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 September 30, 1997

                      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.)


                        5265 Hohman Avenue, Hammond, Indiana 46320-1775
                        (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 October 31, 1997,  62,730,811  common shares were outstanding.












<PAGE>



<PAGE>
NIPSCO INDUSTRIES, INC.

PART I.  FINANCIAL INFORMATION
ITEM I.  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 September 30,
1997, and December 31, 1996, and the related consolidated  statements of income,
common  shareholders' equity and cash flows for the three, nine and twelve month
periods  ended  September  30,  1997  and  1996.  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 September 30, 1997,  and December 31,
1996,  and the results of their  operations  and their cash flows for the three,
nine and twelve month periods  ended  September 30, 1997 and 1996, in conformity
with generally accepted accounting principles.


                                           /s/  Arthur Andersen LLP

Chicago, Illinois
October 29, 1997





<PAGE>



<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
                                                 September 30,      December 31,
ASSETS                                               1997               1996
                                                 ==============     ============
<S>                                              <C>                <C>    
(In thousands)
PROPERTY, PLANT AND EQUIPMENT:
 Utility Plant, (Note 2)(including
   Construction Work in Progress of
    $184,110 and $166,812, respectively)
    Electric                                     $   4,089,701      $  4,050,084
    Gas                                              1,378,448         1,344,230
    Common                                             350,432           346,636
    Water                                              559,132                 0
                                                 -------------      ------------
                                                     6,377,713         5,740,950
    Less -Accumulated provision for
     depreciation and amortization                   2,770,449         2,546,162
                                                 -------------      ------------
      Total Utility Plant                            3,607,264         3,194,788
                                                 -------------      ------------
 Other property, at cost, net of accumulated
  provision for depreciation                            95,291           147,370
                                                 -------------      ------------
      Total Property, Plant and Equipment            3,702,555         3,342,158
                                                 -------------      ------------
INVESTMENTS:
 Investments, at equity (Note 2)                        81,967            52,260
 Investments, at cost                                   30,155            30,424
 Other investments                                      23,622            20,090
                                                 -------------     -------------
      Total Investments                                135,744           102,774
                                                 -------------     -------------
CURRENT ASSETS:
 Cash and cash equivalents                              28,285            26,333
 Accounts receivable, less reserve of
  $7,401 and $5,569, respectively (Note 2)             171,251           165,441
 Other receivables (Note 23)                            81,620            42,184
 Fuel adjustment clause (Note 2)                         3,806             9,149
 Gas cost adjustment clause (Note 2)                    60,491           100,214
 Materials and supplies, at average cost                61,923            59,859
 Electric production fuel, at average cost              17,148            26,483
 Natural gas in storage (Note 2)                        72,024            65,093
 Prepayments and other                                  27,325            28,491
                                                 -------------     -------------
      Total Current Assets                             523,873           523,247
                                                 -------------     -------------
OTHER ASSETS:
 Regulatory assets (Note 2)                            218,023           236,205
 Intangible assets (Note 2)                             85,360                 0
 Prepayments and other (Note 10)                       130,358            84,499
                                                 -------------     -------------
      Total Other Assets                               433,741           320,704
                                                 -------------     -------------
                                                 $   4,795,913     $   4,288,883
                                                 =============     =============

The accompanying notes to consolidated financial statements are an integral part
of this statement.

</TABLE>

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
                                                 September 30,      December 31,
CAPITALIZATION AND LIABILITIES                        1997              1996
                                                 =============      ============
  (In thousands)
<S>                                             <C>                 <C>
CAPITALIZATION:
 Common shareholders' equity
  (See accompanying statement)                   $   1,266,705      $  1,100,501
 Cumulative preferred stocks (Note 12) -
   Series without mandatory redemption
    provisions (Note 13)                                85,620            81,126
   Series with mandatory redemption
    provisions (Note 14)                                59,396            61,246
 Long-term debt excluding amounts due
  within one year (Note 18)                          1,608,720         1,127,106
                                                 -------------      ------------
      Total Capitalization                           3,020,441         2,369,979
                                                 -------------      ------------
CURRENT LIABILITIES:
 Current portion of long-term debt (Note 19)           110,222           144,552
 Short-term borrowings (Note 20)                       165,209           425,985
 Accounts payable                                      179,219           251,730
 Sinking funds due within one year
  (Notes 14 and 18)                                      3,328             3,328
 Dividends declared on common and
  preferred stocks                                      29,199            28,308
 Customer deposits                                      29,337            17,580
 Taxes accrued                                          88,995            78,723
 Interest accrued                                       20,709             7,557
 Accrued employment costs                               48,023            44,186
 Other accruals                                         44,437            30,054
                                                 -------------      ------------
      Total Current Liabilities                        718,678         1,032,003
                                                 -------------      ------------
OTHER:
 Deferred income taxes (Note 9)                        630,894           602,745
 Deferred investment tax credits, being
  amortized over life of related property
  (Note 9)                                             107,446           108,258
 Deferred credits                                       62,955            37,338
 Customer advances and contributions
    in aid of construction (Note 2)                    105,548            15,830
 Accrued liability for postretirement
  benefits (Note 11)                                   134,823           109,429
 Other noncurrent liabilities                           15,128            13,301
                                                 -------------      ------------
      Total Other                                    1,056,794           886,901
                                                 -------------      ------------
COMMITMENTS AND CONTINGENCIES
 (Notes 3, 5, 6, 8, 21, 22 and 23)
                                                 $   4,795,913      $  4,288,883
                                                 =============      ============

     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                 Nine Months
                                               Ended September 30,          Ended September 30,
                                             ----------------------      -----------------------
                                                1997        1996            1997         1996
                                             ==========   =========      ==========   ==========
<S>                                          <C>          <C>            <C>          <C> 
Operating Revenues: (Notes 2, 7 and 25)
  Gas                                        $   90,258   $  79,498      $  544,668   $  527,840
  Electric                                      279,221     276,776         769,099      769,432
  Water                                          23,577           0          42,372            0
  Products and Services                         203,259      37,438         423,313      110,603
                                             ----------  ----------      ----------   ----------
                                                596,315     393,712       1,779,452    1,407,875
                                             ----------  ----------      ----------   ----------
Cost of Sales: (Note 2)
 Gas costs                                       53,841      42,784         330,642      309,480
 Fuel for electric generation                    65,008      62,346         178,025      172,732
 Power purchased                                 13,143      15,356          32,621       41,639
 Products and Services                          174,467      17,621         353,576       58,774
                                             ----------  ----------      ----------   ----------
                                                306,459     138,107         894,864      582,625
                                             ----------  ----------      ----------   ----------
Operating Margin                                289,856     255,605         884,588      825,250
                                             ----------  ----------      ----------   ----------
Operating Expenses and Taxes (except income):
  Operation                                     102,999      83,109         294,883      253,757
  Maintenance (Note 2)                           16,049      20,256          51,647       64,110
  Depreciation and amortization (Note 2)         64,712      58,427         187,471      173,563
  Taxes (except income)                          19,261      17,189          60,861       55,782
                                             ----------  ----------      ----------   ----------
                                                203,021     178,981         594,862      547,212
                                             ----------  ----------      ----------   ----------
Operating Income                                 86,835      76,624         289,726      278,038
                                             ----------  ----------      ----------   ----------
Other Income (Deductions) (Note 2)                3,326       5,338          14,211        7,523
                                             ----------  ----------      ----------   ----------
Interest and Other Charges:
 Interest on long-term debt                      28,266      21,166          77,875       64,534
 Other interest                                   2,435       4,163           7,825       10,755
 Amortization of premium, reacquisition premium,
  discount and expense on debt, net               1,209       1,142           3,542        3,468
 Dividend requirements on preferred stock
  of subsidiaries                                 2,174       2,174           6,520        6,551
                                             ----------  ----------      ----------   ----------
                                                 34,084      28,645          95,762       85,308
                                             ----------  ----------      ----------   ----------
Income before income taxes                       56,077      53,317         208,175      200,253
                                             ----------  ----------      ----------   ----------
Income taxes                                     20,208      18,907          73,232       74,928
                                             ----------  ----------      ----------   ----------
Net Income                                       35,869      34,410         134,943      125,325

Dividend requirements on preferred shares             0           0               0          119
                                             ----------  ----------      ----------   ----------
Balance available for common shareholders    $   35,869  $   34,410      $  134,943   $  125,206
                                             ==========  ==========      ==========   ==========
Average common shares outstanding            62,747,931  61,061,196      61,722,982   61,451,974

Earnings per average common share            $     0.57  $     0.56      $     2.18   $     2.03
                                             ==========  ==========      ==========   ==========
Dividends declared per common share          $     0.45  $     0.42      $     1.35   $     1.26
                                             ==========  ==========      ==========   ==========

The accompanying notes to consolidated financial statements are an integral part
of this statement.

<CAPTION> 
CONSOLIDATED STATEMENT OF INCOME

 (Dollars in thousands, except for per share amounts)
                                                 Twelve Months
                                              Ended September 30,
                                            ----------------------
                                              1997          1996
                                            ==========  ==========
<S>                                         <C>         <C>     
Operating Revenues: (Notes 2, 7 and 25)
  Gas                                       $  816,223  $  746,125
  Electric                                   1,021,898   1,020,133
  Water                                         42,372           0
  Products and Services                        479,033     131,338
                                            ----------  ----------
                                             2,359,526   1,897,596
                                            ----------  ----------
Cost of Sales: (Note 2)
 Gas costs                                     504,939     433,034
 Fuel for electric generation                  238,508     235,760
 Power purchased                                44,733      50,061
 Products and Services                         396,042      60,808
                                            ----------  ----------
                                             1,184,222     779,663
                                            ----------  ----------
Operating Margin                             1,175,304   1,117,933
                                            ----------  ----------
Operating Expenses and Taxes (except income):
  Operation                                    377,945     351,568
  Maintenance (Note 2)                          70,878      83,436
  Depreciation and amortization (Note 2)       247,902     224,897
  Taxes (except income)                         80,583      74,475
                                            ----------  ----------
                                               777,308     734,376
                                            ----------  ----------
Operating Income                               397,996     383,557
                                            ----------  ----------
Other Income (Deductions) (Note 2)              18,675       9,203
                                            ----------  ----------
Interest and Other Charges:
 Interest on long-term debt                     98,723      85,019
 Other interest                                 12,807      16,730
 Amortization of premium, reacquisition premium,
  discount and expense on debt, net              4,679       4,618
 Dividend requirements on preferred stock
  of subsidiaries                                8,681       8,776
                                            ----------  ----------
                                               124,890     115,143
                                            ----------  ----------
Income before income taxes                     291,781     277,617
                                            ----------  ----------
Income taxes                                   105,429     100,464
                                            ----------  ----------
Net Income                                     186,352     177,153

Dividend requirements on preferred shares            0         885
                                            ----------  ----------
Balance available for common shareholders   $  186,352  $  176,268
                                            ==========  ==========
Average common shares outstanding           61,392,733  61,724,244

Earnings per average common share           $     3.03  $     2.85
                                            ==========  ==========
Dividends declared per common share         $     1.80  $     1.68
                                            ==========  ==========

The accompanying notes to consolidated financial statements are an integral part
of this statement.



