<PAGE>





                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-Q


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

                  For the quarterly period ended June 30, 1998

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

     For the transition period from ________________ to ________________

                          Commission file number 1-9779

                             NIPSCO Industries, Inc.
             (Exact name of registrant as specified in its charter)


                                                          Indiana 35-1719974
                                     (State  or other  jurisdiction  of  (I.R.S.
                                    Employer   incorporation   or  organization)
                                    Identification No.)


                                   801 East 86th Avenue,  Merrillville,  Indiana
                                    46410   (Address  of   principal   executive
                                    offices) (Zip Code)


     Registrant's telephone number, including area code: (219) 853-5200

      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 July 31, 1998,  120,145,573 common shares were
outstanding.
<PAGE>
NIPSCO Industries, Inc.

                                     PART I.
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

Report of Independent Public Accountants

To The Board of Directors of
NIPSCO Industries, Inc.:

      We have  audited the  accompanying  consolidated  balance  sheet of NIPSCO
Industries,  Inc. (an Indiana corporation) and subsidiaries as of June 30, 1998,
and December 31, 1997, and the related consolidated statements of income, common
shareholders'  equity and cash flows for the three, six and twelve month periods
ended June 30, 1998 and 1997. These  consolidated  financial  statements are the
responsibility of Industries'  management.  Our  responsibility is to express an
opinion on these consolidated financial statements 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 consolidated  financial  statements referred to above
present  fairly,  in all material  respects,  the  financial  position of NIPSCO
Industries,  Inc. and  subsidiaries  as of June 30, 1998, and December 31, 1997,
and the results of their  operations and their cash flows for the three, six and
twelve month periods ended June 30, 1998 and 1997, in conformity  with generally
accepted accounting principles.


                             /s/ Arthur Andersen LLP

Chicago, Illinois
July 29, 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
                                                                  June 30,          December 31,
Assets                                                              1998                1997
                                                                 ==========          ==========
<S>                                                          <C>                 <C>
(In thousands)
Property, Plant and Equipment:
 Utility Plant, (Note 2)(including Construction Work in
   Progress of  $223,222 and $188,710, respectively)
    Electric                                                 $    4,106,198      $    4,066,568
    Gas                                                           1,418,126           1,395,140
    Water                                                           634,375             604,018
    Common                                                          352,333             351,350
                                                             --------------      --------------
                                                                  6,511,032           6,417,076
    Less -Accumulated provision for depreciation
       and amortization                                           2,857,453           2,759,945
                                                             --------------      --------------
      Total Utility Plant                                         3,653,579           3,657,131
                                                             --------------      --------------
 Other property, at cost, net of accumulated provision
       for depreciation                                              80,266              96,028
                                                             --------------      --------------
      Total Property, Plant and Equipment                         3,733,845           3,753,159
                                                             --------------      --------------
Investments:
 Investments, at equity (Note 2)                                    104,632              82,855
 Investments, at cost                                                44,586              31,771
 Other investments                                                   27,144              24,499
                                                             --------------      --------------
      Total Investments                                             176,362             139,125
                                                             --------------      --------------
Current Assets:
 Cash and cash equivalents                                           36,684              30,780
 Accounts receivable, less reserve of  $5,995 and
     $5,887, respectively (Note 2)                                  231,073             231,580
 Other receivables (Note 24)                                         33,165             107,231
 Fuel adjustment clause (Note 2)                                     -                    2,679
 Gas cost adjustment clause (Note 2)                                 26,825              89,991
 Materials and supplies, at average cost                             60,625              60,085
 Electric production fuel, at average cost                           16,499              18,837
 Natural gas in storage (Note 2)                                     37,576              61,436
 Prepayments and other                                               32,787              28,089
                                                             --------------      --------------
      Total Current Assets                                          475,234             630,708
                                                             --------------      --------------
Other Assets:
 Regulatory assets (Note 2)                                         204,343             211,513
 Intangible assets, net of accumulated amortization (Note 2)         66,179              68,175
 Prepayments and other (Note 9)                                     158,039             134,353
                                                             --------------      --------------
      Total Other Assets                                            428,561             414,041
                                                             --------------      --------------
                                                             $    4,814,002      $    4,937,033
                                                                 ==========          ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
                                                                   June 30,         December 31,
Capitalization and Liabilities                                      1998               1997
                                                                 ==========         ==========
  (In thousands)
<S>                                                          <C>                          <C>
Capitalization:
 Common shareholders' equity
  (See accompanying statement)                               $    1,203,889      $    1,264,788
 Cumulative preferred stocks (Note 11) -
   Series without mandatory redemption provisions (Note 12)          85,614              85,620
   Series with mandatory redemption provisions (Note 13)             57,591              58,841
 Long-term debt excluding amounts due within one
    year (Note 19)                                                1,670,852           1,667,925
                                                             --------------      --------------
      Total Capitalization                                        3,017,946           3,077,174
                                                             --------------      --------------
Current Liabilities:
 Current portion of long-term debt (Note 20)                         20,733              54,621
 Short-term borrowings (Note 21)                                    252,828             212,639
 Accounts payable                                                   201,083             226,751
 Dividends declared on common and preferred stocks                   30,267              30,784
 Customer deposits                                                   23,057              22,091
 Taxes accrued                                                       61,041              77,573
 Interest accrued                                                    19,197              19,124
 Fuel adjustment clause                                                 625                 -
 Accrued employment costs                                            40,854              58,799
 Other accruals                                                      39,337              47,930
                                                             --------------      --------------
      Total Current Liabilities                                     689,022             750,312
                                                             --------------      --------------
Other:
 Deferred income taxes (Note 8)                                     636,101             651,815
 Deferred investment tax credits, being amortized over
   life of related property (Note 8)                                101,895             105,538
 Deferred credits                                                    82,833              73,715
 Customer advances and contributions in aid of
    construction (Note 2)                                           109,771             110,145
 Accrued liability for postretirement benefits (Note 10)            136,681             132,919
 Other noncurrent liabilities                                        39,753              35,415
                                                             --------------      --------------
      Total Other                                                 1,107,034           1,109,547
                                                             --------------      --------------
Commitments and Contingencies
 (Notes 5, 7, 22, 23 and 24)
                                                             $    4,814,002      $    4,937,033
                                                                 ==========          ==========

The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Income
 (Dollars in thousands, except for per share amounts)
                                                        Three Months                  Six Months
                                                       Ended June 30,               Ended June 30,
                                                   ---------------------        ---------------------
                                                     1998         1997            1998         1997
                                                   ========     ========        ========     ========
<S>                                             <C>          <C>             <C>         <C>
Operating Revenues: (Notes 2, 6 and 26)
  Gas                                            $  110,345   $  121,010      $  353,080   $  454,410
  Electric                                          345,639      271,657         669,473      532,314
  Water                                              20,857       18,795          38,566       18,795
  Products and Services                             175,567      111,725         370,633      177,618
                                                 ----------   ----------      ----------   ----------
                                                    652,408      523,187       1,431,752    1,183,137
                                                 ----------   ----------      ----------   ----------
Cost of Sales: (Note 2)
 Gas costs                                           60,754       61,961         199,182      276,801
 Fuel for electric generation                        65,423       54,609         121,017      113,017
 Power purchased                                     95,845       38,403         186,288       62,291
 Products and Services                              147,531       85,910         323,476      136,296
                                                 ----------   ----------      ----------   ----------
                                                    369,553      240,883         829,963      588,405
                                                 ----------   ----------      ----------   ----------
Operating Margin                                    282,855      282,304         601,789      594,732
                                                 ----------   ----------      ----------   ----------
Operating Expenses and Taxes (except income):
  Operation                                          98,048      103,450         194,219      189,154
  Maintenance (Note 2)                               21,011       19,844          39,958       38,328
  Depreciation and amortization (Note 2)             63,643       64,415         126,917      122,759
  Taxes (except income)                              21,110       20,647          44,538       41,957
                                                 ----------   ----------      ----------   ----------
                                                    203,812      208,356         405,632      392,198
                                                 ----------   ----------      ----------   ----------
Operating Income                                     79,043       73,948         196,157      202,534
                                                 ----------   ----------      ----------   ----------
Other Income (Deductions) (Note 2)                    (931)        4,308           7,517       13,711
                                                 ----------   ----------      ----------   ----------
Interest and Other Charges:
 Interest on long-term debt                          27,749       27,151          55,023       46,954
 Other interest                                       2,222        3,077           4,130        8,045
 Amortization of premium, reacquisition premium,
  discount and expense on debt, net                   1,144        1,200           2,292        2,333
 Dividend requirements on preferred stock
  of subsidiaries                                     2,128        2,179           4,295        4,346
                                                 ----------    ---------      ----------   ----------
                                                     33,243       33,607          65,740       61,678
                                                 ----------   ----------      ----------   ----------
Income before income taxes                           44,869       44,649         137,934      154,567
                                                 ----------   ----------      ----------   ----------
Income taxes                                         15,424       16,413          47,767       55,493
                                                 ----------   ----------      ----------   ----------
Net Income                                       $   29,445   $   28,236      $   90,167   $   99,074
                                                   ========     ========        ========     ========
Average common shares outstanding - basic       122,180,915  125,655,240     123,022,091  122,404,026

Basic Earnings per average common share          $     0.24   $     0.22      $     0.73   $     0.80
                                                   ========     ========        ========     ========
Diluted Earnings per average common share        $     0.24   $     0.22      $     0.73   $     0.80
                                                   ========     ========        ========     ========
Dividends declared per common share              $    0.240   $    0.225      $    0.480   $    0.450
                                                   ========     ========        ========     ========
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Income
 (Dollars in thousands, except for per share amounts)
                                                       Twelve Months
                                                       Ended June 30,       
                                                   ---------------------
                                                     1998         1997
                                                   ========     ========
<S>                                              <C>          <C>
Operating Revenues: (Notes 2, 6 and 26)
  Gas                                            $  705,909   $  805,463
  Electric                                        1,323,490    1,061,890
  Water                                              80,514       18,795
  Products and Services                             725,243      270,775
                                                 ----------   ----------
                                                  2,835,156    2,156,923
                                                 ----------   ----------
Cost of Sales: (Note 2)
 Gas costs                                          417,668      493,882
 Fuel for electric generation                       246,548      235,846
 Power purchased                                    329,028       89,759
 Products and Services                              623,928      196,383
                                                 ----------   ----------
                                                  1,617,172    1,015,870
                                                 ----------   ----------
Operating Margin                                  1,217,984    1,141,053
                                                 ----------   ----------
Operating Expenses and Taxes (except income):
  Operation                                         395,318      360,166
  Maintenance (Note 2)                               78,182       72,974
  Depreciation and amortization (Note 2)            253,962      241,617
  Taxes (except income)                              86,346       78,868
                                                 ----------   ----------
                                                    813,808      753,625
                                                 ----------   ----------
Operating Income                                    404,176      387,428
                                                 ----------   ----------
Other Income (Deductions) (Note 2)                    9,574       23,686
                                                 ----------   ----------
Interest and Other Charges:
 Interest on long-term debt                         113,567       88,002
 Other interest                                       6,476       18,155
 Amortization of premium, reacquisition premium,
  discount and expense on debt, net                   4,677        4,613
 Dividend requirements on preferred stock
  of subsidiaries                                     8,640        8,681
                                                 ----------   ----------
                                                    133,360      119,451
                                                 ----------   ----------
Income before income taxes                          280,390      291,663
                                                 ----------   ----------
Income taxes                                         98,448      106,770
                                                 ----------   ----------
Net Income                                       $  181,942   $  184,893
                                                   ========     ========
Average common shares outstanding - basic       124,156,903  121,935,166

Basic Earnings per average common share          $     1.46   $     1.51
                                                   ========     ========
Diluted Earnings per average common share        $     1.46   $     1.51
                                                   ========     ========
Dividends declared per common share              $    0.945   $    0.885
                                                   ========     ========

     The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement Of Common Shareholders' Equity
                                                              Additional
(Dollars in thousands)             Common        Treasury      Paid-in       Retained
Three Months Ended                 Shares         Shares       Capital       Earnings       Other     
========================         ==========     ==========    ==========    ==========    ==========
<S>                              <C>            <C>           <C>           <C>           <C>       
Balance, April 1, 1997           $  870,930     $(295,980)    $   88,118    $  635,900    $  (4,128)
Comprehensive Income:
  Net income                                                                    28,236 
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $775)
     Realized gain

  Gain (loss) on foreign currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                                (29,962)
Treasury shares acquired                          (46,034)          (34)
Issued:
  IWC Resources Corporation acquisition
  NEM Acquisition                                    4,118         1,351
  Employee stock purchase plan                          67            98
  Long-term incentive plan                           1,413            22                        (92)
  Amortization of unearned compensation                                                          479
Other                                                                  1          (91)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1997           $  870,930     $(336,416)    $   89,556    $  634,083    $  (3,741)
                                 ==========     ==========    ==========    ==========    ==========

Balance, April 1, 1998           $  870,930     $(384,009)    $   89,878    $  697,928    $  (2,159)
Comprehensive Income:
  Net income                                                                    29,445 
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $77)
      Realized gain (net of income
       tax of $620)
  Gain (loss) on foreign currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
  Common shares                                                               (28,708)
Treasury shares acquired                          (74,684)
Issued:
 IWC Resources Corporation acquisition
 NEM Acquisition
 Employee stock purchase plan                           94           237
 Long-term incentive plan                            2,581           587                     (1,096)
 Amortization of unearned compensation                                                           293
Other                                                                  2          (32)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1998           $  870,930     $(456,018)    $   90,704    $  698,633    $  (2,962)
                                 ==========     ==========    ==========    ==========    ==========  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                Accumulated                                         Shares                   
                                   Other                                   ------------------------
   Three Months Ended           Comprehensive               Comprehensive    Common       Treasury
   (continued)                     Income        Total         Income        Shares        Shares
========================         ==========    ==========    ==========    ==========    ==========
<S>                              <C>           <C>           <C>          <C>          <C>         
Balance, April 1, 1997           $    2,276    $1,297,116    $      -     147,784,218  (20,363,752)
Comprehensive Income:
  Net income                                       28,236        28,236
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $775)                   1,268         1,268         1,268
     Realized gain
  Gain (loss) on foreign currency translation:
       Unrealized                       461           461           461
       Realized                                                     -
                                                             ----------
Total Comprehensive Income                                   $   29,965
Dividends:                                                   ==========
 Common shares                                   (29,962)
Treasury shares acquired                         (46,068)                               (2,325,078)
Issued:
 IWC Resources Corporation acquisition
 NEM Acquisition                                    5,469                                   270,064
 Employee stock purchase plan                         165                                     8,416
 Long-term incentive plan                           1,343                                    93,366
 Amortization of unearned compensation                479
Other                                                (90)
                                 ----------    ----------                  ----------    ----------
Balance, June 30, 1997           $    4,005    $1,258,417                 147,784,218  (22,316,984)
                                 ==========    ==========                  ==========    ==========

Balance, April 1, 1998           $    3,962    $1,276,530    $       -    147,784,218  (24,177,926)
Comprehensive Income:
  Net income                                       29,445        29,445
  Other comprehensive income, net of tax:
  Unrealized gain (net of income
     tax of $77)                        130           130           130
  Realized gain (net of income
     tax of $620)                   (1,016)       (1,016)       (1,016)
  Gain (loss) on foreign currency translation:
       Unrealized                     (660)         (660)         (660)
       Realized                         186           186           186
                                                             ----------
Total Comprehensive Income                                   $   28,085
Dividends:                                                   ==========
 Common shares                                   (28,708)
Treasury shares acquired                         (74,684)                               (2,716,853)
Issued:
 IWC Resources Corporation acquisition
 NEM acquisition
 Employee stock purchase plan                         331                                    11,830
 Long-term incentive plan                           2,072                                   132,800
 Amortization of unearned compensation                293
Other                                                (30)
                                 ----------    ----------                  ----------    ----------
Balance, June 30, 1998           $    2,602    $1,203,889                 147,784,218  (26,750,149)
                                 ==========    ==========                  ==========    ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement Of Common Shareholders' Equity
                                                              Additional
(Dollars in thousands)             Common        Treasury      Paid-in       Retained
Six Months Ended                   Shares         Shares       Capital       Earnings       Other     
========================         ==========     ==========    ==========    ==========    ==========
<S>                              <C>            <C>           <C>           <C>           <C>       
Balance, January 1, 1997         $  870,930     $(392,995)    $   32,868    $  591,370    $  (4,280)
Comprehensive Income:
  Net income                                                                    99,074 
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $1,033)
     Realized gain

  Gain (loss) on foreign currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                                (56,235)
Treasury shares acquired                         (102,521)             2
Issued:
 IWC Resources Corporation acquisition             152,405        55,007
 NEM Acquisition                                     4,118         1,351
Employee stock purchase plan                           142          211
 Long-term incentive plan                            2,435           116                       (443)

 Amortization of unearned compensation                                                           982
Other                                                                  1         (126)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1997           $  870,930     $ 336,416)    $   89,556    $  634,083    $  (3,741)
                                 ==========     ==========    ==========    ==========    ==========

Balance, January 1, 1998         $  870,930     $(363,943)    $   89,768    $  667,790    $  (2,624)
Comprehensive Income:
  Net income                                                                    90,167 
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $761)
     Realized  gain (net of income
       tax of $620)
  Gain (loss) on foreign currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                                (58,637)
Treasury shares acquired                          (97,982)             2
Issued:
 IWC Resources Corporation acquisition
 NEM Acquisition
 Employee stock purchase plan                          151           357
 Long-term incentive plan                            5,756           575                     (1,130)
 Amortization of unearned compensation                                                           792
Other                                                                  2         (687)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1998           $  870,930     $(456,018)    $   90,704    $  698,633    $  (2,962)
                                 ==========     ==========    ==========    ==========    ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                Accumulated                                         Shares                   
                                   Other                                   ------------------------
   Six Months Ended             Comprehensive               Comprehensive    Common       Treasury
   (continued)                     Income        Total         Income        Shares        Shares
========================         ==========    ==========    ==========    ==========    ==========
<S>                              <C>           <C>           <C>          <C>          <C>         
Balance, January 1, 1997         $    2,608    $1,100,501    $      -     147,784,218  (28,172,896)
Comprehensive Income:
  Net income                                       99,074        99,074
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $1,033)                 1,297         1,297         1,297
     Realized gain
   Gain (loss) on foreign currency translation:
       Unrealized                       100           100           100
       Realized                                                     -
                                                             ----------
Total Comprehensive Income                                   $  100,471
Dividends:                                                   ==========
 Common shares                                   (56,235)
Treasury shares acquired                        (102,519)                               (5,177,306)
Issued:
 IWC Resources Corporation acquisition            207,412                                10,580,764
 NEM Acquisition                                    5,469                                   270,064
 Employee stock purchase plan                         353                                    17,924
 Long-term incentive plan                           2,108                                   164,466
 Amortization of unearned compensation                982
Other                                               (125)
                                 ----------    ----------                  ----------    ----------
Balance, June 30, 1997           $   4 ,005    $1,258,417                 147,784,218  (22,316,984)
                                 ==========    ==========                  ==========    ==========

Balance, January 1, 1998         $    2,867    $1,264,788    $       -    147,784,218  (23,471,554)
Comprehensive Income:
  Net income                                       90,167        90,167
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $761)                   1,249         1,249         1,249
     Realized gain (net of income
       tax of $620)                 (1,016)       (1,016)       (1,016)
  Gain (loss) on foreign currency translation:
       Unrealized                     (684)         (684)         (684)
       Realized                         186           186           186
                                                             ----------
Total Comprehensive Income                                   $   89,902
Dividends:                                                   ==========
 Common shares                                   (58,637)
Treasury shares acquired                         (97,980)                               (3,627,427)
Issued:
 IWC Resources Corporation acquisition
 NEM Acquisition
 Employee stock purchase plan                         508                                    18,988
 Long-term incentive plan                           5,201                                   329,844
 Amortization of unearned compensation                792
Other                                               (685)
                                 ----------    ----------                  ----------    ----------
Balance, June 30, 1998           $    2,602    $1,203,889                 147,784,218  (26,750,149)
                                 ==========    ==========                  ==========    ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement Of Common Shareholders' Equity
                                                              Additional
(Dollars in thousands)             Common        Treasury      Paid-in       Retained
Twelve Months Ended                Shares         Shares       Capital       Earnings       Other     
========================         ==========     ==========    ==========    ==========    ==========
<S>                              <C>            <C>           <C>           <C>           <C>       
Balance, July 1, 1996            $  870,930     $ 339,673)    $   32,674    $  558,076    $  (5,662)
Comprehensive Income:
  Net income                                                                   184,893
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $1,326)
     Realized gain

