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 March 31, 1998

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

            For the transition period from ________________ to ________________

                                           Commission file number 1-9779

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


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


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


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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days.

 
                                     Yes   X         No
                                         --------            --------

            As of April 30, 1998, 122,106,038 common shares were outstanding.



<PAGE>
NIPSCO Industries, Inc.

                                                      PART I.
                                               FINANCIAL INFORMATION

Item 1.  Financial Statements

Report of Independent Public Accountants

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

     We have  audited  the  accompanying  consolidated  balance  sheet of NIPSCO
Industries, Inc. (an Indiana corporation) and subsidiaries as of March 31, 1998,
and December 31, 1997, and the related consolidated statements of income, common
shareholders' equity and cash flows for the three and twelve month periods ended
March  31,  1998 and  1997.  These  consolidated  financial  statements  are the
responsibility of Industries'  management.  Our  responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of NIPSCO
Industries,  Inc. and  subsidiaries as of March 31, 1998, and December 31, 1997,
and the  results  of their  operations  and their  cash  flows for the three and
twelve month periods ended March 31, 1998 and 1997, in conformity with generally
accepted accounting principles.


                                           /s/  Arthur Andersen LLP

Chicago, Illinois
April 28, 1998


<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
                                                                 March 31,          December 31,
Assets                                                              1998                1997
                                                                 ==========          ==========
<S>                                                           <C>               <C>
(In thousands)
Property, Plant and Equipment:
 Utility Plant, (Note 2)(including Construction Work in
   Progress of  $205,460 and $188,710, respectively)
    Electric                                                 $    4,082,197      $    4,066,568
    Gas                                                           1,403,152           1,395,140
    Water                                                           618,279             604,018
    Common                                                          349,531             351,350
                                                            ---------------   -----------------
                                                                  6,453,159           6,417,076
    Less -Accumulated provision for depreciation
       and amortization                                           2,806,186           2,759,945
                                                            ---------------   -----------------
      Total Utility Plant                                         3,646,973           3,657,131
                                                            ---------------   -----------------
 Other property, at cost, net of accumulated provision
       for depreciation                                              76,264              96,028
                                                            ---------------   -----------------
      Total Property, Plant and Equipment                         3,723,237           3,753,159
                                                            ---------------   -----------------
Investments:
 Investments, at equity (Note 2)                                    108,008              82,855
 Investments, at cost                                                33,212              31,771
 Other investments                                                   26,729              24,499
                                                            ---------------   -----------------
      Total Investments                                             167,949             139,125
                                                            ---------------   -----------------
Current Assets:
 Cash and cash equivalents                                           40,376              30,780
 Accounts receivable, less reserve of  $5,727 and
     $5,887, respectively (Note 2)                                  243,971             231,580
 Other receivables (Note 24)                                        127,821             107,231
 Fuel adjustment clause (Note 2)                                      1,111               2,679
 Gas cost adjustment clause (Note 2)                                 37,972              89,991
 Materials and supplies, at average cost                             62,081              60,085
 Electric production fuel, at average cost                           21,241              18,837
 Natural gas in storage (Note 2)                                     21,023              61,436
 Prepayments and other                                               32,248              28,089
                                                            ---------------   -----------------
      Total Current Assets                                          587,844             630,708
                                                            ---------------   -----------------
Other Assets:
 Regulatory assets (Note 2)                                         208,074             211,513
 Intangible assets, net of accumulated amortization (Note 2)         67,436              68,175
 Prepayments and other (Note 9)                                     145,952             134,353
                                                            ---------------   -----------------
      Total Other Assets                                            421,462             414,041
                                                            ---------------   -----------------
                                                             $    4,900,492      $    4,937,033
                                                            ===============   ================

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


<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
                                                                  March 31,        December 31,
Capitalization and Liabilities                                  1998                1997
                                                                ===========         ===========
  (In thousands)
<S>                                                          <C>                <C>
Capitalization:
 Common shareholders' equity
  (See accompanying statement)                               $    1,276,530      $    1,264,788
 Cumulative preferred stocks (Note 11) -
   Series without mandatory redemption provisions (Note 12)          85,619              85,620
   Series with mandatory redemption provisions (Note 13)             58,841              58,841
 Long-term debt excluding amounts due within one
    year (Note 19)                                                1,670,761           1,667,925
                                                          -----------------   -----------------
      Total Capitalization                                        3,091,751           3,077,174
                                                          -----------------   -----------------
Current Liabilities:
 Current portion of long-term debt (Note 20)                         55,729              54,621
 Short-term borrowings (Note 21)                                    142,802             212,639
 Accounts payable                                                   203,890             226,751
 Dividends declared on common and preferred stocks                   30,926              30,784
 Customer deposits                                                   22,684              22,091
 Taxes accrued                                                      137,086              77,573
 Interest accrued                                                    23,823              19,124
 Accrued employment costs                                            42,503              58,799
 Other accruals                                                      43,924              47,930
                                                          -----------------   -----------------
      Total Current Liabilities                                     703,367             750,312
                                                          -----------------   -----------------
Other:
 Deferred income taxes (Note 8)                                     642,865             651,815
 Deferred investment tax credits, being amortized over
   life of related property (Note 8)                                103,717             105,538
 Deferred credits                                                    78,017              73,715
 Customer advances and contributions in aid of
    construction (Note 2)                                           110,674             110,145
 Accrued liability for postretirement benefits (Note 10)            134,365             132,919
 Other noncurrent liabilities                                        35,736              35,415
                                                          -----------------   -----------------
      Total Other                                                 1,105,374           1,109,547
                                                          -----------------   -----------------
Commitments and Contingencies
 (Notes 5, 7, 22, 23 and 24)
                                                             $    4,900,492      $    4,937,033
                                                                 ==========          ==========

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

<PAGE>
<TABLE>
<CAPTION>


Consolidated Statement of Income

 (Dollars in thousands, except for per share amounts)
                                                       Three Months                 Twelve Months
                                                     Ended March 31,                Ended March 31,
                                                 ----------------------------------------------------
                                                  1998         1997             1998         1997
                                                   ========     ========        ========     ========
<S>                                             <C>           <C>            <C>         <C>                   
Operating Revenues: (Notes 2, 6 and 26)
  Electric                                      $   323,834  $   260,657     $ 1,249,508  $ 1,034,464
  Gas                                               242,735      333,400         716,574      805,191
  Water                                              17,709            0          78,452            0
  Products and Services                             195,066       65,893         661,401      192,822
                                             ---------------------------- ----------------------------
                                                    779,344      659,950       2,705,935    2,032,477
                                             ---------------------------- ----------------------------
Cost of Sales: (Note 2)
 Fuel for electric generation                        55,594       58,408         235,734      234,421
 Power purchased                                     90,443       23,888         271,586       65,678
 Gas costs                                          138,428      214,840         418,875      499,359
 Products and Services                              175,945       50,386         562,307      128,374
                                             ---------------------------- ----------------------------
                                                    460,410      347,522       1,488,502      927,832
                                             ---------------------------- ----------------------------
Operating Margin                                    318,934      312,428       1,217,433    1,104,645
                                             ---------------------------- ----------------------------
Operating Expenses and Taxes (except income):
  Operation                                          96,171       85,704         400,720      340,168
  Maintenance (Note 2)                               18,947       18,484          77,015       73,926
  Depreciation and amortization (Note 2)             63,274       58,344         254,734      235,911
  Taxes (except income)                              23,428       21,310          85,883       75,808
                                             ---------------------------- ----------------------------
                                                    201,820      183,842         818,352      725,813
                                             ---------------------------- ----------------------------
Operating Income                                    117,342      128,586         399,309      378,832
                                             ---------------------------- ----------------------------
Other Income (Deductions) (Note 2)                    8,448        9,403          14,813       21,156
                                             ---------------------------- ----------------------------
Interest and Other Charges:
 Interest on long-term debt                          27,274       19,803         112,969       82,499
 Other interest                                       1,908        4,968           7,331       18,672
 Amortization of premium, reacquisition premium,
  discount and expense on debt, net                   1,148        1,133           4,733        4,579
 Dividend requirements on preferred stock
  of subsidiaries                                     2,167        2,167           8,691        8,680
                                             ---------------------------- ----------------------------
                                                     32,497       28,071         133,724      114,430
                                             ---------------------------- ----------------------------
Income before income taxes                           93,065      109,918         280,170      285,558
                                             ---------------------------- ----------------------------
Income taxes                                         32,343       39,080          99,437      105,472
                                             ---------------------------- ----------------------------
Net Income                                         $ 60,722     $ 70,838        $180,733     $180,086
                                                   ========     ========        ========     ========
Average common shares outstanding - basic       123,872,613  119,116,686     125,021,821  121,140,716

Earnings per average common share - basic           $ 0.49       $  0.59         $ 1.44        $ 1.48
                                                   ========     ========        ========     ========
Earnings per average common share - diluted        $  0.48       $  0.59         $ 1.44        $ 1.48
                                                   ========     ========        ========     ========
Dividends declared per common share                $  0.240     $  0.225         $ 0.930      $ 0.870
                                                   ========     ========        ========     ========

The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement Of Common Shareholders= Equity

                                                           Additional
(Dollars in thousands)             Common     Treasury      Paid-in        Retained
Three Months Ended                Shares      Shares        Capital        Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<S>                             <C>             <C>           <C>           <C>           <C>   
Balance, January 1, 1997         $  870,930    $ (392,995)    $   32,868   $   591,370    $   (4,280)
Comprehensive Income:
  Net income                                                                    70,838
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $18)
  Gain (loss) on foreign currency
     translation:
       Unrealized
Total Comprehensive Income
Dividends:
 Common shares                                                                  (26,273)
Treasury shares acquired                           (56,491)            35
Issued:
 IWC Resources Corporation
   acquisition                                      152,409        55,008
 Employee stock purchase plan                            75           113
 Long-term incentive plan                             1,022            94                         (351) 
 Amortization of
  unearned compensation                                                                            503
Other                                                                               (35)
                                -----------     -----------     ----------    ----------    ----------
Balance, March 31, 1997           $ 870,930     $ (295,980)     $  88,118      $ 635,900    $  (4,128)
                                 ==========     ===========     ==========    ==========    ==========

Balance, January 1, 1998         $  870,930     $ (363,943)     $  89,768      $ 667,790    $  (2,624)
Comprehensive Income:
  Net income                                                                      60,722
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $684)
  Gain (loss) on foreign currency
     translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                                  (29,929)
Treasury shares acquired                           (23,298)             2
Issued:
 Employee stock purchase plan                            57          120
 Long-term incentive plan                             3,175          (12)                         (34)
 Amortization of
  unearned compensation                                                                           499
Other                                                                              (655)
                                -----------     -----------     ----------    ----------    ----------
Balance, March 31, 1998          $ 870,930      $ 384,009)      $   89,878    $  697,928    $  (2,159)
                                ==========      ==========      ==========    ===========    ==========    
<CAPTION>
                                  Accumulated                                          Shares
                                  Other                                     --------------------------
   Three Months Ended          Comprehensive                Comprehensive    Common     Treasury
       (continued)              Income         Total         Income          Shares      Shares
========================         ==========     ==========    ==========    ==========   ==========
<S>                             <C>            <C>            <C>           <C>          <C>
Balance, January 1, 1997          $   2,608    $ 1,100,501                  147,784,218  (28,172,896)
Comprehensive Income:
  Net income                                        70,838        70,838
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $18)                       29             29            29
  Gain (loss) on foreign currency
     translation:
       Unrealized                     (361)          (361)         (361)
                                                               ----------
Total Comprehensive Income                                      $  70,506
                                                               ==========
Dividends:
 Common shares                                     (26,273)
Treasury shares acquired                           (56,456)                               (2,852,228)
Issued:
 IWC Resources Corporation
   acquisition                                      207,417                                10,580,764
 Employee stock purchase plan                          188                                      9,508
 Long-term incentive plan                               765                                   71,100
 Amortization of
  unearned compensation                                503
Other                                                  (35)
                                 ----------   ------------                 -----------   -----------
Balance, March 31, 1997          $  2 ,276    $ 1,297,116                 147,784,218   (20,363,752)
                                 ==========   ============                 ============   ===========                   

