1997 INFORMATION STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
UNLOCKING THE POWER 1997

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Information Statement Table of Contents

Notice of Annual Meeting                                         2
Information Statement                                            3
Appendix: 1997 Annual Report to Shareholders                   a-1


To the Shareholders of Illinois Power:
Notice is Hereby Given that the Annual Meeting of Shareholders of Illinois Power
Company  ("Illinois  Power")  will be at 10 a.m.  Wednesday,  April 8, 1998,  at
Shilling Community  Education Center,  Richland  Community College,  One College
Park, Decatur, Illinois 62521, for the following purposes:

     (1) To elect the Board of Directors for the ensuing year.


     (2)  To transact  any other  business  which may  properly  come before the
          meeting or any adjournment.

     Shareholders  of record at the close of business on February 9, 1998,  will
be entitled to receive notice of and to vote at the Annual Meeting.

By Order of the Board of Directors,

Leah Manning Stetzner,
Vice President, General Counsel and Corporate Secretary

Decatur, Illinois
March 10, 1998

IMPORTANT
Only  shareholders  of Illinois Power are entitled to attend the Annual Meeting.
Shareholders  will be admitted on  verification of record share ownership at the
admission  desk.  Shareholders  who own shares through banks,  brokerage  firms,
nominees or other account  custodians  must present  proof of  beneficial  share
ownership (such as a brokerage  account  statement) at the admission desk.
<PAGE>

INFORMATION STATEMENT

March 10, 1998
(Date  first sent or given to  security  holders)

We are not asking you for a proxy and you are  requested not to send us a proxy.

This Information Statement is furnished in connection with the Annual Meeting of
Shareholders  of  Illinois  Power.  The Annual  Meeting  will be held at 10 a.m.
Wednesday,  April 8, 1998,  at Shilling  Community  Education  Center,  Richland
Community College,  One College Park, Decatur,  Illinois 62521, for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders.

     On February 9, 1998  ("Record  Date"),  Illinova  Corporation  ("Illinova")
beneficially  owned all of the 66,215,292  shares of Illinois Power Common Stock
then  outstanding  and there were 1,139,110  shares of Illinois Power  Preferred
Stock then outstanding, none of which was held by Illinova.

Voting Rights 
Shareholders  of record  at the close of  business  on the  Record  Date will be
entitled to receive  notice of and to vote at the Annual  Meeting.  Shareholders
who are  present at the Annual  Meeting  will be  entitled  to one vote for each
share of Illinois Power Stock which they held of record at the close of business
on the Record Date.

     When  voting  for   candidates   nominated  to  serve  as  directors,   all
shareholders  will be  entitled  to 11 votes  (the  number  of  directors  to be
elected)  for each of their  shares and may cast all of their  votes for any one
candidate  whose name has been  placed in  nomination  prior to the  voting,  or
distribute  their votes among two or more such candidates in such proportions as
they determine.  In voting on other matters  presented for  consideration at the
Annual Meeting,  each shareholder will be entitled to one vote for each share of
Stock held of record at the close of business on the Record Date.

Annual Report
and Information Statement
Accompanying this Information  Statement,  which includes Consolidated Financial
Statements, is a Notice of Annual Meeting of Shareholders and the Summary Annual
Report to Shareholders  covering  operations of Illinova for the year 1997. This
Information  Statement  and  accompanying  documents  are first being  mailed to
shareholders  on or  about  March  10,  1998. 
<PAGE>

Board  of  Directors  
Information Regarding the Board of Directors
The Board of Directors held 10 Board meetings in 1997.  Other than Mr.  Adorjan,
who joined the Board in August 1997,  and Mr. Berry,  who retired from the Board
December 1, 1997, all directors  attended at least 75% of the aggregate meetings
of the Board and  Committees of which they were members  during 1997.  The Board
has four standing committees:  the Audit Committee,  the Finance Committee,  the
Compensation and Nominating Committee and the Nuclear Operations Committee.

     The duties and members of the standing committees are:

Audit  Committee 
(1) Review with the  Chairman,  President  and Chief  Executive  Officer and the
independent  accountants  the scope and adequacy of Illinois  Power's  system of
internal  controls;  (2) review the scope and results of the annual  examination
performed by the independent accountants;  (3) review the activities of Illinois
Power's  internal  auditors;  (4) report its findings to the Board and provide a
line of communication  between the Board and both the internal  auditors and the
independent  accountants;  and (5) recommend to the Board the appointment of the
independent   accountants  and  approval  of  the  services   performed  by  the
independent accountants, considering their independence with regard thereto.

     The Audit Committee met three times during 1997.

     This Committee consists of the following  non-employee  directors ("Outside
Directors"):  Robert M. Powers, Chairman,  Richard R. Berry, C. Steven McMillan,
Sheli Z. Rosenberg, Walter M. Vannoy, and Marilou von Ferstel.

Finance Committee
(1) Review  management's cash flow forecasts,  financial forecasts and financing
program,  and make  recommendations  to the Board regarding the approval of such
plans; (2) review Illinois Power's banking  relationships,  short-term borrowing
arrangements,  dividend  policies,  arrangements  with the  transfer  agent  and
registrar, investment objectives and the performance of Illinois Power's pension
and other trust funds,  evaluate fund managers,  and make recommendations to the
Board  concerning  such matters;  (3) review  Illinois  Power's risk  management
programs,  including insurance coverage,  and make recommendations to the Board;
and (4) act in an advisory capacity to management,  the Board of Directors,  and
the Chairman,  President and Chief Executive  Officer on other financial matters
as they may arise.  

     The Finance Committee met three times during 1997.

     This Committee  consists of the following  members of the Board:  Walter D.
Scott,  Chairman,  J. Joe Adorjan,  Richard R. Berry,  Larry D. Haab,  C. Steven
McMillan, Sheli Z. Rosenberg, Marilou von Ferstel, and John D. Zeglis.

Compensation and Nominating  Committee 
(1) Review  performance and recommend  salaries plus other forms of compensation
of  elected  Illinois  Power  officers  and the Board of  Directors;  (2) review
Illinois  Power's  benefit  plans  for  elected   Illinova   officers  and  make
recommendations to the Board regarding any changes deemed necessary;  (3) review
with the Chairman,  President and Chief Executive Officer any  organizational or
other  personnel  matters;  and (4) recommend to the Board nominees to stand for
election as director to fill vacancies in the Board of Directors as they occur.

     The  Compensation  and  Nominating  Committee  will consider  shareholders'
recommendations  for  nominees for director  made  pursuant to timely  notice in
writing  addressed to the Chairman of the Committee at the executive  offices of
Illinois  Power.  The  recommendation  should include a full  description of the
qualifications and business and professional experience of the proposed nominees
and a statement of the nominees'  willingness to serve. To be timely, the notice
must be delivered to or mailed and received at the executive offices of Illinois
Power not less than 90 nor more than 120 days prior to the Annual Meeting.

     The Compensation and Nominating Committee met four times during 1997.

     This  Committee  consists of the  following  Outside  Directors:  Ronald L.
Thompson, Chairman, J. Joe Adorjan, C. Steven McMillan, Robert M. Powers, Walter
D. Scott, Marilou von Ferstel, and John D. Zeglis.

Nuclear Operations Committee 
(1) Review the safety, reliability and quality of nuclear operations; (2) review
the  effectiveness  of the  management  of  nuclear  operations;  (3) review the
strategic plan for nuclear operations;  (4) review various nuclear reports;  and
(5) report its findings to the Board.

     The Nuclear Operations Committee met four times during 1997.

     This Committee  consists of the following  members of the Board:  Walter M.
Vannoy,  Chairman,  Richard R. Berry, Larry D. Haab, Robert M. Powers, Walter D.
Scott, and Ronald L. Thompson.
<PAGE>

Board  Compensation  
The Outside  Directors of Illinois Power, all of whom also serve on the Board of
Illinova,  receive a total retainer fee of $18,000 per year for their service on
these  boards.  Outside  Directors  who also chair Board  Committees  receive an
additional  $2,000,  increased in February  1998 to $2,500,  per year  retainer.
Outside  Directors receive a grant of 650 shares of Illinova Common Stock on the
date  of each  Annual  Shareholders  Meeting,  representing  payment  in lieu of
attendance-based fees for all Board and Committee meetings to be held during the
subsequent  one-year  period.  Outside  Directors  elected to the Board  between
Annual Shareholders  Meetings are paid $850 for each Board and Committee meeting
attended prior to the first Annual Shareholders  Meeting after their election to
the Board.

     Illinova had a Retirement Plan for Outside Directors. Under this plan, each
Outside  Director who attained age 65 and served on the Board for a period of 60
or more consecutive  months was eligible for annual  retirement  benefits at the
rate of the annual  retainer fee in effect when the director  retired.  In 1996,
the Board of Directors  adopted a Comprehensive  Deferred Stock Plan for Outside
Directors,  replacing the Retirement  Plan.  Each former Outside  Director whose
right to receive the  retirement  benefit had vested  continues  to receive such
benefits  in  accordance  with the terms of the  Retirement  Plan.  All  Outside
Directors  serving at the time this new plan was adopted were granted a lump sum
amount based on the net present  value of these  benefits to them,  were they to
have retired under the Retirement  Plan,  based on the number of years they have
served on the Board but not to exceed 10. This dollar amount was converted  into
stock units, based on the then market value of Illinova Common Stock, and placed
into an  account.  The  value  of  these  stock  units  is to be paid out to the
director in cash on  termination  of service,  based on the then market value of
Illinova Common Stock, plus dividend equivalents, in a lump sum or installments.
In  addition,  each  Outside  Director  receives an annual  award of stock units
having  a  value  of  $6,000,  to be  paid to the  Outside  Director  in cash on
retirement,  at once or in  installments  as the  Director  may elect,  with the
amount of such payment  determined by  multiplying  the number of stock units in
the account times the then market value of Illinova Common Stock, and adding the
dividend equivalents attributable to such stock units.

     Pursuant to Illinova's Deferred  Compensation  Plan for Certain  Directors,
Outside  Directors  of  Illinois  Power may elect to defer all or any portion of
their fees and stock grants until  termination  of their  services as directors.
Such deferred  amounts are  converted  into stock units  representing  shares of
Illinova  Common  Stock  with the  value of each  stock  unit  based on the last
reported  sales  price  of  such  stock.  Additional  credits  are  made  to the
participating  director's  account in dollar amounts equal to the dividends paid
on the Common Stock which the director  would have  received if the director had
been the  record  owner of the  shares  represented  by stock  units,  and these
amounts are  converted  into  additional  stock  units.  On  termination  of the
participating directors'  services as directors,  payment of their deferred fees
and stock grants was made in shares of Illinova  Common Stock in an amount equal
to the aggregate number of stock units credited to their accounts.  The plan was
amended  in 1997 to  provide  for a payout in cash  instead  of shares of Common
Stock. Deferred amounts are still converted into stock units representing shares
of Common  Stock with the value of each  stock  unit based on the last  reported
sales  price  of  such  stock.  Payment  is  made  in  cash,  in a  lump  sum or
installments,  as soon as practical following a director's termination. The cash
paid on  termination  equals the number of stock  units times the share price at
the close of market on the last business day of the month preceding termination.
No other payments are made after service on the Board ceases.


Election of Directors  
Illinois  Power's entire Board of Directors is elected at each Annual Meeting of
Shareholders.   Directors   hold  office  until  the  next  Annual   Meeting  of
Shareholders or until their successors are elected and qualified.  At the Annual
Meeting a vote will be taken on a proposal to elect the 11  directors  nominated
by  Illinois  Power's  Board of  Directors.  The  names and  certain  additional
information  concerning  each  of the  director  nominees  is set  forth  on the
following  pages.  If any nominee  should  become unable to serve as a director,
another  nominee may be selected by the current  Board of  Directors.  Walter M.
Vannoy  normally  would have not been eligible for election as a director at the
Annual  Meeting of  Shareholders  pursuant to a Bylaw  provision  which mandates
retirement from Board service at age 70. Because there is a current need for his
nuclear expertise,  the Board of Directors has elected to waive this requirement
in Mr. Vannoy's case, and he has agreed to serve if elected.
<PAGE>

BOARD OF DIRECTORS

Name of Director Nominee, Age,                               Year in Which First
Business Experience and                                       Elected a Director
Other Information                                              of Illinois Power

J. Joe Adorjan, 59                                                          1997
Chairman  and Chief  Executive  Officer  of  Borg-Warner  Security  Corporation,
Chicago, Ill., a security systems services firm, since 1995. He was President of
Emerson  Electric  Company from 1993 to 1995. Prior to that, he was Chairman and
Chief Executive Officer of ESCO Electronics Corporation. He is a director of The
Earthgrains  Company,  ESCO Electronics  Corporation and Goss Graphics  Systems,
Inc. 

Larry D. Haab, 60                                                           1986
Chairman,  President,  and Chief  Executive  Officer of Illinova  since December
1993,  and of Illinois  Power since June 1991, and an employee of Illinois Power
since  1965.  He is a director  of First  Decatur  Bancshares,  Inc.;  The First
National Bank of Decatur; and Firstech, Incorporated.

C. Steven McMillan, 52                                                      1996
President,  Chief  Operating  Officer,  and  Director  of Sara Lee  Corporation,
Chicago, Ill., a global packaged food and consumer products company, since 1997.
He was  Executive  Vice  President of Sara Lee from 1993 to 1997 and Senior Vice
President-Strategy Development from 1986 to 1993. He is Chairman of the Board of
Electrolux Corporation.

Robert M. Powers, 66                                                        1984
From 1980 until  retirement in December 1988, Mr. Powers was President and Chief
Executive  Officer of A. E.  Staley  Manufacturing  Company,  Decatur,  Ill.,  a
processor of grain and oil seeds. He is a director of A. E. Staley Manufacturing
Company.

Sheli Z. Rosenberg, 56                                                      1997
President and Chief  Executive  Officer  since 1994 and General  Counsel 1980 to
1994 of Equity Group Investments, Inc., Chicago, Ill., a privately held business
conglomerate holding controlling  interests in nine publicly traded corporations
involved in basic manufacturing,  radio stations,  retail,  insurance,  and real
estate.  She is a director of American  Classic  Voyages  Company;  Quality Food
Centers, Inc.; Jacor Communications,  Inc.; Anixter International , Inc.; Equity
Office Properties Trust;  Equity Residential  Properties Trust; CVS Corporation;
and Manufactured Home Communities, Inc.

Walter D. Scott, 66                                                         1990
Professor of Management and Senior Austin Fellow,  J. L. Kellogg Graduate School
of  Management,  Northwestern  University,  Evanston,  Ill.,  since 1988. He was
Chairman of GrandMet  USA from 1984 to 1986 and  President  and Chief  Executive
Officer of IDS Financial Services from 1980 to 1984. He is a director of Chicago
Title and Trust Company, Chicago Title Insurance Company,  Neodesic Corporation,
Orval Kent Holding Company, Inc., and Intermatic Incorporated.

Joe J. Stewart, 59 
President of BWX  Technologies,  Inc.,  formerly The Babcock & Wilcox Government
Group, Lynchburg,  Va., a diversified energy equipment and services company, and
Executive  Vice  President  of  McDermott  International,  Inc.  (parent  of BWX
Technologies,  Inc.  and The  Babcock  & Wilcox  Company),  since  1995.  He was
President  and Chief  Operating  Officer  of The  Babcock & Wilcox  Company  and
Executive Vice President of McDermott International, Inc., from 1993 to 1995 and
Executive Vice President of the Power  Generation  Group of The Babcock & Wilcox
Company from 1987 to 1993.
<PAGE>

Ronald L. Thompson, 48                                                      1991
Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing  Co.,
Bowling Green,  Ohio, a  manufacturer  of automotive  parts,  since 1993. He was
President and Chief Executive Officer and a director of The GR Group,  Inc., St.
Louis,  Mo.,  from 1980 to 1993.  He is a director  of  Teachers  Insurance  and
Annuity Association, and Ryerson Tull.

Walter M. Vannoy, 70                                                        1990
Chairman until retirement in May 1995 and Chief Executive  Officer from May 1994
until  January  1995  of  Figgie  International,   Inc.,  Willoughby,   Ohio,  a
diversified  operating  company serving  consumer,  industrial,  technical,  and
service  markets  world-wide.  From  1980  to 1988 he was  President  and  Chief
Operating Officer,  The Babcock & Wilcox Company, and Vice Chairman of McDermott
International, Inc.

Marilou von Ferstel, 60                                                     1990
Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a
public relations firm in Chicago, Ill., from June 1990 until retirement in April
1997. She was Managing  Director and Senior Vice President of Hill and Knowlton,
Chicago, Ill., from 1981 to 1990. She is a director of Walgreen Company.

John D. Zeglis, 50                                                          1993
President of AT&T,  Basking Ridge, N.J., a diversified  communications  company,
since October 1997. He was Vice Chairman from June 1997 to October 1997,  Senior
Executive Vice President and General Counsel,  from 1995 to June 1997 and Senior
Vice President - General Counsel and Government Affairs from 1989 to 1995. He is
a director of the Helmerich & Payne Corporation.

Security  Ownership of Management
and Certain  Beneficial Owners 
The table below shows shares of Illinova Common Stock  beneficially  owned as of
January 31, 1998, by each director  nominee and executive  officers named in the
Summary  Compensation  Table.  All of Illinois  Power's Common Stock is owned by
Illinova. To the best of Illinois Power's knowledge,  no owner holds more than 5
percent of Illinois Power Preferred Stock.

                                     Number      Number of Stock
                                     of Shares   Units in Deferred
  Name of                          Beneficially    Compensation        Percent
Beneficial Owner                   Owned (1)(2)       Plans           of Class
J. Joe Adorjan                               0           0               (3)   
Larry D. Haab                           68,250           0               (3)   
C. Steven McMillan                       1,300         289               (3)   
Robert M. Powers                         8,550         289               (3)   
Sheli Z. Rosenberg                           0       1,539               (3)   
Walter D. Scott                          5,150         289               (3)   
Joe J. Stewart                               0           0               (3)   
Ronald L. Thompson                       3,677       3,275               (3)   
Walter M. Vannoy                         5,010         289               (3)   
Marilou von Ferstel                      4,420       1,603               (3)   
John D. Zeglis                           2,626       1,603               (3)   
Paul L. Lang                            21,216           0               (3)   
Larry F. Altenbaumer                    13,092           0               (3)   
John G. Cook                            11,894           0               (3)   
David W. Butts                           8,817           0               (3)   

     (1)  With sole voting and/or investment power.

     (2)  Includes  the  following  shares  issuable  pursuant to stock  options
          exercisable March 31, 1998: Mr. Haab,  56,900;  Mr. Lang,  17,800; Mr.
          Altenbaumer,  17,800;  Mr. Cook,  9,900; and Mr. Butts,  7,900. 

