SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549


FORM 10-Q


X     Quarterly Report Pursuant to Section 13 or 15(d)
      of the Securities Exchange Act of 1934
 
      For the quarterly period ended June 30, 1997

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

      For the transition period from ________________ to ________________

Commission file number 1-9779

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


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


        5265 Hohman Avenue, Hammond, Indiana            46320-1775
        (Address of principal executive offices)        (Zip Code)


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

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

      As of July 31, 1997, 62,746,483 common shares were outstanding.


<PAGE>
NIPSCO INDUSTRIES, INC.

Part I.  FINANCIAL INFORMATION
Item I.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

     We have  audited  the  accompanying  consolidated  balance  sheet of NIPSCO
Industries,  Inc. (an Indiana corporation) and subsidiaries as of June 30, 1997,
and December 31, 1996, and the related consolidated statements of income, common
shareholders' equity and cash flows for the three, six, and twelve month periods
ended June 30, 1997 and 1996. These  consolidated  financial  statements are the
responsibility of Industries'  management.  Our  responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the  financial  position of NIPSCO
Industries,  Inc. and  subsidiaries  as of June 30, 1997, and December 31, 1996,
and the results of their operations and their cash flows for the three, six, and
twelve month periods ended June 30, 1997 and 1996, in conformity  with generally
accepted accounting principles.

                                           /s/  Arthur Andersen LLP

Chicago, Illinois
July 29, 1997





<PAGE>
<TABLE>

<CAPTION>
CONSOLIDATED BALANCE SHEET
                                                June 30,        December 31,
ASSETS                                            1997             1996
                                              =============     ============
                                                 (Dollars in thousands)
<S>                                           <C>               <C>    

PROPERTY, PLANT AND EQUIPMENT:
 Utility Plant, (Note 2)(including
   Construction Work in Progress of
    $169,983 and $166,812, respectively)
    Electric                                  $  4,077,005       $ 4,050,084
    Gas                                          1,365,216         1,344,230
    Common                                         350,680           346,636
    Water                                          548,321                 0
                                              ------------      ------------
                                                 6,341,222         5,740,950

    Less - Accumulated provision for
     depreciation and amortization               2,722,767         2,546,162
                                              ------------      ------------
      Total Utility Plant                        3,618,455         3,194,788
                                              ------------      ------------

 Other property, at cost, net of accumulated
  provision for depreciation                       142,611           147,370
                                              ------------      ------------
      Total Property, Plant and Equipment        3,761,066         3,342,158
                                              ------------      ------------
INVESTMENTS:
 Investments, at equity (Note 2)                    81,745            52,260
 Investments, at cost                               31,249            30,424
 Other investments                                  23,411            20,090
                                              ------------      ------------
      Total Investments                            136,405           102,774
                                              ------------      ------------

CURRENT ASSETS:
 Cash and cash equivalents                          29,391            26,333
 Accounts receivable, less reserve of
  $7,676 and $5,569, respectively (Note 2)         175,147           165,441
 Other receivables (Note 23)                       111,536            42,184
 Fuel adjustment clause (Note 2)                     8,257             9,149
 Gas cost adjustment clause (Note 2)                47,055           100,214
 Materials and supplies, at average cost            62,667            59,859
 Electric production fuel, at average cost          28,632            26,483
 Natural gas in storage (Note 2)                    35,127            65,093
 Prepayments and other                              29,850            28,491
                                              ------------      ------------
      Total Current Assets                         527,662           523,247
                                              ------------      ------------


OTHER ASSETS:
 Regulatory assets (Note 2)                        227,685           236,205
 Intangible assets (Note 2)                         86,023                 0
 Prepayments and other (Note 10)                   117,506            84,499
                                              ------------      ------------
      Total Other Assets                           431,214           320,704
                                              ------------      ------------
                                              $  4,856,347      $  4,288,883
                                              ============      ============

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


<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
                                                June 30,        December 31,
CAPITALIZATION AND LIABILITIES                    1997              1996
                                              ============      ============
                                                 (Dollars in thousands)
<S>                                           <C>               <C>
CAPITALIZATION:
 Common shareholders' equity
  (See accompanying statement)                $  1,258,417       $ 1,100,501
 Cumulative preferred stocks (Note 12) -
   Series without mandatory redemption
    provisions (Note 13)                            85,620            81,126
   Series with mandatory redemption
    provisions (Note 14)                            59,996            61,246
 Long-term debt excluding amounts due
  within one year (Note 18)                      1,608,345         1,127,106
                                              ------------      ------------
      Total Capitalization                       3,012,378         2,369,979
                                              ------------      ------------
CURRENT LIABILITIES:
 Current portion of long-term debt (Note 19)       189,796           144,552
 Short-term borrowings (Note 20)                   168,781           425,985
 Accounts payable                                  177,930           251,730
 Sinking funds due within one year
  (Notes 14 and 18)                                  3,328             3,328
 Dividends declared on common and
  preferred stocks                                  29,439            28,308
 Customer deposits                                  28,913            17,580
 Taxes accrued                                      91,236            78,723
 Interest accrued                                   15,405             7,557
 Accrued employment costs                           44,739            44,186
 Other accruals                                     49,572            30,054
                                              ------------      ------------
      Total Current Liabilities                    799,139         1,032,003
                                              ------------      ------------
OTHER:
 Deferred income taxes (Note 9)                    632,297           602,745
 Deferred investment tax credits, being
  amortized over life of related property
  (Note 9)                                         109,279           108,258
 Deferred credits                                   56,845            37,338
 Customer advances and contributions
    in aid of construction (Note 2)                103,012            15,830
 Accrued liability for postretirement
  benefits (Note 11)                               129,182           109,429
 Other noncurrent liabilities                       14,215            13,301
                                              ------------      ------------
      Total Other                                1,044,830           886,901
                                              ------------      ------------
COMMITMENTS AND CONTINGENCIES
 (Notes 3, 5, 6, 8, 21, 22 and 23)
                                              $  4,856,347      $  4,288,883
                                              ============      ============

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


<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
 
                                    Three Months              Six Months
                                   Ended June 30,            Ended June 30,
                              ----------------------     ----------------------
                                 1997        1996           1997        1996
                              ==========  ==========     ==========  ==========
                            (Dollars in thousands, except for per share amounts)
<S>                           <C>         <C>            <C>         <C>
Operating Revenues:
 (Notes 2, 7, and 25)
  Gas                         $  121,010  $  120,738     $  454,410  $  448,342
  Electric                       244,054     244,232        489,878     492,656
  Water                           18,795           0         18,795           0
  Products and Services          139,535      33,772        220,054      73,165
                              ----------  ----------     ----------  ----------
                                 523,394     398,742      1,183,137   1,014,163
                              ----------  ----------     ----------  ----------
Cost of Sales: (Note 2)
 Gas costs                        61,961      67,438        276,801     266,696
 Fuel for electric
  generation                      54,609      53,184        113,017     110,386
 Power purchased                  10,518      14,322         19,478      26,283
 Products and Services           113,795      17,900        179,109      41,153
                              ----------  ----------     ----------  ----------
                                 240,883     152,844        588,405     444,518
                              ----------  ----------     ----------  ----------
Operating Margin                 282,511     245,898        594,732     569,645
                              ----------  ----------     ----------  ----------
Operating Expenses and
 Taxes (except income):
  Operation                      108,200      81,400        191,884     170,648
  Maintenance (Note 2)            15,094      22,849         35,598      43,854
  Depreciation and
   amortization (Note 2)          64,414      58,710        122,759     115,136
  Taxes (except income)           20,291      17,587         41,600      38,593
                              ----------  ----------     ----------  ----------
                                 207,999     180,546        391,841     368,231
                              ----------  ----------     ----------  ----------
Operating Income                  74,512      65,352        202,891     201,414
                              ----------  ----------     ----------  ----------
Other Income (Deductions)
 (Note 2)                          3,897       2,228         10,885       2,185
                              ----------  ----------     ----------  ----------
Interest and Other Charges:
 Interest on long-term debt       28,814      21,899         49,609      43,368
 Other interest                    1,000       3,343          5,390       6,592
 Amortization of premium,
  reacquisition premium,
  discount and expense
  on debt, net                     1,200       1,167          2,333       2,326
 Dividend requirements on
  preferred stocks of
  subsidiaries                     2,179       2,178          4,346       4,377
                              ----------  ----------     ----------  ----------
Income before income taxes        45,216      38,993        152,098     146,936
                              ----------  ----------     ----------  ----------
Income taxes                      16,980      15,564         53,024      56,021
                              ----------  ----------     ----------  ----------
Net Income                        28,236      23,429         99,074      90,915

Dividend requirements on
 preferred shares                      0           0              0         119
                              ----------  ----------     ----------  ----------
Balance available for
 common shareholders          $   28,236  $   23,429     $   99,074  $   90,796
                              ==========  ==========     ==========  ==========
Average common shares
 outstanding                  62,827,620  61,234,350     61,202,013  61,649,509

Earnings per average
 common share                 $     0.44  $     0.38     $     1.61  $     1.47
                              ==========  ==========     ==========  ==========
Dividends declared per
 common share                 $     0.45  $     0.42     $     0.90  $     0.84
                              ==========  ==========     ==========  ==========


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




<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
 
                                     Twelve Months
                                     Ended June 30,
                                ----------------------
                                   1997        1996
                                ==========  ==========
(Dollars in thousands, except for per share amounts)
<S>                             <C>         <C>
Operating Revenues:
 (Notes 2, 7, and 25)
  Gas                           $  805,463  $  740,275
  Electric                       1,019,453   1,040,088
  Water                             18,795           0
  Products and Services            313,212     103,892
                                ----------  ----------
                                 2,156,923   1,884,255
                                ----------  ----------
Cost of Sales: (Note 2)
 Gas costs                         493,882     428,451
 Fuel for electric
  generation                       235,846     243,026
 Power purchased                    46,946      47,831
 Products and Services             239,196      46,090
                                ----------  ----------
                                 1,015,870     765,398
                                ----------  ----------
Operating Margin                 1,141,053   1,118,857
                                ----------  ----------
Operating Expenses and
 Taxes (except income):
  Operation                        358,055     350,405
  Maintenance (Note 2)              75,085      82,033
  Depreciation and
   amortization (Note 2)           241,617     219,315
  Taxes (except income)             78,511      74,894
                                ----------  ----------
                                   753,268     726,647
                                ----------  ----------
Operating Income                   387,785     392,210
                                ----------  ----------
Other Income (Deductions)
 (Note 2)                           20,687       4,415
                                ----------  ----------
Interest and Other Charges:
 Interest on long-term debt         91,623      84,914
 Other interest                     14,534      14,140
 Amortization of premium,
  reacquisition premium,
  discount and expense
  on debt, net                       4,613       4,625
 Dividend requirements on
  preferred stocks of
  subsidiaries                       8,681       8,833
                                ----------  ----------
Income before income taxes         289,021     284,113
                                ----------  ----------
Income taxes                       104,128     105,012
                                ----------  ----------
Net Income                         184,893     179,101

Dividend requirements on
 preferred shares                        0       1,651
                                ----------  ----------
Balance available for
 common shareholders            $  184,893  $  177,450
                                ==========  ==========
Average common shares
 outstanding                    60,967,583  62,219,569

Earnings per average
 common share                   $     3.03  $     2.85
                                ==========  ==========
Dividends declared per
 common share                   $     1.77  $     1.65
                                ==========  ==========

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



<PAGE>

<TABLE>

<CAPTION>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

                                        Dollars in Thousands
                         ----------------------------------------------------------------
                                                       Additional
                                            Common       Paid-in     Retained    Treasury
   Three Months Ended         Total         Shares       Capital     Earnings     Shares
========================   ===========   ===========   =========== ==========  ==========
<S>                        <C>           <C>           <C>         <C>         <C>
Balance, April 1, 1996     $ 1,126,350   $   870,930   $    32,541 $  560,401  $ (330,942)
Net income                      23,429                                 23,429
Dividends:
 Preferred shares
 Common shares                 (25,684)                               (25,684)
Treasury shares acquired        (9,548)                                            (9,548)
Issued:
 Employee stock purchase
  plan                             146                          84                     62
 Long-term incentive plan          675                          30                    755
 Amortization of
 unearned
  compensation                     574
Unrealized gain(loss) on
  available for sale
  securities                       258
Other                               28                          19        (70)
                           -----------   -----------   ----------- ----------  ----------
Balance, June 30, 1996     $ 1,116,228   $   870,930   $    32,674 $  558,076  $ (339,673)
                           ===========   ===========   =========== ==========  ==========

Balance, April 1, 1997     $ 1,297,116   $   870,930   $    88,118  $ 635,900 $  (295,980)
Net income                      28,236                                 28,236
Dividends:
 Preferred shares
 Common shares                 (29,962)                               (29,962)
Treasury shares acquired       (45,938)                                           (45,938)
Issued:
 IWC Resources acquisition        (130)                        (34)                   (96)
 Acquisition of minority
  interest                       5,469                       1,351                  4,118
 Employee stock purchase
  plan                             165                          98                     67
 Long-term incentive plan        1,343                          22                  1,413
Amortization of unearned
 compensation                      479
Unrealized gain (loss) on
 available for sale
 securities                      1,268
Other                              371                           1         (91)
                           -----------   -----------   ----------- ----------- ----------
Balance, June 30, 1997     $ 1,258,417   $   870,930   $    89,556 $   634,083 $ (336,416)
                           ===========   ===========   =========== =========== ==========

<CAPTION>
                             Dollars in Thousands             Shares
                           -------------------------   -------------------------
                            Currency
   Three Months Ended      Translation                   Common       Treasury
       (continued)         Adjustment      Other         Shares        Shares
========================   ===========   ===========   ===========  ============
<S>                        <C>           <C>           <C>          <C>
Balance, April 1, 1996     $    (2,070)  $    (4,510)   73,892,109   (12,503,363)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                                (266,067)
Issued:
 Employee stock purchase
  plan                                                                     3,920
 Long-term incentive plan                       (110)                     28,150
Amortization of unearned
 compensation                                    574
Unrealized gain (loss) on
  available for sale
  securities                                     258
Other                               79
                           -----------   -----------   -----------  ------------
Balance, June 30, 1996     $    (1,991)  $    (3,788)   73,892,109   (12,737,360)
                           ===========   ===========   ===========  ============

