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

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1997

                         Commission file number 1-10720

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

          Delaware                                           13-3545405
State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification No.)

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

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

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

           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.001 per share

     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 ....

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     As of February 27,  1998,  the  aggregate  market value of the common stock
held by non-affiliates of the registrant was approximately  $2,386 million. For
purposes of the foregoing  statement only,  directors and executive  officers of
the registrant have been assumed to be affiliates.

     As of February 27, 1998,  there were 61,473,222  shares of the registrant's
common stock outstanding.

 
<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                                    FORM 10-K

                          Year Ended December 31, 1997

                                      INDEX

PART I                                                                 10-K Page

  Item 1.     Business............................................. ..... ..   3
  Item 2.     Properties.......... ................................. .... ..  10
  Item 3.     Legal Proceedings.............................................. 15
  Item 4.     Submission of Matters to a Vote of Security Holders............ 17

PART II

  Item 5.     Market for the Registrant's Common Equity and Related
              Stockholder Matters............................................ 18
  Item 6.     Selected Financial Data........................................ 18
  Item 7.     Management's Discussion and Analysis of Financial
              Condition and Results of Operations............................ 20
  Item 8.     Financial Statements and Supplementary Data.................... 36
  Item 9.     Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure......................... 36

PART III

  Item 10.    Directors and Executive Officers of the Registrant              37
  Item 11.    Executive Compensation ........................................ 40
  Item 12.    Security Ownership of Certain Beneficial Owners and
              Management..................................................... 53
  Item 13.    Certain Relationships and Related Transactions................. 54

PART IV

  Item 14.    Exhibits, Financial Statement Schedules and Reports
              on Form 8-K.................................................... 56

SIGNATURES................................................................... 57


<PAGE>





                                     PART I

Item 1.  Business

Background

         Illinois Central Corporation (the "Company") was incorporated under the
laws of Delaware on January 27,  1989.  The  principal  executive  office of the
Company  is  located  at 455 North  Cityfront  Plaza  Drive,  Chicago,  Illinois
60611-5504 and its telephone number is (312) 755-7500.

         The Company,  through its  wholly-owned  subsidiary,  Illinois  Central
Railroad Company  ("ICR"),  traces its origin to 1851, when ICR was incorporated
as the nation's  first  land-grant  railroad.  ICR, a Class I freight  railroad,
operates 2,600 miles of main-line  track between Chicago and the Gulf of Mexico,
primarily  transporting  chemicals,  coal, paper, grain and grain products,  and
intermodal  trailers  and  containers.  In 1997,  ICR  accounted  for 90% of the
Company's total revenues.

         In June  1996,  the  Company  acquired  in a purchase  transaction  CCP
Holdings,  Inc. ("CCPH").  CCPH has two principal  operating  subsidiaries - the
Chicago,  Central  and Pacific  Railroad  Company  ("CCPR")  and the Cedar River
Railroad  Company ("CRR") - which together  comprise a Class II freight railroad
system operating 850 miles of track primarily  transporting  grain, milled grain
and coal. CCPR operates from Chicago to Omaha,  Nebraska,  with connecting lines
to Cedar Rapids and Sioux City,  Iowa. CRR runs from  Waterloo,  Iowa, to Albert
Lea, Minnesota. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information on the 1996 acquisition of
CCPH.

         While ICR, CCPR and CRR (jointly,  the  "Railroads" or the "IC system")
are legally  separate  railroads,  they  operate as a single rail  system,  with
centralized marketing, administration, and dispatching control.

         In  addition  to  ICR  and  CCPH,  the  Company's  other   wholly-owned
subsidiary, IC Financial Services Corporation ("IC Financial"), functions as the
investment   vehicle  by  which  non-rail  related   activities  are  conducted.
Initially,  IC Financial was formed to finance,  through various special purpose
subsidiaries,  the  acquisition of locomotives and freight cars which are leased
to ICR. More recently,  IC Financial has invested in two terminals located south
of Baton Rouge, Louisiana.  See Item 1.  "Business - Terminal Operations"

Planned Growth

         In the fall of 1997,  the Company  developed  and announced a four-year
growth plan for the years 1998-2001. The plan, called "Beyond 2000," is designed
to position the Company for the next century. The plan anticipates the Company's
revenues,  comprised of the existing  franchise of ICR,  CCPH, and IC Financial,
will be in a range of $925 million to $955 million by year-end 2001. See Item 7.
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -Significant  Developments" and "Outlook", for additional information
which may effect the Company's growth plans.



<PAGE>



Railroad Commodities and Customers

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

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

         In 1997, two customers each accounted for approximately 6% of revenues.
The ten largest customers accounted for approximately 34% of revenues.

Contributions to Total Revenues by Commodity Group

         Data for 1997 is not  comparable  to prior  years  because  the Company
acquired CCPH in June 1996. Consequently, 1993 through 1995 data is ICR only.

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

                Contributions to Total Revenues by Commodity Group
 Commodity
 Group                           1997      1996(1)    1995    1994         1993
 ---------                       ----      -----      ----    ----         ----
Chemicals...................     25.1%      25.4%     25.2%   24.8%       24.7%
Grain, mill & food products.     21.3       19.9      21.9     18.7        23.2
Paper....& forest products..     15.6       16.3      16.9     18.1        18.6
Coal........................     12.1       13.8      12.9     15.2        12.7
Intermodal..................      8.1        7.9       7.3      6.6         4.8
All other...................     17.8       16.7      15.8     16.6        16.0
                                 ----     ------     -----    -----       -----
Total.......................    100.0%     100.0%    100.0%   100.0%      100.0%
                                =====      =====     =====    =====       =====

1 Includes CCPH since June 13, 1996.


<PAGE>

Terminal Operations

         The Company currently has a number of facilities or terminal operations
which  contribute to revenues and enhance the flow of rail traffic across the IC
system.  Most of these facilities have been developed since 1994.  Following are
descriptions of the four most significant terminals.

         In December 1996, IC Financial acquired an existing liquid-bulk storage
and  distribution  terminal on the  Mississippi  River south of Baton Rouge.  IC
Omnimodal   Terminal  Company  ("ICOM")  has  been  serving  the  petroleum  and
petrochemical industries for more than 15 years. Since acquisition, ICOM secured
three new contracts requiring $7.1 million for the construction of new pipelines
and additional  tank storage.  These  contracts and new  facilities  enhance the
long-term revenue streams from this facility.

         In 1996, a subsidiary of IC Financial,  IC RailMarine Terminal Company,
began  construction  of an  import/export,  dry-bulk  handling  terminal  on the
Mississippi River near Convent,  Louisiana. The majority of the construction was
completed  when this terminal began  operation in December 1997.  Initially this
facility  will handle coal,  iron ore and refined iron pellets.  The  terminal's
primary customer,  American Iron Reduction,  constructed a plant adjacent to the
terminal.

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

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


<PAGE>

Operating Statistics

         Data for 1997 is not  comparable  to prior  years  because  the Company
acquired CCPH in June 1996. Consequently, 1993 through 1996 data is ICR only.

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

Carloads (in thousands)           1,031        927      957       915      848
Freight train miles
  (in thousands)1.............    9,167      7,950    7,758     7,179    5,659
Revenue ton miles of freight
  traffic (in millions)2 3....   23,843     22,511   23,773    20,582   20,080
Revenue tons per carload           78.7       71.7     74.7      76.3     79.1
Average length of haul
  (in miles)..................      307        309      328       286      293
Gross freight revenue per
  ton mile3 4.................    $.026      $.026   $ .026   $  .028  $  .028
Net freight ton miles per
  average route mile
  (in millions)...............      6.9        8.2      9.0       7.6      7.4
Gallons per ton mile5.........   .00256     .00236   .00234    .00248   .00251
Active locomotives............      358        331      333       328      322
Track resurfacing (miles)         1,457      1,360    1,360     1,397    1,293
Percent resurfaced............    28.7%      33.7%    32.2%     33.0%    29.8%
Ties laid in replacement
  (including switch ties).....  413,713    425,999  408,760   346,994  323,764
Slow order miles..............   285.28     100.00   209.76    275.79   152.32


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

<PAGE>

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

     Ratio1                      1997   1996    1995    1994   1993
                                 ----   ----    ----    ----   ----

Operating2.....................  62.3%  63.3%   64.3%   66.4%  68.2%
Labor and fringe benefits......  29.2   29.2    30.2    31.0   31.1
Leases and car hire............   5.9    6.8     7.2     8.2   11.9
Diesel fuel....................   5.6    5.8     5.1     5.3    5.4
Materials and supplies.........   5.2    5.0     5.4     6.0    6.2
Depreciation and amortization..   6.1    6.0     5.3     4.6    4.2
Casualty, insurance and losses.   2.3    1.8     2.7     4.0    3.8
Other taxes....................   3.0    2.8     2.8     3.0    2.9
Other..........................   5.0    5.9     5.6     4.3    2.8


1 1996 includes CCPH for six months; 1995-1993 is ICR only.
2 Operating  ratio means the ratio of operating  expenses  before special charge
  over operating revenues.

Employees; Labor Relations

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

         Approximately  90% of all  employees are  represented  by one of eleven
unions.  The general  approach to labor  negotiations by Class I railroads is to
bargain on a  collective  national  basis.  For  several  years now,  one of the
Company's   guiding   principles   is  that  local  --  rather  than   national,
industry-wide  --  negotiations  will  result in labor  agreements  that  better
address  both  employees'  concerns and  preferences  and the  Company's  actual
operating environment.  Therefore, beginning in late 1994, ICR began negotiating
separate  distinct  agreements  with each of its eleven unions.  To date, all of
ICR's eleven  bargaining  units have ratified local agreements that resolve wage
and work-rule  issues through 1999 for shop crafts and through the year 2000 for
engineers and trainmen.  At CCPH,  labor  negotiations are local as well and are
being renegotiated;  until new agreements are reached,  cost-of-living allowance
provisions and other terms in previous agreements will continue.


         There are risks  associated with  negotiating  locally.  Presidents and
Congress  have  repeatedly  demonstrated  they  will  step in to avoid  national
strikes, while a local dispute may not generate

<PAGE>

federal intervention,  making an extended work stoppage potentially more likely.
The  Company's  management  believes  the  potential  mutual  benefits  of local
bargaining outweigh the risk.

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

                     1997      1996      1995     1994      1993
                     ----      ----      ----     ----      ----
         ICR        3,295     3,238     3,268    3,250     3,306
         CCPH         322       379       N/A      N/A       N/A
                   ------    ------    ------   ------    ------
         Total      3,617     3,617     3,268    3,250     3,306
                    =====     =====     =====    =====     =====

N/A = Not Available

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

Regulatory Matters; Freight Rates; Environmental Considerations

         The Railroads,  particularly ICR as a Class I railroad,  are subject to
significant  governmental regulation by the Surface Transportation Board ("STB")
and other federal, state and local regulatory authorities with respect to rates,
service, safety and operations.

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

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

         ICR currently transports Southern Illinois coal which will not meet the
environmental  standards  of Phase II of the Clean Air Act unless  blended  with
lower-sulfur coal or users of the coal install air scrubbers.  As a result, this
source of  traffic  may  decline  in  advance  of or  consistent  with  Phase II
implementation  in the year 2000.  On the other hand,  ICR is  participating  in
movements of Western coal  (lower-sulfur)  and certain  Southern  Illinois  coal
which is being blended to comply with Phase II. ICR anticipates these sources of
traffic may increase. Additionally, the Company has constructed an import/export
terminal  to  handle  the  export  of  coal  (see  Item 1.  "Business  -Terminal
Operations").  Overall,  management  believes that implementation of Phase II of
the Clean Air Act is unlikely to have a material  adverse  effect on the results
of the Company.

         Currently,  the utility  industry is undergoing  deregulation  creating
enormous  pressures for change,  innovation,  and cost  control.  In the face of
increased competition caused by deregulation, utilities are attempting to reduce
costs,  including rail transportation  costs. Methods being investigated include
"power  wheeling",  "coal-by-wire",  and for those utilities  served by a single
railroad, re-regulation of rail rates. Some analysts have suggested that utility
deregulation  may  significantly  reduce  rail  revenues  through a shift in the
pattern of coal movements forcing lower rail rates. At this point, there are too
many variables to know if utility deregulation will have a neutral,


<PAGE>



modestly  positive or modestly  negative effect on the Company in the long-term.
However, management believes that the Company will not be materially,  adversely
affected  because it already provides its utility  customers highly  competitive
rates and service as determined through competitive bids against other railroads
and river options.

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

Railroads' Results Influenced by Economic Conditions

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

Competition

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

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

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


<PAGE>


Adverse Factors Effecting Fuel Prices

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

Liens on Properties

         Currently 17 locomotives  and 1,943 rail cars owned by IC Financial are
subject to liens by lenders.  Neither the Company nor the  railroads are subject
to these liens.

Liability Insurance

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

Item 2.  Properties

Physical Plant and Equipment

         System.  As of December  31,  1997,  ICR's total  system  consisted  of
approximately  4,500 miles of track  comprised of 2,600 miles of main line,  200
miles of  secondary  main line and 1,700  miles of passing,  yard and  switching
track.  ICR owns all of the track except for 190 miles owned by other railroads.
ICR  operates  over this  track by  separate  agreements.  CCPH's  total  system
consisted of approximately 1,100 miles of track.



<PAGE>



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

                                   Capital
                                Expenditures       Maintenance            Total

1997..........................     $107.4             $21.1               $128.5
19961.........................       95.4              25.6                121.0
19952.........................       66.9              33.5                100.4
19942.........................       63.2              29.1                 92.3
19932.........................       50.3              25.1                 75.4

           Total..............     $383.2            $134.4               $517.6



1  Includes CCPH from June 13, 1996, $4.2 million,  $1.9 million,  $6.1 million,
   respectively. 
2  ICR only.


         These   expenditures  have   concentrated   primarily  on  the  routine
maintenance  of the track  roadway  and  bridges.  Approximately  1,400 miles of
roadway ballast was resurfaced in each of the last three years. In 1996, a total
of $20.1 million was spent to construct an intermodal  terminal facility for the
Canadian National Railway ("CN Terminal").  Other large projects include a total
of $11.4 million to complete the conversion of 198 miles of track,  known as the
Yazoo District,  to a single track with centralized  traffic control in 1993 and
1994  and a total of $11.4  million  to  construct  new or  expanded  intermodal
facilities in Chicago and Memphis in 1992 and 1994. Some of the projects at CCPH
were performed with grants from the Iowa Department of Transportation.  See Item
7. "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations" for a discussion of future capital expenditures.

         Terminal Operations.  In 1997, $43.8 million was spent on the expansion
and construction of two terminals in Louisiana.  (See Item 1. "Business-Terminal
Operations")

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

         IC  Financial  acquired  the  SD-70's in 1995 and  leases  them to ICR.
Management has  rationalized  CCPH's  locomotive  fleet and  instituted  revised
maintenance,   fueling   and   train   assignment   practices.   Less-efficient,
high-maintenance locomotives are being stored, sold or scrapped.

         Locomotive  modernization  and  acquisition  were  part of a change  in
operational  philosophy  concerning  equipment  which resulted in adoption of an
equipment  ownership  program in 1993. The program  included  lease  conversions
whereby  equipment was acquired  outright or leased under more  favorable  lease
terms by the Company. Through 1996, lease conversions involved 118 locomotives


<PAGE>



and 4,228 freight cars. As a result of the new lease terms,  $4.3 million,  $7.1
million  and $24.7  million of capital  leases were  recorded in 1997,  1995 and
1994, respectively. Most of these leases contain fixed price options whereby the
equipment can be acquired at or below fair market value at some point during the
lease term.

         Approximately  1,840 of the cars  owned by IC  Financial  are leased to
ICR. The remaining cars are leased to a non-affiliated company.

         The  equipment  program  also  included  a  significant  upgrade of the
highway trailer fleet used in intermodal  service.  In 1992, the entire fleet of
old  leased  trailers,  approximately  880,  was  replaced  with 800  brand  new
trailers.  Expanding  intermodal volume necessitated the addition of another 100
trailers in 1994.

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

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

         The following is the overall fleet at December 31:

Total Units:            1997      1996       1995          1994         1993
------------            ----      ----       ----          ----         ----
Locomotives1.........    405       435        397           417          468
Freight cars......... 17,128    16,619     15,872        16,498       16,634
Work equipment.......    696       655        654           625          745
Highway trailers.....    888       889        898           898          898


1   Approximately  27  locomotives  need  repair  before they can be returned to
    service.  This equipment is either repaired,  if needed on an ongoing basis,
    or sold. ICR sold 32, 6, 40, 48 and 23 surplus  locomotives  in 1997,  1996,
    1995,  1994 and 1993,  respectively.  The active fleet is 358 as of December
    31, 1997. Also, 15 locomotives are being subleased and 5 will be returned to
    active service after repainting.



<PAGE>



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

                                ICR      CCPH   IC Financial     1997      1996
Description1             Total(2)(3)     Total     Total        Total      Total

Locomotives:
  Multipurpose                  221        38          79         338       351
  Switching                      65         2           -          67        84
                            -------     -----    --------        ----    ------
            Total               286        40          79         405       435
                             ======      ====      ======         ===     =====

Freight Cars:
 Box (general service)          310        16       1,120       1,446     1,444
 Box (special purpose)        2,417       145         389       2,951     2,941
 Gondola                      1,538       105           -       1,643     1,615
 Hopper (open top)            3,407       269         434       4,110     4,263
 Hopper (covered)             4,124     1,105           -       5,229     4,470
 Flat                           579         -           -         579       610
 Other                        1,160        10           -       1,170     1,276
                            -------   -------    --------     -------   -------
                  Total      13,535     1,650       1,943      17,128    16,619
                             ======     =====       =====      ======    ======
 Work Equipment                 696                               696       655
                           ========                          ========  ========
  Highway trailers              888       250                   1,138       889
                           ========    ======                 =======  ========


1 In addition, approximately 1,634 freight cars were being used by the Railroads
  under  short-term  car hire  agreements.  
2 Includes  53  locomotives  and 1,494 freight cars under capital leases.
3 Excludes equipment listed under IC Financial.

Environmental Conditions

         ICR  faces  potential   environmental  cleanup  costs  associated  with
approximately 23 contaminated  sites and various fueling  facilities for which a
total of $9.9  million  has been  reserved  as of December  31,  1997.  The most
significant of those sites are described below.

Mobile, Alabama

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



<PAGE>



Jackson, Tennessee

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

McComb, Mississippi

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

Kegley, Illinois

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

East Hazel Crest, Illinois

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

Fueling Facilities

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

Waste Oil Generation

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



<PAGE>



Item 3.  Legal Proceedings

Proposed settlement of purported class actions brought on behalf of stockholders
of the Company (the  "Actions")  filed in the Delaware Court of Chancery  (Civil
Action Nos.  16184-NC,  16191-NC  and  16188-NC)  and the Circuit  Court of Cook
County, Illinois (Civil Action No. 98CH01972), challenging,inter alia, the offer
and  the  transactions  contemplated  in the  Merger  Agreement.  (See  Item  7.
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Significant Developments - Canadian National Tender Offer")

         On March 2, 1998, the parties to the Actions  entered into a Memorandum
of Understanding (the "Memorandum of Understanding") which was signed by counsel
for the  Company  and  its  directors  and  attorneys  from  certain  law  firms
representing  the plaintiffs in those Actions.  The Memorandum of  Understanding
sets forth the parties' agreement-in-principle  concerning a proposed settlement
of those actions.

         Among other things, the Memorandum of Understanding provides that upon,
and only upon,  final  court  approval  of the  proposed  settlement  and other
conditions  summarized  below, the Merger Agreement will be modified as follows:
(i) the definition of "CN Average Closing Price" set forth in Section 2.02(c) of
the Merger  Agreement  will be amended to provide that if such  average  closing
price is less than  $41.50  then the CN Average  Closing  Price for  purposes of
determing the exchange ratio shall be $41.50;  and (ii) Parent shall agree that,
if the STB shall have issued  written  notice  disapproving  the  acquisition of
control of the  Company by CN or advised CN of such a  determination  or imposed
unacceptable  conditions  upon  such  acquisition  of  control,  and  there is a
subsequent  disposition of the Shares in the Voting Trust, CN shall  distribute,
or cause to be  distributed,  to stockholders of the Company who receive payment
for their Shares  pursuant to the Offer and to record  holders at the  Effective
Time,  their pro rata share of  one-third of any net profits  realized  upon any
disposition  of Shares by or out of the Voting  Trust  (after  deducting,  inter
alia,  fees and  expenses,  including  legal  and  advisory  fees and  expenses,
associated  with the  acquisition  and  disposition of such Shares,  the cost of
carrying the Shares between the  acquisition  and disposition of such Shares and
certain taxes  relating to the  acquisition,  ownership and  disposition of such
Shares). As defined in the Memorandum of Understanding,  final court approval of
the proposed settlement means that the Delaware Court of Chancery has entered an
order approving the settlement and that such order is finally affirmed on appeal
or is no longer subject to appeal and the time for any petition for  reargument,
appeal or review, by certiorari or otherwise, has expired.