<PAGE>



</TABLE>

<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

                                                      Dollars in Thousands
                              ----------------------------------------------------------------
                                                         Additional
                                             Common       Paid-in       Retained     Treasury
Three Months Ended             Total         Shares       Capital       Earnings      Shares
========================      ===========    =========   =========     =========    ==========
<S>                           <C>            <C>         <C>           <C>          <C>
Balance, July 1, 1996         $ 1,116,228    $ 870,930   $  32,674     $ 558,076    $ (339,673)
Net income                         34,410                                 34,410
Dividends:
 Preferred shares
 Common shares                    (25,561)                               (25,561)
Treasury shares acquired          (13,904)                                             (13,904)
Issued:
 Employee stock purchase
  plan                                166                      100                          66
 Long-term incentive plan             704                                                  704
 Amortization of
  unearned compensation               560
Unrealized gain(loss) on
  available for sale 
  securities                          230
Other                                 109                                    (22)
                             ------------   ----------    ---------   ----------   -----------
Balance, September 30, 1996  $  1,112,942   $  870,930    $  32,774   $  566,903   $  (352,807)
                             ============   ==========    =========   ==========   ===========

Balance, July 1, 1997        $  1,258,417   $  870,930    $  89,556   $  634,083   $  (336,416)
Net income                         35,869                                 35,869
Dividends:
 Preferred shares
 Common shares                    (28,244)                               (28,244)
Treasury shares acquired           (1,211)                                              (1,211)
Issued:
 IWC Resources acquisition              0                         0                          0
 Acquisition of minority
  interest                              0                         0                          0
 Employee stock purchase
  plan                                174                       107                         67
 Long-term incentive plan           1,412                                                1,412
Amortization of
 unearned compensation                531
Unrealized gain (loss) on
 available for sale securities          1
Other                                (244)
                             ------------  -----------    ----------  ----------   -----------
Balance, September 30, 1997  $  1,266,705  $   870,930    $   89,663  $  641,708   $  (336,148)
                             ============  ===========    ==========  ==========   ===========

<CAPTION> 
                                Dollars in Thousands             Shares
                            --------------------------    ----------------------
                             Currency
   Three Months Ended       Translation                    Common     Treasury
       (continued)          Adjustment      Other          Shares      Shares
========================    ===========     =========     ========== ===========
<S>                         <C>             <C>           <C>        <C>   
Balance, July 1, 1996       $    (1,991)    $  (3,788)    73,892,109 (12,737,360)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                                (377,024)
Issued:
 Employee stock purchase
  plan                                                                     4,118
 Long-term incentive plan                                                 26,100
Amortization of
 unearned compensation                            560
Unrealized gain (loss) on
  available for sale 
  securities                                      230
Other                               131
                            -----------   -----------    ----------- -----------
Balance, September 30, 1996 $    (1,860)  $    (2,998)    73,892,109 (13,084,166)
                            ===========   ===========    =========== ===========

Balance, July 1, 1997       $      (40)   $       304     73,892,109 (11,158,490)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                                 (29,517)
Issued:
 IWC Resources acquisition                                                     0
 Acquisition of minority
   interest                                                                    0
 Employee stock purchase
  plan                                                                     4,201
Long-term incentive plan                                                  46,300
Amortization of
 unearned compensation                            531
Unrealized gain (loss) on
 available for sale securities                      1
Other                              (244)
                            -----------   -----------    ----------- -----------
Balance, September 30, 1997 $      (284)  $       836     73,892,109 (11,137,506)
                            ===========   ===========    =========== ===========

<CAPTION>
                                           Dollars in Thousands
                            -----------------------------------------------------------------
                                                      Additional
                                           Common       Paid-in        Retained     Treasury
Nine Months Ended            Total         Shares       Capital        Earnings      Shares
========================    ===========   ==========   ==========     ==========  ===========
<S>                         <C>           <C>          <C>            <C>         <C>      
Balance, January 1, 1996    $ 1,122,215   $  870,930   $   32,210     $  518,837  $  (293,223)
Net income                      125,325                                  125,325
Dividends:
 Preferred shares                  (119)                                    (119)
 Common shares                  (77,039)                                 (77,039)
Treasury shares acquired        (61,940)                                              (61,940)
Issued:
 Employee stock purchase
  plan                              615                       361                         254
 Long-term incentive plan         1,714                       184                       2,102
 Amortization of
  unearned compensation           1,748
Unrealized gain(loss) on
  available for sale 
  securities                        435
Other                               (12)                       19           (101)
                            -----------   ----------   ----------     ----------  -----------
Balance, September 30, 1996 $ 1,112,942   $  870,930   $   32,774     $  566,903  $  (352,807)
                            ===========   ==========   ==========     ==========  ===========

Balance, January 1, 1997    $ 1,100,501   $  870,930   $   32,868     $  591,370  $  (392,995)
Net income                      134,943                                  134,943
Dividends:
 Preferred shares                     0                                        0
 Common shares                  (84,479)                                 (84,479)
Treasury shares acquired       (103,740)                                             (103,740)
Issued:
 IWC Resources acquisition      207,422                    55,009                     152,413
 Acquisition of minority
  interest                        5,469                     1,351                       4,118
 Employee stock purchase
  plan                              420                       211                         209
 Long-term incentive plan         3,627                       223                       3,847
Amortization of
 unearned compensation            1,513
Unrealized gain (loss) on
 available for sale securities    1,298
Other                              (269)                        1           (126)
                            -----------  -----------   ----------    -----------  -----------
Balance, September 30, 1997 $ 1,266,705  $   870,930   $   89,663    $   641,708  $  (336,148)
                            ===========  ===========   ==========    ===========  ===========

<CAPTION>
                               Dollars in Thousands               Shares
                            --------------------------    ----------------------
                               Currency
Nine Months Ended            Translation                   Common     Treasury
(continued)                  Adjustment      Other         Shares      Shares
========================    ============    =========    ==========  ==========
<S>                         <C>             <C>          <C>         <C> 
Balance, January 1, 1996    $    (1,930)    $  (4,609)   73,892,109  (11,512,513)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (1,666,768)
Issued:
 Employee stock purchase
  plan                                                                    15,965
 Long-term incentive plan                        (572)                    79,150
Amortization of
 unearned compensation                          1,748
Unrealized gain (loss) on
  available for sale securities                   435
Other                                 70
                            ------------   ----------    ----------   ----------
Balance, September 30, 1996 $     (1,860)  $   (2,998)   73,892,109  (13,084,166)
                            ============   ==========    ==========   ==========

Balance, January 1, 1997    $       (140)  $   (1,532)   73,892,109  (14,086,448)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (2,618,875)
Issued:
 IWC Resources acquisition                                             5,291,089
 Acquisition of minority
   interest                                                              135,032
 Employee stock purchase
  plan                                                                    13,163
Long-term incentive plan                         (443)                   128,533
Amortization of
 unearned compensation                          1,513
Unrealized gain (loss) on
 available for sale securities                  1,298
Other                               (144)
                            ------------  -----------    ----------  -----------
Balance, September 30, 1997 $       (284) $       836    73,892,109  (11,137,506)
                            ============  ===========    ==========  ===========

<CAPTION>

                                                  Dollars in Thousands
                            -----------------------------------------------------------------
                                                       Additional
                                            Common     Paid-in        Retained     Treasury
Twelve Months Ended            Total        Shares     Capital        Earnings      Shares
========================    ===========   ==========  ===========    ==========    ==========
<S>                         <C>           <C>         <C>            <C>           <C> 
Balance, October 1, 1995    $ 1,117,182   $  870,930  $    32,202    $  493,876    $ (271,474)
Net income                      177,153                                 177,153
Dividends:
 Preferred shares                  (885)                                   (885)
 Common shares                 (103,140)                               (103,140)
Treasury shares acquired        (87,030)                                              (87,030)
Issued:
 Employee stock purchase
  plan                              615                       361                         254
 Long-term incentive plan         5,057                       186                       5,443
 Amortization of
  unearned compensation           2,425
Unrealized gain(loss) on
  available for sale securities   2,104
Other                              (539)                       25          (101)
                            -----------   ----------  -----------   -----------   -----------
Balance, September 30, 1996 $ 1,112,942   $  870,930  $    32,774   $   566,903   $  (352,807)
                            -----------   ----------  -----------   -----------   -----------
Net income                      186,352                                 186,352
Dividends:
 Preferred shares                     0                                       0
 Common shares                 (111,421)                               (111,421)
Treasury shares acquired       (147,298)                                             (147,298)
Issued:
 IWC Resources acquisition      207,422                    55,009                     152,413
 Acquisition of minority
  interest                        5,469                     1,351                       4,118
 Employee stock purchase
  plan                              695                       411                         284
 Long-term incentive plan         6,817                       118                       7,142
Amortization of
 unearned compensation            2,335
Unrealized gain (loss) on
 available for sale securities    1,942
Other                             1,450                                    (126)
                            -----------   ----------  -----------   ------------  ------------
Balance, September 30, 1997 $ 1,266,705   $  870,930  $    89,663   $    641,708  $   (336,148)
                            ===========   ==========  ===========   ============  ============

<CAPTION>
                               Dollars in Thousands             Shares
                            --------------------------   -----------------------
                              Currency
Twelve Months Ended          Translation                  Common      Treasury
 (continued)                 Adjustment      Other        Shares       Shares
========================    ============   ==========    ==========   ==========
<S>                         <C>            <C>           <C>         <C>    
Balance, October 1, 1995    $     (1,397)  $   (6,955)   73,892,109  (10,953,189)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (2,357,692)
Issued:
 Employee stock purchase
  plan                                                                    15,965
 Long-term incentive plan                        (572)                   210,750
Amortization of
 unearned compensation                          2,425
Unrealized gain (loss) on
  available for sale securities                 2,104
Other                               (463)
                            ------------   ----------    ----------   ----------
Balance, September 30, 1996 $     (1,860)  $   (2,998)   73,892,109  (13,084,166)
                            ------------   ----------    ----------   ----------
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (3,745,711)
Issued:
 IWC Resources acquisition                                             5,291,089
 Acquisition of minority
   interest                                                              135,032
 Employee stock purchase
  plan                                                                    17,867
Long-term incentive plan                         (443)                   248,383
Amortization of
 unearned compensation                          2,335
Unrealized gain (loss) on
 available for sale securities                  1,942
Other                              1,576
                            ------------   ----------    ----------   ----------
Balance, September 30, 1997 $       (284)  $      836    73,892,109  (11,137,506)
                            ============   ==========    ==========   ==========

     The accompanying notes to consolidated financial statements are an integral
part of this statement.
</TABLE>

<PAGE>

<TABLE>

<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
                                                  Three Months                Nine Months
                                                Ended September 30,       Ended September 30,
                                                --------------------     ---------------------
                                                  1997        1996         1997         1996
                                                ========    ========     =========    ========
<S>                                            <C>         <C>           <C>         <C> 
Cash flows from operating activities:
 Net income                                    $  35,869   $  34,410     $ 134,943   $ 125,325

Adjustments to reconcile net income to net cash:
  Depreciation and amortization                   64,712      58,427       187,471     173,563
  Deferred federal and state income
   taxes, net                                       (542)      2,069       (33,902)     14,871
  Deferred investment tax credits, net            (1,832)     (1,984)       (5,467)     (5,322)
  Advance contract payment                           475         475         1,425     (17,575)
  Change in certain assets and liabilities -*
   Accounts receivable, net                        3,896      20,234        22,959      49,399
   Other receivables                              29,916      15,534       (39,436)    (17,817)
   Electric production fuel                       11,484        (301)        9,335     (16,940)
   Materials and supplies                            744       2,168           727       5,246
   Natural gas in storage                        (36,897)    (53,023)       (6,931)    (21,669)
   Accounts payable                                5,171      (7,168)      (54,980)       (126)
   Taxes accrued                                  (4,664)    (22,354)       30,585     (16,174)
   Fuel adjustment clause                          4,451       1,816         5,343         494
   Gas cost adjustment clause                    (13,436)    (10,763)       39,723     (58,286)
   Accrued employment costs                        3,284         797         1,359      (8,232)
   Other accruals                                 (1,635)     (2,265)       11,264     (11,032)
   Other, net                                     28,912      22,100        52,247      25,470
                                               ---------   ---------    ----------  ----------
      Net cash provided by operating activities  129,908      60,172       356,665     221,195
                                               ---------   ---------    ----------  ----------
Cash flows used in investing activities:
  Energy Utilities construction expenditures    (51,833)     (48,580)     (160,504)   (131,456)
  IWCR construction expenditures                (13,140)           0       (27,381)          0
  Acquisition of IWC Resources
  Corporation, net of cash acquired                   0            0      (288,932)          0
  Acquisition of minority interest                    0            0        (5,641)          0
  Proceeds from disposition of assets               186            0        29,961           0
  Proceeds from settlement of litigation         41,069            0        41,069           0
  Other, net                                      1,128       (8,491)      (18,649)    (23,060)
                                              ---------    ---------    ----------  ----------
      Net cash used in investing activities    (22,590)      (57,071)     (430,077)   (154,516)
                                              ---------    ---------    ----------  ----------
Cash flows provided by (used in) financing activities:
  Issuance of long-term debt                    42,669             0       450,931      77,450
  Issuance of short-term debt                  203,400       519,050       778,495   1,117,458
  Net change in commercial paper                19,850         3,500      (235,705)     58,500
  Retirement of long-term debt                (116,909)      (80,434)     (118,416)    (89,171)
  Retirement of short-term debt               (228,807)     (374,350)     (827,302) (1,022,385)
  Retirement of preferred shares                  (600)         (600)       (1,853)    (37,046)
  Issuance of common shares                      1,586           853       216,919       2,267
  Acquisition of treasury shares                (1,211)      (13,904)     (103,740)    (61,940)
  Cash dividends paid on common shares         (28,247)      (25,692)      (83,342)    (77,685)
  Cash dividends paid on preferred shares            0             0             0        (119)
  Other, net                                      (155)          121          (623)        401
                                            ----------    ----------    ----------  ----------
      Net cash provided by (used in)
       financing activities                   (108,424)       28,544        75,364     (32,270)
                                            ----------    ----------    ----------  ----------
Net increase (decrease) in cash and
 cash equivalents                               (1,106)       31,645         1,952      34,409

Cash and cash equivalents at
   Beginning of period                          29,391        31,260        26,333      28,496
                                            ----------    ----------    ----------  ----------
Cash and cash equivalents at
   End of period                            $   28,285    $   62,905    $   28,285  $   62,905
                                            ==========    ==========    ==========  ==========

 *Net of effect from purchase of IWC Resources Corporation.