  Gain (loss) on foreign currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                               (108,738)
Treasury shares acquired                          (159,983)            2
Issued:
 IWC Resources Corporation acquisition              152,405       55,007
 NEM Acquisition                                      4,118        1,351
 Employee stock purchase plan                           283          404
 Long-term incentive plan                             6,434          116                       (443)
 Amortization of unearned compensation                                                         2,364
Other                                                                  2         (148)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1997           $  870,930     $(336,416)    $   89,556    $  634,083    $  (3,741)
                                 ----------     ----------    ----------    ----------    ----------
Net income                                                                     181,942 
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
         tax of $1,001)
      Realized gain (net income
         tax of $620)
  Gain (loss) on foreign currency translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                               (116,705)
Treasury shares acquired                         (128,534)             1
Issued:
IWC Resources Corporation acquisition
 NEM Acquisition
 Employee stock purchase plan                          282           570
 Long-term incentive plan                            8,650           575                     (1,130)
 Amortization of unearned compensation                                                         1,909
Other                                                                  2         (687)
                                 ----------     ----------    ----------    ----------    ----------
Balance, June 30, 1998           $  870,930     $(456,018)    $   90,704    $  698,633    $  (2,962)
                                 ==========     ==========    ==========    ==========    ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                Accumulated                                         Shares                   
                                   Other                                   ------------------------
   Twelve Months Ended          Comprehensive               Comprehensive    Common       Treasury
   (continued)                     Income        Total         Income        Shares        Shares
========================         ==========    ==========    ==========    ==========    ==========
<S>                              <C>           <C>           <C>          <C>          <C>         
Balance, July 1, 1996            $    (117)    $1,116,228    $      -     147,784,218  (25,474,720)
Comprehensive Income:
  Net income                                      184,893       184,893
  Other comprehensive income, net of tax:
     Unrealized gain (net of income
       tax of $1,326)                 2,171         2,171         2,171
      Realized gain
  Gain (loss) on foreign currency translation:
       Unrealized                     1,951         1,951         1,951
       Realized                                                   -
                                                             ----------
Total Comprehensive Income                                   $  189,015
Dividends:                                                   ==========
 Common shares                                  (108,738)
Treasury shares acquired                        (159,981)                               (8,185,026)
Issued:
 IWC Resources Corporation acquisition            207,412                                10,580,764
 NEM Acquisition                                    5,469                                   270,064
 Employee stock purchase plan                         687                                    35,568
 Long-term incentive plan                           6,107                                   456,366
 Amortization of unearned compensation              2,364
Other                                               (146)
                                 ----------    ----------                  ----------    ----------
Balance, June 30, 1997           $   4 ,005    $1,258,417                 147,784,218  (22,316,984)
                                 ==========    ==========                  ==========    ==========

Net income                                        181,942    $  181,942
Other comprehensive income, net of tax:
   Unrealized gain (net of income
     tax of $1,001)                   1,641         1,641         1,641
   Realized gain(net income
     tax of $620)                   (1,016)       (1,016)       (1,016)
Gain (loss) on foreign currency translation:
     Unrealized                     (2,214)       (2,214)       (2,214)
     Realized                           186           186           186
                                                             ----------
Total Comprehensive Income                                   $  180,539
Dividends:                                                   ==========
 Common shares                                  (116,705)
Treasury shares acquired                        (128,533)                               (4,987,049)
Issued:
IWC Resources Corporation acquisition
 NEM Acquisition
  Employee stock purchase plan                        852                                    35,440
 Long-term incentive plan                           8,095                                   518,444
 Amortization of unearned compensation              1,909
Other                                               (685)
                                 ----------    ----------                  ----------    ----------
Balance, June 30, 1998    $           2,602 $   1,203,889                 147,784,218  (26,750,149)
                                 ==========    ==========                  ==========    ==========
</TABLE>
     The accompanying notes to consolidated financial statements are an integral
part of this statement.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows                           
           (In thousands)                          Three Months                Six Months
                                                  Ended June 30,             Ended June 30,
                                               --------------------       --------------------
                                                 1998        1997           1998        1997
                                               ========    ========       ========    ========
<S>                                           <C>         <C>           <C>           <C>    
Cash flows from operating activities:
   Net income                                   $  29,445   $  28,236     $   90,167    $99,074
Adjustments to reconcile net income
 to net cash:
  Depreciation and amortization                  63,643      64,414        126,917     122,759
  Deferred federal and state income
   taxes, net                                  (12,610)    (20,752)       (42,650)    (33,095)
  Deferred investment tax credits, net          (1,821)     (1,833)        (3,642)     (3,635)
  Advance contract payment                          475         475            950         950
  Change in certain assets and liabilities -*
   Accounts receivable, net                      12,898       5,276            507      19,063
   Other receivables                             94,656    (29,341)         74,066    (69,352)
   Electric production fuel                       4,742     (4,500)          2,338     (2,149)
   Materials and supplies                         1,456       (237)          (540)        (17)
   Natural gas in storage                      (16,553)    (17,109)         23,860      29,966
   Accounts payable                             (4,160)    (32,816)       (17,630)    (60,151)
   Taxes accrued                               (67,836)    (42,513)         12,477      35,249
   Fuel adjustment clause                         1,736       4,673          3,304         892
   Gas cost adjustment clause                    11,147      40,931         63,166      53,159
   Accrued employment costs                     (1,649)       2,896       (17,945)     (1,925)
   Other accruals                               (4,587)    (12,612)        (8,593)      12,899
   Other, net                                   (9,205)       5,195       (15,412)       8,829
                                               --------    --------       --------    --------
      Net cash provided by (used in) 
operating activities                            101,777     (9,617)        291,340     212,516
                                               --------    --------       --------    --------
Cash flows provided by (used in) investing activities:
  Utilities construction expenditures          (64,075)    (62,090)      (112,278)   (108,671)
  Acquisition of IWC Resources
    Corporation, net of cash acquired               -      (82,985)            -     (288,932)
  Acquisition of minority interest                  -       (5,641)            -       (5,641)
  Proceeds from disposition of assets               714         275         10,419      29,775
  Proceeds from settlement of litigation           -            -              -           -
  Other, net                                   (15,228)       (425)       (41,144)     19,777)
                                               --------    --------       --------    --------
      Net cash used in investing activities    (78,589)   (150,866)      (143,003)   (393,246)
                                               --------    --------       --------    --------
Cash flows provided by (used in) financing activities:
  Issuance of long-term debt                          4     271,960          6,375     408,262
  Issuance of short-term debt                   610,408     321,050        887,329     575,095
  Net change in commercial paper                 60,600   (113,250)         20,600   (255,555)
  Retirement of long-term debt                 (35,026)        (38)       (37,573)     (1,507)
  Retirement of short-term debt               (561,023)   (312,875)      (867,696)   (598,495)
  Retirement of preferred shares                (1,255)     (1,252)        (1,256)     (1,253)
  Issuance of common shares                       3,499       6,847          6,839     215,333
  Acquisition of treasury shares               (74,684)    (45,938)       (97,980)   (102,529)
  Cash dividends paid on common shares         (29,520)    (28,323)       (59,309)    (55,095)
  Other, net                                        117       (583)            238       (468)
                                               --------    --------       --------    --------
      Net cash provided by (used in)
       financing activities                    (26,880)      97,598      (142,433)     183,788
                                               --------    --------       --------    --------
Net increase (decrease) in cash and
 cash equivalents                               (3,692)    (62,885)          5,904       3,058

Cash and cash equivalents at
   Beginning of period                           40,376      92,276         30,780      26,333
                                               --------    --------       --------    --------
Cash and cash equivalents at
   End of period                               $  6,684    $ 29,391       $ 36,684    $ 29,391
                                               ========    ========       ========    ========
 *Net of effect from purchase of IWC Resources Corporation.

The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statement of Cash Flows
(In thousands)
                                                  Twelve Months
                                                  Ended June 30,
                                               --------------------
                                                 1998        1997
                                               ========    ========
<S>                                            <C>         <C>
Cash flows from operating activities:
 Net income                                    $181,942    $184,893
Adjustments to reconcile net income
 to net cash:
  Depreciation and amortization                 253,962     241,617
  Deferred federal and state income
   taxes, net                                  (11,204)    (24,311)
  Deferred investment tax credits, net          (7,383)     (7,704)
  Advance contract payment                        1,900       1,900
  Change in certain assets and liabilities -*
   Accounts receivable, net                    (55,925)    (69,118)
   Other receivables                            78,371     (66,779)
   Electric production fuel                      12,133       2,265
   Materials and supplies                         2,042       2,090
   Natural gas in storage                       (2,449)     (5,597)
   Accounts payable                              23,954      13,820
   Taxes accrued                               (19,383)      39,543
   Fuel adjustment clause                         8,882       3,366
   Gas cost adjustment clause                    20,230       1,891
   Accrued employment costs                     (3,885)       4,595
   Other accruals                              (12,063)       8,163
   Other, net                                    36,157      22,844
                                               --------    --------
      Net cash provided by(used in)
        operating activities                    507,281     353,478
                                               --------    --------
Cash flows provided by (used in) investing activities:
  Utilities construction expenditures         (222,538)   (214,650)
  Acquisition of IWC Resources
    Corporation, net of cash acquired              -      (288,932)
  Acquisition of minority interest                 -        (5,641)
  Proceeds from disposition of assets            16,637      29,775
  Proceeds from settlement of litigation         41,069         -
  Other, net                                   (76,187)    (32,428)
                                               --------    --------
      Net cash used in investing activities   (241,019)   (511,876)
                                               --------    --------
Cash flows provided by (used in) financing activities:
  Issuance of long-term debt                    256,345     409,178
  Issuance of short-term debt                 1,341,742   1,558,897
  Net change in commercial paper                 51,510   (118,850)
  Retirement of long-term debt                (360,670)    (82,562)
  Retirement of short-term debt             (1,311,425) (1,560,194)
  Retirement of preferred shares                (2,411)     (2,411)
  Issuance of common shares                      10,072     219,635
  Acquisition of treasury shares              (128,528)   (159,991)
  Cash dividends paid on common shares        (115,807)   (106,292)
  Other, net                                        203       (881)
                                               --------    --------
      Net cash provided by (used in)
       financing activities                   (258,969)    156,529
                                               --------    --------
Net increase (decrease) in cash and
 cash equivalents                                 7,293     (1,869)

Cash and cash equivalents at
   Beginning of period                           29,391      31,260
                                               --------    --------
Cash and cash equivalents at
   End of period                               $ 36,684    $ 29,391
                                               ========    ========
 *Net of effect from purchase of IWC Resources Corporation.

     The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements

(1) Holding  Company  Structure:  NIPSCO  Industries,  Inc.  (Industries)  is an
energy/utility-based  holding company providing electric energy, natural gas and
water  to  the  public  through  its  six  wholly-owned  regulated  subsidiaries
(Utilities):  Northern Indiana Public Service Company (Northern Indiana); Kokomo
Gas and Fuel Company (Kokomo Gas); Northern Indiana Fuel and Light Company, Inc.
(NIFL);  Crossroads  Pipeline Company  (Crossroads);  Indianapolis Water Company
(IWC); and Harbour Water Corporation  (Harbour).  Industries'  regulated gas and
electric  subsidiaries  (Northern Indiana,  Kokomo Gas, NIFL and Crossroads) are
referred to as "Energy  Utilities";  and regulated water  subsidiaries  (IWC and
Harbour) are referred to as "Water Utilities."

      Industries  also provides  non-regulated  energy/utility-related  services
including  gas  marketing  and  trading;   wholesale  power   marketing;   power
generation;  gas  transmission,  supply and  storage;  installation,  repair and
maintenance of  underground  pipelines;  utility line locating and marking;  and
related products targeted at customer segments principally through the following
wholly-owned  subsidiaries:  NIPSCO Development Company, Inc. (Development);  NI
Energy  Services,  Inc.  (Services)  (formerly known as NIPSCO Energy  Services,
Inc.); Primary Energy, Inc. (Primary); Miller Pipeline Corporation (Miller); and
SM&P Utility  Resources,  Inc.  (SM&P).  NIPSCO Capital Markets,  Inc.  (Capital
Markets)  handles  financing for  Industries  and its  subsidiaries,  other than
Northern Indiana.  These subsidiaries,  other than the wholesale power marketing
operations of Services, are referred to collectively as "Products and Services."
On March 25, 1997,  Industries acquired IWC Resources Corporation (IWCR). IWCR's
subsidiaries  include two regulated  water  utilities (IWC and Harbour) and five
non-utility companies including Miller and SM&P.

     On December 16, 1997, the Board of Directors authorized a two-for-one split
of  Industries'  common  stock.  The stock split was paid  February 20, 1998, to
shareholders of record at the close of business January 30, 1998. All references
to number of shares  reported  for the period  including  per share  amounts and
stock option data of  Industries'  common stock  reflect the  two-for-one  stock
split as if it had occurred at the beginning of the earliest period.

     On  December  18,  1997,  Industries  and Bay  State Gas  Company  signed a
definitive  merger  agreement  under which  Industries  will  acquire all of the
common stock of Bay State Gas Company in a stock-for-stock transaction. Refer to
"Purchase  of  Bay  State  Gas  Company"  in  Note 4 to  Consolidated  Financial
Statements for a more detailed discussion of the proposed acquisition.

(2)   Summary of Significant Accounting Policies:

      Basis of Presentation.  The consolidated  financial statements include the
accounts of  majority-owned  subsidiaries of Industries after the elimination of
significant  intercompany  accounts  and  transactions.  Investments  for  which
Industries  has at least a 20% interest and certain joint ventures are accounted
for under the  equity  method.  Investments  with less than a 20%  interest  are
accounted  for under the cost  method.  Certain  reclassifications  were made to
conform the prior years' financial statements to the current presentation.

      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 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.

      Operating  Revenues.  Utility  revenues  are  recorded  based on estimated
service rendered, but are billed to customers monthly on a cycle basis. Electric
and gas marketing  revenues are recognized as the related commodity is delivered
to  customers.   Construction  revenues  are  recognize  on  the  percentage  of
completion  method  whereby  revenues  are  recognized  in  proportion  to costs
incurred over the life of each project. Industries records provisions for losses
on  construction  contracts,  if any, in the period in which such losses  become
probable.

      Depreciation  and  Maintenance.  The Utilities  provide  depreciation on a
straight-line  method over the remaining  service  lives of the  electric,  gas,
water and common properties.  The approximated  weighted average remaining lives
for major components of each electric, gas and water plant are as follows:
<TABLE>

                Electric:
<S>                 <C>                                                        <C>     
                    Electric generation plant                               24 years
                    Transmission plant                                      26 years
                    Distribution plant                                      25 years
                    Other electric plant                                    24 years

     The  depreciation  provision for electric utility plant, as a percentage of
the  original  cost,  was  3.7%  for the  three-month  period  and  3.6% for the
six-month and  twelve-month  periods,  ended June 30, 1998, and was 3.6% for the
three-month, six-month and twelve-month periods, ended June 30, 1997.

                Gas:
                    Gas storage plant                                       18 years
                    Transmission plant                                      34 years
                    Distribution plant                                      27 years
                    Other gas plant                                         24 years

     The  depreciation  provision for gas utility plant,  as a percentage of the
original  cost, was 5.1% for the  three-month  period and 5.2% for the six-month
and twelve-month periods, ended June 30, 1998, and was 5.1% for the three-month,
six-month and twelve-month periods, ended June 30, 1997.

                Water:
                    Water source and treatment plant                        34 years
                    Distribution plant                                      68 years
                    Other water plant                                       13 years

     The depreciation  provision for water utility plant, as a percentage of the
original cost, was 2.0% for the  three-month,  six-month,  and the  twelve-month
periods ended June 30, 1998,  and 2.0% for the three month period ended June 30,
1997.
</TABLE>

     The  Utilities  follow the  practice of charging  maintenance  and repairs,
including  the cost of  renewals  of minor  items of  property,  to  maintenance
expense  accounts,  except for repairs of  transportation  and service equipment
which are charged to clearing  accounts and  redistributed to operating  expense
and other accounts. When property which represents a retired unit is replaced or
removed,  the cost of such property is credited to utility plant, and such cost,
together  with the cost of removal less salvage,  is charged to the  accumulated
provision for depreciation.

     Plant Acquisition Adjustments.  Utility plant includes amounts representing
the excess of purchase price over  underlying  book values  associated  with the
acquisitions  of Kokomo Gas,  NIFL,  IWC and  Harbour.  These  amounts are being
amortized over a forty-year period from the respective dates of acquisition. The
plant  acquisition  adjustments  net of  accumulated  amortization  were  $187.9
million and $190.4 million at June 30, 1998 and December 31, 1997, respectively.

      Amortization  of  Software  Costs.  Industries  has  capitalized  software
relating  to  various  technology  functions.   At  the  date  of  installation,
Industries  estimates that the specific software will have a useful life between
five and ten years. The Federal Energy  Regulatory  Commission (FERC) prescribes
certain amortization periods, and Industries' management has determined that, on
average,  these are  reasonable  useful  life  estimates  for the  portfolio  of
capitalized software. The Energy Utilities include these amortization estimates,
based on useful  life,  in their  quarterly  filings  with the  Indiana  Utility
Regulatory Commission (Commission).

      Intangible  Assets.  The  excess  of cost  over the fair  value of the net
assets of non-utility subsidiaries acquired is reported as goodwill and is being
amortized on a straight-line  basis over a weighted  average period of 34 years.
Other intangible  assets  approximating  $7.7 million are being amortized over a
period of eight years.  Industries assesses the recoverability of its intangible
assets on a periodic  basis to confirm that  expected  future cash flows will be
sufficient to support the recorded intangible assets.  Accumulated  amortization
of intangibles at June 30, 1998 and December 31, 1997,  was  approximately  $3.3
million and $1.6 million, respectively.

      Coal Reserves.  Northern  Indiana has a long-term  mining contract to mine
its coal reserves  through the year 2001.  The costs of these reserves are being
recovered  through the  rate-making  process as such coal  reserves  are used to
produce electricity.

     Power  Purchased.  Power  purchases  and net  interchange  power with other
electric  utilities  under   interconnection   agreements  and  wholesale  power
purchases are included in Cost of Sales under the caption "Power purchased."

      Accounts  Receivable.  At June 30,  1998,  Northern  Indiana had sold $100
million of its accounts receivable under a sales agreement which expires May 31,
2002.

      Customer  Advances and  Contributions in Aid of  Construction.  IWC allows
developers to install and provide for the installation of water main extensions,
which  are to be  transferred  to IWC  upon  completion.  The  cost of the  main
extensions  and the  amount of any funds  advanced  for the cost of water  mains
installed are included in customer  advances for  construction and are generally
refundable  to the  customer  over a period of ten years.  Advances not refunded
within  ten  years  are  permanently  transferred  to  contributions  in  aid of
construction.

     Comprehensive   Income.   Industries  adopted  SFAS  No.  130,   "Reporting
Comprehensive  Income" effective January 1, 1998. The objective of the statement
is to report comprehensive income which is a measure of all changes in equity of
an enterprise which result from transactions or other economic events during the
period other than transactions with  shareholders.  This information is reported
in  Industries'   Consolidated   Statement  of  Common   Shareholders'   Equity.
Industries'  components  of  accumulated  other  comprehensive  income  includes
unrealized  gains (losses) on available for sale securities and unrealized gains
(losses) on foreign currency  translation  adjustments.  The accumulated amounts
for these components,  respectively,  were $2.8 million and $(0.5) million as of
April 1, 1997; $5.6 million and $(1.6) million as of April 1, 1998; $2.7 million
and $(0.1) million as of January 1, 1997;  $4.4 million and $(1.5) million as of
January 1, 1998; $1.9 million and $(2.0)  million,  as of July 1, 1996: and $4.0
million and $(0.1) as of July, 1, 1997.

      Statement of Cash Flows. For the purposes of the Consolidated Statement of
Cash Flows,  Industries  considers  temporary cash  investments with an original
maturity of three months or less to be cash equivalents.

     Cash paid during the periods  reported for income taxes and interest was as
follows:

<TABLE>
<CAPTION>
                                      Three  Months                  Six Months              Twelve Months
                                      Ended June 30,               Ended June 30,            Ended June 30,
                                   --------------------      --------------------      --------------------
(In thousands)                       1998        1997          1998        1997          1998        1997
                                   ========    ========      ========    ========      ========    ========
<S>                                <C>         <C>           <C>         <C>           <C>         <C>     
Income taxes                       $ 76,100    $ 61,700      $ 76,100    $ 61,700      $131,249    $ 81,747
Interest, net of  
     amounts capitalized             32,637      32,544        56,186      44,655       113,892      90,988
</TABLE>

      Fuel Adjustment Clause. All metered electric rates contain a provision for
adjustment in charges for electric energy to reflect  increases and decreases in
the cost of fuel and the fuel cost of  purchased  power  through  operation of a
fuel adjustment  clause. As prescribed by order of the Commission  applicable to
metered retail rates,  the adjustment  factor has been  calculated  based on the
estimated  cost of fuel  and  the  fuel  cost of  purchased  power  in a  future
three-month period. If two statutory requirements relating to expense and return
levels are satisfied,  any  under-recovery or over-recovery  caused by variances
between estimated and actual cost in a given three-month period will be included
in a future filing. Northern Indiana records any under-recovery or over-recovery
as a  current  asset or  current  liability  until  such time as it is billed or
refunded to its customers.  The fuel adjustment factor is subject to a quarterly
hearing by the Commission and remains in effect for a three-month period.