     (3)  No director or executive  officer owns any other equity  securities of
          Illinova or as much as 1% of the Common Stock.  As a group,  directors
          and  executive  officers of Illinova  and  Illinois  Power own 187,021
          shares of Common Stock (less than 1%).
<PAGE>

Executive  Compensation  
The  following  table  sets  forth a summary  of the  compensation  of the Chief
Executive Officer and the four other most highly compensated  executive officers
of Illinois Power for the years indicated.  The compensation  shown includes all
compensation paid for service to Illinois Power, its parent and subsidiaries.
<TABLE>

                                         Summary Compensation Table
                                                                                      Long-Term Compensation
                                          Annual Compensation                         Awards
                                                               Other       Restricted     Securities      All Other
                                                   Bonus       Annual      Stock Awards   Underlying    Compensation
Name and Principal Position     Year    Salary      (1)    Compensation       (2)           Options          (3)
<S>                             <C>    <C>        <C>        <C>           <C>             <C>             <C>      
Larry D. Haab                   1997   $514,952   $ 41,840   $ 16,557      $ 41,840        20,000 shs.     $   2,614
  Chairman, President and       1996    493,709     69,267     15,973        69,267        22,000 shs.         2,615
  Chief Executive Officer of    1995    472,250     91,144     19,088        91,144        20,000 shs.         2,550
  Illinova and Illinois Power

Paul L. Lang                    1997   $242,325   $ 10,602   $  8,305      $ 10,601         6,500 shs.      $  2,615
  Senior Vice President         1996    233,450     19,747      8,863        19,747         6,500 shs.         2,595
  of Illinois Power             1995    222,812     23,841      8,265        23,841         6,500 shs.         2,510

Larry F. Altenbaumer            1997   $232,048   $  8,992   $  9,521      $  8,992        6,500 shs.       $  1,985
  Chief Financial Officer,      1996    222,374     19,832      8,459        19,832        7,500 shs.          1,976
  Treasurer and Controller      1995    204,937     20,391      7,686        20,391        6,500 shs.          2,378
  of Illinova, and Senior
  Vice President and Chief
  Financial Officer of
  Illinois Power

John G. Cook                    1997   $203,413    $    -    $  7,642      $     -         6,000 shs.       $  2,575
  Senior Vice President         1996    196,474     16,293      7,409        16,293        6,500 shs.          2,575
  and former Chief Nuclear      1995    179,069     16,620      6,930        16,620        4,500 shs.          2,530
  Officer of Illinois Power

David W. Butts                  1997   $188,227   $  7,529   $  7,185      $  7,529        6,000 shs.       $  2,595
  President of Illinova         1996    181,402     17,314      7,350        17,314        6,500 shs.          2,595
  Energy Partners, formerly     1995    153,333     18,132      6,990        18,132        5,000 shs.          2,540
  Senior Vice President of
  Illinois Power
</TABLE>


     (1)  The amounts  shown in this column are the cash award portion of grants
          made to these individuals under the Executive  Incentive  Compensation
          Plan ("Compensation  Plan") for 1997, including amounts deferred under
          the Executive  Deferred  Compensation  Plan. See the Compensation Plan
          description in footnote (2) below.

     (2)  This  table  sets  forth   stock  unit   awards  for  1997  under  the
          Compensation  Plan.  One-half of each year's  award under this plan is
          converted  into stock units  representing  shares of  Illinova  Common
          Stock based on the closing  price of Common  Stock on the last trading
          day of the award year.  The other one-half of the award is cash and is
          included under Bonus in the Summary  Compensation  Table.  Stock units
          awarded  in  a  given  year,   together  with  cash  representing  the
          accumulated  dividend  equivalents on those stock units,  become fully
          vested after a three-year  holding  period.  Stock units are converted
          into cash  based on the  closing  price of  Common  Stock on the first
          trading day of the distribution  year.  Participants (or beneficiaries
          of deceased participants) whose employment is terminated by retirement
          on or after age 55, disability,  or death receive the present value of
          all unpaid awards on the date of such termination.  Participants whose
          employment   is  terminated   for  reasons   other  than   retirement,
          disability,  or death forfeit all unvested  awards.  In the event of a
          termination  of employment  within two years after a change in control
          of  Illinova,  without  good  cause or by any  participant  with  good
          reason, all awards of the participant become fully vested and payable.
          As of December 31, 1997,  named executive  officers were credited with
          the following total aggregate number of unvested stock units under the
          Compensation  Plan  since  its  inception,  valued on the basis of the
          closing  price of Common Stock on December 31, 1997:  Mr. Haab,  7,619
          units valued at $205,241; Mr. Lang, 2,044 units valued at $55,071; Mr.
          Altenbaumer,  1,862 units  valued at $50,151;  Mr.  Cook,  1,250 units
          valued at $33,685; Mr. Butts, 1,626 units valued at $43,787.  Although
          stock  units  have been  rounded,  valuation  is based on total  stock
          units, including partial shares.

     (3)  The amounts  shown in this column are Illinois  Power's  contributions
          under the Incentive Savings Plan (including the market value of shares
          of Illinova Common Stock at the time of allocation).
<PAGE>

     The following  tables  summarize  grants during 1997 of stock options under
Illinova's  1992  Long-Term  Incentive  Compensation  Plan  ("LTIC")  and awards
outstanding at year end for the  individuals  named in the Summary  Compensation
Table.
<TABLE>
<S>                   <C>                       <C>                    <C>                     <C>                 <C>    
           
                                         Option Grants In 1997
                                    Individual Grants
                       Number of Securities     % of Total Options
                        Underlying Options      Granted to Employees    Exercise or Base                                Grant Date
                        Granted (1)                   in 1997            Price Per Share (1)   Expiration Date     Present Value (2)
Larry D. Haab            20,000                         24%                 $26.125                2/12/2007             $107,200

Paul L. Lang              6,500                          8%                  26.125                2/12/2007               34,840

Larry F. Altenbaumer      6,500                          8%                  26.125                2/12/2007               34,840

John G. Cook              6,000                          7%                  26.125                2/12/2007               32,160
 
David W. Butts            6,000                          7%                  26.125                2/12/2007               32,160
</TABLE>


     (1)  Each option  becomes  exercisable on February 12, 2000. In addition to
          the  specified  expiration  date,  the  grant  expires  on  the  first
          anniversary of the recipient's  death and/or five years following date
          of  retirement,  and is not  exercisable  in the  event a  recipient's
          employment  terminates.  In the  event  of  certain  change-in-control
          circumstances,  the Compensation and Nominating  Committee may declare
          the option immediately exercisable.  The exercise price of each option
          is equal to the fair market  value of the Common  Stock on the date of
          the grant. Recipients shall also receive, on or shortly after February
          12, 2000, a target  performance  award,  determined by calculating the
          difference  between  the return  earned by  Illinova  on its  invested
          capital and its cost of capital (the  "spread"),  then  comparing this
          spread to that of a peer group and reducing or  increasing  the target
          award depending on Illinova's relative  performance,  but not reducing
          the payment  below zero.  The target award is equal to one-half of the
          mid-point  of  compensation   for  each  officer's   salary  grade  (a
          market-based   number)   times  a   percentage,   determined   by  the
          Compensation  and  Nominating  Committee.  In 1997  those  percentages
          ranged  between 20 and 45 percent.  At the  discretion of the Board of
          Directors,  the foregoing  payment may be made in the form of Illinova
          Common Stock of  equivalent  value based on the average New York Stock
          Exchange price of the stock during February 2000, or in cash.

     (2)  The  Grant  Date  Present   Value  has  been   calculated   using  the
          Black-Scholes  option  pricing  model.  Disclosure  of the Grant  Date
          Present  Value,  or the  potential  realizable  value of option grants
          assuming  5%  and  10%  annualized   growth  rates,   is  mandated  by
          regulation;   however,   Illinova  does  not   necessarily   view  the
          Black-Scholes  pricing methodology,  or any other present methodology,
          as a valid or  accurate  means of valuing  stock  option  grants.  The
          calculation  was  based on the  following  assumptions:  (i) As of the
          grant date, Illinova's calculated Black-Scholes ratio was .2248. After
          discounting  for  risk  of  forfeiture  at 3  percent  per  year  over
          Illinova's three-year vesting schedule, the ratio is reduced to .2052;
          (ii) An annual dividend yield on Illinova Common Stock of 4.11%; (iii)
          A  risk-free  interest  rate  of  6.57%,  based  on  the  yield  of  a
          zero-coupon  government  bond  maturing at the end of the option term;
          and (iv) Stock volatility of 19.54%.
<TABLE>
<S>                                        <C>                                             <C>   

                                     Aggregated Option and Fiscal Year-End Option Value Table
                                           Number of Securities Underlying Unexercised     Value of Unexercised In-the-Money
                                                  Options at Fiscal Year-End                  Options at Fiscal Year-End
Name                                              Exercisable/Unexercisable                   Exercisable/Unexercisable
Larry D. Haab                                      56,900 shs./62,000 shs.                         $237,414/$57,400

Paul L. Lang                                       17,800 shs./19,500 shs.                          $75,148/$18,655

Larry F. Altenbaumer                               17,800 shs./20,500 shs.                          $75,148/$18,655

John G. Cook                                        9,900 shs./17,000 shs.                          $43,634/$14,130

David W. Butts                                      7,900 shs./17,500 shs.                          $37,384/$13,100
</TABLE>
<PAGE>

Pension Benefits
Illinois Power  maintains a Retirement  Income Plan for Salaried  Employees (the
"Retirement  Plan")  providing  pension  benefits  for  all  eligible  salaried
employees.  In addition to the Retirement Plan,  Illinois Power also maintains a
nonqualified  Supplemental  Retirement  Income Plan for Salaried  Employees (the
"Supplemental  Plan") that covers certain  officers  eligible to participate in
the  Retirement  Plan and provides for payments  from general  funds of Illinois
Power of any monthly  retirement  income not payable under the  Retirement  Plan
because of benefit limits imposed by law or because of certain  Retirement  Plan
rules  limiting the amount of credited  service  accrued by a  participant. 

     The  following  table  shows the  estimated  annual  pension  benefits on a
straight life annuity basis payable upon  retirement  based on specified  annual
average  earnings  and  years  of  credited  service  classifications,  assuming
continuation of the Retirement Plan and  Supplemental  Plan and employment until
age 65. This table does not show, but any actual pension benefit  payments would
be subject to, the Social Security offset. 

                                  Estimated Annual Benefits (rounded)
            Annual      15 Yrs.     20 Yrs.     25 Yrs.     30 Yrs.     35 Yrs.
            Average     Credited    Credited    Credited    Credited    Credited
            Earnings    Service     Service     Service     Service     Service
           $125,000     $37,500    $ 50,000     $62,500     $75,000     $87,500
            150,000      45,000      60,000      75,000      90,000     105,000
            175,000      52,500      70,000      87,500     105,000     122,500
            200,000      60,000      80,000     100,000     120,000     140,000
            250,000      75,000     100,000     125,000     150,000     175,000
            300,000      90,000     120,000     150,000     180,000     210,000
            350,000     105,000     140,000     175,000     210,000     245,000
            400,000     120,000     160,000     200,000     240,000     280,000
            450,000     135,000     180,000     225,000     270,000     315,000
            500,000     150,000     200,000     250,000     300,000     350,000
            550,000     165,000     220,000     275,000     330,000     385,000
            600,000     180,000     240,000     300,000     360,000     420,000
            650,000     195,000     260,000     325,000     390,000     455,000
            700,000     210,000     280,000     350,000     420,000     490,000
     The earnings used in determining pension benefits under the Retirement Plan
are the participants'  regular base  compensation,  as set forth under Salary in
the Summary Compensation Table.

     At December 31,  1997,  for  purposes of both the  Retirement  Plan and the
Supplemental Plan, Messrs. Haab, Lang, Altenbaumer, Cook and Butts had completed
32, 16, 25, 23 and 19 years of credited service, respectively.
<PAGE>

Employee Retention Agreements
Illinova  has  entered  into  Employee  Retention  Agreements  with  each of its
executive officers and with officers of its subsidiaries.  Under each agreement,
the officer  would be entitled to receive a lump sum cash  payment if his or her
employment were terminated by Illinova  without good cause or voluntarily by the
officer  for good  reason  within  two years  following  a change in  control of
Illinova  (as  defined  in the  Agreement)  or  terminated  prior to a change of
control  at the  request  of a  potential  acquirer.  The amount of the lump sum
payment would be equal to (1) 36 months' salary at the greater of the officer's
salary  rate in effect on the date the change in control  occurred or the salary
rate in effect on the date the officer's  employment  with Illinova  terminated;
plus (2) three times the latest  bonus  earned by the  officer  during the three
calendar years  preceding  termination of employment.  Under the agreement,  the
officer would continue, after any such termination of employment, to participate
in and receive  benefits under other benefit plans of Illinova  and/or  Illinois
Power.  Such coverage  would  continue for 36 months  following  termination  of
employment,  or, if earlier, until the officer reached age 65 or was employed by
another employer;  provided that, if the officer was 50 years of age or older at
the time of such  termination,  then coverage  under health,  life insurance and
similar  welfare plans would  continue until the officer became 55 years of age,
at which time he or she would be eligible to receive  the  benefits  extended to
the  employees  of Illinova  and its  subsidiaries  who elect early  retirement.

Compensation  and  Nominating  Committee  
Report  on  Officer  Compensation  
The seven-member Compensation and Nominating Committee of the Board of Directors
(the  "Committee") is composed  entirely of Outside  Directors.  The Committee's
role  includes an assessment of  Illinova's  and Illinois  Power's  Compensation
Strategy,  a  review  of  the  performance  of  the  elected  officers  and  the
establishment  of  specific  officer  salaries  subject to Board  approval.  The
Committee establishes  performance goals for the officers under the Compensation
Plan,  approves  payments made pursuant to the Compensation  Plan and recommends
grants  under  the  Long-Term  Incentive   Compensation  Plan  approved  by  the
shareholders in 1992. The Committee also reviews other forms of compensation and
benefits making  recommendations  to the Board on changes whenever  appropriate.
The  Committee  carries  out  these  responsibilities  with  assistance  from an
executive  compensation  consulting firm and with input from the Chief Executive
Officer and management as it deems appropriate.

Officer Compensation Philosophy
Illinova's  compensation philosophy reflects a commitment to compensate officers
competitively  with other  companies  while  rewarding  executives for achieving
levels of  operational  and  financial  excellence  consistent  with  continuous
improvement.  Illinova's  current  compensation  policy  is to  provide  a total
compensation  opportunity  targeted to the median of all utilities in the Edison
Electric  Institute (EEI) database.  All but one of the electric power companies
in the S&P Utilities  Index are also in the EEI  database.  The S&P index covers
the  industry  broadly  including  electric  and gas  utilities.  After  careful
consideration,  the  Committee  has decided to maintain a separate  compensation
peer group  limited to electric or  combination  electric and gas  companies for
reference purposes. While the philosophy described above was used by Illinova in
1997 as an indicator of future utility pay practices,  as the industry  migrates
toward deregulation and diversification, it is anticipated that the company will
broaden its competitive reference beyond the regulated utility industry in order
to compete sufficiently for talent in the deregulated environment of the future.
<PAGE>

     The  compensation  program for  officers  consists of base  salary,  annual
incentive and long-term  incentive  components.  The  combination of these three
elements  balances short- and long-term  business  performance  goals and aligns
officer   financial   rewards  with  those  of  Illinova's   shareholders.   The
compensation  program is  structured  so that,  depending  on the salary  level,
between 25 and 45 percent of an officer's total compensation  target is composed
of incentive compensation.

Base Salary Plan 
The Committee  determines  base salary ranges for  executive  officers  based on
competitive  pay  practices  of  similarly  sized  utilities.  Officer  salaries
correspond to approximately the median of the companies in the compensation peer
group.  Individual  increases  are  based  on  several  factors,  including  the
officer's  performance during the year, the relationship of the officer's salary
to the market  salary  level for the position and  competitive  industry  salary
increase practices.

Annual Incentive  Compensation  Plan 
Annual  incentive  awards are earned based on the achievement of specific annual
financial and  operational  goals by the Illinois Power officer group as a whole
and consideration of the officer's individual contribution. If payment is earned
under  this  Plan,  one-half  of the bonus is  payable  in cash  during the year
following the award year,  and one-half is credited to the  participants  in the
form of Common Stock units,  the number of which is  determined by dividing half
of the earned bonus amount by the closing  price of the Common Stock on the last
trading day of the award year.  The officer's  interest in the stock units vests
at the end of the three-year period, which begins the year after the award year.
The officer  receives this award in cash equal to (1) the closing stock price on
the first  trading day of the  distribution  year times the number of units held
plus (2)  dividend  equivalents  that would have been  received if the stock had
actually been issued.  Maximum awards under the plan may be up to 150 percent of
target; threshold awards are 50 percent of target.

     For Illinois Power officers,  1997 awards under the  Compensation  Plan are
based on  achievement in the  performance  areas:  earnings per share,  customer
satisfaction,  safety and employee  teamwork,  cost  management and  shareholder
value added. Up to 50 percent of the awarded amount is based on an assessment of
the individual officer's performance during the year.

     Awards shown under Bonus in the Summary  Compensation Table for performance
during 1997 were based on achievement of officers'  individual goals. There were
no payouts for the identified performance areas.
<PAGE>
    
Long-Term Incentive Compensation (LTIC) Plan
     Awards  under the LTIC plan are based on corporate  performance  as well as
individual  officers'  contributions  to  corporate  performance  subject to the
review of this Committee.  In 1997, it was determined that awards under the LTIC
plan be delivered in two components.  One-half of each officer's LTIC plan award
is  delivered in the form of stock  options  granted at fair market  value.  The
stock  options  granted to the  officers  for 1997  represent  an award based on
Illinova,  Illinois  Power,  and  individual  performance  as  evaluated  by the
Chairman and reviewed by the Committee. The other half of the LTIC plan award is
distributed to officers in cash based upon  Illinova's  Shareholder  Value-Added
(SVA) performance relative to a peer group of utility companies,  as measured in
overlapping  three-year periods. SVA measures Illinova's return on the Company's
weighted  average  cost of capital.  SVA  performance  at the median of the peer
group will  result in target  award  levels.  Performance  above the median will
result  in  payouts  greater  than  target to a  maximum  of two  times  target;
performance  significantly  below the median  results in no payouts.  Since 1996
represented the first year of the SVA plan's first three-year measurement cycle,
no awards are due to be paid out under the plan until 1999.

CEO  Compensation
     Larry Haab became Chairman,  President, and Chief Executive Officer ("CEO")
of Illinois Power on June 12, 1991, and Chairman,  President and Chief Executive
Officer  of  Illinova  in  December   1993.   Illinova  based  Mr.  Haab's  1997
compensation on the policies and plans described above.

     The  Committee  invokes  the  active  participation  of all  non-management
directors in reviewing Mr. Haab's  performance  before it makes  recommendations
regarding his  compensation.  The Committee is responsible for administering the
processes for completing this review.  The process starts early in the year when
the Board of Directors  works with Mr. Haab to establish his personal  goals and
short- and long-term  strategic  goals for Illinova and Illinois  Power.  At the
conclusion of the year, Mr. Haab reviews his performance with the non-management
directors.  The  Committee  oversees  this  review and  recommends  to the Board
appropriate  adjustments to compensation.  In setting the CEO's salary for 1997,
the Committee,  with the participation of all Outside Directors  determined that
Mr. Haab had provided very strong leadership in promoting electric  deregulation
in the State of Illinois. The continuing outage at the Clinton Power Station was
a major  setback.  Significant  progress was made in advancing  other  strategic
objectives of the Company.

     The 1997 Annual Incentive  Compensation  Plan award for the Chief Executive
Officer was calculated consistent with the determination of awards for all other
Illinois Power officers.  Under the terms of the plan, one-half of the award was
paid in cash and one-half  was  converted to 1,539 stock units which vest over a
three-year period as described above.

     The  20,000  option  shares  granted  to the CEO  reflect  the  Committee's
recognition  of this work in directing  Illinova and Illinois  Power towards its
long-term objectives.

Compensation and Nominating  Committee  
Ronald L.  Thompson,  Chairman 
J. Joe  Adorjan 
C. Steven McMillan  
Robert M. Powers  
Walter D. Scott 
Marilou von Ferstel  
John D. Zeglis
<PAGE>

Independent Auditors 
The Board of Directors of Illinois  Power has selected  Price  Waterhouse LLP as
independent  auditors  for the Company for 1998. A  representative  of that firm
will be present at the Annual  Meeting and  available to make a statement and to
respond to questions.