Balance, January 1, 1998         $   2,867    $  1,264,788                147,784,218   (23,471,554)
Comprehensive Income:
  Net income                                        60,722   $   60,722
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $684)                   1,119          1,119         1,119
  Gain (loss) on foreign currency
     translation:
       Unrealized                       162            162           162
       Realized                        (186)          (186)         (186)
                                                             -----------
Total Comprehensive Income                                     $  61,817
                                                             ===========
Dividends:
 Common shares                                     (29,929)
Treasury shares acquired                           (23,296)                                 (910,574)
Issued:
 Employee stock purchase plan                          177                                     7,158
 Long-term incentive plan                            3,129                                   197,044
 Amortization of
  unearned compensation                                499
Other                                                 (655)
                               ------------  --------------               ------------- ------------
Balance, March 31, 1998         $     3,962  $   1,276,530                 147,784,218   (24,177,926)
                               ============  =============                =============  ============
<CAPTION>

                                                           Additional
(Dollars in thousands)             Common     Treasury      Paid-in        Retained
Twelve Months Ended               Shares      Shares        Capital        Earnings       Other
========================         ==========     ==========    ==========    ==========    ==========
<S>                             <C>            <C>          <C>             <C>            <C>
Balance, April 1, 1996            $ 870,930    $ (330,942)    $   32,541    $  560,401    $  (6,126)
Comprehensive Income:
  Net income                                                                   180,086
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $709)
  Gain (loss) on foreign currency
     translation:
       Unrealized
Total Comprehensive Income
Dividends:
 Common shares                                                                (104,460)
Treasury shares acquired                          (123,501)            35
Issued:
 IWC Resources Corporation
   acquisition                                      152,409        55,008
 Employee stock purchase plan                           278           390
 Long-term incentive plan                             5,776           126                      (461)
 Amortization of
  unearned compensation                                                                        2,459
Other                                                                 18         (127)
                               -----------   -------------  ------------  ------------  ------------
Balance, March 31, 1997        $  870,930     $  (295,980)     $  88,118    $  635,900    $  (4,128)
                               -----------   -------------  ------------  ------------  ------------                    
Net income                                                                     180,733
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $1,699)
  Gain (loss) on foreign currency
     translation:
       Unrealized
       Realized
Total Comprehensive Income
Dividends:
 Common shares                                                                (117,959)
Treasury shares acquired                           (99,884)          (33)
Issued:
 Acquisition of minority interest                    4,118         1,351
 Employee stock purchase plan                          255           431
 Long-term incentive plan                            7,482            12                       (126)
 Amortization of
  unearned compensation                                                                        2,095
Other                                                                 (1)         (746)
                                -----------   ------------  ------------  ------------  ------------
Balance, March 31, 1998          $ 870,930     $ (384,009)   $    89,878   $   697,928   $   (2,159)
                                 ==========    ==========    ===========   ===========   ===========

<CAPTION>
                                 Accumulated                                       Shares
                                Other                                      ---------------------------
   Three Months Ended       Comprehensive                  Comprehensive      Common      Treasury
       (continued)              Income         Total         Income          Shares        Shares
========================         ==========     ==========    ==========    ==========     ==========
<S>                              <C>           <C>            <C>           <C>            <C>
Balance, April 1, 1996           $    (454)    $ 1,126,350                  147,784,218   (25,006,726)
Comprehensive Income:
  Net income                                       180,086   $   180,086
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $709)                   1,161          1,161         1,161
  Gain (loss) on foreign currency
     translation:
       Unrealized                     1,569          1,569         1,569
                                                             ------------
Total Comprehensive Income                                   $    182,816
                                                             ============
Dividends:
 Common shares                                    (104,460)
Treasury shares acquired                          (123,466)                               (6,392,082)
Issued:
 IWC Resources Corporation
   acquisition                                      207,417                                10,580,764
 Employee stock purchase plan                           668                                    34,992
 Long-term incentive plan                             5,441                                   419,300
 Amortization of
  unearned compensation                              2,459
Other                                                 (109)
                               ------------   ------------                ------------    ------------
Balance, March 31, 1997        $     2,276    $  1,297,116                 147,784,218     (20,363,752)
                               ------------   ------------                ------------    ------------
 Comprehensive Income:
  Net income                                        180,733   $  180,733
  Other comprehensive income,
   net of tax:
     Unrealized gain (net of income
       tax of $1,699)                 2,779          2,779         2,779
  Gain (loss) on foreign currency
     translation:
       Unrealized                     (907)          (907)         (907)
       Realized                       (186)          (186)         (186)
                                                              -----------
Total Comprehensive Income                                    $  182,419
                                                              ===========
Dividends:
 Common shares                                    (117,959)
Treasury shares acquired                           (99,917)                               (4,595,274)
Issued:
 Acquisition of minority interest                     5,469                                   270,064
 Employee stock purchase plan                           686                                    32,026
 Long-term incentive plan                             7,368                                   479,010
 Amortization of
  unearned compensation                              2,095
Other                                                 (747)
                                ------------   ------------                ------------  ------------
Balance, March 31, 1998          $    3,962    $ 1,276,530                  147,784,218  (24,177,926)
                                ============   ===========                 ============  ============

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

</TABLE>





<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
(In thousands)
                                                 Three Months                 Twelve Months
                                               Ended March 31,              Ended March 31,
                                              ---------------------       ----------------------
                                                 1998        1997            1998         1997
                                              ========    ========          ========     ========
<S>                                          <C>          <C>           <C>           <C>
Cash flows from operating activities:
 Net income                                 $    60,722  $    70,838    $   180,733   $  180,086
Adjustments to reconcile net income
 to net cash:
  Depreciation and amortization                  63,274       58,344        254,734      238,756
  Deferred federal and state income
   taxes, net                                   (30,040)    (12,343)        (19,345)      (5,229)
  Deferred investment tax credits, net          (1,821)     (1,802)          (7,395)      (7,541)
  Advance contract payment                        475          475            1,900        1,900
  Change in certain assets and liabilities -*
   Accounts receivable, net                    (12,391)     13,787          (63,547)     21,897
   Other receivables                          (20,590)    (40,011)          (45,626)     (59,609)
   Electric production fuel                    (2,404)       2,351            2,891       (4,186)
   Materials and supplies                      (1,996)         220              349       4,739
   Natural gas in storage                      40,413        47,075          (3,005)      (6,112)
   Accounts payable                            (13,470)     55,650          (87,687)    105,513
   Taxes accrued                               80,313       77,762            5,940      43,780
   Fuel adjustment clause                       1,568      (3,781)           11,819      (4,463)
   Gas cost adjustment clause                  52,019        12,228          50,014      (38,889)
   Accrued employment costs                   (16,296)     (4,821)              660       1,463
   Other accruals                               (4,006)      25,511        (20,088)         (299)
   Other, net                                  (6,207)       3,635           50,555     (21,803)
                                         ------------- ------------- -------------- --------------
   Net cash provided by operating activities   189,563     305,118          312,902      450,003
                                        -------------- -------------- -------------- --------------
Cash flows used in investing activities:
  Utilities construction expenditures          (48,203)    (46,581)        (220,553)    (198,043)
  Acquisition of IWC Resources
    Corporation, net of cash acquired               0    (288,932)                 0    (288,932)
  Acquisition of minority interest                  0            0           (5,641)           0
  Proceeds from disposition of assets           9,705       29,500           16,198       29,500
  Proceeds from settlement of litigation            0            0           41,069            0
  Other, net                                  (25,916)     (19,352)         (61,384)     (32,655)
                                        -------------- -------------- -------------- --------------
      Net cash used in investing activities    (64,414)   (325,365)        (230,311)    (490,130)
                                        -------------- -------------- -------------- --------------
Cash flows provided by (used in)
 financing activities:
  Issuance of long-term debt                    6,371      136,302          528,301      138,371
  Issuance of short-term debt                 276,921      254,045        1,052,384    1,496,567
  Net change in commercial paper              (40,000)   (142,305)         (122,340)      73,500
  Retirement of long-term debt                  (2,547)     (1,469)        (325,682)     (90,144)
  Retirement of short-term debt               (306,673)   (285,620)      (1,063,277)  (1,510,619)
  Retirement of preferred shares                    (1)         (1)          (2,408)      (2,605)
  Issuance of common shares                     3,340      208,486           13,427      213,594
  Acquisition of treasury shares               (23,296)    (56,591)         (99,789)    (123,601)
  Cash dividends paid on common shares         (29,789)    (26,772)        (114,610)    (103,753)
  Cash dividends paid on preferred shares           0            0                0         (647)
  Other, net                                      121          115             (497)        488
                                        -------------- ------------- -------------- --------------
      Net cash provided by (used in)
       financing activities                   (115,553)     86,190         (134,491)     91,151
                                        -------------- ------------- -------------- --------------
Net increase (decrease) in cash and
 cash equivalents                                9,596      65,943         (51,900)       51,024
 
Cash and cash equivalents at
   Beginning of period                          30,780      26,333           92,276       41,252
                                        -------------- ------------- -------------- --------------
Cash and cash equivalents at
   End of period                          $     40,376 $     92,276    $     40,376 $     92,276
                                         ============= ============    ============  ===========
 *Net of effect from purchase of IWC Resources Corporation.

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

<PAGE>
Notes to Consolidated Financial Statements

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

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

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

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

(2)   Summary of Significant Accounting Policies:

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

     The accompanying  consolidated  financial  statements of Industries include
the  operating  results of IWCR for the three and twelve  months  periods  ended
March 31, 1998.

     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.  Gas
marketing  revenues  are  recognized  as the related  commodity  is delivered to
customers.  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.  Industries  records provisions for losses on construction
contracts, if any, in the period in which such losses become probable.

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

                Electric:
                    Electric generation plant                       24 years
                    Transmission plant                              26 years
                    Distribution plant                              25 years
                    Other electric plant                            24 years

     The provision of depreciable electric utility plant, as a percentage of the
original  cost, was 3.60% for the  three-month  and  twelve-month  periods ended
March 31, 1998 and March 31, 1997.

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

     The  provision of  depreciable  gas utility  plant,  as a percentage of the
original  cost,  was 5.15% for the three and twelve  months ended March 31, 1998
and 5.06% for the three and twelve months ended March 31, 1997.

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

     The provision of depreciable  water utility  plant,  as a percentage of the
original cost, was 1.9% and 1.5% for the  three-month and  twelve-month  periods
ended March 31, 1998, 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.

     Plant Acquisition Adjustments.  Utility plant includes amounts representing
the excess of purchase price over  underlying  book values  associated  with the
acquisitions  of Kokomo Gas,  NIFL,  IWC and  Harbour.  These  amounts are being
amortized over a forty-year period from the respective dates of acquisition. The
plant  acquisition  adjustments  net of  accumulated  amortization  were  $189.1
million  and  $190.4   million  at  March  31,  1998  and   December  31,  1997,
respectively.