     Gas Cost  Adjustment  Clause.  All metered gas rates  contain an adjustment
factor,  which  reflects the cost of purchased  gas,  contracted gas storage and
storage  transportation  charges. The Energy Utilities record any under-recovery
or over-recovery  as a current asset or current  liability until such time it is
billed or refunded to  customers.  The gas cost  adjustment  factor for Northern
Indiana is subject to a  quarterly  hearing  by the  Commission  and  remains in
effect for a  three-month  period.  The gas cost  adjustment  factor for each of
Kokomo Gas and NIFL is subject to  semi-annual  hearings by the  Commission  and
remains in effect for a six-month period. If the statutory  requirement relating
to the level of return is satisfied,  any under-recovery or over-recovery caused
by  variances  between  estimated  and  actual  cost in a given  three-month  or
six-month  period will be included in a future filing.  The Northern Indiana gas
cost  adjustment  factor  includes a gas cost incentive  mechanism  (GCIM) which
allows  Northern  Indiana  to share  any cost  savings  or cost  increases  with
customers  based  on a  comparison  of  Northern  Indiana's  actual  gas  supply
portfolio  costs to a market based benchmark  price.  See note 6, FERC Order No.
636 for a discussion of gas transition cost charges.

      Natural  Gas in  Storage.  Northern  Indiana's  natural  gas in storage is
valued using the last-in,  first-out (LIFO) inventory methodology.  Based on the
average  cost of gas  purchased  in June 1998 and  December  1997 the  estimated
replacement  cost of gas in storage  (current and  non-current) at June 30, 1998
and December 31, 1997 exceeded the stated LIFO cost by approximately $41 million
and $42 million,  respectively.  Certain other  subsidiaries  of Industries have
natural gas in storage valued at average cost.

       Hedging  Activities.  Industries  utilizes a variety  of  commodity-based
derivative  financial  instruments  to reduce  the price  risk  inherent  in its
natural gas and electric  power  marketing  activities.  The gains and losses on
these  derivative  financial  instruments  are deferred (Other Current Assets or
Other Current  Liabilities)  pursuant to an identified risk reduction  strategy.
Such deferrals are recognized in income  concurrent  with the disposition of the
underlying physical commodity. In certain circumstances,  a derivative financial
instrument  will  serve to  hedge  the  acquisition  cost of gas  injected  into
storage.  In this  situation,  the  gain or  loss  on the  derivative  financial
instrument  is  deferred  as  part  of the  cost  basis  of gas in  storage  and
recognized  upon the  ultimate  disposition  of the natural gas. If a derivative
financial  instrument contract is terminated early because it is probable that a
transaction or anticipated  transaction  will not occur,  any gain or loss as of
such date is  immediately  recognized  in earnings.  If a  derivative  financial
instrument contract is terminated early for other economic reasons,  any gain or
loss as of the  termination  date is deferred and recorded  when the  associated
transaction or anticipated transaction affects earnings.

      Industries uses commodity  futures  contracts,  options and swaps to hedge
the impact of natural gas price fluctuations related to its business activities,
including price risk related to the physical  location of the natural gas (basis
risk). As of June 30, 1998, Industries had open derivative financial instruments
representing  hedges of natural  gas sales of 13.0  billion  cubic  feet  (Bcf),
natural gas purchases of 24.2 Bcf and net basis  differentials  of 23.8 Bcf. The
net deferred loss on these derivative financial  instruments as of June 30, 1998
was not material.

      Industries  utilizes options to hedge price risk associated with a portion
of its fixed price purchase and sale  commitments  related to  electricity.  The
deferred premiums on these options as of June 30, 1998 were not material.

     Impact of Accounting Standards.  During June 1998, the Financial Accounting
Standards  Board  (FASB)  issued  Statement of  Financial  Accounting  Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities".
This statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts,  by requiring that a
company  recognize those items as assets or liabilities in the balance sheet and
measure them at fair value.  This Statement  generally  provides for matching of
the timing of gain or loss recognition of derivatives  instruments designated as
a hedge with the recognition of changes in the fair value of the hedged asset or
liability  through  earnings.  This  Statement  also provides that the effective
portion of a hedging  instrument's  gain or loss on a forecasted  transaction be
initially reported in other comprehensive  income and subsequently  reclassified
into  earnings  when  the  hedged  forecasted   transaction   affects  earnings.
Industries  expects to adopt this Statement on January 1, 2000, and is currently
assessing  the impact of  adoption  on its  financial  position  and  results of
operations.


      Regulatory Assets. The Utilities' operations are subject to the regulation
of the  Commission  and,  in  the  case  of  the  Energy  Utilities,  the  FERC.
Accordingly, the Utilities' accounting policies are subject to the provisions of
SFAS No. 71,  "Accounting for the Effects of Certain Types of  Regulation."  The
Utilities monitor changes in market and regulatory  conditions and the resulting
impact of such changes in order to continue to apply the  provisions of SFAS No.
71 to some or all of their  operations.  As of June 30,  1998 and  December  31,
1997, the regulatory assets  identified below represent  probable future revenue
to the  Utilities  associated  with  certain  incurred  costs as these costs are
recovered  through  the  rate-making  process.  If a portion  of the  Utilities'
operations  becomes  no  longer  subject  to the  provisions  of SFAS No.  71, a
write-off of certain  regulatory  assets might be required,  unless some form of
transition cost recovery is established by the appropriate regulatory body which
would meet the requirements under generally accepted  accounting  principles for
continued   accounting  as  regulatory   assets  during  such  recovery  period.
Regulatory assets were comprised of the following items:
<TABLE> 
<CAPTION>
                                                           June 30,    December 31,
(In thousands)                                              1998           1997
                                                         ==========     ==========
<S>                                                      <C>            <C>
Unamortized reacquisition premium on
 debt (Note 19)                                          $   44,990     $   46,748
Unamortized R.M. Schahfer Unit 17 and
 Unit 18 carrying charges and deferred
  depreciation (See below)                                   64,437         66,546
Bailly scrubber carrying charges and
 deferred depreciation (See below)                            9,413          9,880
Deferred SFAS No. 106 expense not
 recovered (Note 10)                                         84,706         87,653
FERC Order No. 636 transition costs (Note 6)                 23,985         28,744
Regulatory income tax asset, net  (Note 8)                    7,141          6,941
Other                                                         4,172          4,261
                                                         ----------     ----------
                                                            238,844        250,773
Less: Current portion of regulatory assets                   34,501         39,260
                                                         ----------     ----------
                                                         $  204,343     $  211,513
                                                         ==========     ==========
</TABLE>

      Carrying  Charges and  Deferred  Depreciation.  Upon  completion  of R. M.
Schahfer Units 17 and 18, Northern Indiana  capitalized the carrying charges and
deferred depreciation in accordance with orders of the Commission until the cost
of  each  unit  was  allowed  in  rates.  Such  carrying  charges  and  deferred
depreciation are being amortized over the remaining life of each unit.

      Northern   Indiana  has   capitalized   carrying   charges  and   deferred
depreciation  and certain  operating  expenses  relating to its scrubber service
agreement for its Bailly  Generating  Station in accordance with an order of the
Commission.  The accumulated  balance of the deferred costs and related carrying
charges is being  amortized  over the  remaining  life of the  scrubber  service
agreement.

      Allowance  for Funds Used During  Construction.  Allowance  for funds used
during  construction  (AFUDC) is charged to construction work in progress during
the period of  construction  and  represents the net cost of borrowed funds used
for construction purposes and a reasonable rate upon other (equity) funds. Under
established regulatory rate practices,  after the construction project is placed
in service,  Northern  Indiana is permitted to include in the rates  charged for
utility  services  (a) a fair  return  on and (b)  depreciation  of  such  AFUDC
included in plant in service.

      At January 1, 1996, a pre-tax rate of 5.5% for all  construction was being
used; effective January 1, 1997 the rate remained at 5.5%; and effective January
1, 1998, the rate increased to 6.0%.

      Foreign Currency  Translation.  Translation gains or losses are based upon
the  end-of-period  exchange  rate and are  recorded as a separate  component of
other   comprehensive   income  reflected  in  the  Consolidated   Statement  of
Shareholders' Equity.

      Investments in Real Estate.  Development invests in a series of affordable
housing projects within the Utilities'  service  territories.  These investments
include certain tax benefits,  including  low-income housing tax credits and tax
deductions for operating losses of the housing  projects.  Development  accounts
for these investments using the equity method.  Investments,  at equity, include
$35.1 million and $30.1 million relating to affordable  housing projects at June
30, 1998 and December 31, 1997, respectively.

      Income  Taxes.  Deferred  income  taxes  are  recognized  as  costs in the
rate-making  process  by the  commissions  having  jurisdiction  over the  rates
charged by the  Utilities.  Deferred  income  taxes are  provided as a result of
provisions in the income tax law that either  require or permit certain items to
be  reported  on the  income  tax  return in a  different  period  than they are
reported in the  financial  statements.  These taxes are  reversed by a debit or
credit to deferred  income tax  expense as the  temporary  differences  reverse.
Investment tax credits have been deferred and are being amortized to income over
the life of the related property.

(3)  Purchase  of IWC  Resources  Corporation:  On March  25,  1997,  Industries
acquired all the outstanding common stock of IWCR for $290.5 million. Industries
financed this transaction with debt of approximately  $83.0 million and issuance
of approximately 10.6 million  Industries' common shares.  Industries  accounted
for the  acquisition  as a purchase.  The  purchase  price was  allocated to the
assets and liabilities acquired based on their fair values.

(4) Purchase of Bay State Gas Company: On December 18, 1997,  Industries and Bay
State Gas Company (Bay State) signed a definitive  merger  agreement under which
Industries   will   acquire  all  of  the  common   stock  of  Bay  State  in  a
stock-for-stock  transaction  valued at $40 per Bay State share. The transaction
is valued at approximately  $551 million.  Bay State  shareholders will have the
option  of  taking  up to 50  percent  of the  total  purchase  price  in  cash.
Consummation of the merger is subject to certain closing  conditions,  including
the  approval  by  the  Securities  and  Exchange  Commission,  FERC  and  state
regulatory agencies in Massachusetts,  New Hampshire and Maine. The shareholders
of Bay State  approved  the  merger on May 27,  1998,  and the state  regulatory
agencies  in New  Hampshire  and  Maine  have  also  approved  the  merger.  The
transaction is expected to be completed in late 1998.

     Bay  State,  one of the  largest  natural  gas  utilities  in New  England,
provides  natural gas  distribution  service to more than  300,000  customers in
Massachusetts,  New Hampshire and Maine. The combined company will be one of the
10 largest natural gas distribution systems in the nation, servicing more than 1
million gas customers.  In addition,  Industries and Bay State have entered into
joint marketing agreements to expand the operation of Bay State's  non-regulated
energy service companies.

(5) NESI Energy Marketing Canada Ltd. Litigation: On October 31, 1996, Services'
wholly-owned  subsidiary  NIPSCO  Energy  Services  Canada  Ltd.  (NESI  Canada)
acquired 70% of the outstanding  shares of Chandler Energy Inc., a gas marketing
and trading company located in Calgary,  Alberta,  and  subsequently  renamed it
NESI Energy Marketing  Canada Ltd.  (NEMC).  Between November 1 and November 27,
1996, gas prices in the Calgary market increased dramatically. As a result, NEMC
was selling  gas,  pursuant to contracts  entered into prior to the  acquisition
date, at prices  substantially  below its costs to acquire such gas. On November
27, 1996,  NEMC ceased doing business and sought  protection  from its creditors
under  the  Companies'   Creditors   Arrangement   Act,  a  Canadian   corporate
reorganization statute. NEMC was declared bankrupt as of December 12, 1996.

      Certain creditors of NEMC have filed claims against Industries,  Services,
Capital Markets and NESI Canada, alleging certain misrepresentations relating to
NEMC's financial  condition and claiming damages.  Industries and its affiliates
intend to vigorously  defend against such claims and any other claims seeking to
assert that any party  other than NEMC is  responsible  for NEMC's  liabilities.
Industries has fully reserved its investment in NEMC.  Management  believes that
any  additional  loss  relating  to NEMC would not be material to the results of
operations or financial position of Industries.

(6) FERC Order No. 636:  Since  December  1993,  the Energy  Utilities have paid
approximately $140.5 million of interstate pipeline transition costs to pipeline
suppliers  to reflect  the impact of FERC Order No.  636.  The Energy  Utilities
expect that additional transition costs will not be significant.  The Commission
has approved the recovery of these FERC-allowed transition costs on a volumetric
basis from sales and  transportation  customers.  Regulatory  assets, in amounts
corresponding to the costs recorded but not yet collected, have been recorded to
reflect the ultimate recovery of these costs.

(7) Environmental Matters: The Utilities have an ongoing program to remain aware
of laws and regulations  involved with hazardous  waste and other  environmental
matters.  The  Utilities  intend to continue to evaluate  their  facilities  and
properties with respect to these rules and identify any sites that would require
corrective  action.  The Utilities have recorded a reserve of approximately  $17
million  to cover  probable  corrective  actions as of June 30,  1998;  however,
environmental  regulations  and  remediation  techniques  are  subject to future
change.  The  ultimate  cost could be  significant,  depending  on the extent of
corrective  actions  required.   Based  upon   investigations  and  management's
understanding  of current laws and regulations,  the Utilities  believe that any
corrective  actions  required,  after  consideration of insurance  coverages and
contributions  from  other  potentially  responsible  parties,  will  not have a
significant  impact on the  results  of  operations  or  financial  position  of
Industries.

     Because  of  major  investments  made  in  modern   environmental   control
facilities and the use of low-sulfur  coal, all of Northern  Indiana's  electric
production  facilities now comply with the sulfur dioxide limitations  contained
in the acid  deposition  provisions  of the  Clean  Air Act  Amendments  of 1990
(CAAA). Reflecting this compliance, on December 31, 1997, the Indiana Department
of Environmental Management (IDEM) issued the Phase II Acid Rain permits for all
four of Northern Indiana's  electric  generating  stations.  As discussed below,
however, other provisions of the CAAA impose additional requirements on Northern
Indiana.

      On  December  19,  1996,  the   Environmental   Protection   Agency  (EPA)
promulgated  rules for Phase II of the Acid Rain nitrogen oxides (NOx) reduction
program.  For Phase I, during the summer of 1997, the EPA formally  approved the
Acid Rain Early Election permits for the pulverized coal units at D. H. Mitchell
and R. M. Schahfer  stations.  The permits  establish the Phase I limits for the
NOx emissions on these units until 2007. On December 23, 1997,  Northern Indiana
submitted  an Acid Rain  Phase II NOx  Compliance  Plan to IDEM  which  included
additional  controls  for two  cyclone  fired  boilers  and a plan for  emission
averaging  to achieve  the NOx limits for the system by 2000.  Northern  Indiana
plans a project to demonstrate a cost effective  combustion control technique on
the Unit 12 cyclone  fired boiler at Michigan  City during  1998.  The CAAA also
contain  other  provisions  that  could  lead to  limitations  on  emissions  of
hazardous air pollutants which may require significant capital  expenditures for
control  of  these  emissions.   Northern  Indiana  cannot  predict  what  these
requirements   will  be  or  the  costs  of  complying   with  these   potential
requirements.

     On October 10, 1997, and  supplemented  on May 11, 1998, the EPA proposed a
rule  under  the  nonattainment  provisions  of the  CAAA  to  reduce  emissions
transported   across  state   boundaries  that  allegedly  are  contributing  to
nonattainment  of the one hour ozone standard in downwind  states.  Because NOx,
along with other  factors,  contributes  to ozone  formation,  the EPA  proposed
significant  NOx reductions  for 22 states,  including  Indiana,  to address the
ozone  transport  issue.  These  proposals,   and  any  resulting  NOx  emission
limitations, arise under different provisions of the CAAA than the Acid Rain NOx
program and can result in additional, more restrictive emission limitations than
are  imposed  under  the Acid Rain  Program.  The EPA has  encouraged  states to
achieve the  reductions  by requiring  controls on electric  utilities and large
boilers.  Northern  Indiana is  evaluating  the EPA's  proposal  and  evaluating
potential requirements that could result from any final rule.

     The EPA issued final rules on July 18, 1997,  revising the National Ambient
Air Quality  Standards for ozone and particulate  matter.  The revised standards
begin a  regulatory  process that may lead to  reductions  in  particulate,  NOx
emissions and possibly  sulfur  dioxide  emissions  from many sources  including
Northern Indiana's coal-fired boilers at its generating stations, beyond current
CAAA  requirements.  Northern Indiana cannot predict the costs of complying with
future control  requirements to meet these new standards.  Northern Indiana will
continue to closely monitor  developments in this area and anticipates the exact
nature of the impact of the new  standards on its  operations  will not be known
for some time.

     The EPA has notified Northern Indiana that it is a Apotentially responsible
party" (PRP) under the  Comprehensive  Environmental  Response  Compensation and
Liability  Act  (CERCLA)  and may be required to share in the cost of cleanup of
several  waste  disposal  sites  identified by the EPA. The sites are in various
stages  of  investigation,  analysis  and  remediation.  At each  of the  sites,
Northern Indiana is one of several PRPs, and it is expected that remedial costs,
as provided  under  CERCLA,  will be shared among them.  At some sites  Northern
Indiana and/or the other named PRPs are presently  working with the EPA to clean
up the sites and avoid the imposition of fines or added costs.

     In December  1997,  at the Summit on Climate  Change in Kyoto,  Japan,  159
nations  formally  agreed to targets  reducing  worldwide  levels of  greenhouse
gases.  If the U.S.  Senate  ratifies the  agreement,  the Kyoto  Protocol would
impose an  obligation on the United States to reduce its emissions of greenhouse
gas to a level  seven  percent  below 1990  levels  during the period of 2008 to
2012.  The impact of this agreement on Northern  Indiana is uncertain.  Northern
Indiana,  as a charter  member of the Department of Energy's  Climate  Challenge
Program,  the  electric  industries'  voluntary  reduction  effort,  has already
implemented  over 21 projects to  voluntarily  reduce  greenhouse gas emissions.
Northern Indiana continues to investigate methods to address reduction in carbon
dioxide  emissions  and will monitor the  development  of U. S.  climate  change
policy.

     The  Energy  Utilities  have  instituted  a program to  investigate  former
manufactured-gas  plants where one of them is the current or former  owner.  The
Energy  Utilities have  identified  twenty-eight  of these sites and made visual
inspections  of these sites.  Initial  samplings have been conducted at eighteen
sites. Follow-up  investigations have been conducted at eight sites and remedial
measures have been selected at five sites.  The Energy  Utilities  will continue
their program to assess and cleanup sites.

     During the  course of various  investigations,  the Energy  Utilities  have
identified impacts to soil, groundwater,  sediment and surface water from former
manufactured-gas  plants.  At three sites where residues were noted seeping into
rivers, Northern Indiana notified IDEM and the EPA and immediately took steps to
contain the material.  The Energy  Utilities have worked with IDEM or the EPA on
investigation or remedial  activities at several sites.  Three of the sites have
been  enrolled in the IDEM  Voluntary  Remediation  Program  (VRP).  The goal of
placing  these sites in the VRP is to obtain IDEM  approval of the selection and
implementation  of whatever  remedial  measures,  if any, may be  required.  The
Energy Utilities  anticipate  placing additional sites in the VRP after remedial
measures have been selected.

     Northern Indiana and Indiana Gas Company,  Inc.  (Indiana Gas) have entered
into an agreement  covering  cost sharing and  management of  investigation  and
remediation programs at five former  manufactured-gas  plant sites at which both
companies or their  predecessors  were former operators or owners.  One of these
sites is the Lafayette site which Indiana Gas had previously  notified  Northern
Indiana is being investigated and remediated pursuant to an administrative order
with IDEM.  Northern  Indiana also notified  Cinergy  Services,  Inc.  (Cinergy)
(formerly  PSI  Energy,  Inc.) that it was a former  owner or  operator of seven
former  manufactured-gas  plants at which Northern  Indiana had conducted or was
planning  investigation or remediation  activities.  In December 1996,  Northern
Indiana sent a written demand to Cinergy related to one of these sites,  Goshen.
Northern  Indiana  demanded that Cinergy pay Northern Indiana for costs Northern
Indiana has already  incurred and to be incurred to implement  the needed remedy
at the Goshen site. In August 1997, Northern Indiana filed suit in federal court
against Cinergy seeking recovery of those costs.