Other Matters  
Illinova's  1997 Summary  Annual Report to  Shareholders  was mailed to Illinois
Power's  shareholders  commencing on or about March 10, 1998. Copies of Illinois
Power's Annual Report on Form 10-K will be available to  shareholders  after its
filing with the Securities and Exchange  Commission on or before March 31, 1998.
Requests  should be  addressed  to  Investor  Relations,  G-21,  Illinois  Power
Company, 500 South 27th Street, Decatur, Illinois 62521-2200.

     Any proposal by a  shareholder  to be presented at the next Annual  Meeting
must be received at Illinois Power's  executive  offices not later than November
12, 1998.

Other Business  
Management does not know of any matter which will be presented for consideration
at the Annual  Meeting  other than the  matters  described  in the  accompanying
Notice of Annual Meeting.

By Order of the Board of Directors,

Leah Manning Stetzner,
Vice President, General Counsel and Corporate Secretary
Decatur, Illinois
March 10, 1998
<PAGE>

APPENDIX: 1997 ANNUAL REPORT TO SHAREHOLDERS

Table of Contents
Management's Discussion and Analysis             a-2
Responsibility for Information                   a-10
Report of Independent Accountants                a-10
Consolidated Statements of Income                a-11
Consolidated Balance Sheets                      a-12
Consolidated Statements of Cash Flows            a-13
Consolidated Statements of Retained Earnings     a-13
Notes to Consolidated Financial Statements       a-14
Selected Consolidated Financial Data             a-32
Selected Illinois Power Company Statistics       a-33

Abbreviations Used Throughout this Report
AFUDC          Allowance for Funds Used
               During Construction
Baldwin        Baldwin Power Station
Clinton        Clinton Power Station
DOE            Department of Energy
EITF           Emerging Issues Task Force of the
               Financial Accounting Standards Board
EMF            Electric and Magnetic Fields
EPS            Earnings Per Share
ESOP           Employees' Stock Ownership Plan
FAS            Statement of Financial
               Accounting Standards
FASB           Financial Accounting Standards Board
FERC           Federal Energy Regulatory Commission
Fuel Company   Illinois Power Fuel Company
HB 362         House Bill 362, An Act in Relation
               to the Competitive Provision of
               Utility Services
ICC            Illinois Commerce Commission
Illinova       Illinova Corporation
IP             Illinois Power Company             
IPFI           Illinois Power Financing I         
ISA            Integrated Safety Assessment       
kw             Kilowatt                           
kwh            Kilowatt-Hour                      
MGP            Manufactured-Gas Plant             
MIPS           Monthly Income Preferred Securities
MW             Megawatt                           
MWH            Megawatt-Hour                      
NOPR           Notice of Proposed Rulemaking      
NOx            Nitrogen Oxide                     
NRC            Nuclear Regulatory Commission      
PCA            Power Coordination Agreement       
PECO           PECO Energy Company                
S&P            Standard & Poor's                  
SO2            Sulfur Dioxide                     
Soyland        Soyland Power Cooperative, Inc.    
TOPrS          Trust Originated Preferred Securities
UFAC           Uniform Fuel Adjustment Clause     
UGAC           Uniform Gas Adjustment Clause      
U.S. EPA       United States Environmental        
               Protection Agency                  
Vermilion      Vermilion Power Station            
Wood River     Wood River Power Station           
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS

In this report, we refer to the Consolidated Financial Statements, related Notes
to Consolidated  Financial Statements,  Selected Consolidated Financial Data and
Selected Statistics for information  concerning  consolidated financial position
and results of operations. This report contains estimates, projections and other
forward-looking statements that involve risks and uncertainties.  Actual results
or outcomes could differ  materially as a result of such  important  factors as:
the  outcome  of  state  and  federal  regulatory   proceedings   affecting  the
restructuring of the electric and gas utility  industries;  the impacts new laws
and regulations relating to restructuring, environmental, and other matters have
on IP; the effects of increased competition on the utility businesses;  risks of
owning and  operating  a nuclear  facility;  changes in prices and cost of fuel;
construction and operation  risks;  and increases in financing  costs.  Below is
discussion of the factors having  significant  impact on consolidated  financial
position and results of operations since January 1, 1995. 

     Illinois Power Company is a subsidiary of Illinova  Corporation,  a holding
company.  Illinova  Generating  Company,  Illinova  Energy  Partners,  Inc.  and
Illinova  Insurance  Company are wholly owned  subsidiaries  of Illinova.  IP is
engaged  in the  generation,  transmission,  distribution  and sale of  electric
energy and the distribution, transportation and sale of natural gas in the State
of Illinois.

Open Access and Wheeling 
On March 29, 1995,  the FERC issued a NOPR  initiating  the process of mandating
non-discriminatory  open access to public  utility  transmission  facilities  at
cost-based rates. Transmission of electricity for a reseller or redistributor of
energy is called  wholesale  wheeling.  Transmission  of electricity for end-use
customers is known as retail wheeling.

     On April 24, 1996,  FERC issued  Orders 888 and 889 which  established  the
Final Rule resulting  from the NOPR.  The Orders became  effective July 9, 1996.
The  Rule  requires  all  public  utilities  under  FERC  jurisdiction  that own
transmission  facilities to file  transmission  service tariffs that comply with
Pro Forma Tariffs attached to the Orders.  FERC also requires that all wholesale
sales  made by a  utility  provide  for  transmission  of the  power  under  the
prescribed terms and conditions. IP made a compliance filing as required on July
9, 1996, which has been accepted by FERC.

     Public  utilities  serving  customers at retail are not  required,  at this
time,  to abide by  FERC-mandated  terms and  conditions.  FERC does not require
public  utilities to give retail  customers access to alternate energy suppliers
or direct transmission service.

     The  move  to  open  access  transmission   service  likely  will  increase
competition in the wholesale  energy  market,  but this alone is not expected to
have a significant financial impact.

Competition  
On December 16, 1997,  Illinois  Governor  Edgar  signed  electric  deregulation
legislation.  HB 362 guarantees IP's residential customers a 15 percent decrease
in base electric  rates  beginning  August 1, 1998,  and an additional 5 percent
decrease  effective on May 1, 2002. The rate decreases are expected to result in
revenue  reductions  of  approximately  $40 million in 1998,  approximately  $80
million in each of the years 1999 through 2001 and approximately $100 million in
2002, based on current consumption. Customers with demand greater than 4 MW at a
single site will be free to choose their electric generation  suppliers ("direct
access") starting October 1999. Customers with at least 10 sites which aggregate
at least 9.5 MW in total demand also will have direct  access  starting  October
1999.  Direct access for the remaining  non-residential  customers will occur in
two  phases:  customers  representing  one-third  of the  remaining  load in the
non-residential  class in October  1999 and  customers  representing  the entire
remaining  non-residential  load on December  31,  2000.  Direct  access will be
available  to all  residential  customers in May 2002.  IP remains  obligated to
serve all customers  who continue to take service from IP at tariff  rates,  and
remains obligated to provide delivery service to all at regulated rates.

     Although the specified  residential rate reductions and the introduction of
direct access will lead to lower electric service  revenues,  HB 362 is designed
to protect the  financial  integrity of electric  utilities  in three  principal
ways: 

     1)   Departing customers are obligated to pay transition charges,  based on
          the utility's lost revenue from that customer,  adjusted to deduct: 1)
          delivery  charges  the  utility  will  continue  to  receive  from the
          customer,  and 2) the  market  value of the  freed-up  energy net of a
          mitigation factor,  which is a percentage  reduction of the transition
          charge amount.  The mitigation factor is designed to provide incentive
          for  management  to continue cost  reduction  efforts and generate new
          sources of revenue.

     2)   Utilities are provided the  opportunity  to lower their  financing and
          capital costs through the issuance of "securitized" bonds; and

     3)   Utilities  are  permitted  to seek rate  relief in the event  that the
          change  in law  leads  to  their  return  on  equity  falling  below a
          specified minimum based on a prescribed test.
<PAGE>

     The extent to which revenues are lowered will depend on a number of factors
including future market prices for wholesale and retail energy,  and load growth
and demand levels in the current IP service territory.  The impact on net income
will  depend on,  among  other  things,  the amount of  revenues  earned and the
ongoing costs of doing business.

     In 1996, IP received approval from both the ICC and FERC to conduct an open
access  experiment  beginning  in 1996 and  ending on  December  31,  1999.  The
experiment  allows  certain  industrial  customers to purchase  electricity  and
related services from other sources.  Currently,  17 customers are participating
in the experiment.  Since  inception,  the experiment has cost IP  approximately
$11.2  million in lost revenue net of avoided  fuel cost and variable  operating
expenses.  This loss was  partially  offset by selling  the  surplus  energy and
capacity on the open market and by $2.7 million in transmission service charges.

Accounting Matters 
Prior  to  the  passage  of HB  362,  IP  prepared  its  consolidated  financial
statements in  accordance  with FAS 71,  "Accounting  for the Effects of Certain
Types of  Regulation."  Reporting  under FAS 71 allows  companies  whose service
obligations  and prices are regulated to maintain on their balance sheets assets
representing  costs they expect to recover from customers,  through inclusion of
such  costs in their  future  rates.  In July  1997,  the  EITF  concluded  that
application of FAS 71 accounting should be discontinued at the date of enactment
of  deregulation   legislation  for  business  segments  for  which  a  plan  of
deregulation has been  established.  The EITF further  concluded that regulatory
assets and  liabilities  that  originated  in the portion of the business  being
deregulated should be written off unless their recovery is specifically provided
for through future cash flows from the regulated portion of the business.

     Because HB 362 provides  for  market-based  pricing of electric  generation
services,  IP discontinued  application of FAS 71 for its generating segment. IP
evaluated its regulatory  assets and liabilities  associated with its generation
segment and  determined  that  recovery of these costs was not probable  through
rates charged to transmission and distribution customers,  the regulated portion
of the business.

     IP wrote  off  generation-related  regulatory  assets  and  liabilities  of
approximately  $195 million (net of income  taxes) in December  1997.  These net
assets  related to previously  incurred costs that were expected to be collected
through  future  revenues,  including  deferred  costs for Clinton,  unamortized
losses on reacquired debt, recoverable income taxes and other generation-related
regulatory  assets.  At December 31, 1997,  IP's net  investment  in  generation
facilities  was $3.5 billion and was  reflected in "Utility  Plant,  at Original
Cost" on IP's balance sheet.

     In addition,  IP evaluated  its  generation  segment plant  investments  to
determine if they had been impaired as defined in FAS 121,  "Accounting  for the
Impairment of Long-Lived  Assets and Long-Lived  Assets to Be Disposed Of." This
evaluation  determined  that future  revenues  were expected to be sufficient to
recover the costs of its generation  segment plant  investments and as a result,
no plant  write-downs were necessary.  However,  ultimate  recovery depends on a
number of factors and variables  including market conditions and IP's ability to
operate its generation assets efficiently.

     The  provisions  of HB 362 allow an  acceleration  in the rate at which any
utility-owned  assets are expensed without  regulatory  approval,  provided such
charges are consistent with generally accepted accounting principles. Under this
legislation,  up to an aggregate of $1.5 billion in  additional  expense for the
generation-related  assets  could be  accelerated  through  the year 2008.  This
reduction in the net book value of IP's  generation-related  assets  should help
position IP to operate  competitively  and  profitably in the changing  business
environment.  This accelerated charge would have a direct impact on earnings but
not on cash flows.

     The FASB  continues to review the  accounting  for  liabilities  related to
closure and removal of long-lived assets, including decommissioning. See "Note 3
- Commitments and Contingencies" for a discussion of decommissioning.

     See "Note 1 - Summary of Significant  Accounting Policies" for a discussion
of other accounting issues.

Regulatory  Matters  
In September  1996,  a leak in a  recirculation  pump seal caused IP  operations
personnel to shut down Clinton. Clinton has not resumed operation.

     In  January  and again in June 1997,  the NRC named  Clinton  among  plants
having a trend of declining  performance.  In June 1997, IP committed to conduct
an ISA to thoroughly  assess Clinton's  performance.  The ISA was conducted by a
team of 30  individuals  with  extensive  nuclear  experience and no substantial
previous  involvement  at Clinton.  Their report  concluded  that the underlying
reasons for the  performance  problems at Clinton  were  ineffective  leadership
throughout the  organization in providing  standards of excellence,  complacency
throughout the organization,  barrier weaknesses and weaknesses in teamwork.  In
late October, a team commissioned by the NRC performed an evaluation to validate
the ISA results.  In December,  this team concluded that the findings of the ISA
accurately characterized Clinton's performance deficiencies and their causes.
<PAGE>

     On January 5, 1998,  IP and PECO  announced an  agreement  under which PECO
will provide  management  services  for Clinton.  Although a PECO team will help
manage the plant, IP will continue to maintain the operating license for Clinton
and retain  ultimate  oversight of the plant.  PECO employees will assume senior
positions  at  Clinton,  but the  plant  will  remain  primarily  staffed  by IP
employees.  IP made this  decision  based on a belief  that  bringing  in PECO's
experienced  management team would be the most efficient way to get Clinton back
on line and operating at a superior level as quickly as possible.

     On January 21,  1998,  the NRC placed  Clinton on its Watch List of nuclear
plants  that  require  additional  regulatory  oversight  because  of  declining
performance.  Twice a year the NRC  evaluates the  performance  of nuclear power
plants in the United  States  and  identifies  those  which  require  additional
regulatory  oversight.  Once  placed on the Watch List a plant must  demonstrate
consistent improved performance before it is removed from the list. The NRC will
monitor Clinton more closely than plants not on the Watch List. This may include
increased inspections, additional required documentation,  NRC-required approval
of processes and procedures, and higher-level NRC oversight.

     The NRC has advised IP that it must  submit a written  report to the NRC at
least two weeks  prior to  restarting  Clinton,  giving  the  agency  reasonable
assurance  that IP's actions to correct  recurring  weaknesses in the corrective
action program have been effective. After the report is submitted, the NRC staff
plans to meet with IP's management to discuss the plant's readiness for restart.

     In March  1997,  the NRC issued an order  approving  transfer  to IP of the
Clinton  operating  license related to Soyland's 13.2% ownership,  in connection
with the transfer  from  Soyland to IP of all of Soyland's  interest in Clinton.
Soyland's  title to the plant and directly  related  assets such as nuclear fuel
was  transferred  to IP in May 1997.  Soyland's  nuclear  decommissioning  trust
assets were  transferred to IP in May 1997,  consistent  with IP's assumption of
all  of   Soyland's   ownership   obligations   including   those   related   to
decommissioning.

     The FERC  approved an amended PCA between IP and Soyland in July 1997.  The
amended PCA  obligates  Soyland to purchase all of its capacity and energy needs
from IP for at  least  10  years.  The  amended  PCA  provides  that a  contract
cancellation  fee will be paid by  Soyland  to IP in the  event  that a  Soyland
Cooperative  member  terminates  its membership  from Soyland.  On May 31, 1997,
three distribution  cooperative  members terminated  membership by buying out of
their long-term wholesale power contracts with Soyland.  This action resulted in
Soyland  paying a fee of $20.8  million  to IP in June 1997 to  reduce  its base
capacity charges.  Fee proceeds of $2.9 million were used to offset the costs of
acquiring  Soyland's share of Clinton with the remaining $17.9 million  recorded
as interchange  revenue.  In December 1997, Soyland signed a letter of intent to
pay in advance the remainder of its base capacity charges in the PCA. The fee of
approximately $70 million will be deferred and recognized as interchange revenue
over the initial term of the PCA. The payment is contingent on Soyland obtaining
the necessary financing and regulatory approvals in 1998.

     In September 1997, the ICC approved a petition filed by IP which stipulates
customers will not be charged for certain additional costs of energy incurred as
a result of Clinton being out of service.  IP did not collect from its customers
$36.3 million for higher-cost replacement power in 1997. IP will forego recovery
of additional  fuel costs as the Clinton outage  continues into 1998.  Under the
petition,  fuel  costs  charged  to  customers  will be no higher  than  average
1995-1996  levels until  Clinton is back in service  operating at least at a 65%
capacity factor for two consecutive months.

     Under HB 362, IP may choose to eliminate application of the UFAC. IP's base
rates will still  include a component  for some level of recovery of fuel costs,
but IP  would  not be able to pass  through  to  customers  increased  costs  of
purchasing fuel,  emission  allowances,  or replacement power. On elimination of
the UFAC,  base rates will include a fixed  fuel-cost  factor  equivalent to the
average  1995 -  1996  fuel  cost  levels.  Future  recovery  of fuel  costs  is
uncertain,  as IP will  decrease base electric  rates to  residential  customers
beginning  in August 1998 and  certain  customers  will be free to choose  their
electric  generation  suppliers  beginning in October 1999.  The extent to which
fuel costs are recovered will depend on a number of factors including the future
market prices for wholesale and retail energy,  when Clinton returns to service,
and whether IP elects to eliminate the UFAC.

Year 2000
In November 1996, IP deployed a project team to coordinate  the  identification,
evaluation,  and  implementation of changes to computer systems and applications
necessary to achieve a year 2000 date  conversion with no effect on customers or
disruption  to business  operations.  

     These  actions are necessary to ensure that systems and  applications  will
recognize  and  process  coding  for the year 2000 and  beyond.  Major  areas of
potential  business impact have been identified and initial  conversion  efforts
are  underway.  IP also is  communicating  with third  parties with whom it does
business to ensure  continued  business  operations.  The cost of achieving year
2000 compliance is estimated to be at least $14 million through 1999.

     Contingency  plans for operating without year 2000 compliance have not been
developed.  Such  activity  will  depend  on  assessment  of  progress.  Project
completion is planned for the fourth quarter of 1999.
<PAGE>

Enhanced  Retirement 
In December  1994, IP announced  plans for  voluntary  enhanced  retirement  and
severance  programs.  During the fourth quarter of 1995, 727 employees  accepted
enhanced  retirement or severance  under these programs.  The combined  enhanced
retirement  and  severance  programs  generated  a pretax  charge of $38 million
against fourth quarter 1995 earnings.

Consolidated  Results  of  Operations
Overview 
Earnings  (loss)  applicable to common stock were $(65)  million for 1997,  $206
million  for 1996 and $156  million  for 1995.  The  decrease  in 1997  earnings
compared  to  1996  was due  primarily  to the  extraordinary  item  related  to
discontinued  application of FAS 71 for the generation segment, higher operation
and  maintenance  expenses due to Clinton,  higher power  purchased costs due to
Clinton  and Wood  River  outages  and an  increase  in  uncollectible  accounts
expense.  The  increase  in 1996 net income over 1995 was due  primarily  to the
one-time  charge in 1995 for the enhanced  retirement  and  severance  programs,
lower  operations  expense due to the  employment  decrease and lower  financing
costs.  The 1995 results  include  $(22.8)  million  net-of-tax for the enhanced
retirement  and severance  programs and $(3.5)  million for the carrying  amount
under consideration paid for preferred stock redeemed in December 1995.

     Regulators  historically  have determined IP's rates for electric  service,
the ICC at the  retail  level  and  the  FERC at the  wholesale  level.  The ICC
determines IP's rates for gas service. These rates have been designed to recover
the cost of service and allow  shareholders  the opportunity to earn a fair rate
of  return.   As  described  under   "Competition"   above,   Illinois  electric
deregulation  legislation  phases  in a  competitive  marketplace  for  electric
generation  while  maintaining   cost-based  regulation  for  electric  delivery
services  and gas service,  protecting  the  financial  integrity of the company
during the transition period.  Future electric and natural gas sales,  including
interchange  sales, will continue to be affected by an increasingly  competitive
marketplace,  changes  in the  regulatory  environment,  increased  transmission
access,   weather  conditions,   competing  fuel  sources,   interchange  market
conditions,  plant  availability,  fuel cost recoveries,  customer  conservation
efforts and the overall economy.