Balance, April 1, 1997     $      (501)  $    (1,351)   73,892,109   (10,181,876)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (1,159,751)
Issued:
 IWC Resources acquisition                                                (2,786)
 Acquisition of minority
   interest                                                              135,032
 Employee stock purchase
  plan                                                                     4,208
Long-term incentive plan                         (92)                     46,683
Amortization of unearned
 compensation                                    479
Unrealized gain (loss) on
 available for sale
 securities                                    1,268
Other                              461
                           -----------   -----------   -----------  ------------
Balance, June 30, 1997     $       (40)  $       304    73,892,109   (11,158,490)
                           ===========   ===========   ===========  ============

<CAPTION>
                                            Dollars in Thousands
                           ---------------------------------------------------------------
                                                       Additional
                                           Common       Paid-in       Retained    Treasury
  Six Months Ended            Total        Shares       Capital       Earnings     Shares
========================   ===========   ===========  ===========  ===========  ==========
<S>                        <C>           <C>          <C>           <C>         <C>
Balance, January 1, 1996   $ 1,122,215   $   870,930  $    32,210   $  518,837  $ (293,223)
Net income                      90,915                                  90,915
Dividends:
 Preferred shares                 (119)                                  (119)
 Common shares                 (51,478)                               (51,478)
Treasury shares acquired       (48,036)                                            (48,036)
Issued:
 Employee stock purchase
  plan                             449                        261                      188
 Long-term incentive plan        1,010                        184                    1,398
Amortization of unearned
  compensation                   1,188
Unrealized gain (loss) on
  available for sale
  securities                       205
Other                             (121)                        19         (79)
                           -----------   -----------   ----------  -----------  ----------
Balance, June 30, 1996     $ 1,116,228   $   870,930   $   32,674  $   558,076  $ (339,673)
                           ===========   ===========  ===========  ===========  ==========

Balance, January 1, 1997   $ 1,100,501   $   870,930   $   32,868   $  591,370  $ (392,995)
Net income                      99,074                                  99,074
Dividends:
 Preferred shares                    0                                       0
 Common shares                 (56,235)                                (56,235)
Treasury shares acquired      (102,529)                                           (102,529)
Issued:
 IWC Resources acquisition     207,422                     55,009                  152,413
 Acquisition of minority
  interest                       5,469                      1,351                    4,118
 Employee stock purchase
  plan                             353                        211                      142
 Long-term incentive plan        2,108                        116                    2,435
Amortization of unearned
 compensation                      982
Unrealized gain (loss) on
 available for sale
 securities                      1,297
Other                              (25)                         1         (126)
                           -----------   -----------   ----------  -----------  ----------
Balance, June 30, 1997     $ 1,258,417   $   870,930   $   89,556   $  634,083  $ (336,416)
                           ===========   ===========   ==========  ===========  ==========

<CAPTION>
                             Dollars in Thousands              Shares
                           ------------------------   --------------------------
                            Currency
 Six Months Ended          Translation                   Common        Treasury
    (continued)             Adjustment      Other        Shares         Shares
========================   ===========   ==========   ===========   ============
<S>                        <C>           <C>          <C>           <C>
Balance, January 1, 1996   $    (1,930)  $   (4,609)   73,892,109    (11,512,513)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (1,289,744)
Issued:
 Employee stock purchase
  plan                                                                    11,847
 Long-term incentive plan                      (572)                      53,050
Amortization of unearned
 compensation                                 1,188
Unrealized gain on
 available for sale
 securities                                     205
Other                              (61)
                           -----------   ----------    -----------  ------------
Balance, June 30, 1996     $    (1,991)  $   (3,788)    73,892,109   (12,737,360)
                           -----------   ----------    -----------  ------------

Balance, January 1, 1997   $      (140)  $   (1,532)    73,892,109   (14,086,448)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (2,589,358)
Issued:
 IWC Resources acquisition                                             5,291,089
 Acquisition of minority
  interest                                                               135,032
 Employee stock purchase
  plan                                                                     8,962
 Long-term incentive plan                      (443)                      82,233
Amortization of unearned
 compensation                                   982
Unrealized gain (loss) on
 available for sale
 securities                                   1,297
Other                              100
                           -----------   ----------    -----------  ------------
Balance, June 30, 1997     $       (40)  $      304     73,892,109   (11,158,490)
                           ===========   ==========    ===========  ============

<CAPTION>
                                            Dollars in Thousands
                           ---------------------------------------------------------------
                                                       Additional
                                           Common       Paid-in       Retained    Treasury
  Twelve Months Ended         Total        Shares       Capital       Earnings     Shares
========================   ===========   ===========  ===========  ===========  ==========
<S>                        <C>           <C>          <C>           <C>         <C>
Balance, July 1, 1995      $ 1,116,208   $   870,930  $    31,950   $  482,823  $ (260,485)
Net income                     179,101                                 179,101
Dividends:
 Preferred shares               (1,651)                                (1,651)
 Common shares                (102,053)                              (102,053)
Treasury shares acquired       (84,980)                                            (84,980)
Issued:
 Employee stock purchase
  plan                             748                        420                      328
 Long-term incentive plan        5,078                        186                    5,464
Amortization of unearned
  compensation                   2,439
Unrealized gain (loss) on
  available for sale
  securities                     1,874
Other                             (536)                       118         (144)
                           -----------   -----------   ----------  -----------  ----------
Balance, June 30, 1996     $ 1,116,228   $   870,930   $   32,674   $  558,076  $ (339,673)
                           -----------   -----------   ----------  -----------  ----------
Net income                     184,893                                 184,893
Dividends:
 Preferred shares                    0                                       0
 Common shares                (108,738)                               (108,738)
Treasury shares acquired      (159,991)                                           (159,991)
Issued:
 IWC Resources acquisition     207,422                     55,009                  152,413
 Acquisition of minority
  interest                       5,469                      1,351                    4,118
 Employee stock purchase
  plan                             687                        404                      283
 Long-term incentive plan        6,109                        118                    6,434
Amortization of unearned
 compensation                    2,364
Unrealized gain (loss) on
 available for sale
 securities                      2,171
Other                            1,803                                    (148)
                           -----------   -----------   ----------  -----------  ----------
Balance, June 30, 1997     $ 1,258,417   $   870,930   $   89,556   $  634,083  $ (336,416)
                           ===========   ===========   ==========  ===========  ==========

<CAPTION>
                             Dollars in Thousands              Shares
                           ------------------------   --------------------------
                            Currency
  Twelve Months Ended      Translation                   Common        Treasury
       (continued)          Adjustment      Other        Shares         Shares
========================   ===========   ==========   ===========   ============
<S>                        <C>           <C>          <C>           <C>
Balance, July 1, 1995      $    (1,481)  $   (7,529)   73,892,109    (10,627,573)
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (2,344,075)
Issued:
 Employee stock purchase
  plan                                                                    20,638
 Long-term incentive plan                      (572)                     213,650
Amortization of unearned
 compensation                                 2,439
Unrealized gain on
 available for sale
 securities                                   1,874
Other                             (510)
                           -----------   ----------    -----------  ------------
Balance, June 30, 1996     $    (1,991)  $   (3,788)    73,892,109   (12,737,360)
                           -----------   ----------    -----------  ------------
Net income
Dividends:
 Preferred shares
 Common shares
Treasury shares acquired                                              (4,093,218)
Issued:
 IWC Resources acquisition                                             5,291,089
 Acquisition of minority
  interest                                                               135,032
 Employee stock purchase
  plan                                                                    17,784
 Long-term incentive plan                      (443)                     228,183
Amortization of unearned
 compensation                                 2,364
Unrealized gain (loss) on
 available for sale
 securities                                   2,171
Other                            1,951
                           -----------   ----------    -----------  ------------
Balance, June 30, 1997     $       (40)  $      304     73,892,109   (11,158,490)
                           ===========   ==========    ===========  ============

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

<PAGE>

<TABLE>

<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS

                                                   Three Months              Six Months
                                                  Ended June 30,           Ended June 30,
                                             ----------------------     ----------------------
(Dollars in thousands)                          1997         1996          1997         1996
                                             =========    =========     =========    =========
<S>                                          <C>          <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                  $  28,236    $  23,429     $  99,074    $  90,915

ADJUSTMENTS TO RECONCILE
 NET INCOME TO NET CASH:
  Depreciation and amortization                 64,414       58,710       122,759      115,136
  Deferred federal and state income
   taxes, net                                  (20,884)      (1,937)      (33,360)      12,802
  Deferred investment tax credits, net          (1,833)      (1,668)       (3,635)      (3,338)
  Advance contract payment                         475          475           950      (18,050)
  Change in certain assets and liabilities - *
   Accounts receivable, net                    (24,065)      62,940       (50,289)      29,165
   Electric production fuel                     (4,500)     (10,951)       (2,149)     (16,639)
   Materials and supplies                         (237)       2,412           (17)       3,078
   Natural gas in storage                      (17,109)     (17,624)       29,966       31,354
   Accounts payable                           (115,801)     (24,109)      (60,151)       7,042
   Taxes accrued                               (42,513)     (38,276)       35,249        6,180
   Fuel adjustment clause                        4,673       (3,156)          892       (1,322)
   Gas cost adjustment clause                   40,931          151        53,159      (47,523)
   Accrued employment costs                      2,896         (236)       (1,925)      (9,029)
   Other accruals                              (12,612)     (21,074)       12,899       (8,767)
   Other, net                                   19,568      (25,164)       23,335      (29,981)
                                             ---------    ---------     ---------    ---------
      Net cash provided by (used in)
        operating activities                   (78,361)       3,922       226,757      161,023
                                             ---------    ---------     ---------    ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
  Utility construction expenditures            (62,025)     (45,203)     (108,421)     (82,512)
  Construction expenditures related to
   Crossroads Pipeline Company                     (65)        (279)         (250)        (364)
  IWCR construction expenditures               (14,241)           0       (14,241)           0
  Acquisition of IWC Resources Corporation,
    net of cash acquired                             0            0      (288,932)           0
  Acquisition of minority interest              (5,641)           0        (5,641)           0
  Customer advances for construction, net
    of refunds                                     134            0           134            0
  Proceeds from disposition of assets              275            0        29,775            0
  Other, net                                      (559)        (652)      (19,911)     (14,569)
                                             ---------    ---------     ---------    ---------
      Net cash used in
         investing activities                  (82,122)     (46,134)     (407,487)     (97,445)
                                             ---------    ---------     ---------    ---------
CASH FLOWS PROVIDED BY (USED IN)
 FINANCING ACTIVITIES:
  Issuance of long-term debt                   271,960        1,153       408,262       77,450
  Issuance of short-term debt                  321,050      258,720       575,095      598,408
  Net change in commercial paper              (113,250)      79,100      (255,555)      55,000
  Retirement of long-term debt                     (38)      (7,620)       (1,507)      (8,737)
  Retirement of short-term debt               (312,875)    (263,300)     (598,495)    (648,035)
  Retirement of preferred shares                (1,252)      (1,446)       (1,253)     (36,446)
  Issuance of common shares                      6,847          806       215,333        1,414
  Acquisition of treasury shares               (45,938)      (9,548)     (102,529)     (48,036)
  Cash dividends paid on common shares         (28,323)     (25,784)      (55,095)     (51,993)
  Cash dividends paid on preferred shares            0            0             0         (119)
  Other, net                                      (583)         139          (468)         280
                                             ---------    ---------     ---------    ---------
      Net cash provided by (used in)
       financing activities                     97,598       32,220       183,788      (60,814)
                                             ---------    ---------     ---------    ---------
NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                              (62,885)      (9,992)        3,058        2,764
 
CASH AND CASH EQUIVALENTS AT
   BEGINNING OF PERIOD                          92,276       41,252        26,333       28,496
                                             ---------    ---------     ---------    ---------
CASH AND CASH EQUIVALENTS AT
   END OF PERIOD                             $  29,391    $  31,260     $  29,391    $  31,260
                                             =========    =========     =========    =========

 *Net of effect from purchase of IWC Resources Corporation.

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


<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS

                                                         Twelve Months
                                                        Ended June 30,
                                                   -----------------------
(In thousands)                                        1997          1996
                                                   =========     =========
<S>                                                <C>           <C>
CASH FLOWS FROM OPERATING
 ACTIVITIES:
 Net income                                        $ 184,893     $ 179,101

ADJUSTMENTS TO RECONCILE
 NET INCOME TO NET CASH:
  Depreciation and amortization                      241,617       219,315
  Deferred federal and state income
    taxes, net                                       (25,036)       34,092
  Deferred investment tax credits, net                (7,705)       (7,117)
  Advance contract payment                             1,900       (18,050)
  Change in certain assets and liabilities - *
   Accounts receivable, net                         (135,897)      (15,427)
   Electric production fuel                            2,265       (11,179)
   Materials and supplies                              2,090         6,943
   Natural gas in storage                             (5,597)        8,800
   Accounts payable                                   13,820        39,545
   Taxes accrued                                      39,543       (32,991)
   Fuel adjustment clause                              3,366        (8,703)
   Gas cost adjustment clause                          1,891       (84,097)
   Accrued employment costs                            4,595        (2,567)
   Other accruals                                      8,163       (15,037)
   Other, net                                         37,811       (38,857)
                                                   ---------     ---------
      Net cash provided by (used in)
        operating activities                         367,719       253,771
                                                   ---------     ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
  Utility construction expenditures                 (210,008)     (171,385)
  Construction expenditures related to
   Crossroads Pipeline Company                        (4,642)       (2,644)
  IWCR construction expenditures                     (14,241)            0
  Acquisition of IWC Resources Corporation,
    net of cash acquired                            (288,932)            0
  Acquisition of minority interest                    (5,641)            0
  Customer advances for construction, net
    of refunds                                           134             0
  Proceeds from disposition of assets                 29,775             0
  Other, net                                         (32,562)      (57,883)
                                                   ---------     ---------
      Net cash used in investing activities         (526,117)     (231,912)
                                                   ---------     ---------
CASH FLOWS PROVIDED BY (USED IN)
 FINANCING ACTIVITIES:
  Issuance of long-term debt                         409,178        83,031
  Issuance of short-term debt                      1,558,897     1,481,242
  Net change in commercial paper                    (118,850)      133,400
  Retirement of long-term debt                       (82,562)     (104,886)
  Retirement of short-term debt                   (1,560,194)   (1,412,693)
  Retirement of preferred shares                      (2,411)      (38,210)
  Issuance of common shares                          219,635         5,975
  Acquisition of treasury shares                    (159,991)      (84,980)
  Cash dividends paid on common shares              (106,292)     (101,014)
  Cash dividends paid on preferred shares               (647)       (1,651)
  Other, net                                            (234)          517
                                                   ---------     ---------
      Net cash provided by (used in)
       financing activities                          156,529       (39,269)
                                                   ---------     ---------
NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                                     (1,869)      (17,410)
 
CASH AND CASH EQUIVALENTS AT
 BEGINNING OF PERIOD                                  31,260        48,670
                                                   ---------     ---------
CASH AND CASH EQUIVALENTS AT
 END OF PERIOD                                     $  29,391     $  31,260
                                                   =========     =========

*Net of effect from purchase of IWC Resources Corporation.

