 1997, the aggregate  annual  maturities and sinking fund
requirements  for debt payments for 1998 through 2003 and thereafter  were $22.7
million,  $32.8 million,  $32.4 million,  $102.5 million,  $2.0 million,  $101.2
million and $281.5 million, respectively. The weighted-average interest rate for
1997 and 1996 on total debt  excluding  the effect of  discounts,  premiums  and
related amortization was 7.1% and 7.1%, respectively.



<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

        In December 1996, ICR issued $125 million  aggregate amount of 100-year,
7.7%  debentures  due September 15, 2096.  These bonds may not be redeemed until
2026 and then only at a premium which declines to par in 2056.

        In 1995,  ICR prepaid the holders of its $160  million  Senior  Notes at
face value plus accrued  interest and a prepayment  penalty.  The monies used to
fund the prepayment were provided by commercial  paper,  the net proceeds of the
$100 million  7.75%  10-year  notes due May 2005 and $40 million  from  existing
lines of credit.

        ICR has a commercial  paper program  whereby a total of $200 million can
be issued and  outstanding  at any one time.  The program is supported by a $250
million Revolver. (the "ICR Revolver"). See below.

        The $250 million ICR Revolver expires in 2001. ICR pays an annual fee of
15 basis points on the ICR Revolver  and the  Eurodollar  offered rate plus 22.5
basis  points for any  borrowings.  The ICR  Revolver  may be used as backup for
commercial  paper and for general  corporate  purposes.  The available amount is
reduced by the outstanding amount of commercial paper borrowings and any letters
of credit issued on behalf of ICR under the  facility.  As of December 31, 1997,
no  amounts  were drawn  under the ICR  Revolver  and no letters of credit  were
issued.

        Various  borrowings  of ICR's  subsidiaries  are governed by  agreements
which  contain  certain   affirmative  and  negative  covenants   customary  for
facilities of this nature  including  restrictions  on additional  indebtedness,
investments,  guarantees, liens, distributions,  sales and leasebacks, and sales
of assets and capital stock. Some also require satisfaction of certain financial
tests,  including a leverage  ratio,  an earnings  before  interest and taxes to
interest   charges   ratio,   and  minimum   consolidated   tangible  net  worth
requirements. See Note 13.

        Interest expense, net consisted of the following ($ in millions):

                                                Years Ended December 31,
                                            1997          1996         1995
                                            ----          ----         ----

Interest expense........................   $43.1          $34.3        $30.4
Less:
   Interest capitalized ................     1.5            1.7          1.3
   Interest income......................    13.4            6.1          2.8
                                          ------        -------      -------
Interest expense, net...................   $28.2          $26.5        $26.3
                                           =====          =====        =====

10.     Receivables

         ICR had entered into a revolving  agreement,  which was  terminated  on
January  8,  1998,  to sell  undivided  percentage  interests  in certain of its
accounts receivable,  with recourse, to a financial  institution.  The agreement
allowed for sales of accounts  receivable  up to a maximum of $50 million at any
one time.  At December  31,  1997,  $45  million  had been sold  pursuant to the
agreement.  Costs related to the agreement fluctuated with changes in prevailing
interest rates. These costs, which are included in other income (expense),  net,
were $3.0  million,  $2.9  million  and $3.2  million  for  1997,  1996 and 1995
respectively.

11.     Benefit Plans

        All  employees of ICR are covered under the Railroad  Retirement  System
instead   of  Social   Security.   Additionally,   various   retirement   plans,
postemployment benefits and postretirement benefits are provided.

        Retirement Plans.

        ICR has two qualified  plans  permitting  participants to make "pre-tax"
contributions  of their salary up to Internal  Revenue Code limitations and each
contains  a company  match  provision.  The ICR union  plan,  which  started  in
mid-1995, allows union employees covered by local contracts to participate.  ICR
matches 25% of the first 4% of salary  deferral.  The  management  employee plan
matches  50% of the  first 6% of  salary  deferral.  The  management  plan  also
contains  a  separate  defined  contribution  portion  of 2% of each  employee's
salary. Expenses related to both plans were $1.5 million, $1.2 million, and $1.1
million in 1997, 1996 and 1995,  respectively.  All ICR  contributions are fully
vested upon contribution.

        ICR also has a  supplemental  executive  retirement  plan ("SERP") which
covers officers and certain other management employees.  The SERP provides for a
monthly  benefit equal to 35% of a participant's  final average  compensation as
defined in the plan. The monthly  benefit is subject to offsets such as employer
contributions to the 401(k) plan. The plan was adopted in 1994. The cost was not
material in the three years ended December 31, 1997.

        Salary  Deferral Plans. In addition to the 401(k) plan, all officers and
certain other  management  employees may elect to defer up to 50% of base salary
and 100% of  annual  bonus.  Participant  deferrals  are fully  vested  and earn
interest at a specified,  variable rate. Approximately $.3 million, $1.1 million
and $.5 million were deferred in 1997, 1996 and 1995, respectively.

        Unfunded  Plan.  ICR has an unfunded  plan  whereby 10% of an  officer's
combined  salary and bonus in excess of a wage offset factor  ($109,000 in 1997)
is accrued and earns interest at a specified, variable rate. Amounts accrued are
paid when the employee leaves the Company, normally at retirement.  Expenses for
this plan were $.4 million in each of 1997, 1996 and 1995.

        Postemployment   Benefit  Plans.  ICR  provides  certain  postemployment
benefits such as long-term  salary  continuation  and waiver of medical and life
insurance co-payments while on long-term disability.

         Postretirement  Plans. In addition to retirement  plans,  ICR has three
benefit  plans  which  provide  some  postretirement  benefits  to  most  former
full-time salaried  employees and selected former union- represented  employees.
The  medical  plan  for  salaried   retirees  is   contributory,   with  retiree
contributions  adjusted annually if expected medical cost inflation rate exceeds
9.5%,  and  contains  other  cost  sharing  features  such  as  deductibles  and
co-payments.  ICR's contribution will be fixed at the 1999 year end rate for all
subsequent  years.  Salaried retirees are covered by a life insurance plan which
provides a nominal death benefit and is  non-contributory.  The medical plan for
locomotive  engineers who retired under a special  early  retirement  program in
1987 provides  non-contributory  coverage  until age 65. All benefits under this
plan terminate in 1998. There are no plan assets and ICR funds these benefits as
claims are paid.