     In 1994, the Energy Utilities  approached  various  companies that provided
insurance  coverage which the Energy  Utilities  believe covers costs related to
actions  taken at former  manufactured-gas  plants.  There  has been  litigation
between  Northern  Indiana and various  insurance  companies over covered costs.
Northern  Indiana has filed  claims in state  court  against  various  insurance
companies,   seeking   coverage  for  costs   associated   with  several  former
manufactured-gas  plants  and  damages  for  alleged  misconduct  by some of the
insurance companies. The state court action is now proceeding.  Northern Indiana
has received cash settlements from several of the insurance companies.

     The  possibility  that  exposure  to electric  and  magnetic  fields  (EMF)
emanating from power lines,  household appliances and other electric sources may
result in adverse  health  effects has been the subject of public,  governmental
and media  attention.  Recently,  researchers from the National Cancer Institute
and the  Childhood  Cancer Group  reported  they found no evidence that magnetic
fields in homes increase the risk of childhood  leukemia.  This study follows an
EMF  report  released  in 1997 by the  U.S.  National  Research  Council  of the
National Academy of Sciences, which concluded, after examining more than 500 EMF
studies  spanning 17 years,  that,  among other things,  there was  insufficient
evidence to  consider  EMF a threat to human  health.  A new report in June 1998
from a National Institutes of Health panel accepted the position that EMF should
be regarded as a "possible human carcinogen". Further panel comments also stated
that the risk "is  possibly  quite small  compared to many other  public  health
risks."

     The Water  Utilities  are subject to  pollution  control and water  quality
control regulations,  including those issued by the EPA, IDEM, the Indiana Water
Pollution Control Board and the Indiana Department of Natural  Resources.  Under
the Federal Clean Water Act and Indiana's regulations,  IWC must obtain National
Pollutant  Discharge  Elimination System (NPDES) permits for discharges from its
water treatment stations.  Applications for renewal of any expiring permits have
been filed and are the subject of ongoing  discussions  with,  but have not been
finalized  by, IDEM.  These  permits  continue in effect  pending  review of the
current applications.

     Under the Federal Safe Drinking Water Act (SDWA),  the Water  Utilities are
subject to  regulation  by the EPA for the  quality of water sold and  treatment
techniques  used to make  the  water  potable.  The EPA  promulgates  nationally
applicable maximum  contaminant levels (MCLs) for contaminants found in drinking
water.  Management believes the Water Utilities are currently in compliance with
all MCLs  promulgated  to date. The EPA has continuing  authority,  however,  to
issue additional  regulations  under the SDWA. In August 1996,  Congress amended
the SDWA to allow the EPA more  authority  to weigh the  costs and  benefits  of
regulations being considered in some, but not all, cases. The 1996 amendments do
not,  however,  reduce the number of new  standards  previously  required.  Such
standards  promulgated  could be costly and require  substantial  changes in the
Water  Utilities'  operations.  The Water  Utilities would expect to recover the
costs of such changes through their water rates;  however, such recovery may not
necessarily be timely.

     Under a 1991 law enacted by the Indiana  Legislature,  a water  utility may
petition  the   Commission  for  prior  approval  of  its  plans  and  estimated
expenditures  required to comply with provisions of, and regulations  under, the
Federal Clean Water Act and SDWA. Upon obtaining such approval,  a water utility
may include, to the extent of its estimated costs as approved by the Commission,
such costs in its rate base for  rate-making  purposes  and recover its costs of
developing and implementing  the approved plans if statutory  standards are met.
The capital costs for such new systems, equipment or facilities or modifications
of  existing  facilities  may be included  in a water  utility's  rate base upon
completion of construction of the project or any part thereof. While use of this
statute is voluntary  on the part of a water  utility,  if  utilized,  it should
allow water  utilities a greater degree of confidence in recovering  major costs
incurred to comply with environmentally related laws on a timely basis.

(8) Income Taxes:  Industries uses the liability method of accounting for income
taxes under which deferred  income taxes are  recognized,  at currently  enacted
income tax rates, to reflect the tax effect of temporary differences between the
financial statement and tax bases of assets and liabilities.

      To  the  extent  certain  deferred  income  taxes  of  the  Utilities  are
recoverable or payable through future rates,  regulatory  assets and liabilities
have  been  established.   Regulatory  assets  are  primarily   attributable  to
undepreciated  AFUDC-equity  and the  cumulative  net amount of other income tax
timing  differences  for which deferred taxes had not been provided in the past,
when  regulators  did not  recognize  such  taxes as  costs  in the  rate-making
process.  Regulatory  liabilities  are primarily  attributable to the Utilities'
obligation  to credit to  ratepayers  deferred  income  taxes  provided at rates
higher than the current  federal tax rate currently being credited to ratepayers
using the average rate assumption method and unamortized deferred investment tax
credits.

     The  components  of the net deferred  income tax liability at June 30, 1998
and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
                                                  June 30,   December 31,
(In thousands)                                      1998         1997
                                                 =========    =========
<S>                                              <C>          <C>
Deferred tax liabilities -
 Accelerated depreciation and other
    property differences                         $ 785,694    $ 779,223
 AFUDC-equity                                       34,067       35,282
 Adjustment clauses                                  9,937       35,253
 Other regulatory assets                            30,800       31,862
 Reacquisition premium on debt                      17,647       18,335

Deferred tax assets -
 Deferred investment tax credits                   (38,622)     (40,017)
 Removal costs                                    (150,307)    (144,111)
 Other postretirement/postemployment benefits      (47,933)     (45,298)
 Other, net                                        (19,266)      (3,069)
                                                 ---------    ---------
                                                   622,017      667,460
Less: Deferred income taxes related to current
         assets and liabilities                    (14,084)      15,645
                                                 ---------    ---------
Deferred income taxes -noncurrent                $ 636,101    $ 651,815
                                                 =========    =========
</TABLE>
<PAGE>
      Federal and state income taxes as set forth in the Consolidated  Statement
of Income are comprised of the following:
<TABLE>
<CAPTION>
                                            Three Months               Six Months              Twelve Months
                                           Ended June 30,            Ended June 30,            Ended June 30,
                                       ----------------------    ----------------------    ----------------------
(In thousands)                            1998         1997         1998         1997         1998         1997
                                       =========    =========    =========    =========    =========    =========
<S>                                    <C>          <C>          <C>          <C>          <C>          <C>      
Current income taxes -
 Federal                               $  25,994    $  33,940    $  81,911    $  80,273    $  99,764    $ 120,506

 State                                     3,861        5,058       12,148       11,950       17,271       18,279

                                       ---------    ---------    ---------    ---------    ---------    ---------
                                          29,855       38,998       94,059       92,223      117,035      138,785
                                       ---------    ---------    ---------    ---------    ---------    ---------
Deferred income taxes, net -
 Federal                                 (11,694)     (19,222)     (39,500)     (30,654)     (10,618)     (22,655)

 State                                      (916)      (1,530)      (3,150)      (2,441)        (586)      (1,656)
                                       ---------    ---------    ---------    ---------    ---------    ---------
                                         (12,610)     (20,752)     (42,650)     (33,095)     (11,204)     (24,311)
                                       ---------    ---------    ---------    ---------    ---------    ---------
Deferred investment tax credits, net      (1,821)      (1,833)      (3,642)      (3,635)      (7,383)
                                                                                                           (7,704)
                                       ---------    ---------    ---------    ---------    ---------    ---------
   Total income taxes                  $  15,424    $  16,413    $  47,767    $  55,493    $  98,448    $ 106,770
                                       =========    =========    =========    =========    =========    =========
</TABLE>
<PAGE>
      A  reconciliation  of total  income tax  expense to an amount  computed by
applying the statutory federal income tax rate to pre-tax income is as follows:
<TABLE>
<CAPTION>
                                                           Three Months               Six Months              Twelve Months
                                                          Ended June 30,            Ended June 30,            Ended June 30,
                                                      ----------------------    ----------------------    ----------------------
(In thousands)                                           1998         1997         1998         1997         1998         1997
                                                      =========    =========    =========    =========    =========    =========
<S>                                                   <C>          <C>          <C>          <C>          <C>          <C>      
Net income                                            $  29,445    $  28,236    $  90,167    $  99,074    $ 181,942    $ 184,893
Add-Income taxes                                         15,424       16,413       47,767       55,493       98,448      106,770
 Dividend requirements on
  preferred stocks of subsidiaries                        2,128        2,179        4,295        4,346        8,640        8,681
                                                      ---------    ---------    ---------    ---------    ---------    ---------
Income before preferred dividend
  requirements of subsidiaries and
  income taxes                                        $  46,997    $  46,828    $ 142,229    $ 158,913    $ 289,030    $ 300,344
                                                      =========    =========    =========    =========    =========    =========
Amount derived by multiplying
   pre-tax  income by the
    statutory rate                                    $  16,449    $  16,390    $  49,780    $  55,620    $ 101,161    $ 105,120

Reconciling items multiplied by the statutory rate:
    Book depreciation over
     related tax depreciation                               998        1,044        1,996        2,088        3,980        4,696
    Amortization of deferred
     investment tax credits                              (1,821)      (1,833)      (3,642)      (3,635)      (7,383)      (7,704)
   State income taxes, net of
     federal income tax benefit                           1,594        1,758        4,746        5,327       10,640       10,225
    Reversal of deferred taxes
      provided at rates in excess
      of the current federal
      income tax rate                                    (1,271)      (1,518)      (2,542)      (3,036)      (3,569)      (6,861)
     Low-income housing
      credits                                              (960)        (764)      (1,920)      (1,528)      (3,448)      (1,009)
     Nondeductible amounts
       related to amortization of
       intangible assets and plant
       acquisition adjustments                              629          515        1,258          611        2,287          804
     Other, net                                            (194)         821       (1,909)          46       (5,220)       1,499
                                                      ---------    ---------    ---------    ---------    ---------    ---------
        Total income taxes                            $  15,424    $  16,413    $  47,767    $  55,493    $  98,448    $ 106,770
                                                      =========    =========    =========    =========    =========    =========
</TABLE>


(9) Pension Plans:  Industries and its subsidiaries  have four  noncontributory,
defined  benefit  retirement  plans  covering the  majority of their  employees.
Benefits under the plans reflect the employees'  compensation,  years of service
and age at retirement.

     The change in the benefit obligation for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(In thousands)                                              1997         1996
                                                         =========    =========
<S>                                                  <C>              <C>      
Benefit obligation at beginning of year (January 1,) $     743,634    $ 759,557
Service cost                                                14,714       16,300
Interest cost                                               57,938       53,477
Plan amendments                                             25,096            0
Actuarial (gain) loss                                       73,818      (39,024)
Acquisition of IWCR                                         15,722            0
Benefits paid                                              (55,166)     (46,676)
                                                         ---------    ---------
Benefit obligation at end of the year (December 31,)$      875,756    $ 743,634
                                                         =========    =========
</TABLE>

     The change in the fair  value of the  plans'  assets for the years 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
(In thousands)                                    1997         1996
                                                ========     ========
<S>                                            <C>          <C> 
Fair value of plan assets at beginning of
      year (January 1,)                        $ 790,978    $ 705,541
Actual return on plans' assets                   126,695       87,407
Employer contributions                            46,440       44,706
Acquisition of IWCR                               15,910            0
Benefits paid                                    (55,166)     (46,676)
                                               ---------    ---------
Plan assets at fair value at end of the year
     (December 31,)                            $ 924,857    $ 790,978
                                               =========    =========
</TABLE>
     The plans' assets are invested primarily in common stocks, bonds and notes.

     The plans'  funded  status as of January 1, 1998 and  January 1, 1997 is as
follows:
<TABLE>
<CAPTION>
                                              January 1,  January 1,
(In thousands)                                   1998        1997
                                               ========    ========
<S>                                            <C>         <C>     
Plan assets in excess of  benefit obligation   $ 49,101    $ 47,344
Unrecognized net actuarial loss                 (46,960)    (66,976)
Unrecognized prior service cost                  47,114      25,172
Unrecognized transition amount                   32,107      38,062
                                               --------    --------
Prepaid pension costs                          $ 81,362    $ 43,602
                                               ========    ========
</TABLE>

      The benefit  obligation  is the present  value of future  pension  benefit
payments and is based on a plan benefit formula which considers  expected future
salary  increases.  Discount  rates of 7.00% and 7.75% and rates of  increase in
compensation  levels  of 4.5%  and  5.5%  were  used to  determine  the  benefit
obligation  at  January  1, 1998 and 1997,  respectively.  The  increase  in the
benefit  obligation  at  January 1, 1998 was  impacted  by the  decrease  in the
discount rate from 7.75% to 7.00%.  Prepaid  pension costs were $98.4 million as
of June 30, 1998.

      The following  items are the components of provisions for pensions for the
three-month, six-month and twelve-month periods ended June 30, 1998 and June 30,
1997:
<TABLE>
<CAPTION>
                                             Three Months               Six Months             Twelve Months
                                            Ended June 30,            Ended June 30,           Ended June 30,
                                        ----------------------    ---------------------    -----------------------
(In thousands)                             1998         1997         1998         1997         1998         1997
                                        =========    =========    =========    =========    =========    =========
<S>                                     <C>          <C>          <C>          <C>          <C>          <C>      
Service costs                           $   6,518    $   4,809    $  13,036    $   9,382    $  18,104    $  15,094
Interest costs                             21,784       16,816       43,568       33,352       67,804       54,700
Expected return on plan assets            (29,253)     (20,977)     (58,506)     (41,480)    (143,272)     (66,928)
Amortization of transition obligation        ,833        1,765        3,666        3,353        6,531        5,512
Amortization of prior service costs         2,092          950        4,183        1,900       58,942        2,954
                                        ---------    ---------    ---------    ---------    ---------    ---------
                                        $   2,974    $   3,363    $   5,947    $   6,507    $   8,109    $  11,332
                                        =========    =========    =========    =========    =========    =========
</TABLE>

     Assumptions  used in the  valuation  and  determination  of 1998  and  1997
pension expense were as follows:
<TABLE>
<CAPTION>
                                            1998           1997
                                           ======         ======
<S>                                         <C>            <C>  
Discount rate                               7.00%          7.75%
Rate of increase in compensation levels     4.50%          5.50%
Expected long-term rate of return on assets 9.00%          9.00%
</TABLE>

     The plans'  assets are invested  primarily  in common  stocks,  bonds,  and
notes.  On July 9, 1998, a  substantial  portion of the plans'  domestic  equity
investments were hedged against significant movements in the S&P 500 Index.
The hedge will expire on December 31, 1998.

      IWCR participates in several  industry-wide,  multi-employer pension plans
for certain of its union  employees at Miller.  These plans  provide for monthly
benefits based on length of service.  Specified amounts per compensated hour for
each employee are contributed to the trustees of these plans.  Contributions  of
$0.5  million,  $0.8  million and $1.9  million were made to these plans for the
three-month,   six-month   and   twelve-month   periods  ended  June  30,  1998,
respectively.  The relative  position of each  employer  participating  in these
plans with respect to the actuarial  present value of accumulated  plan benefits
and net assets available for benefits is not available.

(10) Postretirement  Benefits:  Industries provides certain health care and life
insurance benefits for retired employees.  The majority of Industries' employees
may  become  eligible  for those  benefits  if they reach  retirement  age while
working for Industries. The expected cost of such benefits is accrued during the
employees' years of service.

      Northern  Indiana's  rate-making  had  historically  included  the cost of
providing these benefits based on the related  insurance  premiums.  On December
30,  1992,  the  Commission  authorized  the accrual  method of  accounting  for
postretirement  benefits for rate-making  purposes  consistent with SFAS No. 106
AEmployers'  Accounting for  Postretirement  Benefits Other Than  Pensions," and
authorized   the   deferral  of  the   differences   between  the  net  periodic
postretirement  benefit costs and the insurance  premiums paid for such benefits
as a  regulatory  asset.  On June  11,  1997,  the  Commission  issued  an order
approving the  inclusion of  accrual-based  postretirement  benefit costs in the
rate-making  process to be  effective  February 1, 1997 for  electric  rates and
March 1, 1997 for gas rates. These costs include an amortization of the existing
regulatory  asset  consistent  with the  remaining  amortization  period for the
transition obligation. Northern Indiana discontinued its cost deferral and began
amortizing its regulatory asset concurrent with these dates.

      IWC's  current rates  include  postretirement  benefit costs on an accrual
basis,  including  amortization  of the  regulatory  asset that  arose  prior to
inclusion of these costs in the rates.  IWC currently  remits to a grantor trust
amounts collected in rates.

      The  following  table  sets  forth the  change in the  plans'  accumulated
postretirement benefit obligation (APBO) for the years 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands)                                     1997         1996
                                                =========    =========
<S>                                             <C>          <C>   
Accumulated postretirement benefit obligation
   at beginning of year  (January 1,)           $ 200,790    $ 257,915
Service cost                                        5,034        7,352
Interest cost                                      16,215       18,310
Plan amendments                                     4,015      (10,482)
Actuarial (gain)                                  (10,242)     (65,718)
Acquisition of IWCR                                18,505            0
Benefits paid                                     (10,409)      (6,587)
                                                ---------    ---------
Accumulated postretirement benefit obligation
   at end of the year  (December 31,)           $ 223,908    $ 200,790
                                                =========    =========
</TABLE>
     The change in the fair  value of the  plans'  assets for the years 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
(In thousands)                               1997        1996
                                         ========    ========
<S>                                      <C>         <C>     
Fair value of plan assets at beginning
     of year (January 1,)                $      0    $      0
Employer contributions                     12,809       6,587
Benefits paid                             (10,409)     (6,587)
                                         --------    --------
Plan assets at fair value at end
     of the year (December 31,)          $  2,400    $      0
                                         ========    ========
</TABLE>
     Following is the funded status for postretirement benefits as of January 1,
1998 and January 1, 1997:
<TABLE>
<CAPTION>
                                                January 1,   January 1,
(In thousands)                                     1998         1997
                                                =========    =========
<S>                                             <C>          <C>       
Funded status                                   $(221,508)   $(200,790)
Unrecognized net actuarial gain                   (99,117)     (89,547)
Unrecognized prior service cost                     4,195            0
Unrecognized transition amount                    176,464      175,012
                                                ---------    ---------
Accrued liability for postretirement benefits   $(139,966)   $ 115,325)
                                                =========    =========
</TABLE>

     A discount rate of 7.00%, a pre-Medicare medical trend rate of 8% declining
to a long-term rate of 5%, a discount rate of 7.75% and a  pre-Medicare  medical
trend rate of 9% declining to a long-term rate of 6%, were used to determine the
APBO at  January 1, 1998 and 1997,  respectively.  The  increase  in the APBO at
January 1, 1998 was `primarily  attributable to the inclusion of IWCR's APBO and
the decrease in the discount rate from 7.75% to 7.00%. The accrued liability for
postretirement benefits was $143.5 million at June 30, 1998.

      Net periodic  postretirement  benefits costs, before  consideration of the
rate-making   discussed   previously,   for  the   three-month,   six-month  and
twelve-month periods ended June 30, 1998 and June 30, 1997 include the following
components:
 <TABLE>
<CAPTION>
                                             Three Months            Six Months            Twelve Months
                                           Ended June 30,          Ended June 30,          Ended June 30,
                                        --------------------    --------------------    -------------------- 
 (In thousands)                             1998        1997        1998        1997        1998        1997
                                        ========    ========    ========    ========    ========    ========
<S>                                     <C>         <C>         <C>         <C>         <C>         <C>     
Service costs                           $  1,487    $  1,589    $  2,674    $  3,049    $  4,529    $  7,161
Interest costs                             4,073       4,798       8,146       9,258      14,766      17,410
Expected return on plan assets               (50)          0        (100)          0        (100)          0
Amortization of transition obligation      2,930       2,970       5,859       5,734      11,683      11,137
Amortization of prior service cost            75           0         150           0         429           0
Amortization of (gain) loss               (1,393)     (2,786)     (6,608)     (1,411)
                                        --------    --------    --------    --------    --------    --------
                                        $  7,122    $  8,343    $ 13,943    $ 16,019    $ 24,699    $ 34,297
                                        ========    ========    ========    ========    ========    ========
</TABLE>
     Assumptions  used  in the  determination  of 1998  and  1997  net  periodic
postretirement benefit costs were as follows:
<TABLE>
<CAPTION>
                                                1998       1997
                                              =======    =======
<S>                                             <C>        <C>  
Discount rate                                   7.00%      7.75%
Rate of increase in compensation levels         4.50%      5.50%
</TABLE>

     The  pre-Medicare  medical  trend  rates  used for  1998  and 1997  were 8%
declining to a long-term  rate of 5% and 9% declining to a long-term rate of 6%,
respectively.  The effect of a 1% increase in the assumed health care cost trend
rates for each future year would increase the accumulated postretirement benefit
obligation at January 1, 1998 by approximately  $27.1 million,  and increase the
aggregate  of the  service  and  interest  cost  components  of  plan  costs  by
approximately  $0.8 million and $1.5 million for the  three-month  and six-month
periods ended June 30, 1998.  The effect of a 1% decrease in the assumed  health
care cost trend  rates for each  future  year  would  decrease  the  accumulated
postretirement  benefit  obligation  at January 1, 1998 by  approximately  $22.2
million,  and decrease the aggregate of the service and interest cost components
of plan costs by approximately $0.6 million and $1.2 million for the three-month
and six-month  periods  ended June 30, 1998.  Amounts  disclosed  above could be
changed  significantly in the future by changes in health care costs, work force
demographics, interest rates, or plan changes.