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

</TABLE>


<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

     On March 25, 1997,  Industries  acquired IWC Resources  Corporation (IWCR).
IWCR's  subsidiaries  include two regulated water utilities (IWC and Harbour)and
five  non-utility   companies  providing   utility-related   services  including
installation,  repair and maintenance of underground  pipelines and utility line
locating  and  marking.  The two  primary  non-utility  subsidiaries  are Miller
Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P).

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


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

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

     The  operating  results of IWCR for the  three-month  period ended June 30,
1997 are  reported in the  accompanying  consolidated  financial  statements  of
Industries.

     USE OF ESTIMATES.  The  preparation  of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.
 
     OPERATING  REVENUES.  Utility  revenues  are  recorded  based on  estimated
service  rendered,  but are  billed  to  customers  monthly  on a  cycle  basis.
Construction  revenues are  recognized on the  percentage  of completion  method
whereby revenues are recognized in proportion to costs incurred over the life of
each project.

     DEPRECIATION AND MAINTENANCE.  Northern Indiana provides  depreciation on a
straight-line method over the remaining service lives of the electric,  gas, and
common  properties.  The provisions,  as a percentage of the cost of depreciable
utility  plant,  were  approximately  4.3% for the  three-month,  six-month  and
twelve-month  periods  ended  June 30,  1997;  and  4.3%,  4.2% and 4.1% for the
three-month,   six-month   and   twelve-month   periods  ended  June  30,  1996,
respectively.  The depreciation rates for electric and gas properties were 3.55%
and 4.92%, respectively.

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

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

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

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

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

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

     PLANT ACQUISITION ADJUSTMENTS.  Utility plant includes amounts representing
the excess of purchase price over  underlying  book values  associated  with the
acquisitions  of Kokomo Gas,  NIFL,  IWC and Harbour.  These  amounts are $170.4
million  (see Note 4) and $40.6  million at June 30, 1997 and December 31, 1996,
respectively,  and  are  being  amortized  over a  forty-year  period  from  the
respective dates of acquisition.

     INTANGIBLE ASSETS. The excess of cost over the fair value of the net assets
of non-utility  subsidiaries  acquired as part of the IWCR acquisition (see Note
4) has been recorded as goodwill and is being amortized over a forty-year period
from the date of acquisition.  Industries acquired the minority interest in NESI
Energy  Marketing,  L.L.C.(NEM)  in April 1997. The excess of the purchase price
over the fair value of the tangible net assets  associated with this acquisition
has  been  recorded  as an  intangible  asset  and  is  being  amortized  over a
twenty-year  period  from  the  date of  acquisition.  Industries  assesses  the
recoverability  of its  intangible  assets on a periodic  basis to confirm  that
expected future cash flows will be sufficient to support the recorded intangible
assets.

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

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

     ACCOUNTS  RECEIVABLE.  At June 30,  1997,  Northern  Indiana  had sold $100
million of its accounts receivable under a sales agreement which expires May 31,
2002.

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


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

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

<CAPTION>
                            Three Months           Six Months           Twelve Months
(In thousands)              Ended June 30,        Ended June 30,        Ended June 30,
                         -------------------   -------------------   -------------------
                           1997       1996       1997       1996       1997       1996
<S>                      <C>        <C>        <C>        <C>        <C>        <C>
Income taxes             $ 61,700   $ 55,748   $ 61,700   $ 55,748   $ 81,747   $124,088
Interest, net of
 amounts capitalized     $ 32,544   $ 30,544   $ 44,655   $ 40,948   $ 90,988   $ 89,337
 
</TABLE>

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

     GAS COST  ADJUSTMENT  CLAUSE.  All metered gas rates  contain an adjustment
factor which  reflects the cost of purchased gas,  contracted  gas storage,  and
storage  transportation  charges. The Energy Utilities record any under-recovery
or over-recovery  as a current asset or current  liability until such time as it
is billed or refunded to their  customers.  The gas cost  adjustment  factor for
Northern Indiana is subject to a quarterly hearing by the Commission and remains
in effect for a three-month  period.  The gas cost adjustment factors for Kokomo
Gas and NIFL are subject to semi-annual hearings by the Commission and remain in
effect for a six-month  period.  If the  statutory  requirement  relating to the
level of return is satisfied,  any  under-recovery  or  over-recovery  caused by
variances  between estimated and actual cost in a given three-month or six-month
period will be included in a future filing. See Note 7, FERC Order No. 636 for a
discussion of gas transition cost charges.

     NATURAL GAS IN STORAGE. Northern Indiana's natural gas in storage is valued
using the last-in, first-out (LIFO) inventory methodology.  Based on the average
cost of gas purchased in June 1997 and December  1996 the estimated  replacement
cost of gas in storage  (current and  non-current) at June 30, 1997 and December
31,  1996  exceeded  the stated LIFO cost by  approximately  $32 million and $96
million, respectively. Certain other subsidiaries of Industries have natural gas
in storage valued at average cost.
 
     HEDGING  ACTIVITIES.  Industries  utilizes  a  variety  of  commodity-based
derivative  financial  instruments  to reduce  the price  risk  inherent  in its
natural gas and electric  power  marketing  activities.  The gains and losses on
these  derivative  financial  instruments  are deferred (Other Current Assets or
Other Current  Liabilities)  pursuant to an identified risk reduction  strategy.
Such deferrals are recognized in income  concurrent  with the disposition of the
underlying physical commodity. In certain circumstances,  a derivative financial
instrument  will  serve to  hedge  the  acquisition  cost of gas  injected  into
storage.  In this  situation,  the  gain or  loss  on the  derivative  financial
instrument  is  deferred  as  part  of the  cost  basis  of gas in  storage  and
recognized  upon the  ultimate  disposition  of the natural gas. If a derivative
financial  instrument contract is terminated early because it is probable that a
transaction  or forecasted  transaction  will not occur,  any gain or loss as of
such date is  immediately  recognized  in earnings.  If a  derivative  financial
instrument contract is terminated early for other economic reasons,  any gain or
loss as of the  termination  date is deferred and recorded  when the  associated
transaction or forecasted transaction affects earnings.

     Industries' gas subsidiaries use commodity futures  contracts,  options and
swaps to hedge the  impact of  natural  gas price  fluctuations  related  to its
business  activities,  including price risk related to the physical  location of
the  natural  gas  (basis  risk).  As of June  30,  1997,  Industries  had  open
derivative financial instruments representing hedges of natural gas sales of 4.5
billion  cubic  feet  (Bcf)  and net  basis  differentials  of 3.3 Bcf.  The net
deferred gain on these derivative financial  instruments as of June 30, 1997 was
not material.

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

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

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

     REGULATORY ASSETS. The Utilities'  operations are subject to the regulation
of the Commission and, in the case of the "Energy Utilities", the Federal Energy
Regulatory  Commission (FERC).  Accordingly,  the Utilities' accounting policies
are subject to the  provisions  of SFAS No. 71,  "Accounting  for the Effects of
Certain  Types of  Regulation."  The  Utilities  monitor  changes  in market and
regulatory  conditions  and the  resulting  impact of such  changes  in order to
continue  to  apply  the  provisions  of SFAS  No.  71 to  some or all of  their
operations.  As of June 30, 1997 and December 31, 1996,  the  regulatory  assets
identified below represent  probable future revenue to the Utilities  associated
with certain incurred costs as these costs are recovered through the rate-making
process. If a portion of the Utilities'  operations becomes no longer subject to
the provisions of SFAS No. 71, a write-off of certain of the  regulatory  assets
identified below might be required, unless some form of transition cost recovery
is  established  by  the  appropriate  regulatory  body  which  would  meet  the
requirements  under  generally  accepted  accounting  principles  for  continued
accounting as regulatory  assets during such recovery period.  Regulatory assets
were  comprised of the following  items and were  reflected in the  Consolidated
Balance Sheet as follows:

<TABLE>

<CAPTION>
                                                      June 30,      December 31,
(In thousands)                                          1997             1996
                                                   =============    ============
<S>                                                <C>              <C>
Unamortized reacquisition premium on
 debt (Note 18)                                    $      48,505    $     50,262
Unamortized R.M. Schahfer Unit 17 and
 Unit 18 carrying charges and
 deferred depreciation (See below)                        68,655          70,763
Bailly scrubber carrying charges and
 deferred depreciation (See below)                        10,348          10,816
Deferred SFAS No. 106 expense not
 recovered (Note 11)                                      90,512          87,557
FERC Order No. 636 transition costs (Note 7)              30,386          47,399
Regulatory income tax asset (Note 9)                       8,521           4,736
Other                                                      4,331               0
                                                   -------------    ------------
                                                         261,258         271,533
Less: Current portion of regulatory assets                33,573          35,328
                                                   -------------    ------------
                                                   $     227,685    $    236,205
                                                   =============    ============
</TABLE>

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

     Northern Indiana has capitalized carrying charges and deferred depreciation
and certain  operating  expenses  relating to its scrubber service agreement for
its Bailly  Generating  Station in accordance  with an order of the  Commission.
Pursuant  to such order,  capitalization  of  carrying  charges and  deferral of
depreciation  and certain  operating  expenses  ceased on December 31, 1995. The
accumulated  balance of the deferred costs and related carrying charges is being
amortized over the remaining life of the scrubber service agreement.
 
     ALLOWANCE  FOR FUNDS USED  DURING  CONSTRUCTION.  Allowance  for funds used
during  construction  (AFUDC) is charged to construction work in progress during
the period of  construction  and  represents the net cost of borrowed funds used
for construction purposes and a reasonable rate upon other (equity) funds. Under
established regulatory rate practices,  after the construction project is placed
in service,  Northern  Indiana is permitted to include in the rates  charged for
utility  services  (a) a fair  return  on and (b)  depreciation  of  such  AFUDC
included in plant in service.

     At January 1, 1995, a pre-tax rate of 6.0% for all  construction  was being
used;  effective  January  1, 1996 the rate  decreased  to 5.5%;  and  effective
January 1, 1997, the rate increased to 6.0%.

     FOREIGN CURRENCY  TRANSLATION.  Translation  gains or losses are based upon
the  end-of-period  exchange  rate and are  recorded as a separate  component of
common shareholders' equity.

     INVESTMENTS IN REAL ESTATE.  Development  invests in a series of affordable
housing  projects  in 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
$31.2 million and $24.1 million relating to affordable  housing projects at June
30, 1997 and December 31, 1996, respectively.

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

     (3) PENDING TAX MATTER:  On August 1, 1991,  the Internal  Revenue  Service
(IRS) issued a notice of deficiency for Northern  Indiana's  taxes for the years
1982  through  1985  ($3,785,250  per year plus  interest)  relating to interest
payments on $70 million of 17-1/4%  Notes  issued in 1981 by Northern  Indiana's
former  foreign  subsidiary,   Northern  Indiana  Public  Service  Finance  N.V.
(Finance).  The IRS maintained  that interest paid on the Notes should have been
subject to United  States tax  withholding.  The Notes were redeemed in 1985 and
Finance was  subsequently  liquidated.  On October 25,  1991,  Northern  Indiana
challenged  the  assessment  in the United  States Tax Court (Tax Court) and the
matter was tried in 1994.  On November 6, 1995,  the Tax Court ruled in favor of
Northern Indiana, finding that the interest paid on the Notes was not subject to
United  States tax  withholding.  On March 13,  1996,  the IRS  appealed the Tax
Court's decision to the U. S. Court of Appeals for the Seventh Circuit (Court of
Appeals), and on March 25, 1996 Northern Indiana filed its cross appeal. On June
6, 1997 the Court of  Appeals  issued an order  affirming  in full the Tax Court
order.  The IRS has until  September 4, 1997 to appeal the decision of the Court
of Appeals.  Northern Indiana's management and general counsel do not expect the
IRS to appeal.  However, if the IRS does appeal,  Northern Indiana's  management
and general counsel believe the Tax Court's decision will prevail.

     (4) PURCHASE OF IWC RESOURCES  CORPORATION:  On March 25, 1997,  Industries
acquired all the outstanding common stock of IWCR for $290.5 million. Industries
financed this transaction with debt of approximately  $83.0 million and issuance
of approximately 5.3 million Industries' common shares. Industries accounted for
the  acquisition  as a purchase,  and the  purchase  price was  allocated to the
assets and  liabilities  acquired  based on their  estimated  fair  values.  The
accompanying  consolidated financial statements reflect a preliminary allocation
of the purchase price (see Note 2) as the purchase price allocation has not been
finalized.

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

<TABLE>

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

     On a  proforma  basis,  the  acquisition  of IWCR does not have a  material
impact on Industries' consolidated operating results.
 
     (5) ELM ENERGY AND RECYCLING (UK) LTD.: Development is a 85% shareholder in
Elm Energy and Recycling (UK) Ltd. (Elm),  which owns and operates a tire-fueled
electric  generating plant in  Wolverhampton,  England  (Project).  In 1995, the
Project  failed  certain  performance  and  reliability  tests  which  had  been
established  under a contract between Elm and TBV Power Limited (TBV), a company
jointly owned by  subsidiaries  of the Tarmac PLC Group and Black & Veatch.  Elm
"rejected"  the Project in  accordance  with the contract,  and the  independent
Project  engineer  then  certified  that 29.6 million  British  Pounds  Sterling
(approximately  $49.3  million at June 30, 1997) were to be reimbursed by TBV to
Elm. TBV filed suit in the English courts to enjoin  enforcement of the decision
and to allege certain breaches of the underlying construction contract.

     Elm has counterclaimed, and Elm and Development are also seeking additional
remedies at law, in both the United States and the United  Kingdom,  for damages
and/or sanctions against TBV, Tarmac PLC Group, Black & Veatch and its chairman.
Black & Veatch  has  counterclaimed  against  Elm and  Development.  Development
believes  that  the  claims  made  against  it and Elm are  meritless  and  that
remedies, in conjunction with Elm's rights under the construction contract, will
be sufficient to mitigate any losses which Elm and/or  Development may otherwise
incur.