         The Memorandum of Understanding  also provides for, among other things,
(i)  the  dissemination  to  the  record  holders  of  the  Company  of  certain
supplemental  disclosure  materials,  (ii)  the  certification,  for  settlement
purposes only, of a mandatory  non-opt-class,  (iii) the complete  discharge and
dismissal  with prejudice of any claims that were, or could have been, or in the
future  might  have  been  asserted  in the  Actions,  (iv) the  release  of the
defendants  and  others  and (v) the  defendants'  agreement  that they will not
oppose an application by plaintiffs' counsel for an award of fees not to exceed,
in the  aggregate,  $925,000  and of expenses  not to exceed,  in the  aggregate
$25,000.  The Memorandum of Understanding shall be null and void and of no force
and effect if plaintiffs'  counsel in the Actions  determine that the settlement
is not fair and reasonable.

         The parties to the Memorandum of Understanding  contemplate  submitting
filings to the Delaware Court of Chancery seeking  certification of a settlement
class,  final  approval  of the  terms of the  settlement  upon  notice  in form
approved by that  Court,  and  dismissal  with  prejudice  of the  Actions.  The
agreements-in-principle  in the  Memorandum  of  Understanding  are subject to a
number of  conditions  including,  among  others,  (i) 50.1% of the Shares (on a
fully  diluted  basis) having been acquired by Parent and placed into the Voting
Trust,  (ii) the dismissal of the Illinois Action,  (iii) drafting and execution
of  definitive  settlement  documents  and the  other  agreements  necessary  to
effectuate the terms of the proposed  settlement,  (iv) completion by plaintiffs
of appropriate discovery in the Actions, and (v) final court approval.

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

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

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

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

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

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

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

         The Tennessee  Department of Environment and  Conservation,  on June 6,
1994,  issued a Remedial Order requiring  clean-up by ICR and the current owners
of a site in Jackson,  Tennessee. ICR operated a rail yard and locomotive repair
facility  at the  site.  Trichloroethane  ("TCE")  has  been  found  in  several
municipal  water  wells near the site.  TCE is a common  component  of  solvents
similar  to  those  believed  to  have  been  used  at the  shop.  In  addition,
concentrations  of metals and  organic  chemicals  have been  identified  on the
surface of the site. A remedial  investigation  study has been  completed  which
indicates the TCE in the water wells came from an adjacent municipal dump


<PAGE>



and not from operations on this site.  Exclusive of ground-water  clean-up,  ICR
estimates total clean-up costs between $1.0 million and $7.6 million and expects
another PRP to share in the expense.

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

         No matters were submitted to a vote of the Company's  security  holders
during fourth quarter.


<PAGE>



                                     PART II

Item  5.  Market  for  the  Registrant's   Common  Equity  and  Related Stock-
          holder Matters

         The Common Stock is listed on the New York Stock  Exchange,  Inc. under
the symbol "IC."

         The following table sets forth, for the periods indicated, (i) the high
and low sale  prices  of the  Common  Stock as  reported  on the New York  Stock
Exchange  Composite  Tape and (ii) the per share amount of dividends  paid.  The
following  table has been  restated  to give  effect to a  3-for-2  stock  split
declared in January 1996.

                                           Stock Price            Dividends Paid
                                         High         Low           Per Share
   1995
   First Quarter........               $23.500      $20.500         $  .17
   Second Quarter.......                23.750       21.833            .17
   Third Quarter........                28.000       23.000            .17
   Fourth Quarter.......                28.667       24.500            .17

   1996
   First Quarter........               $28.750      $23.667          $ .20
   Second Quarter.......                30.750       27.000            .20
   Third Quarter........                31.875       26.875            .20
   Fourth Quarter.......                34.375       29.500            .20

   1997
   First Quarter........               $36.125      $30.500         $  .23
   Second Quarter.......                37.625       30.875            .23
   Third Quarter........                37.250       33.250            .23
   Fourth Quarter.......                39.000       32.438            .23

   1998
   First Quarter (through 
    February 27, 1998)                 $38.875      $31.125          $ .23

           As of February 27, 1998, there were approximately 35,000 stockholders
based on  estimates of  beneficial  ownership.  The closing  price of the Common
Stock as reported on the New York Stock Exchange  Composite Tape on February 27,
1998 was $38.8125 per share.

Item 6.  Selected Financial Data

         The  following  table  sets  forth  selected  historical   consolidated
financial  data of the Company for the five years ended  December 31, 1997,  all
derived from the  consolidated  financial  statements  of the Company which were
audited by Arthur Andersen LLP. This summary should be read in conjunction  with
the consolidated  financial statements included elsewhere in this Report and the
schedules and notes thereto.  The selected  financial data for 1996 includes the
results of CCPH for the period June 13, 1996 (date of  acquisition)  to December
31, 1996. Therefore,  data for 1996 is not directly comparable to 1997, and 1997
and 1996 are not comparable to pre-1996 data.


<PAGE>
<TABLE>




                  SELECTED CONSOLIDATED FINANCIAL INFORMATION

                       ($ in millions, except share data)

                            Years Ended December 31,
<CAPTION>
                                 1997       1996       1995       1994       1993
<S>                           <C>        <C>        <C>        <C>        <C>
Income Statement Data (1):
Revenues....................  $  699.8   $  657.5   $  645.3   $  595.3   $  565.9
Operating expenses.............. 435.9      416.3      414.8      395.0      386.4
Operating income................ 263.9      241.2      230.5      200.3      179.5
Other income (expense), net.....   6.0        8.6       (0.2)       1.0        1.7
Interest expense, net........... (40.0)     (34.1)     (29.5)     (28.4)     (33.1)
Income before income taxes,
 extraordinary item and 
 cumulative effect of changes 
 in accounting principles.....   229.9      215.7      200.8      172.9      148.1
Provision for income taxes......  79.7       79.1       71.0       59.0       56.4
Income before extraordinary 
   item and cumulative effect 
   of changes in accounting 
   principles.....               150.2      136.6      129.8      113.9       91.7
Extraordinary item, net.........   -          -        (11.4)       -        (23.4)
Cumulative effect of changes in
   accounting principles........   -          -          -          -         (0.1)
Net income .................  $  150.2   $  136.6   $  118.4   $  113.9   $   68.2

Income per share-Basic (2):
   Before extraordinary item 
    and accounting changes..  $   2.45   $   2.22   $   2.07   $   1.78   $   1.44
   Extraordinary item...........   -          -        (0.18)       -        (0.37)
   Accounting changes...........   -          -          -          -          -
      Net income per share-
       Basic                  $   2.45   $   2.22   $   1.89   $   1.78   $   1.07

Weighted average number of shares
   of common stock outstanding
   (in thousands)(2)............61,409     61,418     62,608     63,896     63,840

Income per share-Diluted (2):
   Before extraordinary item 
      and accounting changes. $   2.42   $   2.20   $   2.06   $   1.78   $   1.43
   Extraordinary item...........   -          -        (0.18)       -        (0.37)
   Accounting changes...........   -          -          -          -          -
      Net income per share-
       Diluted                $   2.42   $   2.20   $   1.88   $   1.78   $   1.06

Weighted average number of
   shares of common stock and
   dilutive potential common
   shares (in thousands)(2).....62,107     61,978     62,969     64,089     64,105

Cash dividends declared per


<PAGE>



   common share (2).........  $   0.92   $   0.83   $   0.71   $   0.59   $   0.46

Operating ratio (3).............  62.3%      63.3%      64.3%      66.4%      68.2%

                                               At December 31,
                                 1997       1996       1995       1994       1993
Balance Sheet Data (4):
Total assets...............  $ 2,009.4  $ 1,911.4  $ 1,437.5  $ 1,308.7  $ 1,258.7
Long-term debt.................. 572.2      633.7      383.6      328.6      360.3
Stockholders' equity............ 642.8      555.5      470.1      454.1      377.4
Working capital (deficit)....... (55.9)      16.6      (76.1)     (65.4)     (32.4)

<FN>

   1. Results for 1996 include results of CCPH since June 13, 1996.
   2. Restated to give effect to a 3-for-2 stock split declared in January 1996.
   3. Operating ratio is the ratio of operating expenses to revenues.
   4. Data for 1996 includes CCPH.
</FN>

</TABLE>

<PAGE>



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

Significant Developments

Canadian National Tender Offer

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

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

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

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

           The  Offer was  successfully  concluded  on March  13,  1998 when the
Purchaser  received  tenders  for in excess of 75% of  outstanding  shares.  The
actual percentage of outstanding  shares purchases has not been determined as of
the date of this filing.

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


<PAGE>


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

Results of Operations

1997 Compared to 1996

The discussion  below takes into account the financial  condition and results of
operations of the Company for the years presented in the consolidated  financial
statements and includes CCPH since June 13, 1996 (date of acquisition).

           Total  revenues for 1997 increased from the prior year by $42 million
or 6.4% to $700 million,  reflecting  full year  operations  of CCPH,  which was
acquired June 13, 1996. The respective  amounts and percentage  contributions by
commodity  group for carloads,  ton miles and carloads for 1997 and 1996 are set
forth below:


                                           Year Ended December 31,

                                1997   19961     1997      19961   1997    19961
                                ----   -----     ----      -----   ----    -----
                                  Carloads          Ton-Miles         Revenue
                               (In Thousands)          (In Millions)

Chemicals                        159    143      4,106     3,682   $176    $167
Grain, mill & food products      177    173      7,479     6,640    149     131
Paper & forest products          146    143      3,255     3,067    109     107
Coal                             240    230      5,284     5,686     85      91
Intermodal                       200    198      1,454     1,421     57      52
Metals                            33     34        923     1,107     29      33
Bulk                              57     56      1,197     1,295     41      42
All Other                         19     19        145       148     54      34
                             -------   ----    -------  --------  -----   -----
Total                          1,031    996     28,843    23,046   $700    $657

1   Includes CCPH since June 13, 1996.

         Chemicals  accounted  for 16% of carloads and 17% of ton-miles in 1997.
Compared with 1996,  loads and ton-miles  were up 11% while revenues were up 5%.
Strength which began in the latter part of 1996 continued as expected into 1997.
Strength was across the board among most chemicals,  and rail rates were strong.
Chemical  loadings and revenues  benefitted  from a service  agreement  with the
Burlington  Northern Santa Fe Railroad  ("BNSF").  The Company believes that the
future annual  benefit of the  agreement  will grow although it is taking longer
than expected for BNSF to penetrate the Union Pacific/Southern  Pacific ("UPSP")
markets to which it gained access through the UPSP merger case.

         Grain and grain mill accounted for 17% of carloads and 31% of ton-miles
in 1997. Against 1996, carloads, ton-miles and revenues were up 2%, 13% and 14%,
respectively,  primarily  reflecting  inclusion  of CCP for the full year.  Weak
export demand for U.S.  grains  throughout  1997  curtailed  the Company's  1997
revenue growth. Very strong demand for grain in 1996, coupled with meager supply
particularly of corn,  resulted in abnormally high prices paid for grain in 1996
which in turn


<PAGE>



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

         Paper  and  Forest  Products  were  14% of  1997  carloads  and  14% of
ton-miles.  Total  carloads,  ton-miles  and  revenues  were  up 2%,  6% and 2%,
respectively,  versus 1996. Paper and forest products are economically sensitive
commodities  that respond to  industrial  production,  housing  starts and other
basic economic  indicators.  Fiber and pulpboard were depressed all year as that
industry  found its  capacity  outstripping  demand  following  the  addition of
significant new capacity in 1995/96. However,  according to major manufacturers,
capacity  was brought  into  balance  with  demand in the  summer,  leading to a
stronger second half of the year.  Additionally,  a plant  conversion by a major
ICR producer from  short-log to long-log  input took several  months longer than
their original expectations, resulting in less rail service than planned.

         Coal  accounted  for 23% of  carloads  and 22% of  ton-miles  in  1997.
Against  1996,  carloads,  ton-miles and revenues were up 4% and down 7% and 6%,
respectively.  Coal  performed as expected.  However,  a mid-year mine fire of a
major  coal  producer/shipper  on  ICR's  line  and,  separately,   severe  rail
congestion in the western U.S.,  which disrupted the movement of coal,  resulted
in ICR  losing  about  18,000  loads of coal it might  otherwise  have  carried.
Underlying demand for coal remains strong.

         Intermodal  accounted  for  19%  of  the  railroads'  loads  and  6% of
ton-miles. Versus 1996, carloads,  ton-miles and revenues were up 1%, 2% and 9%,
respectively.  Base intermodal business, particularly trailer business, was very
strong  throughout  the  year.   However,  a  major  intermodal  customer  UPSP,
discontinued  some of their business with ICR in September.  There was also some
negative  impact from an  approximate  two-week  strike  against  another  major
intermodal customer.

         Metals  accounted for 3% of total carloads and 4% of ton-miles in 1997.
Versus  1996,  carloads,  ton-miles  and  revenues  were  down 5%,  17% and 10%,
respectively.  As expected,  traffic of this commodity  group fell short of 1996
all-time record year which mirrored  exceptional  strength in the steel industry
and included some large  non-recurring  spot moves.  Also, as expected,  a major
shipper took its plant down for several  months in order to  effectively  double
its  productive  capacity,  which resulted in near-term loss of business for ICR
but sets the stage  for  future  growth  with this  customer.  Birmingham  Steel
completed  construction of its new mill in Memphis in the fourth quarter of 1997
and began to take inbound product.

         Bulk  Commodities  contributed  5% of carloads  and  ton-miles in 1997.
Carloads  were  up  2%  while  ton-miles  and  revenues  were  down  8%  and  2%
respectively from the 1996 level. Bulk commodities are primarily stone and other
construction  materials  and are closely tied to state  highway  projects.  This
smaller  commodity  group  fluctuates with the timing of projects as well as the
availability of freight cars for this lower-margin business.

         Operating  expenses overall increased $19.6 million or 4.7% in 1997. Of
the total $435.9 million in 1997, $50.2 million was incurred at CCPH compared to
$28.3 million for the period June 13, 1996 to December 31, 1996. Increased labor
and fringe costs reflect contract increases at ICR and the inclusion of CCPH for
the full year, partially offset by operational  efficiencies experienced at both
ICR and  CCPH.  Leases  and car  hire  decreased  $3.9  million  or 8.7% in 1997
reflecting  a return to more  normal  operating  levels and lower  export  grain
movements.  Fuel expense  reflects the increase in usage (7.7%) from including a
full year of CCPH  activity  offset  by the  lower  cost  (4.2%).  Increases  in
depreciation,  materials and supplies, casualty, insurance and other tax expense
results from  including a full year CCPH  activity.  Other expense  reflects the
recovery of prior period expenses in relation to costs related to a derailment.

         Operating  income for 1997  increased  $22.7  million or 9.4% to $263.9
million for the reasons cited above.

         Other income  (expense),  net, in 1997 includes a $3.7 million  pre-tax
gain related to the grant of a permanent  easement for the  marketing of outdoor
advertising  on ICR and CCPH  rights-of-way.  On October  3, 1996,  ICR sold its
investments in an industry-captive  insurance company, RAIL, which resulted in a
one-time gain,  recorded as other income (expense),  net, of approximately  $7.0
million.

         Net interest expense of $40.0 million for 1997 increased 17.3% compared
to $34.1 million in 1996 caused by higher debt levels year to year.

         Provision  for income taxes of $79.7  million for 1997  included a $4.3
million benefit from the donation of property.

1996 Compared to 1995

               The discussion  below takes into account the financial  condition
and  results  of  operations  of the  Company  for the  years  presented  in the
consolidated financial statements and includes CCPH since June 13, 1996 (date of
acquisition).

         Total  revenues for 1996 increased from the prior year by $12.2 million
or 1.9% to $657  million,  due to the CCPH  acquisition  which  contributed  $40
million to revenues.

                                         Year Ended December 31,

                            19961   1995      19961      1995   19961    1995
                             ----   ----      -----      ----    ----    ----
                                 Carloads       Ton-Miles          Revenue
                             (In Thousands)               (In Millions)

Chemicals                     143    138      3,682     3,617    $167    $163
Grain, mill & food products   173    185      6,640     8,577     131     141
Paper & forest products       143    148      3,067     3,126     107     109
Coal                          230    215      5,686     4,686      91      83
Intermodal                    198    175      1,421     1,279      52      47
Metals                         34     30      1,107       892      33      27
Bulk                           56     50      1,295     1,271      42      39
All Other                      19     16        148       146      34      36
                             ----   ----   --------  --------   -----   -----
Total                         996    957     23,046    23,773    $657    $645

1   Includes CCPH since June 13, 1996

         Chemicals  accounted  for  15% of the  Company's  carloads  and  16% of
ton-miles in 1996.  Compared with 1995,  ton-miles were up 2% while carloads and
revenues  were up 3%. Rail rates,  under  pressure in the earlier  months of the
year,  firmed  in the  second  half.  The  softness  observed  in  the  economy,
especially in the first two quarters was reflected in the building of chemical


<PAGE>



manufacturers'   inventories  and  softness  in  our  customers'  pricing.   Our
customers'  markets firmed in the latter half of the year.  CCPH  contributed $5
million to 1996 chemical revenue.

         Grain and grain mill  accounted  for 17% of ICR's  carloads  and 29% of
ton-miles in 1996. Against 1995, carloads,  ton-miles and revenues were down 7%,
23% and 7% respectively. Grain was clearly the primary cause of the 1996 revenue
shortfall.  Even  though the CCPH  acquisition  contributed  $20 million to 1996
grain and grain  mill  revenues  the  comparisons  were  particularly  difficult
against a record grain carloading year in 1995.  Illinois' 1995 corn and soybean
harvest was abnormally  small so that by the third quarter 1996 grain  elevators
were  essentially  depleted and the new harvest was still weeks away. Rail rates
were  higher on average  1996  versus  1995;  demand for grain was  strong;  the
product was just not  available to move.  The smaller crop also  affected  grain
mill  since  domestic  processors  were  forced  to  cut  back  on  their  usual
production.

         Paper and Forest  Products at the Company were 14% of 1996 carloads and
13% of ton- miles. Total carloads were down 4% while ton-miles and revenues were
down 2% versus 1995.  Rail rates held up reasonably  well  throughout  the year.
Paper and forest products are economically sensitive commodities that respond to
industrial production, housing starts and other basic economic indicators. Fiber
and pulpboard were depressed all year. CCPH contributed $2 million to 1996 paper
and forest products revenue.

         Coal  accounted for 23% of the Company's  carloads and 25% of ton-miles
in 1996. Against 1995,  carloads,  ton-miles and revenues were up 17%, up 6% and
9%,  respectively.  A large coal  contract  for 25,000  annual  carloads was not
renewed in July 1995 as a large customer wanted more aggressive pricing and went
elsewhere.  For a second  year in a row,  coal  margins,  and the  return on the
assets involved, improved. CCPH contributed $8 million to 1996 coal revenues.

         Intermodal  accounted  for  20%  of  the  Company's  loads  and  6%  of
ton-miles.  Versus 1995,  carloads were up 13%,  with  ton-miles and revenues up
11%.  These 1996  results  were  achieved in an industry  that saw trailer  rate
weakness earlier in the year and some weakness in automotive parts traffic later
in the year. CCPH contributed $1 million to 1996 intermodal revenue.

         Metals  accounted for 3% of the Company's  carloads and 5% of ton-miles
in 1996. For 1996,  versus 1995,  carloads,  ton-miles and revenues were up 15%,
24% and 19%,  respectively.  The steel industry had another strong year, and ICR
set another record for metals loads and revenues. CCPH contributed $2 million to
1996 metals revenue.

         Bulk  commodities  contributed 6% of carloads and ton-miles in 1996 for
ICR.  This  represents  carload and  revenue  growth of  approximately  4% while
ton-miles were down slightly from the 1995 level. Bulk commodities are primarily
stone and other  construction  materials  and are closely tied to state  highway
projects. This smaller commodity group fluctuates with the timing of projects as
well as the availability of freight cars for this  lower-margin  business.  CCPH
contributed $2 million to 1996 bulk commodity revenue.

         Operating  expenses overall  increased $1.5 million or 0.4% in 1996. Of
the total $416.3 million,  $28.3 million was incurred at CCPH.  Labor and fringe
costs include the wage increases of 3% negotiated  with nine of the ICR's unions
and costs for CCPH for the last half of 1996.  The  decline in this  category is
primarily  the  result of lower  traffic  levels,  particularly  grain,  and the
elimination of the high overtime  caused by the congestion  experienced in 1995.
Leases and car hire also benefitted from the elimination of congestion to return
to more normal operating  levels.  In 1995,  favorable  one-time  adjustments on
several capital leases were recorded. Fuel expense reflects the increase in cost
per  gallon  (13.8%)  partially  offset by  decreased  usage  (9.4%).  Increased
depreciation  is a result of the  acquisition of CCPH. The decrease in casualty,
insurance  and  losses  reflects  the  emphasis  on safety and  improved  claims
experience.  Other expenses reflect the one-time reversal of non-revenue related
accruals to actual ($2.5  million) and favorable  performance  payments in joint
facilities  that  congestion in 1995  prevented the Company from  receiving ($.7
million).

         Operating  income for 1996 increased by $10.7 million or 4.6% to $241.2
million for the reasons cited above.

         On October 3, 1996,  ICR sold its  investments  in an  industry-captive
insurance  company,  RAIL, which resulted in a one-time gain,  recorded as other
income expense, net, of approximately $7 million.

         Net interest expense of $34.1 million for 1996 increased 15.6% compared
to $29.5 million in 1995. The 1996 expense  includes $3.6 million from increased
borrowings to support the $109.9  million  transferred  from ICR in June 1996 in
connection with the acquisition of CCPH. In 1996,  average  borrowings have been
greater than 1995 and interest rates have been lower.