(11) Authorized Classes of Cumulative Preferred and Preference Stocks:

      Industries -
        20,000,000 shares -Preferred -without par value

       4,000,000 of Industries' Series A Junior  Participating  Preferred Shares
are reserved for issuance  pursuant to the Share Purchase  Rights Plan described
in Note 17, Common Shares.

     Northern Indiana -
        2,400,000 shares -Cumulative  Preferred -$100 par value 3,000,000 shares
        -Cumulative   Preferred  -no  par  value  2,000,000  shares  -Cumulative
        Preference -$50 par value
                                      (none outstanding)
        3,000,000                     shares  -Cumulative   Preference  -no  par
                                      value (none issued)
     Indianapolis Water Company -
           300,000 shares -Cumulative Preferred -$100 par value

      Note 12 sets forth the preferred stocks which are redeemable solely at the
option of the  issuer,  and Note 13 sets forth the  preferred  stocks  which are
subject to mandatory redemption  requirements or whose redemption is outside the
control of the issuer.

      The  Preferred  shareholders  of  Northern  Indiana and IWC have no voting
rights,  except in the  event of  default  on the  payment  of four  consecutive
quarterly  dividends,  or as  required by Indiana  law to  authorize  additional
preferred  shares,  or by the Articles of  Incorporation in the event of certain
merger transactions.


(12)  Preferred  Stocks,   Redeemable  Solely  at  the  Option  of  the  Issuer,
Outstanding at June 30, 1998 and December 31, 1997 :
<TABLE>
<CAPTION>
                                                                                           Redemption
                                                                                            Price at
                                                       June 30,        December 31,         June 30,
 (Dollars in thousands)                                 1998              1997               1998
                                                     ===========       ===========        ===========
<S>                                                     <C>               <C>                 <C>    
Northern Indiana Public Service Company:   
 Cumulative  preferred  stock - $100 par  value -
  4-1/4% series- 209,057 and 209,118 shares
      outstanding,  respectively                        $ 20,906          $ 20,912            $101.20
  4-1/2% series-  79,996 shares outstanding                8,000             8,000            $100.00
  4.22% series - 106,198 shares outstanding               10,620            10,620            $101.60
  4.88% series - 100,000 shares outstanding               10,000            10,000            $102.00
  7.44% series -  41,890 shares outstanding                4,189             4,189            $101.00
  7.50% series -  34,842 shares outstanding                3,484             3,484            $101.00
  Premium on preferred stock                                 254               254                N/A


 Cumulative preferred stock -
  no par value -
   Adjustable  rate  (6.00% at June 30,  1998),
    Series A (stated  value $50 per share) 473,285
    shares outstanding                                    23,664            23,664            $ 50.00


Indianapolis Water Company:
 Cumulative  preferred stock - $100 par value -
  Rates ranging from 4.00% to 5.00%, 44,966
   shares outstanding                                      4,497             4,497            $100 - $105
                                                     -----------       -----------
                                                     $    85,614       $    85,620
                                                     ===========       ===========
</TABLE>

     During the period July 1, 1996 to June 30, 1998,  there were no  additional
issuances of the above preferred
stocks.


      The foregoing  preferred  stocks are redeemable in whole or in part at any
time upon  thirty  days'  notice at the option of the  issuer at the  redemption
prices shown.

(13) Redeemable  Preferred Stocks  Outstanding at June 30, 1998 and December 31,
1997 : Preferred  stocks subject to mandatory  redemption  requirements or whose
redemption is outside the control of issuer, excluding sinking fund payments due
within one year are as follows:
<TABLE> 
<CAPTION>
                                                         June 30,     December 31,
(Dollars in thousands)                                    1998            1997
                                                       ===========    ===========
<S>                                                    <C>            <C>  
Northern Indiana Public Service Company:
 Cumulative  preferred stock -$100 par value -
   8.85% series  - 50,000 and 62,500 shares
      outstanding, respectively                        $     5,000    $     6,250
   7-3/4% series - 38,906 shares outstanding                 3,891          3,891
   8.35% series  - 57,000 shares outstanding                 5,700          5,700

 Cumulative preferred stock -no par value -
   6.50% series - 430,000 shares outstanding                43,000         43,000
                                                 ----------------------------------
                                                       $    57,591    $    58,841
                                                       ===========    ===========
</TABLE>

      The redemption prices at June 30, 1998, as well as sinking fund provisions
for  the   cumulative   preferred   stocks   subject  to  mandatory   redemption
requirements,  or whose  redemption is outside the control of Northern  Indiana,
are as follows: 
<TABLE>
<CAPTION>
                                                               Sinking Fund or
  Series              Redemption Price Per Share         Mandatory Redemption Provisions
==========            ==========================         ======================================
<S>  <C>              <C>                                <C>                              
Cumulative preferred stock -$100 par value -
     8.85%            $101.11, reduced periodically      12,500 shares on or before April 1.

     8.35%            $103.69, reduced periodically      3,000 shares on or before July 1; increasing
                                                         to 6,000 shares beginning in 2004; noncumulative 
                                                         option to double amount each year.

    7-3/4%            $104.23, reduced periodically      2,777 shareson or before  December 1;
                                                       noncumulative option to double amount each year.

Cumulative preferred stock -no par value -
     6.50%            $100.00 on October 14, 2002        430,000 shares on October 14, 2002.
</TABLE>

      Sinking fund  requirements  with respect to  redeemable  preferred  stocks
outstanding at June 30, 1998 for each of the twelve-month  periods subsequent to
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended June 30,*
==============================
<S>                 <C>       
2000                $1,827,700
2001                $1,827,700
2002                $1,827,700
2003                $1,827,700

* Table does not reflect redemptions made after June 30, 1998.
</TABLE>

(14) Stock  Split:  On December 16,  1997,  the Board of Directors  authorized a
two-for-one split of Industries' common stock. The stock split was paid February
20, 1998, to shareholders  of record at the close of business  January 30, 1998.
All references to number of shares  reported for the period  including per share
amounts  and  stock  option  data  of  Industries'   common  stock  reflect  the
two-for-one  stock split as if it had occurred at the  beginning of the earliest
period.

(15) Common Share Dividend:  During the next few years,  Industries expects that
the majority of earnings  available for  distribution  of dividends  will depend
upon  dividends  paid to  Industries  by Northern  Indiana.  Northern  Indiana's
Indenture  dated  August 1,  1939,  as  amended  and  supplemented  (Indenture),
provides  that it will not declare or pay any  dividends on any class of capital
stock (other than preferred or preference stock) except out of earned surplus or
net  profits  of  Northern  Indiana.  At June 30,  1998,  Northern  Indiana  had
approximately $152.7 million of retained earnings (earned surplus) available for
the payment of dividends.  Future  dividends will depend upon adequate  retained
earnings, adequate future earnings and the absence of adverse developments.

(16) Earnings Per Share: At December 31, 1997,  Industries  adopted SFAS No. 128
"Earnings  per Share." The adoption of this  statement  required  Industries  to
present  basic  earnings  per share and diluted  earnings  per share in place of
primary  earnings per share.  Basic  earnings per share was computed by dividing
net income,  reduced for preferred  dividends,  by the average  number of common
shares outstanding during the period. The diluted earnings per share calculation
assumes conversion of nonqualified stock options into common shares. As a result
of adopting the statement,  previously  reported  earnings per share information
was  restated.  The  effect of this  accounting  change on  previously  reported
earnings per share data was insignificant.

The net income, preferred dividends and shares used to compute basic and diluted
earnings per share is presented in the following table:
<TABLE>
                                                   Three Months                 Six Months               Twelve Months
                                                  Ended June 30,              Ended  June 30,            Ended June 30,
                                             ------------------------    ------------------------   ------------------------
(Dollars in thousands, except per share amounts) 1998         1997           1998         1997           1998         1997    
-----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>            <C>          <C>            <C>          <C>      
Basic
Weighted Average Number of Shares:
  Average Common Shares Outstanding          122,180,915  125,655,240    123,022,091  122,404,026    124,156,903  121,935,166
                                             ===========  ===========    ===========  ===========    ===========  ===========
Net Income to be Used to Compute Basic Earnings per Share:
Net Income                                    $   29,445   $   28,236     $   90,167   $   99,074     $  181,942   $  184,893
                                              ----------   ----------     ----------   ----------     ----------   ----------
Basic Earnings per Average Common Share       $     0.24   $     0.22     $     0.73   $     0.80     $     1.46   $     1.51
                                             ===========  ===========    ===========  ===========    ===========  ===========
Diluted
Weighted Average Number of Shares:
  Average Common Shares Outstanding          122,180,915  125,655,240    123,022,091  122,404,026    124,156,903  121,935,166
  Dilutive effect for Nonqualified
       Stock Options                             456,722      349,514        493,845      346,256        460,905      351,628
                                              ----------   ----------     ----------   ----------     ----------   ----------
Weighted Average Shares                      122,637,637  126,004,754    123,515,936  122,750,282    124,617,808  122,286,794
                                             ===========  ===========    ===========  ===========    ===========  ===========

Net Income to be Used to Compute Diluted Earnings per Share:
Net Income                                   $    29,445  $    28,236    $    90,167  $    99,074    $   181,942  $   184,893
                                             -----------  -----------    -----------  -----------    -----------  -----------
Diluted Earnings per Average Common Share    $      0.24  $      0.22    $      0.73  $      0.80    $      1.46  $      1.51
                                             ===========  ===========    ===========  ===========    ===========  ===========

</TABLE>

(17) Common Shares: On April 8, 1998,  shareholders  approved an increase in the
number of authorized common shares without par value from 200,000,000  shares to
400,000,000 shares.

      Share  Purchase  Rights Plan. On February 27, 1990, the Board of Directors
of Industries  (Board)  declared a dividend  distribution  of one Right for each
outstanding  common share of Industries to  shareholders  of record on March 12,
1990. The Rights are not currently  exercisable.  Each Right,  when exercisable,
would initially entitle the holder to purchase from Industries one two-hundredth
of a Series A Junior  Participating  Preferred  Share,  without  par  value,  of
Industries  at a price  of $30 per one  two-hundredth  of a  share.  In  certain
circumstances, if an acquirer obtained 25% of Industries' outstanding shares, or
merged into Industries or merged Industries into the acquirer,  the Rights would
entitle the holders to purchase  Industries' or the acquirer's common shares for
one-half  of the market  price.  The Rights will not dilute  Industries'  common
shares nor affect  earnings per share unless they become  exercisable for common
shares.  The Plan was not adopted in response to any specific attempt to acquire
control of Industries.

      Common Share  Repurchases.  The Board has  authorized  the  repurchase  of
Industries'   common  shares.  At  June  30,  1998,   Industries  had  purchased
approximately  47.7 million  shares since 1989 at an average price of $15.14 per
share.  Approximately  14.4 million  additional common shares may be repurchased
under the Board's authorization.

(18) Long-Term Incentive Plan:  Industries has two long-term incentive plans for
key management  employees that were approved by  shareholders  on April 13, 1988
(1988  Plan) and April 13,  1994 (1994  Plan),  each of which  provides  for the
issuance  of up to 5.0 million of  Industries'  common  shares to key  employees
through  1998 and 2004,  respectively.  At June 30, 1998,  there were  3,847,500
shares reserved for future awards under the 1994 Plan. The 1994 Plan permits the
following  types of grants,  separately or in  combination:  nonqualified  stock
options,  incentive stock options,  restricted stock awards,  stock appreciation
rights and performance  units.  No incentive stock options or performance  units
were  outstanding at June 30, 1998.  Under this Plan, the exercise price of each
option equals the market price of Industries'  stock on the date of grant.  Each
option  has a  maximum  term of ten  years  and  vests one year from the date of
grant.

      The stock appreciation  rights (SARs) may be exercised only in tandem with
stock options on a one-for-one basis and are payable in cash, Industries' common
shares or a combination  thereof.  Restricted  stock awards are restricted as to
transfer and are subject to  forfeiture  for  specific  periods from the date of
grant.  Restrictions  on shares  awarded  in 1995  lapse five years from date of
grant and vesting is variable from 0% to 200% of the number awarded,  subject to
specific earnings per share and stock appreciation goals. Restrictions on shares
awarded  in 1997 and 1998  lapse two years  from  date of grant and  vesting  is
variable from 0% to 100% of the number awarded,  subject to specific performance
goals. If a participant's  employment is terminated  prior to vesting other than
by reason of death,  disability or retirement,  restricted shares are forfeited.
There were 534,666 and 542,666  restricted  shares  outstanding at June 30, 1998
and December 31, 1997, respectively.

      The  Industries  Nonemployee  Director  Stock  Incentive  Plan,  which was
approved  by  shareholders,  provides  for  the  issuance  of up to  200,000  of
Industries'  common  shares to  nonemployee  directors of  Industries.  The Plan
provides  for awards of common  shares,  which vest in 20% per year  increments,
with  full  vesting  after  five  years.  The  Plan  also  allows  the  award of
nonqualified  stock options.  If a director's service on the Board is terminated
for any reason other than death or  disability,  any common shares not vested as
of the date of termination are forfeited. As of June 30, 1998, 71,500 shares had
been issued under the Plan.

      Industries  accounts  for these plans under  Accounting  Principles  Board
Opinion  No.  25,  under  which no  compensation  cost has been  recognized  for
non-qualified stock options. The compensation cost that has been charged against
income for  restricted  stock  awards was $0.9,  $1.4 and $2.5  million  for the
three-month,   six-month  and   twelve-month   periods  ending  June  30,  1998,
respectively.  Had  compensation  cost  for  non-qualified  stock  options  been
determined   consistent   with  SFAS  No.  123   "Accounting   for   Stock-Based
Compensation,"  Industries'  net income and  earnings  per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>

                                  Three Months               Six Months            Twelve Months
                                 Ended June 30,            Ended June 30,          Ended June 30,
                              -------------------       -------------------      -------------------
                                1998       1997           1998       1997         1998       1997
                              ========   ========       ========   ========     ========   ========      
                                       (Dollars   in   thousands,   except  pershare data)
<S>                           <C>        <C>            <C>        <C>          <C>        <C> 
Net Income:
   As reported                $ 29,445   $ 28,236       $ 90,167   $ 99,074     $181,942   $184,893
   Pro forma                    29,230     28,029         89,739     98,660      181,088    184,106

Earnings Per Average Common Share:
 Basic:
   As reported                $   0.24   $   0.22       $   0.73   $   0.80     $   1.46   $   1.51
   Pro forma                      0.23       0.22           0.72       0.80         1.45       1.50
 Diluted:
   As reported                $   0.24   $   0.22       $   0.73   $   0.80     $   1.46   $   1.51
   Pro forma                      0.23       0.22           0.72       0.80         1.45       1.50
</TABLE>

      The fair value of each  option  granted  used to  determine  pro forma net
income  is  estimated  as of the date of grant  using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
the three-month, six-month and twelve-month periods ended June 30, 1998 and June
30, 1997:  risk-free  interest rate of 6.29% and 6.39%,  respectively;  expected
dividend yield per share of $0.87 and $0.84, respectively;  expected option term
of five  and  one-quarter  years  and five  years,  respectively;  and  expected
volatilities of 12.7% and 13.2%, respectively.

      Changes in outstanding  shares under option and SARs for the  three-month,
six-month and twelve-month  periods ended June 30, 1998 and June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
                                                  NONQUALIFIED STOCK OPTIONS

                                       --------------------------------------------
                                                    Weighted               Weighted
                                                     Average                Average
                                                     Option                 Option
Three Months Ended June 30,               1998        Price        1997      Price
============================            ========     =======     ========   =======
<S>                                    <C>           <C>        <C>         <C>    
Balance, beginning of period           2,326,600     $ 16.73    2,284,100   $ 15.33
 Granted                                       0                        0
 Exercised                               112,800       15.45       88,700     14.12
 Canceled                                 10,000       20.64
                                       ---------                ---------
Balance, end of period                 2,203,800       16.78    2,195,400     15.38
                                        ========                 ========
Shares exercisable                     1,693,200       15.61    1,670,500     14.27
                                        ========                 ========
</TABLE>



<TABLE>
<CAPTION>


                                                  NONQUALIFIED STOCK OPTIONS

                                       --------------------------------------------
                                                    Weighted               Weighted
                                                     Average                Average
                                                     Option                 Option
Six Months Ended June 30,                 1998        Price        1997      Price
============================            ========     =======     ========   =======
<S>                                    <C>           <C>        <C>         <C>    
Balance, beginning of period           2,535,400     $ 16.41    2,360,900   $ 15.33
 Granted                                       0                        0
 Exercised                               313,600       13.59      141,800     14.08
 Canceled                                 18,000       20.64       23,700     18.91
                                       ---------                ---------
Balance, end of period                 2,203,800       16.78    2,195,400     15.38
                                        ========                 ========
Shares exercisable                     1,693,200       15.61    1,670,500     14.27
                                        ========                 ========
</TABLE>
<TABLE>
<CAPTION>



                                                  NONQUALIFIED STOCK OPTIONS

                                       --------------------------------------------
                                                    Weighted               Weighted
                                                     Average                Average
                                                     Option                 Option
Twelve Months Ended June 30,              1998        Price        1997      Price
============================            ========     =======     ========   =======
<S>                                    <C>           <C>        <C>         <C>    
Balance, beginning of period           2,195,400     $ 15.38    2,092,000   $ 14.36
 Granted                                 533,600       20.64      556,600     18.91
 Exercised                               502,200       14.57      417,700     14.74
 Canceled                                 23,000       20.64       35,500     18.55
                                       ---------                ---------
Balance, end of period                 2,203,800       16.78    2,195,400     15.38
                                        ========                 ========
Shares exercisable                     1,693,200       15.61    1,670,500     14.27
                                        ========                 ========
Weighted average fair value
 of options granted                     $   2.66                 $   2.50
                                        ========                 ========

</TABLE>
<TABLE>

<CAPTION>
                                            NONQUALIFIED STOCK OPTIONS WITH SARs

                                       --------------------------------------------
                                                     Option                 Option
Three Months Ended June 30,               1998        Price        1997      Price
============================            ========     =======     ========   =======
<S>                                       <C>        <C>           <C>      <C>    
Balance, beginning of period              11,200     $  5.47       11,200   $  5.47
 Exercised                                11,200     $  5.47            0
                                       ---------                ---------
Balance, end of period                         0                   11,200      5.47
                                        ========                 ========
Shares exercisable                             0                   11,200      5.47
                                        ========                 ========

</TABLE>
<TABLE>
<CAPTION>



                                            NONQUALIFIED STOCK OPTIONS WITH SARs

                                       --------------------------------------------
                                                     Option                   Option
Six Months Ended June 30,                 1998        Price        1997        Price
============================            ========     =======     ========   =======
<S>                                       <C>        <C>           <C>      <C>    
Balance, beginning of period              11,200     $  5.47       11,200   $  5.47
 Exercised                                11,200     $  5.47            0
                                       ---------                ---------
Balance, end of period                         0                   11,200      5.47
                                        ========                 ========
Shares exercisable                             0                  11,200        5.47
                                        ========                 ========
</TABLE>
<TABLE>
<CAPTION>


                                            NONQUALIFIED STOCK OPTIONS WITH SARs
                                       --------------------------------------------
                                                     Option                  Option
Twelve Months Ended June 30,              1998        Price        1997       Price
============================            ========     =======     ========   =======
<S>                                       <C>        <C>           <C>      <C>    
Balance, beginning of period              11,200     $  5.47       11,200   $  5.47
 Exercised                                11,200        5.47            0
                                       ---------                ---------
Balance, end of period                         0                   11,200      5.47
                                        ========                 ========
Shares exercisable                             0                   11,200      5.47
                                        ========                 ========
</TABLE>