The accompanying notes to consolidated financial statements are an integral part
of this statement.

<PAGE>

<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
                                                   Twelve Months
                                                 Ended September 30,
                                                --------------------
                                                  1997        1996
                                                ========    ========
<S>                                            <C>          <C> 
Cash flows from operating activities:
 Net income                                    $ 186,352   $ 177,153

Adjustments to reconcile net income to net cash:
  Depreciation and amortization                  247,902     224,897
  Deferred federal and state income
   taxes, net                                    (27,647)     31,911
  Deferred investment tax credits, net            (7,553)     (7,233)
  Advance contract payment                         1,900     (17,575)
  Change in certain assets and liabilities -*
   Accounts receivable, net                      (82,883)    (15,814)
   Other receivables                             (52,397)    (29,223)
   Electric production fuel                       14,050     (14,395)
   Materials and supplies                            666       6,731
   Natural gas in storage                         10,529      (8,489)
   Accounts payable                               26,159      29,759
   Taxes accrued                                  57,233     (34,962)
   Fuel adjustment clause                          6,001      (1,124)
   Gas cost adjustment clause                       (782)    (88,746)
   Accrued employment costs                        7,082      (3,051)
   Other accruals                                  8,793     (17,453)
   Other, net                                     42,050      23,067
                                               ---------   ---------
      Net cash provided by operating activities  437,455     255,453
                                               ---------   ---------
Cash flows used in investing activities:
  Energy Utilities construction expenditures    (217,903)   (179,960)
  IWCR construction expenditures                 (27,381)          0
  Acquisition of IWC Resources Corporation,
    net of cash acquired                        (288,932)          0
  Acquisition of minority interest                (5,641)          0
  Proceeds from disposition of assets             29,961           0
  Proceeds from settlement of litigation          41,069           0
  Other, net                                     (22,809)    (54,298)
                                              ----------   ---------
      Net cash used in investing activities     (491,636)   (234,258)
                                              ----------   ---------
Cash flows provided by (used in) financing activities:
  Issuance of long-term debt                     451,847      75,316
  Issuance of short-term debt                  1,243,247   1,931,495
  Net change in commercial paper                (102,500)     94,000
  Retirement of long-term debt                  (119,037)    (87,614)
  Retirement of short-term debt               (1,414,651) (1,770,311)
  Retirement of preferred shares                  (2,411)    (37,802)
  Issuance of common shares                      220,368       5,804
  Acquisition of treasury shares                (147,298)    (87,030)
  Cash dividends paid on common shares          (108,847)   (102,156)
  Cash dividends paid on preferred shares           (647)        968
  Other, net                                        (510)        542
                                              ----------   ---------
      Net cash provided by (used in)
       financing activities                       19,561      23,212
                                              ----------   ---------
Net increase (decrease) in cash and
 cash equivalents                                (34,620)     44,407

Cash and cash equivalents at
   Beginning of period                            62,905      18,498
                                              ----------   ---------
Cash and cash equivalents at
   End of period                              $   28,285   $  62,905
                                              ==========   =========

*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."

      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   services  including
installation,  repair and maintenance of underground  pipelines and utility line
locating  and  marking.  The two  primary  non-utility  subsidiaries  are Miller
Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P).

     Industries  also  provides  non-regulated  energy/utility-related  services
including  energy marketing and trading;  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 subsidiares:
NIPSCO Development Company,  Inc.  (Development);  NIPSCO Energy Services,  Inc.
(Services);  Primary Energy,  Inc.  (Primary);  Miller; and SM&P. NIPSCO Capital
Markets,  Inc.  (Capital  Markets)  handles  financing  for  Industries  and its
subsidiaries,  other than Northern Indiana.  These  subsidiaries are referred to
collectively as "Products and Services."

(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.

      The prior period operating results related to "Products and Services" were
previously  reported  under  the  caption  "Other  Income  (Deductions)"  in the
Consolidated  Statement  of  Income.   Accordingly,   these  results  have  been
reclassified to conform to the current presentation.

      The accompanying  consolidated  financial statements of Industries include
three  and six  months  of  operating  results  for IWCR for the  periods  ended
September 30, 1997.

      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.
Construction  revenues are  recognized on the  percentage  of completion  method
whereby revenues are recognized in proportion to costs incurred over the life of
each project.

     DEPRECIATION AND MAINTENANCE.  Northern Indiana provides  depreciation on a
straight-line  method over the remaining service lives of the electric,  gas and
common  properties.  The provisions,  as a percentage of the cost of depreciable
utility  plant,  were  approximately  4.3% for the  three-month,  nine-month and
twelve-month  periods ended  September 30, 1997; and 4.3%, 4.2% and 4.2% for the
three-month,  nine-month  and  twelve-month  periods  ended  September 30, 1996,
respectively.  The depreciation rates for electric and gas properties were 3.55%
and 4.92%, respectively.

      Kokomo Gas provides  depreciation on the original cost of utility plant in
service  using  straight-line  rates that  averaged  approximately  3.2% for the
three-month,  nine-month and twelve-month  periods ended September 30, 1997; and
3.1% for the three-month,  nine-month and  twelve-month  periods ended September
30, 1996.

      NIFL  provides  depreciation  on the  original  cost of  utility  plant in
service  using  straight-line  rates that averaged  approximately  2.75% for the
three-month,  nine-month and  twelve-month  periods ended September 30, 1997 and
September 30, 1996.

      Crossroads provides  depreciation on the original cost of utility plant in
service  using  straight-line  rates that  averaged  approximately  2.5% for the
three-month,  nine-month and  twelve-month  periods ended September 30, 1997 and
September 30, 1996.

      IWC and Harbour provide depreciation on the original cost of utility plant
in service using a composite annual rate of 1.9% and 2.0%, respectively.

      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.

     AMORTIZATION OF SOFTWARE COSTS.  Industries amortizes  capitalized software
costs using the straight-line method based on estimated economic lives.

      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 $169.6
million (see Note 4) and $40.6  million at  September  30, 1997 and December 31,
1996,  respectively,  and are being amortized over a forty-year  period from the
respective dates of acquisition.

      INTANGIBLE  ASSETS.  The  excess  of cost  over the fair  value of the net
assets of non-utility subsidiaries acquired as part of the IWCR acquisition (see
Note 4) has been recorded as goodwill and is being  amortized  over a forty-year
period from the date of acquisition.  Industries  acquired the minority interest
in NESI Energy Marketing, L.L.C. in April 1997. The excess of the purchase price
over the fair value of the tangible net assets  associated with this acquisition
has  been  recorded  as an  intangible  asset  and  is  being  amortized  over a
twenty-year  period  from  the  date of  acquisition.  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.

      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  are included in Cost of
Sales under the caption "Power purchased."

      ACCOUNTS RECEIVABLE. At September 30, 1997, 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.

      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            Nine Months           Twelve Months
                        Ended September 30,   Ended September 30,   Ended September 30,
                        -------------------   -------------------   -------------------
(In thousands)           1997       1996       1997       1996        1997       1996
                        =======    ========    =======    =======    ========   ========
<S>                    <C>         <C>        <C>        <C>        <C>         <C>
Income taxes           $ 19,000   $ 20,047    $ 80,700   $ 75,795    $ 80,700  $113,635
Interest, net of
 amounts capitalized     24,059     15,141      68,714     56,089      99,906    89,103
 </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 Indiana Utility Regulatory
Commission  (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 as it
is billed or refunded to their  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 factors for Kokomo
Gas and NIFL are subject to semi-annual hearings by the Commission and remain 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. See Note 7, 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 September  1997 and December 1996 the estimated
replacement  cost of gas in storage  (current and  non-current) at September 30,
1997 and December 31, 1996  exceeded the stated LIFO cost by  approximately  $54
million and $96 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 forecasted  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 forecasted transaction affects earnings.

      Industries' gas subsidiaries use 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 September  30, 1997,  Industries  had open
derivative financial instruments representing hedges of natural gas sales of 9.6
billion  cubic  feet  (Bcf),  natural  gas  purchases  of 4.0 Bcf and net  basis
differentials  of 9.4 Bcf. The net deferred gain on these  derivative  financial
instruments as of September 30, 1997 was not material.

      Industries purchases options to hedge price risk associated with a portion
of its fixed price purchase and sale commitments related to electricity. The net
deferred gain on these options as of September 30, 1997 was not material.

      IMPACT OF ACCOUNTING STANDARDS. In February 1997, the Financial Accounting
Standards  Board  (FASB)  issued  Statement of  Financial  Accounting  Standards
("SFAS")  No.  128,   "Earnings  per  Share."  This   statement   specifies  the
computation, presentation and disclosure requirements for earnings per share for
entities  with  publicly  held common  stock.  Its  objective is to simplify the
computation  of earnings per share and to make the U.S.  standard for  computing
earnings per share more  compatible  with the  standards of other  countries and
with that of the International Accounting Standards Committee. This statement is
effective for fiscal years ending after December 15, 1997. Industries will adopt
this statement at year-end 1997 and does not expect adoption of the statement to
have a significant impact on its current earnings per share calculation.

      In July 1997, FASB issued SFAS No. 130, "Reporting  Comprehensive Income."
This statement  establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The  objective of the  statement is to report a measure of all changes in equity
of an enterprise  that result from  transactions or other economic events during
the  period  other  than  transactions  with  shareholders.  Industries  will be
required  to display  items of other  comprehensive  income  including,  but not
limited  to,  changes  in  its  unrealized   holding  gains  or  losses  on  its
available-for-sale  securities  and foreign  currency  translation  adjustments.
Industries will adopt this statement effective January 1, 1998.

      REGULATORY ASSETS. The Utilities' operations are subject to the regulation
of the Commission and, in the case of the "Energy Utilities", the Federal Energy
Regulatory  Commission (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 September  30, 1997 and December  31,  1996,  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  of the
regulatory  assets  identified  below  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>
                                                 September 30,     December 31,
(In thousands)                                     1997               1996
                                                 ============      ============
<S>                                              <C>                <C>    
Unamortized reacquisition premium on
 debt (Note 18)                                   $    47,626       $    50,262
Unamortized R.M. Schahfer Unit 17 and
 Unit 18 carrying charges and
 deferred depreciation (See below)                     67,600            70,763
Bailly scrubber carrying charges and
 deferred depreciation (See below)                     10,114            10,816
Deferred SFAS No. 106 expense not
 recovered (Note 11)                                   89,060            87,557
FERC Order No. 636 transition costs (Note 7)           27,521            47,399
Regulatory income tax asset, net (Note 9)               9,921             4,736
Other                                                   4,218                0
                                                 ------------       -----------
                                                      256,060           271,533
Less: Current portion of regulatory assets             38,037            35,328
                                                -------------       -----------
                                                $     218,023       $   236,205
                                                =============       ===========
</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.  Pursuant to such  order,  capitalization  of  carrying  charges and
deferral of depreciation and certain  operating  expenses ceased on December 31,
1995. 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, 1995, a pre-tax rate of 6.0% for all  construction was being
used;  effective  January  1, 1996 the rate  decreased  to 5.5%;  and  effective
January 1, 1997, 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
common 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
$30.9  million and $24.1  million  relating to  affordable  housing  projects at
September 30, 1997 and December 31, 1996, 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) RESOLUTION OF TAX MATTER: In 1991, the Internal Revenue Service (IRS) issued
a notice of deficiency for Northern  Indiana's  taxes for the years 1982 through
1985  ($3,785,250 per year plus interest)  relating to interest  payments on $70
million of 17-1/4%  Notes issued in 1981 by Northern  Indiana's  former  foreign
subsidiary,  Northern  Indiana Public Service  Finance N.V.  (Finance).  The IRS
maintained  that  interest  paid on the Notes should have been subject to United
States tax withholding. Northern Indiana challenged the assessment in the United
States  Tax  Court  (Tax  Court)  and the Tax Court  ruled in favor of  Northern
Indiana,  finding that the interest  paid on the Notes was not subject to United
States tax  withholding.  The IRS appealed the Tax Court's decision to the U. S.
Court of Appeals for the Seventh Circuit (Court of Appeals) and Northern Indiana
filed a cross  appeal.  On June 6,  1997 the  Court of  Appeals  issued an order
affirming  in full the Tax Court  order.  The IRS did not appeal the decision of
the Court of Appeals.