         On June 12, 1996,  ICR used  proceeds it received  from the issuance of
Commercial  Paper to pay a $50.0  million  dividend  to the  Company and to loan
$59.9  million  (5.625% per annum) to the  Company.  The Company used the $109.9
million and its bank credit lines to acquire CCPH. The  transaction  closed June
13, 1996,  following the effective date of the approval order issued by the STB.
The purchase price was $147.2  million in cash, the assumption of  approximately
$2.5  million  in debt and  approximately  $17.3  million of  capitalized  lease
obligations existing on the acquisition date.

         On January 25, 1996,  the Board  declared a 3-for-2  stock split in the
form of a stock  dividend  to  holders  of  record on  February  14,  1996.  New
certificates were issued March 14, 1996.  Fractional shares were settled in cash
at a rate of $25.94 per share. When  certificates  were issued,  the approximate
41.0 million shares  outstanding  increased to approximately  61.4 million.  All
share  counts,  options  outstanding,  option  prices and per share  information
presented in this annual  report have been restated to reflect the 3-for-2 split
as if it had occurred at the beginning of the earliest period presented.

Outlook

                                     -NOTE-

         This  section is intended to provide an  understanding  of factors that
will impact the Company in 1998 and beyond.  This discussion  contains  "forward
looking  statements" within the meaning of the federal securities laws including
statements of expectations,  beliefs,  plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks and
uncertainties  that could cause actual results to differ  materially  from those
expressed in the statements. These risks and uncertainties affecting the Company
are  discussed in greater  detail in EXHIBIT 99 to the  Company's  Form 10-K for
1997.

         Illinois Central Corporation is now an operationally integrated holding
company of freight  railroads and terminals  which are  coordinated by operating
and  marketing  initiatives  to originate,  direct and control  traffic over our
service areas. The Company's principal subsidiary remains the ICR, which in 1997
accounted for 90% of the Company's revenues. See Item 1. "Business - Background"
for a more  detailed  description  of  corporate  structure.  Also,  see Item 7.
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Significant  Developments - Canadian National Tender Offer" in this
section.

On a commodity basis:

         CHEMICALS: Solid growth is expected in this commodity group for 1998 as
expansions of ICR's Harvey  transload  facility and of some  existing  plants on
ICR's system begin to produce greater volumes.  Also, the Company's  liquid-bulk
terminal  should  contribute  increased  revenues  from  new  pipeline  and tank
capacity  which will be  constructed  in 1998 to serve new  long-term  contracts
secured in 1997.

         GRAIN:  1997 corn and soybean  harvests in both  Illinois and Iowa were
good to excellent  although export demand for these products has been weak since
the harvest.  Weakness in export demand has continued  into early 1998 and grain
harvests  are affected by vagaries in the  weather.  The Company has  instituted
domestic  and export  grain  programs  for the 1997/98  season  (September  1997
through  August  1998)  which  are  intended  to  assure  more  efficient  train
scheduling  and smoother  demand for rail service over the course of the season.
Per-car  revenues from these  programs are expected to be lower than prior years
(adjusting  for changes in mix of short-haul  and long-haul  traffic),  however,
unit costs of  providing  the  service  are  expected  to be lower  also.  Major
shippers  have  committed  to 'super  grain  trains'  which  turns  historically
on-demand rail service into scheduled service, improving management's ability to
plan and utilize manpower and locomotive resources at lower cost.

         ICR and CCPH  run  through  some of the  richest  and  most  productive
farmland in the country.  Management believes the fundamental grain outlook over
the next several  years is positive for us, even as we recognize the vagaries of
the weather and that export  demand for U.S.  grains,  from  year-to-year,  will
always be more volatile than domestic  demand and subject to the  expansions and
contractions  of world supply as well as  international  agricultural  and trade
policies.

         PAPER AND FOREST  PRODUCTS:  In the second half of 1997 this  commodity
group  benefitted  from the  reduction  in  excess  production  capacity  in its
industry.  This  firming  of  traffic  and the  opening  of  several  new lumber
("reload") centers should result in modest growth for these products in 1998.

         COAL  AND  BULK:  Based  on  our  current  projections,   dependent  on
stockpiles and weather in the service territories of the utilities we serve, the
Company expects to move more utility-coal loads in 1998 versus 1997. The Company
is   marketing   the   newly-constructed    dry-bulk   terminal   to   potential
importers/exporters  of coal and other  bulk  commodities  and  expects to see a
gradual increase of this activity as contracts are secured.  Also, see Item 1.
"Business - Regulatory Matters; Freight Rates; Environmental Considerations" for
discussion of utility deregulation;  at this point, there are too many variables
to know if  utility  deregulation  will have a  neutral,  modestly  positive  or
modestly negative effect on the Company long-term.

         INTERMODAL: This class of traffic is expected to continue its growth in
1998 through  expanded market share of truck traffic and as a service  agreement
with the BNSF grows.

         METALS:  We expect  metals  volumes  and  revenues  to set new  Company
records  in 1998 as a result of the  opening of a new  Birmingham  Steel mill in
Memphis, which is supplied with refined iron pellets from a plant adjacent to IC
Financial's dry-bulk facility in Louisiana.


<PAGE>



Other Issues:

         CONSOLIDATIONS:  The  American  railroad  system  has seen  accelerated
consolidation in the last few years and pending  transactions  suggest the trend
will  continue.  Each rail  merger  presents  a risk that rail  traffic  will be
diverted  around the Company's  railroads.  In the aggregate  rail mergers could
have a material  adverse impact on revenues.  Management  expects to continue to
monitor   developments   and  take  actions  to  mitigate  the  impact  of  rail
consolidations.  Of course, no assurances can be given that such  consolidations
will not have a material adverse affect on the Company.

         FUTURE  INVESTMENTS:  The  Company  continually  considers a variety of
investment  opportunities  including  acquisition of rail and other  properties,
such as its announced interest in the Mexican government's  privatization of its
rail system. (See "Liquidity and Capital Resources- Investment in Mexico").

The Company's Growth Plans

         In the fall of 1997, the Company  announced a four-year growth plan for
the years 1998-2001. The plan, called "Beyond 2000," is designed to position the
Company for the next  century.  The plan  anticipates  the  Company's  revenues,
comprised of the existing  franchise of ICR,  CCPH,  and two  terminals  located
south of Baton  Rouge,  will be in a range of $925  million  to $955  million by
year-end  2001.  It is also assumed the  operating  ratio will fall below 60% by
year-end 1999.

         Following are basic assumptions supporting revenue growth through 2001:

(a) Management  believes  incremental  growth from increased market share,  rate
increases,  and U.S. industrial growth will increase the Company's base business
of existing  customers at a compounded  annual  growth rate of about 2.5% from a
1996 base year.

(b) Management  believes  additional  growth will occur from new plants locating
along the IC system as well as expansions of existing plants.  The plan includes
industrial  development  projects  that have a reasonably  high  probability  of
commencing operations within the 2001 time frame.

(c) The plan is also dependent on no economic downturn occurring through 2001.

         The  growth  plan as  described  does  not  assume a  recession  in the
1998-2001  timeframe  because,  in the fall of 1997 when the plan was formulated
and announced,  the timing,  depth and duration of a possible  business downturn
was highly uncertain.  The plan does assume we will lose some business along the
way, for example,  through traffic diversion  following proposed  acquisition of
Conrail by the Norfolk  Southern and CSX railroads.  On the other hand, the plan
does not include  initiatives  outside the  existing  franchise,  such as the CN
tender offer and "Investment in Mexico" see below, which, if consummated,  could
be additive to the plan.

Liquidity and Capital Resources

Operating Data ($ in millions):
                                                  1997        1996        1995
                                                  ----        ----        ----
Cash flows provided by (used for):
     Operating activities..................     $221.5      $183.9      $177.4
     Investing activities..................     (135.9)     (300.6)     (127.0)
     Financing activities..................     (110.7)      170.9       (69.6)
                                                -------     ------    ---------
     Net change in cash and  temporary
      cash investments.....................     $(25.1)    $  54.2     $ (19.2)
                                                =======    =======     ========

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

Investing Data



<PAGE>



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

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

         Communications and signals..   $  16.5      $   12.2         $  10.7
         Equipment/rolling stock.....      20.8          29.4            61.5
         Track and bridges...........      73.6          57.8            47.0
         Bulk transfer facility......      43.8           -               -
         Other.......................      13.5          25.4             9.6
                                         ------        ------          ------
                 Total...     .......    $168.2        $124.8          $128.8
                                         ======        ======          ======

         Expenditures  for CN Terminal  were $2.0 million  included in other for
1997 and $3.3  million  and $16.8  million  included in track and  bridges,  and
other,  respectively,  in 1996. In 1995, Equipment includes $25.9 million for 20
new SD-70 locomotives placed in service in the fourth quarter.  In 1996 and 1995
capital  expenditures  exceeded original  estimates as several  opportunities to
acquire  equipment were acted upon in accordance with the Company's  strategy of
owning  more of its  equipment.  Property  retirements  and  removals  generated
proceeds of $4.9 million, $6.9 million, and $5.4 million in 1997, 1996 and 1995,
respectively.

         The Company  anticipates  that  capital  expenditures  for 1998 will be
approximately  $116  million.  Replacement  expenditures  of  $92  million  will
concentrate on track maintenance, bridges and freight car upgrades. Productivity
and  expansion  expenditures  will total $24  million.  These  expenditures  are
expected to be met from current operations or other available sources.

         In June 1996,  following the effectiveness of the order by the STB, the
Company acquired the stock of CCPH. (See Note 18 to the  Consolidated  Financial
Statements.)  The Company used its own bank credit lines and funds received from
ICR (a loan of $59.9  million and a $50 million  dividend)  to complete the $147
million transaction. The acquisition was treated as a purchase.

Financing Activities

         The Company  has a $50 million  364-day  floating-rate  revolving  loan
agreement  which expires in August 1998. In June 1996, the Company  borrowed $40
million under this  agreement to acquire CCPH (see Note 18). The $40 million was
repaid in June 1996 with  proceeds  from  borrowings  under  CCPH's $50  million
revolving  credit  facility  (see below).  At December 31, 1997, no amounts were
drawn  under  the  Company's  revolving  loan  agreement.  IC  Financial  leases
equipment  to ICR and has  approximately  $1.8  million in  long-term  borrowing
agreements  which were used to acquire  locomotives  during  1993.  IC Financial
lease  revenue  and  corresponding  expense  at  ICR,  which  is  eliminated  in
consolidation, was $14.7 million for 1997.

         For the three  years  ended  December  31,  1997,  the Company has paid
$147.2 million in cash dividends on its common stock.  Dividends from ICR ($63.0
million in 1997, $103.2 million in 1996 and $107.7 million in 1995) were used to
fund these  payments  to  stockholders,  the  acquisition  of CCPH,  and the $60
million stock  repurchase in 1995. (See "Long-Term  Equity  Enhancement  Program
below.")  Included  in the 1996  dividends  to the  Company  is the  March  1996
transfer by ICR of its ownership in the Chicago Intermodal Company ("CIC") via a
dividend of CIC stock. The book value of the CIC investment was $5.7 million.

         In June 1996, CCPH entered into a revolving  credit  agreement with its
bank lending group for an unsecured $50 million revolving credit facility,  (the
"CCPH  Revolver").  The CCPH  Revolver has a $5 million  sublimit for letters of
credit and  expires in 2001.  The  revolver  can be used for  general  corporate
purposes. The annual commitment fee is 25 basis points and borrowings are at the
Eurodollar  offered rate plus 62.5 basis points.  The credit agreement  contains
various financial covenants including minimum  consolidated  tangible net worth,
minimum interest  coverage and maximum leverage ratio.  CCPH does not anticipate
any difficulty in maintaining  compliance with such  covenants.  At December 31,
1997 this  facility  was undrawn.  At December 31, 1996 $15.5  million of CCPH's
Revolver  was  outstanding.  In 1996,  CCPH  used $5  million  to repay  amounts
outstanding under a predecessor revolver which was then canceled.

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

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

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

         Certain  covenants of ICR's debt agreements and CCPH's Revolver require
specific levels of tangible net worth but not a specific  dividend  restriction.
At December 31, 1997, ICR and CCPH exceeded  their tangible net worth  covenants
by $32.0  million  and $29.6  million,  respectively.  Both ICR and CCPH were in
compliance  with all covenants at December 31, 1997, and do not  contemplate any
difficulty maintaining such compliance.

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

    Principal                                    Year
     Amount           Coupon            Issued           Matures
 
     $20              6.27%             1995             1998
      30              6.83              1995             2000
      50              6.98              1996             2007
      50              7.12              1996             2001
      30              6.85              1996             1999
      50              6.72              1996             2001

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

         In 1995,  ICR prepaid the holders of its $160  million  Senior Notes at
face value plus accrued  interest and a prepayment  penalty.  The monies used to
fund the prepayment were provided by commercial  paper,  the net proceeds of the
2005  Notes and $40  million  from  existing  lines of  credit.  The  prepayment
resulted in an  extraordinary  loss of $18.4  million,  $11.4 million  after-tax
($.18 per share).  The line of credit borrowings were replaced with the proceeds
of MTN's.

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


<PAGE>



Investment in Mexico

         The Company and two Mexican partners have formed a joint venture to bid
on the Ferrocarril del Sureste rail line (the "Southeast  Line").  The Southeast
Line is one of the last  segments of rail line being  privatized  by the Mexican
government.  The Southeast Line stretches from Mexico City to the port cities of
Veracruz and Coatzacoalcos.  The Company's participation in the partnership will
not exceed forty-nine percent.

         To date the amount spent has been immaterial. The auction process began
February 1998,  and bids are currently due June 11, 1998. The Mexican  transport
ministry is expected to announce  the  successful  bidder  within 30 days of the
close of the auction period. If the joint venture is awarded the Southeast Line,
the  Company  has  sufficient  financing  resources  available  to  support  its
investment.

Year 2000 Conversion

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

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

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

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

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

Miscellaneous

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

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

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

Long-Term Equity Enhancement Program

         The  Company  declared  its  twenty-fifth  consecutive  quarterly  cash
dividend on February  20,  1998,  payable on March 25, 1998 to  shareholders  of
record on March 6, 1998. The Board believes quarterly  dividends are an integral
part of its announced  Long-Term Equity Enhancement Program designed to increase
stockholder  value  through  dividend  payments  and stock  repurchases.  Actual
dividends are declared by the Board of Directors based on profitability, capital
expenditure  requirements,  debt  service and other  factors,  including  the CN
tender offer. (See Item 7.
"Significant Developments - Canadian National Tender Offer".)

         During  1995,  the Company  completed a $60  million  stock  repurchase
program acquiring 2,475,000 shares in open market  transactions.  While intended
to be an annual component of the Long-Term Equity Enhancement Program, the Board
concluded that alternative  funding needs, most notably the acquisition of CCPH,
the expansion of the intermodal  facility in Chicago and the  construction  of a
bulk  transfer   facility  in  Louisiana   warranted  the  suspension  of  share
repurchases under the program for 1997 and 1996.



<PAGE>



Environmental Liabilities

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

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

         The Company is aware of approximately 23 contaminated sites at which it
is probably  liable for some  portion of any  required  clean-up.  Of these,  15
involve  contamination  primarily by diesel fuel which can be remediated without
material cost.  Five other sites are expected to require more than $1 million in
clean-up costs. At three of these sites other parties are expected to contribute
the majority of the costs incurred.  The Company paid  approximately $.6 million
toward the  investigation  and remediation at all sites in 1997, and anticipates
similar expenditures annually.

           For all known sites of environmental contamination where Company loss
or liability is probable, the Company has recorded an estimated liability at the
time when a reasonable  estimate of remediation  cost and Company  liability can
first be determined.  Adjustments to initial estimates are recorded as necessary
based upon additional information developed in subsequent periods.  Estimates of
the Company`s potential financial exposure for environmental claims or incidents
are  necessarily  imprecise  because of the difficulty of determining in advance
the nature and extent of contamination, the varying costs of alternative methods
of remediation, the regulatory clean-up standards which will be applied, and the
appropriate  allocation of liability  among  multiple  responsible  parties.  At
December 31, 1997, the Company  estimated the probable range of its liability to
be $9.9 million to $45 million,  and in accordance  with the  provisions of SFAS
No. 5 had a reserve of $9.9 million for environmental contingencies. This amount
is not reduced for potential insurance recoveries or third-party contributions.

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


<PAGE>



Litigation

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

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

Recent Accounting Pronouncements

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

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

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

Item 8.  Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements on page 60 of this Report.

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


<PAGE>




                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

Directors

         The directors of the Company are identified in the table below.

                       Name                     Age

                Gilbert H.  Lamphere             45
                E.  Hunter Harrison              53
                George D.  Gould                 70
                William B.  Johnson              79
                Alexander P.  Lynch              45
                Samuel F.  Pryor IV              42
                F.  Jay Taylor                   74
                John V.  Tunney                  63
                Alan H.  Washkowitz              57

Biographical Information

         Gilbert H.  Lamphere,  45, has been a director  of the  Company and ICR
since 1989.  He has been  Chairman of the Board since 1993,  and Chairman of the
Executive  Committee of the Board since 1990. Mr. Lamphere is Managing  Director
of the Fremont Group, a diversified  investment  company. He was Co-Chairman and
Chief  Executive  Officer of Noel, from 1991 until 1994 and was the Chairman and
Chief  Executive  Officer of  Prospect  until  1994,  for which he had served in
various  capacities  since becoming a director in 1983.  Mr.  Lamphere also is a
director and Chairman of Prospect.  He serves as a director of the Fremont Group
and Sequois. Mr. Lamphere is the brother-in-law of another director,  Mr. Lynch.
Committee: Executive (Chairman).

         E.  Hunter  Harrison,  53, has been a director  of the  Company and ICR
since  1993 and has  served as  President  and Chief  Executive  Officer  of the
Corporation  and the Railroad  since  February  1993.  Mr.  Harrison  joined the
Company and the ICR as Vice President and Chief Transportation  Officer in 1989,
was elected Senior Vice  President-Transportation in 1991 and was elected Senior
Vice  President-Operations  in July 1992.  Mr.  Harrison  also is a director  of
Wabash  National  Corporation,  a  manufacturer  of truck  trailers.  Committee:
Executive.

         George D. Gould,  70, has been a director of the Company since 1990. He
has been Vice Chairman of  Klingenstein,  Fields & Co., L.P., a money management
firm,  since 1989.  Mr. Gould is Chairman of the Hungarian  American  Enterprise
Fund. He previously  served as  Undersecretary of the United States Treasury for
Finance  from 1985 to 1988.  Mr.  Gould also serves as a director of the Federal
Home Loan  Mortgage  Corporation,  TIG  Holdings,  and the Needham  Growth Fund.
Committees: Audit, Compensation (Chairman) and Finance.

         William B. Johnson,  79, has been a director of the Company since 1989.
He previously  served as a director,  Chairman and Chief Executive Officer of IC
Industries,  Inc. (now known as Whitman Corporation).  Until 1989, Whitman owned
ICR. Mr.  Johnson was employed by the Company as Advisor to the Chairman in 1990
and 1991. Mr. Johnson serves as a director of Webster Broadcasting, is a Trustee
of the University of Chicago and the University of  Pennsylvania  Law School and
is a member  of the  Board of  Governors  of  Washington  College,  Chestertown,
Maryland. Committees: Audit and Executive.

         Alexander P. Lynch,  45, has been a director of the Company since 1991.
He is a general  partner of The Beacon Group  Capital  Services,  LLC, a private
investment and strategic  advisory  firm.  From 1995 until 1997, he was Co-Chief
Executive Officer and Co-President of The Bridgeford Group, a financial advisory
firm. From 1991 until 1995 he was a Senior Managing Director of Bridgeford. From
1985 until 1991,  Mr.  Lynch was a Managing  Director of Lehman  Brothers or its
predecessors.  Mr. Lynch also serves as a director of Lincoln Snacks Company and
Patina  Oil and Gas  Corporation.  Mr.  Lynch is the  brother-in-law  of another
director, Mr. Lamphere. Committees: Audit (Chairman) and Finance.

         Samuel F. Pryor, IV, 42, has been a director of the Company since 1989.
Mr. Pryor is President of Brazil Rail Partners, LLC. He was Managing Director of
The Noel Group, Inc.  ("Noel"),  a diversified  company from 1991 until 1997. He
was President of The Prospect Group, Inc.  ("Prospect") until 1997, for which he
has served in various capacities since 1986. Committees: Audit, Compensation and
Finance (Chairman).

         F. Jay Taylor,  74, has been a director of the Company since 1994.  Dr.
Taylor is a Labor- Management Arbitrator in both the public and private sectors.
He served as President  of  Louisiana  Tech  University  from 1962 to 1987,  and
currently serves as President Emeritus of the University. Dr. Taylor is a member
of the Board of Directors of Michael's  Stores,  Inc. and Pizza Inn,  Inc. and a
member of the National  Academy of Arbitrators and Society of  Professionals  in
Dispute Resolution. Committees: Audit and Compensation.

         John V. Tunney,  63, has been a director of the Company  since 1990. He
has been  Chairman  of the  Board  of  Cloverleaf  Group,  Inc.,  a real  estate
development  firm,  since 1980.  Mr. Tunney served as United States Senator from
the State of  California  from 1971 to 1977 and as a member of the United States
House of  Representatives  from 1965 to 1971. Mr. Tunney is a director of Foamex
International, a manufacturer and fabricator of polyurethane foam and Swiss Army
Brands. Committees: Audit and Compensation.