        The  accumulated  postretirement  benefit  obligations  ("APBO")  of the
postretirement plans were as follows ($ in millions):

                                                             December 31,
                                                          1997             1996
                                                   ---------------------   ----
                                                   Medical  Life   Total  Total
Accumulated postretirement benefit obligation:
        Retirees.................................   $12.6   $2.1   $14.7  $15.1
        Fully eligible active
          plan participants   ...................      .7      -      .7     .7
        Other active plan participants...........     3.9      -     3.9    3.3
                                                  -------   -----   ----    ----
                  Total APBO.....................   $17.2   $2.1    19.3    19.1
                                                    =====   ====

        Unrecognized net gain....................                   16.5   18.3
                                                                    ----   -----
        Accrued liability for
        postretirement benefits..................                  $35.8   $37.4
                                                                   =====  =====

        The  weighted-average  discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% at December 31, 1996. As a result of
the change in general  interest rates on high quality fixed rate  investments in
1997, ICR decreased the  weighted-average  discount rate to 7.25% as of December
31, 1997. The change in rates resulted in  approximately  $.7 million  actuarial
loss.  The  actuarial  gains and losses  along  with  actual  experience  gains,
primarily  fewer claims and lower  medical rate  inflation,  resulted in a total
$16.5 million  unrecognized net gain as of December 31, 1997. In accordance with
SFAS No. 106,  the excess gain is subject to $1.1  million  annual  amortization
based on an amortization period of approximately 13 years. The components of the
net periodic postretirement benefits cost were as follows ($ in millions):

                                                     Years Ending December 31,
                                                     1997               1996
                                                    -----              -----
Service costs..........................            $  .2            $    .1
Interest costs.........................              1.3                1.4
Net amortization of excess gain........             (1.1)              (1.2)
                                                   ------            ------
Net periodic postretirement
  benefit costs........................            $  .4            $    .3
                                                   =====            =======

         The weighted-average  annual assumed rate of increase in the per capita
cost of covered  benefits  (e.g.,  health  care cost trend rate) for the medical
plans is 10.0% for 1998 and is assumed to  decrease  gradually  to 6.25% by 2002
and remain at that level thereafter.  The health care cost trend rate assumption
normally has a significant  effect on the amounts  reported;  however,  the plan
limits  annual  inflation  for ICR's portion of such costs to 9.5% each year and
caps ICR's contribution at the actual 1999 level.  Therefore, an increase in the
assumed health care cost trend rates by one percentage  point in each year would
have no impact on ICR's accumulated  postretirement  benefit  obligation for the
medical  plans as of December  31,  1997,  or the  aggregate  of the service and
interest  cost  components  of net periodic  postretirement  benefit  expense in
future years.

12.     Provision for Income Taxes

        The Provision for Income Taxes for  continuing  operations  consisted of
the following ($ in millions):

                                                Years Ended December 31,
                                           1997            1996           1995
                                           ----            ----           ----
Current income tax:
  Federal...............................   $27.1          $39.9         $38.1
  State.................................     3.1            4.9           4.5
Deferred income taxes...................    39.9           31.5          24.5
                                          ------         ------         -----
Provision for income taxes..............   $70.1          $76.3         $67.1
                                           =====          =====         =====

         The effective  income tax rates for the years ended  December 31, 1997,
1996 and  1995,  were  34%,  38% and 34%,  respectively.  See Note 4 for the tax
benefits associated with the 1995 extraordinary loss.

         At December 31, 1997, ICR for tax or financial  reporting  purposes had
no Federal net operating loss carryovers.

         In 1996  and 1995  tax  benefits  of $1.8  million  and  $4.3  million,
respectively,  were recorded to reflect the favorable resolution of prior-period
tax issues.

         The items  which gave rise to  differences  between  the  income  taxes
provided for continuing operations in the Consolidated  Statements of Income and
the income  taxes  computed at the  statutory  rate are  summarized  below ($ in
millions):

                                           Years Ended December 31,
                                      1997              1996           1995
                                --------------      -------------   -----------
Expected tax expense computed
 at statutory rate............. $72.2      35%     $71.0      35%   $69.4    35%
Dividends received exclusion...   (.2)      -        (.1)      -      (.1)    -
State income taxes, net
 of federal tax effect.........   5.5       3        5.9       3      5.4     3
Charitable contribution of
 property......................  (4.1)     (2)         -       -        -     -
Favorable resolution of
 prior period tax issues.......     -       -       (1.8)     (1)    (4.3)   (2)
Other items, net...............  (3.3)     (2)       1.3       1     (3.3)   (2)
                                ------    ----      -------  ----   ------  ----
Provision for income taxes..... $70.1      34%      $76.3     38%   $67.1    34%
                                =====      ===      =====    ====   =====    ===



<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

         Temporary differences between book and tax income arise because the tax
laws  require that  certain  items of income and expense be treated  differently
than under  generally  accepted  accounting  principles.  As a result,  the book
provisions  for taxes  differ from the actual  taxes  reported on the income tax
returns.  The net results of such  differences  are included in deferred  income
taxes in the Consolidated Balance Sheets.

         Deferred income taxes consisted of the following ($ in millions):

                                                     December 31,
                                            1997                      1996
                                            ----                      ----

Deferred tax assets..................   $   66.8                  $   71.7
Less: Valuation allowance............       (1.5)                     (1.5)
                                        ---------                  --------
Deferred tax assets,
    net of valuation allowance.......       65.3                      70.2
Deferred tax liabilities.............     (350.7)                   (315.6)
                                        ---------                  --------
Deferred income taxes................    $(285.4)                  $(245.4)
                                         ========                  ========

         The  valuation  allowance  is comprised of the portion of state tax net
operating  loss  carryforwards  expected to expire  before they are utilized and
non-deductible  expenses  incurred  with the  previous  merger  of  wholly-owned
subsidiaries.

         Major types of deferred  tax assets are:  reserves not yet deducted for
tax purposes ($56.0 million) and safe harbor leases ($10.2 million). Major types
of deferred tax liabilities are: accelerated depreciation ($324.4 million), land
basis differences ($10.7 million) and debt marked to market ($2.1 million).

         The Company and its subsidiaries  have a tax sharing  agreement whereby
each  subsidiary's  federal  income  tax and state  income tax  liabilities  are
determined on a separate  company income tax basis as if it were not a member of
the Company's  consolidated  group,  with no benefit for net operating losses or
credit carryovers from prior years.

13.     Equity and Restrictions on Dividends

        ICR paid dividends to the  Corporation of $62.9 million in 1997,  $103.2
million in 1996 and $107.7 million in 1995.  Certain covenants of ICR's Revolver
require  specific  levels of  tangible  net worth  but not a  specific  dividend
restriction.  At December  31,  1997,  ICR's  tangible  net worth  exceeded  the
required level by  approximately  $32.0 million.  In January and March 1998, ICR
declared and paid a dividend of $19.0 and $15.6  million,  respectively,  to the
Corporation.

        For the year ended  December 31, 1995,  the  Corporation  made a capital
contribution of $.5 million to ICR which was equivalent to the vested portion of
the restricted the Corporation common stock granted to various ICR employees.