     Elm is continuing  to operate the Project,  and the banks which provide the
non-recourse financing for the Project are continuing to support its operations.
However, because of ongoing defaults under the Project financing (resulting from
the Project's poor performance and the pending litigation),  and the uncommitted
nature of a working capital  facility  provided by the banks, the banks have the
right to ask that the  operation of the Project be  terminated  at any time.  In
that  event,  some  or all of  Industries'  investment  in Elm  may be at  risk.
Industries' investment in Elm, however, was not material at June 30, 1997.

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

     In December  1996,  and in 1997,  certain  creditors  of NEMC filed  claims
against Industries,  Services, Capital Markets and NESI Canada, alleging certain
misrepresentations  relating to NEMC's financial condition and claiming damages.
Industries  and its affiliates  intend to vigorously  defend against such claims
and any other  claims  seeking  to  assert  that any  party  other  than NEMC is
responsible for NEMC's liabilities. Industries has fully reserved its investment
in NEMC. Management believes that any additional loss relating to NEMC would not
be material to the results of operations or financial position of Industries.

     (7) FERC ORDER NO. 636. The Energy  Utilities  have recorded  approximately
$130 million of interstate  pipeline  transition  costs to reflect the impact of
FERC Order No.  636, a majority  of which  costs have been paid to the  pipeline
suppliers. The Energy Utilities expect that additional transition costs will not
be significant.  The Commission has approved the recovery of these  FERC-allowed
transition costs on a volumetric basis from sales and transportation  customers.
Regulatory  assets,  in amounts  corresponding to the costs recorded but not yet
collected, have been recorded to reflect the ultimate recovery of these costs.

     (8) ENVIRONMENTAL  MATTERS: The Utilities have an ongoing program to remain
aware  of  laws  and  regulations   involved  with  hazardous  waste  and  other
environmental matters. It is the Utilities' intent to continue to evaluate their
facilities  and  properties  with  respect to these rules and identify any sites
that would require  corrective  action. The Utilities have recorded a reserve of
approximately  $17 million to cover probable  corrective  actions as of June 30,
1997; however,  environmental regulations and remediation techniques are subject
to future  change.  The  ultimate  cost could be  significant,  depending on the
extent  of  corrective   actions  required.   Based  upon   investigations   and
management's  understanding  of  current  laws and  regulations,  the  Utilities
believe that any corrective actions required,  after  consideration of insurance
coverages and contributions from other potentially responsible parties, will not
have a significant  impact on the financial position or results of operations of
Industries.

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

     Because  of  major  investments  made  in  modern   environmental   control
facilities and the use of low-sulfur  coal, all of Northern  Indiana's  electric
production  facilities now comply with the sulfur dioxide limitations  contained
in the acid  deposition  provisions  of the  Clean  Air Act  Amendments  of 1990
(CAAA).  Northern Indiana estimates that total costs of compliance with the CAAA
sulfur  dioxide  regulations  will impact  electric rates by less than 5% in the
future.

     The CAAA contain  provisions that could lead to limitations on emissions of
nitrogen  oxides and  hazardous  air  pollutants  which may require  significant
capital  expenditures  for  control  of these  emissions.  Northern  Indiana  is
pursuing a nitrogen oxide control program to meet future requirements.  Northern
Indiana  cannot  predict  the costs of  complying  with CAAA  requirements,  but
Northern  Indiana  believes  that any such mandated  costs would be  recoverable
through the rate-making process.
 
     The EPA has notified Northern Indiana that it is a "potentially responsible
party" (PRP) under the  Comprehensive  Environmental  Response  Compensation and
Liability  Act  (CERCLA)  and may be required to share in the cost of cleanup of
several  waste  disposal  sites  identified by the EPA. The sites are in various
stages  of  investigation,  analysis  and  remediation.  At each  of the  sites,
Northern Indiana is one of several PRPs, and it is expected that remedial costs,
as provided  under  CERCLA,  will be shared among them.  At some sites  Northern
Indiana and/or the other named PRPs are presently  working with the EPA to clean
up the sites and avoid the imposition of fines or added costs.

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

     During the  course of various  investigations,  the Energy  Utilities  have
identified impacts to soil, groundwater,  sediment and surface water from former
manufactured-gas  plants.  At three sites where residues were noted seeping into
rivers,  Northern  Indiana  notified  the Indiana  Department  of  Environmental
Management  (IDEM)  and  the EPA and  immediately  took  steps  to  contain  the
material. The Energy Utilities have worked with IDEM or the EPA on investigation
or remedial  activities at several sites. Two 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 1994, the Energy Utilities  approached  various  companies that provided
insurance  coverage which the Energy  Utilities  believe covers costs related to
actions taken at former  manufactured-gas  plants. In September 1995, certain of
the insurance companies initiated a suit in Indiana state court against Northern
Indiana seeking a ruling that denied coverage.  Later that same month,  Northern
Indiana  initiated a similar suit in federal  court,  and the state court action
was stayed.  After the  dismissal  of the  federal  court  action on  procedural
grounds in May 1997,  Northern  Indiana  filed  claims in the state court action
against various insurance companies,  seeking coverage for costs associated with
several  former  manufactured  gas plants and damages for alleged  misconduct by
some of the  insurance  companies.  The state  court  action is now  proceeding.
Northern  Indiana has received  cash  settlements  from several of the insurance
companies.

     The  possibility  that exposure to electric and magnetic  fields  emanating
(EMF) 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.  The U.S. National Research Council of the National Academy
of Sciences  concluded in a report,  after  examining  more than 500 EMF studies
spanning 17 years,  that among other things,  there is insufficient  evidence to
consider EMF a threat to human  health.  Despite the report's  findings,  future
research appropriations are continuing to be dedicated to explore this issue.

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

     Under the Federal Safe Drinking Water Act (SDWA),  the Water  Utilities are
subject to  regulation  by the EPA for the  quality of water sold and  treatment
techniques  used to make  the  water  potable.  The EPA  promulgates  nationally
applicable maximum  contaminant levels (MCLs) for contaminants found in drinking
water.  Management believes its water utilities are currently in compliance with
all MCLs  promulgated  to date. The EPA has continuing  authority,  however,  to
issue additional  regulations  under the SDWA. In August 1996,  Congress amended
the SDWA to allow the EPA more  authority  to weigh the  costs and  benefits  of
regulations being considered in some (but not all) cases. The 1996 amendments do
not,  however,  reduce  the  number  of  new  standards  required  by  the  1986
amendments.  Such standards  promulgated could be costly and require substantial
changes in the Water Utilities' operations.  The Water Utilities would expect to
recover the costs of such  changes  through  their water  rates;  however,  such
recovery may not necessarily be timely.

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

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

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

     The  components  of the net deferred  income tax liability at June 30, 1997
and December 31, 1996, are as follows:

<TABLE>

<CAPTION>
                                                  June 30,       December 31,
                                                    1997             1996
                                                =============    ============
                                                    (Dollars in thousands)
<S>                                             <C>              <C>
Deferred tax liabilities -
 Accelerated depreciation
   and other property differences               $     769,392    $    727,528

 AFUDC-equity                                          36,506          37,713
 Adjustment clauses                                    20,804          41,181
 Take-or-pay gas costs                                    601             877
 Other regulatory assets                               33,580          39,458
 Reacquisition premium on debt                         19,002          19,041

Deferred tax assets -
 Deferred investment tax credits                      (41,433)        (41,046)
 Removal costs                                       (138,109)       (131,718)
 FERC Order No. 636 transition costs                   (2,780)         (8,144)
 Other postretirement/postemployment
    benefits                                          (44,949)        (43,446)
 Other, net                                           (16,341)        (11,987)
                                                -------------    ------------
                                                      636,273         629,457
Less: Deferred income taxes related to
  current assets and liabilities                        3,976          26,712
                                                -------------    ------------
Deferred income taxes - noncurrent              $     632,297    $    602,745
                                                =============    ============
</TABLE>

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

<TABLE>

<CAPTION>
                                   Three Months          Six Months         Twelve Months
                                  Ended June 30,        Ended June 30,      Ended June 30,
                                ------------------   ------------------   ------------------
(In thousands)                     1997      1996      1997       1996      1997       1996
                                ========  ========   ========  ========   ========  ========
<S>                             <C>       <C>        <C>       <C>        <C>       <C>
Current income taxes -
 Federal                        $ 34,241  $ 16,390   $ 78,016  $ 40,089   $118,553  $ 66,552
 State                             5,456     2,781     12,003     6,469     18,315    11,486
                                --------  --------   --------  --------   --------  --------
                                  39,697    19,171     90,019    46,558    136,868    78,038
                                --------  --------   --------  --------   --------  --------
Deferred income taxes, net -
 Federal                         (19,344)   (1,833)   (30,898)   11,709    (23,325)   31,284
 State                            (1,540)     (104)    (2,462)    1,093     (1,711)    2,808
                                --------  --------   --------  --------   --------  --------
                                 (20,884)   (1,937)   (33,360)   12,802    (25,036)   34,092
                                --------  --------   --------  --------   --------  --------
Deferred investment tax
 credits, net                     (1,833)   (1,670)    (3,635)   (3,339)    (7,704)   (7,118)
                                --------  --------   --------  --------   --------  --------
 Income taxes                     16,980    15,564     53,024    56,021    104,128   105,012

Income taxes applicable to
  non-operating activities
  and equity investments            (311)       46      2,558      (569)     2,920    (1,696)
                                --------  --------   --------  --------   --------  --------
   Total income taxes           $ 16,669  $ 15,610   $ 55,582  $ 55,452   $107,048  $103,316
                                ========  ========   ========  ========   ========  ========
</TABLE>

     A reconciliation of total tax expense to an amount computed by applying the
statutory federal income tax rate to pre-tax income is as follows:

<TABLE>

<CAPTION>

                                   Three Months           Six Months          Twelve Months
                                  Ended June 30,        Ended June 30,        Ended June 30,
                               --------------------  --------------------  --------------------
                                  1997       1996       1997       1996      1997       1996
                               =========  =========  =========  =========  =========  =========
<S>                            <C>        <C>        <C>        <C>        <C>        <C>
Net income                     $  28,236  $  23,429  $  99,074  $  90,915  $ 184,893  $ 179,101
Add-Income taxes                  16,669     15,610     55,582     55,452    107,048    103,316
 Dividend requirements on
 preferred stocks of
 subsidiary                        2,179      2,178      4,346      4,377      8,681      8,833
                               ---------  ---------  ---------  ---------  ---------  ---------
Income before preferred
 dividend requirements of
 subsidiary and income taxes   $  47,084  $  41,217  $ 159,002  $ 150,744  $ 300,622  $ 291,250
                               =========  =========  =========  =========  =========  =========
Amount derived by multiplying
 pre-tax income by the
 statutory rate                $  16,480  $  14,426  $  55,651  $  52,760  $ 105,218  $ 101,938

Reconciling items multiplied
 by the statutory rate:
  Book depreciation over
   related tax depreciation        1,044      1,030      2,088      2,013      4,696      4,022
  Amortization of deferred
   investment tax credits         (1,833)    (1,670)    (3,635)    (3,339)    (7,704)    (7,118)
  State income taxes, net of
   federal income tax benefit      2,832      1,706      6,339      5,391     11,548     10,171
  Reversal of deferred taxes
   provided at rates in excess
   of the current federal
   income tax rate                (1,518)    (1,145)    (3,036)    (2,819)    (6,861)    (5,765)
  Other, net                        (336)     1,263     (1,885)     1,446        151         68
                               ---------  ---------  ---------  ---------  ---------  ---------
    Total income taxes         $  16,669  $  15,610  $  55,582  $  55,452  $ 107,048  $ 103,316
                               =========  =========  =========  =========  =========  =========
</TABLE>

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

    The plans' funded status as of January 1, 1997 and 1996 are as follows:

<TABLE>

<CAPTION>
(In thousands)                                       1997            1996
                                                   =========       =========
<S>                                                <C>             <C>
Vested benefit obligation                          $(550,151)      $(549,234)
Nonvested benefit                                   (105,339)       (104,814)
                                                   ---------       ---------
Accumulated benefit obligation                     $(655,490)      $(654,048)
                                                   =========       =========
Projected benefit obligation for service
 rendered to date                                  $(759,406)      $(759,681)
Plan assets at fair market value                     806,888         706,320
                                                   ---------       ---------
Plan assets in excess of (or less than)
 projected benefit obligation                         47,482         (53,361)
Unrecognized transition obligation at January 1,
 being recognized over seventeen years                37,401          43,484
Unrecognized prior service cost                       25,528          27,242
Unrecognized gains                                   (66,611)         (4,217)
                                                   ---------       ---------
Prepaid pension costs                              $  43,800       $  13,148
                                                   =========       =========
</TABLE>

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

     The following  items are the  components of provisions for pensions for the
three-month,  six-month,  and twelve-month  periods ended June 30, 1997 and June
30, 1996:

<TABLE>

<CAPTION>
                            Three Months         Six Months           Twelve Months
                               Ended                Ended                 Ended
                              June 30,             June 30,              June 30,
                        ------------------   ------------------    ------------------
                          1997      1996       1997      1996       1997      1996
                        ========  ========   ========  ========    ========  ========
(In thousands)
<S>                     <C>       <C>        <C>       <C>         <C>       <C>
Service costs           $  4,809  $  4,321   $  9,382  $ 10,588    $ 15,094  $ 16,222
Interest costs            16,816    13,078     33,352    32,129      54,700    57,964
Estimated return
 on plan assets          (20,977)  (15,499)   (41,480)  (38,103)    (90,784) (147,618)
Amortization of
 transition obligation     1,765     1,321      3,353     3,263       5,512     5,974
Other net amortization
 and deferral                950       636      1,900     1,550      26,810    86,397
                        --------  --------   --------  --------    --------  --------
                        $  3,363  $  3,857   $  6,507  $  9,427    $ 11,332  $ 18,939
                        ========  ========   ========  ========    ========  ========
</TABLE>

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

<TABLE>

<CAPTION>
                                                      1997         1996
                                                     =====        =====
<S>                                                  <C>          <C>
Discount rate                                        7.75%        7.25%
Rate of increase in compensation levels              5.50%        5.50%
Expected long-term rate of return on assets          9.00%        9.00%
</TABLE>

     The plans'  assets are invested  primarily  in common  stocks,  bonds,  and
notes.  On July 22, 1997, a substantial  portion of the plans'  domestic  equity
investments were hedged against substantial  movements in the S&P 500 Index. The
hedge will expire on December 31, 1997.

     IWCR participates in several  industry-wide,  multi-employer  pension plans
for certain of its union  employees at Miller.  These plans  provide for monthly
benefits based on length of service.  Specified amounts per compensated hour for
each employee are contributed to the trustees of these plans.  Contributions  of
$0.5 million were made to these plans for the three-month  period ended June 30,
1997. The relative  position of each employer  participating in these plans with
respect to the  actuarial  present  value of  accumulated  plan benefits and net
assets available for benefits is not available.