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

     Intangible Assets. The excess of cost over the fair value of the net assets
of  non-utility  subsidiaries  acquired is  reported  as  goodwill  and is being
amortized on a straight-line  basis over a weighted  average period of 34 years.
Other intangible  assets  approximating  $7.7 million are being amortized over a
period of eight years.  Industries assesses the recoverability of its intangible
assets on a periodic  basis to confirm that  expected  future cash flows will be
sufficient to support the recorded intangible assets.  Accumulated  amortization
of intangibles at March 31, 1998 and December 31, 1997, was  approximately  $2.6
million and $1.1 million, respectively.

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

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

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

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

     Comprehensive   Income.   Industries  adopted  SFAS  No.  130,   "Reporting
Comprehensive  Income" effective January 1, 1998. The objective of the statement
is to report comprehensive income which is a measure of all changes in equity of
an enterprise which result from transactions or other economic events during the
period other than  transactions  with  shareholders.  Industries'  components of
other  comprehensive  income includes unrealized gains (losses) on available for
sale securities and unrealized  gains (losses) on foreign  currency  translation
adjustments.  The accumulated amounts for these components,  respectively,  were
$1.6  million and $(2.1)  million as of April 1, 1996;  $2.7  million and $(0.1)
million as of January 1, 1997; and $4.4 million and $(1.5) million as of January
1, 1998. This information is disclosed in Industries'  Consolidated Statement of
Common Shareholders' Equity.

     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         Twelve Months
                               Ended March  31,         Ended  March 31,
                              --------    -------    -------     ---------
(In thousands)                  1998       1997       1998          1997
                               =======    =======    =======       =======
<S>                            <C>        <C>        <C>           <C>
Income taxes                   $     0    $    0    $ 116,849      $ 75,795
Interest, net of amounts 
        capitalized             23,549    12,111      113,799        88,988
 </TABLE>

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

     Gas Cost  Adjustment  Clause.  All metered gas rates  contain an adjustment
factor  which  reflects the cost of purchased  gas,  contracted  gas storage and
storage  transportation  charges. The Energy Utilities record any under-recovery
or over-recovery  as a current asset or current  liability until such time 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 6, FERC Order No. 636 for a
discussion of gas transition cost charges.

     Natural Gas in Storage. Northern Indiana's natural gas in storage is valued
using the last-in, first-out (LIFO) inventory methodology.  Based on the average
cost of gas purchased in March 1998 and December 1997 the estimated  replacement
cost of gas in storage  (current and non-current) at March 31, 1998 and December
31,  1997  exceeded  the stated LIFO cost by  approximately  $29 million and $42
million, respectively. Certain other subsidiaries of Industries have natural gas
in storage valued at average cost.
 
     Hedging  Activities.  Industries  utilizes  a  variety  of  commodity-based
derivative  financial  instruments  to reduce  the price  risk  inherent  in its
natural gas and electric  power  marketing  activities.  The gains and losses on
these  derivative  financial  instruments  are deferred (Other Current Assets or
Other Current  Liabilities)  pursuant to an identified risk reduction  strategy.
Such deferrals are recognized in income  concurrent  with the disposition of the
underlying physical commodity. In certain circumstances,  a derivative financial
instrument  will  serve to  hedge  the  acquisition  cost of gas  injected  into
storage.  In this  situation,  the  gain or  loss  on the  derivative  financial
instrument  is  deferred  as  part  of the  cost  basis  of gas in  storage  and
recognized  upon the  ultimate  disposition  of the natural gas. If a derivative
financial  instrument contract is terminated early because it is probable that a
transaction or anticipated  transaction  will not occur,  any gain or loss as of
such date is  immediately  recognized  in earnings.  If a  derivative  financial
instrument contract is terminated early for other economic reasons,  any gain or
loss as of the  termination  date is deferred and recorded  when the  associated
transaction or anticipated transaction affects earnings.

     Industries uses commodity futures contracts, options and swaps to hedge the
impact of natural gas price  fluctuations  related to its  business  activities,
including price risk related to the physical  location of the natural gas (basis
risk).  As  of  March  31,  1998,   Industries  had  open  derivative  financial
instruments  representing hedges of natural gas sales of 11.9 billion cubic feet
(Bcf), natural gas purchases of 9.1 Bcf and net basis differentials of 35.8 Bcf.
The net deferred gains on these derivative financial instruments as of March 31,
1998 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
deferred premiums paid on these options as of March 31, 1998 were not material.

     Regulatory Assets. The Utilities'  operations are subject to the regulation
of the  Commission  and,  in  the  case  of  the  Energy  Utilities,  the  FERC.
Accordingly, the Utilities' accounting policies are subject to the provisions of
SFAS No. 71,  "Accounting for the Effects of Certain Types of  Regulation."  The
Utilities monitor changes in market and regulatory  conditions and the resulting
impact of such changes in order to continue to apply the  provisions of SFAS No.
71 to some or all of their  operations.  As of March 31, 1998 and  December  31,
1997, the regulatory assets  identified below represent  probable future revenue
to the  Utilities  associated  with  certain  incurred  costs as these costs are
recovered  through  the  rate-making  process.  If a portion  of the  Utilities'
operations  becomes  no  longer  subject  to the  provisions  of SFAS No.  71, a
write-off of certain  regulatory  assets might be required,  unless some form of
transition cost recovery is established by the appropriate regulatory body which
would meet the requirements under generally accepted  accounting  principles for
continued   accounting  as  regulatory   assets  during  such  recovery  period.
Regulatory assets were comprised of the following items:
<TABLE>
<CAPTION>
                                                     March 31,        December 31,
(In thousands)                                       1998                 1997
                                                    ==========          ==========
<S>                                                <C>                <C>
Unamortized reacquisition premium on
 debt (Note 19)                                    $    45,869         $    46,748
Unamortized R.M. Schahfer Unit 17 and
 Unit 18 carrying charges and deferred
  depreciation (See below)                              65,492              66,546
Bailly scrubber carrying charges and
 deferred depreciation (See below)                       9,647               9,880
Deferred SFAS No. 106 expense not
 recovered (Note 10)                                    86,158              87,653
FERC Order No. 636 transition costs (Note 6)            25,771              28,744
Regulatory income tax asset, net  (Note 8)               7,218               6,941
Other                                                    4,207               4,261
                                                  ------------         -----------
                                                       244,362             250,773
Less: Current portion of regulatory assets              36,288              39,260
                                                  ------------         -----------
                                                  $    208,074         $   211,513
                                                  ============         ===========
</TABLE>

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

     Northern Indiana has capitalized carrying charges and deferred depreciation
and certain  operating  expenses  relating to its scrubber service agreement for
its Bailly Generating Station in accordance with an order of the Commission. The
accumulated  balance of the deferred costs and related carrying charges is being
amortized over the remaining life of the scrubber service agreement.
 
     Allowance  for Funds Used  During  Construction.  Allowance  for funds used
during  construction  (AFUDC) is charged to construction work in progress during
the period of  construction  and  represents the net cost of borrowed funds used
for construction purposes and a reasonable rate upon other (equity) funds. Under
established regulatory rate practices,  after the construction project is placed
in service,  Northern  Indiana is permitted to include in the rates  charged for
utility  services  (a) a fair  return  on and (b)  depreciation  of  such  AFUDC
included in plant in service.

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

     Foreign Currency  Translation.  Translation  gains or losses are based upon
the  end-of-period  exchange  rate and are  recorded as a separate  component of
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
$35.5 million and $30.1 million relating to affordable housing projects at March
31, 1998 and December 31, 1997, respectively.

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

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

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

     Bay  State,  one of the  largest  natural  gas  utilities  in New  England,
provides  natural gas  distribution  service to more than  300,000  customers in
Massachusetts,  New Hampshire and Maine. The combined company will be one of the
10 largest natural gas distribution systems in the nation, servicing more than 1
million gas customers. In addition, Industries and Bay State anticipate entering
into a joint marketing  agreement in 1998 that will expand the operations of Bay
State's non-regulated energy service companies.

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

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

     (6) FERC Order No. 636: Since December 1993, the Energy Utilities have paid
approximately $139 million of interstate  pipeline  transition costs to pipeline
suppliers  to reflect  the impact of FERC Order No.  636.  The Energy  Utilities
expect that additional transition costs will not be significant.  The Commission
has approved the recovery of these FERC-allowed transition costs on a volumetric
basis from sales and  transportation  customers.  Regulatory  assets, in amounts
corresponding to the costs recorded but not yet collected, have been recorded to
reflect the ultimate recovery of these costs.

     (7) Environmental  Matters: The Utilities have an ongoing program to remain
aware  of  laws  and  regulations   involved  with  hazardous  waste  and  other
environmental  matters.  The  Utilities  intend to continue  to  evaluate  their
facilities  and  properties  with  respect to these rules and identify any sites
that would require  corrective  action. The Utilities have recorded a reserve of
approximately $20 million to cover probable  corrective  actions as of March 31,
1998; however,  environmental regulations and remediation techniques are subject
to future  change.  The  ultimate  cost could be  significant,  depending on the
extent  of  corrective   actions  required.   Based  upon   investigations   and
management's  understanding  of  current  laws and  regulations,  the  Utilities
believe that any corrective actions required,  after  consideration of insurance
coverages and contributions from other potentially responsible parties, will not
have a significant  impact on the results of operations or financial position of
Industries.

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

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

     On October  10,  1997,  the EPA  proposed  a rule  under the  nonattainment
provisions of the CAAA to reduce emissions  transported  across state boundaries
that allegedly are  contributing to nonattainment of the one hour ozone standard
in downwind  states.  Because NOx is  considered  a precursor  or cause of ozone
formation,  the EPA proposed significant NOx reductions for 22 states, including
Indiana,  to  address  the  ozone  transport  issue.  These  proposals,  and any
resulting NOx emission limitations, arise under different provisions of the CAAA
than the Acid Rain NOx program and can result in  additional,  more  restrictive
emission  limitations than are imposed under the Acid Rain Program.  The EPA has
encouraged  states to achieve the  reductions by requiring  controls on electric
utilities and large boilers.  Northern  Indiana is evaluating the EPA's proposal
and evaluating potential requirements that could result from any final rule.
 
     The EPA issued final rules on July 18, 1997,  revising the National Ambient
Air Quality  Standards for ozone and particulate  matter.  The revised standards
begin a  regulatory  process that may lead to  reductions  in  particulate,  NOx
emissions  and  possibly  sulfur  dioxide  emissions  from  coal-fired   boilers
(including   Northern  Indiana's   generating   stations)  beyond  current  CAAA
requirements. Northern Indiana cannot predict the costs of complying with future
control requirements to meet these new standards. Northern Indiana will continue
to closely monitor developments in this area and anticipates the exact nature of
the impact of the new  standards  on its  operations  will not be known for some
time.

     The EPA has notified Northern Indiana that it is a "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.

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

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

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

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

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

     The  possibility  that  exposure  to electric  and  magnetic  fields  (EMF)
emanating from power lines,  household appliances and other electric sources may
result in adverse  health  effects has been the subject of public,  governmental
and media  attention.  Recently,  researchers from the National Cancer Institute
and the Childhood  Cancer Group reported they found no evidence  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  Council of the
National Academy of Sciences, which concluded, after examining more than 500 EMF
studies  spanning 17 years,  that,  among other things,  there was  insufficient
evidence  to  consider  EMF a  threat  to human  health.  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.  Applications for renewal of any expiring permits have
been filed and are the subject of ongoing  discussions  with,  but have not been
finalized  by, IDEM.  These  permits  continue in effect  pending  review of the
current applications.