(4)  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 5.3 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  estimated fair values.  The  accompanying
consolidated  financial  statements  reflect  a  preliminary  allocation  of the
purchase  price  (see  Note 2) as the  purchase  price  allocation  has not been
finalized.

     Following is a summary of the assets  acquired and  liabilities  assumed in
the acquisition of IWCR:
<TABLE>

<CAPTION>
(In thousands)
<S>                                      <C>
 Assets acquired:
  Utility plant (net of
       accumulated depreciation)          $ 448,387
  Other property and investments             26,526
  Other current assets                       34,826
  Intangible assets                          80,572
  Other noncurrent assets                    22,350
                                          ---------
                                            612,661
Less:
 Liabilities assumed:
  Long-term debt                            112,185
  Preferred stock                             4,497
  Short-term debt                            28,329
  Other current liabilities                  23,315
  Customer advances and contributions
    in aid of construction                   86,175
  Other noncurrent liabilities               67,623
                                          ---------
                                            322,124
                                          ---------
 Net assets acquired                      $ 290,537
                                          =========
</TABLE>

      On a  proforma  basis,  the  acquisition  of IWCR does not have a material
impact on Industries' consolidated operating results.

     (5)  RESOLUTION  OF  ELM  ENERGY  AND  RECYCLING   (UK)  LTD.   LITIGATION:
Development is a 85%  shareholder  in Elm Energy and Recycling (UK) Ltd.  (Elm),
which  owns  and   operates  a   tire-fueled   electric   generating   plant  in
Wolverhampton,   England   (Project).   In  1995,  the  Project  failed  certain
performance and reliability  tests which had been  established  under a contract
between Elm and TBV Power Limited (TBV), a company jointly owned by subsidiaries
of the  Tarmac  PLC Group and Black & Veatch.  Elm  "rejected"  the  Project  in
accordance  with  the  contract,  and  the  independent  Project  engineer  then
certified that 29.6 million British Pounds Sterling (approximately $47.9 million
at September  30, 1997) were to be  reimbursed  by TBV to Elm. TBV filed suit in
the English  courts to enjoin  enforcement of the decision and to allege certain
breaches of the underlying  construction contract.  Elm counterclaimed,  and Elm
and  Development  also  sought  additional  remedies  at law, in both the United
States and the United Kingdom,  for damages and/or sanctions against TBV, Tarmac
PLC  Group,  Black & Veatch  and its  chairman.  Black &  Veatch  counterclaimed
against Elm and Development.

      In September 1997, a settlement was reached on mutually agreed terms which
resulted in the  dismissal,  with  prejudice,  of all  litigation  in the United
States  and  the  United  Kingdom   relating  to  the  Project  (Elm  Litigation
Settlement).  Concurrently,  Elm reached a settlement with its banks pursuant to
which the banks were paid a portion of the  proceeds  received by Elm in the Elm
Litigation  Settlement  in  exchange  for the banks  agreeing  to forgive  Elm's
remaining  bank  debt and to  release  all  security  interests  they had in the
Project.  The Elm  Litigation  Settlement  was not  material  to the  results of
operations or financial position of Industries. Elm is continuing to operate the
Project and Development provides financing to support its operations.

(6) 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.

(7) FERC ORDER NO. 636: The Energy  Utilities have recorded  approximately  $135
million of interstate  pipeline  transition  costs to reflect the impact of FERC
Order No.  636,  a  majority  of which  costs  have  been  paid to the  pipeline
suppliers. 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.

(8) 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 $20 million to cover probable  corrective  actions as of September
30, 1997;  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.

     On December 19, 1996, the Environmental Protection Agency (EPA) promulgated
rules for the second phase of the Acid Rain nitrogen oxides  reduction  program.
Northern  Indiana  is  evaluating  compliance  strategies  to meet  the  reduced
emission limitations found in the final rule.  Additional controls may be needed
to meet the  requirements.  A  compliance  plan must be  submitted to the EPA by
December  31, 1997 with details of the plan to meet the new limits by January 1,
2000.

      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).  Northern Indiana estimates that total costs of compliance with the CAAA
sulfur  dioxide  regulations  will impact  electric rates by less than 5% in the
future.

      The CAAA contain provisions that could lead to limitations on emissions of
nitrogen  oxides and  hazardous  air  pollutants  which may require  significant
capital  expenditures  for  control  of these  emissions.  Northern  Indiana  is
pursuing a nitrogen oxide control program to meet future requirements.  Northern
Indiana  cannot  predict  the costs of  complying  with CAAA  requirements,  but
Northern  Indiana  believes  that any such mandated  costs would be  recoverable
through the rate-making process.

     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 sulfur  dioxide and
nitrogen oxide emissions from coal-fired boilers  (including  Northern Indiana's
generating  stations) beyond reductions  required in the Acid Rain provisions of
the CAAA.  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  "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.

      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 seven sites and remedial
measures have been selected at four 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  the Indiana  Department  of  Environmental
Management  (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 Indiana state
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. In September 1995, certain of
the insurance companies initiated a suit in Indiana state court against Northern
Indiana seeking a ruling that denied coverage.  Later that same month,  Northern
Indiana  initiated a similar suit in federal  court,  and the state court action
was stayed.  After the  dismissal  of the  federal  court  action on  procedural
grounds in May 1997,  Northern  Indiana  filed  claims in the state court action
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  magnetic fields
in homes  increase the risk of  childhood  leukemia.  This study  follows an EMF
report  released  late last year by the U.S.  National  Research  Counsel 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.  Despite  the  reports'
findings,  future  research  appropriations  are  continuing  to be dedicated to
explore this issue.

      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.  Application for renewal of any expiring permits have
been filed and are the subject of ongoing  discussions  with,  but not finalized
by, IDEM. These permits continue in effect pending review of the 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 its 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  required  by  the  1986
amendments.  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.

(9) 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 September 30,
1997 and December 31, 1996, are as follows:
<TABLE>
<CAPTION>
                                             September 30,        December 31,
(In thousands)                                   1997               1996
                                             =============        ============
<S>                                          <C>                  <C>    
Deferred tax liabilities -
 Accelerated depreciation
   and other property differences             $    771,471        $    727,528

 AFUDC-equity                                       35,903              37,713
 Adjustment clauses                                 23,987              41,181
 Take-or-pay gas costs                                 496                 877
 Other regulatory assets                            30,270              39,458
 Reacquisition premium on debt                      18,674              19,041

Deferred tax assets -
 Deferred investment tax credits                   (40,738)            (41,046)
 Removal costs                                    (141,305)           (131,718)
 FERC Order No. 636 transition costs               (10,437)             (8,144)
 Other postretirement/postemployment benefits      (50,218)            (43,446)
 Other, net                                           (813)            (11,987)
                                              ------------         -----------
                                                   637,290             629,457
Less: Deferred income taxes related to
  current assets and liabilities                     6,396              26,712
                                              ------------         -----------
Deferred income taxes -noncurrent             $    630,894         $   602,745
                                              ============         ===========
</TABLE>

     Federal and state income taxes as set forth in the  Consolidated  Statement
of Income are comprised of the following:
<TABLE>

<CAPTION>
                                  Three Months         Nine Months          Twelve Months
                               Ended September 30,  Ended September 30,   Ended September 30,
                               --------- ---------  -------- ---------   --------- ---------
(In thousands)                    1997      1996      1997      1996       1997      1996
                               ========= =========  ========  ========   =========  ========
<S>                             <C>       <C>       <C>       <C>       <C>         <C>
Current income taxes -
 Federal                        $ 18,988  $ 15,955  $ 97,004  $ 56,044   $121,586   $ 64,253
 State                             3,594     2,866    15,597     9,335     19,043     11,533
                               --------- ---------  --------  --------   --------   --------
                                  22,582    18,821   112,601    65,379    140,629     75,786
                               --------- ---------  --------  --------   --------   --------
Deferred income taxes, net -
 Federal                            (554)    1,841   (31,452)   13,550    (25,720)    29,256
 State                                12       228    (2,450)    1,321     (1,927)     2,655
                               --------- ---------  --------  --------   --------   --------
                                    (542)    2,069   (33,902)   14,871    (27,647)    31,911
                               --------- ---------  --------- --------   --------   --------
Deferred investment tax
 credits, net                     (1,832)   (1,984)   (5,467)   (5,322)    (7,553)    (7,233)
                               --------- ---------  --------  --------   --------   --------
 Income taxes                     20,208    18,906    73,232    74,928    105,429    100,464

Income taxes applicable to
  non-operating activities
  and equity investments             474     1,170     3,032       601      2,224       (770)
                               --------- ---------  --------  --------   --------   --------
   Total income taxes           $ 20,682  $ 20,076  $ 76,264  $ 75,529   $107,653    $99,694
                               ========= =========  ========  ========   ========   ========

</TABLE>
      A  reconciliation  of total 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           Nine Months             Twelve Months
                                  Ended September 30,    Ended September 30,     Ended September 30,
                                 ---------  ---------   ---------  ---------    ---------  ---------
(In thousands)                     1997       1996        1997       1996         1997       1996
                                 =========  =========   =========  =========    =========  =========
<S>                              <C>        <C>         <C>        <C>          <C>        <C>
Net income                       $  35,869  $  34,410   $ 134,943  $ 125,325    $ 186,352  $ 177,153
Add-Income taxes                    20,682     20,076      76,264     75,529      107,653     99,694
 Dividend requirements on
 preferred stocks of subsidiaries    2,174      2,174       6,520      6,551        8,681      8,776
                                 ---------  ---------   ---------  ---------    ---------  ---------
Income before preferred
 dividend requirements of
 subsidiaries and income taxes   $  58,725  $  56,660   $ 217,727  $ 207,405    $ 302,686  $ 285,623
                                 =========  =========   =========  =========    =========  =========
Amount derived by multiplying
 pre-tax income by the
 statutory rate                  $  20,553  $  19,832   $  76,204  $  72,592    $ 105,939  $  99,969

Reconciling items multiplied by the statutory rate:
  Book depreciation over
   related tax depreciation          1,021      1,007       3,109      3,020        4,710      4,024
  Amortization of deferred
   investment tax credits           (1,832)    (1,984)     (5,467)    (5,322)      (7,553)    (7,233)
  State income taxes, net of
   federal income tax benefit        2,957      1,946       9,356      7,337       12,559      9,598
  Reversal of deferred taxes
   provided at rates in excess
   of the current federal
   income tax rate                 (1,033)    (1,409)      (4,069)    (4,228)      (6,485)    (5,814)
  Other, net                         (984)       684       (2,869)     2,130       (1,517)      (850)
                                ---------  ---------    ---------  ---------    ---------   --------
    Total income taxes          $  20,682  $  20,076    $  76,264  $  75,529    $ 107,653   $ 99,694
                                =========  =========    =========  =========    =========   ========

</TABLE>

(10) 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 plans' funded status as of January 1, 1997 and 1996 are as follows:
<TABLE>

<CAPTION>
(In thousands)                                       1997           1996
                                                  ==========     ==========
<S>                                               <C>            <C>    

Vested benefit obligation                         $ (550,151)    $ (549,234)
Nonvested benefit                                   (105,339)      (104,814)
                                                  ----------     ----------
Accumulated benefit obligation                    $ (655,490)    $ (654,048)
                                                  ==========     ==========
Projected benefit obligation for service
 rendered to date                                 $ (759,406)    $ (759,681)
Plan assets at fair market value                     806,888        706,320
                                                  ----------     ----------
Plan assets in excess of (or less than)
 projected benefit obligation                         47,482        (53,361)
Unrecognized transition obligation at January 1,
 being recognized over seventeen years                37,401         43,484
Unrecognized prior service cost                       25,528         27,242
Unrecognized gains                                   (66,611)        (4,217)
                                                  ----------    -----------
Prepaid pension costs                             $   43,800     $   13,148
                                                  ==========    ===========
</TABLE>

      The accumulated  benefit obligation is the present value of future pension
benefit  payments and is based on a plan  benefit  formula  without  considering
expected future salary  increases.  The projected benefit  obligation  considers
estimated future salary  increases.  Discount rates of 7.75% and 7.25% and rates
of  increase  in  compensation  levels  of  5.50%  were  used to  determine  the
accumulated  benefit  obligation and projected benefit  obligation at January 1,
1997 and 1996, respectively.