Electric Operations For the years 1995 through 1997, electric revenues including
interchange  increased  3.7% and the gross  electric  margin  decreased  6.4% as
follows:

(Millions of dollars)                        1997           1996           1995
Electric revenues                        $  1,244.4     $  1,202.9   $  1,252.6
Interchange revenues                          175.6          137.6        116.3
Fuel cost & power
  purchased                                  (450.3)        (313.3)      (333.4)
  Electric margin                        $    969.7     $  1,027.2   $  1,035.5

The components of annual changes in electric revenues were:

(Millions of dollars)                        1997            1996           1995
Price                                      $ (11.5)       $  (7.2)       $  13.3
Volume and other                               9.7            6.4           42.7
Fuel cost recoveries                          43.3          (48.9)          19.1
  Revenue increase
  (decrease)                               $  41.5        $ (49.7)       $  75.1

1997 Electric revenues excluding interchange sales increased 3.4%, primarily due
to an increase  in  revenues  under the UFAC and  increased  wheeling  revenues.
Interchange  revenues  increased 27.6% due to the receipt of an opt-out fee from
Soyland per the amended PCA and increased interchange activity.  Electric margin
decreased  primarily  due to  increased  power  purchased  costs as a result  of
outages at the nuclear and fossil facilities.

1996 Electric revenues excluding interchange sales decreased 4.0%, primarily due
to reduction in revenues  under the UFAC.  Volume changes by customer class were
insignificant,  as kwh sales to ultimate consumers (excluding  interchange sales
and wheeling) decreased .3%. Interchange revenues increased 18.3% as a result of
higher plant availability in the first half of the year.
<PAGE>

1995 The 6.4% increase in electric revenues was primarily due to a 1.9% increase
in kwh sales to ultimate consumers  (excluding  interchange sales and wheeling).
Volume  increases  resulted  from  higher  residential  sales  (4.8%) and higher
commercial  sales  (8.2%)  due  to  an  improving   economy  and  warmer  summer
temperatures  compared to 1994.  Industrial sales remained essentially unchanged
from 1994.  Interchange  revenues  increased  $6.3 million (5.8%) as a result of
increased sales opportunities.

     The cost of meeting IP's system  requirements  was  reflected in fuel costs
for  electric  plants and power  purchased.  Changes in these costs are detailed
below:

(Millions of dollars)                           1997         1996          1995
Fuel for electric plants
  Volume and other                          $   (37.7)    $   15.4     $    9.8
  Price                                          (8.5)       (12.0)       (35.5)
  Emission allowances                            12.3           .8         18.5
  Fuel cost recoveries                           18.2        (30.0)        14.5
                                                (15.7)       (25.8)         7.3
Power purchased                                 152.7          5.7          6.9
  Total increase (decrease)                 $   137.0     $  (20.1)    $   14.2
Weighted average system
  generating fuel cost
  ($/MWH)                                   $    12.06    $   11.01    $   11.41

     System  load  requirements,  generating  unit  availability,  fuel  prices,
purchased power prices, resale of energy to other utilities,  emission allowance
costs and fuel cost recovery through UFAC caused changes in these costs.

Changes in factors affecting the cost of fuel for electric generation are below:

                                          1997           1996          1995
Increase (decrease)
  in generation                          (25.4)%         5.4%           .7%
Generation mix
  Coal and other                          100%            78%           73%
  Nuclear                                   0%            22%           27%

1997 The cost of fuel decreased 6.3% and electric  generation  decreased  25.4%.
The decrease in fuel cost was primarily attributable to decreased generation and
a favorable  price variance.  These factors were partially  offset by effects of
the UFAC and increased  emission  allowance  costs.  Power  purchased  increased
$152.7  million  primarily  due to Clinton  and Wood River being out of service.

1996 The cost of fuel decreased 9.4% and electric generation increased 5.4%. The
decrease in fuel cost was primarily  attributable to the effects of the UFAC, as
well as a favorable  price variance.  These factors were partially  offset by an
increase  in fuel  cost  due to the  increase  in  generation.  Power  purchased
increased $5.7 million  primarily due to the extended Clinton outage.  Clinton's
equivalent  availability  and  generation  were  lower  than in 1995 due to that
outage. 

1995 The cost of fuel increased 2.8% and electric generation  increased .7%. The
increase in fuel cost was  attributable to the effects of the UFAC, the increase
in higher-cost fossil generation and the cost of emission allowances.  Clinton's
equivalent  availability  and generation  were lower in 1995 as compared to 1994
due to the  scheduled  refueling and  maintenance  outage.  Clinton  returned to
service April 29, 1995,  after  completing its fifth  refueling and  maintenance
outage, which began March 12, 1995. Power purchased increased $6.9 million.

Gas  Operations  For  the  years  1995  through  1997,  gas  revenues  including
transportation increased 29.9%, while the gross margin on gas revenues increased
9.3% as follows:

(Millions of dollars)                        1997            1996          1995
Gas revenues                               $  345.2      $  341.4      $  264.5
Gas cost                                     (207.7)       (202.6)       (138.8)
Transportation revenues                         8.7           6.8           8.0
  Gas margin                               $  146.2      $  145.6      $  133.7
(Millions of therms)
Therms sold                                   537           703           588
Therms transported                            309           251           273
  Total consumption                           846           954           861

Changes in the cost of gas purchased for resale were:

(Millions of dollars)                            1997         1996        1995
Gas purchased for resale
  Cost                                         $   8.0      $  49.0     $ (43.5)
  Volume                                         (30.0)         8.5        25.3
  Gas cost recoveries                             27.1          6.3       (15.4)
  Total increase (decrease)                    $   5.1      $  63.8     $ (33.6)
Average cost per therm
  delivered                                    $   .28      $  .267     $  .201
<PAGE>

     The 1997  increase  in gas costs was due to  slightly  higher  prices  from
suppliers  and  effects of the UGAC,  offset by a decrease  in volume.  The 1996
increase in gas costs was primarily due to higher prices from  suppliers and the
effects of the UGAC.  The 1995  decrease in the cost of gas purchased was due to
lower gas prices  caused by  unusually  warm  winter  weather  nationwide.  Also
contributing to the higher gas margins in 1995 was the 6.1% increase in gas base
rates approved by the ICC in April 1994.

Other  Expenses A  comparison  of  significant  increases  (decreases)  in other
operating  expenses,  maintenance and  depreciation  for the last three years is
presented in the following table:

(Millions of dollars)                        1997         1996          1995
Other operating expenses                   $  40.6      $ (9.8)      $   (.3)
Maintenance                                   12.0         (.3)         10.4
Depreciation and
  amortization                                 8.8         3.5           7.2

     The increase in operating  and  maintenance  expenses for 1997 is primarily
due to increased  company and contractor labor at the nuclear and fossil plants.
An increase in uncollectible  accounts expense and disposal of surplus inventory
also contributed to the increase.

     The decrease in operating expenses for 1996 is due primarily to the savings
from the enhanced  retirement  and severance  program,  partially  offset by the
costs of the extended  Clinton  outage and  increased  amortization  of MGP site
expenses.  The ICC  approved  tariff  riders in March 1996 that  resulted in the
current  recognition of MGP site remediation  costs in operating  expenses.  The
1996  increase  amounted to $5.5  million.  This increase is offset by increased
revenues collected under the riders.

     The  increase in  maintenance  expenses  for 1995 is  primarily  due to the
refueling and maintenance  outage at Clinton.  The increases in depreciation and
amortization  for each of the three years were due to increases in utility plant
balances.

Other  Income and  Deductions  - Net The 1997  decrease of $2.1 million in Other
Income and  Deductions,  Net is due primarily to 1996 accruals  recorded for the
planned  disposition  of  property.  The 1996  increase  was due  primarily to a
decrease  in the credit for  allocated  income  taxes.  The 1995 change in Other
Income and Deductions, Net was negligible.

Interest Charges Interest  charges,  including AFUDC,  decreased $2.8 million in
1997,  decreased  $15.5 million in 1996, and increased $3.6 million in 1995. The
1997  decrease is  primarily  due to the  continued  benefits of IP  refinancing
efforts  and  capitalization   reductions   partially  offset  by  increased  IP
short-term  borrowings  and  lower  AFUDC.  The 1996  decrease  was due to lower
short-term  interest  rates  and  the  impact  of  IP  refinancing  efforts  and
capitalization  reduction  during 1996.  The 1995  increase was due to increased
short-term borrowings at higher interest rates.

Inflation  Inflation,  as measured by the Consumer Price Index,  was 2.3%, 3.3%,
and 2.5% in 1997, 1996, and 1995,  respectively.  IP recovers  historical rather
than current plant costs in its regulated rates.

Liquidity and Capital Resources
Dividends 
On December 10, 1997,  IP declared the quarterly  common stock  dividend for the
first quarter of 1998.  On December 11, 1996, IP increased the quarterly  common
stock  dividend by 11% declaring the common stock dividend for the first quarter
of 1997. On December 13, 1995, IP increased the quarterly  common stock dividend
12%, declaring the common stock dividend for the first quarter of 1996.

Capital Resources and  Requirements 
IP needs cash for operating expenses,  interest and dividend payments,  debt and
certain  preferred stock  retirements and construction  programs.  To meet these
needs, IP has used internally generated funds and external financings, including
the  issuance of debt and  revolving  lines of credit.  The timing and amount of
external   financings   depend   primarily  on  economic  and  financial  market
conditions, cash needs and capitalization ratio objectives.
<PAGE>

     IP cash flows from  operations  during  1997  provided  sufficient  working
capital to meet ongoing operating  requirements,  to service existing common and
IP  preferred  stock  dividends  and debt  requirements  and to meet all of IP's
construction requirements.  Additionally, IP expects that future cash flows will
enable it to meet operating  requirements  and continue to service IP's existing
debt, preferred stock dividends,  IP's sinking fund requirements and all of IP's
anticipated construction  requirements.  Continued sufficiency of cash flows for
these  purposes  will  depend on a number of factors  and  variables,  including
market conditions, business expenses and the ability to compete.

     To a significant  degree,  the availability and cost of external  financing
depend on the  financial  health of the company  seeking  those funds.  Security
ratings are an indication of a company's  financial  position and may affect the
cost of securities,  as well as the  willingness of investors to invest in these
securities. The current ratings of IP's securities by three principal securities
rating agencies are as follows:

                                                Standard    Duff &
                                   Moody's      & Poor's    Phelps
First/New mortgage bonds            Baa1        BBB         BBB+
Preferred stock                     baa2        BBB-        BBB-
Commercial paper                    P-2         A-2         D-2

     Under current market conditions,  these ratings would afford IP the ability
to issue  additional  securities  through  external  financing.  IP has adequate
short-term and intermediate-term bank borrowing capacity.

     Based on its 1993  revised  standards  for review of utility  business  and
financial  risks,  S&P placed  IP,  along with  approximately  one-third  of the
industry,  in a "somewhat  below average"  category.  In April 1994, S&P lowered
IP's  mortgage  bond rating to BBB from BBB+.  In August  1995,  S&P revised its
ratings outlook from stable to positive.  In February 1996, Moody's also revised
its ratings outlook from stable to positive.

     Moody's  upgraded IP's  securities on July 1, 1996. The rating for mortgage
bonds was raised from Baa2 to Baa1, while preferred stock ratings went from baa3
to baa2.  Duff & Phelps has  indicated  that it expects  IP's  ratings to remain
stable,  reflecting a modestly strengthening  financial profile characterized by
good cash flow and an average business risk profile.

     For the years 1997, 1996 and 1995,  changes in long-term debt and preferred
stock, including normal maturities and elective redemptions, were as follows:

(Millions of dollars)                        1997           1996            1995
Long-term debt                              $ (11)         $(154)         $  (5)
Preferred stock                               (39)            71           (135)
  Total decrease                            $ (50)         $ (83)         $(140)

     The  amounts  shown in the  preceding  table  for debt  retirements  do not
include all mortgage  sinking  fund  requirements.  IP  generally  has met these
requirements  by  pledging  property  additions  as  permitted  under  IP's 1943
Mortgage  and  Deed  of  Trust  and  the  1992  New  Mortgage.   For  additional
information, see "Note 8 - Long-Term Debt" an d "Note 9 - Preferred Stock."

     During 1997, IP redeemed  $34.9 million (all of the  remaining)  Adjustable
Rate Series A serial  preferred  stock. IP also redeemed $4.2 million of various
issues of serial  preferred  stock.  In addition,  $10.5 million of  medium-term
notes  matured  and were  retired.  During  the year IP issued  $150  million of
Adjustable Rate Pollution Control Revenue Bonds, due April 1, 2032. The proceeds
were used on June 2,  1997,  to retire  $150  million  of IP's 7 5/8%  Pollution
Control First Mortgage Bonds due 2016.

     During 1996, IP redeemed  $2.2 million of  Adjustable  Rate Series A serial
preferred stock,  $20.5 million (all of the remaining)  Adjustable Rate Series B
serial preferred stock and $6.7 million of 7.75% serial preferred stock.  During
the year, IP also retired $62.9 million of 8.75% First  Mortgage Bonds due 2021,
$6  million  of 8% New  Mortgage  Bonds  due  2023 and $23  million  of 7.5% New
Mortgage  Bonds due 2025.  The $40 million of 5.85% First Mortgage Bonds matured
and were retired.  In addition,  $21.5 million of medium-term  notes matured and
were retired.

     In February 1995, IP redeemed $12 million of 8.00%  mandatorily  redeemable
serial  preferred  stock.  In May 1995, IP redeemed the remaining $24 million of
8.00% mandatorily  redeemable serial preferred stock. In March 1995, IP redeemed
$.2  million of 7.56%  serial  preferred  stock and $3  million of 8.24%  serial
preferred  stock. In August 1995, IP redeemed $5 million of 8.75% First Mortgage
Bonds.  In December  1995, IP redeemed  $34.7 million of 8.00% serial  preferred
stock,  $33.6 million of 7.56% serial  preferred  stock and $27 million of 8.24%
serial preferred stock.
<PAGE>

     IPFI is a  statutory  business  trust in which IP serves as  sponsor.  IPFI
issued $100 million of TOPrS at 8% (4.8%  after-tax  rate) in January 1996.  The
TOPrS were issued by IPFI,  which invested the proceeds in an equivalent  amount
of IP subordinated debentures due in 2045. The proceeds were used by IP to repay
short-term indebtedness on varying dates on or before March 1, 1996. IP incurred
the indebtedness in December 1995 to redeem $95.3 million  (principal  value) of
higher-cost outstanding preferred stock of IP.

     In 1992,  IP  executed a general  obligation  mortgage  (New  Mortgage)  to
replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage).  Both
mortgages  are  secured  by liens on  substantially  all of IP's  properties.  A
corresponding  issue of First Mortgage bonds, under the First Mortgage,  secures
any  bonds  issued  under  the New  Mortgage.  In  October  1997,  at a  special
bondholders  meeting,  the 1943  First  Mortgage  was  amended  to be  generally
consistent  with the New Mortgage.  The New Mortgage  provides IP with increased
financial flexibility.

     At December 31, 1997, based on the most restrictive earnings test contained
in the New Mortgage, IP could issue approximately $800 million of additional New
Mortgage bonds for other than refunding purposes. Also at December 31, 1997, the
unused portion of IP total bank lines of credit was $354 million.  The amount of
available IP unsecured  borrowing  capacity totaled $168 million at December 31,
1997.

     On February  12, 1997,  the IP Board of Directors  approved a change to the
Articles of  Incorporation  to remove the  limitation on the amount of unsecured
debt  that  IP  can  issue.  The  change  will  be  voted  on by  the  preferred
stockholders at a special meeting planned to be held in 1998.

     Under HB 362, IP may issue transitional  funding  instruments for up to 25%
of its  December  31, 1996,  capitalization  on or after  August 1, 1998.  IP is
continuing to review its refinancing plans but could issue up to $864 million of
transitional  funding  instruments  on or  after  August  1,  1998,  under  this
provision.  In addition,  IP would be eligible to issue up to an additional $864
million of  transition  funding  instruments  on or after August 1, 1999. Of the
proceeds from the issuance of transitional funding instruments, 80% or more must
be used to retire and  repurchase  IP debt and  equity  while 20% or less can be
used to fund certain other transition costs.

     Construction   expenditures   for  the  years   1995   through   1997  were
approximately  $620.5  million,  including  $17.5 million of AFUDC. IP estimates
that it will spend  approximately $225 million for construction  expenditures in
1998.  IP  construction  expenditures  for the period  1998-2002 are expected to
total  about $1 billion.  Additional  expenditures  may be required  during this
period  to  accommodate  transitional  expenditures  related  to  a  competitive
environment, environmental compliance costs and system upgrades, which cannot be
determined at this time.

     IP's capital  expenditures  for the years 1998 through 2002, in addition to
its construction expenditures,  are expected to include $129 million for nuclear
fuel and $291 million for mandatory debt retirement.

     See "Note 3 - Commitments and  Contingencies"  for additional  information.
Internal cash generation will meet  substantially  all  construction and capital
requirements.

Environmental  Matters  
See "Note 3 - Commitments and  Contingencies"  for a discussion of environmental
matters that impact or could potentially impact IP.

Tax Matters 
See "Note 6 - Income  Taxes"  for a discussion  of effective tax rates and other
tax issues.
<PAGE>

Illinois Power Company 
RESPONSIBILITY FOR INFORMATION 

The consolidated  financial statements and all information in this annual report
are the responsibility of management. The consolidated financial statements have
been prepared in conformity with generally  accepted  accounting  principles and
include  amounts that are based on  management's  best  estimates and judgments.
Management  also  prepared  the other  information  in the annual  report and is
responsible for its accuracy and  consistency  with the  consolidated  financial
statements. In the opinion of management,  the consolidated financial statements
fairly reflect Illinois Power's  financial  position,  results of operations and
cash flows.

Illinois  Power believes that its  accounting  and internal  accounting  control
systems are maintained so that these systems provide  reasonable  assurance that
assets are  safeguarded  against loss from  unauthorized  use or disposition and
that the financial records are reliable for preparing the consolidated financial
statements.  The consolidated financial statements have been audited by Illinois
Power's  independent  accountants,  Price  Waterhouse  LLP, in  accordance  with
generally accepted auditing standards.  Such standards include the evaluation of
internal  accounting  controls to establish a basis for  developing the scope of
the examination of the consolidated financial statements. In addition to the use
of independent  accountants,  Illinois Power  maintains a professional  staff of
internal  auditors who conduct  financial,  procedural  and special  audits.  To
assure their  independence,  both Price Waterhouse LLP and the internal auditors
have direct access to the Audit Committee of the Board of Directors.

The Audit Committee is composed of members of the Board of Directors who are not
active or retired  employees of Illinois  Power.  The Audit Committee meets with
Price Waterhouse LLP and the internal auditors and makes  recommendations to the
Board of Directors concerning the appointment of the independent accountants and
services to be performed.  Additionally,  the Audit  Committee  meets with Price
Waterhouse  LLP to discuss the results of their annual audit,  Illinois  Power's
internal  accounting  controls  and  financial  reporting  matters.   The  Audit
Committee  meets with the internal  auditors to assess the  internal  audit work
performed, including tests of internal accounting controls.