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

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

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

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

     The  components of the net deferred  income tax liability at March 31, 1998
and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
                                                      March 31,        December 31,
(In thousands)                                        1998             1997
                                                      ===========       ===========
<S>
<C>                        <C>
Deferred tax liabilities -
 Accelerated depreciation and other 
     property differences                              $  781,738       $   779,223
 AFUDC-equity                                              34,675            35,282
 Adjustment clauses                                        14,822            35,253
 Take-or-pay gas costs                                        496               496
 Other regulatory assets                                   31,331            31,862
 Reacquisition premium on debt                             18,012            18,335

Deferred tax assets -
 Deferred investment tax credits                          (39,339)          (40,017)
 Removal costs                                           (147,209)         (144,111)
 Other postretirement/postemployment benefits             (45,856)          (45,298)
 Other, net                                               (10,960)           (3,565)
                                                      ------------        ---------
                                                          637,710           667,460
Less: Deferred income taxes related to current
         assets and liabilities                           (5,155)            15,645
                                                     -----------        -----------
Deferred income taxes -noncurrent                    $   642,865        $   651,815
                                                      ===========       ===========
</TABLE>

     Federal and state income taxes as set forth in the  Consolidated  Statement
of Income are comprised of the following:
<TABLE>
<CAPTION>
                                     Three  Months           Twelve Months
                                     Ended March 31,        Ended March 31,
                                   --------   --------      -------     -------
(In thousands)                       1998       1997         1998         1997
                                   ========    =======      =======     =======
<S>                                <C>        <C>          <C>          <C>
Current income taxes -
 Federal                           $ 55,917   $ 46,333     $ 107,709    $ 102,345
 State                                8,287      6,892        18,468       15,897
                               ------------ ------------ ------------ ------------
                                     64,204     53,225       126,177      118,242
                               ------------ ------------ ------------ ------------
Deferred income taxes, net -
 Federal                            (27,806)   (11,432)      (18,145)     (5,020)
 State                               (2,234)     (911)        (1,200)       (209)
                               ------------ ------------ ------------ ------------
                                    (30,040)   (12,343)      (19,345)      (5,229)
                               ------------ ------------ ------------ ------------
Deferred investment tax 
       credits, net                  (1,821)    (1,802)      (7,395)       (7,541)
                               ------------ ------------ ------------ ------------
   Total income taxes            $   32,343 $   39,080    $   99,437    $ 105,472
                                 ==========  ==========   ==========  ===========
</TABLE>
     A  reconciliation  of total  income tax  expense to an amount  computed  by
applying the statutory federal income tax rate to pre-tax income is as follows:
<TABLE>
<CAPTION>
                                                      Three Months               Twelve Months
                                                   Ended March  31,             Ended March 31,
                                                 ------------ ------------ ------------ -----------
(In thousands)                                       1998        1997          1998       1997
                                                 ===========   =========== ============ ===========
<S>                                               <C>          <C>           <C>         <C>
Net income                                         $   60,722  $   70,838     $ 180,733  $ 180,086
Add-Income taxes                                       32,343      39,080        99,437    105,472
 Dividend requirements on preferred stocks
    of subsidiaries                                     2,167       2,167         8,691      8,680
                                                 ------------ ------------ ------------ -----------
Income before preferred dividend requirements of
   subsidiaries and income taxes                   $   95,232  $  112,085     $ 288,861  $ 294,238
                                                  ===========  ==========   ===========  ==========
   Amount derived by multiplying pre-tax
  income by the statutory rate                      $ 33,331  $   39,230     $  101,101 $  102,983

Reconciling items multiplied by the statutory rate:
  Book depreciation over related tax depreciation        998       1,044         4,026      4,682
  Amortization of deferred investment tax credits      (1,821)    (1,802)       (7,395)    (7,541)
  State income taxes, net of federal income tax 
    benefit                                             3,300       3,567        11,597     10,424
  Reversal of deferred taxes provided at rates in excess
     of the current federal income tax rate            (1,271)     (1,518)       (3,816)    (6,488)
  Low-income housing credits                             (960)       (764)       (3,252)    (2,491)
  Nondeductible amounts related to amortization of
    intangible assets and plant acquisition adjustments   629          96         2,173        385
  Other, net                                           (1,863)      (773)        (4,997)     3,518
                                                 ------------ ------------ ------------ -----------
    Total income taxes                             $   32,343  $   39,080    $   99,437  $ 105,472
                                                  ===========  =========== ============ ===========
</TABLE>

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

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

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

     The plans' assets are invested primarily in common stocks, bonds and notes.

     The plans'  funded  status as of January 1, 1998 and  January 1, 1997 is as
follows:
<TABLE>
<CAPTION>
                                                      January 1,      January 1,
(In thousands)                                         1998            1997
                                                      =========        =========
<S>                                                   <C>             <C>
Plan assets in excess of  benefit obligation           $49,100        $ 47,344
Unrecognized net actuarial loss                        (46,959)        (66,976)
Unrecognized prior service cost                         47,114          25,172
Unrecognized transition amount                          32,107          38,062
                                                   -----------      -----------
Prepaid pension costs                              $    81,362       $   43,602
                                                   ===========      ===========
</TABLE>
 
     The benefit  obligation  is the  present  value of future  pension  benefit
payments and is based on a plan benefit formula which considers  expected future
salary  increases.  Discount  rates of 7.00% and 7.75% and rates of  increase in
compensation  levels  of 4.5%  and  5.5%  were  used to  determine  the  benefit
obligation  at  January  1, 1998 and 1997,  respectively.  The  increase  in the
benefit  obligation  at January 1, 1998 is mainly  caused by the decrease in the
discount rate from 7.75% to 7.00%.  Prepaid  pension costs were $90.4 million as
of March 31, 1998.

     The following  items are the  components of provisions for pensions for the
three-month and twelve-month periods ended March 31, 1998 and March 31, 1997:

<TABLE>
<CAPTION>
                                          Three Months           Twelve Months
                                         Ended March 31,         Ended March 31,
                                      ---------  ---------     --------- ---------
(In thousands)                         1998         1997         1998       1997
                                      =======      =======      =======    =======
<S>                                   <C>          <C>          <C>        <C>
Service costs                        $  4,934     $  4,573      $14,799    $14,606
Interest costs                         19,324       16,536       60,433     50,962
Expected return on plan assets        (24,733)     (20,503)     (76,483)   (61,528)
Amortization of transition obligation   1,760        1,588        5,498      5,068
Amortization of prior service costs     1,676          950        4,227      2,718
                                     --------    ---------      -------   --------
                                      $ 2,961     $  3,144      $ 8,474   $ 11,826
                                     ========    =========      =======    =======
</TABLE>

     Assumptions  used in the  valuation  and  determination  of 1998  and  1997
pension expense were as follows:

<TABLE>
<CAPTION>
                                           1998           1997
                                           ======         ======
<S>                                       <C>             <C>
Discount rate                               7.00%          7.75%
Rate of increase in compensation levels     4.50%          5.50%
Expected long-term rate of return on assets 9.00%          9.00%

</TABLE>

     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
$0.4 million and $2.1 million were made to these plans for the  three-month  and
twelve-month  periods  ended  March 31,  1998.  The  relative  position  of each
employer  participating  in these plans with  respect to the  actuarial  present
value of accumulated  plan benefits and net assets available for benefits is not
available.

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

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

     IWC's  current  rates  include  postretirement  benefit costs on an accrual
basis,  including  amortization  of the  regulatory  asset that  arose  prior to
inclusion of these costs in the rates.  IWC currently  remits to a grantor trust
amounts collected in rates.
 
     The  following  table  sets  forth  the  change in the  plans'  accumulated
postretirement benefit obligation (APBO) for the years 1997 and 1996:

<TABLE>
<CAPTION>
 
(In thousands)                                            1997             1996
                                                        =========         ========
<S>                                                   <C>                 <C>
Accumulated postretirement benefit obligation
   at beginning of year  (January 1,)                  $ 200,790         $ 257,915
Service cost                                               5,034             7,352
Interest cost                                             16,215            18,310
Plan amendments                                            4,015           (10,482)
Actuarial (gain)                                         (10,242)          (65,718)
Acquisition of IWCR                                       18,505                 0
Benefits paid                                            (10,409)           (6,587)
                                                       ---------          ---------
Accumulated postretirement benefit obligation
   at end of the year  (December 31,)                  $ 223,908          $ 200,790
                                                       =========          =========
</TABLE>

     The change in the fair  value of the  plans'  assets for the years 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
(In thousands)                                                  1997            1996
                                                              ========         ========
<S>
<C>                     <C>
Fair value of plan assets at beginning of year (January 1,)    $     0         $     0
Employer contributions                                          12,809           6,587
Benefits paid                                                  (10,409)         (6,587)
                                                           -----------     -----------
Plan assets at fair value at end of the year (December 31,)   $  2,400       $       0
                                                           ===========     ===========
</TABLE>

     Following is the funded status for postretirement benefits as of January 1,
1998 and January 1, 1997:
<TABLE>
<CAPTION>

                                                       January 1,     January 1,
(In thousands)                                           1998            1997
                                                      =========        =========
<S>                                                  <C>              <C>
Funded status                                        $ (221,508)      $(200,790)
Unrecognized net actuarial gain                         (99,118)        (89,547)
Unrecognized prior service cost                           4,195               0
Unrecognized transition amount                          176,464         175,012
                                                     ----------       ---------
Accrued liability for postretirement benefits        $ (139,966)      $(115,325)
                                                     ==========       =========
</TABLE>

     A discount rate of 7.00%, a pre-Medicare medical trend rate of 8% declining
to a long-term rate of 5%, a discount rate of 7.75% and a  pre-Medicare  medical
trend rate of 9% declining to a long-term rate of 6%, were used to determine the
APBO at  January 1, 1998 and 1997,  respectively.  The  increase  in the APBO at
January 1, 1998 was primarily  attributable  to the inclusion of IWCR's APBO and
the decrease in the discount rate from 7.75% to 7.00%. The accrued liability for
postretirement benefits was $139.2 million at March 31, 1998.

     Net periodic  postretirement  benefits costs,  before  consideration of the
rate-making discussed  previously,  for the three-month and twelve-month periods
ended March 31, 1998 and March 31, 1997 include the following components:
 <TABLE>
<CAPTION>
                                             Three Months             Twelve Months
                                             Ended March 31,          Ended March 31, 
 (In thousands)                              1998       1997           1998      1997
                                            ======     ======         ======     ======
<S>                                         <C>       <C>             <C>        <C>
Service costs                               $1,187    $ 1,460         $4,631     $7,192
Interest costs                               4,073      4,460         15,491     17,691
Expected return on plan assets                 (50)         0            (50)         0 
Amortization of transition obligation        2,929      2,764         11,723     11,262
Amortization of prior service cost              75          0            354          0
Amortization of (gain) loss                 (1,393)    (1,008)        (6,229)      (979)
                                           -------   --------        --------   --------
                                           $ 6,821   $ 7,676         $ 25,920   $ 35,166
                                           =======   ========        ========   ========
</TABLE>

     Assumptions  used  in the  determination  of 1998  and  1997  net  periodic
postretirement benefit costs were as follows:
<TABLE>
<CAPTION>
                                           1998           1997
                                           ======         ======
<S>                                        <C>           <C>
Discount rate                               7.00%          7.75%
Rate of increase in compensation levels     4.50%          5.50%
</TABLE>

     The  pre-Medicare  medical  trend  rates  used for  1998  and 1997  were 8%
declining to a long-term  rate of 5% and 9% declining to a long-term rate of 6%,
respectively.  The effect of a 1% increase in the assumed health care cost trend
rates for each future year would increase the accumulated postretirement benefit
obligation at January 1, 1998 by approximately  $27.1 million,  and increase the
aggregate  of the  service  and  interest  cost  components  of  plan  costs  by
approximately  $0.7 million for the three-month period ended March 31, 1998. The
effect of a 1%  decrease  in the  assumed  health care cost trend rates for each
future year would decrease the accumulated  postretirement benefit obligation at
January 1, 1998 by  approximately  $22.2 million,  and decrease the aggregate of
the service and interest  cost  components of plan costs by  approximately  $0.6
million for the three-month period ended March 31, 1998. Amounts disclosed above
could be changed  significantly  in the future by changes in health  care costs,
work force demographics, interest rates, or plan changes.