         Alan H. Washkowitz,  57, has been a director of the Company since 1991.
He has been a Managing  Director of Lehman  Brothers or its  predecessors  since
1978.  Mr.  Washkowitz  also serves as a director  of K&F  Industries,  Inc.,  a
manufacturer  of aircraft wheels and brakes,  McBrides,  Ltd., a manufacturer of
private label  household and personal  care  products and L3  Communications,  a
merchant supplier of secure communications systems. Committees: Compensation and
Finance.

         The  executive  officers  of the Company  are  identified  in the table
below.  Each  executive  officer of the  Company  currently  holds an  identical
position  with ICR and CCPH.  Executive  officers of the  Company,  ICR and CCPH
serve at the pleasure of the respective Boards of Directors.


<PAGE>



Executive Officers

       Name             Age            Position(s)

  E. Hunter Harrison    53    President and Chief Executive Officer, Director
  John D. McPherson     51    Senior Vice President - Operations
  Donald H. Skelton     54    Senior Vice President - Marketing and Sales
  James M. Harrell      45    Vice President - Human Resources
  David C. Kelly        53    Vice President - Maintenance
  Ronald A. Lane        47    Vice President and General Counsel and  Secretary
  John V.  Mulvaney     47    Vice President and Chief Financial Officer
  Douglas A.  Koman     48    Controller

Biographical Information

         The  following  sets  forth the  periods  during  which  the  executive
officers of the Company have served as such and a brief  account of the business
experience of such persons during the past five years.  Unless  otherwise stated
each individual holds a similar position at ICR and CCPH.

         E.  Hunter  Harrison,  53, has been a director  of the  Company and ICR
since  1993 and has  served as  President  and Chief  Executive  Officer  of the
Corporation  and the Railroad  since  February  1993.  Mr.  Harrison  joined the
Company and the ICR as Vice President and Chief Transportation  Officer in 1989,
was elected Senior Vice  President-Transportation in 1991 and was elected Senior
Vice  President-Operations  in July 1992.  Mr.  Harrison  also is a director  of
Wabash  National  Corporation,  a  manufacturer  of truck  trailers.  Committee:
Executive.

         Mr. McPherson joined the Company in July 1993. He was named Senior Vice
President  Operations  in 1994.  He also serves as a Director of ICR,  and since
June 1996 of CCPH. Mr.  McPherson is also a director of the Peoria & Pekin Union
Railroad.  Prior to joining  the  Company  he held  various  positions  with the
Atchison,  Topeka and Santa Fe Railway  Company from 1966 to 1993, most recently
as Assistant Vice President - Safety.

         Mr.  Skelton was elected Senior Vice  President-Marketing  and Sales of
the Company in January 1996. He serves as a director of ICR, and since June 1996
of CCPH. He joined the Company as Vice President  Marketing and Sales in October
1994.  He  was  previously  employed  by  Mark  VII  Transportation  and  as  an
independent consulting specialist in international transportation.  From 1987 to
1993 he was  employed  by the  Atchison,  Topeka  and Santa Fe  Railway  Company
holding various executive positions including Vice President Marketing and Sales
and Vice President International/Domestic Customer Development.

         Mr.  Harrell  joined the  Company in his current  position in 1992.  He
served as  Director of Labor  Relations  for The  Atchison,  Topeka and Santa Fe
Railway Company from 1989 to 1992.

         Mr. Kelly joined the Company as Vice  President  and Chief  Engineer in
1989. In January 1994, he was appointed Vice President - Maintenance.

         Mr. Lane joined the Company as Vice  President and General  Counsel and
Secretary  in 1990.  He also serves as a Director of ICR, and since June 1996 of
CCPH.



<PAGE>



         Mr.  Mulvaney was  appointed to his present  position in the Company in
November  1997. He also serves as a director of ICR,  CCPH,  and Peoria & Pekin
Union Railroad. He joined the Company as Controller in June 1990.

         Mr.  Koman was  appointed  to his  present  position  in the Company in
November  1997. He joined the Company in 1971 and served as Assistant  Treasurer
from 1990 to 1991 and Treasurer from 1991 to 1997.

         No family relationship exists among the officers of the Company, ICR or
CCPH.

         Pursuant to Item 405 of  Regulation  S-K,  Mr. A. P. Lynch's Form 4 for
August 1997  reflecting  the sale of 20,000 shares was filed  February 17, 1998,
160 days late.

Item 11.  Executive Compensation

         All of the  cash  compensation  received  by  the  Company's  executive
officers  during fiscal years 1997, 1996 and 1995 was paid or accrued by ICR; no
compensation was paid by the Company. The following table sets forth information
concerning  the  Chief  Executive   Officer  and  the  four  other  most  highly
compensated  executive  officers for the year ended December 31, 1997. The table
has been  restated to give affect to a 3-for-2  stock split  declared in January
1996. Any deferred compensation has been added back in the table.


<PAGE>


<TABLE>

Summary Compensation Table
<CAPTION>

                                              Annual Compensation                       Long-Term Compensation
                                                                    Other
                                                                    Annual       Restricted     Securities    All Other
Name and                                                            Compen-      Stock          Underlying    Compen-
Principal                              Salary        Bonus          sation2      Award(s)3      Options       sation
Positions(s)               Year         ($)1         ($)1             ($)         ($)            #            ($)
------------               ----       -------       -------        -------      ----------     ----------    --------

<S>                        <C>        <C>           <C>            <C>             <C>         <C>           <C>          
  
E. Hunter Harrison         1997       500,000       395,000        19,634          -           68,200        156,9404
President and Chief        1996       500,000       387,500        18,615          -           85,500        175,7344
Executive Officer          1995       500,000       650,000        14,857          -           90,000        156,7394


John D. McPherson          1997       232,337       150,000        12,065          -           23,400         46,5105
Senior Vice President      1996       217,420       130,920        71,5226         -           30,000         48,5205
Operations                 1995       201,925       195,000         9,568          -           30,112         42,7055


Donald H. Skelton          1997       203,887       131,000        12,494          -           23,400         35,3938
Senior Vice President      1996       188,674       113,620        11,657          -           30,000         35,8748
Marketing and Sales        1995       166,984       158,000       108,8357         -           19,800         16,2858


Ronald A. Lane             1997       184,344       110,000       11,327           -           15,400         39,6929
Vice President and         1996       173,982        96,710       12,676           -           19,500         42,1729
General Counsel and        1995       164,562       158,000       11,320           -           19,800         38,0559
Secretary

James M.  Harrell          1997       170,450       101,000       11,116           -           15,400         29,13410
Vice President             1996       148,996        83,035       12,366           -           19,500         28,89510
Human Resources            1995       137,379       135,000       11,621           -           19,800         25,65610

Dale W. Phillips (a)       1997       200,040       110,000       43,53712         -            3,850         35,78911
Vice President and         1996       188,674       104,880       10,808           -           19,500         44,50311
Chief Financial Officer    1995       164,562       158,000        8,863           -           19,800         37,95711


<FN>
(a)      Mr. Phillips resigned effective October 31, 1997.

Notes to Summary Compensation Table

         1 Bonus amounts  include,  but are not limited to,  Performance  Awards
(see  "Compensation  Committee  Report").  Amounts shown in a given year reflect
amounts  awarded with respect to that year but may have been paid the  following
year. Salary and Bonus amounts,  where applicable,  have not been reduced by the
officers  election  to defer  compensation  pursuant to the  Executive  Deferred
Compensation Plan.

         2  Generally  includes  federal  and state tax "gross  ups" for various
perquisites  such as company cars and club dues and initiation  fees,  and, when
they  exceeded  the lesser of  $50,000 or 10% of the total of annual  salary and
bonus, the value of perquisites.  Excludes the value of the Company paid portion
of the price for shares purchased under the Management Employee Discounted Stock
Purchase Plan as same discount is available to all management employees.


<PAGE>



         3 Restricted  stock awards were granted in 1994 to Mr. Skelton.  Shares
awarded are  restricted  for a period of four years from the date of purchase or
award. On each of the first four year anniversary dates of purchase or award, if
employment  has not previously  been  terminated,  25% of the shares  originally
awarded become  unrestricted.  Dividends paid on unvested  restricted shares are
not included in this table because they do not exceed regular  dividends.  As of
December 31, 1997,  Mr.  Skelton's  unvested 5,625 shares had a current value of
$191,602. Current value is computed by multiplying the closing NYSE market price
of  unrestricted  stock on  December  31,  1997,  by the number of shares  still
subject  to  restrictions  and  netting  out any  consideration  paid  by  award
recipient. See "Employment Contracts and Termination of Employment and Change in
Control Arrangements."

         4  Includes:  (i) ICR  contributions  to defined  contribution  plan of
$3,200,  for each fiscal year 1997,  1996 and 1995;  (ii) ICR  contributions  to
401(k) plan of $4,750,  $4,125,  and $4,620 for each fiscal year 1997,  1996 and
1995,  respectively;  (iii) amounts  accrued under an executive  account balance
plan of $122,038,  $136,680  and $124,559 for fiscal years 1997,  1996 and 1995,
respectively;  and (iv) amounts accrued under an excess benefit plan of $27,152,
$31,929 and $24,560 for fiscal years 1997, 1996 and 1995, respectively.

         5  Includes:  (i) ICR  contributions  to defined  contribution  plan of
$3,200 for each  fiscal  year 1997,  1996 and 1995;  (ii) ICR  contributions  to
401(k) plan of $4,750,  $4,488 and $4,620 for fiscal years 1997,  1996 and 1995,
respectively;  (iii) amounts accrued under an executive  account balance plan of
$34,240, $36,408 and $31,942 for fiscal years 1997, 1996 and 1995, respectively;
and (iv)  amount  accrued  under an excess  benefit  plan of $4,520,  $4,624 and
$3,143 in 1997, 1996 and 1995, respectively.

         6 Includes perquisites, including club dues and initiation fees of $28,774.

         7 Includes perquisites, including club dues and initiation fees of $50,905.

         8 Includes (i) ICR contributions to defined contribution plan of $3,200
for each fiscal 1997, 1996 and 1995,  respectively;  (ii) ICR  contributions  to
401(k)  plan of  $4,750,  $4,541 and  $4,620  for  fiscal  1997,  1996 and 1995,
respectively;  (iii) amounts accrued under an executive  account balance plan of
$24,901,  $26,117 and $7,925 for fiscal years 1997, 1996 and 1995, respectively;
and (iv) amounts  accrued  under the excess  benefit plan of $2,742,  $2,216 and
$740 in 1997, 1996 and 1995, respectively.

         9  Includes:  (i) ICR  contributions  to defined  contribution  plan of
$3,200 for each  fiscal  year 1997,  1996 and 1995;  (ii) ICR  contributions  to
401(k) plan of $4,750,  $4,551 and $4,620 for fiscal years 1997,  1996 and 1995,
respectively;  (iii) amounts accrued under an executive  account balance plan of
$29,990, $32,837 and $29,656 for fiscal years 1997, 1996 and 1995, respectively;
and (iv) amounts  accrued  under the excess  benefit plan of $1,952,  $1,784 and
$779 in 1997, 1996 and 1995, respectively.

         10 Includes:  (i) ICR  contributions  to defined  contribution  plan of
$3,200,  $2,985 and $2,745 for fiscal  year 1997,  1996 and 1995,  respectively;
(ii) ICR  contributions  to 401(k) plan of $4,750,  $3,415 and $3,468 for fiscal
years  1997,  1996  and  1995,  respectively;  (iii)  amounts  accrued  under an
executive account balance plan of $20,939,  $22,495 and $19,443 for fiscal years
1997,  1996 and 1995,  respectively;  and (iv) amounts  accrued under the excess
benefit plan of $460 in 1997.

         11 Includes:  (i) ICR  contributions  to defined  contribution  plan of
$3,000 for each  fiscal  year 1997,  1996 and 1995;  (ii) ICR  contributions  to
401(k) plan of $4,525,  $4,462 and $4,222 for fiscal years 1997,  1996 and 1995,
respectively;  (iii) amounts accrued under an executive  account balance plan of
$27,207, $34,763 and $29,953 for fiscal years 1997, 1996 and 1995, respectively;
and (iv) amounts  accrued  under the excess  benefit plan of $1,057,  $2,278 and
$782 in 1997, 1996 and 1995, respectively.

         12 Includes requisite,  included value of car $14,231 given to employee
upon his resignation.
</FN>
</TABLE>

Options/Grants Table


<PAGE>



         During  1997  following   stock  options  awards  under  the  Executive
Performance Compensation Program were awarded.
<TABLE>

                                                                                              Potential Realizable
                                                                                              Value at Assumed
                                                                                              Annual Rates of Stock
                                                                                              Price Appreciation
                                      Individual Grants                                       for Option Terms(2)
                                             Percent
                            Number of        of Total
                            Securities       Options
                            Underlying       Granted to    Exercise
                            Options          Employees     or Base
                            Granted          in Fiscal     Price       Expiration
Name                          (#)            Year          ($/SH)      Date(1)               5% ($)         10%($)
----                        ------           ------        ------      ---------         ---------    ---------
<CAPTION>
<S>                         <C>              <C>           <C>         <C>               <C>          <C>

E. Hunter Harrison          68,200           14.33%        34.125      3/12/2007         1,463,642    3,709,157
John D. McPherson           23,400            4.92         34.125      3/12/2007           502,188    1,272,643
Donald H. Skelton           23,400            4.92         34.125      3/12/2007           502,188    1,272,643
Ronald A. Lane              15,400            3.23         34.125      3/12/2007           330,500      837,552
James M.  Harrell           15,400            3.23         34.125      3/12/2007           330,500      837,552


<FN>
(1)  Options vest at 25% per year on March 12 1998, March 12 1999, March 12, 
     2000 and March 12, 2001.
(2)  Potential realizable value is reported net of the option exercise price but
     before  taxes  associated  with  exercise.   These  amounts  assume  annual
     compounding  results  in total  appreciation  of 63% (5% per year) and 159%
     (10% per year).  Actual gains, if any, on stock option exercises and common
     stock are  dependent  on the future  performance  of the  common  stock and
     overall  market  conditions.  There can be no  assurance  that the  amounts
     reflected in this table will be achieved.
</FN>
</TABLE>

Aggregated Option Exercises and Fiscal Year-End Option Value Table
<TABLE>

                                                          Number of Securities            Value of Unexercised
                                                        Underlying Unexercised              In-the-Money
                        Shares                              Options at                       Options at
                        Acquired on   Value                  FY-End (#)                      FY-End($)2
Name                    Exercise(#) Realized($)     Exercisable    Unexercisable    Exercisable   Unexercisable
<CAPTION>

<S>                      <C>        <C>              <C>              <C>             <C>           <C>      
E. Hunter Harrison       200,000    7,325,000        278,875          177,325         4,233,628     1,055,414
John D. McPherson              0            0         40,556           60,956           468,266       362,329
Donald H. Skelton              0            0         17,400           55,800           173,963       306,150
Ronald A. Lane                 0            0         31,275           39,925           369,111       236,752
James H.  Harrell              0            0         29,775           39,925           349,267       236,752


<FN>
1  Includes shares exercisable on February 17, 1997, (93,750) and March 16, 1997
   (44,878) and March 8, 1997 (48,262).
2  Based on the year-end price of $32.00.
</FN>
</TABLE>

Pension and Retirement Plans

         Executive  Account Balance Plan.  ICR's Executive  Account Balance Plan
provides  for a sum  equivalent  to 10% of an  executive's  combined  salary and
performance awards in excess of a wage offset factor to be accrued annually (but
not funded),  and is payable upon the retirement  from the ICR or termination of
employment.  The wage  offset  factor is  adjusted  annually  by the  percentage
increase in the social  security wage base. For 1997, the wage offset factor was
$109,000. Amounts accrued earn interest in accordance with the plan.

         Defined Contribution Plan. All management employees of the Railroad are
eligible  to  participate  in a  defined  contribution  plan  to  which  the ICR
contributes  2% of each  participant's  earnings  (as defined in the plan).  All
contributions  are fully  vested upon  contribution  and are invested in various
investment funds as selected by the employees.  Contributions  are designated as
Employer Contributions in the Savings Plan.

         Supplemental  Retirement and Savings Plans. All management employees of
the ICR are eligible to participate in the  Supplemental  Retirement and Savings
Plan (the "Savings  Plan"),  which is a qualified  salary reduction 401(k) plan.
Eligible employees may make "pre-tax" contributions to the Savings Plan of up to
15% of their salary subject to limitations imposed by the Internal Revenue Code.
Those contributions are partially matched by the ICR. The matching  contribution
is limited to 50% of the first 6% of an employee's  pre-tax  salary  (i.e.,  the
matching  contribution is limited to 3% of his or her salary). All contributions
are fully vested upon contribution and are invested in various  investment funds
as selected by the employees.

         Excess Benefit Plan.  Under the ICR's Excess Benefit Plan,  amounts are
accrued  for  each  executive  officer  on  an  unfunded  basis  to  offset  the
limitations imposed by the Internal Revenue Code with respect to certain benefit
plans as a result of the level of the recipient's  compensation.  Currently, the
Excess Benefit Plan provides for the accrual of a sum equivalent to the employer
matching  contribution under the Supplemental  Retirement and Savings Plan which
is restricted by the limits of Section 402(g) of the Internal  Revenue Code. The
amounts  accrued will be  distributed  at the same time and on the same terms as
the amounts paid under the Savings Plan.

         Executive  Deferred  Compensation  Plan.  The Company  established  the
Illinois Central Corporation  Executive Deferred  Compensation Plan effective as
of January 1, 1994.  The plan is  available  to all officers of the ICR and such
management  employees  as  specified  from  time to time  by the  ICR.  Eligible
employees  may elect to defer up to 50% of base salary and 100% of annual bonus.
Participants'  account  balances  are  fully  vested  and  earn  interest  at  a
specified,  variable rate.  Distributions  under the plan will be made in a lump
sum or installments  after the participant's  retirement or other termination of
employment.  Subject to a penalty,  a participant may elect to withdraw all or a
portion  of his or her  account  under  the plan in the  event of an  unforeseen
financial emergency.

         Supplemental   Executive   Retirement   Plan.   The   Company   has  no
tax-qualified  defined  benefit  retirement  plan for  employees.  However,  the
Company  established the Illinois  Central  Corporation  Supplemental  Executive
Retirement  Plan  effective as of January 1, 1994 (the "SERP").  The SERP covers
all officers of the ICR and such other  management  employees as specified  from
time to time by the Company. The monthly benefit payable pursuant to the SERP is
equal  to a  maximum  of 35% of the  participant's  final  average  compensation
(defined as the average annual  compensation paid for the highest 36 consecutive
months out of the last 60 months  prior to  retirement)  offset by the amount of
annual  annuity that could be purchased  with the sum of: (i) the portion of the
participant's  account  in the  Savings  Plan  which is  attributable  solely to
Employer  contributions and the earnings thereon; (ii) the participant's account
in the Excess Benefit Plan; and (iii) the  participant's  account balance in the
Executive Account Balance Plan. Participants vest after


<PAGE>



five years of  participation  in the SERP.  The following  table shows  benefits
payable to those  executives who are eligible for early  retirement at age 55 or
above with 10 years of credited service, or upon normal retirement at age 65.

                                    Pension Plan Table
   Average       Estimated Annual Benefit for Years of Credited Service
   Final           ------------------------------------------------------
  Earnings          5           10          15              20             25
  --------          -           --          --              --             --

  $100,000     $  17,500   $  35,000   $  35,000       $  35,000       $  35,000
   200,000        35,000      70,000      70,000          70,000          70,000
   300,000        52,500     105,000     105,000         105,000         105,000
   400,000        70,000     140,000     140,000         140,000         140,000
   500,000        87,500     175,000     175,000         175,000         175,000
   600,000       105,000     210,000     210,000         210,000         210,000
   700,000       122,500     245,000     245,000         245,000         245,000
   800,000       140,000     280,000     280,000         280,000         280,000
   900,000       157,500     315,000     315,000         315,000         315,000

         The above table sets forth the estimated  annual benefits  payable on a
single-life  annuity  basis if  participant  does not have a spouse  at the time
payment is to commence and a joint and 50% survivor  annuity  basis in the event
the participant has a spouse at the time of commencement.

         The number of years of credited  service as of December  31,  1997,  is
four (4)  years for each of  Messrs.  Harrison,  McPherson,  Lane,  Harrell  and
Phillips.  Mr.  Skelton has three (3) years of credited  service at December 31,
1997.

Directors' Compensation

         Under  the  compensation  program  for  Outside  Directors  the  annual
retainer for the  Chairman is $170,000  and the annual  retainer for other Board
members  is  $20,000.  A  supplemental  annual  retainer  of $3,000 is paid each
committee  chairman.  Each director  receives $2,000 for each board or committee
meeting  attended and is  reimbursed  for expenses  incurred in attending  those
meetings.  No director fees are paid to Mr. Harrison since he is an employee.  A
Directors  Deferral  Plan  permits  directors  to defer up to 100% of their cash
compensation until they terminate their services as directors.

         Through  1997 the  Outside  Directors  also  received  an annual  grant
ofstock options to purchase 2,250 shares at the fair market value on the date of
grant which was the date of each Annual Meeting. Such options are exercisable in
full six months  following  their grant date and expire 10 years following grant
date or if earlier,  one year after termination of service as a director for any
reason other than death or disability.

         For 1998, as a result of the Merger,  the annual grant of stock options
has been  replaced by the Black  Scholes  equivalent  of such a grant.  Thus, in
1998, the Directors are expected to receive  approximately  $25,000 each in lieu
of a grant of stock options.