<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


14.      Stock Based Compensation

         The  Corporation  grants  stock  options to  employees of ICR under the
Corporation's  1990  Long- Term  Incentive  Plan and the  employees  of ICR also
participate in two stock purchase plans to acquire the Corporation Common Stock.
ICR  accounts  for these plans under APB Opinion 25 under which no  compensation
cost has been recognized.

         Under the  Corporation  1990 Long-Term  Incentive Plan employees of ICR
can receive incentive options, award stock appreciation rights, restricted stock
and restricted stock units,  dividend  equivalents and other stock-based awards.
The exercise  price of an option to  employees is limited to fair market  value.
Awards, vest ratably over four years and expire 10 years from date of grant.

         In 1994,  an employee of ICR was awarded  22,500  shares of  restricted
stock. No cash payments are required by the individuals.  Shares awarded may not
be sold,  transferred,  or used as  collateral  by the holders  until the shares
awarded  become free of the  restrictions.  Restrictions  lapse over a four-year
period.  All shares still subject to restrictions will be forfeited and returned
to the plan if the employee's  relationship  with ICR is  terminated.  No shares
were forfeited in 1996. A total of 4,125 shares and 150 shares were forfeited in
1995 and 1994,  respectively.  If the employee becomes  disabled,  or dies, or a
change in control occurs during the vesting period,  the  restrictions  lapse at
that time. In connection with early  retirements,  43 and 7,632 shares vested in
1996 and 1995,  respectively.  The compensation expense resulting from the award
of restricted  stock is valued at the closing market price of the  Corporation's
Common Stock on the date of the award,  recorded as a reduction of Stockholder's
Equity,  and charged to expense  evenly over the  vesting  period.  Compensation
expense, recorded by ICR, was $.2 million, $.8 million and $1.2 million in 1997,
1996 and 1995, respectively.

         The Corporation has two stock purchase  programs.  The basic program is
open to all ICR  employees  and permits them to acquire the  Corporation  common
stock via payroll  deductions.  The other plan is the Discounted  Stock Purchase
Plan  ("Discounted  Plan").  Only  ICR  management  employees  are  eligible  to
participate  in the  Discounted  Plan which provides for the investment of up to
15% of an eligible employee's salary in the common stock of the Corporation at a
15% discount. A participant must continue employment with the Corporation or its
subsidiaries for two years to retain the 15% discount,  and, during that period,
the shares will be held by the plan's  administrator.  If the employee withdraws
shares or directs  the sale of shares  within two years,  the  discount  must be
repaid in cash or  relinquished  shares.  No such  repayment  is required in the
event of death, retirement,  disability or change of control of the Corporation.
Costs associated with these programs have been immaterial to date.


<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



         The following table summarizes  changes in shares under options,  after
giving effect to the 3-for- 2 stock split declared by the Corporation in January
1996:

                                      Weighted  Weighted                Weighted
                                      Average   Average Fair            Average
                                      Exercise  Value On   Exercisable  Exercise
                         Options      Price     Grant Date At Year End   Price

Outstanding 12-31-94     780,000     $18.790                195,000     $18.790
                                                            =======     =======
Granted                  515,024      23.167     $9.109
                                                 ======
Forfeited (a)           (11,250)      20.833
                        --------   
Outstanding 12-31-95  1,283,774       20.528                531,131     $19.886
                                                            =======     =======
Granted                 530,250       25.250     $9.016
                                                 ======
Exercised (b)            (4,125)      21.257
Forfeited (c)            (3,375)      22.389
                      ----------  
Outstanding 12-31-9   1,806,524       21.909                961,105     $20.821
                                                            =======     =======
Granted                 476,050       34.125     $12.888
                                                 =======
Exercised (d)          (277,872)      18.193
Forfeited               (19,200)      24.713
                     -----------  
Outstanding 12-31-97  1,985,502                            1,248,872    $23.050
                      =========                            =========    =======



(a)      Pre-1995 option awards
(b)      Includes 3,375 pre-1995 option awards
(c)      Includes 1,125 pre-1995 option awards
(d)      Includes 232,498 pre-1995 option awards

         The last date exercisable for options above is March 13, 2007.

         Had ICR adopted the compensation  cost recognition  methods outlined in
FASB Statement No. 123 "Accounting for Stock-Based  Compensation " ("SFAS 123"),
ICR's 1997, 1996 and 1995 net income would have been as follows - on a pro forma
basis - ($ in millions):

                            1997               1996                1995
                       As       Pro       As        Pro        As        Pro
                   Reported     Forma  Reported     Forma   Reported    Forma
                                    
Income before Extra-
 ordinary Item       $136.2    $134.0   $126.6     $125.4    $131.2     $130.7
Net Income           $136.2    $134.0   $126.6     $125.4    $119.8     $119.3



<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

        Because the SFAS No. 123 method of  accounting  has not been  applied to
options  granted prior to January 1, 1995, the resulting pro forma  compensation
cost may not be representative of that to be expected in future years.

        Of the options outstanding at December 31, 1997, 1,248,872 have exercise
prices between $16.583 and $34.125,  with a weighted  average  exercise price of
$23.050,  a weighted average  remaining  contractual life of 8 years and all are
exercisable.  The remaining  736,630 options,  which are not  exercisable,  have
exercise  prices  between  $23.167 and $34.125 with a weighted  average price of
$29.198 and a weighted average remaining contractual life of 8 years.

        The fair value of each option is  estimated  on the grant date using the
Black-Scholes   option  pricing  models  with  the  following   weighted-average
assumptions:

                                1997      1996        1995
                                ----      ----        ----

Risk-free interest rate(s)      6.7%      6.7%         7.2%
Dividend yields                 2.7%      3.2%         2.9%
Days to expiration              3652      3652         3652
Volatility                    30.18%     31.4%        33.1%

15.      Contingencies, Commitments and Concentration of Risks

         ICR is self-insured  for the first $5 million of each loss. ICR carries
$245 million of liability insurance per occurrence,  subject to an annual cap of
$385 million in the  aggregate  for all losses.  This  coverage is considered by
ICR's  management  to be  adequate  in light of ICR's  safety  record and claims
experience.

         ICR has guaranteed repayment of certain indebtedness of a jointly owned
company aggregating $7.8 million.  ICR's share of the guarantee is $1.0 million;
the remainder is the obligation of other unrelated owner companies.

         ICR is one of several defendants in a New Orleans class action in which
a jury has  returned a verdict  against  the ICR for $125  million  in  punitive
damages as a result of a tank car fire. The Louisiana  Supreme Court has vacated
the judgment  and remanded the case to the trial court for further  proceedings.
ICR  believes  the verdict has no basis and intends to continue to  challenge it
vigorously.  While the final outcome of this proceeding cannot be determined, in
the opinion of management, based on present information, the ultimate resolution
of this  case  will not  have a  material  adverse  effect  on  ICR's  financial
position, results of operations, cash flow or liquidity.