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

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

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

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

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

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

     (12)  Preferred  Stocks,  Redeemable  Solely at the  Option of the  Issuer,
Outstanding at March 31, 1998 and December 31, 1997 :
<TABLE>
<CAPTION>
                                                                                         Redemption
                                                                                          Price at
                                                      March 31,      December 31,          March 31,
 (Dollars in thousands)                                1998              1997               1998
                                                     ===========       ===========        ===========
<S>                                                  <C>              <C>                  <C>
Northern Indiana Public Service Company:
 Cumulative preferred stock -  $100 par value -
  4-1/4% series - 209,107 and 209,118 shares
      outstanding,  respectively                       $  20,911        $   20,912            $101.20
  4-1/2% series -  79,996 shares outstanding               8,000             8,000            $100.00
  4.22% series - 106,198 shares outstanding               10,620            10,620            $101.60
  4.88% series - 100,000 shares outstanding               10,000            10,000            $102.00
  7.44% series -   41,890 shares outstanding               4,189             4,189            $101.00
  7.50% series -   34,842 shares outstanding               3,484             3,484            $101.00
  Premium on preferred stock                                 254               254                N/A

 Cumulative preferred stock -
  no par value -
   Adjustable rate (6.00% at March 31, 1998),
     Series A (stated value $50 per share) 473,285
     shares outstanding                                   23,664            23,664            $ 50.00

Indianapolis Water Company:
 Cumulative preferred stock - $100 par value -
  Rates ranging from 4.00% to 5.00%, 44,966
     shares outstanding                                    4,497             4,497        $100 - $105
                                                     -----------       -----------
                                                      $   85,619         $  85,620
                                                     ===========       ===========
</TABLE>

     During the period April 1, 1996 to March 31, 1998, there were no additional
issuances of the above
preferred stocks.

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

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

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

     The redemption prices at March 31, 1998, 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%        $101.11, reduced periodically  12,500 shares on or before April 1.

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

        7-3/4%        $104.23, reduced periodically  2,777 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 March 31, 1998 for each of the twelve-month periods subsequent to
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,*
============================
<S>                                    <C>
2000                                   $1,827,700
2001                                   $1,827,700
2002                                   $1,827,700
2003                                   $1,827,700

* Table does not reflect redemptions made after March 31, 1998.
</TABLE>

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

     (15) Common Share Dividend:  During the next few years,  Industries expects
that the majority of earnings  available  for  distribution  of  dividends  will
depend upon dividends paid to Industries by Northern Indiana. Northern Indiana's
Indenture  dated  August 1,  1939,  as  amended  and  supplemented  (Indenture),
provides  that it will not declare or pay any  dividends on any class of capital
stock (other than preferred or preference stock) except out of earned surplus or
net  profits of  Northern  Indiana.  At March 31,  1998,  Northern  Indiana  had
approximately $164.0 million of retained earnings (earned surplus) available for
the payment of dividends.  Future  dividends will depend upon adequate  retained
earnings, adequate future earnings and the absence of adverse developments.

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

     The net income,  preferred  dividends  and shares used to compute basic and
diluted earnings per share is presented in the following table:
<TABLE>
<CAPTION>
 
                                                               Three Months                 Twelve Months    
                                                              Ended March 31,               Ended  March 31, 
 (Dollars in thousands, except per share amounts)            1998        1997              1998         1997
<S>                                                    <C>        <C>                    <C>               <C>

Basic
Weighted Average Number of Shares:
     Average Common Shares Outstanding                     123,872,613  119,116,686     125,021,821  121,140,716

Net Income to be Used to Compute Basic Earnings per Share:
Net Income                                                  $   60,722   $   70,838      $  180,733   $  180,086
Basic Earnings per Average Common Share                      $    0.49    $    0.59      $     1.44    $    1.48

Diluted
Weighted Average Number of Shares:
     Average Common Shares Outstanding                     123,872,613  119,116,686     125,021,821  121,140,716
     Dilutive effect for Nonqualified Stock Options            511,358      311,027         304,907      242,047
     Weighted Average Shares                               124,383,971  119,427,713     125,326,728  121,382,763

Net Income to be Used to Compute Diluted Earnings per Share:
Net Income                                                  $   60,722   $   70,838      $  180,733   $  180,086
Diluted Earnings per Average Common Share                    $    0.48    $    0.59      $     1.44    $    1.48
</TABLE>

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

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

     Common  Share  Repurchases.  The Board has  authorized  the  repurchase  of
Industries'  common  shares.  At  March  31,  1998,   Industries  had  purchased
approximately  45.0 million  shares since 1989 at an average price of $14.41 per
share.  Approximately  17.1 million  additional common shares may be repurchased
under the Board's authorization.

     (18) Long-Term Incentive Plan: Industries has two long-term incentive plans
for key  management  employees that were approved by  shareholders  on April 13,
1988 (1988 Plan) and April 13, 1994 (1994 Plan),  each of which provides for the
issuance  of up to 5.0 million of  Industries'  common  shares to key  employees
through 1998 and 2004, respectively. At March 31, 1998, there were 12,912 shares
and  3,837,500  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 March 31, 1998.  Under both Plans,  the  exercise  price of each
option equals the market price of Industries'  stock on the date of grant.  Each
option  has a  maximum  term of ten  years  and  vests one year from the date of
grant.
 
     The stock  appreciation  rights (SARs) may be exercised only in tandem with
stock options on a one-for-one basis and are payable in cash, Industries' common
shares or a combination  thereof.  Restricted  stock awards are restricted as to
transfer and are subject to  forfeiture  for  specific  periods from the date of
grant.  Restrictions  on shares  awarded  in 1995  lapse five years from date of
grant and vesting is variable from 0% to 200% of the number awarded,  subject to
specific earnings per share and stock appreciation goals. Restrictions on shares
awarded  in 1997 and 1998  lapse two years  from  date of grant and  vesting  is
variable from 0% to 100% of the number awarded,  subject to specific performance
goals. If a participant's  employment is terminated  prior to vesting other than
by reason of death,  disability or retirement,  restricted shares are forfeited.
There were 558,666 and 542,666  restricted shares  outstanding at March 31, 1998
and December 31, 1997, respectively.

     The  Industries  Nonemployee  Director  Stock  Incentive  Plan,  which  was
approved  by  shareholders,  provides  for  the  issuance  of up to  200,000  of
Industries'  common  shares to  nonemployee  directors of  Industries.  The Plan
provides for awards of common shares which vest in 20% per year increments, with
full vesting  after five years.  The Plan also allows the award of  nonqualified
stock options. If a director's service on the Board is terminated for any reason
other than death or  disability,  any common shares not vested as of the date of
termination are forfeited.  As of April 8, 1998,  138,100 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 and $1.9 million for the three-month
and twelve-month periods ending March 31, 1998,  respectively.  Had compensation
cost for  non-qualified  stock options been determined  consistent with SFAS No.
123  "Accounting  for  Stock-Based  Compensation,"  Industries'  net  income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
                              Three Months            Twelve  Months
                              Ended March 31,          Ended March 31,
                            -----------------       -------------------
                             1998       1997           1998       1997
                            =======   =======       ========   ========
(Dollars in thousands, except per share data)
<S>                         <C>       <C>            <C>       <C>
Net Income:
 As reported                $ 60,722   $ 70,838      $ 180,733  $ 180,086
 Pro forma                    60,501     70,631        179,869    179,341

Earnings Per Average Common Share:
 Basic:
   As reported              $   0.49   $   0.59       $   1.44   $   1.48
   Pro forma                    0.49       0.59           1.43       1.48
 Diluted:
  As reported               $   0.48   $   0.59       $   1.43   $   1.48
   Pro forma                    0.48       0.59           1.43       1.47
</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  and  twelve-month  periods  ended March 31, 1998 and March 31,
1997:  risk-free  interest  rate of  6.29%  and  6.39%,  respectively;  expected
dividend yield per share of $0.87 and $0.84, respectively;  expected option term
of five  and  one-quarter  years  and five  years,  respectively;  and  expected
volatilities of 12.7% and 13.2%, respectively.

     Changes in outstanding shares under option and SARs for the three-month and
twelve-month periods ended March 31, 1998 and March 31, 1997 are as follows:
<TABLE>
<CAPTION>
                                                NONQUALIFIED STOCK OPTIONS
                                    ----------------------------------------------
                                                    Weighted              Weighted
                                                    Average               Average
                                                    Option                Option
Three Months Ended March 31,            1998        Price       1997       Price
============================          ==========    =======   ========    =======
<S>                                   <C>          <C>        <C>        <C>
Balance, beginning of period           2,535,400    $  16.41  2,360,900  $  15.33
 Granted                                       0                      0
 Exercised                              (200,800)      12.55    (53,100)    14.02
 Canceled                                      0               (23,700)     18.91
                                     -----------             ----------
Balance, end of period                 2,334,600       16.74  2,284,100     15.33
                                     ===========             ==========
Shares exercisable                     1,806,000       15.60  1,759,200     14.26
                                     ===========             ==========

 
                                                  NONQUALIFIED STOCK OPTIONS
                                      ---------------------------------------------
                                                    Weighted              Weighted
                                                    Average               Average
                                                    Option                Option
Twelve Months Ended March 31,           1998        Price      1997       Price
============================            ========     =======   ========    =======
Balance, beginning of period           2,284,100     $ 15.33  2,166,300    $ 14.30
 Granted                                 533,600       20.64    556,600      18.91
 Exercised                              (478,100)      14.28   (395,300)     14.45
 Canceled                                 (5,000)      20.64    (43,500)     18.12
                                      ----------              ---------
Balance, end of period                 2,334,600       16.74  2,284,100      15.33
                                      ==========              =========
Shares exercisable                     1,806,000       15.60  1,759,200      14.26
                                      ==========              =========
Weighted average fair value
 of options granted                      $  2.66               $   2.50
                                        ========               ========
<CAPTION>
                                           NONQUALIFIED STOCK OPTIONS WITH SARs
 
                                       ----------------------------------------------
                                                      Option                  Option
Three Months Ended March 31,             1998         Price       1997        Price
============================            ========     =======    ========     =======
Balance, beginning of period              11,200   $    5.47      11,200   $    5.47
 Exercised                                     0                       0
                                      ----------               ---------
Balance, end of period                    11,200        5.47      11,200        5.47
                                        ========                ========
Shares exercisable                        11,200        5.47      11,200        5.47
                                        ========                ========


                                            NONQUALIFIED STOCK OPTIONS WITH SARs
                                       --------------------------------------------
                                                     Option                  Option
Twelve Months Ended March 31,            1998         Price       1997        Price
============================            ========     =======    ========     =======
Balance, beginning of period              11,200   $    5.47      11,200   $    5.47
 Exercised                                     0                       0
                                      ----------               ---------
Balance, end of period                    11,200        5.47      11,200        5.47
                                        ========                ========
Shares exercisable                        11,200        5.47      11,200        5.47
                                        ========                ========
</TABLE>