          In March 1996,  each Outside  Director  received an option to purchase
37,500 shares which will vest on April 1, 2001 if specified Company  performance
objectives are achieved in the year 2000.  See "Directors  Incentive 2000 Option
Plan" below.

         The  Company  has  an  Indemnification   Agreement  with  each  of  the
directors.



<PAGE>



Employment Contracts and Termination of Employment and Change in Control
Arrangements

         The  Company has  entered  into  Employment  Security  Agreements  with
approximately 29 senior officers which provide stated benefits in the event they
are  terminated  without  cause or terminate  their  employment  for good reason
within two years after a change in control. Following a covered termination, the
officer will be entitled to two or three years' base salary (depending on salary
grade) and target incentive payment for one year plus a proration of the current
year.  Two or three  years'  credit  will be granted  toward  the  Supplementary
Executive Retirement Plan and fringe benefits will be extended. However, payment
under these agreements will be limited to 2.99 times average last five years W-2
earnings.  The  Merger  will  constitute  a change of  control as defined by the
Employment Security  Agreements  ("ESA").  Terms of the Merger Agreement provide
for  amendments to the ESA's whereby if payments  under the ESA's exceed 105% of
the 2.99 limit the full amount will be paid and the participant will be "grossed
up" for any excise  taxes  owed.  In addition  any  unvested  stock  options and
restricted stock granted to participants will vest upon a Change in Control.

         Compensation   Committee   Interlocks  and  Insider   Participation  in
Compensation Decisions

         The  following  independent  directors  are  members  of the  Company's
Compensation Committee: George D. Gould (Chairman), Samuel F. Pryor, IV, John V.
Tunney and Alan H. Washkowitz.  No executive officer serves as a director of any
entity whose executive officers serve on the Company's Compensation Committee.

Compensation Committee Report on Executive Compensation

Executive Compensation Philosophy

         The Compensation  Committee of the Board of Directors (the "Committee")
has adopted a philosophy that compensation for the management of the Company and
its  subsidiaries  should be tied  directly  to the  Company's  stated  business
objectives  and to the sustained  creation of stockholder  value.  The Committee
believes that  stockholder  interests and the  Company's  compensation  programs
should be closely aligned and integrated.  Therefore, the Company's compensation
program  reflects both a performance  and long-term  orientation.  Further,  the
performance  measures  used to  determine  compensation  levels are the primary,
sustainable  drivers  of  stockholder  value  among   transportation   companies
specifically  and other  publicly-held  companies  generally.  As a result,  the
Company's total  compensation  program is designed to be highly sensitive to the
Company's performance, defined in terms of stockholder value creation.

Performance Compensation Program

         The  Company's  Performance   Compensation  Program  consists  of  four
components:  (1) Base Salary, (2) Performance  Awards, (3) Stock Options and (4)
Incentive  2000 Plan  Awards.  The program is designed to  emphasize  risk-based
compensation  which rewards  Company and individual  performance.  Each of these
components and its respective role in total direct compensation,  as well as the
basis for  determining  the  compensation  of the President and Chief  Executive
Officer ("CEO"), Mr. Harrison, are described below:

(1) Base Salary

         Salary  levels  are  determined  by  several  factors,  including:  the
Company's performance,  the individual's  contribution to that performance,  the
individual's position within his/her salary grade and competitive pay levels. In
1997,  the  Committee  reviewed  the  salary  and  compensation  levels  of  all
management employees to ensure a consistent and competitive compensation program
with the Company's peer groups.  The Committee reviews the salary of the CEO and
all other officers annually.

(2)  Performance Awards and Bonuses

         Approximately  500  management  employees  participate in the Company's
annual  incentive  program.  Each  participant is assigned a target  Performance
Award  according to the  individual's  level of  responsibility  (salary grade).
Target award  levels  range from 10% to 75% of annual base salary.  Actual award
levels  vary  depending   upon  the   Corporation's   performance   relative  to
predetermined  objectives  for annual revenue growth and return on total capital
("ROTC"),  and range from 0% to 150% of target awards. Award levels are weighted
two-thirds on ROTC and one-third on revenue growth. Performance awards under the
program for management  employees  other than the CEO and four other most highly
compensated  officers contain a second component for individual  performance for
the year as well as Company performance. The individual component of performance
awards vary from 0% to 50% of the target award.

         The  Company  performance  objectives  are the same for all  management
employees and relate directly to those measures which drive stockholder value --
annual return on average total capital,  calculated on an after-award  after-tax
basis, and annual revenue growth. Specific performance objectives are set by the
Committee  annually in relation to the Company's fiscal budget after it has been
reviewed and approved by the Board. Except as to the CEO and the four other most
highly  compensated  individuals,  the  Committee  has the ability to adjust the
Company  payout  through a  discretionary  factor of plus or minus 20% of target
award by evaluating  other business  measures (e.g.,  safety,  operating  ratio,
earnings  per  share,  or other  measures).  For the CEO and the four other most
highly  compensated  officers,  only Company  performance,  subject to potential
reduction by the Committee, determines the Performance Award.

         The CEO's  target  award is 75% of base  salary and the targets for the
other four most  highly  compensated  officers  range from 60% to 65%. To comply
with IRS regulations limiting the deductibility of executive  compensation,  the
CEO and the four other most  highly  compensated  officers  are not  eligible to
receive any  performance  award based on individual  performance.  The Committee
also cannot adjust upward the Company  performance award for these  individuals.
However,  the Committee has retained the discretion to award cash bonuses (which
are subject to the deductibility cap) to those individuals.

(3) Stock Options

         The   Company   maintains  a  long-term   stock   option   program  for
approximately  90 senior  managers  to provide an  equity-like  interest  in the
Company.  This program is intended to motivate senior  management to improve the
long-term  performance  of  the  Company's  stock  price  and  total  return  to
stockholders.

         The number of stock  options  available  for grant in any given year to
all  eligible  employees  will  vary  between  .3%  and  .9%  of  common  shares
outstanding, depending on Company performance. Company performance is determined
based upon  three  measures:  the  Company's  3-year  total  stockholder  return
relative  to the S&P Midcap  400 index,  its  3-year  ROTC  relative  to Class I
railroads and its annual  compound  revenue growth over a 3-year period relative
to Class I railroads.  The measures are weighted 50% on comparative  stockholder
return, 25% on ROTC and 25% on revenue growth. Stock options are granted at fair
market value on the date of grant and vest 25% each year over four years. Actual
awards to individual participants are based upon Company performance, individual
performance and individual responsibility (salary grade) within the Company. The
maximum award which can be made in one year to a participant  under this program
is options on 150,000 shares.

(4) Incentive 2000 Plan Awards

         In May 1996, the  stockholders  approved the Illinois  Central Railroad
Incentive 2000 Plan  ("Incentive 2000 Plan") for key management  employees.  The
Incentive  2000 Plan is  intended to focus  senior  managers on the goals of (a)
increasing  operating  revenue  to $800  million  in the  year  1999  while  (b)
achieving an operating ratio  (operating  expense divided by operating  revenue)
under 60%,  (c) a return on total  capital of 14% and (d)  earnings per share of
$4.00 for the year 2000. The Committee  determined  that  providing  significant
cash incentives to management conditioned on achieving financial measures linked
to these  goals will  promote  the  long-term  interests  of the Company and its
stockholders.

         Employees  in the  Company's  top ten  salary  grades are  eligible  to
receive   awards  under  the  Incentive   2000  Plan.  As  of  March  12,  1998,
approximately  90 employees  were eligible to  participate in the Incentive 2000
Plan.

         In connection  with the merger between CN and IC, the change of control
provisions  of  Incentive   2000  Plan  will  be  triggered.   Therefore,   upon
consummation  of the Offer,  the target awards under Incentive 2000 will be paid
out on a pro-rata basis in accordance with the terms of the plan.


<PAGE>



Directors Incentive 2000 Option Plan

         In May  1996  the  Stockholders  also  approved  the  Illinois  Central
Corporation  Directors Incentive 2000 Option Plan (the "Directors Option Plan").
The  Directors  Option Plan is intended to  complement  the senior  management's
Incentive 2000 Plan and to link  compensation of directors who are not employees
of the Company or its  subsidiaries  ("Outside  Directors") to the same goals of
Plan 2000 and the  stockholders'  interests in the creation of stock value. Each
of the eight eligible  Outside  Directors,  as of May 1996,  received a one-time
grant of options to purchase  37,500 shares of Common Stock.  The exercise price
for each option is $37.875, which is equal to 150% of the closing sales price of
the Common  Stock on the New York Stock  Exchange on March 8, 1996,  the date of
grant (adjusted to reflect the 3-for-2 stock split of the Common Stock effective
March 14, 1996).

         As with Incentive  Plan 2000,  the Merger of CN and IC will  accelerate
the vesting of options in the Director  Option Plan. The proratios will be based
on the number of months prior to the change of control  divided by 62 (the total
months during which the plan was to be in existence.)


Results for 1997

         Actual results for 1997 were below  threshold for the ROTC objective of
10.5% and above the revenue growth objective of 5.0%. Actual 1997 ROTC was 10.3%
and revenue  was 6.4%.  However,  there were  significant  capital  expenditures
during 1997 for which associated returns were not yet realized.  Considering the
impact of these investments,  the committee determined that 1997 ROTC would have
been approximately 10.5% and accordingly  approved incentive payouts for ROTC at
the  threshold  level (i.e.,  50% of target).  No  incentive  payout for revenue
growth was approved since revenue growth is only  considered  when ROTC is at or
above target. In aggregate,  approximately  $4.5 million in bonuses were paid to
all management employees for 1997.

         The Company's  stockholder  return for the three years ending  December
31,  1997 was 27%  compared  to 21% for the S&P Midcap  400 index.  ROTC for the
three years  ending 1997 was 10.8%  compared to 7.1% for all Class I  railroads.
The annual compound revenue growth for those years was 5.6% compared to 3.5% for
Class I railroads.  Accordingly,  the  Committee  determined  that options for a
maximum of 552,600 shares,  or .90% of shares  outstanding on grant date, should
be awarded  pursuant to the senior  management stock option plan with respect to
1997 performance. These options will be awarded in 1998.

         Based on the 1998 Budget and the Company's  strategic plans,  including
Plan 2000, the Committee established the Company's 1998 ROTC target at 10.4% and
the annual revenue growth target at 6.0%.


<PAGE>



CEO Compensation

         Mr.  Harrison  was the  highest  compensated  officer of the Company in
1997. Mr. Harrison's  salary for 1997 was $500,000.  Pursuant to the Performance
Compensation Plan, based on Company performance in 1997 and considerations cited
above, Mr. Harrison received a Performance Award of $203,595.

         The  Committee  awarded  Mr.  Harrison  a cash bonus of  $191,405  with
respect to his individual  performance in 1997 in guiding the Company through an
extremely  soft export grain market and traffic  congestion  resulting  from the
UPSP merger while  improving the operating  ratio by one  percentage  point.  In
determining the amount of this bonus,  the Committee  considered Mr.  Harrison's
individual   contribution  toward  the  achievement  of  significant   corporate
objectives including, among others, negotiation of labor contracts, of important
growth  opportunities  and his  participation  in analysis of several  strategic
opportunities, including negotiations with CN, and the southeast rail concession
in  Mexico.  Additionally,  consideration  was  given  to the  magnitude  of Mr.
Harrison's personal award in relation to other employees. Finally, the Committee
noted that since Mr.  Harrison did not receive a salary  increase for 1995, 1996
or 1997 and that his total  direct  compensation  (salary  plus cash  bonus) was
below comparable  compensation for CEO's of Class I railroads on a size-adjusted
basis the Committee increased Mr. Harrison's annual compensation to $625,000 for
1998.

Employment Security Agreements

         In January 1997, the Board of Directors approved  extending  Employment
Security  Agreements  to  senior  management  employees  in  recognition  of the
extensive  restructuring  underway  in the  railroad  industry.  To  retain  the
Company's  management and promote  alignment of management's  interests with the
stockholders' interests, the Company entered into Employment Security Agreements
with approximately 29 senior officers which provide stated benefits in the event
they are terminated  without cause or terminate their employment for good reason
within two years after a change of control. Following a covered termination, the
officer will be entitled to two or three years base salary  (depending on salary
grade) and incentive payment target for one year plus a proration of the current
year.  Two or three  years  credit,  respectively,  will be  granted  toward the
Supplemental  Executive  Retirement  Plan and fringe  benefits will be extended.
However,  payments under these  agreements will be limited to 2.99 times average
last five year W-2  wages to  preclude  triggering  "Excess  Parachute  Payment"
excise taxes.  The Merger will  constitute a change of control as defined by the
Employment Security  Agreements  ("ESA").  Terms of the Merger Agreement provide
for  amendments to the ESA's whereby if payments  under the ESA's exceed 105% of
the 2.99 limit the full amount will be paid and the participant will be "grossed
up" for any excise taxes owed.


<PAGE>



Nondeductible Compensation

         The  Committee  does  not  currently   anticipate  that  any  executive
officer's  nonperformance-  based compensation will exceed $1 million. For 1997,
no executive officer received  nonperformance-based  compensation which exceeded
$1 million. It is anticipated that all executive compensation to be paid in 1998
will be fully  deductible  as well.  However,  the  Committee  and the  Board of
Directors  retain the  discretion to grant  nondeductible  compensation  if that
would be in the  best  interests  of the  Company  and  stockholders  under  the
circumstances.

Respectfully submitted,


Mr. George D. Gould, Chairman
Mr. Samuel F. Pryor, IV
Dr. F.  Jay Taylor
Mr. John V. Tunney
Mr. Alan H. Washkowitz




<PAGE>



Performance Graph

         The following  performance graph compares the  Corporation's  change in
total  stockholder  return on its Common Stock since  December 31, 1992 with the
S&P Midcap Index in which the Corporation is included and the S&P Railroad Index
which  includes  other  Class  I  railroads  but  not  the  Railroad.   Dividend
reinvestment has been assumed.

                             Stock Performance Table
                                     S & P

              Period       IC Stock   Midcap 400   Railroads
              ------       --------  ----------   -----------

               12-92         100        100         100
               12-93         150        114         124
               12-94         132        110         107
               12-95         169        144         157
               12-96         218        171         195
               12-97         238        227         220


<PAGE>



Item 12.  Security Ownership of Certain Beneficial Owners and Management

OWNERSHIP TABLE

               The following table sets forth certain  information  with respect
to  persons  known  by the  Company  to  beneficially  own  (as  defined  by the
Securities  Exchange  Act of 1934) as of March 4, 1998,  five percent or more of
Common Stock,  and with respect to each director and named executive  officer of
the Company and all directors and executive officers of the Company as a group.

                   Name and Address               Amount and       Percentage of
                   (if applicable) of             Nature of         Common Stock
                  Beneficial Owner          Beneficial Ownership1   Outstanding1

        AMVESCAP PLC, et al.
        11 Devonshire Square
        London, EC2M 4YR England...............   6,343,9352           10.31%

        MacKay Shields Financial Corporation
        9 West 57th Street
        New York, New York  10019..............   3,427,3253           5.57%

        George D. Gould........................       51,000           *
        William B. Johnson.....................       82,7184          *
        Gilbert H. Lamphere ...................      897,8355          1.46%
        Alexander P. Lynch ....................      408,2956          *
        Samuel F. Pryor, IV ...................      390,5407          *
        F. Jay Taylor .........................       74,9988          *
        John V. Tunney ........................       55,7439          *
        Alan H. Washkowitz ....................       96,00010         *
        E. Hunter Harrison ....................      725,983           1.17%
        Ronald A. Lane ........................      235,532           *
        John D. McPherson .....................      166,705           *
        James M.  Harrell......................      105,470           *
        Donald H. Skelton......................      105,217           *
        Dale W.  Phillips**....................          746          -

        All directors and executive officers
         of the Company as a group
         (16 persons)..........................   3,760,63611          5.94%


        *  under 1%
        ** Mr. Phillips resigned as an officer of the Company on October 31, 
           1997.


<PAGE>



Notes to Ownership Table

      1 Based on 61,518,172 shares of Common Stock outstanding on March 4, 1998.
        Shares  issuable  currently  or upon  exercise of options are treated as
        outstanding  for the  purposes  of  stating  the  amount  of  beneficial
        ownership and computing the percentage of beneficial ownership of shares
        by such  person  (or of the  group).  No  adjustment  for  the  pro-rata
        reduction of options  issued to directors  under the Incentive 2000 Plan
        has  been  made.  As  of  March  4,  1998,   such  reduction   would  be
        approximately 22,380 per director and 179,040 in total.

      2 According to a Schedule 13G dated February 9, 1998,  AMVESCAP PLC and or
        its United  Kingdom or U.S.  subsidiaries  (known in US as INVESCO) have
        shared voting and dispositive power for 6,343,935 shares in its capacity
        as an investment advisor to several investment funds.

      3 According to a Schedule 13G dated  February  13,  1998,  MacKay  Shields
        Financial  Corporation,  in its  capacity as an  investment  manager for
        various  clients,  has shared  voting and shared  disposition  power for
        3,427,325 shares.

      4 Includes 225 shares held by Mr. Johnson's spouse.  Mr. Johnson disclaims
        beneficial ownership of these shares.

      5 Excludes  209,112  shares  held  by a  trust  for  the  benefit  of  Mr.
        Lamphere's descendants,  of which Messrs. Alexander P. Lynch and Richard
        G. Woolworth,  Jr. are co-trustees.  Mr. Lamphere  disclaims  beneficial
        ownership of these  shares.  Includes  69,831 shares held by a trust for
        benefit of Mr. Pryor's children, of which Mr. Lamphere is a co-trustee.

      6 Includes  209,112  shares  held  by a  trust  for  the  benefit  of  Mr.
        Lamphere's descendants,  of which Messrs. Alexander P. Lynch and Richard
        G. Woolworth, Jr. are co-trustees.

      7 Excludes  69,831  shares held by a trust for the benefit of Mr.  Pryor's
        children,  of which Mr.  Lamphere  and Mr.  Samuel F.  Pryor,  III,  Mr.
        Pryor's father, are trustees.  Mr. Pryor disclaims  beneficial ownership
        of these shares.

      8 Includes 1,500 shares held by Dr. Taylor's spouse.  Dr. Taylor disclaims
        beneficial ownership of these shares.

      9 Includes 4,500 shares held in trust for Mr. Tunney's  mother,  for which
        Mr. Tunney is Trustee.

     10 Under an arrangement with Lehman Brothers,  Mr. Washkowitz must remit to
        Lehman  Brothers any gain upon exercise of the options for 24,750 shares
        of the total.

     11 See Notes (4) - (10) above.


Item 13.  Certain Relationships and Related Transactions

Lehman Brothers Inc.

     Mr.  Washkowitz  has been a Managing  Director  of Lehman  Brothers  or its
predecessors  since 1978.  Lehman Brothers has provided  services to the Company
and ICR in the past and is  expected  to do so in the  future.  Lehman  Brothers
managed (i) the public  debt  offerings  of ICR in 1996 and 1995,  (ii) the debt
tender  offer and public  debt  offering  of ICR in 1993 and (iii) is one of the
designated dealer's for ICR's commercial paper program which started in November
1993.


<PAGE>



The Bridgeford Group

     Mr.  Lynch is a general  partner  of Beacon  Group  Capital  Services,  LLC
("Beacon") and until 1997 was Co-Chief Executive Officer and Co-President of The
Bridgeford Group and served as a Senior Managing  Director there from 1991 until
1995.  Beacon and The Bridgeford Group have provided services to the Company and
ICR in the past and is expected to do so in the future. Beacon Group assisted in
various  strategies  studies  in  1997,  including  negotiations  with  Canadian
National  Railway.  The  Bridgeford  Group  assisted  in the  evaluation  of and
negotiations with Kansas City Southern  Industries in 1994 and the evaluation of
and  negotiations  with CCP  Holdings,  Inc.  in 1995  and  1996.  During  1997,
approximately  $.4  million  was  paid  to the  Bridgeford  Group  for  services
rendered.




<PAGE>



                                     PART IV

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

(a)    1.   Financial Statements:

            See Index to  Consolidated  Financial  Statements on page 60 of this
            Report.

       2.   Financial Statement Schedules:

            See  Index to  Financial  Statement  Schedules  on page F-30 of this
            Report.