     The  following  table  summarizes  information  about  non-qualified  stock
options at June 30, 1998:
<TABLE>
<CAPTION>
                                                    OPTIONS OUTSTANDING

                                       ------------------------------------------
                         Number       Weighted Average
   Range of          Outstanding at     Remaining        Weighted Average
  Option Price       June 30, 1998    Contractual Life     Option Price
==================    ===========        ===========       =============
<S>                        <C>            <C>                    <C>    
$ 5.47 to $ 8.97           91,000         1.75 years             $  8.63
$11.47 to $15.16          566,400         4.92 years              $13.37
$16.22 to $20.64        1,546,400         7.73 years              $18.51
------------------    -----------        -----------       -------------
$ 5.47 to $20.64        2,203,800         6.76 years              $16.78
                         ========
</TABLE>
<TABLE>

<CAPTION>
                                                    OPTIONS EXERCISABLE
                                       ------------------------------------------
                                 Number
   Range of                  Exercisable at       Weighted Average
  Option Price                June 30, 1998          Option Price
================             ==============        ==============
<S>                                  <C>                  <C>    
$ 5.47 to $ 8.97                     91,000               $  8.63
$11.47 to $15.16                    566,400                $13.37
$16.22 to $18.91                  1,035,800                $17.45
----------------             --------------               --------
$ 5.47 to $18.91                  1,693,200                $15.61
                             ==============
</TABLE>

(19)  Long-Term  Debt:  At June 30,  1998 and  December  31,  1997,  Industries'
outstanding  long-term debt,  excluding  amounts due within one year, issued and
not retired or canceled was as follows:
<TABLE>
<CAPTION>
                                                              June 30,       December 31,
(Dollars in thousands)                                          1998            1997
                                                             ==========     ==========   
<S>                                                          <C>            <C>       
 Interest rates between 5.20% and 9.83% with a weighted
  average interest rate of 7.23% and various maturities
  between May 1, 2001 and September 1, 2025                  $  187,100     $  187,100

Pollution control notes and bonds-
 Interest rates between 3.60% and 5.70% with a weighted
  average interest rate of 3.85% and various maturities
  between October 1, 2003 and April 1, 2019                     241,000        241,000

Medium-term notes -
 Interest rates between 6.10% and 7.99% with a weighted
  average interest rate of 7.19% and various maturities
  between March 20, 2000 and August 4, 2027                   1,048,025      1,048,025

Subordinated Debentures -
  7-3/4%, due March 31, 2026                                     75,000         75,000

Senior Notes Payable -
  6.78%, due December 1, 2027                                    75,000         75,000

Notes payable -
 Interest rates between 6.31% and 9.00% with a weighted
  average interest rate of 7.44% and various maturities
  between August 31, 1999 and January 1, 2008                    42,918         40,229

Variable bank loan -
  6.66% -due August, 2003                                        5,600           5,600

Unamortized premium and discount on long-term debt, net         (3,791)         (4,029)
                                                             ---------      ----------
    Total long-term debt, excluding amounts due in one year  $,670,852      $1,667,925
                                                             =========      ==========
</TABLE>

      The sinking fund  requirements  of long-term debt  outstanding at June 30,
1998 (including the maturity of Northern Indiana's first mortgage bonds:  Series
T, 7.50%, due April 1, 2002; Northern Indiana's medium-term notes due from March
20, 2000 to April 21, 2003;  NDC Douglas  Properties,  Inc.'s notes  payable due
August 15, 1999 through April 1, 2003; IWC's first mortgage bonds: Series 5.20%,
due May 1, 2001 and Series 8.00%, due December 15, 2001; and IWCR's senior notes
payable, due March 15, 2001), for each of the twelve-month periods subsequent to
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
=================================
<S>                 <C>          
2000                $ 163,664,194
2001                   34,722,639
2002                   82,487,340
2003                   64,128,954
</TABLE>


       Unamortized  debt  expense,   premium  and  discount  on  long-term  debt
applicable  to  outstanding  bonds  are being  amortized  over the lives of such
bonds.  Reacquisition premiums are being deferred and amortized.  These premiums
are not earning a return during the recovery period.

       Northern Indiana's Indenture, securing the first mortgage bonds issued by
Northern  Indiana,  constitutes a direct first mortgage lien upon  substantially
all property and franchises,  other than expressly excepted  property,  owned by
Northern Indiana.

       On May 28, 1997,  Northern Indiana was authorized to issue and sell up to
$217.7 million of its Medium-Term Notes, Series E, with various maturities,  for
purposes of refinancing  certain first mortgage bonds and medium-term  notes. As
of June 30, 1998,  $139.0 million of the medium-term  notes had been issued with
various  interest rates and  maturities.  The proceeds from these issuances were
used to pay short-term debt incurred to redeem its First Mortgage Bonds,  Series
N, and to pay at maturity various issues of Medium-Term Notes, Series D.

       IWC's first mortgage  bonds are secured by its utility plant.  Provisions
of trust  indentures  related to the 8% Series Bonds require annual sinking fund
or improvement fund payments  amounting to 1/2% of the maximum  aggregate amount
outstanding. As permitted, this requirement has been satisfied by substituting a
portion of permanent additions to utility plant.

     On July 15, 1998, IWC issued  Refunding  Revenue Bonds,  Series 1998 in the
aggregate  principal  amount of $40 million.  The proceeds  form the Series 1998
Bonds are to be used to redeem the City of Indianapolis, Indiana 7-7/8% Economic
Development  Water  Facilities  Revenue  Bonds and the Town of Fishers,  Indiana
7-7/8% Economic  Development  Water  Facilities  Revenue Bonds.  The Series 1998
bonds will bear  interest from July 15, 1998, at the rate of 5.05% per annum and
will mature on July 15, 2028.

      Between March 27, 1997 and May 7, 1997,  Capital  Markets  issued and sold
$300 million of medium-term  notes with various  interest rates and  maturities.
The proceeds from these  issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations of Capital Markets.

     In  December  1997,  Capital  Markets  issued and sold $75 million of 6.78%
senior notes  payable  which mature  December 1, 2027.  The holders of the notes
have the right to require  Capital Markets to repurchase all or a portion of the
notes on  December  1, 2007 at a purchase  price of the  principal  amount  plus
accrued interest thereon.  The proceeds from these issuances were primarily used
for the payment of Capital  Markets Zero Coupon Notes which matured  December 1,
1997. The remaining net proceeds were used for general corporate purposes.

      The  obligations  of Capital  Markets are  subject to a Support  Agreement
between Industries and Capital Markets,  under which Industries has committed to
make payments of interest and principal on Capital  Markets'  obligations in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  creditors against
the stock and assets of Northern  Indiana which are owned by  Industries.  Under
the  terms of the  Support  Agreement,  in  addition  to the  cash  flow of cash
dividends paid to Industries by any of its consolidated subsidiaries, the assets
of  Industries,  other  than the  stock  and  assets of  Northern  Indiana,  are
available  as  recourse  for the  benefit of  Capital  Markets'  creditors.  The
carrying  value of the assets of  Industries,  other than the assets of Northern
Indiana,  reflected in the consolidated financial statements of Industries,  was
approximately $1.2 billion at June 30, 1998.

(20) Current  Portion of Long-Term Debt: At June 30, 1998 and December 31, 1997,
Industries'  current  portion  of  long-term  debt  due  within  one year was as
follows:


<TABLE>
<CAPTION>
                                                            June 30,         December 31,
(Dollars in thousands)                                       1998                1997
                                                         ===========         ==========
<S>                                                      <C>                 <C>       
First Mortgage Bonds                                     $    14,509         $   14,509

Medium-term notes -
  Interest rates of 5.83% and 5.95% with a weighted
   average interest rate of 5.86% and various
   maturities between April 6, 1998 and April 13, 1998             0             35,000

Notes payable -
Interest rates of 6.72% and 9.00% with a weighted
   average interest rate of 7.87% and various
   maturities between August 15, 1998 and January 29, 1999     4,724              3,612

Sinking funds due within one year                              1,500              1,500
                                                         -----------       ------------
   Total current portion of long-term debt               $    20,733       $     54,621
                                                         ===========       ============
</TABLE>

(21)  Short-Term  Borrowings:  Northern  Indiana and Capital Markets make use of
commercial paper to fund short-term working capital requirements. As of June 30,
1998 and December 31, 1997, Northern Indiana had $71.1 million and $71.5 million
of commercial paper  outstanding,  respectively.  At June 30, 1998, the weighted
average interest rate of commercial paper  outstanding was 5.66%. As of June 30,
1998 and December 31, 1997,  Capital Markets had $38.0 million and $17.0 million
of commercial paper outstanding. At June 30, 1998, the weighted average interest
rate of commercial paper outstanding was 5.86%.

     Northern Indiana has a $250 million revolving Credit Agreement with several
banks which  terminates  August 19,  1999.  As of June 30,  1998,  there were no
borrowings outstanding under this agreement.  In addition,  Northern Indiana has
$14.2 million in lines of credit which run to May 31, 1999.  The credit  pricing
of each of the lines varies from either the lending banks'  commercial  prime or
market rates.  Northern Indiana has agreed to compensate the participating banks
with  arrangements  that vary from no commitment  fees to a combination  of fees
which are mutually satisfactory to both parties. As of June 30, 1998, there were
no  borrowings  under these lines of credit.  The Credit  Agreement and lines of
credit are also available to support the issuance of commercial paper.

      Northern  Indiana also has $273.5 million of money market lines of credit.
As of June 30, 1998,  there was $41.2 million  outstanding  under these lines of
credit.  At December 31, 1997, there was $47.5 million  outstanding  under these
lines of credit.

      Northern Indiana has a $50 million uncommitted  finance facility.  At June
30, 1998, there were no borrowings outstanding under this facility.

      Capital Markets has a $150 million revolving Credit Agreement,  which will
terminate  August  19,  1999.  This  facility  provides   short-term   financing
flexibility  to  Industries  and also  serves as the  back-up  instrument  for a
commercial  paper  program.  As of June  30,  1998,  there  were  no  borrowings
outstanding under this agreement.

      Capital Markets also has $130 million of money market lines of credit.  As
of June  30,  1998 and  December  ,  1997,  $19.0  million  and  $20.1  million,
respectively, were outstanding under these lines of credit.

      IWCR and its  subsidiaries  have lines of credit  with  banks  aggregating
$93.7  million.  As of June 30, 1998 and December 31,  1997,  $77.5  million and
$48.9 million were outstanding under these lines of credit, respectively.

     At June 30, 1998 and December 31, 1997,  Industries'  short-term borrowings
were as follows:
<TABLE>
<CAPTION>
                                               June 30, December 31,
(In thousands)                                   1998       1997
                                               ========   ========
<S>                                            <C>        <C>     
  Commercial paper                             $109,100   $ 88,500
  Notes payable                                 143,728    116,469
  Revolving loan facility                             0      7,670
                                               --------   --------
   Total short-term borrowings                 $252,828   $212,639
                                               ========   ========
</TABLE>

(22)  Operating  Leases:  On April 1,  1990,  Northern  Indiana  entered  into a
twenty-year  agreement for the rental of office facilities from Development at a
current annual rental payment of approximately $3.4 million.

The  following  is a schedule,  by years,  of future  minimum  rental  payments,
excluding those to associated  companies,  required under operating  leases that
have initial or remaining  noncancelable lease terms in excess of one year as of
June 30, 1998:
<TABLE>
<CAPTION>
  Twelve Months Ended June 30,
==============================
<S>                   <C> 
(In thousands)
   1999               $ 15,452
   2000                 13,793
   2001                 13,471
   2002                 51,458
   2003                 10,532
   Later years          76,088
                      --------
Total minimum 
   payments required  $180,794
                       =======
</TABLE>
     The  consolidated  financial  statements  include  rental  expense  for all
operating leases as follows:
<TABLE>
<CAPTION>
                                          June 30,  June 30,
(In thousands)                              1998      1997
                                          =======   =======
<S>                                       <C>       <C>    
Three months ended                        $ 6,583   $ 2,292
Six months ended                           11,532     4,540
Twelve months ended                        15,831     8,937
</TABLE>

(23) Commitments:  The Utilities estimate that approximately $1.019 billion will
be expended  for  construction  purposes  for the period from January 1, 1998 to
December 31, 2002.  Substantial  commitments  have been made by the Utilities in
connection with their programs.

      Northern  Indiana has entered  into a service  agreement  with Pure Air, a
general  partnership  between Air Products and  Chemicals,  Inc. and  Mitsubishi
Heavy Industries America,  Inc., under which Pure Air provides scrubber services
to reduce  sulfur  dioxide  emissions  for  Units 7 and 8 at  Bailly  Generating
Station.  Services  under this  contract  commenced on June 15, 1992 with annual
charges approximating $20 million. The agreement provides that, assuming various
performance standards are met by Pure Air, a termination payment would be due if
Northern  Indiana  terminates the agreement  prior to the end of the twenty-year
contract period.

      During the fourth  quarter of 1995,  Northern  Indiana  entered into a ten
year agreement with IBM to perform all data center,  application development and
maintenance,  and  desktop  management.  Annual  fees  under the  agreement  are
estimated at $20.6 million.

(24)  Primary  Energy:  Primary  arranges   energy-related  projects  for  large
energy-intensive   facilities  and  has  entered  into  certain  commitments  in
connection  with  these  projects.   Primary  offers  large  energy   customers,
nationwide, expertise in managing the engineering,  construction,  operation and
maintenance  of these  energy-related  projects.  Primary  is the  parent of the
following  subsidiaries:  Harbor Coal Company  (Harbor Coal);  North Lake Energy
Corporation (North Lake);  Lakeside Energy  Corporation  (LEC);  Portside Energy
Corporation (Portside); and Cokenergy, Inc. (CE).

      Harbor Coal has invested in a partnership to finance,  construct,  own and
operate a $65 million  pulverized coal injection facility which began commercial
operation in August  1993.  The facility  receives raw coal,  pulverizes  it and
delivers it to Inland Steel Company  (Inland  Steel) for use in the operation of
its blast  furnaces.  Harbor Coal is a 50% partner in the project with an Inland
Steel  affiliate.  Industries has guaranteed the payment and  performance of the
partnership's obligations under a sale and leaseback of a 50% undivided interest
in the facility.

      North Lake has entered  into a lease for the use of a  75-megawatt  energy
facility  located at Inland Steel.  The facility uses steam  generated by Inland
Steel to produce  electricity  which is delivered to Inland Steel.  The facility
began commercial  operation in May 1996.  Industries has guaranteed North Lake's
obligations  relative  to the  lease and  certain  obligations  to Inland  Steel
relative to the project.

      LEC has entered into a lease for the use of a 161-megawatt energy facility
located at USS Gary  Works.  The  facility  processes  high-pressure  steam into
electricity  and  low-pressure  steam for delivery to USX  Corporation-US  Steel
Group. The fifteen-year  tolling  agreement with US Steel commenced on April 16,
1997 when the  facility  was placed in  commercial  operation.  Capital  Markets
guarantees LEC's security deposit obligations  relative to the lease and certain
limited LEC obligations to the lessor.

      Portside has entered into an agreement  with  National  Steel  Corporation
(National) to utilize a new 63-megawatt  energy  facility at National's  Midwest
Division to process natural gas into electricity, process steam and heated water
for a fifteen-year period.  Portside has entered into a lease with a third-party
lessor for use of the  facility.  Industries  has  guaranteed  certain  Portside
obligations  to the lessor.  Construction  of the project began in June 1996 and
the facility began commercial operation on September 26, 1997.

      CE has entered into a fifteen-year service agreement with Inland Steel and
the Indiana Harbor Coke Company,  LP (Harbor Coke), a subsidiary of Sun Company,
Inc.  This  agreement  provides  that CE will  utilize a new energy  facility at
Inland  Steel's  Indiana Harbor Works to scrub flue gases and recover waste heat
from Harbor Coke's coke facility and produce process steam and electricity  from
the recovered heat which will be delivered to Inland Steel.  CE has entered into
a lease  for the use of these  facilities  with a third  party  lessor.  Capital
Markets guarantees certain CE obligations relative to the lease. Construction of
the  project  began in January  1997.  The  facility is now  conducting  startup
operations with commercial operation being anticipated before December 31, 1998.

      Primary has advanced  approximately $33 million and $107 million,  at June
30,  1998 and  December  31,  1997,  respectively,  to the lessors of the energy
related  projects  discussed  above.  These net  advances are included in "Other
Receivables" in the  Consolidated  Balance Sheet and as a component of operating
activities in the Consolidated Statement of Cash Flows.

     Primary is  evaluating  other  potential  projects  with  Northern  Indiana
customers  as well as with  potential  customers  outside of Northern  Indiana's
service  territory.   Projects  under  consideration  include  those  which  use
industrial by-product fuels and natural gas to produce electricity.

(25) 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 cash  equivalents:  The carrying amount  approximates fair
                  value because of the short maturity of those instruments.

     Investments:  The fair value of the  majority  of  investments  is based on
market prices for those or similar investments.

           Long-term debt/Preferred  stock: The fair value of long-term debt and
                   preferred  stock  is  estimated  based on the  quoted  market
                   prices for the same or similar issues or on the rates offered
                   to  Industries   for   securities   of  the  same   remaining
                   maturities.  Certain premium costs  associated with the early
                   settlement of long-term debt are not taken into consideration
                   in determining fair value.

      The carrying  values and estimated  fair values of  Industries'  financial
instruments (excluding derivatives) are as follows:
<TABLE>
<CAPTION>

                                                   June 30, 1998           December 31, 1997
                                             -----------------------   -----------------------
                                              Carrying     Estimated    Carrying     Estimated
(In thousands)                                 Amount     Fair Value     Amount     Fair Value
                                             ==========   ==========   ==========   ==========
<S>                                          <C>          <C>          <C>          <C>       
Cash and cash equivalents                    $   36,684   $   36,684   $   30,780   $   30,780
Investments                                      44,868       44,160       32,625       32,886
Long-term debt (including
 current portion)                             1,691,585    1,734,806    1,722,546    1,718,897
Preferred stock                                 144,777      136,896      146,289      139,814
</TABLE>


      The  majority of the  long-term  debt relates to utility  operations.  The
Utilities  are  subject to  regulation,  and gains or losses may be  included in
rates  over a  prescribed  amortization  period,  if in fact  settled at amounts
approximating those above.

(26) Customer  Concentrations:  Industries' utility  subsidiaries supply natural
gas, electric energy and water.  Natural gas and electric energy are supplied to
the northern third of Indiana.  The water utilities serve Indianapolis,  Indiana
and surrounding areas.  Although the Energy Utilities have a diversified base of
residential and commercial  customers,  a substantial  portion of their electric
and gas industrial  deliveries are dependent upon the basic steel industry.  The
basic  steel  industry  accounted  for  2%  and  4% of  gas  revenue  (including
transportation  services)  and 15% and 21% of  electric  revenue  for the twelve
months ended June 30, 1998 and June 30, 1997, respectively.

(27)  Business  Segments:  Industries  adopted SFAS No. 131  "Disclosures  about
Segments of an Enterprise and Related  Information"  during the first quarter of
1998.  SFAS No.  131  establishes  standards  for  reporting  information  about
operating  segments in financial  statements and disclosures  about products and
services,  and geographic areas. Operating segments are defined as components of
an  enterprise  for which  separate  financial  information  is available and is
evaluated  regularly by the chief  operating  decision  maker in deciding how to
allocate resources and in assessing performance.

     Industries has four reportable operating segments: Gas, Electric, Water and
Gas Marketing.  The Gas segment  includes  regulated gas utilities which provide
natural gas distribution and  transportation  services.  The Electric segment is
comprised  principally of Northern Indiana, a regulated electric utility,  which
generates,  transmits and  distributes  electricity.  In addition,  the Electric
segment includes a wholesale power marketing  operation which markets  wholesale
power to other  utilities  and  electric  power  marketers.  The  Water  segment
includes regulated water utilities which provide distribution of water supply to
the public.  The Gas Marketing  segment provides natural gas marketing and sales
to wholesale and industrial customers.  The Other Products and Services category
includes a variety of energy-related  businesses,  such as installation,  repair
and  maintenance  of underground  pipelines;  utility line locating and marking;
transmission of natural gas through pipelines; the arrangement of energy-related
projects  for  large  energy-intensive   facilities;  and  other  energy-related
products.

     Industries'  reportable segments are operations that are managed separately
and meet the quantitative thresholds required by SFAS No. 131.

     Revenues for each of Industries'  segments are principally  attributable to
customers in the United States.  Additional revenues, which are insignificant to
Industries'  consolidated  revenues, are attributable to customers in Canada and
the United Kingdom.