     The  following  table  summarizes  information  about  non-qualified  stock
options at March 31, 1998:
<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING
 --------------------------------------------------------------------------------
                         Number            Weighted Average
   Range of           Outstanding at        Remaining         Weighted Average
  Option Price        March 31, 1998     Contractual Life     Option Price
=============         ===============     ===============     ===============
<S>                   <C>                <C>                     <C>
$ 5.47 to $ 8.97          102,200         1.79 years              $ 8.29
$11.47 to $15.16          594,600         5.21 years              $13.41
$16.22 to $20.64        1,637,800         7.96 years              $18.48
----------------     ------------       ------------           ----------
$5.47 to $20.64         2,334,600         6.99 years              $16.74
                      ===========
<CAPTION>
                                             OPTIONS EXERCISABLE
--------------------------------------------------------------------------------
                                 Number
   Range of                 Exercisable at     Weighted Average
  Option Price              March 31, 1998       Option Price
=============               ===============    ==============
$ 5.47 to $ 8.97              102,200                $ 8.29
$11.47 to $15.16              594,600                $13.41
$16.22 to $18.91            1,109,200                $17.45
----------------           ----------               -------
$  5.47 to $18.91           1,806,000                $15.60
                           ==========
</TABLE>

     (19) Long-Term  Debt: At March 31, 1998 and December 31, 1997,  Industries'
outstanding  long-term debt,  excluding  amounts due within one year, issued and
not retired or canceled was as follows:
<TABLE>
<CAPTION>
                                                             March 31,   December 31,
(Dollars in thousands)                                        1998            1997
                                                            ==========     ==========
<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 May 1, 2001 and September 1, 2025                $ 187,100      $ 187,100

Pollution control notes and bonds-
 Interest rates between 3.58% and 5.70% with a weighted
  average interest rate of 4.07% and various maturities
  between October 1, 2003 and April 1, 2019                   241,000        241,000

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

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

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

Notes payable -
 Interest rates between 6.31% and 9.00% with a weighted
  average interest rate of 7.34% and various maturities
  between August 31, 1999 and January 1, 2008                  42,944         40,229

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

Unamortized premium and discount on long-term debt, net        (3,908)        (4,029)
                                                            ----------    ----------
    Total long-term debt, excluding amounts due in one year $1,670,761    $1,667,925
                                                             =========    ==========
</TABLE>

     The sinking fund  requirements  of long-term debt  outstanding at March 31,
1998 (including the maturity of Northern Indiana's first mortgage bonds:  Series
T, 7.50%, due April 1, 2002; Northern Indiana's medium-term notes due from March
20, 2000 to March 31, 2003;  NDC Douglas  Properties,  Inc.'s notes  payable due
December 22, 1999 thru  January 29, 2003;  IWC's first  mortgage  bonds:  Series
5.20%,  due May 1, 2001 and Series  8.00%,  due December  15,  2001;  and IWCR's
senior notes payable,  due March 15, 2001), for each of the twelve-month periods
subsequent to March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
===========================
<S>                <C>
2000                $  14,661,785
2001                  172,120,004
2002                   39,584,457
2003                   84,625,802
</TABLE>

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

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

     On May 28, 1997,  Northern  Indiana was  authorized to issue and sell up to
$217.7 million of its Medium-Term Notes, Series E, with various maturities,  for
purposes of refinancing  certain first mortgage bonds and medium-term  notes. As
of March 31, 1998,  $139.0 million of the medium-term notes had been issued with
various  interest rates and  maturities.  The proceeds from these issuances were
used to pay short-term debt incurred to redeem its First Mortgage Bonds,  Series
N, and to pay at maturity various issues of Medium-Term Notes, Series D.

     IWC's first mortgage bonds are secured by its utility plant.  Provisions of
trust  indentures  related  to the 8% Series  Bonds  require  annual  sinking 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.

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

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

     The  obligations  of Capital  Markets  are  subject to a Support  Agreement
between Industries and Capital Markets,  under which Industries has committed to
make payments of interest and principal on Capital  Markets'  obligations in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  creditors against
the stock and assets of Northern  Indiana which are owned by  Industries.  Under
the  terms of the  Support  Agreement,  in  addition  to the  cash  flow of cash
dividends paid to Industries by any of its consolidated subsidiaries, the assets
of  Industries,  other  than the  stock  and  assets of  Northern  Indiana,  are
available  as  recourse  for the  benefit of  Capital  Markets'  creditors.  The
carrying  value of the assets of  Industries,  other than the assets of Northern
Indiana,  reflected in the consolidated financial statements of Industries,  was
approximately $1.3 billion at March 31, 1998.

     (20) Current  Portion of Long-Term Debt: At March 31, 1998 and December 31,
1997,  Industries'  current portion of long-term debt due within one year was as
follows:
<TABLE>
<CAPTION>
                                                         March 31,          December 31,
(Dollars in thousands)                                     1998               1997
                                                         ===========         ==========
<S>                                                      <C>                 <C>
First Mortgage Bonds                                      $   14,509          $  14,509

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

Notes payable -
  Interest rates between 6.72% and 9.00% with a weighted
   average interest rate of 7.76% and maturities between
   August 31, 1998 and January 1, 1999                         4,720              3,612

Sinking funds due within one year                              1,500              1,500
                                                         -----------         ----------
   Total current portion of long-term debt                $   55,729          $  54,621
                                                         ===========          =========
</TABLE>

     (21) Short-Term  Borrowings:  Northern Indiana and Capital Markets make use
of commercial paper to fund short-term working capital requirements. As of March
31, 1998 and  December 31, 1997,  Northern  Indiana had $18.5  million and $71.5
million of commercial paper  outstanding,  respectively.  At March 31, 1998, the
interest rate of commercial  paper  outstanding  was 5.60%. As of March 31, 1998
and  December 31, 1997 Capital  Markets had $30.0  million and $17.0  million of
commercial paper  outstanding.  At March 31, 1998, the weighted average interest
rate of commercial paper outstanding was 5.76%.

     Northern Indiana has a $250 million revolving Credit Agreement with several
banks which  terminates  August 19, 1999.  As of March 31,  1998,  there were no
borrowings outstanding under this agreement.  In addition,  Northern Indiana has
$14.2 million in lines of credit which run to May 31, 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 March 31, 1998,  there
were no borrowings  under these lines of credit.  The Credit Agreement and lines
of credit are also available to support the issuance of commercial paper.

     Northern  Indiana also has $273.5  million of money market lines of credit.
As of March 31, 1998 there were no  borrowings  under these lines of credit.  At
December 31, 1997, there was $47.5 million of borrowings outstanding under these
lines of credit.

     Northern Indiana has a $50 million uncommitted  finance facility.  At March
31, 1998, there were no borrowings outstanding under this facility.

     Capital Markets has a $150 million  revolving  Credit  Agreement which will
terminate  August  19,  1999.  This  facility  provides   short-term   financing
flexibility  to  Industries  and also  serves as the  back-up  instrument  for a
commercial  paper  program.  As of March  31,  1998,  there  were no  borrowings
outstanding under this agreement.

     Capital  Markets also has $130 million of money market lines of credit.  As
of March 31, 1998 and  December  31,  1997,  $28.0  million  and $20.1  million,
respectively, of borrowings were outstanding under these lines of credit.

     IWCR and its subsidiaries had lines of credit with banks  aggregating $78.7
million.  As of March 31, 1998 and December 31,  1997,  $60.1  million and $48.9
million  of   borrowings   were   outstanding   under  these  lines  of  credit,
respectively.

     At March 31, 1998 and December 31, 1997,  Industries' short-term borrowings
were as follows:
<TABLE>
<CAPTION>
                                      March 31,       December 31,
(In thousands)                          1998             1997
                                      ===========      ===========
 <S>                                 <C>               <C>
  Commercial paper                    $    48,500      $    88,500
  Notes payable                            94,302          116,469
  Revolving loan facility                       0            7,670
                                      -----------      -----------
   Total short-term borrowings         $  142,802       $  212,639
                                      ===========      ===========
</TABLE>

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

     The following is a schedule,  by years, of future minimum rental  payments,
excluding those to associated  companies,  required under operating  leases that
have initial or remaining  noncancelable lease terms in excess of one year as of
March 31, 1998:
<TABLE>
<CAPTION>
  Twelve Months Ended March 31,
======================================
<S>                                  <C>
(In thousands)
   1999                              $ 15,959
   2000                                13,600
   2001                                13,343
   2002                                13,334
   2003                                49,796
   Later years                         80,081
                                    ---------
Total minimum payments required      $186,113
                                    =========
</TABLE>
     The  consolidated  financial  statements  include  rental  expense  for all
operating leases as follows:
<TABLE>
<CAPTION>
                            March 31,       March 31,
(In thousands)              1998              1997
                          ==========      ==========
<S>                       <C>             <C>
Three months ended          $  4,949        $ 2,248
Twelve months ended           11,540          8,338
</TABLE>

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

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

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

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

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

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

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

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

     CE has entered into a fifteen-year  service agreement with Inland Steel and
the Indiana Harbor Coke Company,  LP (Harbor Coke), a subsidiary of Sun Company,
Inc.  This  agreement  provides  that CE will  utilize a new energy  facility at
Inland  Steel's  Indiana Harbor Works to scrub flue gases and recover waste heat
from the coke  facility  being  constructed  by Harbor Coke and produce  process
steam and electricity  from the recovered heat which will be delivered to Inland
Steel.  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 June 1998.

     Primary has advanced  approximately $128 million and $107 million, at March
31,  1998 and  December  31,  1997,  respectively,  to the lessors of the energy
related  projects  discussed  above.  These net  advances are included in "Other
Receivable" in the  Consolidated  Balance Sheet and as a component of operating
activities in the Consolidated Statement of Cash Flows.

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

     (25)  Fair  Value of  Financial  Instruments:  The  following  methods  and
assumptions  were used to  estimate  the fair value of each  class of  financial
instruments for which it is practicable to estimate that value:

     Cash and cash  equivalents:  The carrying  amount  approximates  fair value
because of the short maturity of those instruments.

     Investments:  The fair  value of 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>
                                       March 31, 1998             December 31, 1997
                              ----------------------------    ------------------------
                                Carrying      Estimated      Carrying      Estimated
(In thousands)                   Amount       Fair Value      Amount       Fair Value
                                ========      =========      =========     ==========
<S>                            <C>            <C>            <C>           <C>
Cash and cash equivalents       $ 40,376      $  40,376      $  30,780     $   30,780
Investments                       34,771         34,068         32,625         32,886
Long-term debt (including
 current portion)              1,726,490      1,759,879      1,722,546      1,718,897
Preferred stock                  146,288        135,732        146,289        139,814

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

     (26)  Customer  Concentrations:  Industries'  utility  subsidiaries  supply
natural gas,  electric  energy and water.  Natural gas and  electric  energy are
supplied  to  the  northern  third  of  Indiana.   The  water   utilities  serve
Indianapolis,  Indiana and surrounding areas. Although the Energy Utilities have
a  diversified  base of  residential  and  commercial  customers,  a substantial
portion of their electric and gas  industrial  deliveries are dependent upon the
basic steel  industry.  The basic steel industry  accounted for 2% and 4% of gas
revenue (including  transportation services) and 19% and 22% of electric revenue
for the twelve months ended March 31, 1998 and March 31, 1997, respectively.