       3.   Exhibits:

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

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

            None

(c)         Exhibits:

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

(d)         Financial Statement Schedules:

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


<PAGE>



                                   SIGNATURES

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

                          ILLINOIS CENTRAL CORPORATION

                            By: /s/ JOHN V. MULVANEY
                                John V. Mulvaney
                   Vice President and Chief Financial Officer
                              Date: March 16, 1998

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

        Signature                         Title(s)                     Date

/s/ GILBERT H. LAMPHERE     Chairman of the Board and Director    March 16, 1998
---------------------------
    Gilbert H. Lamphere

/s/ E. HUNTER HARRISON      President and Chief Executive Officer March 16, 1998
    E. Hunter Harrison     (principal executive officer), Director

/s/ JOHN V.  MULVANEY               Vice President                March 16, 1998
--------------------------  and Chief Financial Officer
    John V.  Mulvaney       (principal financial officer)

/s/ DOUGLAS A.  KOMAN                Controller                   March 16, 1998
--------------------------  (principal accounting officer)
    Douglas A.  Koman 

/s/  GEORGE D. GOULD                 Director                     March 16, 1998
--------------------------
     George D. Gould

/s/ WILLIAM B. JOHNSON               Director                     March 16, 1998
-----------------------   
    William B. Johnson

/s/ ALEXANDER P. LYNCH               Director                     March 16, 1998
-----------------------
    Alexander P. Lynch

/s/ SAMUEL F. PRYOR, IV              Director                     March 16, 1998
-----------------------
    Samuel F. Pryor, IV

/s/ F. JAY TAYLOR                    Director                     March 16, 1998
-----------------------
    F. Jay Taylor

/s/ JOHN V. TUNNEY                   Director                     March 16, 1998
-----------------------
    John V. Tunney

/s/ ALAN H. WASHKOWITZ               Director                     March 16, 1998
-----------------------
    Alan H. Washkowitz


<PAGE>










                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES








                                  F O R M 10-K



                              FINANCIAL STATEMENTS

                         SUBMITTED IN RESPONSE TO ITEM 8


                                     <PAGE>








                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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


<PAGE>





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Illinois Central Corporation:

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

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

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

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


                                                            ARTHUR ANDERSEN LLP


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


<PAGE>



                 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
                       Consolidated Statements of Income
                       ($ in millions, except share data)

                                                   Years Ended December 31,
                                           1997           1996           1995
 Revenues                            $    699.8     $    657.5     $    645.3

 Operating expenses:
   Labor and fringe benefits              204.3          192.0          194.8
   Leases and car hire                     41.0           45.0           46.5
   Diesel fuel                             39.1           38.4           33.2
   Materials and supplies                  36.1           32.9           35.0
   Depreciation and amortization           43.0           39.3           33.9
   Casualty, insurance and losses          16.4           12.1           17.4
   Other taxes                             21.2           18.2           18.2
   Other                                   34.8           38.4           35.8
 Operating expenses                       435.9          416.3          414.8

 Operating income                         263.9          241.2          230.5

 Other income (expense), net                6.0            8.6           (0.2)
 Interest expense, net                    (40.0)         (34.1)         (29.5)

 Income before income taxes and 
  extraordinary item                      229.9          215.7          200.8
 Provision for income taxes                79.7           79.1           71.0

 Income before extraordinary item         150.2          136.6          129.8
 Extraordinary item, net                    -              -            (11.4)


 Net income                          $    150.2     $    136.6     $    118.4

 Basic EPS:
  Before extraordinary item          $     2.45     $     2.22     $     2.07

  Extraordinary item, net                   -              -            (0.18)
 Net income per share                $     2.45     $     2.22     $     1.89

 Weighted average number of 
  shares of common stock             61,408,637     61,417,769     62,608,274

 Diluted EPS:
  Before extraordinary item          $     2.42     $     2.20     $     2.06

  Extraordinary item, net                   -              -            (0.18)
 Net income per share                $     2.42     $     2.20     $     1.88

 Weighted average number 
   of shares of common 
   stock and dilutive 
   potential common shares           62,107,316     61,978,391     62,968,622


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


<PAGE>



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


                       ASSETS               December 31, 1997  December 31, 1996
  Current assets:
     Cash and temporary cash investments          $   34.1          $    59.2
     Receivables, net of allowance for doubtful 
        accounts of $1.2 in 1997 and $1.3 in 1996    122.7              107.0
     Secured financing receivable                      -                 32.6
     Materials and supplies, at average cost          15.4               17.3
     Assets held for disposition                       1.3                1.6
     Deferred income taxes - current                  18.3               20.3
     Other current assets                              7.4               10.6
        Total current assets                         199.2              248.6

  Investments                                         12.1               17.5

  Properties:
     Transportation:
        Road and structures, including land        1,526.4            1,375.0
        Equipment                                    270.8              261.2
     Other, principally land                          41.3               41.5
        Total properties                           1,838.5            1,677.7
     Accumulated depreciation                        (69.7)             (53.6)
        Net properties                             1,768.8            1,624.1

  Other assets                                        29.3               21.2
        Total assets                              $2,009.4          $ 1,911.4
                  LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
     Current maturities of long-term debt         $   24.5          $     6.3
     Accounts payable                                 65.5               60.4
     Dividends payable                                14.1               14.1
     Income taxes payable                              -                  1.1
     Casualty and freight claims                      13.0               21.1
     Employee compensation and vacations              21.5               21.4
     Taxes other than income taxes                    19.1               17.4
     Accrued redundancy reserve                        3.9                4.9
     Other accrued expenses                           93.5               85.3
        Total current liabilities                    255.1              232.0

  Long-term debt                                     572.2              633.7
  Deferred income taxes                              409.2              356.6
  Other liabilities and reserves                     130.1              133.6

  Contingencies and commitments (Note 15)

  Stockholders' equity:
     Common stock, par value $.001, 
     authorized 100,000,000 shares,
     64,622,956 shares issued and 
     61,402,347 shares outstanding                     0.1                0.1


<PAGE>



     Additional paid-in capital                      172.7              167.1
     Retained income                                 547.4              453.8
     Treasury stock (3,220,609 shares)               (77.4)             (65.5)
         Total stockholders' equity                  642.8              555.5
         Total liabilities and stockholders' 
          equity                                 $ 2,009.4          $ 1,911.4

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


<PAGE>



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


                                                     Years Ended December 31,
                                                    1997      1996      1995
Cash flows from operating activities :
   Net income                                    $ 150.2   $ 136.6   $ 118.4
   Reconciliation of net income to 
      net cash provided by (used for) 
      operating activities :
         Extraordinary item, net                     -         -        11.4
         Depreciation and amortization              43.0      39.3      33.9
         Deferred income taxes                      47.5      36.4      30.7
         Equity in undistributed earnings 
            of affiliates, net of dividends 
            received                                (1.0)     (0.5)     (0.8)
         Net gains on sales of real estate          (0.6)     (1.6)     (0.1)
         Cash changes in working capital            (8.5)    (15.0)     (8.0)
         Changes in other assets                    (3.1)     (6.1)     (1.7)
         Changes in other liabilities and 
            reserves                                (6.0)     (5.2)     (6.4)
            Net cash provided by operating 
             activities                            221.5     183.9     177.4

Cash flows from investing activities :
   Additions to properties                        (168.2)   (124.8)   (128.8)
   Acquisitions                                      -      (152.9)      -
   Proceeds from sales of real estate                2.4       3.0       2.5
   Proceeds from equipment sales                     2.5       3.9       2.9
   Proceeds from sales of investments                0.6       2.3       0.8
   Secured financing                                32.6     (32.6)      -
   Other                                            (5.8)      0.5      (4.4)
            Net cash (used for) investing 
             activities                           (135.9)   (300.6)   (127.0)

Cash flows from financing activities :
   Proceeds from issuance of debt                    0.9     335.5     250.0
   Principal payments on debt                      (28.5)    (77.4)   (259.8)
   Net proceeds (payments)  -  Commercial Paper    (20.0)    (37.0)     42.0
   Dividends paid                                  (56.6)    (48.7)    (41.9)
   Stock repurchases                               (11.9)     (1.0)    (59.8)
   Proceeds from exercise of stock options and 
    warrants                                         5.4       0.2       0.1
   Purchase of subsidiary's common stock             -        (0.7)     (0.2)
            Net cash provided by (used for) 
             financing activities                 (110.7)   170.9     (69.6)
Changes in cash and temporary cash investments     (25.1)     54.2     (19.2)
Cash and temporary cash investments at 
 beginning of year                                  59.2       5.0      24.2
Cash and temporary cash investments at end
 of year                                         $  34.1   $  59.2   $   5.0
Supplemental  disclosure  of cash flow  
 information  : 
Cash paid during the year for:
      Interest (net of amount capitalized)       $  40.5   $  31.6   $  32.1
      Income taxes                               $  32.9   $  50.9   $  31.0


<PAGE>



                 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
      Consolidated Statements of Stockholders' Equity and Retained Income

                         Shares
                        (000's)            Equity ($ in millions)
                                       Additional                  Total Stock-
                        Common  Common  Paid-in  Retained  Treasury  holders'
                        Stock   Stock   Capital  Income     Stock    Equity


Balance 
December 31, 1994       63,915  $ 0.1  $ 165.0   $ 293.0   $(4.0)$    454.1


Issuance of Common 
 Stock:

Exercise stock option        4       -       -                           -

Restricted stock awards      -       -     1.3                          1.3

Stock repurchased/
forfeited               (2,494)                            (60.5)     (60.5)

Dividends                                          (43.2)             (43.2)

Net income                                         118.4              118.4

Balance 
December 31, 1995       61,425      0.1  166.3     368.2   (64.5)     470.1

Issuance of Common 
Stock:

Exercise stock 
options                     13        -    0.2                          0.2

Restricted stock 
awards                       -        -    0.6                          0.6

Stock repurchased          (31)                             (1.0)      (1.0)

Dividends                                          (51.0)             (51.0)

Net income                                         136.6              136.6

Balance 
December 31, 1996       61,407      0.1  167.1     453.8   (65.5)     555.5

Issuance of Common 
Stock:

Exercise stock 
options                    325        -    5.4                          5.4

Restricted stock 
awards                      (5)       -    0.2                          0.2

Stock repurchased         (325)                            (11.9)     (11.9)

Dividends                                          (56.6)             (56.6)

Net income                                         150.2              150.2


<PAGE>




Balance 
December 31, 1997       61,402 $    0.1 $172.7   $ 547.4  $(77.4)$   642.8  

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


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



1.       The Company

         Illinois Central  Corporation (the "Company"),  a holding company,  was
incorporated under the laws of Delaware.  The Company,  through its wholly-owned
subsidiaries,  Illinois Central Railroad Company ("ICR") and CCP Holdings,  Inc.
("CCPH"),  is principally engaged in the rail freight  transportation  business.
ICR  operates  2,600  miles of main line track  between  Chicago and the Gulf of
Mexico,  primarily transporting  chemicals,  grain and milled grain, coal, paper
and intermodal commodities.  CCPH has two principal operating subsidiaries - the
Chicago  Central  and Pacific  Railroad  ("CCPR")  and the Cedar River  Railroad
("CRR") - which together comprise a Class II railroad system operating 850 miles
of track. CCPR operates from Chicago to Omaha,  Nebraska,  with connecting lines
to Cedar Rapids and Sioux City,  Iowa.  CRR runs from  Waterloo,  Iowa to Albert
Lea, Minnesota. IC Financial Services ("IC Financial"),  the Company's remaining
direct subsidiary,  conducts financing  operations for railroad equipment and is
the  investment  vehicle for  non-rail  related  activities  including  terminal
operations.

2.       Subsequent Event

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

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

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

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

           The  Offer was  successfully  concluded  on March  13,  1998 when the
Purchaser  received  tenders  for in excess of 75% of  outstanding  shares.  The
actual percentage of outstanding  shares purchases has not been determined as of
the date of this filing.

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


<PAGE>


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

  
3.       Summary of Significant Accounting Policies

         Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company and its subsidiaries.  Significant  investments in affiliated  companies
are  accounted  for by the  equity  method.  Transactions  between  consolidated
companies  have  been  eliminated  in the  accompanying  consolidated  financial
statements.  Results  for  1996  include  CCPH  from  June  13,  1996  (date  of
acquisition). See Note 18.

         Properties

         Depreciation  is  computed  by the  straight-line  method and  includes
depreciation on properties under capital leases.  The depreciation rates for the
equipment  owned by the  Company's  finance  subsidiary  are based on  estimated
useful life and anticipated salvage value. Lives used range from 18 to 20 years.
The operating  subsidiaries  use the composite  method of depreciation for track
structure,   other  road  property,  and  equipment.  In  the  case  of  routine
retirements,  removal  costs less salvage  recovery  are charged to  accumulated
depreciation.  Expenditures for maintenance and repairs are charged to operating
expense.

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

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

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


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         Revenues

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

         Income Taxes

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

         Cash and Temporary Cash Investments

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

         Income Per Share

         Income per common share of the Company is calculated in accordance with
Statement of Financial  Accounting Standard No. 128, "Earnings per Share," (SFAS
No. 128).  In accordance  with SFAS No. 128,  basic income per share is based on
the weighted  average number of common stock  outstanding and diluted income per
share is based on the  weighted  average  number of  shares of common  stock and
dilutive potential common shares for the period. See Note 14.

         Derivative Financial Instruments

         The Company has only  limited  involvement  with  derivative  financial
instruments and does not use them for trading purposes.  The Company has entered
into various  diesel fuel collar  agreements  with the  objective of  mitigating
significant fluctuations in fuel prices. Premiums paid for the purchase of these
agreements  are  amortized  to fuel  expense  over the terms of the  agreements.
Unamortized  premiums are included in Other Assets in the  Consolidated  Balance
Sheets. Amounts receivable or payable under the collar agreements are accrued as
increases or decreases to Diesel Fuel Expense.
See Note 8.

         Casualty Claims

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



<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


         Stock-Based Compensation

         The  Company  has  elected  to adopt  SFAS  No.  123,  "Accounting  for
Stock-Based  Compensation"  ("SFAS No. 123"), for disclosure  purposes only. The
Company accounts for compensation  under its Long-Term  Incentive Plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 15.

         Use of Estimates

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

         Reclassifications

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

4.       Stock Repurchase Program

         In  1994,  the  Board of  Directors  authorized  a plan for the  annual
repurchase of Common Stock.  For 1995, the Board  authorized the purchase of $60
million of Common Stock. Purchases in 1994 and 1995 under the program, 2,475,000
shares of Common Stock,  were funded by a special $60 million  dividend from ICR
which was declared in 1994 and paid in 1995. The Board  determined  that various
capital  needs such as the  acquisition  of CCPH in 1996 (see Note 18) precluded
stock  repurchases  under the  program for 1997 and 1996.  However,  open market
purchases, in conjunction with option exercises, did occur in 1997 and 1996.

5.       Extraordinary Item

         In 1995,  ICR prepaid the holders of its $160  million  Senior Notes at
face value plus  accrued  interest  and a  prepayment  penalty.  The  prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
loss resulted from the premium paid, the write-off of unamortized financing fees
and costs associated with the prepayment. See Note 10.


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



6.       Other Income (Expense), Net

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

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

Rental income, net..............................    $3.4       $2.9        $3.5
Net gains  (losses) on sales of real estate.....      .6        1.6         (.1)
Equity in undistributed
   earnings of affiliates.......................     1.6         .8          .9
Sales of accounts receivable   (see Note 11)....    (3.0)      (2.9)       (3.2)
Grant of permanent easement (see below).........     3.7        -           -
Sale of RAIL (see below)........................     -          7.3         -
Other, net......................................     (.3)      (1.1)       (1.3)
                                                    -----      ----       ------
   Other income (expense), net..................    $6.0       $8.6       $ (.2)
                                                    =====      =====      ======

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

7.       Supplemental Cash Flow Information

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

                                                    Years Ended December 31,
                                             1997           1996           1995
                                             ----           ----           ----
 
Receivables, net.....................       $(16.6)       $ (5.1)        $(17.6)
Materials and supplies...............          1.9           1.0             .8
Other current assets.................          3.7          (7.5)            .7
Accounts payable.....................          5.1         (12.2)           2.2
Income taxes payable.................         (1.6)         (8.1)          11.1
Accrued redundancy reserve...........         (1.0)           .6           (2.5)
Other current liabilities............          -            16.3           (2.7)
                                            -------       ------         -------
    Cash changes in working capital..       $ (8.5)       $(15.0)        $ (8.0)
                                            =======       =======        =======

        ICR recorded capital leases of $4.3 million and $7.1 million covering 40
locomotives and 328 freight cars in 1997 and 1995, respectively.  See Note 9 for
the present value of the minimum lease payments.



<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


8.      Materials and Supplies

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

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

9.      Leases

        As of December 31, 1997,  the Company leased 6,316 and 53 of its freight
cars and locomotives,  respectively.  These leases expire between 1998 and 2007.
Under the terms of many of its lease  agreements,  the  Company has the right of
first  refusal  to  purchase,  at the end of the lease  term,  certain  cars and
locomotives  at or below fair  market  value.  The Company  also  leases  office
facilities, computer equipment and vehicles.

        Net  obligations  under  capital  leases at December  31, 1997 and 1996,
included  in the  Consolidated  Balance  Sheets  were  $33.8  million  and $34.5
million,  respectively.  The gross  assets under  capitalized  leases were $39.9
million and $37.4 million at December 31, 1997 and 1996,  respectively,  and are
included in properties in the Consolidated Balance Sheets.

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

                                                   Capital      Operating
                                                    Leases        Leases

1998......................................        $  6.6         $  24.5
1999......................................           7.0            23.3
2000......................................           5.9            16.6
2001......................................           7.0            14.9
2002......................................           4.3            13.3
Thereafter................................          13.3            74.2
                                                  ------        --------
    Total minimum lease payments..........         $44.1          $166.8
                                                                  ======

Less: Imputed interest....................          10.3
                                                  ------
    Present value of minimum payments.....         $33.8
                                                  ======

        Total  rent  expense  applicable  to  noncancellable   operating  leases
amounted to $26.4  million in 1997,  $26.7  million in 1996 and $19.9 million in
1995.  Most of the leases  provide  that the  Company  pay  taxes,  maintenance,
insurance and certain other operating expenses.


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



10.     Long-Term Debt and Interest Expense

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

                                                                1997       1996

Equipment obligations, due annually to 2007, 6.11% to 7.7%....   2.0    $   7.8
Debentures and other debt, due 1998 to 2056, 4.5% to 5.0%.....  11.9       27.6
Debentures, due 2096, 7.7%.................................... 125.0      125.0
Commercial paper, at average interest rate 5.68 in 1997 and 
 5.61% in 1996                                                   -         20.0
Notes, due 2003, 6.75%........................................ 100.0      100.0
Notes, due 2005, 7.75%........................................ 100.0      100.0
Medium term notes, due 1998 to 2007, 6.72% to 7.12%........... 210.0      230.0
Capitalized leases (see Note 9)...............................  30.1       30.4
Unamortized discount, net ....................................  (6.8)      (7.1)
                                                               ------     ------

             Total long-term debt............................ $572.2      $633.7
                                                              ======      ======

        At December 31, 1997, the aggregate  annual  maturities and sinking fund
requirements  for debt payments for 1998 through 2003 and thereafter  were $24.5
million,  $35.4 million,  $34.5 million,  $105.8 million,  $3.6 million,  $104.2
million and $288.7 million, respectively. The weighted-average interest rate for
1997 and 1996 on total debt  excluding  the effect of  discounts,  premiums  and
related amortization was 7.1% and 7.2%, respectively.

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

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

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

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



<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        CCPH has a floating rate  revolving  loan agreement for an unsecured $50
million (the "CCPH  Revolver").  The CCPH Revolver has a $5 million sublimit for
letters of credit and expires in 2001. The CCPH Revolver can be used for general
corporate purposes.  The annual commitment fee is 25 basis points and borrowings
are at the Eurodollar offered rate plus 62.5 basis points. At December 31, 1997,
the CCPH Revolver was undrawn.

        The Company  has a $50  million  364-day  floating-rate  revolving  loan
agreement  which expires in August 1998. In June 1996, the Company  borrowed $40
million under this  agreement to acquire CCPH (see Note 18). The $40 million was
repaid in June 1996 with proceeds from  borrowings  under the CCPH Revolver.  At
December 31, 1997, no amounts were drawn under this agreement.  IC Financial has
approximately  $1.8  million in  long-term  borrowing  agreements  for which the
original  proceeds were used to acquire a total of 17 locomotives in 1993.  Such
borrowings are secured by the locomotives  which are leased to ICR and mature in
2000. IC Financial  lease  revenue and  corresponding  expense at ICR,  which is
eliminated  in  consolidation,  was $14.7  million and $14.4 million in 1997 and
1996, respectively.

        Various  borrowings  of  the  Company's  subsidiaries  are  governed  by
agreements which contain certain  affirmative and negative  covenants  customary
for facilities of this nature including restrictions on additional indebtedness,
investments,  guarantees, liens, distributions,  sales and leasebacks, and sales
of assets and capital stock. Some also require satisfaction of certain financial
tests,  including a leverage  ratio,  an earnings  before  interest and taxes to
interest   charges   ratio,   and  minimum   consolidated   tangible  net  worth
requirements. See Note 14.

        Interest Expense, Net consisted of the following ($ in millions):

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

Interest expense........................    $45.9          $37.4        $32.2
Less:
   Interest capitalized ................      1.9            1.7          1.3
   Interest income......................      4.0            1.6          1.4
                                          -------        -------      -------
Interest Expense, Net...................    $40.0          $34.1        $29.5
                                            =====          =====        =====

11.     Receivables

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

        At December  31, 1996,  the Company had a $32.6  million  receivable  in
connection  with the  secured  financing  of freight  equipment  acquired  by an
unrelated third party. This amount was repaid on January 3, 1997.

12.     Benefit Plans


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



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

        Retirement Plans.

        ICR has two qualified  plans  permitting  participants to make "pre-tax"
contributions  of their salary up to Internal  Revenue Code limitations and each
contains  a company  match  provision.  The ICR union  plan,  which  started  in
mid-1995, allows union employees covered by local contracts to participate.  ICR
matches 25% of the first 4% of salary  deferral.  There is no CCPH union plan in
effect.  The  management  employee  plan  matches  50% of the first 6% of salary
deferral.  The  management  plan also contains a separate  defined  contribution
portion of 2% of each  employee's  salary.  Expenses  related to both plans were
$1.5  million,   $1.2  million,  and  $1.1  million  in  1997,  1996  and  1995,
respectively. All ICR contributions are fully vested upon contribution.