Larry D.  Haab  Chairman,  President  
and Chief Executive Officer 



Larry F. Altenbaumer 
Senior Vice President 
and Chief Financial Officer  

Illinois  Power  Company  
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE  LLP 
To the Board of Directors  and  Shareholders  of Illinois  Power Company 

In our opinion, the consolidated  financial statements of Illinois Power Company
and its subsidiaries appearing on pages a-11 through a-31 of this report present
fairly,  in all material  respects,  the  financial  position of Illinois  Power
Company and its  subsidiaries  at 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.  These  financial  statements  are the  responsibility  of  Illinois
Power's  management;  our  responsibility  is to  express  an  opinion  on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.

As discussed in Note 1 to the consolidated financial statements,  Illinois Power
discontinued  applying the  provisions  of  Statement  of  Financial  Accounting
Standards No. 71,  "Accounting for the Effects of Certain Types of Regulations,"
for its generation segment of the business in December 1997.

Price Waterhouse LLP 
St. Louis, Missouri 
February 12, 1998 

<PAGE>

Illinois Power Company 
CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<S>                                                                                       <C>        <C>         <C>    
                                                                                                       (Millions of dollars)
For the Years Ended December 31,                                                             1997        1996        1995
Operating Revenues
Electric                                                                                 $  1,244.4  $  1,202.9  $  1,252.6
Electric interchange                                                                          175.6       137.6       116.3
Gas                                                                                           353.9       348.2       272.5
  Total                                                                                     1,773.9     1,688.7     1,641.4
Operating Expenses and Taxes
Fuel for electric plants                                                                      232.4       248.1       273.9
Power purchased                                                                               217.9        65.2        59.5
Gas purchased for resale                                                                      207.7       202.6       138.8
Other operating expenses                                                                      290.5       249.9       259.7
Maintenance                                                                                   111.7        99.7       100.0
Enhanced retirement and severance                                                               -           -          37.8
Depreciation and amortization                                                                 198.8       190.0       186.5
General taxes                                                                                 133.8       131.3       135.0
Income taxes                                                                                  102.4       140.5       125.8
  Total                                                                                     1,495.2     1,327.3     1,317.0
Operating income                                                                              278.7       361.4       324.4
Other Income and Deductions, Net                                                               (4.2)       (6.3)         .3
Income before interest charges                                                                274.5       355.1       324.7
Interest Charges
Interest expense                                                                              128.7       133.0       148.0
Allowance for borrowed funds used during construction                                          (5.0)       (6.5)       (6.0)
  Total                                                                                       123.7       126.5       142.0
Net income before extraordinary item                                                          150.8       228.6       182.7
Extraordinary item net of income tax benefit of $118.0 million (Note 1)                      (195.0)        -           -
Net income (loss)                                                                             (44.2)      228.6       182.7
Less - Preferred dividend requirements                                                         21.5        22.3        23.7
Plus - Carrying amount over (under) consideration paid for redeemed preferred stock              .2         (.7)       (3.5)
Net income (loss) applicable to common stock                                             $    (65.5) $    205.6  $    155.5
</TABLE>

See notes to  consolidated  financial  statements  which are an integral part of
these statements.

<PAGE>

Illinois Power company
CONSOLIDATED BALANCE SHEETS
<TABLE>
                                                                                                            (Millions of dollars)
December 31,                                                                                                    1997       1996
Assets
Utility Plant, at original cost
<S>                                                                                                         <C>        <C>  
Electric (includes construction work in progress of $214.3 million and $212.5 million, respectively)        $  6,690.4 $  6,335.4
Gas (includes construction work in progress of $10.7 million and $21.2 million, respectively)                    663.0      646.1
                                                                                                               7,353.4    6,981.5
Less - accumulated depreciation                                                                                2,808.1    2,419.7
                                                                                                               4,545.3    4,561.8
Nuclear fuel in process                                                                                            6.3        5.3
Nuclear fuel under capital lease                                                                                 126.7       96.4
                                                                                                               4,678.3    4,663.5
Investments and Other Assets                                                                                       5.9       14.5
Current Assets
Cash and cash equivalents                                                                                         17.8       12.5
Accounts receivable (less allowance for doubtful accounts of $5.5 million and $3.0 million, respectively)
  Service                                                                                                        115.6      138.8
  Other                                                                                                           16.6       51.1
Accrued unbilled revenue                                                                                          86.3      106.0
Materials and supplies, at average cost
  Fossil fuel                                                                                                     12.6        7.9
  Gas in underground storage                                                                                      29.3       27.2
  Operating materials                                                                                             75.4       77.1
Prepayments and other                                                                                             61.2       23.7
                                                                                                                 414.8      444.3
Deferred Charges
Deferred Clinton costs                                                                                             -        103.9
Recoverable income taxes                                                                                           -        101.3
Other                                                                                                            192.5      241.0
                                                                                                                 192.5      446.2
                                                                                                            $  5,291.5 $  5,568.5
Capital and Liabilities
Capitalization
Common stock - No par value, 100,000,000 shares authorized; 75,643,937 shares issued, stated at             $  1,424.6 $  1,424.6
Retained earnings                                                                                                 89.5      245.9
Less - Capital stock expense                                                                                       7.3        8.2
Less - 9,428,645 and 3,410,897 shares of common stock in treasury, respectively, at cost                         207.7       86.2
  Total common stock equity                                                                                    1,299.1    1,576.1
Preferred stock                                                                                                   57.1       96.2
Mandatorily redeemable preferred stock                                                                           197.0      197.0
Long-term debt                                                                                                 1,617.5    1,636.4
  Total capitalization                                                                                         3,170.7    3,505.7
Current Liabilities
Accounts payable                                                                                                 102.7      149.7
Notes payable                                                                                                    376.8      310.0
Long-term debt and lease obligations maturing within one year                                                     87.5       47.7
Dividends declared                                                                                                22.9       24.7
Taxes accrued                                                                                                     27.5       46.0
Interest accrued                                                                                                  33.0       34.3
Other                                                                                                             78.7       43.1
                                                                                                                 729.1      655.5
Deferred Credits
Accumulated deferred income taxes                                                                                980.6    1,048.0
Accumulated deferred investment tax credits                                                                      208.3      215.5
Other                                                                                                            202.8      143.8
                                                                                                               1,391.7    1,407.3
                                                                                                            $  5,291.5 $  5,568.5
</TABLE>


(Commitments and Contingencies Note 3)
See notes to  consolidated  financial  statements  which are an integral part of
these statements.


<PAGE>

Illinois Power company
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S>                                                                                                 <C>       <C>       <C>   
                                                                                                             (Millions of dollars)
For the Years Ended December 31,                                                                       1997      1996      1995
Cash Flows from Operating Activities
Net income (loss)                                                                                   $  (44.2) $  228.6  $  182.7
Items not requiring (providing) cash -                                                                 202.1     195.3     190.0
  Depreciation and amortization                                                                         (5.0)     (6.5)     (6.0)
  Allowance for funds used during construction                                                          29.4      64.2      42.0 
  Deferred income taxes                                                                                  -         -        37.8 
  Enhanced retirement and severance                                                                    195.0       -         -   
  Extraordinary item                                                                                                             
Changes in assets and liabilities -                                                                     57.7     (35.2)     38.7 
  Accounts and notes receivable                                                                         19.7     (16.9)    (10.2)
  Accrued unbilled revenue                                                                              (5.1)     (1.2)     22.8 
  Materials and supplies                                                                               (31.2)     29.8     (14.0)
  Accounts payable                                                                                        .3     (14.8)    (10.1)
  Interest accrued and other, net                                                                      418.7     443.3     473.7 
Net cash provided by operating activities                                                                                        
Cash Flows from Investing Activities                                                                  (223.9)   (187.3)   (209.3)
Construction expenditures                                                                               5.0       6.5       6.0 
Allowance for funds used during construction                                                            27.8       5.0      (7.5)
Other investing activities                                                                            (191.1)   (175.8)   (210.8)
Net cash used in investing activities                                                                                           
Cash Flows from Financing Activities                                                                 (114.6)   (107.9)   (100.5)
Dividends on common stock and preferred stock                                                        (121.5)    (18.9)    (67.3)
Repurchase of common stock                                                                                                      
Redemptions -                                                                                        (164.1)   (355.8)   (213.6)
  Short-term debt                                                                                    (160.8)   (153.7)     (5.2)
  Long-term debt                                                                                      (39.0)    (29.5)   (134.5)
  Preferred stock                                                                                                                
Issuances -                                                                                            231.0     306.2     209.5 
  Short-term debt                                                                                      150.0       -         -   
  Long-term debt                                                                                         -       100.0       -   
  Preferred stock                                                                                       (3.3)       .3       5.1 
Other financing activities                                                                            (222.3)   (259.3)   (306.5)
Net cash used in financing activities                                                                    5.3       8.2     (43.6)
Net change in cash and cash equivalents                                                                 12.5       4.3      47.9 
Cash and cash equivalents at beginning of year                                                       $  17.8  $   12.5  $    4.3 
Cash and cash equivalents at end of year                                                            
</TABLE>


Illinois Power company
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<S>                                                                              <C>      <C>       <C>  
                                                                                         (Millions of dollars)
For the Years Ended December 31,                                                   1997      1996        1995
Balance at beginning of year                                                     $  245.9  $  129.6  $   51.1
Net income (loss) before dividends and carrying amount adjustment                   (44.2)    228.6     182.7
                                                                                    201.7     358.2     233.8
Less -
  Dividends -
  Preferred stock                                                                    21.7      22.6      23.6
  Common stock                                                                       90.7      86.6      77.1
  Investment transfer to Illinova                                                     -         2.4       -
Plus -
  Carrying amount over (under) consideration paid for redeemed preferred stock         .2       (.7)     (3.5)
                                                                                   (112.2)   (112.3)   (104.2)
Balance at end of year                                                           $   89.5  $  245.9  $  129.6
</TABLE>

See notes to  consolidated  financial  statements  which are an integral part of
these statements.


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation  IP is a subsidiary of Illinova,  a holding company.
IP is engaged in the generation, transmission, distribution and sale of electric
energy and the distribution, transportation and sale of natural gas in the state
of Illinois. The consolidated financial statements include the accounts of IP, a
combination electric and gas utility, Illinois Power Capital, L.P. and IPFI. See
"Note  9  - Preferred  Stock"  for  additional  information.   

     All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements.  Preparation of financial statements
in conformity with generally accepted accounting  principles requires the use of
management's estimates. Actual results could differ from those estimates.

Regulation  IP is subject to  regulation  by the ICC and the FERC.  Prior to the
passage  of HB  362,  IP  prepared  its  consolidated  financial  statements  in
accordance  with  FAS 71,  "Accounting  for the  Effects  of  Certain  Types  of
Regulation."  Reporting under FAS 71 allows companies whose service  obligations
and prices are  regulated  to  maintain on their  balance  sheets  assets  which
represent costs they expect to recover from customers  through inclusion of such
costs in their future rates.  In July 1997, the EITF concluded that  application
of FAS 71  accounting  should  be  discontinued  at the  date  of  enactment  of
deregulation  legislation for business segments for which a plan of deregulation
has been  established.  The EITF further  concluded that  regulatory  assets and
liabilities  that  originated in the portion of the business  being  deregulated
should be written off unless their recovery is specifically provided for through
future cash flows from the  regulated  portion of the  business.  

     Because HB 362 provides  for  market-based  pricing of electric  generation
services,  IP discontinued  application of FAS 71 for its generating  segment in
December 1997 when HB 362 was signed by Illinois  Governor  Edgar.  IP evaluated
its regulatory assets and liabilities associated with its generation segment and
determined  that recovery of these costs was not probable  through rates charged
to  transmission  and  distribution  customers,  the  regulated  portion  of its
business.  Therefore,  IP wrote off  generation-related  regulatory  assets  and
liabilities  of  approximately  $195 million  (net of income  taxes) in December
1997.  These net  assets  related  to  previously  incurred  costs that had been
expected to be collected  through future  revenues,  including  deferred Clinton
post  construction  costs,  unamortized  losses on reacquired debt,  recoverable
income taxes and other  generation-related  regulatory  assets.  At December 31,
1997,  IP's net  investment  in generation  facilities  was $3.5 billion and was
included in "Utility  Plant,  at Original  Cost"  on IP's  Consolidated  Balance
Sheets.

IP's principal accounting policies are:

Regulatory  Assets  Regulatory  assets represent  probable future revenues to IP
associated  with certain costs that are expected to be recovered  from customers
through the ratemaking process. Significant regulatory assets are as follows:

(Millions of dollars)                          1997            1996
Deferred Clinton
  post-construction costs                   $    -           $ 103.9
Recoverable income taxes                    $    -           $ 101.3
Unamortized losses on reacquired debt       $  32.3          $  87.7
Manufactured-gas plant site cleanup costs   $  64.8          $  69.1
DOE decontamination and
  decommissioning fees                      $   6.3          $   5.4

Utility  Plant The cost of  additions  to  utility  plant and  replacements  for
retired property units is capitalized.  Cost includes labor,  materials,  and an
allocation of general and  administrative  costs, plus AFUDC as described below.
Maintenance and repairs,  including replacement of minor items of property,  are
charged to maintenance expense as incurred.  When depreciable property units are
retired,  the original cost and  dismantling  charges,  less salvage value,  are
charged  to   accumulated   depreciation.   

<PAGE>

Allowance for Funds Used During Construction The FERC Uniform System of Accounts
defines AFUDC as the net costs for the period of  construction of borrowed funds
used for  construction  purposes  and a  reasonable  rate on other funds when so
used.  AFUDC is capitalized as a component of  construction  work in progress by
those business  segments  applying the  provisions of FAS 71. In 1997,  1996 and
1995,  the pre-tax rate used for all  construction  projects was 5.6%,  5.8% and
6.5%, respectively.  Although cash is not currently realized from the allowance,
it is realized under the ratemaking process over the service life of the related
property through increased revenues resulting from a higher rate base and higher
depreciation expense.  Non-regulated business segments capitalize interest under
the guidelines in FAS 34, "Capitalization of Interest Cost."

Depreciation  For  financial  statement  purposes,  IP  depreciates  the various
classes of depreciable  property over their  estimated  useful lives by applying
composite rates on a straight-line basis. In 1997, 1996 and 1995, provisions for
depreciation were 2.8%, 2.8% and 2.8%, respectively,  of the average depreciable
cost for Clinton.  Provisions for depreciation for all other electric plant were
2.8%,  2.6% and  2.6% in  1997,  1996 and  1995,  respectively.  Provisions  for
depreciation  of gas utility plant,  as a percentage of the average  depreciable
cost,  were  3.3%,  3.9%  and  3.9%  in  1997,  1996  and  1995,   respectively.

Amortization  of Nuclear Fuel IP leases nuclear fuel from the Fuel Company under
a capital  lease.  Amortization  of nuclear fuel  (including  related  financing
costs) is determined on a unit of production  basis.  A provision for spent fuel
disposal costs is charged to fuel expense based on kwh generated.  See "Note 3 -
Commitments and  Contingencies"  for discussion of  decommissioning  and nuclear
fuel disposal costs. 

Unamortized  Debt Discount,  Premium and Expense  Discount,  premium and expense
associated  with  long-term  debt are  amortized  over the lives of the  related
issues.  Costs  related  to  refunded  debt  for  business  segments  under  the
provisions of FAS 71 are amortized over the lives of the related new debt issues
or the remaining life of the old debt if no new debt is issued. Costs related to
refunded debt for the generating segment are expensed when incurred.

Revenue and Energy Cost IP records  revenue for  services  provided  but not yet
billed to more closely match revenues with expenses. Unbilled revenues represent
the estimated  amount  customers  will be billed for service  delivered from the
time  meters  were  last  read to the end of the  accounting  period.  Operating
revenues  include related taxes that have been billed to customers in the amount
of $71 million in 1997,  $68 million in 1996 and $66 million in 1995.  The costs
of fuel for the generation of electricity, purchased power and gas purchased for
resale are recovered from customers  pursuant to the electric fuel and purchased
gas  adjustment  clauses.  Accordingly,  allowable  energy  costs that are to be
passed on to customers  in a  subsequent  accounting  period are  deferred.  The
recovery of costs deferred under these clauses is subject to review and approval
by the ICC. In September  1997, IP filed a petition with the ICC that stipulated
customers will not be charged for certain additional costs of energy incurred as
a result of  Clinton  being out of  service.  During  1997,  as a result of this
stipulation, IP did not collect $36.3 million of fuel costs. IP will also forego
recovery  of  additional  fuel  costs in 1998 for the  duration  of the  Clinton
outage.  Under the petition,  fuel costs charged to customers  will be no higher
than  average  1995-1996  levels until  Clinton is back in service  operating at
least at a 65% capacity factor for two consecutive months.

Income Taxes  Deferred  income taxes result from temporary  differences  between
book income and taxable  income,  and the tax bases of assets and liabilities on
the balance  sheet.  The temporary  differences  relate  principally to plant in
service and  depreciation. 

     Investment  tax  credits  used to reduce  federal  income  taxes  have been
deferred and are being amortized to income over the service life of the property
that gave rise to the credits.

     IP is included in Illinova's consolidated federal income tax return. Income
taxes  are  allocated  to the  individual  companies  based on their  respective
taxable income or loss. See "Note 6 - Income Taxes" for additional discussion.

<PAGE>

Preferred Dividend Requirements Preferred dividend requirements reflected in the
Consolidated Statements of Income are recorded on the accrual basis.

Consolidated  Statements of Cash Flows Cash and cash equivalents include cash on
hand and  temporary  investments  purchased  with an initial  maturity  of three
months or less.  Capital lease obligations not affecting cash flows increased by
$30  million,   $31  million  and  $19  million  during  1997,  1996  and  1995,
respectively. Income taxes and interest paid are as follows:

                                                 Years ended December 31,
(Millions of dollars)                1997          1996             1995
Income taxes                       $   94.3      $   65.9         $   65.7
Interest                           $  140.0      $  147.4         $  152.4

Interest  Rate Cap  Generally,  premiums  paid for  purchased  interest rate cap
agreements are being  amortized to interest  expense over the terms of the caps.
Unamortized premiums are included in Current Assets, "Prepayments and other," in
the Consolidated Balance Sheets. Amounts to be received under the cap agreements
are accrued and recognized as a reduction in interest expense. 

Transactions  with Illinova In addition to transfers of capital reflected in the
Consolidated  Statements of Retained  Earnings,  IP provided  approximately $122
million,  $81 million and $34 million in funds to Illinova  for  operations  and
investments  during  1997,  1996 and 1995,  respectively.  Illinova is paying IP
interest on these funds at a rate equal to that which  Illinova  would have paid
had it used a currently outstanding line of credit. In addition, Illinova and IP
have  recorded  an  intercompany  payable  and  receivable,   respectively,  for
approximately  $10.2 million,  $14.3 million and $18.4 million in 1997, 1996 and
1995,  respectively,  in order to recognize the effect on the  Employees'  Stock
Ownership  Plan of the  conversion  of IP common stock to Illinova  common stock
concurrent with the formation of Illinova.  This was a noncash transaction.  See
"Note 10 - Common Stock and Retained Earnings" for additional information.

New  Pronouncements  The FASB issued FAS 128,  "Earnings Per Share"  in February
1997, effective for financial statements issued after December 15, 1997. FAS 128
establishes  standards  for  computing  and  presenting  EPS  and  replaces  the
presentation  of primary EPS and fully diluted EPS with a presentation  of basic
EPS and diluted EPS, respectively.  No new requirements are imposed on IP by FAS
128.

     The  FASB  issued  FAS  129,   "Disclosure  of  Information  about  Capital
Structure"  in February  1997,  effective for financial  statements  for periods
ending after  December 15, 1997.  FAS 129  establishes  standards for disclosing
information  about an  entity's  capital  structure  and  contains  no change in
disclosure  requirements  for  entities  that  were  previously  subject  to the
requirements  of Accounting  Principles  Board Opinions 10 and 15 and FAS 47. No
new requirements are imposed on IP by FAS 129.