         There are other various regulatory  proceedings,  claims and litigation
pending  against  ICR.  While the ultimate  amount of liability  that may result
cannot be  determined,  in the  opinion  of ICR's  management,  based on present
information, adequate provisions for liabilities have been recorded.

         Environmental   Contingencies.   ICR  is  aware  of   approximately  22
contaminated  sites at which  it is  probably  liable  for some  portion  of any
required clean up. Of these, 14 involve  contamination  primarily by diesel fuel
which can be remediated  without material cost. Five other sites are expected to
require  more than $1 million in clean-up  costs.  At three of these sites other
parties are  expected  to  contribute  the  majority  of the  remediation  costs
incurred.

         For all known sites of  environmental  contamination  where ICR loss or
liability is probable,  ICR has recorded an estimated liability at the time when
a  reasonable  estimate  of  remediation  cost and ICR  liability  can  first be
determined.  Adjustments  to initial  estimates are recorded as necessary  based
upon additional information developed in subsequent periods.  Estimates of ICR`s
potential   financial  exposure  for  environmental   claims  or  incidents  are
necessarily  imprecise  because of the  difficulty of determining in advance the
nature and extent of contamination,  the varying costs of alternative methods of
remediation,  the regulatory  clean-up standards which will be applied,  and the
appropriate  allocation of liability  among  multiple  responsible  parties.  At
December 31, 1997,  ICR estimated the probable range of its liability to be $9.1
million to $45 million,  and in accordance with the provisions of SFAS No. 5 had
a reserve of $9.1 million for  environmental  contingencies.  This amount is not
reduced for potential insurance recoveries or third-party contributions.

         The risk of incurring  environmental  liability in connection with both
past and current  activities  is inherent  in railroad  operations.  Decades-old
railroad  housekeeping  practices were not always  consistent with  contemporary
standards. Historically ICR leased substantial amounts of property to industrial
tenants,  and ICR  continues to haul  hazardous  materials  which are subject to
occasional  accidental release.  Because the ultimate cost of known contaminated
sites cannot be  definitively  established and because  additional  contaminated
sites  yet  unknown  may be  discovered  or  future  operations  may  result  in
accidental releases,  no assurance can be given that ICR will not incur material
environmental  liabilities in the future.  However,  based on its assessments of
the facts and circumstances now known,  management believes that it has recorded
adequate reserves for known liabilities and does not expect future environmental
charges or expenditures, based on these known facts and circumstances, to have a
material adverse effect on ICR`s financial position, results of operations, cash
flow or liquidity.

16.      Disclosures about Fair Value of Financial Instruments

         The following  methods and  assumptions  were used to estimate the fair
value of each class of  financial  instruments  for which it is  practicable  to
estimate that value:

         Cash and Temporary Cash Investments.  The carrying amount  approximates
fair value because of the short  maturity of those  instruments.  Investments in
U.S.  corporate demand notes of $25.4 million and $43.6 million included in cash
and temporary cash  investments as of December 31, 1997 and 1996,  respectively,
have been classified and accounted for as held to maturity securities.

         Investments.  ICR has  investments  of $5.2  million  in 1997  and $5.9
million in 1996 for which there are no quoted market prices.  These  investments
are in joint railroad  facilities,  railroad  terminal  associations,  switching
railroads  and  other  transportation  companies.  For  these  investments,  the
carrying  amount  is a  reasonable  estimate  of  fair  value.  ICR's  remaining
investments ($6.9 million in 1997 and $5.8 million in 1996) are accounted for by
the equity method.

         Loans to Affiliates.  See Note 17


<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

         Long-Term  Debt.  The fair value of ICR's  long-term  debt is estimated
based on the  quoted  market  prices  for the same or  similar  issues or on the
current rates offered to ICR for debt of the same remaining maturities.

         Derivative Financial Instruments.  The fair value of diesel fuel collar
agreements  is the  estimated  amount that ICR would receive or pay to terminate
the agreements as of year end, taking into account the current credit worthiness
of the agreement counterparties.

         The estimated fair values of ICR's financial instruments are as follows
($ in millions):

                                                    December 31,
                                             1997                    1996
                                       ------------------     -----------------

                                        Carrying   Fair     Carrying       Fair
                                         Amount    Value     Amount        Value

Cash and temporary cash investments    $ 28.2    $ 28.2   $   46.3    $    59.2
Investments...........................    5.2       5.2        5.9          5.9
Fuel Hedge............................      -       (.5)         -           .1
Loans to affiliates - short-term......    4.9       4.9       14.9         14.9
Loans to affiliates - long-term.......  160.9     160.9      138.2        138.2
Debt.................................. (575.1)   (604.3)    (593.1)      (586.6)


<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



17.     Related Party Transactions and Intercompany Advances

        The Corporation and its subsidiaries  maximize the consolidated  group's
borrowing  power and minimize the group's  interest costs. If an entity requires
funds for operations or capital  expenditures,  the lowest cost source  provides
the cash.  The company that needs the funds pays  interest at the borrowed  rate
with no mark up or add-on fees.

        The amounts outstanding at December 31, consisted of the following ($ in
millions):

                                          1997                      1996
                                          ----                     ----
Advance due from:
       -   CCPH                        $    -                    $  4.4
       -   IC                               -                        -
Loans due from:
       -   IC Financial Services           1.4                      1.5
       -   IC Leasing III                  3.5                      9.0
                                       -------                   ------
Total Short-Term Intercompany          $   4.9                   $ 14.9
                                       =======                   =======

Advances due from:
           IC                          $156.3                    $112.9
Loans due from:
           IC Financial Services          4.6                      22.5
           IC Leasing III                   -                       2.8
                                       ------                   --------
Total Long-Term Intercompany           $160.9                    $138.2
                                       ======                   =======

       In 1997, the amount due from the Corporation  includes $39.8 million used
to fund construction  costs for IC RailMarine  Terminal Company, a subsidiary of
the Corporation.  Amounts due from the Corporation  bears interest at prime rate
minus 2.3%. In 1996, the amount due from the Corporation  includes $59.9 million
used to acquire CCPH and $25 million used by The  Corporation to repay a portion
of CCPH's revolver.  Because of the nature of the assets acquired these advances
are considered  long-term.  The loan to IC Financial Services is due in 1999 and
bears interest at LIBOR + 50 basis points.  The loan to IC Leasing III is due in
1998 and bears interest at LIBOR +.625%.

       Interest  paid to ICR for  1997  and  1996  was  $11.6  million  and $5.3
million, respectively.