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

        The Company's former Chairman,  President and Chief Executive Officer is
covered by a non-qualified,  unfunded supplemental  retirement benefit agreement
which provides for a defined benefit payable annually, in the amount of $250,000
per year, until the year 2008.

        The Company's  non-employee  directors  are covered by a  non-qualified,
unfunded  retirement  plan.  This plan  provides an annual  payment equal to the
annual  retainer at the time of the  director's  retirement  and is paid for the
number of years the director served up to a maximum of ten years. The 1997, 1996
and 1995  expenses for the plan were $.4  million,  $.8 million and $.9 million,
respectively.

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

        Beginning in 1995, the Company's  non-employee  directors may also defer
their annual  retainer and meeting fees.  All deferrals are 100% vested and earn
interest at a specified,  variable rate.  Approximately $.4 million was deferred
in 1997.  Deferrals  were not material for the two years ended December 31, 1996
and 1995.

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

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


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


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

        CCPH provides to employees of CCPR  postretirement  medical  benefits to
age 65 if the employee attained age 60, worked for CCPR's previous owner, worked
for CCPR since it commenced operations and between the two employers rendered at
least 30 years  continuous  service.  These benefits are subject to deductibles,
co-insurance provisions and other limitations. CCPH may amend or change the plan
periodically subject to its union labor agreements. There are no plan assets and
CCPH funds these benefits as claims are paid.

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

                                                           December 31,
                                                         1997             1996
                                                -----------------------  ------
                                                Medical   Life  Total     Total
Accumulated postretirement benefit obligation:
  Retirees...................................... $13.2    $2.1   $15.3    $15.5
  Fully eligible active
   plan participants   ........................     .7      -       .7      1.0
  Other active plan participants................   4.7      -      4.7      5.1
                                                 -----       -- -----   ------- 
  Total APBO..........................           $18.6    $2.1    20.7     21.6
                                                 =====    ====

  Unrecognized net gain........................                   17.6     18.3
                                                                  -----
        Accrued liability for
        postretirement benefits.......................           $38.3    $39.9
                                                                 =====    =====

         The weighted-average  discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% at December 31, 1996. As a result of
the change in general  interest rates on high quality fixed rate  investments in
1997, the Company  decreased the  weighted-average  discount rate to 7.25% as of
December 31, 1997.  The change in rates  resulted in  approximately  $.7 million
actuarial  loss.  The  actuarial  gains and losses along with actual  experience
gains,  primarily fewer claims and lower medical rate  inflation,  resulted in a
total $17.6 million unrecognized net gain as of December 31, 1997. In accordance
with  SFAS  No.  106,  the  excess  gain  is  subject  to  $1.2  million  annual
amortization  based on an amortization  period of  approximately  13 years.  The
components of the net periodic  postretirement  benefits cost were as follows ($
in millions):

                                                      Years Ending December 31,
                                                        1997            1996
                                                       -----            -----
Service costs.....................................    $  .2            $  .2
Interest costs....................................      1.4              1.5
Net amortization of excess gain...................     (1.2)            (1.2)
                                                      ------            ------
Net periodic postretirement
  benefit costs...................................    $  .4            $  .5
                                                      =====            =======

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

13.     Provision for Income Taxes

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

                                        Years Ended December 31,
                                  1997            1996           1995
                                  ----            ----           ----
Current income tax:
  Federal...................      $28.3          $38.1         $35.8
  State.....................        3.9            4.6           4.5
Deferred income taxes.......       47.5           36.4          30.7
                                 ------         ------        ------
Provision for income taxes..      $79.7          $79.1         $71.0
                                  =====          =====         =====

         The effective  income tax rates for the years ended  December 31, 1997,
1996 and  1995,  were  35%,  37% and 35%,  respectively.  See Note 5 for the tax
benefits associated with the 1995 extraordinary loss.

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



<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


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

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

                                           Years Ended December 31,
                                      1997             1996           1995
                                    ----------    -------------   -------------
Expected tax expense computed
 at statutory rate..............   $80.5   35%    $75.5     35%   $70.3     35%
Dividends received exclusion....   (.2)     -       (.2)     -      (.1)     -
State income taxes, net
 of federal tax effect..........   6.5      3       6.1      3      5.4      2
Charitable contribution of
 property.......................  (4.1)    (2)        -      -        -      -
Favorable resolution of
 prior period tax issues........     -      -      (1.8)    (1)    (4.3)    (2)
Other items, net................  (3.0)    (1)      (.5)     -     ( .3)     -
                                  ------  ----     -----   ----    ----    ----

Provision for income taxes...... $79.7     35%     $79.1    37%   $71.0     35%
                                 =====     ===     =====    ====  =====     ===

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

         Deferred income taxes consisted of the following ($ in millions):
                                                           December 31,
                                                  1997                1996
                                                  ----                ----

Deferred tax assets......................     $   72.0            $   77.6
Less: Valuation allowance................         (1.5)               (1.5)
                                              ---------           ---------
Deferred tax assets,
    net of valuation allowance...........         70.5                76.1
Deferred tax liabilities.................       (461.5)             (412.4)
                                              ---------           --------
Deferred income taxes....................     $ (391.0)            $(336.3)
                                              ========             ========

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

         Major types of deferred  tax assets are:  reserves not yet deducted for
tax purposes ($60.5 million) and safe harbor leases ($10.2 million). Major types
of deferred tax liabilities are: accelerated depreciation ($427.2 million), land
basis differences ($16.9 million) and debt marked to market ($2.1 million).


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


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

14.     Common Stock and Dividends

        The Company is authorized to issue  100,000,000  shares of Common Stock,
par value $.001. At December 31, 1997,  there were  61,402,347  shares of Common
Stock outstanding. Each holder of Common Stock is entitled to one vote per share
in the  election  of  directors  and  on  all  matters  submitted  to a vote  of
stockholders.  Subject to the rights and  preferences  of  redeemable  preferred
stock,  if any,  each share of Common Stock is entitled to receive  dividends as
may be declared by the Board of Directors out of funds legally  available and to
share ratably in all assets  available for  distribution  to  stockholders  upon
dissolution or liquidation.  No holder of Common Stock has any preemptive  right
to subscribe  for any  securities of the Company.  No shares of preferred  stock
were outstanding at December 31, 1997 and 1996.

        On January 25,  1996,  the Board of Directors  declared a  three-for-two
stock  split on Common  Stock.  The split  was  effected  in the form of a stock
dividend  and was paid March 14,  1996.  Approximately  21 million  shares  were
issued from  declared but  unissued  shares.  Fractional  shares were settled in
cash. The effects of the stock split are presented herein as if it took place as
of the earliest  period shown. In 1992, the Board of Directors also authorized a
three-for-two stock split on Common Stock.

        The Board of Directors has a policy of quarterly dividends on the Common
Stock of the Company.  Future  dividends  may be dependent on the ability of its
subsidiaries  to pay dividends to the Company.  Covenants of ICR's  Revolver and
CCPH's Revolver require  specified levels of tangible net worth. At December 31,
1997,  ICR exceeded its  tangible net worth  covenant by $32.0  million and CCPH
exceeded its tangible net worth covenant by $29.6 million.

        See Note 15 for discussion of a restricted stock award in 1994.

        See Note 2 for discussion of Canadian National Tender offer.


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



        The following table presents a reconciliation  of the shares used in the
calculations  of basic and diluted income per share in accordance  with SFAS No.
128:

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

Weighted average number
of common shares out-
standing - Basic shares       61,408,637     61,417,769       62,608,274

Plus:
Effect of shares issuable
under stock options              698,679        560,622          360,348
                            ------------    ------------    ------------

Equals: Dilutive potential
common shares                62,107,316      61,978,391       62,968,622


15.      Stock Based Compensation

         The Company  grants stock options to employees and directors  under the
1990 Long-Term  Incentive Plan and has two employee  stock purchase  plans.  The
Company  accounts for the stock option plans under APB Opinion 25 under which no
compensation cost has been recognized.

         Long-Term  Incentive Plan. Under the Company's 1990 Long-Term Incentive
Plan (the "Long- Term  Incentive  Plan")  3,101,028  shares of Common  Stock are
reserved for issuance upon the exercise of incentive options that may be awarded
by the Compensation  Committee to directors and selected  salaried  employees of
the Company and its  affiliates  under the  Executive  Compensation  Plan and to
certain other  individuals who possess the potential to contribute to the future
success of the Company.  This amount includes 300,000 shares added following the
approval of Incentive  2000 for Outside  Directors at the 1996 Annual Meeting of
Stockholders.  The  Compensation  Committee  also has the  authority  under  the
Long-Term  Incentive Plan to award stock appreciation  rights,  restricted stock
and restricted stock units,  dividend  equivalents and other stock-based awards,
and to determine the consideration to be paid by the participant for any awards,
any limits on transfer of awards,  and,  within certain  limits,  other terms of
awards.  In the case of options (other than options granted to directors who are
not  full-time  employees  of the Company  ("Outside  Directors"),  as described
below) granted under the Long-Term  Incentive Plan, the  Compensation  Committee
has the power to determine  the exercise  price of the option  (which  cannot be
less  than 50% of the  fair  market  value  on the  date of grant of the  shares
subject to the option),  the term of the option, the time and method of exercise
and whether the options are  intended to qualify as  "incentive  stock  options"
pursuant to Section  422A of the  Internal  Revenue  Code.  Under the  Executive
Compensation  Plan  the  grant  price  is  limited  to fair  market  value.  The
Compensation  Committee  awarded stock options to employees  under the Long-Term
Incentive  Plan for the first time in 1993.  Awards,  all at the closing  market
price on date of grant,  vest  ratably  over four years and expire 10 years from
date of grant.

         Outside Directors also participate in the Long-Term  Incentive Plan. On
the date of each Annual Meeting,  each Outside  Director who serves  immediately
prior to such date and who will  continue to serve after such date (whether as a
result of such director's  re-election or by reason of the  continuation of such
director's  term) is granted an option to purchase 2,250 shares of Common Stock.
Options  granted to Outside  Directors  entitle such persons to purchase  Common
Stock at the fair market  value of such Common  Stock on the date the option was
granted.  Options  held by  Outside  Directors  expire 10 years from the date of
grant, or, if earlier,  one year following  termination of service as a director
for any reason other than death or disability.  Such options become  exercisable
in full six months after their date of grant.  Options for 37,500 shares granted
in connection  with the Incentive 2000 Plan are  exercisable  after December 31,
1999,  if the Company's  stock price is at least $43.000 for twenty  consecutive
days from January 1, 2000 until April 30, 2001.

         The Committee  awarded 22,500 shares of restricted stock to an eligible
employee of ICR in 1994. No cash  payments are required by the employee.  Shares
awarded may not be sold,  transferred,  or used as  collateral  until the shares
become free of the restrictions. Restrictions lapse over a four-year period. All
shares still subject to restrictions  will be forfeited and returned to the plan
if the employee's relationship with ICR is terminated.  No shares were forfeited
in 1997 or 1996. A total of 4,125 shares were forfeited in 1995. If the employee
becomes  disabled,  or dies,  or a change in control  occurs  during the vesting
period,   the  restrictions  lapse  at  that  time.  In  connection  with  early
retirements,  43 and 7,632  shares  vested in 1996 and 1995,  respectively.  The
compensation  expense  resulting from the award of restricted stock is valued at
the closing market price of the Company's Common Stock on the date of the award,
recorded as a reduction of Stockholders'  Equity,  and charged to expense evenly
over the vesting period.  Compensation  expense was $.2 million, $.8 million and
$1.1 million in 1997, 1996 and 1995, respectively.

         Stock Purchase  Programs.  The Company has two stock purchase programs.
The basic  program is open to all  employees  and permits  employees  to acquire
Company  common stock via payroll  deductions.  The other plan is the Discounted
Stock  Purchase  Plan  ("Discounted  Plan").  A total of 1.2 million  shares are
registered  for both plans.  All  purchases  are made by the trustee in the open
market and no purchases  are made  directly  from the Company.  Only  management
employees are eligible to participate in the Discounted  Plan which provides for
the investment of up to 15% of an eligible employee's salary in the common stock
of the Company at a 15% discount.  A participant  must continue  employment with
the Company or its subsidiaries  for two years to retain the 15% discount,  and,
during that period, the shares will be held by the plan's administrator.  If the
employee  withdraws  shares or directs the sale of shares within two years,  the
discount must be repaid in cash or  relinquished  shares.  No such  repayment is
required in the event of death,  retirement,  disability or change of control of
the Company. Costs associated with these programs have been immaterial to date.



<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


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

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

Outstanding 12-31-94  1,063,500   $16.822                   478,500     $14.417
                                                            =======     =======
Granted                 535,274    23.158    $  9.105
                                                ========
Exercised (a)            (4,500)   16.834
Forfeited (a)           (11,250)   20.833
                       ---------
Outstanding 12-31-95  1,583,024    18.936                   812,381     $17.007
                                                            =======     =======
Granted                 848,250    29.803    $  8.247
                                                ========
Exercised (b)           (13,125)   22.367
Forfeited (c)            (3,375)   22.389
                     -----------
Outstanding 12-31-96  2,414,774    22.730                 1,269,355     $18.873
                                                          =========     =======
Granted                 494,050    34.148     $12.900
                                              =======
Exercised (d)          (325,122)   16.675
Forfeited               (19,200)   24.713
                     -----------   ------
Outstanding 12-31-97  2,564,502                           1,527,872     $21.593
                      =========                           =========     =======


(a)      Pre-1995 option awards
(b)      Includes 7,875 pre-1995 option awards
(c)      Includes 1,125 pre-1995 option awards
(d)      Includes 277,498 pre-1995 option awards

         The last date  exercisable for options granted to Outside  Directors is
May 7, 2007, and March 13, 2007, for those granted to employees.

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



<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


                                1997            1996               1995
                                ----            ----               ----
      Pro Forma            As        Pro     As       Pro                Pro
      Unaudited          Reported   Forma  Reported  Forma     Actual    Forma
      ---------            -----    -----   ------   ------    ------    -----

Income before extra-
 ordinary item             150.2   $147.6   $136.6   $135.0    $129.8    $129.3
Net income                 150.2   $147.6   $136.6   $135.0    $118.4    $117.9
EPS before extraordinary
 item - diluted            $2.42   $2 .39   $ 2.20   $ 2.17    $ 2.06    $ 2.06
EPS - net income - diluted $2.42   $2 .39   $ 2.20   $ 2.17    $ 1.88    $ 1.88

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

       Of the options outstanding at December 31, 1997,  1,527,872 have exercise
prices between  $5.333 and $34.750,  with a weighted  average  exercise price of
$21.593,  a weighted average  remaining  contractual life of 8 years and all are
exercisable.  The remaining  1,036,030 options,  that are not exercisable,  have
exercise  prices  between  $23.167 and $37.875 with a weighted  average price of
$31.709 and a weighted average remaining contractual life of 8 years.

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

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

Risk-free interest rate(s) 6.7%              6.7% and 7.0%   7.2% and 7.3%
Dividend yields            2.7% and 2.6%     3.2% and 2.7%   2.9% and 3.0%
Days to expiration         3652              3652            3652
Volatility                 30.18% and 30.01% 31.4%           33.1% and 32.9%

16.      Contingencies, Commitments and Concentration of Risks

         The Company has unconditionally  guaranteed IC Financial's $1.8 million
obligations via a pledge of stock of a subsidiary of IC Financial.

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

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


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


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

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

         Environmental  Contingencies.  The Company is aware of approximately 23
contaminated  sites at which  it is  probably  liable  for some  portion  of any
required clean up. Of these, 15 involve  contamination  primarily by diesel fuel
which can be  remediated  without  material  cost.  Five sites are  expected  to
require  more than $1 million in clean-up  costs.  At three of these sites other
parties are  expected  to  contribute  the  majority  of the  remediation  costs
incurred.

         For all known sites of environmental  contamination  where Company loss
or liability is probable, the Company has recorded an estimated liability at the
time when a reasonable  estimate of remediation  cost and Company  liability can
first be determined.  Adjustments to initial estimates are recorded as necessary
based upon additional information developed in subsequent periods.  Estimates of
the Company`s potential financial exposure for environmental claims or incidents
are  necessarily  imprecise  because of the difficulty of determining in advance
the nature and extent of contamination, the varying costs of alternative methods
of remediation, the regulatory clean-up standards which will be applied, and the
appropriate  allocation of liability  among  multiple  responsible  parties.  At
December 31, 1997, the Company  estimated the probable range of its liability to
be $9.9 million to $45 million,  and in accordance  with the  provisions of SFAS
No. 5 had a reserve of $9.9 million for environmental contingencies. This amount
is not reduced for potential insurance recoveries or third-party contributions.

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


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements



17.      Disclosures about Fair Value of Financial Instruments

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

         Cash and Temporary Cash Investments.  The carrying amount  approximates
fair value because of the short  maturity of those  instruments.  Investments in
U.S.  corporate demand notes of $30.1 million and $52.8 million included in cash
and temporary cash  investments as of December 31, 1997 and 1996,  respectively,
have been classified and accounted for as held to maturity securities.

         Investments.  The Company has  investments  of $5.2 million in 1997 and
$11.7  million  in 1996 for  which  there  are no quoted  market  prices.  These
investments are in joint railroad  facilities,  railroad terminal  associations,
switching railroads and other transportation  companies.  For these investments,
the  carrying  amount is a  reasonable  estimate  of fair value.  The  Company's
remaining  investments  ($6.9  million  in 1997 and $5.8  million  in 1996)  are
accounted for by the equity method.

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

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

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

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

                                     Carrying    Fair       Carrying      Fair
                                      Amount     Value       Amount       Value

Cash and temporary cash investments $  34.1    $  34.1    $   59.2    $    59.2
Investments...........................  5.2        5.2        11.7         11.7
Fuel Hedge..........................      -        (.5)          -           .1
Debt................................ (596.7)    (626.0)     (640.0)      (634.2)

18.        Acquisition of CCP Holdings, Inc.

           On June 12, 1996,  ICR used proceeds it received from the issuance of
Commercial  Paper (average  interest rate 5.52% and average maturity 30 days) to
pay a $50.0 million  dividend to the Company and to loan $59.9  million  (5.625%
per annum) to the  Company.  The  Company  used the $109.9  million and its bank
credit lines to acquire CCPH. The transaction closed June 13, 1996,


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


following  the  effective  date of the  approval  order  issued by the STB.  The
purchase price was $147.1  million in cash and the  assumption of  approximately
$2.5  million  in debt and  approximately  $17.3  million of  capitalized  lease
obligations existing on acquisition date. The acquisition has been accounted for
under the purchase method of accounting.  Accordingly, the Company has allocated
the purchase cost to CCPH's assets and liabilities as of June 13, 1996.

           A summary of the CCPH assets acquired and liabilities assumed at June
13, 1996, after  reflecting the final purchase  accounting  allocations,  is set
forth below ($ in millions):

Cash and Cash Equivalents $   4.9    Accounts Payable                   $(16.8)
Accounts Receivable          14.5    Other Current Liabilities           (12.2)
Other Current Assets         11.2    Long-Term Debt                      (21.3)
Properties                  264.6    Deferred Income Taxes               (84.6)
                                     Other Liabilities and Reserves      (13.3)

           The  following   unaudited  pro-forma  results  of  the  Company  are
presented to reflect the  Company's  results of  operations  for the years ended
December 31, 1996 and 1995, as if CCPH had been acquired on January 1, 1996, and
January 1, 1995, respectively ($ in millions, except share data):

                                          Years Ended December 31,
                                          1996                 1995
                                                 (Unaudited)

Revenues                                 $697.3                $719.8
Operating income                          255.5                 251.5
                                        -------               -------
Income before extraordinary item          143.2                 135.5
                                        -------               -------
Net income                                143.2                 124.1
                                        =======               =======

Basic income per share:
 - Before extraordinary item             $  2.33                $ 2.16
 - Net income                            $  2.33                $ 1.98

Diluted income per share:
- Before extraordinary item               $ 2.31                $ 2.15
- Net income                              $ 2.31                $ 1.97




<PAGE>



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

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

Revenues.......................    $172.1     $165.6      $173.6     $188.5
Operating income...............      64.5       63.2        62.0       74.2
Net income.....................      33.9       35.0        34.6       46.7

Basic income per share.........  $    .55     $  .57      $  .56     $  .76
                                 ========     ======      =======    =======
Diluted income per share.......  $    .55     $  .56      $  .56     $  .75
                                 ========     ======      =======    =======

1996

Revenues.......................    $162.6     $153.4      $167.9     $173.6
Operating income...............      60.3       56.4        61.5       63.0
Net income.....................      33.1       31.4        32.1       40.0

Basic income share        .....  $    .54     $  .51      $  .52     $  .65
                                 ========     ======      =======    =======
Diluted income per share.......  $    .53     $  .51      $  .52     $  .65
                                 ========     ======      =======    =======

1995

Revenues.......................    $167.9     $156.6      $161.3     $159.5
Operating income...............      62.5       55.9        53.1       59.0
Income before extraordinary
 item, net.....................      34.3       29.6        29.2       36.7
Net income.....................      34.3       18.2        29.2       36.7

Basic income per share:
Before extraordinary item......   $   .54      $ .47      $  .47     $  .60
Extraordinary item.............         -       (.18)          -          -
                                ---------      ------     -------    -------
Basic income per share.........   $   .54      $ .29      $  .47     $  .60
                                  =======      ======     =======    =======

Diluted income per share:
Before extraordinary item......   $   .54      $ .47      $  .47     $  .59
Extraordinary item.............         -       (.18)          -          -
                                ---------      -------    -------    --------
Diluted income per share.......   $   .54      $ .29      $  .47     $   .59
                                  =======      =======    =======    =======

Per share amounts have been restated to reflect the 3-for-2 stock split that was
declared in January 1996.