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

     Northern  Indiana's  rate-making  has  historically  included  the  cost of
providing these benefits based on the related  insurance  premiums.  On December
30,  1992,  the  Commission  authorized  the accrual  method of  accounting  for
postretirement  benefits for rate-making  purposes  consistent with SFAS No. 106
"Employers'  Accounting for  Postretirement  Benefits Other Than  Pensions," and
authorized   the   deferral  of  the   differences   between  the  net  periodic
postretirement  benefit costs and the insurance  premiums paid for such benefits
(OPRB) as a regulatory asset until such time as the accrual cost method could be
reflected in the rate-making process.

     On June 11, 1997, the Commission issued an order approving the inclusion of
accrual-based  postretirement  benefit  costs in the  rate-making  process to be
effective  February 1, 1997 for electric  rates and March 1, 1997 for gas rates.
These costs include an amortization of the existing  regulatory asset consistent
with the remaining amortization period for the transition  obligation.  Northern
Indiana discontinued its cost deferral and began amortizing its regulatory asset
concurrent with the dates.

     IWC's  current  rates  include  postretirement  benefit costs on an accrual
basis,  including  amortization  of the  regulatory  asset that  arose  prior to
inclusion of these costs in the rates.  IWC currently  remits to a grantor trust
amounts collected in rates.
 
    The following table sets forth the plans' accumulated postretirement benefit
obligation as of January 1, 1997 and 1996:

<TABLE>

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

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

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

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

<CAPTION>
                                  Three Months         Six Months        Twelve Months
                                     Ended               Ended                Ended
                                    June 30,            June 30,            June 30,
                              ------------------  ------------------  ------------------
                                1997      1996      1997      1996      1997      1996
                              ========  ========  ========  ========  ========  ========
(In thousands)
<S>                           <C>       <C>       <C>       <C>       <C>       <C>
Service costs                 $  1,589  $  1,620  $  3,049  $  3,240  $ 7,161   $  6,264
Interest costs                   4,798     5,079     9,258    10,159   17,410     19,700
Amortization of
 transition obligation
 over twenty years               2,970     3,095     5,734     6,190    11,137    11,985
Amortization of unrecognized
 actuarial gain                 (1,014)     (582)   (2,022)   (1,165)   (1,411)   (2,262)
                              --------  --------  --------  --------  --------  --------
                              $  8,343  $  9,212  $ 16,019  $ 18,424  $ 34,297  $ 35,687
                              ========  ========  ========  ========  ========  ========
</TABLE>

     The net  periodic  postretirement  benefit  costs for 1997 were  determined
assuming  a 7.75%  discount  rate,  a 5% rate of  compensation  increase,  and a
pre-Medicare  medical trend rate of 9% declining to a long-term  rate of 6%. The
effect of a 1%  increase  in the  assumed  health care cost trend rates for each
future year would increase the accumulated  postretirement benefit obligation at
January 1, 1997 by  approximately  $31.3 million,  and increase the aggregate of
the service and interest  cost  components of plan costs by  approximately  $1.3
million and $2.4 million for the  three-month  and six-month  periods ended June
30, 1997,  respectively.  Amounts disclosed above could be changed significantly
in the future by changes in health care costs, work force demographics, interest
rates, or plan changes.

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

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

     Effective  March  2,  1990,   2,000,000  of  Industries'  Series  A  Junior
Participating  Preferred Shares were reserved for issuance pursuant to the Share
Purchase Rights Plan described in Note 16, Common Shares.

     NORTHERN INDIANA -
        2,400,000 shares - Cumulative Preferred - $100 par value
        3,000,000 shares - Cumulative Preferred - no par value
        2,000,000 shares - Cumulative Preference - $50 par value
                            (none outstanding)
        3,000,000 shares - Cumulative Preference - no par value
                            (none issued)

     INDIANAPOLIS WATER COMPANY -
           300,000 shares - Cumulative Preferred - $100 par value

     Note 13 sets forth the preferred stocks which are redeemable  solely at the
option of the  issuer,  and Note 14 sets forth the  preferred  stocks  which are
subject to mandatory redemption  requirements or whose redemption is outside the
control of the issuer.

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

     (13)PREFERRED  STOCKS,  REDEEMABLE  SOLELY  AT THE  OPTION  OF THE  ISSUER,
OUTSTANDING AT JUNE 30, 1997 AND DECEMBER 31, 1996 (SEE NOTE 12):

<TABLE>

<CAPTION>
                                                                        Redemption
                                                                         Price at
                                      June 30,        December 31,       June 30,
 (Dollars in thousands)                 1997              1996             1997
                                    =============    =============    =============
<S>                                 <C>              <C>              <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
 Cumulative preferred stock -
  $100 par value -

  4-1/4% series - 209,123 and
   209,145 shares outstanding,
   respectively                     $      20,912    $      20,915          $101.20
  4-1/2% series -  79,996 shares
   outstanding                              8,000            8,000          $100.00
  4.22% series -  106,198 shares
   outstanding                             10,620           10,620          $101.60
  4.88% series -  100,000 shares
   outstanding                             10,000           10,000          $102.00
  7.44% series -   41,890 shares
   outstanding                              4,189            4,189          $101.00
  7.50% series -   34,842 shares
   outstanding                              3,484            3,484          $101.00
  Premium on preferred stock                  254              254

 Cumulative preferred stock -
  no par value -
   Adjustable rate (6.00% at
    June 30, 1997), Series A
    (stated value $50 per share)
    473,285 shares outstanding             23,664           23,664           $50.00

INDIANAPOLIS WATER COMPANY:
 Cumulative preferred stock -
  $100 par value -

  Rates ranging from 4.00% to
    5.00%, 44,966 shares
    outstanding                             4,497                -      $100 - $105
                                     ------------     ------------
                                     $     85,620     $     81,126
                                     ============     ============
</TABLE>

     During the period July 1, 1995 to June 30, 1997,  there were no  additional
issuances of the above preferred stocks.

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

     (14)REDEEMABLE  PREFERRED STOCKS  OUTSTANDING AT JUNE 30, 1997 AND DECEMBER
31,  1996  (SEE NOTE 12):  Preferred  stocks  subject  to  mandatory  redemption
requirements  or whose  redemption  is  outside  the  control  of issuer  are as
follows:
 
<TABLE>
<CAPTION>
                                                      June 30,      December 31,
(Dollars in thousands)                                  1997            1996
                                                    ===========     ===========
<S>                                                 <C>             <C>
NORTHERN INDIANA PUBLIC SERVICE COMPANY:
 Cumulative preferred stock - $100 par value -

  8.85% series - 62,500 and 75,000 shares
   outstanding, respectively, excluding sinking
   fund payments due within one year                $     6,250     $     7,500
  7-3/4% series - 44,460 shares outstanding,
   excluding sinking fund payments due within
   one year                                               4,446           4,446
  8.35% series - 63,000 shares outstanding,
   excluding sinking fund payments due within
   one year                                               6,300           6,300
 Cumulative preferred stock - no par value -
  6.50% series - 430,000 shares outstanding              43,000          43,000
                                                    -----------     -----------
                                                    $    59,996     $    61,246
                                                    ===========     ===========
</TABLE>

     The redemption  prices at June 30, 1997, as well as sinking fund provisions
for the cumulative preferred stock subject to mandatory redemption requirements,
or whose redemption is outside the control of Northern Indiana, are as follows:

<TABLE>

<CAPTION>
                                                        Sinking Fund Or
                                                     Mandatory Redemption
Series   Redemption Price Per Share                     Provisions
======   ==========================              ===========================
<S>      <C>                                     <C>
Cumulative preferred stock - $100 par value -
  8.85%  $101.48, reduced periodically           12,500 shares on or before
                                                  April 1.

  8.35%  $103.93, reduced periodically           3,000 shares on or before
                                                  July 1; increasing to
                                                  6,000 shares beginning
                                                  in 2004; noncumulative
                                                  option to double amount
                                                  each year.
 
  7-3/4% $104.41, reduced periodically           2,777 shares on or
                                                  before December 1;
                                                  noncumulative option
                                                  to double amount each
                                                  year.

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

     Sinking fund  requirements  with  respect to  redeemable  preferred  stocks
outstanding at June 30, 1997 for each of the twelve-month  periods subsequent to
June 30, 1998 are as follows:

<TABLE>
<CAPTION>

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


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

     (15)COMMON SHARE DIVIDEND:  During the next few years,  Industries  expects
that the majority of earnings  available  for  distribution  of  dividends  will
depend upon dividends paid to Industries by Northern Indiana. Northern Indiana's
Indenture provides that it will not declare or pay any dividends on any class of
capital stock (other than  preferred or  preference  stock) except out of earned
surplus or net profits of Northern Indiana.  At June 30, 1997,  Northern Indiana
had approximately $152.8 million of retained earnings (earned surplus) available
for the  payment of  dividends.  Future  dividends  will  depend  upon  adequate
retained  earnings,  adequate  future  earnings,  and  the  absence  of  adverse
developments.

     (16)COMMON  SHARES:  Industries has  200,000,000  common shares  authorized
without par value.

     SHARE PURCHASE RIGHTS PLAN. On February 27, 1990, the Board of Directors of
Industries  (Board)  declared  a  dividend  distribution  of one  Right for each
outstanding  common share of Industries to  shareholders  of record on March 12,
1990. The Rights are not currently  exercisable.  Each Right,  when exercisable,
would initially entitle the holder to purchase from Industries one one-hundredth
of a Series A Junior  Participating  Preferred  Share,  without  par  value,  of
Industries  at a price  of $60 per one  one-hundredth  of a  share.  In  certain
circumstances, if an acquirer obtained 25% of Industries' outstanding shares, or
merged into Industries or merged Industries into the acquirer,  the Rights would
entitle the holders to purchase  Industries' or the acquirer's common shares for
one-half  of the market  price.  The Rights will not dilute  Industries'  common
shares nor affect  earnings per share unless they become  exercisable for common
shares.  The Plan was not adopted in response to any specific attempt to acquire
control of Industries.

     COMMON  SHARE  REPURCHASES.  The Board has  authorized  the  repurchase  of
Industries'   common  shares.  At  June  30,  1997,   Industries  had  purchased
approximately  21.3 million  shares since 1989 at an average price of $27.83 per
share.  Approximately  5.9 million  additional  common shares may be repurchased
under the Board's authorization.

     (17)LONG-TERM  INCENTIVE PLAN: Industries has two long-term incentive plans
for key  management  employees that were approved by  shareholders  on April 13,
1988 (1988 Plan) and April 13, 1994 (1994 Plan),  each of which provides for the
issuance  of up to 2.5 million of  Industries'  common  shares to key  employees
through 1998 and 2004,  respectively.  At June 30, 1997, there were 4,578 shares
and  2,206,550  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 June 30,  1997.  Under both Plans,  the  exercise  price of each
option equals the market price of Industries'  stock on the date of grant.  Each
option's maximum term is ten years and vests one year from the date of grant.
 
     The stock  appreciation  rights (SARs) may be exercised only in tandem with
stock options on a one-for-one basis and are payable in cash, Industries' common
shares, or a combination  thereof.  Restricted stock awards are restricted as to
transfer and are subject to  forfeiture  for  specific  periods from the date of
grant.  Restrictions  on shares  awarded  in 1995  lapse five years from date of
grant and vesting is variable from 0% to 200% of the number awarded,  subject to
specific earnings per share and stock appreciation goals. Restrictions on shares
awarded  in 1996 and 1997  lapse two years  from  date of grant and  vesting  is
variable from 0% to 100% of the number awarded,  subject to specific performance
goals. If a participant's  employment is terminated  prior to vesting other than
by reason of death,  disability or retirement,  restricted shares are forfeited.
There were 271,000 and 262,000  restricted  shares  outstanding at June 30, 1997
and December 31, 1996, respectively.

     The  Industries  Nonemployee  Director  Stock  Incentive  Plan,  which  was
approved  by  shareholders,  provides  for  the  issuance  of up to  100,000  of
Industries'  common  shares to  nonemployee  directors of  Industries.  The Plan
provides for awards of common shares which vest in 20% per year increments, with
full vesting  after five years.  The Plan also allows the award of  nonqualified
stock options. If a director's service on the Board is terminated for any reason
other than death or  disability,  any common shares not vested as of the date of
termination  are forfeited.  As of June 30, 1997,  32,750 shares had been issued
under the Plan.

     Industries  accounts  for these plans  under  Accounting  Principles  Board
Opinion  No.  25,  under  which no  compensation  cost has been  recognized  for
non-qualified stock options. The compensation cost that has been charged against
income for  restricted  stock  awards was $0.4,  $0.9,  and $1.9 million for the
three-month,   six-month,   and  twelve-month  periods  ending  June  30,  1997,
respectively. Had compensation cost for stock options been determined consistent
with SFAS No. 123  "Accounting for  Stock-Based  Compensation,"  Industries' net
income and earnings per share would have been reduced to the following pro forma
amounts:

<TABLE>

<CAPTION>
                           Three Months           Six Months            Twelve Months
                              Ended                 Ended                  Ended
                             June 30,              June 30,               June 30,
                        ------------------   --------------------   --------------------
                           1997    1996       1997        1996        1997        1996
                        ========  ========   =========  =========   =========  =========
                               (Dollars in thousands, except per share data)
<S>                     <C>       <C>        <C>        <C>         <C>        <C>
Net Income:
 As reported            $ 28,236  $ 23,429   $  99,074  $  90,915   $ 184,893  $ 179,101
 Pro forma              $ 28,029  $ 23,267   $  98,660  $  90,590   $ 184,102  $ 178,532

Earnings Per Share:
 As reported            $   0.44  $   0.38   $    1.61  $    1.47   $    3.03  $    2.85
 Pro forma              $   0.44  $   0.38   $    1.61  $    1.47   $    3.02  $    2.84
</TABLE>

     The fair  value of each  option  granted  used to  determine  pro forma net
income  is  estimated  as of the date of grant  using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
the three-month,  six-month,  and  twelve-month  periods ended June 30, 1997 and
June  30,  1996,  respectively:  risk-free  interest  rate of 6.39%  and  6.24%,
respectively;   expected   dividend   yield  of  $1.68  and  $1.56  per   share,
respectively;  expected  option term of five years;  and expected  volatility of
13.2% and 13.0%, respectively.