      The following  items are the components of provisions for pensions for the
three-month,  nine-month and  twelve-month  periods ended September 30, 1997 and
September 30, 1996:
<TABLE>

<CAPTION>
                                  Three Months            Nine Months          Twelve Months
                                Ended September 30,   Ended September 30,   Ended September 30,
                                --------  --------    --------   --------   --------   --------
(In thousands)                    1997      1996       1997         1996      1997       1996
                                ========  ========    ========   ========   ========   ========
<S>                              <C>       <C>        <C>        <C>        <C>        <C>
Service costs                    $ 6,641   $ 4,495    $16,023    $ 15,083   $ 17,240   $ 17,453
Interest costs                    31,651    17,482     65,003      49,611     68,869     62,075
Estimated return on plan assets  (40,486)  (20,874)   (81,966)    (58,977)  (110,396)  (155,593)
Amortization of transition
  obligation                       3,216     1,791      6,569       5,054      6,937      6,410
Other net amortization and
  deferral                         2,011       846      3,911       2,396     27,975     86,607
                                 -------   -------    -------    --------   --------   --------
                                 $ 3,033   $ 3,740    $ 9,540    $ 13,167   $ 10,625   $ 16,952
                                 =======   =======    =======    ========   ========   ========
</TABLE>

     Assumptions  used in the  valuation  and  determination  of 1997  and  1996
pension expenses were as follows:
<TABLE>

<CAPTION>
                                             1997           1996
                                            ======         ======
<S>                                         <C>            <C> 
Discount rate                                7.75%          7.25%
Rate of increase in compensation levels      5.50%          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 22, 1997, a substantial  portion of the plans'  domestic  equity
investments were hedged against substantial  movements in the S&P 500 Index. The
hedge will expire on December 31, 1997.

      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
$0.6 million and $1.1 million were made to these plans for the  three-month  and
six-month  periods  ended  September  30, 1997.  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.

(11) 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  has  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
"Employers'  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
(OPRB) as a regulatory asset until such time as the accrual cost method could be
reflected in the rate-making process.

      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  plans'  accumulated  postretirement
benefit obligation as of January 1, 1997 and 1996:
<TABLE>

<CAPTION>

                                                      January 1,    January 1,
(In thousands)                                         1997           1996
                                                      =========     ==========
<S>                                                  <C>            <C>  
Postretirement Benefit Obligation for:
 Retirees                                            $  (85,308)     $ (99,453)
 Fully eligible active plan participants                (19,448)       (23,084)
 Other active plan participants                        (115,383)      (136,322)
                                                     ----------      ---------
Accumulated postretirement benefit obligation          (220,139)      (258,859)
Unrecognized transition obligation at January 1,
 being recognized over twenty years                     188,229        197,088
Unrecognized actuarial gain                             (91,023)       (23,439)
                                                     ----------      ---------
Accrued liability for postretirement benefits         $(122,933)     $ (85,210)
                                                     ==========      =========
</TABLE>

      A  discount  rate  of  7.75%,  a  pre-Medicare  medical  trend  rate of 9%
declining to a long-term rate of 6%, a discount rate of 7.25% and a pre-Medicare
medical  trend rate of 10%  declining  to a  long-term  rate of 6%, were used to
determine the accumulated  postretirement  benefit obligation at January 1, 1997
and 1996, respectively.

      The decrease in the accumulated  postretirement  benefit obligation (APBO)
and the related increase in unrecognized  actuarial gain at January 1, 1997 were
primarily  attributable  to favorable  claim  experience and the increase in the
discount rate to 7.75%. Additionally, Industries amended its plan to implement a
3% cap on its share of retiree  cost  increases  for  pre-Medicare  benefits for
certain  non-bargaining  retirees who retire after  February 1, 1997.  This plan
amendment  reduced the APBO and the unrecognized  transition  obligation by $9.6
million at January 1, 1997.

      Net periodic postretirement benefits costs for the three-month, nine-month
and twelve-month periods ended September 30, 1997 and September 30, 1996 include
the following components:
 <TABLE>

<CAPTION>
                                   Three Months        Nine Months      Twelve Months
                                     Ended                Ended             Ended
                                  September 30,       September 30,     September 30,
                                 ----------------   ----------------   ---------------
(In thousands)                    1997     1996      1997      1996     1997     1996
                                 ======   ======    =======   ======   =======  ======
<S>                             <C>      <C>        <C>      <C>       <C>     <C>
Service costs                   $ 1,589  $ 1,621    $ 4,638  $ 4,861   $ 7,129 $ 6,359
Interest costs                    4,798    5,079     14,056   15,238    17,129  20,034
Amortization of transition
 obligation over twenty years     2,970    3,095      8,704    9,285    11,012  12,181
Amortization of unrecognized
 actuarial gain                  (1,014)    (583)    (3,036)  (1,748)   (1,842) (2,304)
                                -------  -------   --------  -------   ------- -------
                                $ 8,343  $ 9,212    $24,362  $27,636   $33,428 $36,270
                                =======   ======   ========  =======   ======= =======
</TABLE>

      The net periodic  postretirement  benefit  costs for 1997 were  determined
assuming  a  7.75%  discount  rate,  a 5% rate of  compensation  increase  and a
pre-Medicare  medical trend rate of 9% declining to a long-term  rate of 6%. 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, 1997 by  approximately  $31.3 million,  and increase the aggregate of
the service and interest  cost  components of plan costs by  approximately  $1.2
million and $3.6  million  for the  three-month  and  nine-month  periods  ended
September  30,  1997,  respectively.  Amounts  disclosed  above could be changed
significantly  in the  future  by  changes  in health  care  costs,  work  force
demographics, interest rates, or plan changes.

(12) AUTHORIZED CLASSES OF CUMULATIVE PREFERRED AND PREFERENCE STOCKS:

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

      Effective  March  2,  1990,  2,000,000  of  Industries'  Series  A  Junior
Participating  Preferred Shares were reserved for issuance pursuant to the Share
Purchase Rights Plan described in Note 16, 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 13 sets forth the preferred stocks which are redeemable solely at the
option of the  issuer,  and Note 14 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.

(13)  PREFERRED  STOCKS,   REDEEMABLE  SOLELY  AT  THE  OPTION  OF  THE  ISSUER,
OUTSTANDING AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (see Note 12):
<TABLE>

<CAPTION>
                                                                                  Redemption
                                                                                   Price at
                                              September 30,     December 31,     September 30,
 (Dollars in thousands)                          1997             1996              1997
                                              ============      ===========       ===========
<S>                                           <C>               <C>               <C>    
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
 CUMULATIVE PREFERRED STOCK -
 $100 PAR VALUE -
  4-1/4% series - 209,123 and 209,145
    shares outstanding,  respectively          $    20,912      $    20,915          $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 
   September 30, 1997), 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                0       $100 - $105
                                                ----------        ---------
                                                $   85,620        $  81,126
                                                ==========        =========
</TABLE>

      During the period  October 1, 1995 to September 30, 1997, 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.

(14) REDEEMABLE  PREFERRED STOCKS OUTSTANDING AT SEPTEMBER 30, 1997 AND DECEMBER
31,  1996  (see Note 12):  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>
                                                     September 30,   December 31,
(Dollars in thousands)                                 1997             1996
                                                     ============    ============
<S>                                                  <C>             <C> 
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
 CUMULATIVE  PREFERRED  STOCK -$100 PAR VALUE-
   8.85% series - 62,500 and 75,000 Shares
     outstanding, respectively                         $    6,250      $    7,500
   7-3/4% series - 44,460 shares outstanding                4,446           4,446
   8.35% series - 57,000 and 63,000 shares
     outstanding, respectively                              5,700           6,300
 CUMULATIVE PREFERRED STOCK -NO PAR VALUE -
   6.50% series - 430,000 shares outstanding               43,000          43,000
                                                        ---------       ---------
                                                        $  59,396       $  61,246
                                                        =========       =========
</TABLE>

      The  redemption  prices at  September  30,  1997,  as well as sinking fund
provisions for the cumulative  preferred  stock 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>  
Cumulative preferred stock -$100 par value -
   8.85%    $101.48, 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%    $104.41, reduced periodically     2,777 shares on 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  September  30,  1997  for  each  of  the  twelve-month  periods
subsequent to September 30, 1998 are as follows:
<TABLE>

<CAPTION>
Twelve Months Ended September 30,*
=================================
<S>           <C>   
1999          $1,827,700
2000          $1,827,700
2001          $1,827,700
2002          $1,827,700

* Table does not reflect redemptions made after September 30, 1997.
</TABLE>

(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 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 September  30,  1997,  Northern
Indiana had  approximately  $139.9 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) COMMON SHARES:  Industries has  200,000,000  common shares  authorized
without par value.

      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 one-hundredth
of a Series A Junior  Participating  Preferred  Share,  without  par  value,  of
Industries  at a price  of $60 per one  one-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 September  30, 1997,  Industries  had purchased
approximately  21.4 million  shares since 1989 at an average price of $27.85 per
share.  Approximately  4.7 million  additional  common shares may be repurchased
under the Board's authorization.

     (17) 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 2.5 million of  Industries'  common  shares to key  employees
through 1998 and 2004,  respectively.  At September  30, 1997,  there were 4,578
shares and 1,939,750  shares  reserved for future awards under the 1988 Plan and
1994 Plan, respectively.  The 1988 Plan and 1994 Plan permit 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 September 30, 1997.  Under both Plans, the exercise price of each
option equals the market price of Industries'  stock on the date of grant.  Each
option's maximum term is 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 1996 and 1997  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 271,333 and 262,000  restricted  shares  outstanding at September 30,
1997 and December 31, 1996, respectively.

      The  Industries  Nonemployee  Director  Stock  Incentive  Plan,  which was
approved  by  shareholders,  provides  for  the  issuance  of up to  100,000  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 September  30, 1997,  32,750 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 $0.5,  $1.4 and $1.9  million  for the
three-month,  nine-month and  twelve-month  periods  ending  September 30, 1997,
respectively. Had compensation cost for 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       Nine Months           Twelve Months
                    Ended               Ended                 Ended
                  September 30,     September 30,          September 30,
                ---------------    -----------------     ----------------
                 1997     1996       1997       1996       1997      1996
                ======   ======    =======    =======     =======  =======
                (Dollars in thousands, except per share data)
<S>            <C>      <C>        <C>       <C>         <C>       <C>
Net Income:
 As reported   $35,869  $34,410    $134,943  $125,325    $186,352  $177,153
 Pro forma      35,653   34,238     134,313   124,838     185,516   176,503
 
Earnings Per Share:
 As reported   $  0.57   $ 0.56    $   2.18  $   2.03    $   3.03  $   2.85
 Pro forma        0.57     0.56        2.18      2.03        3.02      2.85
</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,  nine-month and  twelve-month  periods ended September 30, 1997
and   September  30,  1996:   risk-free   interest  rate  of  6.29%  and  6.39%,
respectively;   expected   dividend   yield  per  share  of  $1.74  and   $1.68,
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,
nine-month and  twelve-month  periods ended September 30, 1997 and September 30,
1996 are as follows:
<TABLE>