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

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

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

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

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

<TABLE>
<CAPTION>

(In thousands)                                                                    Other
For the three months ended March 31, 1998                               Gas     Products
                                      Gas      Electric     Water    Marketing & Services Adjustments   Total
<S>                                 <C>        <C>         <C>       <C>        <C>       <C>        <C>
Operating revenues                   $242,735   $323,834   $ 17,709   $174,866  $ 53,875  $ (33,675)    $ 779,344
Other Income (Deductions)             $   606   $     89    $ (111)    $  517    $ 7,250   $     97      $  8,448
Depreciation and amortization       $  18,714   $ 38,768   $  2,793    $   66    $ 2,880   $     53     $  63,274
Income before Interest and Other
   Charges and Income Taxes         $  48,728   $ 73,760   $  3,674    $  133    $ 2,537   $ (3,270)    $ 125,562
Assets                               $903,257 $2,515,774   $568,453   $88,156 $1,435,329  $(610,477) $4,900,492

(In thousands)                                                                    Other
For the three months ended March 31, 1997                               Gas      Products
                                      Gas      Electric     Water    Marketing & Services Adjustments   Total
Operating revenues                   $333,401   $260,657      $ 0    $ 88,786    $ 25,339  $(48,233)    $ 659,950
Other Income (Deductions)              $  385      $ 204      $ 0      $  794     $ 8,076    $  (56)    $   9,403
Depreciation and amortization         $17,858   $ 38,282      $ 0      $   14     $ 2,140    $   50     $  58,344
Income before Interest and Other
  Charges and Income Taxes          $  59,000   $ 69,896      $ 0     $ 3,372     $ 7,052   $(1,331)    $ 137,989
Assets                               $960,226 $2,573,497 $517,592     $50,685  $1,065,418 $(256,845)   $4,910,573


(In thousands)                                                                    Other
For the twelve months ended March 31, 1998                             Gas      Products
                                      Gas     Electric     Water    Marketing  &Services  Adjustments    Total
Operating revenues                 $716,574 $1,249,508  $ 78,571     $567,066  $240,501    $(146,285)   $2,705,935
Other Income (Deductions)           $ 1,008     $  519   $ 1,354      $ 2,989   $ 9,208       $ (265)     $ 14,813
Depreciation and amortization       $73,703  $ 154,331   $11,033      $   284   $15,179       $  204     $ 254,734
Income before Interest and Other
  Charges and Income Taxes         $ 78,643  $ 316,105  $ 23,885      $ 4,105   $ 6,614     $(15,458)     $413,894
Assets                             $903,257 $2,515,774  $568,453      $88,156$1,435,329    $(610,477)   $4,900,492


(In thousands)                                                                   Other
For the twelve months ended March 31, 1997                             Gas     Products
                                      Gas     Electric     Water    Marketing  &Services  Adjustments    Total
Operating revenues                 $805,191 $1,034,464     $   0     $244,414  $ 94,550     $(146,142 ) $2,032,477
Other Income (Deductions)            $  756   $  1,046     $   0      $ 2,958  $ 15,226       $ 1,170     $ 21,156
Depreciation and amortization       $69,368  $ 148,343     $   0       $   42   $17,986        $  172     $235,911
Income before Interest and Other
  Charges and  Income Taxes         $85,796  $ 305,138     $   0      $11,292   $ 3,377       $(5,615)    $399,988
Assets                             $960,226 $2,573,497  $517,592      $50,685$1,065,418     $(256,845 ) $4,910,573

</TABLE>

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

Results of Operations

Holding Company -

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

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

     On March 25, 1997,  Industries  acquired IWC Resources  Corporation (IWCR).
IWCR's subsidiaries  include two regulated water utilities (IWC and Harbour) and
five  non-utility  companies  providing  utility-related  products  and services
including  installation,  repair and  maintenance of  underground  pipelines and
utility line locating and marking. The two primary non-utility  subsidiaries are
Miller and SM&P.  Industries  results  of  operations  include  three and twelve
months of  operating  results  from IWCR for the  three-month  and  twelve-month
periods ended March 31, 1998.  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  March 31,  1998
increased  $673.5 million as compared to the twelve months ended March 31, 1997.
The increase  includes  $200.7  million  reflecting  twelve  months of operating
revenues  from  IWCR for the  period.  Gas  revenues  decreased  $88.6  million,
electric revenues  increased $215.0 million and Products and Services  revenues,
excluding  IWCR,  increased  $346.3  million,  as compared to the same period in
1997.  The decrease in gas revenues was largely  attributable  to decreased  gas
costs  per  dekatherm  (dth),  decreased  sales to  residential  and  commercial
customers  due to  unusually  warm  weather  during  the first  quarter of 1998,
decreased sales to industrial customers and decreased gas transition costs which
were partially offset by increased  wholesale sales and increased  deliveries of
gas transported for others.  The increase in electric revenues was mainly due to
increased  wholesale electric marketing  activities and wholesale  transactions,
and increased sales to residential and commercial customers which were partially
offset by decreased  fuel costs per kilowatt hour (kwh) and  decreased  sales to
industrial  customers.  Increased  volumes in gas  marketing to existing and new
customers  resulted in an increase of $344.5  million in Products  and  Services
revenues for the twelve-month period ended March 31, 1998. For the twelve months
ended  March 31,  1998,  volumes in gas  marketing  were 193.1  million  dth, an
increase of 125.7 million dth over the same period in 1997.

     Total  operating  revenues  for the  three  months  ended  March  31,  1998
increased  $119.4  million as compared to the three months ended March 31, 1997.
The  increase  includes  $41.0  million  reflecting  three  months of  operating
revenues from IWCR for the current period. Gas revenues decreased $90.7 million,
electric  revenues  increased $63.2 million and Products and Services  revenues,
excluding IWCR,  increased  $105.9 million  compared to the same period in 1997.
The  decrease in gas  revenues  was mainly due to  decreased  gas costs per dth,
decreased  sales to residential  and commercial  customers due to unusually warm
weather  during  the  first  quarter  of 1998,  decreased  sales  to  industrial
customers and  decreased gas  transition  costs which were  partially  offset by
increased sales to wholesale  customers.  The increase in electric  revenues was
mainly due to increased  wholesale electric  marketing  activities and wholesale
transactions  which  were  partially  offset by  decreased  sales to  industrial
customers and decreased fuel costs per kwh.  Increased  volumes in gas marketing
resulted in an increase of $105.5 million in Products and Services  revenues for
the  three-month  period ended March 31, 1998.  For the three months ended March
31,  1998,  gas  marketing  volumes  were 68.1  million dth, an increase of 44.4
million dth compared to the three months ended March 31, 1997.

     The  basic  steel  industry  accounted  for 31% of  natural  gas  delivered
(including  volumes  transported)  and 32% of  electric  sales  for  the  Energy
Utilities during the twelve months ended March 31, 1998.

     The components of the variations in gas,  electric,  water and Products and
Services revenues are shown in the following table:
<TABLE>
<CAPTION>
                                         Variations from Prior Periods
                   ---------------------------------------------------------------------
                                   March 31,  1998  Compared  to March 31, 1997
                   ---------------------------------------------------------------------
                                            Three                   Twelve
(In thousands)                              Months                  Months
                                           =======                 =======
<S>                                     <C>                        <C>
Gas Revenue -
  Pass through of net changes in
    purchased gas costs, gas storage,
    and storage transportation costs      $ (44,453)               $ (55,177)
  Gas transition costs                       (7,483)                 (13,195)
  Changes in sales levels                   (39,719)                 (24,712)
  Gas transported                               990                    4,467
                                        -----------               -----------
Gas Revenue Change                         (90,665)                   (88,617)
                                        -----------               -----------
Electric Revenue  -
  Pass through of net changes
     in fuel costs                           (4,960)                   (3,339)
  Changes in sales levels                      (678)                   (4,847)
  Wholesale electric marketing                68,815                  223,229
                                         -----------               ------------
Electric Revenue Change                       63,177                  215,043
                                         -----------               ------------
Water Revenue Change                          17,709                   78,452
                                         -----------              ------------
Products and Services Revenues -
  Gas marketing                              105,529                  344,474
  Pipeline construction                       11,151                   58,326
  Locate and marking                          11,286                   59,640
  Other                                         1,207                   6,140
                                        ------------               ------------
Products and Services Revenue Change         129,173                  468,580
                                        ------------               ------------
   Total Revenue Change                    $ 119,394                $ 673,458
                                         ===========               ============
</TABLE>

     See Note 6 to Notes to  Consolidated  Financial  Statements  regarding FERC
Order No. 636 transition costs.

Gas Costs -

     The Energy  Utilities' gas costs  decreased $76.4 million and $80.5 million
for the three-month and twelve-month periods ended March 31, 1998, respectively.
Gas  costs  decreased  for  the  three-month  and  twelve-month  periods  due to
decreased  gas  purchases,  decreased  gas  costs  per  dth  and  decreased  gas
transition costs. The average cost for the Energy  Utilities'  purchased gas for
the three-month and twelve-month  periods ended March 31, 1998, after adjustment
for gas transition costs billed to transport customers,  was $2.60 and $2.90 per
dth,  respectively,  as compared to $3.45 and $3.19 per dth for the same periods
in 1997.

Fuel and Purchased Power -

     The cost of fuel for  electric  generation  increased  $1.3 million for the
twelve-month period ended March 31, 1998,  compared to the 1997 periods,  mainly
as a  result  of  increased  production  of  electricity.  The  cost of fuel for
electric generation  decreased $2.8 million for the three months ended March 31,
1998  compared  to the  three  months  ended  March  31,  1997 due to  decreased
production of electricity.

     Power  purchased  increased  $66.6  million  and  $205.9  million  for  the
three-month  and  twelve-month  periods  ended  March  31,  1998,  respectively,
reflecting increased purchases of wholesale power for marketing activities which
were partially offset by decreased bulk power purchases at Northern Indiana. For
the twelve months ended March 31, 1998,  electric power marketing purchases were
10.7  million kwh, an increase of 9.8 million kwh compared to the same period in
1997. Electric power marketing purchases increased 2.8 million kwh for the three
months ended March 31, 1998 compared to March 31, 1997.

Cost of Products and Services -

     The cost of sales for Products and Services  increased  $433.9  million for
the twelve  months ended March 31, 1998.  The increase  includes  $85.0  million
reflecting  twelve  months of cost of sales from IWCR for the period.  Increased
volumes in gas marketing  activities  increased cost of sales $321.2 million for
the twelve-months ended March 31, 1998, compared to March 31, 1997.

     The cost of sales for Products and Services  increased  $125.6  million for
the three-months ended March 31, 1998, compared to the 1997 period. The increase
includes  $17.9  million  related  to the cost of sales for IWCR in the  current
period.  Increased volumes in gas marketing  activities  increased cost of sales
$109.4 million for the three months ended March 31, 1998,  compared to March 31,
1997.

Operating Margins -

     Operating  margins for the twelve  months  ended  March 31, 1998  increased
$112.8  million  from the same  period a year ago.  The  increase  in  operating
margins  includes  $115.7 million related to twelve months of IWCR operations in
the period. The operating margin from gas deliveries  decreased $8.1 million due
to decreased sales to residential and commercial  customers reflecting unusually
warm weather in the first quarter of 1998 and decreased  industrial  sales which
were  partially  offset by  increased  sales to  wholesale  customers.  Electric
operating  margin  increased  $7.8 million due to increased  sales to commercial
customers  and  increased  wholesale  transactions.  The  operating  margin  for
Products and Services,  excluding IWCR, decreased $2.9 million, primarily from a
decrease in gas marketing  margin offset by an increase in operating margin from
the LEC and Portside operations.

     Operating  margins for the three months ended March 31, 1998 increased $6.5
million  from the same  period a year ago.  The  increase in  operating  margins
includes $23.1 million related to three months of IWCR operations in the current
period.  Gas operating  margin decreased $14.3 million due to decreased sales to
residential and commercial  customers  reflecting  unusually mild weather during
the  period  and  decreased  industrial  sales,  partially  offset by  increased
wholesale  sales and gas  transported  for  others.  Electric  operating  margin
increased $2.5 million mainly as a result of increased  wholesale  transactions.
The operating margin for Products and Services,  excluding IWCR,  decreased $1.8
million, primarily reflecting a decrease in gas marketing margin.