     Changes in  outstanding  shares under option and SARs for the  three-month,
six-month, and twelve-month periods ended June 30, 1997 and June 30, 1996 are as
follows:

<TABLE>

<CAPTION>
                                          NONQUALIFIED STOCK OPTIONS
                                -------------------------------------------
                                           Weighted                Weighted
                                           Average                 Average
   Three Months Ended                      Option                  Option
      June 30,                     1997    Price           1996    Price
===========================     =========  ========     =========  ========
<S>                             <C>        <C>          <C>        <C>
Balance beginning of period     1,149,750  $  30.57     1,089,850  $  28.52
 Exercised                        (44,350) $  28.24       (25,150) $  24.36
 Canceled                          (1,000) $  37.81        (4,000) $  32.44
                                ---------               ---------
Balance end of period           1,104,400  $  30.66     1,060,700  $  28.61
                                =========               =========
Shares exercisable                841,950  $  28.43       796,250  $  27.34
                                =========               =========

                                          NONQUALIFIED STOCK OPTIONS
                                -------------------------------------------
                                           Weighted                Weighted
                                           Average                 Average
   Six Months Ended                        Option                  Option
      June 30,                     1997    Price           1996    Price
===========================     =========  ========     =========  ========
<S>                             <C>        <C>          <C>        <C>
Balance beginning of period     1,187,150  $  30.58     1,107,750  $  28.55
 Exercised                        (70,900) $  28.16       (38,050) $  25.92
 Canceled                         (11,850) $  37.81        (9,000) $  32.52
                                ---------               ---------
Balance end of period           1,104,400  $  30.66     1,060,700  $  28.61
                                =========               =========
Shares exercisable                841,950  $  28.43       796,250  $  27.34
                                =========               =========

                                          NONQUALIFIED STOCK OPTIONS
                                -------------------------------------------
                                           Weighted                Weighted
                                           Average                 Average
   Twelve Months Ended                     Option                  Option
      June 30,                     1997    Price           1996    Price
===========================     =========  ========     =========  ========
<S>                             <C>        <C>          <C>        <C>
Balance beginning of period     1,060,700  $  28.61       995,900  $  27.07
 Granted                          278,300  $  37.81       277,450  $  32.44
 Exercised                       (216,850) $  29.29      (198,650) $  25.96
 Canceled                         (17,750) $  37.09       (14,000) $  32.49
                                ---------               ---------
Balance end of period           1,104,400  $  30.66     1,060,700  $  28.61
                                =========               =========
Shares exercisable                841,950  $  28.43       796,250  $  27.34
                                =========               =========
Weighted average fair value
 of options granted             $    5.00               $    3.87
                                =========               =========

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

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

                                    NONQUALIFIED STOCK OPTIONS WITH SARs
                                -------------------------------------------
   Twelve Months Ended                     Option                  Option
       June 30,                    1997    Price           1996    Price
===========================     =========  ========     =========  ========
<S>                             <C>        <C>          <C>        <C>
Balance beginning of period         5,600  $ 10.94          9,900  $  10.94
 Exercised                              0                  (4,300) $  10.94
                                ---------               ---------
Balance end of period               5,600  $ 10.94          5,600  $  10.94
                                =========               =========
Shares exercisable                  5,600  $ 10.94          5,600  $  10.94
                                =========               =========
</TABLE>

     The  following  table  summarizes  information  about  non-qualified  stock
options at June 30, 1997:

<TABLE>

<CAPTION>
                         OPTIONS OUTSTANDING
--------------------------------------------------------------------------
                      Number         Weighted Average
   Range of        Outstanding at       Remaining        Weighted Average
  Option Price     June 30, 1997    Contractual Life      Option Price
================   ==============   ==================   =================
<S>                <C>              <C>                  <C>
$10.94 to $17.94        88,500           2.54 years            $16.60
$22.94 to $28.75       359,150           5.84 years            $26.58
$30.31 to $37.81       656,750           7.97 years            $34.78
----------------     ---------           ----------            ------
$10.94 to $37.81     1,104,400           6.84 years            $30.66
                     =========

<CAPTION>
                         OPTIONS EXERCISABLE
--------------------------------------------------------------------------
                                  Number
   Range of                    Exercisable at             Weighted Average
  Option Price                 June 30, 1997                Option Price
================             ==================          =================
<S>                          <C>                         <C>
$10.94 to $17.94                    88,500                     $16.60
$22.94 to $28.75                   359,150                     $26.58
$30.31 to $33.19                   394,300                     $32.77
----------------                 ---------                     ------
$10.94 to $33.19                   841,950                     $28.43
                                 =========
</TABLE>

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

<TABLE>

<CAPTION>
                                                      AMOUNTS OUTSTANDING
                                                 ---------------------------
                                                   June 30,      December 31,
(Dollars in thousands)                               1997           1996
                                                 =============   ============
<S>                                              <C>             <C>
First mortgage bonds -
 Interest rates between 5.20% and 9.83% with
  a weighted average interest rate of 7.21%
  and various maturities between October 1, 1998
  and September 1, 2025                           $   202,109     $  109,509
 
Pollution control notes and bonds-
 Interest rates between 3.78% and 5.70% with
  a weighted average interest rate of 4.01%
  and various maturities between October 1, 2003
  and April 1, 2019                                   242,000        242,000

Medium-term notes -
 Interest rates between 6.10% and 7.99% with
  a weighted average interest rate of 7.20%
  and various maturities between March 20, 2000
  and June 27, 2027                                 1,008,025        644,025

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

Notes payable -
 Interest rates between 6.31% and 8.15% with
  a weighted average interest rate of 7.23%
  and various maturities between December 22, 1999
  and April 1, 2006                                    38,497         19,522

Variable bank loan -
  6.81% - due August, 2003                              5,600              -

Term Loan Facility-weighted average interest
  rate of 8.81% at June 30, 1997, due
  December 31, 2004                                    41,108         40,576

Unamortized premium and discount
 on long-term debt, net                                (3,994)        (3,526)
                                                 ------------    -----------
    Total long-term debt, excluding
    amounts due in one year                       $ 1,608,345    $ 1,127,106
                                                 ============    ===========
</TABLE>

     The sinking fund  requirements  of long-term  debt  outstanding at June 30,
1997 (including the maturity of Northern Indiana's first mortgage bonds:  Series
P, 6-7/8%, due October 1, 1998 and Series T, 7.50%, due April 1, 2002;  Northern
Indiana's  medium-term  notes due from  March  20,  2000 to June 12,  2002;  NDC
Douglas  Properties,  Inc.'s notes  payable due  December 22, 1999;  IWC's first
mortgage bonds: Series 5.20%, due May 1, 2001 and Series 8.00%, due December 15,
2001;  and IWCR's senior notes  payable,  due March 15,  2001),  for each of the
twelve-month periods subsequent to June 30, 1998 are as follows:

<TABLE>
<CAPTION>

Twelve Months Ended June 30,
=================================
<S>                 <C>
1999                $  27,281,577
2000                  167,945,193
2001                   38,958,443
2002                   86,746,993
</TABLE>

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

     Northern  Indiana's   Indenture  dated  August  1,  1939,  as  amended  and
supplemented,  securing the first  mortgage  bonds  issued by Northern  Indiana,
constitutes  a direct first  mortgage lien upon  substantially  all property and
franchises, other than expressly excepted property, owned by Northern Indiana.

     On May 28, 1997,  Northern  Indiana was  authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes,  Series E, with various  maturities,  for
purposes of refinancing  certain first mortgage bonds and medium-term  notes. As
of June 30, 1997,  $99.0 million of the  medium-term  notes had been issued with
various  interest rates and  maturities.  The proceeds from these issuances were
used to pay short-term debt incurred to redeem its First Mortgage Bonds,  Series
N, and to pay at maturity various issues of Medium-Term Notes, Series D.

     IWC's first mortgage bonds are secured by its utility plant.  Provisions of
trust  indentures  related to the 5-7/8%  Series  Bonds and the 8% Series  Bonds
require annual sinking or improvement  payments amounting to 1/2% of the maximum
aggregate amount outstanding.  As permitted, this requirement has been satisfied
by substituting a portion of permanent additions to utility plant.

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

     On February 14, 1997,  Capital  Markets was authorized to issue and sell up
to $300 million of medium-term  notes.  As of June 30, 1997, $300 million of the
medium-term  notes had been issued with various  interest rates and  maturities.
The proceeds from these  issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations of Capital Markets.

     The  obligations  of Capital  Markets  are  subject to a Support  Agreement
between Industries and Capital Markets,  under which Industries has committed to
make  payments of interest and principal on Capital  Markets'  securities in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  investors against
the  stock and  assets  of  Northern  Indiana.  Under  the terms of the  Support
Agreement,  in addition to the cash flow of cash dividends paid to Industries by
any of its consolidated subsidiaries,  the assets of Industries,  other than the
stock and assets of Northern  Indiana,  are  available as recourse to holders of
Capital  Markets'  securities.  The carrying  value of those assets  (other than
Northern  Indiana),  reflected  in  the  consolidated  financial  statements  of
Industries, was approximately $1.2 billion at June 30, 1997.

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

<TABLE>

<CAPTION>
                                                June 30,       December 31,
(Dollars in thousands)                            1997              1996
                                              =============     ============
<S>                                            <C>               <C>
First Mortgage Bonds -
 Interest rates of 5-7/8% and 6-3/8% with a
  weighted average interest rate of 6.27% and
  maturities of August 1, 1997 and
  September 1, 1997                            $     32,522       $    25,747
Medium-term notes -
 Interest rate of 5.83% and 5.95% with a
  weighted average interest rate of 5.85% and
  various maturities between July 4, 1997
  and April 13, 1998                                 75,000            40,000
Zero Coupon notes -
    7.57%, $72,500 at maturity -
     due December 1, 1997                            70,296            67,731
Notes payable -
 Interest rates between 6.72% and 9.00% with a
  a weighted average interest rate of 8.26%
  and maturities between October 1, 1997 and
  April 1, 1998                                       5,894             5,033
Term loan facility -
 Interest rate of 8.81%                               6,084             6,041
                                               ------------      ------------
   Total current portion of long-term debt     $    189,796      $    144,552
                                               ============      ============
</TABLE>

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

     (20)SHORT-TERM  BORROWINGS:  Northern Indiana has a $250 million  revolving
Credit  Agreement  with several  banks which  terminates  August 19, 1999 unless
extended by its terms. As of June 30, 1997, there were no borrowings outstanding
under this agreement.  In addition,  Northern Indiana has $14.2 million in lines
of credit  which run to May 31,  1998.  The credit  pricing of each of the lines
varies from either the lending banks' commercial prime or market rates. Northern
Indiana has agreed to compensate the participating  banks with arrangements that
vary  from no  commitment  fees to a  combination  of fees  which  are  mutually
satisfactory  to both  parties.  As of June 30, 1997,  there were no  borrowings
under these lines of credit.  The Credit  Agreement and lines of credit are also
available to support the issuance of commercial paper.

     Northern  Indiana also has $273.5  million of money market lines of credit.
As of June 30, 1997 and December 31,  1996,  there were $35.1  million and $79.0
million of borrowings, respectively, outstanding under these lines of credit.

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

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

     As of June 30,  1997 and  December  31,  1996,  Northern  Indiana had $45.4
million and $193.9 million of commercial  paper  outstanding,  respectively.  At
June  30,  1997,  the  weighted   average  interest  rate  of  commercial  paper
outstanding was 5.60%.

     Capital Markets has a $150 million  revolving  Credit  Agreement which will
terminate August 19, 1999,  unless extended by its terms. This facility provides
short-term  financing  flexibility  to Industries and also serves as the back-up
instrument for a commercial  paper program.  As of June 30, 1997,  there were no
borrowings outstanding under this agreement.

     Capital Markets also has $95 million of money market lines of credit. As of
June  30,  1997  and  December  31,  1996,  $33.0  million  and  $27.0  million,
respectively, of borrowings were outstanding under these lines of credit.

     As of June 30,  1997 and  December  31,  1996,  Capital  Markets  had $12.3
million and $119.3 million of commercial  paper  outstanding,  respectively.  At
June  30,  1997,  the  weighted   average  interest  rate  of  commercial  paper
outstanding was 5.80%.

     As of June 30,  1997,  IWCR and its  subsidiaries  had lines of credit with
banks  aggregating  $48.9  million.  As of  June  30,  1997,  $34.2  million  of
borrowings were outstanding under these lines of credit.

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

<CAPTION>
                                               June 30,        December 31,
                                                 1997              1996
                                             =============      ============
                                                  (Dollars in thousands)
<S>                                          <C>                <C>
  Commercial paper                           $    57,650        $   313,205
  Notes payable                                  102,200            106,000
  Standby loan facility                            6,266              4,949
  Revolving loan facility                          2,665              1,831
                                             -----------        -----------
   Total short-term borrowings               $   168,781        $   425,985
                                             ===========        ===========
</TABLE>

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

     The following is a schedule,  by years, of future minimum rental  payments,
excluding those to associated  companies,  required under operating  leases that
have initial or remaining  noncancelable lease terms in excess of one year as of
June 30, 1997:

<TABLE>

<CAPTION>

      Twelve Months Ended June 30,
==========================================
(In thousands)
<S>                               <C>
   1998                           $ 14,845
   1999                             14,527
   2000                             13,665
   2001                             13,377
   2002                             51,636
   Later years                      88,146
                                  --------
Total minimum payments required   $196,196
                                  ========
</TABLE>

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

<TABLE>

<CAPTION>

                             June 30,      June 30,
(In thousands)                 1997         1996
                            =========     =========
<S>                         <C>            <C>
Three months ended          $ 2,292        $ 1,693
Six months ended              4,540          3,724
Twelve months ended           8,937          8,187
</TABLE>

     (22)COMMITMENTS:  The Utilities  estimate that  approximately  $974 million
will be expended for  construction  purposes for the period from January 1, 1997
to December 31, 2001. Substantial commitments have been made by the Utilities in
connection with their programs.

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

     Northern  Indiana has entered into an  agreement  with  Integrated  Systems
Solutions  Corporation  (ISSC),  a  wholly-owned  subsidiary of IBM, for ISSC to
perform all data center,  application  development and maintenance,  and desktop
management of Northern Indiana.

     (23)PRIMARY   ENERGY:   Primary  Energy,   a  wholly-owned   subsidiary  of
Industries,  is the parent of subsidiaries including Harbor Coal Company (Harbor
Coal), North Lake Energy  Corporation (North Lake),  Lakeside Energy Corporation
(LEC), Portside Energy Corporation (Portside),  and Cokenergy, Inc (CE). Primary
arranges energy-related projects with large industrial customers and has entered
into certain commitments in connection with these projects.