<CAPTION>
                                             NONQUALIFIED STOCK OPTIONS
                                    ----------------------------------------------
                                                      Weighted             Weighted
                                                      Average              Average
                                                      Option               Option
Three Months Ended September  30,         1997        Price      1996      Price
================================      ======= ==     =======  =========    =======
<S>                                   <C>            <C>      <C>          <C>  
Balance, beginning of period           1,104,400      $30.66  1,052,700     $28.64
 Granted                                 266,800       41.28    278,300      37.81
 Exercised                               (46,300)      31.64    (18,100)     28.32
 Canceled                                      0                      0
                                       ---------              ---------
Balance, end of period                 1,324,900       32.76  1,312,900      30.59
                                       =========              =========
Shares exercisable                     1,058,100       30.62  1,034,600      28.65
                                       =========              =========
Weighted average fair value
 of options granted                      $  5.32                $  5.00
                                        ========               ========
<CAPTION>
                                                NONQUALIFIED STOCK OPTIONS
                                      --------------------------------------------
                                                    Weighted             Weighted
                                                     Average               Average
                                                      Option                Option
Nine Months Ended September  30,          1997         Price      1996       Price
================================       =========     =======  =========    =======
<S>                                    <C>            <C>     <C>           <C>   
Balance, beginning of period           1,187,150      $30.58  1,107,750     $28.55
 Granted                                 266,800       41.28    278,300      37.81
 Exercised                              (117,200)      29.53    (64,150)     26.42
 Canceled                                (11,850)      37.81     (9,000)     32.52
                                       ---------              ---------
Balance, end of period                 1,324,900       32.76  1,312,900      30.59
                                       =========              =========
Shares exercisable                     1,058,100       30.62  1,034,600      28.65
                                       =========              =========
Weighted average fair value
 of options granted                      $  5.32                $  5.00
                                        ========               ========
<CAPTION>
                                               NONQUALIFIED STOCK OPTIONS
                                     ---------------------------------------------
                                                     Weighted              Weighted
                                                     Average               Average
                                                     Option                Option
Twelve Months Ended September  30,       1997        Price      1996       Price
=================================      =========     =======  =========    =======
<S>                                    <C>           <C>      <C>          <C>
Balance, beginning of period           1,312,900      $30.59  1,242,350     $28.36
 Granted                                 266,800       41.28    278,300      37.81
 Exercised                              (237,050)      29.98   (195,750)     26.60
 Canceled                                (17,750)      37.09    (12,000)     32.50
                                       ---------              ---------
Balance, end of period                 1,324,900       32.76  1,312,900      30.59
                                       =========              =========
Shares exercisable                     1,058,100       30.62  1,034,600      28.65
                                       =========              =========
Weighted average fair value
 of options granted                      $  5.32                $  5.00
                                        ========               ========

<CAPTION>
                                           NONQUALIFIED STOCK OPTIONS WITH SARs
                                       --------------------------------------------
                                                     Option                  Option
Three Months Ended September 30,         1997         Price       1996        Price
===============================         ========     =======    ========     =======
<S>                                    <C>           <C>        <C>          <C>  
Balance, beginning of period               5,600      $10.94       5,600      $10.94
 Exercised                                     0                       0
                                        --------                --------
Balance, end of period                     5,600       10.94       5,600       10.94
                                        ========                ========
Shares exercisable                         5,600       10.94       5,600       10.94
                                        ========                ========

                                            NONQUALIFIED STOCK OPTIONS WITH SARs
                                       ---------------------------------------------
                                                      Option                  Option
Nine Months Ended September 30,          1997         Price       1996        Price
===============================         ========     =======    ========     =======
<S>                                     <C>          <C>        <C>          <C>  
Balance, beginning of period               5,600      $10.94       5,600      $10.94
 Exercised                                     0                       0
                                        --------               ---------
Balance, end of period                     5,600       10.94       5,600       10.94
                                        ========                ========
Shares exercisable                         5,600       10.94       5,600       10.94
                                        ========                ========

                                           NONQUALIFIED STOCK OPTIONS WITH SARs
                                       ---------------------------------------------
                                                     Option                  Option
Twelve Months Ended September 30 ,       1997         Price       1996        Price
================================        ========     =======    ========     =======
<S>                                     <C>          <C>        <C>           <C>  
Balance, beginning of period               5,600      $10.94       5,600      $10.94
 Exercised                                     0                       0
                                       ---------               ---------
Balance, end of period                     5,600       10.94       5,600       10.94
                                        ========                ========
Shares exercisable                         5,600       10.94       5,600       10.94
                                        ========                ========
</TABLE>

     The  following  table  summarizes  information  about  non-qualified  stock
options at September 30, 1997:
<TABLE>

<CAPTION>
                                OPTIONS OUTSTANDING
-----------------------------------------------------------------------------
                       Number             Weighted Average
   Range of         Outstanding at         Remaining         Weighted Average
  Option Price      September 30, 1997  Contractual Life     Option Price
===============     ==================  ================     ===============
<S>                 <C>                 <C>                  <C>   
$10.94 to $17.94           87,000          2.30 years              $16.59
$22.94 to $30.31          351,250          5.60 years              $26.60
$32.44 to $41.28          886,650          8.39 years              $36.79
-----------------       ---------         -----------             -------
$10.94 to $41.28        1,324,900          7.25 years              $32.76
                        =========

<CAPTION>
                         OPTIONS EXERCISABLE
------------------------------------------------------------
                          Number
   Range of           Exercisable at        Weighted Average
  Option Price        September 30, 1997    Option Price
================      ==================    ===============
<S>                   <C>                   <C>    
$10.94 to $17.94             87,000                $16.59
$22.94 to $30.31            351,250                $26.60
$32.44 to $37.81            619,850                $34.86
----------------         ----------             ---------
$10.94 to $37.81          1,058,100                $30.62
                         ==========
</TABLE>

(18)  LONG-TERM  DEBT: At September 30, 1997 and December 31, 1996,  Industries'
outstanding  long-term debt,  excluding  amounts due within one year, issued and
not retired or canceled was as follows:
<TABLE>

<CAPTION>
                                                 September 30,   December 31,
(Dollars in thousands)                               1997            1996
                                                 ============    ===========
<S>                                              <C>             <C> 
First mortgage bonds -
 Interest rates between 5.20% and 9.83% 
  with a weighted average interest rate of
   7.22% and various maturities between 
   October 1, 1998 and September 1, 2025          $   201,609    $   109,509

Pollution control notes and bonds-
 Interest rates between 3.77% and 5.70% 
  with a weighted average interest rate of
  3.93% and various maturities between 
  October 1, 2003 and April 1, 2019                   242,000        242,000

Medium-term notes -
 Interest rates between 6.10% and 7.99%
  with a weighted average interest rate of
  7.19% and various maturities between 
  April 5, 2000 and August 4, 2027                  1,048,025        644,025

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

Notes payable -
 Interest rates between 6.31% and 9.00% 
  with a weighted average interest rate of
  7.34% and various maturities between 
  December 22, 1999 and April 1, 2006                  40,635         19,522

Variable bank loan -
  6.50% -due August, 2003                               5,600              0

Term Loan Facility                                          0         40,576

Unamortized premium and discount on 
  long-term debt, net                                  (4,149)        (3,526)
                                                   ----------     ----------
    Total long-term debt, excluding amounts 
       due in one year                             $1,608,720     $1,127,106
                                                   ==========     ==========
</TABLE>

     The sinking fund  requirements  of long-term debt  outstanding at September
30, 1997  (including the maturity of Northern  Indiana's  first mortgage  bonds:
Series P,  6-7/8%,  due October 1, 1998 and Series T, 7.50%,  due April 1, 2002;
Northern  Indiana's  medium-term notes due from March 20, 2000 to June 12, 2002;
NDC Douglas  Properties,  Inc.'s notes  payable due December 22, 1999 and August
15, 2002;  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 September 30, 1998 are
as follows:
<TABLE>

<CAPTION>
Twelve Months Ended September 30,
=================================
<S>                 <C>
1999                $  21,656,468
2000                  162,674,817
2001                   48,698,492
2002                   65,998,446
</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  dated  August 1,  1939,  as  amended  and
supplemented,  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
$217,692,000 of its Medium-Term Notes,  Series E, with various  maturities,  for
purposes of refinancing  certain first mortgage bonds and medium-term  notes. As
of September 30, 1997,  $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 5-7/8% Series Bonds and the 8% Series Bonds
require annual sinking or improvement  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 February 13, 1996,  Capital Markets issued $75 million of 7-3/4% Junior
Subordinated  Deferrable  Interest  Debentures,  Series A, due  March  31,  2026
(Debentures) pursuant to an underwritten public offering. Proceeds from the sale
of the Debentures were used to pay short-term debt incurred to redeem on January
12,  1996 $35  million  of  Industries'  8.75%  Preferred  Shares,  pursuant  to
mandatory redemption, and to pay other short-term debt of Capital Markets.

      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'  securities in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  investors against
the  stock and  assets  of  Northern  Indiana.  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 to holders of
Capital  Markets'  securities.  The carrying  value of those assets  (other than
Northern  Indiana),  reflected  in  the  consolidated  financial  statements  of
Industries, was approximately $1.3 billion at September 30, 1997.

(19) CURRENT  PORTION OF LONG-TERM  DEBT: At September 30, 1997 and December 31,
1996,  Industries'  current portion of long-term debt due within one year was as
follows:
<TABLE>

<CAPTION>
                                                    September 30,    December 31,
(Dollars in thousands)                                 1997            1996
                                                    ============     ===========
<S>                                                 <C>              <C>
First Mortgage Bonds                                  $        0      $   25,747

Medium-term notes -
  Interest rate 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                      35,000          40,000
 
Zero Coupon notes -
   7.57%, $72,500 at maturity
    -due December 1, 1997                                 71,618          67,731

Notes payable -
  Interest rates between 6.72% and 9.00%
   with a weighted  average  interest rate
   of 7.76% and maturities between
   October 1, 1997 and August 31, 1998                     3,604           5,033

Term loan facility                                             0           6,041
                                                     -----------      ----------
   Total current portion of long-term debt            $  110,222       $ 144,552
                                                     ===========      ==========
</TABLE>

      Capital  Markets expects to refinance its 7.57% Zero Coupon Notes maturing
in the amount of $72.5 million on December 1, 1997.

(20) SHORT-TERM BORROWINGS: Northern Indiana has a $250 million revolving Credit
Agreement with several banks which  terminates  August 19, 1999. As of September
30,  1997,  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, 1998. 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 September 30, 1997, 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 September  30, 1997 and December  31, 1996,  there were $13.6  million and
$79.0  million of  borrowings,  respectively,  outstanding  under these lines of
credit.

      Northern  Indiana  has a $50  million  uncommitted  finance  facility.  At
September 30, 1997, there were no borrowings outstanding under this facility.

   Northern  Indiana and Capital  Markets make use of  commercial  paper to fund
short-term working capital requirements.

      As of September 30, 1997 and December 31, 1996, Northern Indiana had $77.5
million and $193.9 million of commercial  paper  outstanding,  respectively.  At
September 30, 1997,  the weighted  average  interest  rate of  commercial  paper
outstanding was 5.59%.

      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 September 30, 1997,  there were no borrowings
outstanding under this agreement.

      Capital Markets also has $130 million of money market lines of credit.  As
of September 30, 1997 and December 31, 1996,  $22.6  million and $27.0  million,
respectively, of borrowings were outstanding under these lines of credit.

      As  of  September  30,  1997  Capital  Markets  had  no  commerical  paper
outstanding.  At  December  31,  1996,  Capital  Markets  had $119.3  million of
commercial paper outstanding.

     IWCR and its subsidiaries had lines of credit with banks  aggregating $57.7
million.  As of September 30, 1997, $46.9 million of borrowings were outstanding
under these lines of credit.

     At  September  30,  1997 and  December  31,  1996,  Industries'  short-term
borrowings were as follows:
<TABLE>

<CAPTION>
                                   September 30,    December 31,
(In thousands)                        1997             1996
                                   =============    ============
<S>                                <C>              <C>   
  Commercial paper                 $      77,500    $    313,205
  Notes payable                           83,159         106,000
  Standby loan facility                        0           4,949
  Revolving loan facility                  4,550           1,831
                                   -------------    ------------
   Total short-term borrowings      $    165,209    $    425,985
                                   =============    ============
</TABLE>

(21)  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
September 30, 1997:
<TABLE>

<CAPTION>
Twelve Months Ended September 30,
=================================
<S>                             <C>    
(In thousands)
   1998                          $ 15,279
   1999                            14,240
   2000                            13,585
   2001                            13,340
   2002                            51,038
   Later years                     85,417
                                 --------
Total minimum payments required  $192,899
                                 ========
</TABLE>

     The  consolidated  financial  statements  include  rental  expense  for all
operating leases as follows:
<TABLE>

<CAPTION>
                           September 30,    September 30,
(In thousands)                 1997             1996
                           ============    ============
<S>                        <C>             <C> 
Three months ended               $2,112          $1,762
Nine months ended                 6,652           5,486
Twelve months ended               9,287           7,760
</TABLE>

(22) COMMITMENTS: The Utilities estimate that approximately $974 million will be
expended  for  construction  purposes  for the  period  from  January 1, 1997 to
December 31, 2001.  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.