     The FASB issued FAS 130,  "Reporting  Comprehensive  Income"  in June 1997,
effective  for  fiscal  years   beginning  after  December  15,  1997.  FAS  130
establishes  standards for reporting and display of comprehensive income and its
components in a financial  statement that is displayed with the same  prominence
as other  financial  statements.  IP  continues  to analyze FAS 130 and does not
expect it to have a significant impact on its financial statements presentation.

     The FASB issued FAS 131,  "Disclosures  about Segments of an Enterprise and
Related  Information"  in June  1997,  effective  for  periods  beginning  after
December 15, 1997. FAS 131 supersedes FAS 14, "Financial  Reporting for Segments
of a Business  Enterprise."  FAS 131  establishes  standards  for the way public
business  enterprises  report financial and descriptive  information about their
reportable  operating  segments  in  their  financial   statements.   Generally,
financial  information  is  required  to be  reported  on the basis that is used
internally  for  evaluating  segment  performance  and  deciding how to allocate
resources to segments.  IP continues to evaluate the  provisions  of FAS 131 and
determine  the  impact  of the  revised  disclosure  requirements  on  its  1998
financial statements.

<PAGE>

Note  2 - Clinton  Power  Station  
Clinton  Operations  
In September  1996,  a leak in a  recirculation  pump seal caused IP  operations
personnel to shut down Clinton. Clinton has not resumed operation.

     In  January  and again in June 1997,  the NRC named  Clinton  among  plants
having a trend of declining  performance.  In June 1997, IP committed to conduct
an ISA to thoroughly  assess Clinton's  performance.  The ISA was conducted by a
team of 30  individuals  with  extensive  nuclear  experience and no substantial
previous  involvement  at Clinton.  Their report  concluded  that the underlying
reasons for the  performance  problems at Clinton  were  ineffective  leadership
throughout the  organization in providing  standards of excellence,  complacency
throughout the organization,  barrier weaknesses and weaknesses in teamwork.  In
late October, a team commissioned by the NRC performed an evaluation to validate
the ISA results.  In December,  this team concluded that the findings of the ISA
accurately characterized Clinton's performance deficiencies and their causes.

     In September  1997, the NRC advised IP that it must submit a written report
to the NRC at least two weeks  prior to  restarting  Clinton,  giving the agency
reasonable  assurance that IP's actions to correct  recurring  weaknesses in the
corrective  action program have been  effective.  After the report is submitted,
the NRC  staff  plans to meet  with  IP's  management  to  discuss  the  plant's
readiness for restart.  

     In November  1997,  Larry Haab,  Chief  Executive  Officer of IP,  publicly
pledged to address the findings of the ISA, to improve Clinton,  and provide the
resources necessary to restart the plant.  Further, in January 1998, IP and PECO
announced an agreement  under which PECO will  provide  management  services for
Clinton.  The new  management  team initially will consist of nine people in key
positions, including chief nuclear officer and plant manager.

     Although  a PECO team will help  manage  the  plant,  IP will  continue  to
maintain the operating license for Clinton and retain ultimate  oversight of the
plant. The plant will remain staffed primarily by IP employees.

     PECO  operates  two  stations,  Limerick  and Peach  Bottom,  each with two
boiling  water  reactors  similar to the one at Clinton.  Although  PECO's Peach
Bottom Station was a troubled plant that experienced a two-year  outage,  it was
turned around,  and both plants have set performance  records for long operating
runs and short refueling outages,  receiving excellent  performance ratings from
the NRC and the Institute of Nuclear Power Operations.

     On January 21,  1998,  the NRC placed  Clinton on its Watch  List.  Nuclear
plants are placed on the Watch List when the NRC believes additional  regulatory
oversight is required because of declining  performance.  Clinton will remain on
the Watch List until consistent improved performance is demonstrated. During the
period  Clinton  remains on the Watch List, the NRC will monitor it more closely
than  plants not on the Watch  List.  This may  include  increased  inspections,
additional  required  documentation,  NRC-required  approval  of  processes  and
procedures and higher-level NRC oversight.

 <PAGE>

Transfer  of Soyland's Ownership Share to IP 
In March 1997, the NRC issued an order  approving  transfer to IP of the Clinton
operating  license  related to Soyland's  13.2% ownership in connection with the
transfer from Soyland to IP of all of Soyland's  interest in Clinton.  Soyland's
title  to the  plant  and  directly  related  assets  such as  nuclear  fuel was
transferred to IP in May 1997.  Soyland's nuclear  decommissioning  trust assets
were  transferred to IP in May 1997,  consistent  with IP's assumption of all of
Soyland's ownership obligations, including those related to decommissioning.

     The FERC  approved an amended PCA in July 1997.  The amended PCA  obligates
Soyland to purchase all of its capacity and energy needs from IP for at least 10
years.  The amended PCA  provides  that a contract  cancellation  fee be paid by
Soyland to IP in the event that a Soyland member  terminates its membership from
Soyland.  In  May  1997,  three  distribution   cooperative  members  terminated
membership  by buying out of their  long-term  wholesale  power  contracts  with
Soyland.  As a result,  Soyland paid a fee of $20.8  million to IP in June 1997.
Fee  proceeds  of $2.9  million  were  used to  offset  the  costs of  acquiring
Soyland's  share of  Clinton  with  the  remaining  $17.9  million  recorded  as
interchange revenue.

     In December  1997,  Soyland signed a letter of intent to pay in advance the
remainder of its base capacity charges in the PCA. The fee of approximately  $70
million will be deferred and recognized as interchange  revenue over the initial
term of the PCA. The payment is  contingent  on Soyland  obtaining the necessary
financing and regulatory approvals in 1998.

Clinton  Cost and Risks  
Clinton was placed in service in 1987 and represents approximately 20.3% of IP's
installed   generation   capacity.   The   investment  in  Clinton   represented
approximately  57% of IP's total  assets at  December  31,  1997.  See "Note 1 -
Summary of Significant Accounting Policies" for additional information.

     IP's  Clinton-related  costs  represented  38%  of  its  total  1997  other
operating,   maintenance  and  depreciation   expenses.   Clinton's   equivalent
availability was 0%, 66% and 76% for 1997, 1996 and 1995, respectively.

     Ownership of an operating nuclear generating unit exposes IP to significant
risks,  including  increased and changing  regulatory,  safety and environmental
requirements  and the uncertain future cost of closing and dismantling the unit.
IP expects  to be  allowed to  continue  to  operate  Clinton;  however,  if any
unforeseen or unexpected  developments  would prevent it from doing so, IP would
be materially  adversely affected.  See "Note 3 - Commitments and Contingencies"
for additional information.

Note 3 - Commitments and Contingencies  
Commitments
IP estimates  that it will spend  approximately  $225  million for  construction
expenditures in 1998. IP construction  expenditures for the period 1998-2002 are
expected  to total  about $1 billion.  Additional  expenditures  may be required
during  this  period  to  accommodate  transitional  expenditures  related  to a
competitive  environment,  environmental  compliance  costs and system upgrades,
which cannot be determined at this time. 

     IP's capital  expenditures  for the years 1998 through 2002, in addition to
its construction expenditures,  are expected to include $129 million for nuclear
fuel and $291 million for mandatory debt retirement.

     In addition, IP has substantial  commitments for the purchase of coal under
long-term  contracts.  Estimated coal contract commitments for 1998 through 2002
are $619 million (excluding price escalation  provisions).  Total coal purchases
for 1997,  1996 and 1995 were  $181  million,  $184  million  and $168  million,
respectively. IP has contracts with various natural gas suppliers and interstate
pipelines  to provide  natural gas supply,  transportation  and leased  storage.
Estimated  committed  natural  gas,  transportation  and  leased  storage  costs
(including  pipeline  transition costs) for 1998 through 2002 total $56 million.
Total  natural gas  purchased  for 1997,  1996 and 1995 was $185  million,  $207
million and $150 million, respectively.

<PAGE>

IP's  estimated  nuclear  fuel  commitments  for Clinton are  approximately  $11
million  for  uranium  concentrates  through  2001,  $3 million  for  conversion
services through 2002, $35 million for enrichment services through 1999 and $232
million for  fabrication  services  through  2019.  IP is  committed to purchase
approximately  $20 million of emission  allowances  through 1999. IP anticipates
that  all  gas-related  costs  will be  recoverable  under  IP's  UGAC.  See the
subcaption "Fuel Cost Recovery" below for discussion of the UFAC.

Fuel Cost Recovery On September  29, 1997,  the ICC approved an IP petition that
stipulates  customers will not be charged for certain additional costs of energy
incurred as a result of Clinton being out of service.  Under the petition,  fuel
costs  charged to  customers  will be no higher than  average 1995 - 1996 levels
until Clinton is back in service operating at least at a 65% capacity factor for
two  consecutive  months.  See "Note 2 - Clinton Power  Station"  for additional
information about Clinton.

     As a  result  of  Illinois  deregulation  legislation,  IP  may  choose  to
eliminate  application  of the  UFAC.  IP's base  rates  would  still  include a
component for some level of recovery of fuel costs,  but IP would not be able to
pass  through  to  customers   increased  costs  of  purchasing  fuel,  emission
allowances or replacement  power.  On  elimination of the UFAC,  base rates will
include a fixed fuel cost factor equivalent to the average 1995 - 1996 fuel cost
levels.  Future  recovery of fuel costs is  uncertain,  as IP will decrease base
electric  rates to  residential  customers  beginning  August  1998 and  certain
customers will be free to choose their electric  generation  suppliers beginning
in October 1999.  The extent to which fuel costs are recovered  will depend on a
number of factors  including  the future  market prices for wholesale and retail
energy, when Clinton returns to service,  and whether IP elects to eliminate the
UFAC.

Insurance IP maintains  insurance for certain losses  involving the operation of
Clinton.  For  physical  damage to the plant,  IP's  insurance  program  has two
layers:  1) a primary layer of $500 million provided by nuclear insurance pools;
and 2) an excess  coverage layer of $1.1 billion  provided by an  industry-owned
mutual insurance  company for a total coverage of $1.6 billion.  In the event of
an  accident  with  an  estimated  cost  of  reactor   stabilization   and  site
decontamination  exceeding $100 million,  NRC regulations require that insurance
proceeds be  dedicated  and used first to return the reactor to, and maintain it
in, a safe and stable condition, and second to decontaminate the reactor station
site.   The   insurers   also  provide   coverage  for  the   shortfall  in  the
Decommissioning  Trust  Fund  caused  by the  premature  decommissioning  of the
reactor due to an accident.  In the event insurance  limits are not exhausted by
the above,  the  remaining  coverage  will be applied to  property  damage and a
portion of the value of the  undamaged  property.  In addition,  while IP has no
reason to anticipate a serious nuclear accident at Clinton,  if such an incident
should occur,  the claims for property  damage and other costs could  materially
exceed the limits of current or available insurance coverage. In the event of an
extended  shutdown  of  Clinton  due to  accidental  property  damage,  IP  also
purchases approximately $1.5 million per week of business interruption insurance
coverage through an industry-owned mutual insurance company. This insurance does
not provide coverage until Clinton has been out of service for 21 weeks.

     All  United   States   nuclear   reactor   licensees  are  subject  to  the
Price-Anderson  Act.  This act currently  limits public  liability for a nuclear
incident  to $8.9  billion.  Private  insurance  covers the first $200  million.
Retrospective  premium  assessments against each licensed nuclear reactor in the
United States provide excess coverage. Currently, the liability to these nuclear
reactor  licensees  for such an  assessment  would be up to  $79.3  million  per
incident, not including premium taxes which may be applicable, payable in annual
installments of not more than $10 million.

     A Master Worker Policy covers worker tort claims  alleging  bodily  injury,
sickness or disease due to the nuclear  energy  hazard for workers whose initial
radiation  exposure  occurred  on or after  January 1,  1988.  The policy has an
aggregate limit of $200 million that applies to the commercial  nuclear industry
as a whole. A provision provides for automatic reinstatement of policy limits up
to an additional $200 million.

     IP may be subject to other risks that may not be  insurable,  or the amount
of insurance  carried to offset the various  risks may not be sufficient to meet
potential  liabilities  and losses.  There is also no assurance  that IP will be
able  to  maintain   insurance  coverage  at  its  present  level.  Under  those
circumstances,  such losses or liabilities may have a substantial adverse effect
on IP's financial position.

<PAGE>

Decommissioning  and Nuclear Fuel  Disposal IP is  responsible  for the costs of
decommissioning  Clinton and for spent nuclear fuel disposal costs. In May 1997,
consistent  with IP's  assumption of all of Soyland's  ownership  obligations of
Clinton,  Soyland's nuclear decommissioning trust assets were transferred to IP.
Future  decommissioning  costs related to Soyland's former share of Clinton will
be  provided  through the PCA between  Soyland and IP. IP is  collecting  future
decommissioning  costs for the remaining portion of Clinton through its electric
rates based on an  ICC-approved  formula that allows IP to adjust rates annually
for changes in decommissioning cost estimates. Illinois deregulation legislation
provides for the continued recovery of decommissioning  costs from IP's delivery
customers.

     IP  concluded  a  site-specific  study  in 1996 to  estimate  the  costs of
dismantlement, removal and disposal of Clinton. This study resulted in projected
decommissioning  costs of $538  million  (1996  dollars) or $969  million  (2026
dollars, assuming a 2% inflation factor).  Regulatory approval of this increased
decommissioning  cost level was  received in August 1997.  This  estimate is the
basis used for  funding  decommissioning  costs  through  rates  charged to IP's
customers and through the PCA with Soyland.

     External  decommissioning  trusts,  as  prescribed  under  Illinois law and
authorized  by the ICC,  accumulate  funds  for the  future  decommissioning  of
Clinton  based on the expected  service  life of the plant.  For the years 1997,
1996 and 1995,  IP  contributed  $5.3  million,  $3.9 million and $5.0  million,
respectively,  to its external nuclear decommissioning trust funds. The balances
in these nuclear decommissioning funds at December 31, 1997 and 1996, were $62.5
million and $41.4 million,  respectively.  Decommissioning funds are recorded as
assets  on  the  balance  sheet.  A  decommissioning   liability   approximately
equivalent to trust assets is also recorded. IP recognizes earnings and expenses
from the trust fund as changes in its assets and  liabilities  relating to these
funds occur.

     The FASB is  reviewing  the  accounting  for closure  and removal  costs of
long-lived  assets.  Changes to current  electric  utility  industry  accounting
practices for  decommissioning  may result in recording the estimated total cost
for   decommissioning  as  a  liability  and  an  increase  to  plant  balances,
depreciating the increased plant balances,  and reporting trust fund income from
the  external  decommissioning  trusts as  investment  income  rather  than as a
reduction to decommissioning  expense. Based on current information,  management
believes  that  these  changes  will not have an  adverse  effect on  results of
operations   due  to  existing  and   anticipated   future  ability  to  recover
decommissioning costs through rates.

     Under the Nuclear Waste Policy Act of 1982, the DOE is responsible  for the
permanent storage and disposal of spent nuclear fu el. The DOE currently charges
one mill ($0.001) per net kwh (one dollar per MWH) generated and sold for future
disposal of spent fuel. IP is recovering  these charges  through rates. In 1996,
the  District  of  Columbia  Circuit  Court of Appeals  issued an order,  at the
request of nuclear-owning  utilities and state regulatory  agencies,  confirming
DOE's  unconditional  obligation to take  responsibility  for spent nuclear fuel
commencing  in  1998,  even if it has no  permanent  repository  at  that  time.
Notwithstanding  this  decision,  which  the  DOE did  not  appeal,  the DOE has
indicated to all nuclear  utilities that it may experience delay in performance.
The impact of any such delay on IP will depend on many  factors,  including  the
duration of such delay and the cost and feasibility of interim, on-site storage.

<PAGE>

Environmental Matters
Clean Air Act To comply with the SO2 emission reduction  requirements of Phase I
(1995 - 1999) of the Acid Rain Program of the 1990 Clean Air Act Amendments,  IP
continues  to  purchase  emission  allowances.  An  emission  allowance  is  the
authorization  by the U.S.  EPA to emit one ton of SO2.  The ICC  approved  IP's
Phase I Acid Rain  Compliance  Plan in September  1993,  and IP is continuing to
implement that plan. IP has acquired sufficient emission allowances to meet most
of its  anticipated  needs for 1998 and 1999 and will  purchase the remainder on
the spot market.  In 1993, the Illinois General Assembly passed and the governor
signed  legislation   authorizing,   but  not  requiring,   the  ICC  to  permit
expenditures  and revenues  from  emission  allowance  purchases and sales to be
included in rates charged to customers as a cost of fuel. In December  1994, the
ICC approved the recovery of emission  allowance costs through the UFAC. See the
subcaption  "Fuel  Cost  Recovery"  above  for  discussion  of  the  UFAC.  IP's
compliance plan will defer, until at least 2000, any need for scrubbers or other
capital  projects  associated with SO2 emission  reductions.  Phase II (2000 and
beyond) SO2  emission  reduction  requirements  of the Acid Rain  Program  could
require  additional  actions  and may  result in  capital  expenditures  and the
purchase  of  emission  allowances.  

     To comply with the Phase I NOx emission reduction  requirements of the acid
rain  provisions of the Clean Air Act, IP installed  low-NOx  burners at Baldwin
Unit 3 and  Vermilion  Unit 2. On November 29, 1994,  the Phase I NOx rules were
remanded to the U.S. EPA. On April 13, 1995, the U.S. EPA reinstated,  with some
modifications,  the  Phase  I NOx  rules  effective  January  1,  1996.  IP  was
positioned to comply with these revised rules without  additional  modifications
to any of its generating plants.

     The U.S. EPA issued  revised  Phase II NOx emission  limits on December 10,
1996. IP has prepared a Phase II Compliance Plan.  Litigation over the scope and
legality of these  Phase II NOx limits  precludes  a precise  quantification  of
anticipated capital costs for compliance; however, capital expenditures for IP's
NOx Compliance  Plan are expected to be $100 million prior to the year 2000. The
majority of this  investment  will be directed to Baldwin Units 1 and 2 and will
occur in conjunction with replacement of the air heaters on these units.

     In addition,  regulators are continuing to examine potential approaches for
compliance  with current  federal  ozone air quality  standards.  On November 7,
1997, the U.S. EPA proposed air pollution rules which would require  substantial
reductions of NOx emissions in Illinois and 21 other states.  The proposal would
require the  installation  of NOx controls by September  2002.  This proposal is
expected  to be  finalized  by November  1998 with  Illinois  utility  reduction
requirements  specified in 1999.  Preliminary  cost estimates to comply with the
proposed NOx  limitations are $130 to $150 million beyond what is already needed
to comply with the NOx  requirements  of Phase II of the Acid Rain Program.  The
legality of this proposal along with its technical feasibility is expected to be
challenged by a number of utilities and utility groups, including IP.

Global  Warming On  December  11,  1997,  international  negotiations  to reduce
greenhouse gas emissions concluded with the adoption of the Kyoto Protocol. This
Protocol  requires the United  States to reduce  greenhouse  gas emissions to 7%
below  1990  levels  during  the years  2008  through  2012 and to make  further
reductions  thereafter.  This  Protocol  must be ratified  by the United  States
Senate.  United States Senate  Resolution 98 (passed 95-0)  indicates the Senate
would not  ratify an  agreement  that fails to involve  all  countries  or would
damage the United States economy.  Ratification  will be a major political issue
as the Protocol  does not contain key elements  that Senate  Resolution  98 said
would be necessary for ratification. It is anticipated that ratification will be
delayed until after 1998.