     The  following  tables  provides  information  about  Industries'  business
segments.  Industries  uses income before  interest and other charges and income
taxes as its primary measurement for each of the reported segments.  Adjustments
have been made to the segment  information to arrive at information  included in
the results of operations and financial position of Industries. Such adjustments
include  unallocated  corporate  revenues and expenses  and the  elimination  of
intercompany transactions, a majority of which are intercompany receivables. The
accounting policies of the operating segments are the same as those described in
Note 2, "Summary of Significant Accounting Policies."
<PAGE>
<TABLE>
<CAPTION>


                                                                                      Other
(In thousands)                                                            Gas      Products
For the three months ended June 30, 1998  Gas     Electric      Water  Marketing  &Services  Adjustments   Total
-------------------------------------------------------------------------------------------------------------------
<S>                                <C>          <C>          <C>        <C>      <C>          <C>        <C>       
Operating revenues                 $  110,345   $  345,639   $ 20,857   $139,931 $   65,252   $ (29,616) $  652,408
Other Income (Deductions)          $      369   $       84   $    118   $    654 $    7,567   $  (9,723) $    (931)
Depreciation and amortization      $   18,808   $   38,956   $  1,874   $     51 $    3,901   $       53 $   63,643
Income before Interest and Other
   Charges and Income Taxes        $  (2,712)   $   77,018   $  6,966   $  2,022 $    6,723   $ (11,905) $   78,113
Assets                             $  890,340   $2,522,108   $585,706   $ 79,619 $1,367,838   $(631,609) $4,814,002

                                                                                      Other
 (In thousands)                                                            Gas     Products
For the three months ended June 30, 1997 Gas      Electric      Water  Marketing  &Services  Adjustments   Total
-------------------------------------------------------------------------------------------------------------------
Operating revenues                 $  121,010   $  271,657   $ 18,795   $81,587  $   62,370   $ (32,232) $  523,187
Other Income (Deductions)          $      146   $       44   $    456   $ 1,477  $    1,827   $     358  $    4,308
Depreciation and amortization      $   18,345   $   38,823   $  2,567   $   100  $    4,223   $     356  $   64,414
Income before Interest and Other
  Charges and Income Taxes         $    3,067   $   68,104   $  5,918   $ 2,726  $    1,172   $  (2,731) $   78,256
Assets                             $  917,942   $2,570,068   $531,972   $56,329  $1,218,763   $(438,727) $4,856,347


                                                                                      Other
 (In thousands)                                                            Gas     Products
For the six months ended June 30, 1998   Gas      Electric      Water  Marketing  &Services  Adjustments   Total
-------------------------------------------------------------------------------------------------------------------
Operating revenues                 $  353,080   $  669,473   $ 38,566  $314,797  $   119,098  $ (63,262) $1,431,752
Other Income (Deductions)          $      975   $      174   $    219  $  1,171  $    25,503  $ (20,525) $    7,517
Depreciation and amortization      $   37,522   $   77,724   $  3,690  $    117  $     7,758  $     106  $  126,917
Income before Interest and Other
   Charges and Income Taxes        $   46,015   $  150,778   $ 11,858  $  2,133  $    19,014  $ (26,126) $  203,674
Assets                             $  890,340   $2,522,108   $585,706  $ 79,619  $ 1,367,838  $(631,609) $4,814,002


                                                                                     Other
 (In thousands)                                                            Gas      Products
For the six months ended June 30, 1997  Gas      Electric      Water  Marketing  &Services  Adjustments   Total
-------------------------------------------------------------------------------------------------------------------
Operating revenues                 $  454,410   $  532,314   $  18,795  $170,373 $    87,710  $ (80,465) $1,183,137
Other Income (Deductions)          $      565   $      251   $     456  $  2,354 $    11,045  $    (960) $   13,711
Depreciation and amortization      $   36,203   $   77,104   $   2,567  $    114 $     6,363  $     408  $  122,759
Income before Interest and Other
  Charges and Income Taxes         $   62,102   $  138,003   $   5,918  $  6,180 $     9,367  $  (5,325) $  216,245
Assets                             $  917,942   $2,570,068   $ 531,972  $ 56,329 $ 1,218,763  $(438,727) $4,856,347


                                                                                     Other
 (In thousands)                                                            Gas      Products
For the twelve months ended June 30,1998 Gas      Electric      Water  Marketing  &Services  Adjustments   Total
-------------------------------------------------------------------------------------------------------------------
Operating revenues                 $  705,909   $1,323,490   $  80,514  $625,410 $   243,383  $(143,550) $2,835,156
Other Income (Deductions)          $    1,231   $      559   $   1,228  $  2,166 $    46,020  $ (41,630) $    9,574
Depreciation and amortization      $   74,166   $  154,465   $   7,245  $    235 $    14,731  $   3,121  $  253,962
Income before Interest and Other
  Charges and  Income Taxes        $   72,777   $  325,019   $  28,826  $  3,124 $    43,664  $ (59,659) $  413,751
Assets                             $  890,340   $2,522,108   $  585,706 $ 79,619 $ 1,367,838  $(631,609) $4,814,002

                                                                                     Other
 (In thousands)                                                            Gas      Products
For the twelve months ended June 30, 1997 Gas      Electric      Water  Marketing  &Services  Adjustments   Total
-------------------------------------------------------------------------------------------------------------------
Operating revenues                 $  805,463   $1,061,890   $  18,795  $285,140 $   140,655  $(155,020) $2,156,923
Other Income (Deductions)          $    1,025   $    1,041   $     456  $  3,786 $    18,893  $  (1,515) $   23,686
Depreciation and amortization      $   70,583   $  150,048   $   2,567  $    135 $    20,637  $  (2,353) $  241,617
Income before Interest and Other
  Charges and  Income Taxes        $   89,282   $  306,328   $   5,918  $ 11,462 $     4,255  $  (8,976) $  408,269
Assets                             $  917,942   $2,570,068   $ 531,972  $ 56,329 $ 1,218,763  $(438,727) $4,856,347

</TABLE>
<PAGE>



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



Results of Operations


Holding Company -

      NIPSCO Industries,  Inc. (Industries) is an  energy/utility-based  holding
company providing  electric energy,  natural gas and water to the public through
its six wholly-owned regulated subsidiaries (Utilities): Northern Indiana Public
Service Company  (Northern  Indiana);  Kokomo Gas and Fuel Company (Kokomo Gas);
Northern  Indiana  Fuel and Light  Company,  Inc.  (NIFL);  Crossroads  Pipeline
Company  (Crossroads);  Indianapolis  Water  Company  (IWC);  and Harbour  Water
Corporation  (Harbour).  Industries'  regulated  gas and  electric  subsidiaries
(Northern  Indiana,  Kokomo Gas, NIFL and Crossroads) are referred to as "Energy
Utilities";  and regulated water  subsidiaries (IWC and Harbour) are referred to
as "Water Utilities."

     Industries also provides non-regulated  energy/utility-related products and
services  including  gas marketing and trading;  wholesale  electric  marketing;
power generation; gas transmission, supply and storage; installation, repair and
maintenance of  underground  pipelines;  utility line locating and marking;  and
related products targeted at customer segments principally through the following
wholly-owned  subsidiaries:  NIPSCO Development Company, Inc. (Development);  NI
Energy  Services,  Inc.  (Services);  Primary  Energy,  Inc.  (Primary);  Miller
Pipeline Corporation (Miller);  and SM&P Utility Resources,  Inc.(SM&P).  NIPSCO
Capital Markets, Inc. (Capital Markets) handles financing for Industries and its
subsidiaries,  other than Northern Indiana.  These subsidiaries,  other than the
wholesale power marketing  operations of Services,  are referred to collectively
as "Products and Services."

     On March 25, 1997,  Industries  acquired IWC Resources  Corporation (IWCR).
IWCR's subsidiaries  include two regulated water utilities (IWC and Harbour) and
five  non-utility  companies  providing  utility-related  products  and services
including  installation,  repair and  maintenance of  underground  pipelines and
utility line locating and marking. The two primary non-utility  subsidiaries are
Miller and SM&P. Industries' results of operations include three, six and twelve
months  of  operating  results  from  IWCR for the  three-month,  six-month  and
twelve-month  periods ended June 30, 1998, and three months for the three-month,
six-month,  and  twelve-month  periods ended June 30, 1997. The discussion below
excludes  the  comparative  results of IWCR  operations  for the  six-month  and
twelve-month periods as such discussion would not be meaningful.

Revenues -

      Total  operating  revenues  for the  twelve  months  ended  June 30,  1998
increased  $678.2  million as compared to the twelve months ended June 30, 1997.
The increase  includes  $153.9  million  reflecting  twelve  months of operating
revenues  from  IWCR for the  period.  Gas  revenues  decreased  $99.6  million,
electric revenues  increased $261.6 million and Products and Services  revenues,
excluding  IWCR,  increased  $362.3  million,  as compared to the same period in
1997.  The  decrease  in gas  revenues  was  mainly  due to  decreased  sales to
residential and commercial  customers  reflecting  unusually warm weather during
the first quarter of 1998, decreased industrial sales,  decreased gas transition
costs and decreased gas cost per dekatherm (dth),  partially offset by increased
wholesale  sales and increased  deliveries of gas  transported  for others.  The
increase in electric  revenues was mainly due to increased  sales to residential
and  commercial  customers due to warmer  weather  during the second  quarter of
1998, and increased  wholesale electric  marketing volumes,  partially offset by
decreased sales to industrial  customers.  Increased volumes in gas marketing to
existing and new customers resulted in an increase of $358.1 million in Products
and Services  revenues for the twelve-month  period ended June 30, 1998. For the
twelve months ended June 30, 1998,  volumes in gas marketing  were 224.3 million
dth, an increase of 141.0 million dth over the same period in 1997.

     Total  operating  revenues for the six months ended June 30, 1998 increased
$248.6  million as compared to the six months ended June 30, 1997.  The increase
includes $45.8 million reflecting six months of operating revenues from IWCR for
the period. Gas revenues  decreased $101.3 million,  electric revenues increased
$137.1 million and Products and Services  revenues,  excluding  IWCR,  increased
$167.0  million,  as compared to the same  period in 1997.  The  decrease in gas
revenues  was  largely  attributable  to  decreased  sales  to  residential  and
commercial  customers due to unusually  warm weather during the first quarter of
1998,  decreased gas costs per dekatherm  (dth),  decreased  sales to industrial
customers and  decreased gas  transition  costs which were  partially  offset by
increased  wholesale  sales and  increased  deliveries  of gas  transported  for
others. The increase in electric revenues was mainly due to increased  wholesale
electric marketing activities and wholesale transactions, and increased sales to
residential and commercial customers due to warmer weather during second quarter
of 1998.  Increased  volumes in gas  marketing  to  existing  and new  customers
resulted in an increase of $165.0 million in Products and Services  revenues for
the  six-month  period  ended June 30,  1998.  For the six months ended June 30,
1998,  volumes in gas  marketing  were 126.9  million  dth,  an increase of 78.6
million dth over the same period in 1997.

     Total operating revenues for the three months ended June 30, 1998 increased
$129.2 million as compared to the three months ended June 30, 1997. Gas revenues
decreased  $10.7 million,  electric  revenues  increased  $74.0  million,  water
revenues increased $2.1 million,  and Products and Services revenues,  increased
$63.8 million  compared to the same period in 1997. The decrease in gas revenues
was  mainly  attributable  to  decreased  sales to  residential  and  commercial
customers  as a result of warmer  weather  during  the  second  quarter of 1998,
decreased  sales to industrial  customers and  decreased  gas  transition  costs
partially  offset by increased  sales to wholesale  customers  and incerased gas
cost per dth.  The  increase in electric  revenues  was mainly  attributable  to
increased sales to residential  and commercial  customers due to warmer weather,
increased  sales  to  industrial  customers  and  increased  wholesale  electric
marketing activities. Increased volumes in gas marketing resulted in an increase
of $58.2 million in Products and Services  revenues for the  three-month  period
ended June 30, 1998.  For the three months  ended June 30, 1998,  gas  marketing
volumes  were 68.1  million dth, an increase of 60.0 million dth compared to the
three months ended June 30, 1997.

      The basic  steel  industry  accounted  for 33% of  natural  gas  delivered
(including  volumes  transported)  and 18% of  electric  sales  for  the  Energy
Utilities for the twelve months ended June 30, 1998.


<PAGE>



    The  components of the variations in gas,  electric,  water and Products and
Services revenues are shown in the following table:
<TABLE>
<CAPTION>
                                             Variations from Prior Periods

                                       -----------------------------------------
                                        June 30, 1998 Compared to June 30, 1997
                                       -----------------------------------------
                                                       Three          Six       Twelve
(In thousands)                                        Months       Months       Months
                                                   =========    =========    =========
<S>                                                <C>          <C>          <C>     
Gas Revenue -
  Pass through of net changes in
    purchased gas costs, gas storage,
     and storage transportation costs               $  19,564    $ (24,889)   $ (22,241)
  Gas transition costs                                (6,103)     (13,586)     (19,164)
  Changes in sales levels                            (24,584)     (64,303)     (61,435)
  Gas transported                                        458        1,448        3,286
                                                   ---------    ---------    ---------
Gas Revenue Change                                   (10,665)    (101,330)     (99,554)
                                                   ---------    ---------    ---------
Electric Revenue                                        --
  Pass through of net changes
     in fuel costs                                     3,899       (1,061)       2,540
  Changes in sales levels                             23,658       22,980       17,009
  Wholesale electric marketing                        46,425      115,240      242,051
                                                   ---------    ---------    ---------
Electric Revenue Change                               73,982      137,159      261,600
                                                   ---------    ---------    ---------
Water Revenue Change                                   2,062       19,771       61,719
                                                   ---------    ---------    ---------
Products and Services Revenues -
  Gas marketing                                       59,984      164,980      358,077
  Pipeline construction                                 (558)      10,592       43,134
  Locate and marking                                   1,978       13,264       44,414
  Other                                                2,438        4,179        8,843
                                                   ---------    ---------    ---------
Products and Services Revenue Change                  63,842      193,015      454,468
                                                   ---------    ---------    ---------
   Total Revenue Change                            $ 129,221    $ 248,615    $ 678,233
                                                   =========    =========    =========
</TABLE>
See "Summary of Significant Accounting Policies - Gas Cost Adjustment Clause" in
the Notes to  Consolidated  Financial  Statements  for a discussion  of gas cost
incentive  mechanism.  Also,  see  Note 6 to  Notes  to  Consolidated  Financial
Statements regarding FERC Order No. 636 transition costs.

Gas Costs -

      The Energy Utilities' gas costs decreased $1.2 million,  $77.6 million and
$76.2 million for the three-month, six-month and twelve-month periods ended June
30, 1998,  respectively.  Gas costs decreased for the six-month and twelve-month
periods due to decreased  gas  purchases,  decreased  gas  transition  costs and
decreased  gas  costs  per  dth.  The  average  cost for the  Energy  Utilities'
purchased gas for the three-month, six-month and twelve-month periods ended June
30,  1998,  after  adjustment  for gas  transition  costs  billed  to  transport
customers,  was $2.87,  $2.71 and $2.96 per dth,  respectively,  as  compared to
$2.60, $3.10 and $3.14 per dth for the same periods in 1997.

Fuel and Purchased Power -

      The cost of fuel for electric  generation  increased  $10.8 million,  $8.0
million  and $10.7  million  for the  three-month,  six-month  and  twelve-month
periods ended June 30, 1998, compared to the 1997 periods, mainly as a result of
increased production of electricity.

      Power purchased increased $57.4 million, $124.0 million and $239.3 million
for the  three-month,  six-month and  twelve-month  periods ended June 30, 1998,
respectively,   reflecting   increased   purchases   of   wholesale   power  for
non-regulated marketing activities which were partially offset by decreased bulk
power purchases at Northern Indiana.

Cost of Products and Services -

      The cost of sales for Products and Services  increased  $427.5 million for
the twelve  months ended June 30,  1998.  The increase  includes  $65.5  million
reflecting  twelve  months of cost of sales from IWCR for the period.  Increased
volumes in gas marketing  activities  increased cost of sales $372.2 million for
the twelve-months ended June 30, 1998, compared to June 30, 1997.

     The cost of sales for Products and Services  increased  $187.1  million for
the six-months  ended June 30, 1998,  compared to the 1997 period.  The increase
includes  $20.5  million  related  to the cost of sales for IWCR in the  current
period.  Increased volumes in gas marketing  activities  increased cost of sales
$171.6  million  for the six months  ended June 30,  1998,  compared to June 30,
1997.

       The cost of sales for Products and Services  increased  $61.6 million for
the three-months ended June 30, 1998,  compared to the 1997 period mainly due to
increased  volumes in gas marketing  activities,  which  increased cost of sales
$62.2  million for the three months  ended June 30,  1998,  compared to June 30,
1997.

Operating Margins -

      Operating  margins for the twelve  months  ended June 30,  1998  increased
$76.9 million from the same period a year ago. The increase in operating margins
includes  $88.4  million  related  to twelve  months of IWCR  operations  in the
period. The operating margin from gas deliveries  decreased $23.0 million due to
decreased sales to residential  and commercial  customers  reflecting  unusually
warm weather in the first quarter of 1998 and decreased  industrial  sales which
were partially offset by increased sales to wholesale  customers,  and increased
deliveries of gas transported for others.  Electric  operating  margin increased
$11.7  million  mainly  as a  result  of  increased  sales  to  residential  and
commercial customers due to warmer weather and increased wholesale transactions,
which were  partially  offset by  additional  wholesale  power  marketing  costs
incurred  during the final week of June 1998. The operating  margin for Products
and Services, excluding IWCR, decreased $0.2 million.

     Operating  margins for the six months  ended June 30, 1998  increased  $7.1
million  from the same  period a year ago.  The  increase in  operating  margins
includes $25.3 million  related to six months of IWCR  operations in the current
period.  Gas operating  margin decreased $23.7 million due to decreased sales to
residential and commercial  customers  reflecting  unusually warm weather during
the first  half of 1998 and  decreased  industrial  sales,  partially  offset by
increased  wholesale  sales and  increased  deliveries  of gas  transported  for
others.  Electric  operating margin increased $5.2 million mainly as a result of
increased  sales to residential  and commercial  customers due to warmer weather
and increased wholesale transactions,  which were partially offset by additional
wholesale power marketing costs incurred during the final week of June 1998. The
operating  margin for Products and  Services,  excluding  IWCR,  increased  $0.3
million.

      Operating  margins for the three months ended June 30, 1998 increased $0.6
million from the same period a year ago. Gas  operating  margin  decreased  $9.5
million  due  to  decreased  sales  to  residential  and  commercial   customers
reflecting  mild  weather  during  the period and  decreased  industrial  sales,
partially  offset by increased  wholesale  sales and  increased  delivery of gas
transported for others.  Electric operating margin increased $5.7 million mainly
as a result of warmer weather and increased wholesale  transactions,  which were
partially  offset by additional  wholesale power marketing costs incurred during
the final week of June 1998.  Water operating  margin  increased $2.1 million in
the current period due to increased  volumes sold and increased  water rates for
Indianapolis  Water Company  effective  April 8, 1998. The operating  margin for
Products and Services  increased $2.3 million,  primarily  reflecting  increased
operating margin from Primary Energy subsidiaries.

Operating Expenses and Taxes -

      Operation  expenses  increased $35.1 million for the  twelve-month  period
ended June 30, 1998.  Operation  expense  includes an increase of $62.4  million
reflecting a full year of operations of IWCR for the  twelve-month  period ended
June 30, 1998.  New operations at Primary Energy  subsidiaries  increased  lease
expenses by approximately  $11.0 million.  This increase was partially offset by
decreased  operation  expenses  at  Northern  Indiana of $23.0  million  for the
twelve-month  period  ended  June 30,  1998,  mainly  as a result  of  decreased
marketing  activity  of $10.0  million,  decreased  environmental  costs of $3.1
million,  and decreased  insurance  costs of $1.7 million.  Operation  expenses,
excluding  IWCR, for the six months ended June 30, 1998 decreased $10.4 million.
Operation costs at Northern  Indiana  decreased $16.0 million for the six months
ended June 30, 1998 mainly reflecting  decreased  employee related costs of $7.7
million and decreased  marketing  activity of $5.6 million,  partially offset by
increased operating expenses of Primary Energy subsidiaries.  Operating expenses
decreased  $5.4 million for the three month period ended June 30, 1998  compared
to the same period in 1997 primarily due to decreased  employee related costs at
Northern Indiana.

      Maintenance  expenses  increased $5.2 million for the twelve-month  period
ended  June 30,  1998,  mainly  reflecting  maintenance  expenses  of the  Water
Utilities and increased  maintenance  activity at Northern Indiana.  Maintenance
expenses  increased  $1.6 million for the six-month  period ended June 30, 1998,
mainly  reflecting  maintenance  expenses of the Water  Utilities  and increased
maintenance  activity at Northern Indiana.  Maintenance  expenses increased $1.2
million  for the  three-month  period  ended  June 30,  1998  mainly  reflecting
increased electric production maintenance activity at Northern Indiana.