      Northern  Indiana has entered  into an  agreement  with IBM to perform all
data center, application development and maintenance,  and desktop management of
Northern Indiana.

(23) PRIMARY ENERGY: 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).  Primary  arranges  energy-related  projects  with  large  industrial
customers  and has entered into certain  commitments  in  connection  with these
projects.

      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  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 Company.  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
Company 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's  Indiana Harbor Works to scrub flue gases and recover waste
heat from the coke facility being constructed by Harbor Coke and produce process
steam and electricity from the recovered heat which will be delivered to Inland.
CE intends to lease these  facilities,  once  constructed,  from a third  party.
Additionally,  CE has entered into an interim agreement,  which expires when the
lease is  established  with the third party lessor,  under which CE is acting as
agent  to  design,  construct  and  start  up the  facilities.  Capital  Markets
anticipates  guaranteeing  certain CE  obligations  relative to the  anticipated
lease.  Construction  of the  project  began in January  1997.  The  facility is
scheduled to be operational in July 1998.

      Primary  has  advanced  approximately  $82  million  and $42  million,  at
September  30, 1997 and December 31, 1996,  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.

(24) 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 some investments is estimated 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>
                                     September 30, 1997             December 31, 1996
                                  ------------------------    -------------------------
                                  Carrying      Estimated      Carrying      Estimated
(In thousands)                     Amount       Fair Value      Amount       Fair Value
                                  ==========    ==========    =========     ===========
<S>                               <C>           <C>           <C>           <C>   
Cash and cash equivalents           $ 28,285      $ 28,285     $ 26,333        $ 26,333
Investments                           31,748        32,178       30,003          33,019
Long-term debt (including
 current portion)                  1,720,442     1,704,547       1,273,158    1,220,492
Preferred stock                      146,844       132,246         144,200      126,379
</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.

     (25)  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 4% and 2% of gas
revenue (including transportation services) and 21% and 22%, of electric revenue
for the  twelve  months  ended  September  30,  1997  and  September  30,  1996,
respectively.

<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."

      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 Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P).

     Industries also provides non-regulated  energy/utility-related products and
services  including  energy  marketing  and  trading;   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
subsidiares:  NIPSCO  Development  Company,  Inc.  (Development);  NIPSCO Energy
Services,  Inc.  (Services);  Primary Energy, Inc. (Primary);  Miller; and SM&P.
NIPSCO Capital Markets,  Inc. (Capital Markets) handles financing for Industries
and its  subsidiaries,  other than  Northern  Indiana.  These  subsidiaries  are
referred to collectively as "Products and Services."

      Industries results of operations include three and six months of operating
results from IWCR for the three-month, nine-month and twelve-month periods ended
September 30, 1997. The discussion  below  excludes the  comparative  results of
IWCR operations, as such discussion would not be meaningful.

REVENUES -

      Total  operating  revenues for the twelve months ended  September 30, 1997
increased  $461.9  million as compared to the twelve months ended  September 30,
1996. The increase  includes  $110.1 million  reflecting six months of operating
revenues from IWCR for the current period. Gas revenues increased $70.1 million,
electric  revenues  increased  $1.8 million and Products and Services  revenues,
excluding  IWCR,  increased  $280.0  million,  as compared to the same period in
1996.  The increase in gas revenues was largely  attributable  to increased  gas
costs per dekatherm (dth) and increased sales to wholesale customers,  partially
offset by decreased gas transition  costs. The increase in electric revenues was
mainly due to increased  sales to residential  customers and increased fuel cost
per kilowatt-hour  (kwh),  partially offset by decreased sales to industrial and
wholesale customers.  Increased volumes in gas marketing resulted in an increase
of $173.3 million in Products and Services revenue for the  twelve-month  period
ended September 30, 1997. NESI Power Marketing,  Inc., a wholly-owned subsidiary
of Services,  which was formed on December 11, 1996, markets wholesale power and
provided an  additional  $105.2  million in  operating  revenue for Products and
Services for the twelve months ended September 30, 1997.

      Total  operating  revenues  for the nine months ended  September  30, 1997
increased  $371.6  million as compared to the nine months  ended  September  30,
1996. The increase  includes  $110.1 million  reflecting six months of operating
revenues from IWCR for the current period. Gas revenues increased $16.8 million,
electric  revenues  decreased  $0.3 million and  Products and Services  revenue,
excluding  IWCR,  increased  $245.0  million,  as compared to the same period in
1996.  The increase in gas  revenues  was mainly due to increased  gas costs per
dth,  increased  sales to wholesale  customers and  increased  deliveries of gas
transported for others,  partially  offset by decreased sales to residential and
commercial  customers  and  decreased gas  transition  costs.  Increased gas and
wholesale power marketing  volumes  resulted in an increase of $243.9 million in
Products and Services  revenue for the  nine-month  period ended  September  30,
1997.

      Total  operating  revenues for the three months ended  September  30, 1997
increased  $202.6  million as compared to the three months ended  September  30,
1996. The increase  includes $58.5 million  reflecting three months of operating
revenues from IWCR for the current period. Gas revenues increased $10.8 million,
electric  revenues  increased  $2.4 million and  Products and Services  revenue,
excluding IWCR,  increased  $130.9 million  compared to the same period in 1996.
The  increase in gas  revenues  was mainly due to  increased  gas costs per dth,
increased  sales  to  wholesale  customers  and  increased   deliveries  of  gas
transported for others,  partially offset by decreased gas transition costs. The
increase in electric  revenues was mainly due to increased  sales to residential
customers and increased fuel costs per kwh,  partially offset by decreased sales
to commercial,  industrial and wholesale customers. Increased volumes in gas and
wholesale power marketing  resulted in an increase of $133.5 million in Products
and Services revenue for the three-month period ended September 30, 1997.

      The basic  steel  industry  accounted  for 31% of  natural  gas  delivered
(including  volumes  transported)  and 34% of  electric  sales  for  the  Energy
Utilities during the twelve months ended September 30, 1997.

      The  components  of the  variations  in gas,  electric  and  products  and
services revenues are shown in the following table:
<TABLE>
<CAPTION>
                                                Variations from Prior Periods
                                -----------------------------------------------------------
                                        September 30, 1997 Compared to September 30, 1996
                                -----------------------------------------------------------
                                             Three              Nine            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        $ 10,420          $ 25,465         $ 71,292
  Gas transition costs                        (2,082)             (588)          (5,108)
  Changes in sales levels                      1,174           (11,361)             428
  Gas transported                              1,248             3,312            3,486
                                          ----------        ----------       ----------
Gas Revenue Change                            10,760            16,828           70,098
                                          ----------        ----------       ----------
Electric Revenue  -
  Pass through of net changes
     in fuel costs                             7,075             8,468            8,769
  Changes in sales levels                     (4,630)           (8,801)          (7,004)
                                          ----------        ----------       ----------
Electric Revenue Change                        2,445              (333)           1,765
                                          ----------        ----------       ----------
Water Revenue Change                          23,577            42,372           42,372
                                          ----------        ----------       ----------
Products and Services Revenue -
  Gas marketing                               70,687           138,694          173,303
  Wholesale power marketing                   62,798           105,201          105,201
  Pipeline construction                       17,197            31,829           31,829
  Locate and marking                          16,716            33,921           33,921
  Other                                       (1,577)            3,065            3,441
                                          ----------        ----------       ----------
Product and Services Revenue Change          165,821           312,710          347,695
                                          ----------        ----------       ----------
   Total Revenue Change                    $ 202,603         $ 371,577        $ 461,930
                                          ==========        ==========       ==========
</TABLE>

     See Note 7 to Notes to  Consolidated  Financial  Statements  regarding FERC
Order No. 636 transition costs.

GAS COSTS -

      The Energy Utilities' gas costs increased $11.1 million, $21.2 million and
$71.9 million for the  three-month,  nine-month and  twelve-month  periods ended
September  30, 1997,  respectively.  Gas costs  increased  for the  three-month,
nine-month  and  twelve-month  periods  due to  increased  gas  costs  per  dth,
partially  offset by decreased gas  transition  costs.  The average cost for the
Energy Utilities' purchased gas for the three-month, nine-month and twelve-month
periods ended  September 30, 1997,  after  adjustment for gas  transition  costs
billed to transport customers, was $3.09, $3.10 and $3.22 per dth, respectively,
as compared to $2.72, $2.88 and $2.74 per dth for the same periods in 1996.

FUEL AND PURCHASED POWER -

      The cost of fuel for electric  generation  increased  $2.7  million,  $5.3
million  and $2.7  million  for the  three-month,  nine-month  and  twelve-month
periods ended  September 30, 1997,  respectively,  compared to the 1996 periods,
mainly as a result of increased production of electricity.

      Power purchased decreased $2.2 million,  $9.0 million and $5.3 million for
the three-month,  nine-month and twelve-month  periods ended September 30, 1997,
respectively, as a result of decreased bulk power purchases.

COST OF PRODUCTS AND SERVICES -

      The cost of sales for Products and Services  increased  $335.2 million for
the twelve months ended September 30, 1997. The increase  includes $45.8 million
reflecting  six  months  of cost of  sales  from  IWCR for the  current  period.
Increased  volumes in gas and wholesale power marketing  increased cost of sales
$288.0  million for the  twelve-months  ended  September  30, 1997,  compared to
September 30, 1996.

       The cost of sales for Products and Services  increased $294.8 million for
the  nine-months  ended  September  30, 1997,  compared to the 1996 period.  The
increase includes $45.8 million reflecting six months of cost of sales from IWCR
for the current period.  Increased  volumes in gas and wholesale power marketing
increased cost of sales $248.0 million for the current nine-month period.

       The cost of sales for Products and Services  increased $156.8 million for
the  three-months  ended  September 30, 1997,  compared to the 1996 period.  The
increase  includes $23.6 million  related to the cost of sales from IWCR for the
current period. Increased volumes in gas and wholesale power marketing increased
cost of sales  $133.9  million for the three months  ended  September  30, 1997,
compared to September 30, 1996.

OPERATING MARGINS -

      Operating margins for the twelve months ended September 30, 1997 increased
$57.4 million from the same period a year ago. The increase in operating  margin
includes $64.3 million  related to six months of IWCR  operations in the current
period.  The operating margin from gas deliveries  decreased $1.8 million due to
decreased  sales to  residential  and  commercial  customers  reflecting  milder
weather,  partially  offset  by  increased  sales to  wholesale  customers.  The
operating  margin from electric  sales  increased  $4.3 million due to increased
sales  to  residential  customers,   partially  offset  by  decreased  sales  to
industrial  and  wholesale  customers.  The  operating  margin for  Products and
Services,  excluding IWCR, decreased $9.5 million,  primarily from a decrease in
gas  marketing  margin  offset  by an  increase  in  operating  margin  from the
Northlake and LEC facilities.

      Operating  margins for the nine months ended  September 30, 1997 increased
$59.3 million from the same period a year ago. The increase in operating  margin
includes $64.3 million  related to six months of IWCR  operations in the current
period.  The operating margin from gas deliveries  decreased $4.3 million due to
decreased  sales to  residential  and  commercial  customers  reflecting  milder
weather,  partially  offset  by  increased  sales  to  wholesale  customers  and
increased  deliveries of gas transported for others.  The operating  margin from
electric  sales  increased  $3.4  million  as a  result  of  increased  sales to
residential  customers,  partially  offset by decreased  sales to industrial and
wholesale customers.  The operating margin for Products and Services,  excluding
IWCR,  decreased $4.0 million  resulting from a decrease in gas marketing margin
offset by an increase in operating  margin from  Northlake and LEC. The decrease
in gas marketing  margin is largely  attributable  to the disposition of certain
oil and gas properties during the first quarter of 1997.

      Operating  margins for the three months ended September 30, 1997 increased
$34.3 million from the same period a year ago. The increase in operating  margin
includes $34.9 million related to three months of IWCR operations in the current
period. Gas operating margin was consistent with the same period ended September
30, 1996.  Operating  margin from electric  sales  increased $2.0 million due to
increased  sales to  residential  customers,  which  were  partially  offset  by
decreased sales to commercial, industrial and wholesale customers. The operating
margin for Products and Services, excluding IWCR, decreased $2.4 million.