     IP will face major  changes in how it  generates  electricity  if the Kyoto
Protocol is ratified, or if the Protocol's reduction goals are incorporated into
other environmental regulations.  IP would have to repower some generating units
and change  from coal to natural  gas in other  units to reduce  greenhouse  gas
emissions.  IP estimates that  compliance  with these proposed  regulations  may
require  significant  capital outlays and annual operating  expenses which could
have a material adverse impact on IP.

<PAGE>

Manufactured-Gas  Plant IP's estimated liability for MGP site remediation is $65
million.  This amount represents IP's current best estimate of the costs that it
will  incur in  remediation  of the 24 MGP sites  for  which it is  responsible.
Because of the  unknown  and  unique  characteristics  at each  site,  IP cannot
presently determine its ultimate liability for remediation of the sites.

     IP is currently  recovering  MGP site  remediation  through  tariff  riders
approved by the ICC.  Accordingly,  IP has  recorded a  regulatory  asset on its
balance sheet totaling $65 million as of December 31, 1997.  Management  expects
that cleanup costs will be fully recovered from IP's customers.

     To offset the burden imposed on its customers,  IP has initiated litigation
against a number of  insurance  carriers.  Any  settlement  proceeds  or damages
recovered  from the  carriers  will  continue to be  credited to IP's  customers
through the tariff rider mechanism which the ICC previously approved.

Electric and Magnetic Fields The possibility that exposure to EMF emanating from
power  lines,  household  appliances  and other  electric  sources may result in
adverse  health   effects   continues  to  be  the  subject  of  litigation  and
governmental,  medical and media attention. Litigants also have claimed that EMF
concerns  justify recovery from utilities for the loss in value of real property
exposed to power lines, substations and other such sources of EMF. The number of
EMF cases has declined in the last few years as more national and  international
science  commissions  have  concluded  that an EMF  health  risk  has  not  been
established.  Additional  research  is being  conducted  to  attempt  to resolve
continuing scientific  uncertainties.  On July 3, 1997, President Clinton signed
legislation   extending  the  National  EMF  Research  and  Public   Information
Dissemination  Program  through 1998.  Research  results,  policy  decisions and
public information  developments will continue into 1999. It is too soon to tell
what,  if any,  impact these  actions may have on IP's  financial  position.  IP
continues its commitment to address  customer and employee  concerns  related to
the EMF issue.

Other 
Legal Proceedings IP is involved in legal or administrative  proceedings  before
various  courts and agencies  with respect to matters  occurring in the ordinary
course  of  business,  some of  which  involve  substantial  amounts  of  money.
Management  believes that the final  disposition of these  proceedings  will not
have a material  adverse effect on the  consolidated  financial  position or the
results of operations.

Accounts  Receivable IP sells  electric  energy and natural gas to  residential,
commercial and industrial customers  throughout Illinois.  At December 31, 1997,
72%,  17% and 11% of  "Accounts  receivable  - Service"  were from  residential,
commercial and industrial  customers,  respectively.  IP maintains  reserves for
potential   credit  losses  and  such  losses  have  been  within   management's
expectations.  During 1997, IP increased its reserve for doubtful  accounts from
$3.0 million to $5.5 million.

Contingencies 
Soyland In March 1997, the NRC issued an order  approving  transfer to IP of the
Clinton  operating  license  related to Soyland's  13.2% ownership in connection
with the transfer from Soyland to IP of all of Soyland's interest in Clinton.

     The FERC  approved an amended PCA in July 1997.  The amended PCA  obligates
Soyland to purchase all of its capacity and energy needs from IP for at least 10
years (the initial term of the PCA) and includes a provision that allows Soyland
to pay its base capacity charges in advance.  The amended PCA also provides that
a  contract  cancellation  fee will be paid by Soyland to IP in the event that a
Soyland  Cooperative member terminates its membership from Soyland. In May 1997,
three distribution cooperative members terminated their membership by buying out
of their  respective  long-term  wholesale  power  contracts with Soyland.  As a
result,  Soyland  paid a fee of $20.8  million  to IP in June 1997 to reduce its
future base capacity charges.

     In December,  1997, Soyland signed a letter of intent to pay in advance the
remainder of its base capacity charges in the PCA. The fee of approximately  $70
million will be deferred and recognized as interchange  revenue over the initial
term of the PCA.  The  payment  will be  contingent  on  Soyland  obtaining  the
necessary financing and regulatory approvals in 1998.

Nuclear Fuel Lease See "Note 7 - Capital Leases" for discussion of contingencies
related to IP's nuclear fuel lease.

Internal  Revenue  Service  Audit The  Internal  Revenue  Service  is  currently
auditing  IP's federal  income tax returns for the years 1991 through  1993.  At
this time,  the outcome of the audit cannot be determined;  however,  management
does not expect that the  results  will have a material  adverse  effect on IP's
financial position or results of operations. For a detailed discussion of income
taxes, see "Note 6 - Income Taxes."

<PAGE>

Note 4 - Lines of Credit and Short-Term Loans
IP has total lines of credit  represented by bank commitments  amounting to $354
million,  all of which were unused at December 31,  1997.  These lines of credit
are  renewable  in May 1998,  August 1998 and May 2002.  These bank  commitments
support the amount of commercial paper outstanding at any time,  limited only by
the amount of unused bank  commitments,  and are  available to support  other IP
activities.

     IP pays  facility  fees up to .10% per annum on $350  million  of the total
lines of credit,  regardless of usage.  The interest  rate on  borrowings  under
these  agreements is, at IP's option,  based upon the lending  banks'  reference
rate, their  Certificate of Deposit rate, the borrowing rate of key banks in the
London interbank market or competitive bid.

     IP has letters of credit totaling $206 million and pays fees up to .45% per
annum on the unused amount of credit.

     In  addition,  IP and the Fuel  Company  each have a  short-term  financing
option to obtain funds not to exceed $30 million. IP and the Fuel Company pay no
fees for this uncommitted  facility and funding is subject to availability  upon
request.

     For the years 1997, 1996 and 1995, IP had short-term  borrowings consisting
of bank  loans,  commercial  paper,  extendible  floating  rate  notes and other
short-term debt outstanding at various times as follows:

(Millions of dollars, except rates)               1997      1996     1995
Short-term borrowings
  at December 31,                              $  376.8  $  310.0  $  359.6   
Weighted average interest                                                     
  rate at December 31,                              6.0%      5.7%      6.0%  
Maximum amount                                                                
  outstanding                                                                 
  at any month end                             $  376.8  $  310.0  $  359.6   
Average daily borrowings                                                      
  outstanding during                                                          
  the year                                     $  284.4  $  261.9  $  306.5   
Weighted average interest                                                     
  rate during the year                              5.8%      5.6%      6.2%  
                                                                              
     Interest rate cap  agreements  are used to reduce the  potential  impact of
increases in interest  rates on  floating-rate  debt.  IP has two variable  rate
interest rate cap agreements  covering up to $114.6 million of commercial paper.
These agreements  entitle IP to receive from a counterparty on a quarterly basis
the amount,  if any,  by which IP's  interest  payments  on a nominal  amount of
commercial  paper exceed the interest rate set by the cap. On December 31, 1997,
the cap rates were set at 7.75% and 8.0% while the current market rate available
to IP was 5.8%.

     IP also has a $50 million interest rate swap in effect through October 1998
where IP pays 5.92% and receives the LIBOR variable rate, payable quarterly.

Note  5 - Facilities  Agreements 
On March 13,  1997,  the NRC  issued an order  approving  transfer  to IP of the
Clinton  operating  license related to Soyland's 13.2% ownership  obligations in
connection with the transfer from Soyland to IP of all of Soyland's  interest in
Clinton pursuant to an agreement  reached in 1996.  Soyland's title to the plant
and directly related assets such as nuclear fuel was transferred to IP on May 1,
1997. Soyland's nuclear  decommissioning  trust assets were transferred to IP on
May 19, 1997,  consistent  with IP's  assumption  of all of Soyland's  ownership
obligations including those related to decommissioning.

     The FERC approved an amended PCA between  Soyland and IP in July 1997.  The
amended PCA  obligates  Soyland to purchase all of its capacity and energy needs
from IP for at  least  10  years.  The  amended  PCA  provides  that a  contract
cancellation  fee will be paid by  Soyland  to IP in the  event  that a  Soyland
member  terminates its membership in Soyland.  In May 1997,  three  distribution
cooperative   members  terminated  their  membership  by  buying  out  of  their
respective  long-term  wholesale  power  contracts  with  Soyland.  This  action
resulted in Soyland  paying a fee of $20.8  million to IP in June 1997 to reduce
its future base  capacity  charges.  Fee  proceeds of $2.9  million were used to
offset the costs of  acquiring  Soyland's  share of Clinton  with the  remaining
$17.9 million recorded as interchange  revenue. In December 1997, Soyland signed
a letter of intent to pay in advance the remainder of its base capacity  charges
in the PCA. The fee of approximately $70 million will be deferred and recognized
as  interchange  revenue  over the initial  term of the PCA. The payment will be
contingent on Soyland obtaining the necessary financing and regulatory approvals
in 1998.

<PAGE>

Note 6 -  Income  Taxes  
Deferred tax assets and liabilities were comprised of the following:

                                                    Balances as of December 31,
(Millions of dollars)                                       1997        1996
Deferred tax assets:
Current:
  Misc. book/tax recognition differences               $     11.2  $      7.7  
Noncurrent:                                                                    
  Depreciation and other property related                    46.2        42.0  
  Alternative minimum tax                                   156.8       198.5  
  Tax credit and net operating loss                                            
    carryforward                                              -          32.8  
  Unamortized investment tax credit                         116.9       120.9  
  Misc. book/tax recognition differences                     40.3        65.8  
                                                            360.2       460.0  
    Total deferred tax assets                          $    371.4  $    467.7  
                                                                               
Deferred tax liabilities:                                                      
Current:                                                                       
  Misc. book/tax recognition differences               $       .9  $     11.3  
Noncurrent:                                                                    
  Depreciation and other property related                 1,348.0     1,350.1  
  Deferred Clinton costs                                      -          58.2  
  Misc. book/tax recognition differences                     (7.1)       99.7  
                                                          1,340.9     1,508.0  
    Total deferred tax liabilities                     $  1,341.8  $  1,519.3  
                                                                               

Income taxes  included in the  Consolidated  Statements of Income consist of the
following components:

                                           Years Ended December 31,
(Millions of dollars)                     1997       1996      1995
Current taxes-
  Included in operating
    expenses and taxes                 $   72.7  $   79.2  $   98.6
  Included in other income
    and deductions                          (.7)    (14.5)    (20.3)
  Total current taxes                      72.0      64.7      78.3
Deferred taxes-
  Included in operating
  expenses and taxes
    Property related differences            9.2      60.4      62.2
    Alternative minimum tax                41.7       1.1       2.9
    Gain/loss on reacquired debt             .4      (1.6)     (1.9)
    Net operating loss
      carryforward                          -         -         (.2)
    Enhanced retirement
      and severance                          .5       2.6     (15.0)
    Misc. book/tax recognition
      differences                         (16.7)      6.1     (13.9)
    Included in other income
      and deductions
        Property related differences        (.4)     10.2       9.7
        Misc. book/tax recognition
          differences                       1.5       1.7       2.2
    Total deferred taxes                   36.2      80.5      46.0
Deferred investment
tax credit-net
  Included in operating
    expenses and taxes                     (7.3)     (7.3)     (6.9)
  Total investment tax credit              (7.3)     (7.3)     (6.9)
Total income taxes from
  continuing operations                $  100.9  $  137.9  $  117.4
Income tax -
  Extraordinary item
    Current tax expense                   (17.8)      -         -
    Deferred tax expense                 (100.2)      -         -
    Total extraordinary item             (118.0)      -         -
Total income taxes                     $  (17.1) $  137.9  $  117.4

<PAGE>

     The  reconciliations  of income tax expense to amounts computed by applying
the statutory tax rate to reported pretax income from continuing  operations for
the period are set below:

                                                       Years Ended December 31,
(Millions of dollars)                               1997      1996      1995
Income tax expense at the
  federal statutory tax rate                     $   88.1  $  128.3  $  105.0
Increases/(decreases) in taxes resulting from-
  State taxes,
    net of federal effect                            11.8      13.7      14.0
  Investment tax credit
    amortization                                     (7.3)     (7.3)     (6.9)
Depreciation not normalized                          11.3       9.4       7.4
Interest expense on
    preferred securities                             (6.9)     (6.9)     (3.7)
Other-net                                             3.9        .7       1.6
Total income taxes from
  continuing operations                          $  100.9  $  137.9  $  117.4

     Combined federal and state effective income tax rates were 40.1%, 37.6% and
39.1% for the years 1997, 1996 and 1995, respectively.

     IP is subject to the provisions of the Alternative Minimum Tax System. As a
result,  IP has an Alternative  Minimum Tax credit  carryforward at December 31,
1997,  of  approximately  $156.8  million.  This  credit can be carried  forward
indefinitely  to offset future regular  income tax  liabilities in excess of the
tentative minimum tax.

     The  Internal  Revenue  Service is  currently  auditing  IP's  consolidated
federal  income tax returns for the years 1991 through 1993.  At this time,  the
outcome of the audit cannot be determined; however, the results of the audit are
not expected to have a material  adverse effect on IP's  consolidated  financial
position or results of operations.

     Because of the  passage of HB 362,  IP's  electric  generation  business no
longer  meets the criteria  for  application  of FAS 71. As required by FAS 101,
"Regulated  Enterprises - Accounting for the  Discontinuation  of Application of
FASB  Statement  No. 71", the income tax effects of the  write-off of regulatory
assets and  liabilities  related to electric  generation  are  reflected  in the
extraordinary  item  for  the  cumulative  effect  of  a  change  in  accounting
principle.

Note 7 - Capital  Leases 
The Fuel  Company,  which is 50% owned by IP, was formed in 1981 for the purpose
of leasing nuclear fuel to IP for Clinton.  Lease payments are equal to the Fuel
Company's   cost  of  fuel  as  consumed   (including   related   financing  and
administrative costs).  Billings under the lease agreement during 1997, 1996 and
1995 were $4  million,  $35  million and $41  million,  respectively,  including
financing costs of $4 million,  $5 million and $7 million,  respectively.  IP is
required to pay financing costs whether or not fuel is consumed. IP is obligated
to make  subordinated  loans to the Fuel Company at any time the  obligations of
the Fuel Company that are due and payable exceed the funds available to the Fuel
Company.  Lease terms stipulate that in the event that Clinton is out of service
for 24 consecutive  months,  IP will be obligated to purchase  Clinton's incore
nuclear fuel for $62 million from the Fuel  Company.  IP has an  obligation  for
nuclear fuel disposal  costs of leased  nuclear fuel.  See "Note 3 - Commitments
and Contingencies"  for discussion of decommissioning  and nuclear fuel disposal
costs.  Nuclear fuel lease payments are included with "Fuel for electric plants"
on IP's Consolidated Statements of Income.

     At December 31, 1997 and 1996, current  obligations under capital lease for
nuclear fuel are $18.7 million and $36.9 million, respectively.

     Over the next five years  estimated  payments  under capital  leases are as
follows:

                                                       (Millions of dollars)
1998                                                        $           23.5
1999                                                                    44.3
2000                                                                    23.9
2001                                                                    21.5
2002                                                                    16.7
Thereafter                                                              12.8
                                                                       142.7
Less-Interest                                                           16.0
  Total                                                            $   126.7

<PAGE>


Note 8 - Long-Term Debt
<TABLE>
<S>                                                                                               <C>                     <C>      
                                                                                                              (Millions of dollars)
December 31,                                                                                                 1997            1996
First mortgage bonds-
  6 1/2%       series due 1999                                                                     $  72.0                 $  72.0
  6.60%        series due 2004 (Pollution Control Series A)                                            6.3                     6.5
  7.95%        series due 2004                                                                        72.0                    72.0
  6%           series due 2007 (Pollution Control Series B)                                           18.7                    18.7
  7 5/8%       series due 2016 (Pollution Control Series F, G and H)                                   -                     150.0
  8.30%        series due 2017 (Pollution Control Series I)                                           33.8                    33.8
  7 3/8%       series due 2021 (Pollution Control Series J)                                           84.7                    84.7
  8 3/4%       series due 2021                                                                        57.1                    57.1
  5.70%        series due 2024 (Pollution Control Series K)                                           35.6                    35.6
  7.40%        series due 2024 (Pollution Control Series L)                                           84.1                    84.1
  Total first mortgage bonds                                                                         464.3                   614.5
New mortgage bonds-
  6 1/8%       series due 2000                                                                        40.0                    40.0
  5 5/8%       series due 2000                                                                       110.0                   110.0
  6 1/2%       series due 2003                                                                       100.0                   100.0
  6 3/4%       series due 2005                                                                        70.0                    70.0
  8%           series due 2023                                                                       229.0                   229.0
  7 1/2%       series due 2025                                                                       177.0                   177.0
  Adjustable rate series due 2028 (Pollution Control Series M, N and O)                              111.8                   111.8
  Adjustable rate series due 2032 (Pollution Control Series P, Q and R)                              150.0                     -  
  Total new mortgage bonds                                                                           987.8                   837.8
  Total mortgage bonds                                                                             1,452.1                 1,452.3
Medium-term notes, series A                                                                           68.0                    78.5
Variable rate long-term debt due 2017                                                                 75.0                    75.0
  Total other long-term debt                                                                         143.0                   153.5
                                                                                                   1,595.1                 1,605.8
Unamortized discount on debt                                                                         (16.8)                  (18.1)
  Total long-term debt excluding capital lease obligations                                         1,578.3                 1,587.7
  Obligations under capital leases                                                                   126.7                   96.4
                                                                                                   1,705.0                 1,684.1
Long-term debt and lease obligations maturing within one year                                        (87.5)                  (47.7)
  Total long-term debt                                                                     $       1,617.5            $    1,636.4
</TABLE>

In April 1997, IP  refinanced  $150 million of 7 5/8% First  Mortgage  Bonds due
2016 as Adjustable Rate New Mortgage Bonds due 2032. 

In 1989 and  1991,  IP  issued a series  of fixed  rate  medium-term  notes.  At
December 31, 1997,  these notes had interest  rates ranging from 9% to 9.31% and
will mature at various dates in 1998.  Interest rates on variable rate long-term
debt due 2017 are adjusted  weekly and ranged from 4.35% to 4.6% at December 31,
1997.

For the years 1998,  1999, 2000, 2001 and 2002, IP has long-term debt maturities
and cash sinking fund  requirements  in the  aggregate of (in  millions)  $68.8,
$72.8,  $150.8, $.8 and $.8,  respectively.  These amounts exclude capital lease
requirements. See "Note 7 - Capital Leases." 

At December  31,  1997,  the  aggregate  total of  unamortized  debt expense and
unamortized loss on reacquired debt was approximately $50.4 million.

In 1992,  IP  executed a new  general  obligation  mortgage  (New  Mortgage)  to
replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage).  Both
mortgages  are  secured  by liens on  substantially  all of IP's  properties.  A
corresponding  issue of First Mortgage bonds, under the First Mortgage,  secures
any  bonds  issued  under  the New  Mortgage.  In  October  1997,  at a  special
bondholders  meeting,  the 1943  First  Mortgage  was  amended  to be  generally
consistent  with  the  New  Mortgage.  The  remaining  balance  of net  bondable
additions at December 31, 1997, was approximately $1.8 billion.