Operating Expenses and Taxes -

     Operation  expenses  increased  $60.6 million for the  twelve-month  period
ended March 31, 1998.  Operation  expense  includes an increase of $62.4 million
reflecting operations of IWCR in the current twelve-month period. New operations
at LEC and Portside increased  operation expenses  approximately  $10.8 million.
This  increase  was  offset by  decreased  environmental  cleanup  costs of $4.2
million,  decreased  employee  costs of $3.8  million  and  decreased  pollution
control facility costs of $2.2 million at Northern Indiana.  Operation expenses,
excluding IWCR, for the three-month  period ended March 31, 1998 decreased $11.6
million. Employee costs at Northern Indiana decreased $4.3 million for the three
months ended March 31, 1998 compared to the same period in 1997.

     Maintenance  expenses  increased $3.1 million for the  twelve-month  period
ended  March 31,  1998,  mainly  reflecting  maintenance  expenses  of the Water
Utilities.  Maintenance  expenses  decreased  $0.5  million for the  three-month
period ended March 31, 1998.

     Depreciation  and  amortization  expense  increased  $4.9 million and $18.8
million for the  three-month  and  twelve-month  periods  ended March 31,  1998,
respectively, primarily reflecting depreciation and amortization at IWCR.

Other Income (Deductions) -

     Other  Income  (Deductions)  decreased  $6.3  million  due  to  a  loss  on
disposition of property during the twelve months ended March 31, 1998 and a gain
on the disposition of property during the same period a year ago.

Interest and Other Charges -

     Interest and other charges  increased for the three-month and  twelve-month
periods ended March 31, 1998  reflecting the issuance of $300 million of Capital
Markets'  medium-term notes, $75 million of Capital Markets' Junior Subordinated
Deferrable Interest Debentures, Series A and interest expense at IWCR.

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

Net Income -

     Industries' net income for the twelve-month period ended March 31, 1998 was
$180.7  million  compared to $180.1  million for the  twelve-month  period ended
March 31, 1997.

     Net income for the three  months  ended  March 31,  1998 was $60.7  million
compared to $70.8 million for the three months ended March 31, 1997.

Environmental Matters -

     The  Utilities  have an  ongoing  program  to  remain  aware  of  laws  and
regulations involved with hazardous waste and other environmental matters. It is
the Utilities'  intent to continue to evaluate  their  facilities and properties
with respect to these rules and identify any sites that would require corrective
action.  The Utilities have recorded a reserve of  approximately  $20 million to
cover probable corrective actions as of March 31, 1998;  however,  environmental
regulations  and  remediation  techniques  are  subject  to future  change.  The
ultimate  cost  could be  significant,  depending  on the  extent of  corrective
actions required.  Based upon  investigations and management's  understanding of
current laws and regulations,  the Utilities believe that any corrective actions
required,  after  consideration of insurance  coverages and  contributions  from
other potentially responsible parties, will not have a significant impact on the
results of operations or financial position of Industries.

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

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

Liquidity and Capital Resources -

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

     Cash flow from operations has provided sufficient liquidity to meet current
operating  requirements.  Because of the seasonal nature of the utility business
and the  construction  program,  Northern  Indiana makes use of commercial paper
intermittently  as short-term  financing.  As of March 31, 1998 and December 31,
1997,  Northern  Indiana had $18.5 million and $71.5 million of commercial paper
outstanding,  respectively.  At March 31, 1998,  the interest rate of commercial
paper outstanding was 5.60%.

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

     Northern  Indiana also has $273.5  million of money market lines of credit.
As of March 31, 1998 there were no  borrowing  outstanding  under these lines of
credit.

     Northern Indiana has a $50 million uncommitted  finance facility.  At March
31, 1998, there were no borrowings outstanding under this facility.

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

     As of March 31,  1998 and  December  31,  1997,  Capital  Markets had $30.0
million and $17.0 million of commercial  paper  outstanding.  At March 31, 1998,
the weighted average interest rate of commercial paper outstanding was 5.76%.

     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 March  31,  1998,  there  were no  borrowings
outstanding under this agreement.
 
     Capital  Markets also has $130 million of money market lines of credit.  As
of March 31, 1998 and  December  31,  1997,  $28.0  million  and $20.1  million,
respectively, of borrowings were outstanding under these lines of credit.

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

     The  obligations  of Capital  Markets  are  subject to a Support  Agreement
between Industries and Capital Markets,  under which Industries has committed to
make payments of interest and principal on Capital  Markets'  obligations in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  creditors against
the stock and assets of Northern  Indiana which are owned by  Industries.  Under
the  terms of the  Support  Agreement,  in  addition  to the  cash  flow of cash
dividends paid to Industries by any of its consolidated subsidiaries, the assets
of  Industries,  other  than the  stock  and  assets of  Northern  Indiana,  are
available  as  recourse  for the  benefit of  Capital  Markets'  creditors.  The
carrying  value of the assets of  Industries,  other than the assets of Northern
Indiana,  reflected in the consolidated financial statements of Industries,  was
approximately $1.3 billion at March 31, 1998.

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

     IWCR and its subsidiaries had lines of credit with banks  aggregating $78.7
million.  At March 31, 1998, $60.1 million of borrowings were outstanding  under
these lines of credit.

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

Year 2000 Costs-

     Industries  has several major projects  underway to modify  portions of its
systems  for proper  functioning  in the year 2000.  These  include a project to
evaluate  Industries'  proprietary software and to work with each of Industries'
software vendors to assure that appropriate steps are being take to mitigate the
problem in each vendor's  software or, in some cases,  to replace  software with
year 2000  compliant  software;  a project to identify and mitigate any problems
wherever  they exist in  Industries'  systems  ranging  from  equipment  used in
Northern  Indiana's  generating  stations to Industries'  phone system that have
date information  within them; and an initiative to assure that each entity that
electronically  receives  information  from  Industries or sends  information to
Industries  is aware of the  steps  that  Industries  is  taking  and is  taking
appropriate  steps of its own to address the problem.  Consistent with its plan,
Industries  expects to be year 2000  compliant with some systems as early as the
third quarter 1998 and other systems no later than the third quarter of 1999.

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

Competition -

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

     In January 1997 and January 1998, legislation was introduced in the Indiana
General  Assembly  addressing  electric  utility  competition and  deregulation.
Neither proposed legislation was adopted. Northern Indiana has begun discussions
with other  utilities  and its largest  customers on the  technical and economic
aspects of possible legislation to allow customer choice.
 
     Operating  in a  competitive  environment  will place  added  pressures  on
utility  profit  margins  and  credit  quality.  Increasing  competition  in the
electric  utility  industry has already led the credit rating  agencies to apply
more stringent guidelines in making credit rating determinations.

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

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

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

     On October 8, 1997, the Commission approved Northern Indiana's  Alternative
Regulatory  Plan (ARP) which  implements  new rates and services  that  include,
among other  things,  further  unbundling  of services for  additional  customer
classes, increased customer choice for sources of natural gas supply, negotiated
services and prices,  an gas cost  incentive  mechanism  and a price  protection
program.  The gas cost incentive  mechanism,  which gives  Northern  Indiana the
opportunity  to share any gas cost savings (or losses) with its customers  based
on a comparison of Northern  Indiana's  actual gas supply  portfolio  costs to a
market based  benchmark  price,  went into effect on Northern  Indiana's  system
November 1, 1997.  The first pilot  program was launched in January 1998 and the
first gas volumes flowed under this program in April 1998. The Commission  order
allows the natural gas marketing affiliate of Northern Indiana to participate as
a supplier of choice to customers on the Northern Indiana system.

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

Forward Looking Statements -

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

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

     Although the Energy  Utilities are subject to commodity  price risk as part
of their traditional  operations,  the current regulatory framework within which
the Energy Utilities operate allows for full collection of fuel and gas costs in
rate-making.   Consequently,   there  is  limited  commodity  price  risk  after
consideration  of the related  rate-making.  However,  as the  utility  industry
deregulates,  Energy Utilities will be providing services without the benefit of
the  traditional  rate-making  allowances  and will therefore be more exposed to
commodity price risk.
 
     Because the  commodities  covered by Industries'  derivative  financial and
commodity  instruments are  substantially  the same  commodities that Industries
buys and sells in the physical market, no special correlation studies are deemed
necessary other than monitoring the degree of convergence between the derivative
and cash markets.

     Industries'   daily  net  commodity   position   consists  of  natural  gas
inventories, commodity purchase and sales contracts and derivative financial and
commodity  instruments.  The fair value of such  positions is a summation of the
fair values calculated for each commodity by valuing each net position at quotes
from  exchanges  and  over-the-counter   counterparties  and  includes  location
differentials.  Based on  Industries'  net  commodity  position at fair value at
March 31, 1998, a 10% adverse movement in electric and natural gas market prices
would have reduced net income by approximately $0.8 million.  However,  any such
movements  in prices is not  indicative  of actual  results  and is  subject  to
change. Refer to Summary of Significant Accounting  Policies-Hedging  Activities
for further discussion of Industries' hedging policies.

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

<PAGE>
                                                     PART II.
                                                 OTHER INFORMATION

Item 1.   Legal Proceedings.

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

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

Item 3.  Defaults Upon Senior Securities.
         None

     Item 4.  Submission of Matters to a Vote of Security  Holders.  On April 8,
1998, at the Annual Meeting of Shareholders  of the Registrant,  shareholders of
the Registrant elected Steven C. Beering,  James T. Morris, Denis E. Ribordy and
Carolyn  Y.  Woo as  directors  to  serve  until  the  2001  Annual  Meeting  of
Shareholders.  Carolyn Y. Woo was elected to replace  Ernestine M.  Raclin,  who
retired  at the  expiration  of her  term.  Directors  whose  term of  office as
director  continue  after the 1998  Annual  Meeting of  Shareholders  are Ian M.
Rolland, Edmund A. Schroer and John W. Thompson,  whose terms expire at the 1999
Annual Meeting of Shareholders, and Arthur J. Decio, Gary L. Neale and Robert J.
Welsh, whose terms expire at the 2000 Annual Meeting of Shareholders.

     There were no abstentions  or broker  non-votes for any of the nominees for
directors.  The number of vostes cast for,  or  withheld,  for each  nominee for
director was as follows:

<TABLE>
<CAPTION>

                                    Votes          Votes
                                   Received       Withheld
<S>        <C>                  <C>               <C>
           Steven C. Beering     101,325,618      1,223,579
           James T. Morris       101,410,235      1,138,962
           Denis E. Ribordy      101,368,173      1,181,024
           Carolyn Y. Woo        101,230,143      1,319,053

</TABLE>

     Additionally  at the Annual Meeting of  Shareholders,  shareholders  of the
Registrant  approved an amendment to the Articles of  Incorporation  to increase
the number of authorized  Common Shares from  200,000,000  to  400,000,000.  The
number of votes cast for, or withheld, was as follows:

<TABLE>
<CAPTION>

                              Votes                 Votes               Votes
                               For                Against              Abstain
<S>                       <C>                    <C>                  <C>
                           98,201,052             3,487,304            860,840
</TABLE>

Item 5.  Other Information.
         None

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

               Exhibit 3(i) - Restated Articles of Incorporation

               Exhibit 23 - Consent of Arthur Andersen LLP
 
               Exhibit 27 - Financial Data Schedule

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

          (b)  Reports on Form 8-K.
 
     A report on Form 8-K was filed under the date of  February  13,  1998.  All
events were reported under Item 5, Other Events.


Signatures

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


                               NIPSCO Industries, Inc.

                                     (Registrant)

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



Date:  May 13, 1998