<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

18.    Selected Quarterly Financial Data - (Unaudited) ($ in millions, except 
       share data):

                                     First     Second      Third      Fourth
1997                                Quarter    Quarter    Quarter     Quarter
----                               -------     -------    -------     -------

Revenues.........................  $154.2      $147.9      $152.9     $167.5
Operating income.................    57.7        56.1        52.4       61.7
Net income.......................    31.9        32.9        30.8       40.6

1996

Revenues.........................  $162.6       $149.4     $150.8     $154.4
Operating income.................    57.8         52.3       54.9       54.5
Net income.......................    30.2         29.5       30.2       36.7

1995

Revenues.........................  $168.0       $156.5     $161.3     $159.5
Operating income.................    61.1         54.2       51.4       55.2
Income before extraordinary
 item, net.......................    34.2         29.8       28.8       38.4
Net income.......................    34.2         18.4       28.8       38.4


<PAGE>









                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES








                                  F O R M 10-K




                          FINANCIAL STATEMENT SCHEDULES

                       SUBMITTED IN RESPONSE TO ITEM 14(a)


                                     <PAGE>







                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES









                                    I N D E X

                                       T O
                          FINANCIAL STATEMENT SCHEDULES
                       SUBMITTED IN RESPONSE TO ITEM 14(a)




Schedules for the three years ended December 31, 1996:

         II-Valuation and qualifying accounts...........................F-27

Pursuant to Rule 5.04 of General  Rules of Regulation  S-X, all other  schedules
are omitted because they are not required or because the required information is
set forth in the financial statements or related notes thereto.








<PAGE>



                       ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                ($ in millions)

   Year Ended December 31, 1997

                                     Balance At  Additions  Payments   Balance
                                      Beginning   Charged     And       At End
           Classification              of Year   To Expense (Charges)   Of Year
   Accrued redundancy reserve..........$ 30.2    $   1.1    $   2.8    $  28.5
   Casualty and other reserves.......... 43.7        7.1       12.9       37.9
   Environmental........................ 17.1        2.1       10.1        9.1
   Bad debt reserve.....................  1.3        1.6        2.0        0.9
   Taxes................................  1.5        -          -          1.5
         Total.........................$ 93.8    $  11.9    $  27.8    $  77.9


    Year Ended December 31, 1996


                                        Balance At Additions  Payments  Balance
                                        Beginning   Charged     And      At End
           Classification               Of Year    To Expense (Charges) Of Year
   Accrued redundancy reserve..........$ 33.9    $   2.1    $   5.8    $  30.2
   Casualty and other reserves.......... 55.7        8.8       20.8       43.7
   Environmental........................ 12.9        1.9       (2.3)      17.1
   Bad debt reserve.....................  2.0        1.8        2.5        1.3
   Taxes................................  1.8        -          0.3        1.5
         Total.........................$106.3    $  14.6    $  27.1    $  93.8


    Year Ended December 31, 1995


                                        Balance At Additions  Payments  Balance
                                        Beginning  Charged     And      At End
           Classification               Of Year    To Expense (Charges) Of Year
   Accrued redundancy reserve..........$ 38.2    $   3.0    $   7.3    $  33.9
   Casualty and other reserves.......... 61.7       14.3       20.3       55.7
   Environmental........................ 13.3        5.3        5.7       12.9
   Bad debt reserve.....................  2.1        1.9        2.0        2.0
   Taxes................................  1.8        -          -          1.8
         Total.........................$117.1    $  24.5    $  35.3    $ 106.3





<PAGE>





                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES

                                  EXHIBIT INDEX

Exhibit                                                             Sequential
  No.                            Descriptions                        Page No.


     3.1       Articles  of  Incorporation  of  Illinois
               Central  Railroad  Company,  as  amended.
               (Incorporated by reference to Exhibit 3.1
               to the Registration Statement of Illinois
               Central  Railroad  Company  on  Form  S-1
               dated as of September 26, 1989. (SEC File
               No. 33- 29269))

     3.2       By-Laws  of  Illinois   Central  Railroad
               Company,  as  amended.  (Incorporated  by
               reference   to   Exhibit   3.2   to   the
               Registration    Statement   of   Illinois
               Central  Railroad  Company  on  Form  S-1
               dated as of September 26, 1989. (SEC File
               No. 33-29269))

     3.3       Restated  Articles  of  Incorporation  of
               Illinois       Central       Corporation.
               (Incorporated by reference to Exhibit 3.1
               to the  Current  Report  of the  Illinois
               Central  Corporation  on Form  8-K  dated
               July 29, 1994. (SEC File No. 1-10720))

     3.4       By-Laws of Illinois Central  Corporation,
               as amended. (Incorporated by reference to
               Exhibit 3.4 to the Registration Statement
               of  Illinois   Central   Corporation  and
               Illinois Central Railroad Company on Form
               S-1 dated as of  August  21,  1990.  (SEC
               File Nos. 33-36321 and 33- 36321-01))

     3.5       Certificate  of  Retirement  of  Illinois
               Central   Corporation   (Incorporated  by
               reference   to   Exhibit   3.3   to   the
               Registration    Statement   of   Illinois
               Central  Corporation and Illinois Central
               Railroad  Company on Form S-1, as amended
               dated as of August  21,  1990.  (SEC File
               No.    33-40696    and     Post-Effective
               Amendments to Registration Statement Nos.
               33-36321 and 33- 36321-01))

     3.6       By-Laws  of  Illinois   Central  Railroad
               Company,  as  amended.  (Incorporated  by
               reference  to Exhibit 3 to the  Quarterly
               Report of the Illinois  Central  Railroad
               Company on Form 10-Q for the three months
               ended  June  30,  1997.   (SEC  File  No.
               1-07092))


* Used  herein  to  identify  management  contracts  or  compensation  plans  or
arrangements as required by Item 14 of Form 10-K.




<PAGE>



            ILLINOIS CENTRAL RAILROAD COMPANY
                    AND SUBSIDIARIES

                      EXHIBIT INDEX

Exhibit                                                          Sequential
  No.                   Descriptions                               Page No.