OPERATING EXPENSES AND TAXES -

      Operation  expenses  increased $26.4 million for the  twelve-month  period
ended  September  30,  1997.  Operation  expense  includes  an increase of $31.5
million reflecting six months of operations of IWCR in the current period.  This
increase was offset by decreased  production pollution control facility costs of
$5.2  million  and  decreased  environmental  cleanup  costs of $4.4  million at
Northern Indiana. Operation expenses, excluding IWCR, increased $9.6 million for
the nine-month period ended September 30, 1997 reflecting  operating expenses of
North  Lake  and  LEC  which  began  operations  in May  1996  and  April  1997,
respectively,  in addition to new  operations  at  Services.  This  increase was
offset by decreased electric production pollution control facility costs of $4.3
million and  decreased  environmental  cleanup costs of $5.3 million at Northern
Indiana.  Operation  expenses,  excluding IWCR, for the three-month period ended
September 30, 1997 increased $4.3 million  partially  attributable to operations
at LEC and new operations at Services.

      Maintenance  expenses decreased $12.6 million for the twelve-month  period
ended September 30, 1997 mainly reflecting decreased maintenance activity at the
electric production  facilities of $5.7 million and decreased maintenance on the
transmission and distribution  facilities.  Maintenance expenses decreased $12.5
million for the nine-month period reflecting  decreased  maintenance on electric
production  facilities.  Maintenance  expenses  decreased  $4.2  million for the
three-month  period  primarily  reflecting  decreased  maintenance  on  electric
production facilities.

      Depreciation and  amortization  expense,  excluding IWCR,  increased $2.7,
$7.2 million and $16.3 million for the three-month,  nine-month and twelve-month
periods ended September 30, 1997, respectively,  resulting from plant additions,
increased  amortization  of computer  software,  amortization  of deferred costs
related to  scrubber  services  provided  by Pure Air at the  Bailly  Generating
Station and amortization of SFAS No. 106 costs effective February 1, 1997.

OTHER INCOME (DEDUCTIONS) -

      Other Income (Deductions)  increased $6.7 million and $9.5 million for the
nine-month  and  twelve-month  periods ended  September 30, 1997,  respectively,
mainly  resulting from the disposition of certain oil and natural gas properties
during the first  quarter of 1997.  Other  Income  (Deductions)  decreased  $2.0
million for the three-month period ended September 30, 1997.

INTEREST AND OTHER CHARGES -

      Interest and other charges  increased for the three-month,  nine-month and
twelve-month  periods ended  September 30, 1997  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 Note 2 to Notes  to  Consolidated  Financial  Statements  (Summary  of
Significant Accounting Policies) for a discussion of Regulatory Assets, Carrying
Charges  and  Deferred   Depreciation   and  Allowance  for  Funds  Used  During
Construction. Also see Notes 7, 9 and 11 for a discussion of FERC Order No. 636,
Income Taxes and Postretirement Benefits.

NET INCOME -

      Industries'  net income for the  twelve-month  period ended  September 30,
1997 was $186.4 million compared to $177.2 million for the  twelve-month  period
ended September 30, 1996.

      Net income for the nine months ended September 30, 1997 was $134.9 million
compared to $125.3 million for the nine months ended September 30, 1996.

      Net income for the three months ended September 30, 1997 was $35.9 million
compared to $34.4 million for the three months ended September 30, 1996.

IMPACT OF ACCOUNTING STANDARDS -

      For a discussion of the impact of accounting  standards not yet adopted in
Industries'  consolidated financial statements see Note 2, "Impact of Accounting
Standards" in the Notes to the Consolidated Financial Statements.

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  $20 million to
cover  probable   corrective   actions  as  of  September  30,  1997;   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.

            On December  19, 1996,  the  Environmental  Protection  Agency (EPA)
promulgated  rules  for the  second  phase  of the  Acid  Rain  nitrogen  oxides
reduction program.  Northern Indiana is evaluating compliance strategies to meet
the reduced emission  limitations found in the final rule.  Additional  controls
may be needed to meet the  requirements.  A compliance plan must be submitted to
the EPA by December  31, 1997 with details of the plan to meet the new limits by
January 1, 2000.

     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).  Northern Indiana estimates that total costs of compliance with the CAAA
sulfur  dioxide  regulations  will impact  electric rates by less than 5% in the
future.

      The CAAA contain provisions that could lead to limitations on emissions of
nitrogen  oxides and  hazardous  air  pollutants  which may require  significant
capital  expenditures  for  control  of these  emissions.  Northern  Indiana  is
pursuing a nitrogen oxide control program to meet future requirements.  Northern
Indiana  cannot  predict  the costs of  complying  with CAAA  requirements,  but
Northern  Indiana  believes  that any such mandated  costs would be  recoverable
through the rate-making process.

     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 sulfur  dioxide and
nitrogen oxide emissions from coal-fired boilers  (including  Northern Indiana's
generating  stations) beyond reductions  required in the Acid Rain provisions of
the CAAA.  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  "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.

      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 seven sites and remedial
measures have been selected at four 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  the Indiana  Department  of  Environmental
Management  (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 Indiana state
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. In September 1995, certain
of the  insurance  companies  initiated a suit in Indiana  state  court  against
Northern Indiana seeking a ruling that denied  coverage.  Later that same month,
Northern Indiana  initiated a similar suit in federal court, and the state court
action was stayed. After the dismissal of the federal court action on procedural
grounds in May 1997,  Northern  Indiana  filed  claims in the state court action
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  magnetic fields
in homes  increase the risk of  childhood  leukemia.  This study  follows an EMF
report  released  late last year by the U.S.  National  Research  Counsel 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.  Despite  the  reports'
findings,  future  research  appropriations  are  continuing  to be dedicated to
explore this issue.

      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.  Application for renewal of any expiring permits have
been filed and are the subject of ongoing  discussions  with,  but not finalized
by, IDEM. These permits continue in effect pending review of the 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 its 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  required  by  the  1986
amendments.  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.

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.

      On February 13, 1996,  Capital Markets issued $75 million of 7-3/4% Junior
Subordinated  Deferrable  Interest  Debentures,  Series A, due  March  31,  2026
(Debentures),  pursuant to an underwritten  public  offering.  Proceeds from the
sale of the Debentures  were used to pay  short-term  debt incurred to redeem on
January 12, 1996, $35 million of Industries= 8.75% Preferred Shares, pursuant to
mandatory redemption and to pay other short-term debt of Capital Markets.

      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.

      Capital  Markets expects to refinance its 7.57% Zero Coupon Notes maturing
in the amount of $72.5 million on December 1, 1997.

      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   5.3  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  estimated  fair  values.  See  Note  2 of  Notes  to
Consolidated Financial Statements for a discussion of the preliminary allocation
of the purchase price.

      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 September 30, 1997,  there were no borrowings
outstanding under this agreement.

      Capital Markets also has $130 million of money market lines of credit.  As
of September 30, 1997, $22.6 million of borrowings were outstanding  under these
lines of credit.

      As of  September  30,  1997,  Capital  Markets  had  no  commercial  paper
outstanding.  At  December  31,  1996,  Capital  Markets  had $119.3  million of
commercial paper outstanding.

      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'  securities in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  investors against
the  stock and  assets  of  Northern  Indiana.  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 to holders of
Capital  Markets'  securities.  The carrying  value of those assets  (other than
Northern  Indiana),  reflected  in  the  consolidated  financial  statements  of
Industries, is approximately $1.3 billion at September 30, 1997.

      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 September  30, 1997 and
December  31, 1996,  Northern  Indiana had $77.5  million and $193.9  million of
commercial paper outstanding,  respectively. At September 30, 1997, the weighted
average interest rate of commercial paper outstanding was 5.59%.

      Northern  Indiana  has a $250  million  revolving  Credit  Agreement  with
several banks which terminates  August 19, 1999. As of September 30, 1997, 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,  1998.  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
September 30, 1997,  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 September 30, 1997,  $13.6 million of borrowings  were  outstanding  under
these lines of credit.

      Northern  Indiana  has a $50  million  uncommitted  finance  facility.  At
September 30, 1997, there were no borrowings outstanding under this facility.

      On May 28, 1997,  Northern  Indiana was authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes,  Series E, with various  maturities,  for
purposes of refinancing  certain first mortgage bonds and medium-term  notes. As
of September 30, 1997,  $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.

      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.

     IWCR and its subsidiaries had lines of credit with banks  aggregating $57.7
million.  As of September 30, 1997, $46.9 million of borrowings were outstanding
under these lines of credit.

      The Utilities do not expect the effects of inflation at current  levels to
have a  significant  impact on their results of  operations,  ability to contain
cost  increases,  or 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.

EMPLOYEE RELATIONS -

      At September 30, 1997,  approximately 74% of Northern Indiana's  employees
(physical  and clerical  workers)  were  represented  by two local unions of the
United  Steelworkers  of America,  AFL-CIO-CLC.  The bargaining  unit employees'
contracts expired May 31, 1997. New contracts were ratified in October 1997. The
new contracts have a term of two years, from June 1, 1997 thru May 31, 1999.

YEAR 2000 COSTS -

      Industries  has  completed an  assessment  of its  information  systems to
determine what  modifications,  if any, are necessary for proper  functioning of
these systems in the year 2000.  Costs related to maintenance or modification of
these systems will be expensed as incurred.  Industries  does not anticipate the
related costs to have a material impact on its results of operations.

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
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.  Order No. 888 also provides for the full recovery of stranded costs
- that is, costs that were prudently  incurred to serve 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.  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, legislation was introduced to the Indiana General Assembly
addressing  electric  utility   competition  and  deregulation.   This  proposed
legislation  has not been  adopted,  however,  a study  commission  on  electric
competition and  deregulation  was established by the Indiana General  Assembly.
Northern  Indiana  has  begun  discussions  with its  largest  customers  on the
technical and economic aspects of possible legislation to allow customer choice.

      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-1980's, 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.

      Northern Indiana filed a petition for an Alternative Regulatory Plan (ARP)
with the  Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory  environment and structure  which will permit  increased
choice for gas customers,  competition  among suppliers and improved natural gas
service.  On May 9, 1997,  Northern  Indiana  filed an Amended  Stipulation  and
Agreement  which  proposed a  modified  ARP.  Northern  Indiana=s  proposal  was
supported  by  numerous  parties   including  the  Office  of  Utility  Consumer
Counselor,  Citizens  Action  Coalition of Indiana,  Inc.  and major  industrial
customers of Northern Indiana. In its modified ARP, Northern Indiana proposed to
implement new rates and services that would 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,  an
incentive gas cost mechanism and a price protection program. The Commission held
a hearing on the ARP on June 12, 1997. On October 9, 1997, the Commission issued
an order  approving,  in all respects,  the modified ARP which became  effective
November 1, 1997.

      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.


<PAGE>
PART II.  OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS.

      Industries   and   Northern   Indiana  are  parties  to  various   pending
proceedings,  including suits and claims against them for personal injury, death
and property  damage,  but, in the opinion of their counsel,  the nature of such
proceedings and suits, and the amounts involved, do not depart from the ordinary
routine litigation and proceedings  incidental to the kind of business conducted
by  Industries  and Northern  Indiana,  except as  described  under Note 6 (NESI
Energy Marketing Canada Ltd.) and Note 8 (Environmental Matters) in the Notes to
Consolidated  Financial  Statements  under Part I, Item 1 of this report on Form
10-Q.

      To the knowledge of Industries no other material legal proceedings against
Industries,   Northern  Indiana  or  their   subsidiaries  are  contemplated  by
governmental authorities and other parties.

ITEM 2.  CHANGES IN SECURITIES.
         None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.
         None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
         None

ITEM 5.  OTHER INFORMATION.
         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
         (a)  Exhibits.

               Exhibit 11.1 -Computation of Per Share Earnings
                Three-Month, Nine-Month and Twelve-Month Periods
                Ended September 30, 1997.

               Exhibit 11.2 -Computation of Per Share Earnings
                Three-Month, Nine-Month and Twelve-Month Periods
                Ended September 30, 1996.

               Exhibit 23 -Consent of Arthur Andersen LLP

               Exhibit 27 -Financial Data Schedule

          (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/    Jerry M. Springer
                                    Controller
                            and Chief Accounting Officer



Date:  November 13, 1997

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