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

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

     LEC has entered into a lease for the use of a 161-megawatt  energy facility
located at USS Gary  Works.  The  facility  processes  high-pressure  steam into
electricity  and  low-pressure  steam for delivery to USX  Corporation-US  Steel
Group. The fifteen-year  lease with a third-party  lessor commenced on April 16,
1997 when the facility was placed in commercial  operation.  Capital Markets has
guaranteed LEC obligations relative to plant construction.  Capital Markets also
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  intends  to lease  this  facility,  once
constructed,  from a third  party.  Additionally,  Portside  has entered into an
interim  agreement,  which  expires  when  the  lease  is  established  with the
third-party  lessor,  under which  Portside is acting as agent for the lessor to
design,  construct, and start up the energy facility.  Industries has guaranteed
certain Portside obligations to the lessor during construction.  Capital Markets
anticipates   guaranteeing   certain  Portside   obligations   relative  to  the
anticipated lease.  Construction of the project began in June 1996. The facility
is scheduled to be operational in August 1997.

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

     Primary has advanced  approximately  $112 million and $42 million,  at June
30,  1997 and  December  31,  1996,  respectively,  to the lessors of the energy
related  projects  discussed  above.  These net  advances are included in "Other
Receivables" in the Consolidated  Balance Sheet and "Other,  net" as a component
of operating activities in the Consolidated Statement of Cash Flows.

     (24)FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS:   The  following  methods  and
assumptions  were used to  estimate  the fair value of each  class of  financial
instruments for which it is practicable to estimate that value:

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

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

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

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

<TABLE>

<CAPTION>
                                   June 30, 1997           December 31, 1996
                              ----------------------     ----------------------
                               Carrying    Estimated      Carrying    Estimated
(In thousands)                  Amount    Fair Value       Amount    Fair Value
                              ==========  ==========     ==========  ==========
<S>                           <C>         <C>            <C>         <C>
Cash and cash equivalents     $   29,391  $   29,391     $   26,333  $   26,333
Investments                       32,953      36,953         30,003      33,019
Long-term debt (including
 current portion)              1,799,641   1,745,925      1,273,158   1,220,492
Preferred stock                  147,444     130,594        144,200     126,379
</TABLE>

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

     (25)CUSTOMER   CONCENTRATIONS:   Industries'  utility  subsidiaries  supply
natural gas,  electric  energy and water.  Natural gas and  electric  energy are
supplied  to  the  northern  third  of  Indiana.   The  water   utilities  serve
Indianapolis,  Indiana and surrounding areas. Although the Energy Utilities have
a  diversified  base of  residential  and  commercial  customers,  a substantial
portion of their electric and gas  industrial  deliveries are dependent upon the
basic  steel  industry.  The  basic  steel  industry  accounted  for 4% and  3%,
respectively,  of gas revenue  (including  transportation  services)  and 22% of
electric revenue for the twelve months ended June 30, 1997 and June 30, 1996.

<PAGE>
     ITEM 2.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

HOLDING COMPANY -

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

     On March 25, 1997,  Industries  acquired IWC Resources  Corporation (IWCR).
IWCR's  subsidiaries  include two regulated water utilities (IWC and Harbour)and
five  non-utility  companies  providing  utility-related  products  and services
including  installation,  repair and  maintenance of  underground  pipelines and
utility line locating and marking. The two primary non-utility  subsidiaries are
Miller Pipeline Corporation (Miller) and SM&P Utility Resources, Inc. (SM&P).

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

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

REVENUES -

     Total  operating  revenues  for the  twelve  months  ended  June  30,  1997
increased  $272.7  million as compared to the twelve months ended June 30, 1996.
The  increase  includes  $51.6  million  reflecting  three  months of  operating
revenues from IWCR for the current period. Gas revenues increased $65.2 million,
electric  revenues  decreased $20.6 million,  and Products and Services revenues
increased  $209.3 million,  as compared to the same period in 1996. The increase
in gas  revenues  was  largely  attributable  to  increased  sales to  wholesale
customers, increased deliveries of gas transported for others, and increased gas
costs per dekatherm (dth),  partially offset by decreased gas transition  costs.
The  decrease  in  electric  revenues  was  mainly  due to  decreased  sales  to
residential  customers  resulting  from the cooler  summer in 1996 and decreased
sales to industrial and wholesale customers.  Increased volumes in gas marketing
resulted in an increase of $123.6  million in Products and Services  revenue for
the  twelve-month   period  ended  June  30,  1997.  NESI  Power  Marketing,   a
wholly-owned  subsidiary  of  Services,  which was formed on December  11, 1996,
markets  wholesale  power and provided an additional  $42.4 million in operating
revenue for Products and Services for the twelve months ended June 30, 1997.

     Total  operating  revenues for the six months ended June 30, 1997 increased
$169.0  million as compared to the six months ended June 30, 1996.  The increase
includes $51.6 million  reflecting three months of operating  revenues from IWCR
for the current period. Gas revenues  increased $6.1 million,  electric revenues
decreased  $2.8  million and  Products and  Services  revenue  increased  $146.9
million,  as compared to the same period in 1996.  The  increase in gas revenues
was mainly due to increased sales to wholesale  customers,  increased deliveries
of gas transported for others, increased gas transition costs, and increased gas
costs per dth.  The  decrease in electric  revenues  was mainly due to decreased
sales to industrial and wholesale  customers.  Increased gas and wholesale power
marketing  volumes  resulted in an increase  of $112.1  million in Products  and
Services revenue for the six-month period ended June 30, 1997.
 
     Total operating revenues for the three months ended June 30, 1997 increased
$124.7 million as compared to the three months ended June 30, 1996. The increase
includes $51.6 million  reflecting three months of operating  revenues from IWCR
for the current  period.  Gas and electric  revenues  were  consistent  with the
levels for the same period  ended June 30,  1996.  Increased  volumes in gas and
wholesale power  marketing  resulted in an increase of $72.3 million in Products
and Services revenue for the three-month period ended June 30, 1997.

     The  basic  steel  industry  accounted  for 30% of  natural  gas  delivered
(including  volumes  transported)  and 35% of  electric  sales  for  the  Energy
Utilities during the twelve months ended June 30, 1997.

     The  components  of the  variations  in gas,  electric,  and  products  and
services revenues are shown in the following table:

<TABLE>

<CAPTION>
                                               Variations from Prior Periods
                                          ----------------------------------------
                                           June 30, 1997 Compared to June 30, 1996
                                          ----------------------------------------
                                            Three            Six           Twelve
(In thousands)                              Months          Months         Months
                                           =========      ==========     =========
<S>                                        <C>            <C>            <C>
Gas Revenue -
 Pass through of net changes in
  purchased gas costs, gas storage,
  and storage transportation costs         $ (13,387)     $  15,045      $  62,072
 Gas transition costs                         (1,620)         1,494         (8,023)
 Changes in sales levels                      13,630        (12,535)         8,453
 Gas transported                               1,649          2,064          2,686
                                           ---------      ---------      ---------
Gas Revenue Change                               272          6,068         65,188
                                           ---------      ---------      ---------
Electric Revenue  -
 Pass through of net changes
     in fuel costs                               152          1,393            (21)
 Changes in sales levels                        (330)        (4,171)       (20,614)
                                           ---------      ---------      ---------
Electric Revenue Change                         (178)        (2,778)       (20,635)
                                           ---------      ---------      ---------
Water Revenue Change                          18,795         18,795         18,795
                                           ---------      ---------      ---------
Products and Services Revenue -
 Gas marketing                                44,690         68,007        123,617
 Wholesale power marketing                    27,580         42,403         42,403
 Pipeline construction                        14,632         14,632         14,632
 Locate and marking                           17,204         17,204         17,204
 Other                                         1,657          4,643         11,464
                                           ---------      ---------      ---------
Product and Services Revenue Change          105,763        146,889        209,320
                                           ---------      ---------      ---------
   Total Revenue Change                    $ 124,652      $ 168,974      $ 272,668
                                           =========      =========      =========
</TABLE>

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

GAS COSTS -

     The Energy  Utilities' gas costs decreased $5.5 million for the three-month
period ended June 30, 1997. Gas costs  increased $10.1 and $65.4 million for the
six-month and twelve-month periods ended June 30, 1997, respectively.  Gas costs
decreased  for the  three-month  period  due to  decreased  gas  costs per dth
partially offset by increased  purchases.  Gas costs increased for the six-month
and  twelve-month  periods due to  increased  gas costs per dth,  increased  gas
transition  costs,  and  increased  purchases.  The average  cost for the Energy
Utilities' purchased gas for the three-month, six-month and twelve-month periods
ended  June 30,  1997,  after  adjustment  for gas  transition  costs  billed to
transport  customers,  was $2.61, $3.10 and  $3.14  per dth,  respectively,  as
compared to $2.84, $2.95 and $2.74 per dth for the same periods in 1996.

FUEL AND PURCHASED POWER -

     The cost of fuel for electric  generation  decreased  for the  twelve-month
period ended June 30, 1997,  compared to the 1996 period,  mainly as a result of
decreased production of electricity.

     Power purchased decreased $3.8 million and $6.8 million for the three-month
and  six-month  periods  ended  June 30,  1997,  respectively,  as a  result  of
decreased bulk power purchases.

COST OF PRODUCTS AND SERVICES -

     The cost of sales for Products and Services  increased  $193.1  million for
the twelve  months ended June 30,  1997.  The increase  includes  $22.2  million
reflecting  three  months  of cost of sales  from IWCR for the  current  period.
Increased  volumes in gas and wholesale power marketing  increased cost of sales
$167.8 million for the twelve-months  ended June 30, 1997,  compared to June 30,
1996.

     The cost of sales for Products and Services  increased  $138.0  million for
the six- months ended June 30, 1997,  compared to the 1996 period.  The increase
includes  $22.2 million  reflecting  three months of cost of sales from IWCR for
the current  period.  Increased  volumes in gas and  wholesale  power  marketing
increased  cost of sales $114.1  million for the six months ended June 30, 1997,
compared to June 30, 1996.

     The cost of sales for Products and Services increased $95.9 million for the
three-  months  ended June 30, 1997,  compared to the 1996 period.  The increase
includes  $22.2 million  reflecting  three months of cost of sales from IWCR for
the current  period.  Increased  volumes in gas and  wholesale  power  marketing
increased  cost of sales $73.6 million for the three months ended June 30, 1997,
compared to June 30, 1996.

OPERATING MARGINS -

     Operating margins for the twelve months ended June 30, 1997 increased $22.2
million  from the same  period a year ago.  The  increase  in  operating  margin
includes $29.4 million related to three months of IWCR operations in the current
period.  The operating  margin from gas deliveries  decreased $0.2 million.  The
operating  margin from electric sales  decreased  $12.6 million due to decreased
sales to  residential  customers,  reflecting  milder 1996 summer  weather,  and
decreased sales to industrial and wholesale customers.

     Operating  margins for the six months ended June 30, 1997  increased  $25.1
million  from the same  period a year ago.  The  increase  in  operating  margin
includes $29.4 million related to three months of IWCR operations in the current
period.  The operating margin from gas deliveries  decreased $4.0 million due to
decreased  sales to  residential  and  commercial  customers  reflecting  milder
weather,  partially  offset  by  increased  sales  to  wholesale  customers  and
increased  deliveries of gas transported for others.  The operating  margin from
electric sales increased $1.4 million as a result of increased  wholesale energy
transactions.  The operating  margin for Products and Services,  excluding IWCR,
decreased $1.7 million resulting from a decrease in gas marketing margin.

     Operating  margins for the three months ended June 30, 1997 increased $36.6
million  from the same  period a year ago.  The  increase  in  operating  margin
includes $29.4 million related to three months of IWCR operations in the current
period.  Gas operating  margin  increased $5.7 million due to increased sales to
residential  and  commercial  customers  reflecting  colder  weather  during the
period,  increased sales to wholesale customers, and increased deliveries of gas
transported  for  others,  partially  offset by  decreased  sales to  industrial
customers.  Operating  margin from electric sales  increased $2.2 million due to
increased  sales to residential and commercial  customers,  which were partially
offset by decreased sales to industrial and wholesale customers.

OPERATING EXPENSES AND TAXES -

     Operation expenses increased $7.7 million for the twelve-month period ended
June  30,  1997.  Operation  expense  includes  an  increase  of  $16.0  million
reflecting  three  months of  operations  of IWCR in the  current  period.  This
increase was offset by decreased  employee  costs of $7.2 million and  decreased
electric production pollution control facility costs of $4.7 million at Northern
Indiana.  Operation  expenses,  excluding  IWCR,  increased $5.3 million for the
six-month period ended June 30, 1997 reflecting operating expenses of North Lake
and LEC  which  began  operations  in May 1996  and  April  1997,  respectively.
Operation expenses increased $10.8 million for the three-month period ended June
30, 1997.

     Maintenance  expenses  decreased $6.9 million for the  twelve-month  period
ended June 30,  1997 mainly  reflecting  decreased  maintenance  activity at the
electric production facilities of $4.3 million and decreased maintenance of $2.6
million on the transmission and distribution  facilities.  Maintenance  expenses
decreased  $8.3  million  for  the  six-  month  period   reflecting   decreased
maintenance on  distribution  facilities.  Maintenance  expenses  decreased $7.8
million for the three-month period reflecting decreased  maintenance on electric
production and distribution facilities.

     Depreciation  and  amortization  expense  increased  $5.7,  $7.6 and  $22.3
million for the three-month,  six-month and twelve-month  periods ended June 30,
1997,  respectively,  resulting from plant additions,  increased amortization of
computer  software,  amortization of deferred costs related to scrubber services
provided by Pure Air at the Bailly Generating Station,  and amortization of SFAS
No. 106 costs  effective  February 1, 1997.  The  increase in  depreciation  and
amortization  also  includes $3.1 million  related to IWCR for the  three-month,
six-month and twelve-month periods ended June 30, 1997.

OTHER INCOME (DEDUCTIONS) -

     Other Income  (Deductions)  for the  twelve-month  period  increased  $16.3
million  mainly  resulting  from the  disposition of certain oil and natural gas
properties,  and the sale of Crescent Dunes  Lakeshore  property to the National
Park Service. Other Income (Deductions) increased $8.7 million for the six-month
period  ended June 30,  1997  mainly due to the  disposition  of certain oil and
natural gas properties. Other Income (Deductions) increased $1.7 million for the
three-month period ended June 30, 1997.