     4.1       Form  of  14-1/8%   Senior   Subordinated
               Debenture Indenture dated as of September
               15,   1989  (the   "Senior   Subordinated
               Debenture  Indenture")  between  Illinois
               Central   Railroad   Company  and  United
               States Trust Company of New York, Trustee
               (including  the  form of  14-1/8%  Senior
               Subordinated    Debenture   included   as
               Exhibit  A  therein).   (Incorporated  by
               reference   to   Exhibit   4.1   to   the
               Registration    Statement   of   Illinois
               Central  Railroad Company on Form S-1, as
               amended  dated as of September  26, 1989.
               (SEC File No. 33-29269))

     4.3       Form  of  Pledge  Agreement  dated  as of
               September  22,  1989,   and  amended  and
               restated  as  of  July  23,  1991,  among
               Illinois  Central   Corporation  and  the
               Banks  named  therein  that  are  or  may
               become   parties  to  the   Amended   and
               Restated  Revolving  Credit and Term Loan
               Agreement dated as of September 22, 1989,
               and amended  and  restated as of July 23,
               1991, among the Illinois Central Railroad
               Company and the Banks  named  therein and
               the  Senior  Note   Purchasers  that  are
               parties  to the Note  Purchase  Agreement
               dated as of July 23, 1991.  (Incorporated
               by   reference  to  Exhibit  4.4  to  the
               Quarterly   Report  of  Illinois  Central
               Corporation  on Form  10-Q for the  three
               months ended  September  30,  1991.  (SEC
               File No. 1-10720))

     4.4       Form of Note Purchase  Agreement dated as
               of July 23, 1991,  among Illinois Central
               Railroad Company, as issuer, and Illinois
               Central  Corporation,  as guarantor,  for
               10.02% Guaranteed Senior Secured Series A
               Notes due 1999 and for  10.4%  Guaranteed
               Senior  Secured  Series B Notes  due 2001
               (including  the Form of Series A Note and
               Series B Note  included as  Exhibits  A-1
               and    A-2,    respectively,    therein).
               (Incorporated by reference to Exhibit 4.3
               to the  Quarterly  Report of the Illinois
               Central Railroad Company on Form 10-Q for
               the  three  months  ended  September  30,
               1991. (SEC File No. 1-7092))

     4.10      Form of Commercial Paper Dealer Agreement
               between Illinois Central Railroad Company
               and Lehman  Commercial  Paper, Inc. dated
               as of November 19, 1993. (Incorporated by
               reference  to Exhibit  4.10 to the Annual
               Report  on Form  10-K for the year  ended
               December  31, 1993 for  Illinois  Central
               Railroad  Company  filed March 16,  1994.
               (SEC File No. 1-7092))



<PAGE>



            ILLINOIS CENTRAL RAILROAD COMPANY
                    AND SUBSIDIARIES

                      EXHIBIT INDEX

Exhibit                                                         Sequential
  No.                  Descriptions                              Page No.


     4.11      Form  of  Issuing   and   Paying   Agency
               Agreement   of   the   Illinois   Central
               Railroad    Company    related   to   the
               Commercial Paper Program between Illinois
               Central Railroad Company and Bank America
               National   Trust   Company  dated  as  of
               November 19, 1993,  (including  Exhibit A
               the Form of Certificated Commercial Paper
               Note included therein).  (Incorporated by
               reference  to Exhibit  4.11 to the Annual
               Report  on Form  10-K for the year  ended
               December  31, 1993 for  Illinois  Central
               Railroad  Company  filed March 16,  1994.
               (SEC File No. 1-7092))

     4.14      Toronto    Dominion   Credit    Agreement
               (Incorporated by reference to Exhibit 4.1
               to the  Quarterly  Report of the Illinois
               Central Railroad Company on Form 10-Q for
               the three  months  ended March 31,  1994.
               (SEC File No. 1-7092))

     4.15      Form of  Receivables  Purchase  Agreement
               dated  as  of  March  29,  1994,  between
               Illinois  Central  Railroad  Company  and
               Golden    Gate    Funding    Corporation.
               (Incorporated by reference to Exhibit 4.2
               to the  Quarterly  Report of the Illinois
               Central Railroad Company on Form 10-Q for
               the three  months  ended March 31,  1994.
               (SEC File No. 1-7092))

     4.17      Form of Note Purchase  Agreement dated as
               of May 1, 1993,  between Illinois Central
               Railroad  Company and The First  National
               Bank of Boston (Incorporated by reference
               to  Exhibit   4.1  to  the   Registration
               Statement  of Illinois  Central  Railroad
               Company  on  Form  S-3.   (SEC  File  No.
               33-61410))

     4.18      Form  of  Second   Amended  and  Restated
               Revolving  Credit  Agreement  dated as of
               April 2, 1993, amended and restated as of
               October 27, 1993 and further  amended and
               restated as of  November  1, 1994,  among
               Illinois Central Railroad Company and the
               Banks  named  therein   (Incorporated  by
               reference  to Exhibit  4.14 to the Annual
               Report  of  Illinois   Central   Railroad
               Company  on Form 10-K for the year  ended
               December  31,  1994.  (SEC  File  No.  1-
               7092))


<PAGE>



            ILLINOIS CENTRAL RAILROAD COMPANY
                    AND SUBSIDIARIES

                      EXHIBIT INDEX

Exhibit                                                           Sequential
  No.                 Descriptions                                  Page No.


     4.19      Form of Lease  Agreement dated as of July
               1, 1994,  between IC Leasing  Corporation
               III   and   Illinois   Central   Railroad
               Company.  (Incorporated  by  reference to
               Exhibit 4.10 to the Annual Report on Form
               10-K  for the  year  ended  December  31,
               1994, for the Illinois  Central  Railroad
               Company. (SEC File No. 1-7092))

     4.20      Form of Lease  Agreement dated as of July
               1, 1994  between IC  Leasing  Corporation
               III   and   Waterloo   Railway   Company.
               (Incorporated  by  reference  to  Exhibit
               4.11 to the  Annual  Report  on Form 10-K
               for the year ended December 31, 1994, for
               the Illinois  Central  Railroad  Company.
               (SEC File No. 1-7092))

     4.21      Form of  Options  Agreement  dated  as of
               July  1,   1994,   between   IC   Leasing
               Corporation  III  and  Illinois   Central
               Railroad   Company.    (Incorporated   by
               reference  to Exhibit  4.12 to the Annual
               Report  on Form  10-K for the year  ended
               December  31,  1994,   for  the  Illinois
               Central Railroad  Company.  (SEC File No.
               1-7092))

     4.22      Form of  Options  Agreement  dated  as of
               July  1,   1994,   between   IC   Leasing
               Corporation  III  and  Illinois   Central
               Railroad   Company.    (Incorporated   by
               reference  to Exhibit  4.13 to the Annual
               Report  on form  10-K for the year  ended
               December  31,  1994,   for  the  Illinois
               Central Railroad  Company.  (SEC File No.
               1-7092))

     4.23      Third  Amended  and  Restated   Revolving
               Credit Agreement between Illinois Central
               Railroad  Company  and  the  banks  named
               therein   dated  as  of  April  2,  1993,
               amended  and  restated  as of October 27,
               1993,  further amended and restated as of
               November 1, 1994 and further  amended and
               restated   as   of   April   28,    1995.
               (Incorporated by reference to Exhibit 4.1
               to  the  quarterly   report  of  Illinois
               Central Railroad Company in Form 10-Q for
               the three  months  ended  June 30,  1995.
               (SEC File No. 1-7092))

     4.24      Form of  Indenture  dated  as of April 1,
               1995 between  Illinois  Central  Railroad
               Company  and The First  National  Bank of
               Boston.  (Incorporated  by  reference  to
               Exhibit 4.1 to Registration  Statement on
               Form  S-3 of  Illinois  Central  Railroad
               Company  dated April 12, 1995.  (SEC File
               No. 33-58547))

     4.25      Form of Fixed Rate Medium-Term Note dated
               as  of  May  1,  1995  between   Illinois
               Central   Railroad   Company  and  Lehman
               Brothers Inc.