Information for 1996 includes results of CCPH for the period June 13, 1996 (date
of acquisition) to December 31, 1996.




<PAGE>

                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES


                                  F O R M 10-K



                          FINANCIAL STATEMENT SCHEDULES

                       SUBMITTED IN RESPONSE TO ITEM 14(a)


<PAGE>







                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES



                                    I N D E X

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




Schedules for the three years ended December 31, 1997:

          I-Condensed financial information.............................F-30
         II-Valuation and qualifying accounts...........................F-33

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










<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                              AND SUBSIDIARIES 
                                    
                                                               
                 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
                  Illinois Central Corporation--Parent Company
                 Condensed Statements of Income ($ in millions,
                               except share data)

                                                      Years Ended December 31,
                                                     1997       1996       1995
      Operating expenses.......................  $    0.4   $    0.3   $    0.7
      Operating (loss).............................  (0.4)      (0.3)      (0.7)

      Other income (expense), net..................  (0.6)      (1.9)      (2.8)
      Interest income (expense), net...............  (9.7)      (3.2)      (0.5)
      (Loss) before taxes and earnings
          of subsidiaries.......................... (10.7)      (5.4)      (4.0)
      Earnings of subsidiaries..................... 153.6      137.7      120.9
      Provision (benefit) for income taxes.........  (7.3)      (4.3)      (1.5)

      Net income...............................  $  150.2   $  136.6   $  118.4
      Income per share-Basic...................  $   2.45   $   2.22   $   1.89

      Weighted average number of shares of
          common stock (thousands)...............61,408.6   61,417,8   62,608.3 

      Income per share-Diluted.................  $   2.42   $   2.20   $   1.88

      Weighted average number of shares of
          common stock and dilutive
          potential common shares (thousands).....62,107.3  61,978.4   62,968.6


The Notes to  Consolidated  Financial  Statements  beginning  on page F-6 are an
integral part of this schedule.


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                              AND SUBSIDIARIES 
                                    
                                    
                 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
                                Illinois Central
                          Corporation--Parent Company
                    Condensed Balance Sheets 
                                ($ in millions)

                                                              December 31,
                                                         1997         1996
                        ASSETS                                                
   Current assets:
      Cash and temporary cash investments..........  $    0.3     $    0.9     
      Receivables......................................  12.1         49.1     
      Other current assets.............................   0.9          0.5     
         Total current assets..........................  13.3         50.5     

   Investments in subsidiaries......................... 719.5        627.8     

   Loan to affiliate...................................  89.1         17.1     

   Deferred income taxes...............................   0.2          1.4     

   Other assets........................................   1.0          0.2     
         Total assets..............................  $  823.1     $  697.0    
 LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities:
      Accounts payable.............................  $    5.8     $   56.8     
      Dividends payable................................  14.1         14.1     
         Total current liabilities.....................  19.9         70.9     

   Intercompany debt................................... 156.3         67.0     

   Other liabilities and reserves......................   4.1          3.6     

   Contingencies and commitments

   Stockholders' equity:
      Common stock, par value $.001 authorized 100,000,000 shares,
         64,622,956 shares issued and 61,402,347 shares   0.1          0.1     
      Additional paid-in capital....................... 172.7        167.1     
      Retained income..............................     547.4        453.8     
      Treasury stock (3,220,609 shares)............     (77.4)       (65.5)    
         Total stockholders' equity.................... 642.8        555.5     

         Total liabilities and stockholders' equity  $  823.1     $  697.0    




<PAGE>



The Notes to  Consolidated  Financial  Statements  beginning  on page F-6 are an
integral part of this schedule.


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                              AND SUBSIDIARIES
                                    
                                                 
                 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
                                Illinois Central
                          Corporation--Parent Company
                       Condensed Statements of Cash Flows
                                 ($ in millions)


                                                      Years Ended December 31,
                                                    1997       1996       1995
   Cash flows from operating activities:
      Net income...............................  $  150.2   $  136.6   $  118.4
      Reconciliation of net income to net cash
         provided by (used for) operating activities:
         Deferred income taxes.....................   1.2       (0.9)      (1.5)
         Earnings of subsidiaries..................(153.6)    (137.7)    (120.9)
         Cash changes in working capital:
            Receivables............................  37.0      (42.6)      (4.1)
            Other current assets...................  (0.4)      (0.5)       0.1
            Accounts payable....................... (51.0)      40.0        7.9
            Income taxes payable...................   -          -         (0.4)
         Changes in other assets...................  (0.8)       0.1        0.1
         Changes in other liabilities and reserves.   0.5        2.3        2.2
            Net cash provided by (used for) 
            operating activities                    (16.9)      (2.7)       1.8

   Cash flows from investing activities:
      Acquisitions ................................   -       (152.9)       -
      Loan to subsidiaries......................... (72.0)       -        (17.1)
      Loan from subsidiaries.......................  89.3       67.0        -
      Capital contribution to subsidiaries.........  (0.8)      (6.2)      (0.4)
      Dividends received from subsidiaries.........  62.9      143.9      107.7
            Net cash provided by investing 
            activities                               79.4       51.8       90.2

   Cash flows from financing activities:
      Proceeds from the issuance of debt...........   -         40.0        -
      Principal payments on debt...................   -        (40.0)       -
      Dividends paid............................... (56.6)     (48.7)     (41.9)
      Stock repurchases............................ (11.9)      (1.0)     (59.8)
      Proceeds from exercise of stock options and 
      warrants                                        5.4        0.2        -
            Net cash (used for) financing activities(63.1)     (49.5)    (101.7)

   Changes in cash and temporary cash investments..  (0.6)      (0.4)      (9.7)
   Cash and temporary cash investments at beginning 
      of period....................................   0.9        1.3       11.0
   Cash and temporary cash investments at end of
      period...................................  $    0.3   $    0.9   $    1.3

   Supplemental disclosure of cash flow information:


<PAGE>



      Cash paid during the year for:
         Interest (net of amount capitalized)..  $    -     $    -     $    -
         Income taxes..........................  $    -     $    -     $    -




The Notes to  Consolidated  Financial  Statements  beginning  on page F-6 are an
integral part of this schedule.


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                           AND SUBSIDIARIES 

              SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 ($ IN MILLIONS)
                                   
 Year Ended December 31, 1997
                                   Balance At  Additions   Payments    Balance
                                   Beginning   Charged      And        At End
        Classification             Of Year     To Expense  (Charges)   Of Year
 Accrued redundancy reserve...  $  30.8     $   1.1     $   3.4     $  28.5
 Casualty and other reserves...... 45.0         7.7        13.2        39.5
 Environmental.................... 17.2         2.4         9.7         9.9
 Bad debt reserve.................  1.3         1.9         2.0         1.2
 Taxes............................  1.5         -           -           1.5
       Total..................  $  95.8     $  13.1     $  28.3     $  80.6


  Year Ended December 31, 1996


                                   Balance At  Additions   Payments    Balance
                                   Beginning   Charged      And        At End
        Classification             Of Year     To Expense  (Charges)   Of Year
 Accrued redundancy reserve...  $  33.9     $   2.1     $   5.2     $  30.8
 Casualty and other reserves...... 55.7         8.9        19.6        45.0
 Environmental.................... 12.9         1.9        (2.4)       17.2
 Bad debt reserve.................  2.0         1.8         2.5         1.3
 Taxes............................  1.8         -           0.3         1.5
       Total..................  $ 106.3     $  14.7     $  25.2     $  95.8


  Year Ended December 31, 1995


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



<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES

                                  EXHIBIT INDEX

Exhibit                                                           Sequential
  No.                      Descriptions                            Page No.



 2.1      Stock Purchase  Agreement  dated as of January 17, 1996
          among Illinois Central Corporation, CCP Holdings, Inc.,
          Donald R. Wood,  Jr.  and Lyle D. Reed,  and the Ann L.
          and  Walter  A.   Drexel   Revocable   Trust  and  Reed
          Charitable  Remainder Unitrust and R. Kevin Trout, John
          A.  Adair  and  Gregory  L.  Amys.   (Incorporated   by
          reference  to Exhibit 2 to the  current  report on Form
          8-K dated as of May 15, 1996 for the  Illinois  Central
          Corporation. (SEC File No. 1-10720))

 2.2      Agreement  and Plan of Merger  dated as of February 10,
          1998  among  Canadian   National  Railway  Company  and
          Illinois   Central   Corporation,    (Incorporated   by
          reference to Exhibit 2.2 to the current  report on Form
          14D-9  dated as of  February  13,  1998 and as  amended
          February  23,  1998 and March 6, 1998 for the  Illinois
          Central Corporation. (SEC File No. 5-41121))

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

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

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



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


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES

                                  EXHIBIT INDEX

Exhibit                                                           Sequential
  No.                             Descriptions                     Page No.


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

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

 3.6      Certificate   of   Elimination   of  Illinois   Central
          Corporation.  (Incorporated by reference to Exhibit 3.2
          to  the  Quarterly   Report  of  the  Illinois  Central
          Corporation  on Form  10-Q for the three  months  ended
          September 30, 1991. (SEC File No. 1-10720))

 3.7      By-Laws  of  Illinois  Central  Railroad  Company,   as
          amended. (Incorporated by reference to Exhibit 3 to the
          Quarterly  Report  of  the  Illinois  Central  Railroad
          Company  on Form 10-Q for the three  months  ended June
          30, 1997. (SEC File No. 1-7092))

 4.2      Restated  Articles of Incorporation of Illinois Central
          Corporation (included in Exhibit 3.3)

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


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES

                                  EXHIBIT INDEX

Exhibit                                                           Sequential
  No.                            Descriptions                      Page No.


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

 4.5      Form of the Loan  and  Security  Agreement  dated as of
          December 6, 1991, between IC Leasing  Corporation I and
          Hitachi Credit America Corp. (including the Form of the
          Initial   Funding   Credit   Note,   the  Form  of  the
          Refurbishing  Credit Note,  the Form of  Assignment  of
          Lease and Agreement,  the Form of the Pledge  Agreement
          between IC Financial  Services  Corporation and Hitachi
          Credit  America  Corp.  and the  Form  of the  Guaranty
          Agreement  between  Illinois  Central  Corporation  and
          Hitachi Credit America Corp. included as Exhibits D, E,
          F, G and H,  respectively,  therein).  (Incorporated by
          reference  to Exhibit 4.9 to the Annual  Report on Form
          10-K for the year  ended  December  31,  1991,  for the
          Illinois Central Corporation filed March 12, 1992. (SEC
          File No. 1-10720))

 4.6      Form of the Trust Agreement dated as of March 30, 1993,
          between IC Leasing  Corporation II and Wilmington Trust
          Company.  (Incorporated  by reference to Exhibit 4.1 to
          the Current Report of Illinois  Central  Corporation on
          Form 8-K dated May 7, 1993. (SEC File No. 1-10720))

 4.7      Form of the Security Agreement and Mortgage dated as of
          March 30,  1993,  between IC Leasing  Trust II and UNUM
          Life Insurance  Company of America  (Including the Form
          of the Promissory  Note between IC Leasing Trust II and
          UNUM Life  Insurance  Company  of America  included  as
          Exhibit A,  therein).  (Incorporated  by  reference  to
          Exhibit 4.2 to the Current  Report of Illinois  Central
          Corporation  on Form 8-K dated May 7,  1993.  (SEC File
          No. 1-10720))

 4.8      Assignment  of Lease  and  Conveyance  dated  March 30,
          1993, between IC Leasing  Corporation II and IC Leasing
          Trust II.  (Incorporated by reference to Exhibit 4.3 to
          the Current Report of Illinois  Central  Corporation on
          Form 8-K dated May 7, 1993. (SEC File No. 1-10720))

 4.9      Assignment  of Lease  and  Conveyance  dated  March 30,
          1993,  between  IC  Leasing  Trust  II  and  UNUM  Life
          Insurance   Company  of   America.   (Incorporated   by
          reference  to  Exhibit  4.4 to the  Current  Report  of
          Illinois  Central  Corporation on Form 8-K dated May 7,
          1993. (SEC File No. 1-10720))

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

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

 4.12     Form of Revolving  Credit  Agreement  between  Illinois
          Central  Corporation and Bank of America National Trust
          and  Saving   Association   Dated   August  24,   1994.
          (Incorporated  by  reference  to  Exhibit  4.1  to  the
          Quarterly  Report of Illinois  Central  Corporation  on
          Form  10-Q for the three  months  ended  September  30,
          1994. (SEC File No. 1-10720))


<PAGE>



                          ILLINOIS CENTRAL CORPORATION
                                AND SUBSIDIARIES

                                  EXHIBIT INDEX

Exhibit                                                           Sequential
  No.                           Descriptions                       Page No.


 4.13     Form  of  Revolving  Credit  and  Term  Loan  Agreement
          between IC Leasing III and the First  National  Bank of
          Boston  dated  as of July  5,  1994.  (Incorporated  by
          reference  to Exhibit  4.2 to the  Quarterly  Report of
          Illinois Central Corporation on Form 10-Q for the three
          months  ended  September  30,  1994.  (SEC  File No. 1-
          10720))

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

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

 4.16     Form of Railcar Management  Agreement between Interrail
          and IC Leasing  Corporation III dated December 3, 1993.
          (Incorporated  by  reference  to  Exhibit  4.1  to  the
          Current Report of the Illinois  Central  Corporation on
          Form 8-K dated July 29, 1994. (SEC File No. 1- 10720))

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

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

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

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

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

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

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

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

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

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

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

 4.28     Form  of  Revolving   Credit   Agreement   between  CCP
          Holdings,  Inc.,  Chicago,  Central & Pacific  Railroad
          Company,  Cedar  River  Railroad  Company,  Iron  Horse
          Properties, Inc., Missouri River Bridge Company and the
          First National Bank of Boston and Bank of America Trust
          and  Savings  Association  dated as of June  14,  1996.
          (Incorporated   by   reference  to  Exhibit  4  to  the
          Quarterly  Report  on Form 10-Q for the  quarter  ended
          September 30, 1996 for the Illinois Central Corporation
          filed on November 8, 1996. (SEC File No. 1-10720))

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

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



<PAGE>



                   ILLINOIS CENTRAL CORPORATION
                         AND SUBSIDIARIES

                          EXHIBIT INDEX

Exhibit                                                               Sequential
  No.                       Descriptions                               Page No.


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

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

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

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

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


<PAGE>



                   ILLINOIS CENTRAL CORPORATION
                         AND SUBSIDIARIES

                          EXHIBIT INDEX

Exhibit                                                             Sequential
  No.                      Descriptions                              Page No.


 10.2     Form of  indemnification  agreement dated as of January
          29, 1991,  between  Illinois  Central  Corporation  and
          certain   officers  and  directors.   (Incorporated  by
          reference to Exhibit 10.9 to the Annual  Report on Form
          10-K for the year  ended  December  31,  1990,  for the
          Illinois  Central  Corporation  filed on April 1, 1991.
          (SEC File No. 1-10720))

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

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

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

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

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


<PAGE>



                   ILLINOIS CENTRAL CORPORATION
                         AND SUBSIDIARIES

                          EXHIBIT INDEX

Exhibit                                                              Sequential
  No.                     Descriptions                                 Page No.


 10.8*    Form  of  Consulting  and   Non-Competition   Agreement
          between  Illinois  Central  Corporation  and  Edward L.
          Moyers dated as of February 18, 1993.  (Incorporated by
          reference  to  Exhibit  10.10 to Annual  Report on Form
          10-K for the year  ended  December  31,  1992,  for the
          Illinois Central  Corporation filed March 5, 1993. (SEC
          File No. 1-10720))

 10.9*    Form of the Note Agreement between the Illinois Central
          Corporation  and Edward L. Moyers  dated  February  18,
          1993.  (Incorporated  by reference to Exhibit  10.11 to
          Annual Report on Form 10-K for the year ended  December
          31, 1992, for the Illinois  Central  Corporation  filed
          March 5, 1993. (SEC File No. 1-10720))

 10.10*   Form of a  Supplemental  Retirement  Benefit  Agreement
          dated as of August 20, 1992  between  Illinois  Central
          Corporation  and  Edward L.  Moyers.  (Incorporated  by
          reference  to Exhibit 10.3 to the  Quarterly  Report of
          the Illinois  Central  Corporation on Form 10-Q for the
          three month ended  September  30,  1992.  (SEC File No.
          1-10720))

 10.11    The Asset Sale Agreement between Allied Railcar Company
          and IC Leasing  Corporation III dated December 3, 1993,
          (Incorporated  by  reference  to  Exhibit  10.13 to the
          Annual Report on Form 10-K for the year ended  December
          31, 1993 for the  Illinois  Central  Corporation  field
          March 16, 1994,  including  the Bill of Sale  Agreement
          and  Assumption of  Liabilities  included as Exhibits C
          and D, respectively, therein). (SEC File No. 1-10720))

 10.12    The Purchase  Agreement between IC Leasing  Corporation
          III and The  First  National  Bank  of  Maryland  dated
          December  29,  1993.   (Incorporated  by  reference  to
          Exhibit 10.15 to the Annual Report on Form 10-K for the
          Illinois Central Corporation filed March 16, 1994. (SEC
          File No. 1-10720))

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

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

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

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

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

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

 10.19    Form  of   Illinois   Central   Corporation   Directors
          Incentive 2000 Option Plan  (Incorporated  by reference
          to Exhibit  10.1 to the  Quarterly  Report on Form 10-Q
          for the quarter ended March 31, 1996,  for the Illinois
          Central  Corporation  filed on May 10, 1996.  (SEC File
          No. 1-10720))


<PAGE>





                   ILLINOIS CENTRAL CORPORATION
                         AND SUBSIDIARIES
                          EXHIBIT INDEX

    Exhibit                                                           Sequential
        No.               Descriptions                                 Page No.


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

 10.21    Form of Illinois Central Corporation Directors Deferred
          Compensation  Plan,  as amended and restated  effective
          May 1, 1997.  (Incorporated  by reference to Exhibit 10
          to  the  Quarterly   Report  of  the  Illinois  Central
          Corporation  on Form  10-Q for the three  months  ended
          June 30, 1997. (SEC File No. 1-10720))

 10.22    Form  of   Illinois   Central   Corporation   Directors
          Retirement  Plan  adopted  effective  as of  January 1,
          1994. (A)

 11       Computation  of Income Per Common  Share  (Included  at
          E-13)

 21       Subsidiaries of Registrant (Included at E-14)

 23       Consent of Arthur Andersen LLP (A)

 27       Financial Data Schedule (A)

 99       Provisions of the Private Securities  Litigation Reform
          Act of 1995


  (A) Included herein but not reproduced.


<PAGE>
                                                                      Exhibit 11



                 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES

                     COMPUTATION OF INCOME PER COMMON SHARE
                       ($ in millions, except share data)


                                             Years Ended December 31,
                                          1997          1996          1995
Income before extraordinary item      $    150.2    $    136.6    $    129.8

Extraordinary item, net                      -             -           (11.4)

Net income                            $    150.2    $    136.6    $    118.4

Calculation of average number of shares outstanding (1):
Basic:
Weighted average number of common shares
   outstanding                        61,408,637    61,417,769    62,608,274



Diluted:
Weighted average number of common 
   shares outstanding                 61,408,637    61,417,769    62,608,274

Effect of shares issuable under stock 
 options(2)                              698,679       560,622       360,348
                                      62,107,316    61,978,391    62,968,622

Income per common share:
Basic:
Before extraordinary item             $     2.45    $     2.22    $     2.07

Extraordinary item, net                      -             -           (0.18)

Net income                            $     2.45    $     2.22    $     1.89

Diluted:
Before extraordinary item             $     2.42    $     2.20    $     2.06

Extraordinary item, net                      -            -            (0.18)

Net income                            $     2.42    $     2.20    $     1.88

(1)   Shares  restated to reflect the  3-for-2  stock split  declared in January
      1996 as if it took place at the earliest period shown.
(2)   The dilutive effect of outstanding stock options are calculated under the 
      treasury stock method using the average price of Common Stock.





<PAGE>
                                                                     Exhibit 21


                          ILLINOIS CENTRAL CORPORATION
                         Subsidiaries of the Registrant
                             as of December 31, 1997

Name                                                   Place of Incorporation

Subsidiaries included in the financial statements, which are 100% owned:

Illinois Central Railroad Company                                  Illinois
IC Financial Services Corporation                                  Delaware
CCP Holdings, Inc.                                                 Delaware

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

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

Subsidiaries that are 100% owned by IC Financial Services Corporation:

IC Leasing Corporation I                                           Nevada
IC Leasing Corporation II                                          Nevada
IC Leasing Corporation III                                         Nevada
IC Terminal Holdings Company                                       Delaware

Subsidiaries that are 100% owned by IC Terminal Holdings Company:

IC RailMarine Terminal Company                                     Delaware
IC Omnimodal Terminal Company of Delaware                          Delaware
IC Omnimodal Terminal Company                                      Louisiana
NPC, Inc.                                                          Louisiana

Subsidiaries that are 100% owned by CCP Holdings, Inc.:

Chicago Central & Pacific Railroad Company                         Delaware
Cedar River Railroad Company                                       Iowa
Iron Horse Properties, Inc.                                        Delaware
Missouri River Bridge Company                                      Delaware


<PAGE>