INTEREST AND OTHER CHARGES -

     Interest and other charges  increased for the three-month,  six-month,  and
twelve-month periods ended June 30, 1997 reflecting the issuance of $300 million
of Capital  Markets'  medium-term  notes, $75 million of Capital Markets' Junior
Subordinated  Deferrable  Interest  Debentures,  Series A and  three  months  of
interest expense at IWCR.

     See  Note 2 to Notes  to  Consolidated  Financial  Statements  (Summary  of
Significant Accounting Policies) for a discussion of Regulatory Assets, Carrying
Charges  and  Deferred  Depreciation,   and  Allowance  for  Funds  Used  During
Construction.  Also see Notes 7, 9, and 11 for a  discussion  of FERC  Order No.
636, Income Taxes and Postretirement Benefits.

NET INCOME-

     Industries' net income for the twelve-month  period ended June 30, 1997 was
$184.9 million compared to $179.1 million for the twelve-month period ended June
30, 1996.

     Net  income  for the six  months  ended  June 30,  1997 was  $99.1  million
compared to $90.9 million for the six months ended June 30, 1996.

     Net  income for the three  months  ended  June 30,  1997 was $28.2  million
compared to $23.4 million for the three months ended June 30, 1996.

IMPACT OF ACCOUNTING STANDARDS -

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

ENVIRONMENTAL MATTERS -

     The  Utilities  have an  ongoing  program  to  remain  aware  of  laws  and
regulations involved with hazardous waste and other environmental matters. It is
the Utilities'  intent to continue to evaluate  their  facilities and properties
with respect to these rules and identify any sites that would require corrective
action.  The Utilities have recorded a reserve of  approximately  $17 million to
cover probable  corrective actions as of June 30, 1997;  however,  environmental
regulations  and  remediation  techniques  are  subject  to future  change.  The
ultimate  cost  could be  significant,  depending  on the  extent of  corrective
actions required.  Based upon  investigations and management's  understanding of
current laws and regulations,  the Utilities believe that any corrective actions
required,  after  consideration of insurance  coverages and  contributions  from
other potentially responsible parties, will not have a significant impact on the
financial position or results of operations of Industries.

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

     Because  of  major  investments  made  in  modern   environmental   control
facilities and the use of low-sulfur  coal, all of Northern  Indiana's  electric
production  facilities now comply with the sulfur dioxide limitations  contained
in the acid  deposition  provisions  of the  Clean  Air Act  Amendments  of 1990
(CAAA).  Northern Indiana estimates that total costs of compliance with the CAAA
sulfur  dioxide  regulations  will impact  electric rates by less than 5% in the
future.

     The CAAA contain  provisions that could lead to limitations on emissions of
nitrogen  oxides and  hazardous  air  pollutants  which may require  significant
capital  expenditures  for  control  of these  emissions.  Northern  Indiana  is
pursuing a nitrogen oxide control program to meet future requirements.  Northern
Indiana  cannot  predict  the costs of  complying  with CAAA  requirements,  but
Northern  Indiana  believes  that any such mandated  costs would be  recoverable
through the rate-making process.
 
     The EPA has notified Northern Indiana that it is a "potentially responsible
party" (PRP) under the  Comprehensive  Environmental  Response  Compensation and
Liability  Act  (CERCLA)  and may be required to share in the cost of cleanup of
several  waste  disposal  sites  identified by the EPA. The sites are in various
stages  of  investigation,  analysis  and  remediation.  At each  of the  sites,
Northern Indiana is one of several PRPs, and it is expected that remedial costs,
as provided  under  CERCLA,  will be shared among them.  At some sites  Northern
Indiana and/or the other named PRPs are presently  working with the EPA to clean
up the sites and avoid the imposition of fines or added costs.

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

     During the  course of various  investigations,  the Energy  Utilities  have
identified impacts to soil, groundwater,  sediment and surface water from former
manufactured-gas  plants.  At three sites where residues were noted seeping into
rivers,  Northern  Indiana  notified  the Indiana  Department  of  Environmental
Management  (IDEM)  and  the EPA and  immediately  took  steps  to  contain  the
material. The Energy Utilities have worked with IDEM or the EPA on investigation
or remedial  activities at several sites. Two 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 1994, the Energy Utilities  approached  various  companies that provided
insurance  coverage which the Energy  Utilities  believe covers costs related to
actions taken at former  manufactured-gas  plants. In September 1995, certain of
the insurance companies initiated a suit in Indiana state court against Northern
Indiana seeking a ruling that denied coverage.  Later that same month,  Northern
Indiana  initiated a similar suit in federal  court,  and the state court action
was stayed.  After the  dismissal  of the  federal  court  action on  procedural
grounds in May 1997,  Northern  Indiana  filed  claims in the state court action
against various insurance companies,  seeking coverage for costs associated with
several  former  manufactured  gas plants and damages for alleged  misconduct by
some of the  insurance  companies.  The state  court  action is now  proceeding.
Northern  Indiana has received  cash  settlements  from several of the insurance
companies.

     The  possibility  that exposure to electric and magnetic  fields  emanating
(EMF) 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.  The U.S. National Research Council of the National Academy
of Sciences  concluded in a report,  after  examining  more than 500 EMF studies
spanning 17 years,  that among other things,  there is insufficient  evidence to
consider EMF a threat to human  health.  Despite the report's  findings,  future
research appropriations are continuing to be dedicated to explore this issue.

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

     Under the Federal Safe Drinking Water Act (SDWA),  the Water  Utilities are
subject to  regulation  by the EPA for the  quality of water sold and  treatment
techniques  used to make  the  water  potable.  The EPA  promulgates  nationally
applicable maximum  contaminant levels (MCLs) for contaminants found in drinking
water.  Management believes its water utilities are currently in compliance with
all MCLs  promulgated  to date. The EPA has continuing  authority,  however,  to
issue additional  regulations  under the SDWA. In August 1996,  Congress amended
the SDWA to allow the EPA more  authority  to weigh the  costs and  benefits  of
regulations being considered in some (but not all) cases. The 1996 amendments do
not,  however,  reduce  the  number  of  new  standards  required  by  the  1986
amendments.  Such standards  promulgated could be costly and require substantial
changes in the Water Utilities' operations.  The Water Utilities would expect to
recover the costs of such  changes  through  their water  rates;  however,  such
recovery may not necessarily be timely.

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

LIQUIDITY AND CAPITAL RESOURCES -

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

     On February 13, 1996,  Capital  Markets issued $75 million of 7-3/4% Junior
Subordinated  Deferrable  Interest  Debentures,  Series A, due  March  31,  2026
(Debentures),  pursuant to an underwritten  public  offering.  Proceeds from the
sale of the Debentures  were used to pay  short-term  debt incurred to redeem on
January 12, 1996, $35 million of Industries' 8.75% Preferred Shares, pursuant to
mandatory redemption, and to pay other short-term debt of Capital Markets.
 
     On February 14, 1997,  Capital  Markets was authorized to issue and sell up
to $300 million of  medium-term  notes.  As of May 7, 1997,  $300 million of the
medium-term  notes had been issued with various  interest rates and  maturities.
The proceeds from these  issuances were used for the purchase of IWCR and to pay
other outstanding short-term obligations of Capital Markets.

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

     On March 25, 1997,  Industries acquired all the outstanding common stock of
IWCR for $290.5  million.  Industries  financed  this  transaction  with debt of
approximately   $83.0  million  and  issuance  of   approximately   5.3  million
Industries'  common  shares.  Industries  accounted  for  the  acquisition  as a
purchase,  and the purchase  price was  allocated to the assets and  liabilities
acquired  based  on  their  estimated  fair  values.  See  Note  2 of  Notes  to
Consolidated Financial Statements for a discussion of the preliminary allocation
of the purchase price.

     Capital Markets has a $150 million  revolving  Credit  Agreement which will
terminate August 19, 1999,  unless extended by its terms. This facility provides
short-term  financing  flexibility  to Industries  and also serves as the backup
instrument for a commercial  paper program.  As of June 30, 1997,  there were no
borrowings outstanding under this agreement.
 
     Capital Markets also has $95 million of money market lines of credit. As of
June 30, 1997, $33.0 million of borrowings were outstanding under these lines of
credit.

     As of June 30,  1997 and  December  31,  1996,  Capital  Markets  had $12.3
million and $119.3 million of commercial  paper  outstanding,  respectively.  At
June  30,  1997,  the  weighted   average  interest  rate  of  commercial  paper
outstanding was 5.80%.

     The  obligations  of Capital  Markets  are  subject to a Support  Agreement
between Industries and Capital Markets,  under which Industries has committed to
make  payments of interest and principal on Capital  Markets'  securities in the
event of a  failure  to pay by  Capital  Markets.  Restrictions  in the  Support
Agreement  prohibit  recourse on the part of Capital Markets'  investors against
the  stock and  assets  of  Northern  Indiana.  Under  the terms of the  Support
Agreement,  in addition to the cash flow of cash dividends paid to Industries by
any of its consolidated subsidiaries,  the assets of Industries,  other than the
stock and assets of Northern  Indiana,  are  available as recourse to holders of
Capital  Markets'  securities.  The carrying  value of those assets  (other than
Northern  Indiana),  reflected  in  the  consolidated  financial  statements  of
Industries, is approximately $1.2 billion at June 30, 1997.

     Cash flow from operations has provided sufficient liquidity to meet current
operating  requirements.  Because of the seasonal nature of the utility business
and the  construction  program,  Northern  Indiana makes use of commercial paper
intermittently  as  short-term  financing.  As of June 30, 1997 and December 31,
1996,  Northern Indiana had $45.4 million and $193.9 million of commercial paper
outstanding,  respectively. At June 30, 1997, the weighted average 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 unless extended by its terms. As of June
30,  1997,  there  were no  borrowings  outstanding  under  this  agreement.  In
addition, Northern Indiana has $14.2 million in lines of credit which run to May
31, 1998. The credit pricing of each of the lines varies from either the lending
banks'  commercial  prime or  market  rates.  Northern  Indiana  has  agreed  to
compensate  the  participating   banks  with  arrangements  that  vary  from  no
commitment fees to a combination of fees which are mutually satisfactory to both
parties.  As of June 30,  1997,  there were no  borrowings  under these lines of
credit.  The Credit  Agreement and lines of credit are also available to support
the issuance of commercial paper.

     Northern  Indiana also has $273.5  million of money market lines of credit.
As of June 30, 1997,  $35.1 million of borrowings were  outstanding  under these
lines of credit.

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

     On May 28, 1997,  Northern  Indiana was  authorized to issue and sell up to
$217,692,000 of its Medium-Term Notes,  Series E, with various  maturities,  for
purposes of refinancing  certain first mortgage bonds and medium-term  notes. As
of June 30, 1997,  $99.0 million of the  medium-term  notes had been issued with
various  interest rates and  maturities.  The proceeds from these issuances were
used to pay short-term debt incurred to redeem its First Mortgage Bonds,  Series
N, and to pay at maturity various issues of Medium-Term Notes, Series D.

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

     As of June 30,  1997,  IWCR and its  subsidiaries  had lines of credit with
banks  aggregating  $48.9  million.  As of  June  30,  1997,  $34.2  million  of
borrowings were outstanding under these lines of credit.

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

     At  June  30,  1997,  approximately  73% of  Northern  Indiana's  employees
(physical  and clerical  workers)  were  represented  by two local unions of the
United  Steelworkers  of America,  AFL-CIO-CLC.  The bargaining  unit employees'
current contracts expired May 31, 1997.  Employees are currently working without
a contract.  Northern Indiana continues to negotiate new agreements with the two
local unions, but cannot predict the timing or terms of new agreements.
 
COMPETITION

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

     In January 1997, legislation was introduced to the Indiana General Assembly
addressing  electric  utility   competition  and  deregulation.   This  proposed
legislation  has not been  adopted,  however,  a study  commission  on  electric
competition and  deregulation  was established by the Indiana General  Assembly.
Industries has begun discussions with its largest customers on the technical and
economic aspects of possible legislation to allow customer choice.
 
     Operating  in a  competitive  environment  will place  added  pressures  on
utility  profit  margins  and  credit  quality.  Increasing  competition  in the
electric  utility  industry has already led the credit rating  agencies to apply
more stringent guidelines in making credit rating determinations.

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

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

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

     Northern Indiana filed a petition for an Alternative  Regulatory Plan (ARP)
with the  Commission on November 29, 1995. The purpose of the ARP is to create a
business and regulatory  environment and structure  which will permit  increased
choice for gas customers,  competition among suppliers, and improved natural gas
service.  On May 9, 1997,  Northern  Indiana  filed an Amended  Stipulation  and
Agreement  which  proposed a  modified  ARP.  Northern  Indiana's  proposal  was
supported  by  numerous  parties   including  the  Office  of  Utility  Consumer
Counselor,  Citizens  Action  Coalition of Indiana,  Inc.  and major  industrial
customers of Northern Indiana. In its modified ARP, Northern Indiana proposes to
implement new rates and services that would include, among other things, further
unbundling  of services for  additional  customer  classes,  increased  customer
choice for sources of natural gas supply,  negotiated  services  and prices,  an
incentive gas cost mechanism and a price protection program. The Commission held
a hearing on the ARP on June 12,  1997.  Action by the  Commission  is  expected
during the fourth quarter of 1997.

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


<PAGE>
Part II.  OTHER INFORMATION
Item 1.   LEGAL PROCEEDINGS.

     Industries and Northern Indiana are parties to various pending proceedings,
including suits and claims against them for personal injury,  death and property
damage, but, in the opinion of their counsel, the nature of such proceedings and
suits,  and the  amounts  involved,  do not  depart  from the  ordinary  routine
litigation  and  proceedings  incidental  to the kind of business  conducted  by
Industries and Northern  Indiana,  except as described under Note 3 (Pending Tax
Matter),  Note 5 (Elm  Energy and  Recycling  (UK)  Ltd.),  Note 6 (NESI  Energy
Marketing  Canada  Ltd.)  and Note 8  (Environmental  Matters)  in the  Notes to
Consolidated  Financial  Statements  under Part I, Item 1 of this report on Form
10-Q.

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

Item 2.  CHANGES IN SECURITIES.
         None

Item 3.  DEFAULTS UPON SENIOR SECURITIES.
         None

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

Item 5.  OTHER INFORMATION
         None

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a)  Exhibits.

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

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

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

          (b)  Reports on Form 8-K.
                None


<PAGE>
                            SIGNATURES

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


                               NIPSCO Industries, Inc.

                                    (Registrant)

                                /s/Jerry M. Springer
                                    Controller
                            and Chief Accounting Officer

Date August 13, 1997