<PAGE>



            ILLINOIS CENTRAL RAILROAD COMPANY
                    AND SUBSIDIARIES

                      EXHIBIT INDEX

Exhibit                                                          Sequential
  No.              Descriptions                                   Page No.


               Salomon  Brothers,  Inc and Smith  Barney
               Inc.   (Incorporated   by   reference  to
               Exhibit  4.1 to  the  Current  Report  of
               Illinois Central Railroad Company of Form
               8-K  dated  May 2,  1995.  (SEC  File No.
               1-7092))

     4.26      Form of Floating Rate  Medium-Term  Notes
               dated as of May 1, 1995 between  Illinois
               Central   Railroad   Company  and  Lehman
               Brothers  Inc,  Salomon  Brothers Inc and
               Smith   Barney  Inc.   (Incorporated   by
               reference  to Exhibit  4.2 to the Current
               Report  of  Illinois   Central   Railroad
               Company  on Form 8-K dated  May 2,  1995.
               (SEC File No. 1-7092))

     4.27      Amendment  No.  1,  dated as of April 29,
               1996 to the Third  Amended  and  Restated
               Revolving   Credit   Agreement,   between
               Illinois Central Railroad Company and the
               First  National Bank of Boston  initially
               dated as of April 2,  1993,  amended  and
               restated  November  1, 1994,  and further
               amended  and  restated  as of  April  28,
               1995.   (Incorporated   by  reference  to
               Exhibit 4 to the Quarterly Report on Form
               10-Q for the quarter ended June 30, 1996,
               for the Illinois Central Railroad Company
               filed on August 13,  1996.  (SEC File No.
               1-7092))

     4.29      Form of  Indenture  between the  Illinois
               Central  Railroad  Company  and The Chase
               Manhattan  Bank,  N.A.,  dated as of July
               25, 1996.  (Incorporated  by reference to
               Exhibit  4.1 of Form S-3  dated as of May
               15,   1996  for  the   Illinois   Central
               Railroad Company. (SEC File No. 1-7092))

     4.30      Form of  Indenture  between the  Illinois
               Central  Railroad  Company  and The Chase
               Manhattan  Bank,  N.A.,  dated  as of May
               1996.   (Incorporated   by  reference  to
               Exhibit  4.2 of Form S-3  dated as of May
               15,   1996  for  the   Illinois   Central
               Railroad Company. (SEC File No. 1-7092))


<PAGE>



            ILLINOIS CENTRAL RAILROAD COMPANY
                    AND SUBSIDIARIES

                      EXHIBIT INDEX

Exhibit                                                           Sequential
  No.             Descriptions                                     Page No.


     4.31      Form of  Indenture  between the  Illinois
               Central  Railroad  Company  and The Chase
               Manhattan  Bank,  N.A.,  dated as of July
               25, 1996.  (Incorporated  by reference to
               Exhibit  4.1  of  Form  S-4  dated  as of
               December   18,  1996  for  the   Illinois
               Central Railroad  Company.  (SEC File No.
               1-7092))

     4.32      Form  of  First  Supplemental   Indenture
               between  the  Illinois  Central  Railroad
               Company  and The  Chase  Manhattan  Bank,
               N.A.  dated  as  of  December  17,  1996.
               (Incorporated by reference to Exhibit 4.2
               of Form S-4 dated as of December 18, 1996
               for   the   Illinois   Central   Railroad
               Company. (SEC File No. 1-7092))

     4.33      Form  of  Registration  Rights  Agreement
               among Illinois Central Railroad  Company,
               Lehman  Brothers Inc. And Merrill  Lynch,
               Pierce, Fenner & Smith Incorporated dated
               as of December 10, 1996. (Incorporated by
               reference  to  Exhibit  4.3 of  Form  S-4
               dated  as of  December  18,  1996 for the
               Illinois Central Railroad  Company.  (SEC
               File No. 1-7092))

     4.34      Form   of   fixed   and   floating   rate
               Medium-Term   Notes   Series  B  for  the
               Illinois   Central   Railroad    Company.
               (Incorporated by reference to Exhibit 4.3
               to the  current  report on Form 8-K dated
               as of July  29,  1996  for  the  Illinois
               Central Railroad Company (SEC File No. 1-
               7092))

     10.1      * Form  of  supplemental  retirement  and
               savings plan.  (Incorporated by reference
               to  Exhibit   10C  to  the   Registration
               Statement     of     Illinois     Central
               Transportation  Co.  on Form 10  filed on
               October 7, 1988,  as  amended.  (SEC File
               No. 1-10085))

     10.3      * Form  of  the  Corporation  1990  Stock
               Purchase Plan. (Incorporated by reference
               to  Exhibit  10.6  to  the   Registration
               Statement of Illinois Central Corporation
               on Form 10 filed on January  5, 1990,  as
               amended. (SEC File No. 1-10720))

     10.4      *  Form  of  the  Corporation   Long-Term
               Incentive  Option Plan.  (Incorporated by
               reference   to   Exhibit   10.17  to  the
               Registration    Statement   of   Illinois
               Central  Corporation and Illinois Central
               Railroad  Company on Form S-1 dated as of
               September   26,  1989.   (SEC  File  Nos.
               33-36321 and 33-36321-01))



<PAGE>



            ILLINOIS CENTRAL RAILROAD COMPANY
                    AND SUBSIDIARIES

                      EXHIBIT INDEX

Exhibit                                                             Sequential
  No.          Descriptions                                          Page No.