      Depreciation  and  amortization  expense  increased $4.1 million and $12.3
million  for the  six-month  and  twelve-month  periods  ended  June  30,  1998,
respectively,  primarily  reflecting  depreciation  and  amortization  at  IWCR.
Depreciation and amortization expense decreased $0.8 million for the three-month
period ended June 30, 1998,  primarily as a result of a reclassification  of oil
and gas properties partially offset by increased utility plant depreciation.

Other Income (Deductions) -

      Other Income (Deductions)  decreased $5.2 million,  $6.2 million and $14.1
million for the three-month,  six-month and twelve-month  periods ended June 30,
1998, respectively.  Other Income (Deductions) for the three-month and six-month
periods decreased  primarily as a result of lower equity earnings in certain oil
and gas investments. Other Income (Deductions) for the twelve-month period ended
June 30, 1998 decreased  primarily as a result of the above  mentioned  items as
well as a loss on the  disposition  of  property  during the  current  period as
compared to gains on disposition of properties in the same period a year ago.

Interest and Other Charges -

      Interest and other charges  increased for the  three-month,  six-month and
twelve-month periods ended June 30, 1998 reflecting the issuance of $300 million
of Capital  Markets'  medium-term  notes, $75 million of Capital Markets' Junior
Subordinated  Deferrable Interest  Debentures,  Series A and interest expense at
IWCR.

      See  Notes  to  Consolidated  Financial  Statements  for a  discussion  of
accounting policies and transactions impacting this analysis.

Net Income -

     Industries' net income for the twelve-month  period ended June 30, 1998 was
$181.9 million compared to $184.9 million for the twelve-month period ended June
30, 1997.

     Net  income  for the six  months  ended  June 30,  1998 was  $90.1  million
compared to $99.1 million for the six months ended June 30, 1997.

     Net  income for the three  months  ended  June 30,  1998 was $29.4  million
compared to $28.2 million for the three months ended June 30, 1997.

Environmental Matters -

      The  Utilities  have an  ongoing  program  to  remain  aware  of laws  and
regulations involved with hazardous waste and other environmental matters. It is
the Utilities'  intent to continue to evaluate  their  facilities and properties
with respect to these rules and identify any sites that would require corrective
action.  The Utilities have recorded a reserve of  approximately  $17 million to
cover probable  corrective actions as of June 30, 1998;  however,  environmental
regulations  and  remediation  techniques  are  subject  to future  change.  The
ultimate  cost  could be  significant,  depending  on the  extent of  corrective
actions required.  Based upon  investigations and management's  understanding of
current laws and regulations,  the Utilities believe that any corrective actions
required,  after  consideration of insurance  coverages and  contributions  from
other potentially responsible parties, will not have a significant impact on the
results of operations or financial position of Industries.

     The EPA has notified Northern Indiana that it is a "potentially responsible
party" (PRP) under the  Comprehensive  Environmental  Response  Compensation and
Liability  Act  (CERCLA)  and may be required to share in the cost of cleanup of
several  waste  disposal  sites  identified by the EPA. The sites are in various
stages  of  investigation,  analysis  and  remediation.  At each  of the  sites,
Northern Indiana is one of several PRPs, and it is expected that remedial costs,
as provided  under  CERCLA,  will be shared among them.  At some sites  Northern
Indiana and/or the other named PRPs are presently  working with the EPA to clean
up the sites and avoid the imposition of fines or added costs.

      Refer to Note 7 "Environmental  Matters" for a more detailed discussion of
the status of certain environmental issues.

Liquidity and Capital Resources -

      During the next few years, it is anticipated that the majority of earnings
available  for  distribution  of dividends  will depend upon  dividends  paid to
Industries by Northern Indiana.  See Note 15 of Notes to Consolidated  Financial
Statements for a discussion of the Common Share dividend.

     Cash flow from operations has provided sufficient liquidity to meet current
operating  requirements.  Because of the seasonal nature of the utility business
and the  construction  program,  Northern  Indiana makes use of commercial paper
intermittently  as  short-term  financing.  As of June 30, 1998 and December 31,
1997,  Northern  Indiana had $71.1 million and $71.5 million of commercial paper
outstanding,  respectively. At June 30, 1998, the weighted average interest rate
of commercial paper outstanding was 5.66%.

      Northern  Indiana  has a $250  million  revolving  Credit  Agreement  with
several banks which terminates  August 19, 1999. As of June 30, 1998, there were
no borrowings  outstanding under this agreement.  In addition,  Northern Indiana
has $14.2  million in lines of credit.  The credit  pricing of each of the lines
varies from either the lending banks' commercial prime or market rates. Northern
Indiana has agreed to compensate the participating  banks with arrangements that
vary  from no  commitment  fees to a  combination  of fees  which  are  mutually
satisfactory  to both  parties.  As of June 30, 1998,  there were no  borrowings
under these lines of credit.  The Credit  Agreement and lines of credit are also
available to support the issuance of commercial paper.

     Northern  Indiana also has $273.5  million of money market lines of credit.
As of June 30,  1998 there was $41.2  million  outstanding  under these lines of
credit.

      Northern Indiana has a $50 million uncommitted  finance facility.  At June
30, 1998, there were no borrowings outstanding under this facility.

      During  recent  years,  Northern  Indiana  has been  able to  finance  its
construction  program with internally  generated funds and expects to be able to
meet future commitments through such funds.

     As of June 30,  1998 and  December  31,  1997,  Capital  Markets  had $38.0
million and $17.0 million of commercial paper outstanding. At June 30, 1998, the
weighted average interest rate of commercial paper outstanding was 5.86%.

      Capital Markets has a $150 million  revolving  Credit Agreement which will
terminate  August  19,  1999.  This  facility  provides   short-term   financing
flexibility  to  Industries  and also  serves  as the  backup  instrument  for a
commercial  paper  program.  As of June  30,  1998,  there  were  no  borrowings
outstanding under this agreement.

      Capital Markets also has $130 million of money market lines of credit.  As
of June 30,  1998 and  December  31,  1997,  $19.0  million  and $20.1  million,
respectively, of borrowings were outstanding under these lines of credit.

      Between March 27, 1997 and May 7, 1997,  Capital  Markets  issued and sold
$300 million of medium-term  notes with various  interest rates and  maturities.
The proceeds from these  issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations of Capital Markets.

     The  obligations  of Capital  Markets  are  subject to a Support  Agreement
between Industries and Capital Markets,  under which Industries has committed to
make payments of interest and principal on Capital  Markets'  obligations in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  creditors against
the stock and assets of Northern  Indiana which are owned by  Industries.  Under
the  terms of the  Support  Agreement,  in  addition  to the  cash  flow of cash
dividends paid to Industries by any of its consolidated subsidiaries, the assets
of  Industries,  other  than the  stock  and  assets of  Northern  Indiana,  are
available  as  recourse  for the  benefit of  Capital  Markets'  creditors.  The
carrying  value of the assets of  Industries,  other than the assets of Northern
Indiana,  reflected in the consolidated financial statements of Industries,  was
approximately $1.2 billion at June 30, 1998.

     On March 25, 1997,  Industries acquired all the outstanding common stock of
IWCR for $290.5  million.  Industries  financed  this  transaction  with debt of
approximately   $83.0  million  and  issuance  of  approximately   10.6  million
Industries'  common  shares.  Industries  accounted  for  the  acquisition  as a
purchase and the  purchase  price was  allocated  to the assets and  liabilities
acquired based on their fair values.

     IWCR and its subsidiaries have lines of credit with banks aggregating $93.7
million.  At June 30, 1998, $77.5 million of borrowings were  outstanding  under
these lines of credit.

      Industries  does not expect the effects of inflation at current  levels to
have a significant impact on its results of operations,  ability to contain cost
increases,  or the Utilities' need to seek timely and adequate rate relief.  The
Energy  Utilities do not  anticipate  the need to file for gas and electric base
rate increases in the near future.

Year 2000 Costs-

     Industries  has several major projects  underway to modify  portions of its
systems  for proper  functioning  in the year 2000.  These  include a project to
evaluate  Industries'  proprietary software and to work with each of Industries'
software vendors to assure that appropriate steps are being take to mitigate the
problem in each vendor's  software or, in some cases,  to replace  software with
year 2000  compliant  software;  a project to identify and mitigate any problems
wherever  they exist in  Industries'  systems  ranging  from  equipment  used in
Northern  Indiana's  generating  stations to Industries'  phone system that have
date  information  embedded  within them;  and an initiative to assure that each
entity  that  electronically  receives  information  from  Industries  or  sends
information to Industries is aware of the steps that Industries is taking and is
taking appropriate steps of its own to address the problem.  Consistent with its
plan, Industries expects to be year 2000 compliant with some systems as early as
the third  quarter  1998 and other  systems no later  than the third  quarter of
1999.  Industries  is currently in the process of  structuring  its  contingency
plans with respect to the potential nonperformance of certain of its information
systems and embedded  systems as a result of year 2000  problems,  and estimates
that those plans will be complete by the third  quarter of 1999.  Industries  is
currently  working with utility industry groups to evaluate the potential impact
of the Year 2000 computer problems on the interconnected  national electric grid
and pipeline network.

      Industries  estimates  that costs to become  year 2000  compliant  will be
approximately $17-$26 million,  including acquisition costs of new systems which
will be capitalized  consistent  with  Industries'  accounting  policies.  Costs
related to maintenance or modification of Industries' systems have been and will
be expensed as incurred.  Industries  does not anticipate the related costs will
have a  material  impact  on its  results  of  operations,  nor does  Industries
currently  anticipate  any  disruption  of its  ability to deliver  service as a
result of the year 2000 issue.

Competition -

      The Energy  Policy Act of 1992 (Energy Act) allows FERC to order  electric
utilities  to  grant  access  to  transmission   systems  by  third-party  power
producers.  The Energy Act specifically prohibits federally mandated wheeling of
power for retail  customers.  On April 24, 1996, FERC issued its Order No. 888-A
which opens wholesale  power sales to competition and requires public  utilities
owning,  controlling, or operating transmission lines to file non-discriminatory
open access tariffs that offer others the same transmission service they provide
themselves.  Northern  Indiana  filed  its  tariff  as did  virtually  all other
transmission owners subject to FERC jurisdiction.  Order No. 888-A also provides
for the recovery of stranded costs - that is, costs that were prudently incurred
to serve  wholesale  power  customers  and that  could go  unrecovered  if these
customers  use open access to move to another  supplier.  FERC expects this rule
will accelerate competition and bring lower prices and more choices to wholesale
energy  customers.  On  November  25,  1997,  FERC  issued  Order  No.  888-B on
rehearing,  affirming in all  important  respects its earlier  Order No.  888-A.
Although  wholesale  customers  represent a relatively small portion of Northern
Indiana's  sales,  Northern  Indiana will continue its efforts to retain and add
customers by offering competitive rates.

      In January  1997 and  January  1998,  legislation  was  introduced  in the
Indiana  General   Assembly   addressing   electric   utility   competition  and
deregulation.  Neither bill was passed.  Northern Indiana has begun  discussions
with other  utilities  and its largest  customers on the  technical and economic
aspects of possible legislation to allow customer choice. If Industries believes
that consensus legislation is possible,  Industries would support a deregulation
bill in the January 1999 Indiana General Assembly.

      Operating  in a  competitive  environment  will place added  pressures  on
utility  profit  margins  and  credit  quality.  Increasing  competition  in the
electric  utility  industry has already led the credit rating  agencies to apply
more stringent guidelines in making credit rating determinations.

      Competition within the electric utility industry will create opportunities
to compete for new customers  and revenues,  as well as increase the risk of the
loss of customers.  Industries'  management  has taken steps to make the company
more competitive and profitable in the changing utility  environment,  including
partnering on energy projects with major industrial customers and conversions of
some of its generating units to allow use of lower cost, low sulfur coal.

      FERC Order No. 636 shifted  primary  responsibility  for gas  acquisition,
transportation  and peak days' supply from  pipelines to local gas  distribution
companies such as the Energy Utilities. Although pipelines continue to transport
gas, they no longer provide sales  service.  The Energy  Utilities  believe they
have taken appropriate steps to ensure the continued acquisition of adequate gas
supplies at reasonable prices.

      The mix of gas revenues  from retail  sales,  interruptible  retail sales,
firm  transportation  service  and  interruptible  transportation  services  has
changed  significantly  over the past several years. The deregulation of the gas
industry, since the mid-1980s,  allows large industrial and commercial customers
to  purchase  their gas  supplies  directly  from  producers  and use the Energy
Utilities'  facilities  to transport the gas.  Transportation  customers pay the
Energy  Utilities  only for  transporting  their  gas from the  pipeline  to the
customers' premises.

      The Commission has approved Northern Indiana's Alternative Regulatory Plan
(ARP) which implements new rates and services that include,  among other things,
further  unbundling  of services  for  additional  customer  classes,  increased
customer  choice for  sources of natural  gas supply,  negotiated  services  and
prices,  gas cost incentive  mechanism and a price protection  program.  The gas
cost incentive  mechanism  allows Northern Indiana to share any gas cost savings
or cost increases with its customers based on a comparison of Northern Indiana's
actual gas supply  portfolio costs to a market based benchmark  price. The first
pilot  program  was  launched in January  1998 and the first gas volumes  flowed
under this program in April 1998.  The  Commission  order allows the natural gas
marketing  affiliate of Northern  Indiana to participate as a supplier of choice
to customers on the Northern Indiana system. Northern Indiana offers customers a
price protection  service (PPS) which allows  residential  customers to purchase
gas at a fixed price or capped price for a specific period of time.

      To date, the Energy Utilities' system has not been materially  affected by
competition,  and management does not foresee substantial adverse effects in the
near future,  unless the current regulatory structure is substantially  altered.
The Energy  Utilities  believe the steps they are taking to deal with  increased
competition will have significant, positive effects in the next few years.

Forward Looking Statements -

     This report contains forward looking  statements  within the meaning of the
securities laws. Forward looking statements include terms such as "may", "will",
"expect",  "believe",  "plan" and other similar terms. Industries cautions that,
while it believes  such  statements to be based on  reasonable  assumptions  and
makes such  statements in good faith,  there can be no assurance that the actual
results  will  not  differ   materially  from  such   assumptions  or  that  the
expectations  set forth in the  forward  looking  statements  derived  from such
assumptions  will be realized.  Investors  should be aware of important  factors
that could have a material impact on future results.  These factors include, but
are not limited to, weather, the federal and state regulatory  environment,  the
economic climate, regional, commercial, industrial and residential growth in the
service  territories  served  by  Industries'  subsidiaries,   customers'  usage
patterns and preferences,  the speed and degree to which competition  enters the
utility industry, the timing and extent of changes in commodity prices, changing
conditions  in the capital and equity  markets and other  uncertainties,  all of
which are  difficult  to  predict,  and many of which are beyond the  control of
Industries.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     The primary  market risks to which  Industries is exposed and in connection
with which Industries uses market risk sensitive instruments are commodity price
risk and interest rate risk.

     Industries   engages  in  price  risk  management   activities  related  to
electricity  and natural  gas.  Price risk arises  from  fluctuations  in energy
commodity  prices  due to  changes in supply  and  demand.  Industries  actively
monitors and limits its exposure to commodity price risk. Industries' price risk
management  policy  allows  the  use  of  derivative   financial  and  commodity
instruments to reduce (hedge)  exposure to price risk of its commodity  supplies
and  related  purchase  and sales  commitments  of  energy,  as well as  related
anticipated  transactions.  Industries  utilitizes  contracts  for  the  forward
purchase of natural gas and  electricity  and natural gas futures and options to
manage its power and gas marketing  businesses.  As part of its commodity  price
risk,  Industries is exposed to geographic price  differentials due primarily to
transportation  costs and local  supply-demand  factors.  Industries  uses basis
swaps to hedge a portion of this  exposure.  For economic  reasons or otherwise,
Industries does not hedge all of its basis exposure.

     Industries  enters into certain sales contracts with customers based upon a
fixed commodity  sales price and varying volumes which are ultimately  dependent
upon  the  customer's  supply   requirements.   Industries   utilizes  financial
instruments to reduce the commodity price risk based on modeling techniques that
anticipate these future supply requirements.  Industries continues to be exposed
to  commodity  price  risk  for  the  difference  between  the  ultimate  supply
requirements and those modeled.

     Although the Energy  Utilities are subject to commodity  price risk as part
of their traditional  operations,  the current regulatory framework within which
the Energy  Utilities  operate  allows for  collection  of fuel and gas costs in
rate-making.  Consequently, there is limited commodity price risk for the Energy
Utilities  after  consideration  of the  related  rate-making.  However,  as the
utility industry  deregulates,  the Energy Utilities will be providing  services
without the benefit of the traditional rate-making allowances and will therefore
be more exposed to commodity price risk.

     Because the  commodities  covered by Industries'  derivative  financial and
commodity  instruments are  substantially  the same  commodities that Industries
buys and sells in the physical market, no special correlation studies are deemed
necessary other than monitoring the degree of convergence between the derivative
and cash markets.

     Industries'   daily  net  commodity   position   consists  of  natural  gas
inventories,  natural gas and power purchase and sales  contracts and derivative
financial  and  commodity  instruments.  The fair value of such  positions  is a
summation of the fair values  calculated  for each commodity by valuing each net
position  at quotes  from  exchanges  and  over-the-counter  counterparties  and
includes location differentials.  Based on Industries' net commodity position at
fair value at June 30, 1998, a 10% adverse  movement in electric and natural gas
market  prices  would have  reduced net income by  approximately  $2.0  million.
However,  any such movement in prices is not indicative of actual results and is
subject to change. Refer to Summary of Significant  Accounting  Policies-Hedging
Activities for further discussion of Industries' hedging policies.

     Industries  utilizes  long-term  debt as a primary source of capital in its
business.  A  significant  portion  of  the  total  debt  portfolio  includes  a
medium-term note program,  the interest  component of which resets on a periodic
basis to reflect current market conditions.  The Energy Utilities utilize longer
term fixed  price debt  instruments  which have been and will be  refinanced  at
lower interest rates if Industries deems it to be economical.  Refer to Notes to
Consolidated   Financial   Statements  for  detailed   information   related  to
Industries'   long-term  debt  outstanding  and  the  fair  value  of  financial
instruments for the current market valuation of long-term debt.

<PAGE>
                                    PART II.
                                OTHER INFORMATION

Item 1.   Legal Proceedings.

      Industries   and  its   subsidiaries   are  parties  to  various   pending
proceedings,  including suits and claims against them for personal injury, death
and property  damage.  Such  proceedings and suits, and the amounts involved are
routine  litigation  and  proceedings  for the kinds of businesses  conducted by
Industries and its  subsidiaries,  except as described under Note 5 (NESI Energy
Marketing  Canada Ltd.  Litigation)  and Note 7  (Environmental  Matters) in the
Notes to Consolidated  Financial  Statements under Part I, Item 1 of this report
on Form 10-Q, which notes are incorporated by reference. No other material legal
proceedings  against  Industries  or its  subsidiaries  are  pending  or, to the
knowledge of  Industries,  contemplated  by  governmental  authorities  or other
parties.

Item 2.  Changes in Securities and Use of Proceeds.
         None

Item 3.  Defaults Upon Senior Securities.
         None

Item 4.  Submission of Matters to a Vote of Security Holders.
         None
Item 5.  Other Information.
         Any shareholder  proposal submitted outside the processes of Rule 14a-8
under the Securities  Exchange Act of 1934 for  presentation to Industries' 1999
Annual Meeting of Shareholders will be considered untimely for purposes of Rules
14a-4 and 14a-5 if notice  thereof is received by Industries  after  November 9,
1998.

Item 6.  Exhibits and Reports on Form 8-K.
         (a)  Exhibits.

               Exhibit 23 - Consent of Arthur Andersen LLP

               Exhibit 27 - Financial Data Schedule

          Pursuant to Item  601(b)(4)(iii) of Regulation S-K,  Industries hereby
          agrees  to  furnish  the  Commission,  upon  request,  any  instrument
          defining the rights of holders of  long-term  debt of  Industries  not
          filed as an exhibit herein.  No such instrument  authorizes  long-term
          debt securities in excess of 10% of the total assets of Industries and
          its subsidiaries on a consolidated basis.

          (b)  Reports on Form 8-K.
                 None


<PAGE>


Signatures

      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                               NIPSCO Industries, Inc.

                                    (Registrant)

                                  /s/ STEPHEN P. ADIK
     --------------------------------------------------
                                 Stephen P. Adik
               Executive Vice President, Chief Financial Officer,
                                 Treasurer and Chief Accounting Officer



Date:  August    , 1998