     10.5      *  Amendments  No.  1 and No. 2 to the IC
               Long-Term  Incentive Plan.  (Incorporated
               by  reference  to the Proxy  Statement of
               Illinois    Central     Corporation    in
               connection  with its 1992 Annual  Meeting
               of Stockholders. (SEC File No. 1-10720))

     10.6      Railroad   Locomotive   Lease   Agreement
               between  IC  Leasing  Corporation  I  and
               Illinois  Central  Railroad Company dated
               as of September 5, 1991. (Incorporated by
               reference  to Exhibit  10.9 to the Annual
               Report  on Form  10-K for the year  ended
               December   31,  1991  for  the   Illinois
               Central  Railroad Company filed March 12,
               1992. (SEC File No. 1-7092))

     10.7      Railroad   Locomotive   Lease   Agreement
               between  IC  Leasing  Corporation  II and
               Illinois  Central  Railroad Company dated
               as of January 14, 1993.  (Incorporated by
               reference  to Exhibit  10.6 to the Annual
               Report  on Form  10-K for the year  ended
               December  31,  1992,   for  the  Illinois
               Central  Railroad  Company filed March 5,
               1993. (SEC File No. 1-7092))

     10.13*    Form  of the  Illinois  Central  Railroad
               Company       Executive       Performance
               Compensation  Program   (Incorporated  by
               reference  to Exhibit  10.1 to the report
               on  Form  8-K  of  the  Illinois  Central
               Railroad  Company  dated  as of July  29,
               1994. (SEC File No. 1- 7092))

     10.14*    Form  of the  Illinois  Central  Railroad
               Company Supplemental Executive Retirement
               Plan   (Incorporated   by   reference  to
               Exhibit 10.2 to the report on Form 8-K of
               the  Illinois  Central  Railroad  Company
               dated as of July 29, 1994.  (SEC File No.
               1-7092))

     10.15*    Form  of the  Illinois  Central  Railroad
               Company Executive  Deferred  Compensation
               Plan   (Incorporated   by   reference  to
               Exhibit 10.3 to the report on Form 8-K of
               the  Illinois  Central  Railroad  Company
               dated as of July 29, 1994.  (SEC File No.
               1-7092))


<PAGE>



            ILLINOIS CENTRAL RAILROAD COMPANY
                    AND SUBSIDIARIES

                      EXHIBIT INDEX

Exhibit                                                          Sequential
  No.                  Descriptions                                Page No.


     10.16*    Form of Illinois Central Railroad Company
               Performance      Compensation     Program
               (Incorporated  by  reference  to  Exhibit
               10.4 to the  report  on  Form  8-K of the
               Illinois  Central  Railroad Company dated
               as  of  July  29,  1994.  (SEC  File  No.
               1-7092)

     10.17*    Illinois Central  Corporation  Management
               Employee  Discounted Stock Purchase Plan.
               (Incorporated  by  reference  to  Exhibit
               10.7  to  the  report  of  Form  10-K  of
               Illinois Central Corporation for the year
               ended  December 31,  1995.  (SEC File No.
               1-10720)

     10.18     Form of Illinois Central Railroad Company
               Union     Employees'     Savings    Plan.
               (Incorporated     by     reference     to
               Registration    Statement   of   Illinois
               Central  Corporation on Form S-8 dated as
               of  July   18,   1995.   (SEC   File  No.
               33-61095))

     10.20*    Form of Illinois Central Railroad Company
               Incentive  2000  Plan   (Incorporated  by
               reference to Exhibit 10 to the  Quarterly
               Report on Form 10-Q for the quarter ended
               March 31, 1996, for the Illinois  Central
               Railroad  Company  filed on May 10, 1996.
               (SEC File No. 1-7092))

     21        Subsidiaries  of Registrant                    (Included at E-9)

     23        Consent of Arthur Andersen LLP                               (A)

     27        Financial Data Schedule

     99        Provisions  of  the  Private   Securities
               Litigation Reform Act of 1995


  (A) Included herein but not reproduced.


<PAGE>




                                                          Exhibit 21


            ILLINOIS CENTRAL RAILROAD COMPANY
             Subsidiaries of the Registrant
                 as of December 31, 1997

Name                                                    Place of Incorporation

Subsidiaries that are 100% owned by 
Illinois Central Railroad Company:

Kensington and Eastern Railroad Company                          lllinois
Mississippi Valley Corporation                                   Delaware
Waterloo Railroad Company                                        Delaware




<PAGE>


                                                                 Exhibit 23



        CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

ILLINOIS CENTRAL RAILROAD COMPANY

    As independent public accountants, we hereby consent to the incorporation by
reference  of our report  dated  January 19, 1998  (except  with  respect to the
matter  discussed in Note 2, as to which the date is February 10, 1998) included
in the  Company's  Annual  Report on Form 10-K for the year ended  December  31,
1997,  into  Illinois  Central  Railroad  Company's  previously  filed  Form S-3
Registration Statements File Nos. 33-58547 and 333-03825.



                                                            ARTHUR ANDERSEN LLP





Chicago, Illinois
March 27, 1998



<PAGE>


                                                                   EXHIBIT 99




 PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The  Private  Securities  Litigation  Reform  Act of 1995  provides  a new "safe
harbor"  for  forward-looking  statements  to  encourage  companies  to  provide
prospective information about their companies without fear of litigation so long
as those  statements are identified as  forward-looking  and are  accompanied by
meaningful cautionary statements  identifying important factors that could cause
actual results to differ  materially from those projected in the statement.  ICR
desires to take  advantage of the new "safe  harbor"  provisions  of the Private
Securities  Litigation Reform Act of 1995 and is filing this exhibit in order to
do so. The Act became law in late December 1995 and no official  interpretations
of the Act's provisions have been published.  Accordingly, ICR hereby identifies
the following important factors which could cause ICR's actual financial results
to differ  materially from any such results which might be projected,  forecast,
estimated or budgeted by ICR in forward-looking statements.

Grain  traffic,   in  total,   is  subject  to  the  supply   domestically   and
internationally. A key factor affecting supply is the weather. Grain traffic for
export is further  impacted by changes in world supply and the  agricultural and
trade policies of both U.S. and foreign governments.

Coal  traffic   depends  on  stockpiles   and  weather  in  utilities'   service
territories.  Deregulation  in the  utility  industry  may  shift  coal  traffic
patterns and cause pressure on rail rates.

Chemical traffic and paper shipments are sensitive to the economic cycles. Other
forest products are also sensitive to industrial  production and housing starts.
Chemical traffic could be affected if other railroads decided to build new track
into our current service territories.

Market  realities  for new  ventures,  such as the  terminals,  may differ  from
assumptions    because   of   changes   in   the    economy    and   timing   of
construction/expansion.

Because ICR's mainline track parallels the Mississippi  River, barge competition
is  formidable.  Barge  rates  fluctuate  partially  based on water  levels  and
shipping conditions on the river.

The  merger  of SP and UP could  result  in the loss of the  haulage  moves  ICR
performs for the SP.

As to expenses,  the most volatile are labor costs and fuel. Negotiating locally
with the labor  unions  increases  the risk of a strike  and a strike may not be
averted via  governmental  intervention  as is  frequently  the case in national
labor disputes in the transportation industry.

The variability of fuel prices can be offset via hedging but hedging also brings
risk.

Finally, mergers in the railroad industry could create traffic diversions if the
new entity  routes  traffic  around ICR's routes or if it uses its size to block
shippers' routing options or pricing.



<PAGE>