<PAGE>

Note 9 - Preferred Stock
<TABLE>
<S>                                                                                               <C>                   <C>   
                                                                                                             (Millions of dollars)
December 31,                                                                                          1997                    1996
Serial Preferred Stock, cumulative, $50 par value-
Authorized 5,000,000 shares; 1,139,110 and 1,221,700 shares outstanding, respectively
  Series      Shares             Redemption Prices
  4.08%       283,290             $   51.50                                                       $   14.1               $    15.0
  4.26%       136,000                 51.50                                                            6.8                     7.5
  4.70%       176,000                 51.50                                                            8.8                    10.0
  4.42%       134,400                 51.50                                                            6.7                     7.5
  4.20%       167,720                 52.00                                                            8.4                     9.0
  7.75%       241,700                 50.00 after July 1, 2003                                        12.1                    12.1
   Net premium on preferred stock                                                                       .2                      .2
  Total Preferred Stock, $50 par value                                                           $    57.1               $    61.3

Serial Preferred Stock, cumulative, without par value-
Authorized 5,000,000 shares; 0 and 698,200 shares outstanding, respectively
  Series      Shares      Redemption Prices
    A           -                 -                                                             $      -                 $    34.9
  Total Preferred Stock, without par value                                                      $      -                 $    34.9

Preference Stock, cumulative, without par value-
Authorized 5,000,000 shares; none outstanding                                                          -                       -
  Total Serial Preferred Stock, Preference Stock and Preferred Securities                       $     57.1               $    96.2

Company Obligated Mandatorily Redeemable Preferred Securities of:
Illinois Power Capital, L.P.
Monthly Income Preferred Securities, cumulative, $25 liquidation preference-
3,880,000 shares authorized and outstanding                                                     $     97.0               $    97.0

Illinois Power Financing I
Trust Originated Preferred Securities, cumulative, $25 liquidation preference-
4,000,000 shares authorized and outstanding                                                          100.0                   100.0

  Total Mandatorily Redeemable Preferred Stock                                                  $    197.0               $   197.0

</TABLE>

Serial  Preferred  Stock  ($50 par value) is  redeemable  at the option of IP in
whole or in part at any time  with  not less  than 30 days and not more  than 60
days notice by publication. The MIPS are redeemable at the option in whole or in
part on or after October 6, 1999 with not less than 30 days and not more than 60
days  notice by  publication.  The TOPrS  mature on January  31, 2045 and may be
redeemed in whole or in part at any time on or after January 31, 2001.

Quarterly  dividend rates for Serial Preferred  Stock,  Series A, are determined
based on market interest rates of certain U.S.  Treasury  securities.  Dividends
paid in 1997 and 1996 were $.75 per share per quarter.

Illinois Power Capital,  L.P., is a limited  partnership in which IP serves as a
general   partner.   Illinois   Power  Capital  issued  (1994)  $97  million  of
tax-advantaged   MIPS  at  9.45%  (5.67%  after-tax  rate)  with  a  liquidation
preference  of $25 per share.  IP  consolidates  the accounts of Illinois  Power
Capital.

Illinois Power  Financing I is a statutory  business trust in which IP serves as
sponsor.  IPFI issued (1996) $100 million of TOPrS at 8% (4.8% after-tax  rate).
IP consolidates the accounts of IPFI.

On September  29, 1997,  IP issued a notice of  redemption to all holders of its
Adjustable Rate Series A Preferred  Stock.  All 698,200 shares  outstanding were
redeemed  on  November  1,  1997,  at the price of $50 per  share.  In 1997,  IP
redeemed $4.2 million of various issues of Serial  Preferred Stock. The carrying
amount was $.2 million  over  consideration  paid and was recorded in equity and
included in Net income applicable to common stock.

<PAGE>

Note 10 - Common Stock 
and Retained  Earnings 
On May 31, 1994, common shares of IP began trading as common shares of Illinova.
Illinova is the sole shareholder of IP common stock.

     In 1997, IP repurchased 6,017,748 shares of its common stock from Illinova.
In  1996  and  1995,  IP  repurchased   714,811  shares  and  2,696,086  shares,
respectively, of its common stock from Illinova. Under Illinois law, such shares
may be held as treasury stock and treated as authorized but unissued,  or may be
canceled by resolution  of the Board of Directors.  IP holds the common stock as
treasury stock and deducts it from common equity at the cost of the shares.

     IP employees participate in an ESOP that includes an incentive compensation
feature which is tied to achievement of specified  corporate  performance goals.
This arrangement  began in 1991 when IP loaned $35 million to the Trustee of the
Plans,  which used the loan proceeds to purchase 2,031,445 shares of IP's common
stock on the open market.  The loan and common shares were converted to Illinova
instruments with the formation of Illinova in May 1994. These shares are held in
a suspense account under the Plans and are being  distributed to the accounts of
participating  employees  as the  loan  is  repaid  by the  Trustee  with  funds
contributed by IP,  together with dividends on the shares acquired with the loan
proceeds.  IP  financed  the loan with  funds  borrowed  under  its bank  credit
agreements.

     For the year ended  December 31, 1997,  91,282 common shares were allocated
to  salaried  employees  and  83,418  shares  to  employees  covered  under  the
Collective Bargaining Agreement through the matching contribution feature of the
ESOP arrangement. Under the incentive compensation feature, 70,720 common shares
were allocated to employees for the year ended  December 31, 1997.  During 1997,
IP contributed $5.0 million to the ESOP and, using the shares allocated  method,
recognized  $3.3  million  of  expense.  Interest  paid  on the  ESOP  debt  was
approximately  $1.3  million in 1997 and  dividends  used for debt  service were
approximately $2.3 million.

     In 1992,  the Board of Directors  adopted and the  shareholders  approved a
Long-Term  Incentive  Compensation  Plan (the  Plan) for  officers  or  employee
members of the Board, but excluding directors who are not officers or employees.
The types of awards  that may be granted  under the Plan are  restricted  stock,
incentive stock options, non-qualified stock options, stock appreciation rights,
dividend  equivalents and other stock-based  awards.  The Plan provides that any
one or more  types of  awards  may be  granted  for up to  1,500,000  shares  of
Illinova's  common stock.  The following  table outlines the activity under this
plan at December 31, 1997. Of the options  granted in 1992,  1993, 1994 and 1995
in the table below, 7,500, 10,500, 4,400 and 6,500 options,  respectively,  have
been  forfeited  and are not  exercisable.  An  additional  20,000  options were
exercised in January 1998.

Year        Options     Grant          Year         Expiration     Options
Granted     Granted     Price       Exercisable        Date        Exercised
1992         62,000   $ 23 3/8         1996           6/10/01        38,000
1993         73,500   $ 24 1/4         1997           6/09/02            - 
1994         82,650   $ 20 7/8         1997           6/08/03            - 
1995         69,300   $ 24 7/8         1998           6/14/04            - 
1996         80,500   $ 29 3/4         1999           2/07/05            - 
1997         82,000   $ 26 1/8         2000           2/12/07            - 
                                                                           
     In October  1995,  the FASB  issued FAS 123,  "Accounting  for  Stock-Based
Compensation"  effective  for fiscal years  beginning  after  December 15, 1995.
Based on the current and anticipated use of stock options, the impact of FAS 123
is not material on the current  period and is not  envisioned  to be material in
any future  period.  IP continues to account for its stock options in accordance
with Accounting Principle Board Opinion No. 25.

     The  provisions  of  Supplemental   Indentures  to  IP's  General  Mortgage
Indenture and Deed of Trust  contain  certain  restrictions  with respect to the
declaration  and  payment  of  dividends.  IP was not  limited  by any of  these
restrictions at December 31, 1997. Under the Restated Articles of Incorporation,
common stock dividends are subject to the preferential  rights of the holders of
preferre d and preference stock.

Note 11 -Pension and Other Benefit Costs  
Illinova   offers  certain  benefit  plans  to  the  employees  of  all  of  its
subsidiaries. IP is sponsor and administrator of all of the benefit plans. IP is
reimbursed by the other Illinova subsidiaries for their share of the expenses of
the benefit  plans.  The  discussion  and amounts  below  represent the plans in
total, including the amounts attributable to the other subsidiaries.

     IP has  defined-benefit  pension plans covering all officers and employees.
Benefits are based on years of service and compensation.  IP's funding policy is
to  contribute  annually at least the  minimum  amount  required  by  government
funding  standards,  but not more than can be deducted  for  federal  income tax
purposes.

<PAGE>

     Pension costs, a portion of which have been  capitalized for 1997, 1996 and
1995, include the following components:

                                                      Years Ended December 31, 
(Million of dollars)                                   1997     1996     1995 
Service cost on benefits
  earned during the year                             $  10.1  $  10.2  $  10.4
Interest cost on projected                                                    
  benefit obligation                                    27.9     26.8     23.6
Return on plan assets                                  (95.6)   (42.2)   (58.3)
Net amortization and deferral                           61.5      9.4     29.6
Effect of enhanced retirement                                                 
  program                                                -        -       15.7
Net periodic pension cost                            $   3.9  $   4.2  $  21.0
                                                      
     The  estimated  funded  status of the plans at December  31, 1997 and 1996,
using discount  rates of 7.5% and 8.0%,  respectively,  and future  compensation
increases of 4.5% was as follows:

                                                  Balances as of December 31,  
(Millions of dollars)                                     1997      1996 
Actuarial present value of:
  Vested benefit obligation                            $ (329.7) $ (291.7)    
  Accumulated benefit obligation                         (350.6)   (312.5)    
Projected benefit obligation                             (412.8)   (361.5)    
Plan assets at fair value                                 432.1     357.2     
  Funded status                                            19.3      (4.3)    
  Unrecognized net (gain)/loss                            (39.1)    (13.8)    
  Unrecognized net asset at transition                    (26.1)    (30.3)    
  Unrecognized prior service cost                          17.4      19.3     
Accrued pension cost included in                                              
  deferred credits                                     $  (28.5) $  (29.1)    
                                                       
     The  plans'  assets  consist  primarily  of  common  stocks,  fixed  income
securities,  cash  equivalents,  alternative  investments  and real estate.  The
actuarial  present  values of  accumulated  plan benefits at January 1, 1997 and
1996,  were  $375  million  and $361  million,  respectively,  including  vested
benefits of $353 million and $337  million,  respectively.  The pension cost for
1997,  1996 and 1995 was  calculated  using a discount  rate of 8.0%,  7.75% and
8.75%,  respectively;  future compensation  increases of 4.5% for 1997, 1996 and
1995;  and a return on assets of 9.5% for 1997 and 1996,  and 9.0% for 1995. The
unrecognized net asset at transition and the unrecognized prior service cost are
amortized on a straight-line  basis over the average remaining service period of
employees  who are  expected to receive  benefits  under the plan.  IP made cash
contributions of $5 million in 1997, $6 million in 1996 and $2 million in 1995.

     IP provides  health  care and life  insurance  benefits to certain  retired
employees,  including their eligible  dependents,  who attain specified ages and
years of service under the terms of the  defined-benefit  plans.  Postretirement
benefits,  a portion of which have been capitalized,  for 1997 and 1996 included
the following components:
                                                       Years Ended December 31,
(Millions of dollars)                                     1997       1996
Service cost on benefits earned
  during the year                                       $  1.9     $  2.2      
Interest cost on projected                                                  
  benefit obligation                                       5.9        6.1      
Return on plan assets                                     (8.0)      (5.9)     
Amortization of unrecognized                                                
  transition obligation                                    7.4        6.4      
Net periodic postretirement                                                 
  benefit cost                                          $  7.2     $  8.8      
                                                        
     The  net  periodic  postretirement  benefit  cost  in the  preceding  table
includes amortization of the previously unrecognized accumulated  postretirement
benefit  obligation,  which was $41.4 million and $44.2 million as of January 1,
1997 and 1996, respectively, over 20 years on a straight-line basis.

     IP has  established two separate trusts for those retirees who were subject
to a  collectively  bargained  agreement and all other  retirees to fund retiree
health care and life  insurance  benefits.  IP's funding policy is to contribute
annually an amount at least equal to the  revenues  collected  for the amount of
postretirement benefit costs allowed in rates. The plan assets consist of common
stocks and fixed income  securities at December 31, 1997 and 1996. The estimated
funded status of the plans at December 31, 1997 and 1996, using weighted average
discount rates of 7.0% and 8.0%,  respectively,  and a return on assets of 9.0%,
was as follows:

                                               Balances  as of  December  31,  
(Millions  of  dollars)                                1997     1996  
Accumulated postretirement 
benefit obligation
  Current retirees                                  $ (51.1) $ (49.6)  
  Current employees - fully eligible                   (5.5)    (3.5)  
  Current employees - not fully eligible              (32.8)   (28.6)  
    Total benefit obligation                          (89.4)   (81.7)  
Plan assets at fair value                              49.7     34.4   
Funded status                                         (39.7)   (47.3)  
Unrecognized transition obligation                     38.7     41.4   
Unrecognized net (gain)/loss                           (6.3)    (7.1)  
Accrued postretirement benefit cost                                    
  included in deferred credits                      $  (7.3) $ (13.0)  
                                                    
     The pre-65  health-care-cost  trend rate  decreases  from 7.1% to 5.5% over
nine years and the post-65  health-care-cost trend rate is level at 1.5%. A 1.0%
increase in each future year's assumed  health-care-cost  trend rates  increases
the  service  and  interest  cost  from $7.8  million  to $8.7  million  and the
accumulated  postretirement  benefit  obligation  from  $89.4  million  to $99.9
million.

<PAGE>

Note 12 -  Segments  of Business
Illinois  Power  Company  is  a  public  utility   engaged  in  the  generation,
transmission,  distribution and sale of electric energy,  and the  distribution,
transportation  and  sale  of  natural  gas.  The  following  is  a  summary  of
operations:
<TABLE>
<S>                        <C>         <C>      <C>        <C>        <C>      <C>         <C>       <C>      <C>

                                                                                                               (Millions of dollars)
                                          1997                           1996                           1995
                                                   Total                           Total                          Total
                              Electric     Gas     Company    Electric    Gas     Company    Electric   Gas      Company
Operation information -
Operating revenues          $  1,420.0 $  353.9 $  1,773.9 $  1,340.5 $  348.2 $  1,688.7 $  1,368.9 $  272.5 $  1,641.4
Operating expenses,
  excluding provision
  for income taxes             1,081.3    311.5    1,392.8      886.2    300.5    1,186.7      946.2    245.0    1,191.2
Pre-tax operating income         338.7     42.4      381.1      454.3     47.7      502.0      422.7     27.5      450.2
AFUDC                              4.9       .1        5.0        6.3       .2        6.5        5.5       .5        6.0
Pre-tax operating income,
  including AFUDC           $    343.6 $   42.5 $    386.1 $    460.6 $   47.9 $    508.5 $    428.2 $   28.0 $    456.2
  Other deductions, net                                5.7                            9.0                            8.1
  Interest charges                                   128.7                          133.0                          148.0
  Provision for
    income taxes                                     100.9                          137.9                          117.4
  Net income                                         150.8                          228.6                           182.7
  Extraordinary item
    (net of taxes)                                  (195.0)                           -                              -
  Preferred dividend
    requirements                                     (21.5)                         (22.3)                          (23.7)
  Carrying value over
    (under) consideration
    paid for redeemed
    preferred stock                                     .2                            (.7)                          (3.5)
Net income (loss) applicable
  to common stock                                   $(65.5)                        $205.6                         $155.5
Other information -
  Depreciation                171.5 $     24.1 $    195.6 $    164.0 $     22.5 $   186.5 $    161.4 $   21.6     $183.0
  Capital expenditures     $  201.3 $     22.6 $    223.9 $    164.0 $     23.3 $   187.3 $    185.7 $   23.6     $209.3
Investment information -
  Identifiable assets*     $4,508.1 $    453.8    4,961.9 $  4,577.1 $    481.9 $ 5,059.0 $  4,580.4 $    446.3 $5,026.7
  Nonutility plant and
    other investments                                 5.7                            14.3                           16.2
  Assets utilized for
    overall operations                              323.9                           495.2                          524.3       
Total assets                                     $5,291.5                        $5,568.5                       $5,567.2
</TABLE>

<PAGE>

Note 13 - Fair Value of Financial Instruments
                                        1997                   1996
                                Carrying    Fair        Carrying    Fair
(Millions of dollars)           Value       Value       Value       Value
Nuclear decommissioning
  trust funds               $     62.5 $     62.5 $     41.4 $     41.4
Cash and cash equivalents         17.8       17.8       12.5       12.5
Mandatorily redeemable
  preferred stock                197.0      202.7      197.0      199.3
Long-term debt                 1,578.3    1,627.6    1,587.7    1,629.3
Notes payable                    376.8      376.8      310.0      310.0

     The following  methods and assumptions were used to estimate the fair value
of each class of financial instruments listed in the table above:

Nuclear  Decommissioning  Trust  Funds  The fair  values  of  available-for-sale
marketable  debt  securities  and  equity   investments   held  by  the  Nuclear
Decommissioning  Trust are based on quoted market  prices at the reporting  date
for those or similar investments.  

Cash and Cash  Equivalents  The  carrying  amount  of cash and cash  equivalents
approximates fair value due to the short maturity of these instruments.

Mandatorily  Redeemable  Preferred  Stock and  Long-Term  Debt The fair value of
mandatorily  redeemable preferred stock and long-term debt is estimated based on
the quoted  market  prices for similar  issues or by  discounting  expected cash
flows at the rates currently offered for debt of the same remaining  maturities,
as advised by IP's bankers.

Notes Payable The carrying amount of notes payable  approximates  fair value due
to the short maturity of these instruments.

Note 14 - Quarterly  Consolidated  Financial  Information  and Common Stock Data
(unaudited)
<TABLE>
<S>                                                <C>                    <C>                 <C>                     <C>   
                                                                                                               (Millions of dollars)
                                                    First Quarter         Second Quarter      Third Quarter           Fourth Quarter
                                                        1997                  1997               1997                     1997
Operating revenues                                  $   472.8             $  415.3             $   497.1               $   388.7
Operating income                                         88.9                 82.6                 101.8                     5.4
Net income (loss) before extraordinary item              55.0                 51.4                  71.9                   (27.5)
Net income (loss) after extraordinary item               55.0                 51.4                  71.9                  (222.5)
Net income (loss) applicable to common stock             49.5                 46.0                  67.5                  (228.5)
Cash dividends declared on common stock                  23.5                 23.2                  22.2                    22.2
Cash dividends paid on common stock                      23.5                 23.5                  23.2                    22.2


                                                   First Quarter          Second Quarter       Third Quarter          Fourth Quarter
                                                       1996                    1996               1996                      1996
Operating revenues                                  $   446.7             $   365.7          $   458.4                 $   417.9
Operating income                                         88.1                  74.9              133.3                      65.1
Net income                                               49.1                  48.7              100.6                      30.2
Net income applicable to common stock                    43.5                  42.5               94.8                      24.8
Cash dividends declared on common stock                  21.2                  21.2               21.2                      23.5
Cash dividends paid on common stock                      21.2                  21.2               21.2                      21.2
</TABLE>

<PAGE>

Illinois Power Company
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>

<S>                                            <C>           <C>         <C>           <C>         <C>            <C>
                                                                                                              (Millions of dollars)
                                                     1997          1996        1995         1994         1993          1987
Operating revenues
  Electric                                     $   1,244.4   $   1,202.9  $   1,252.6  $   1,177.5  $   1,135.6   $     910.8
  Electric interchange                               175.6         137.6        116.3        110.0        130.8          92.4
  Gas                                                353.9         348.2        272.5        302.0        314.8         308.7
  Total operating revenues                        $1,773.9      $1,688.7  $   1,641.4  $   1,589.5  $   1,581.2   $   1,311.9
Extraordinary item net of income tax benefit   $    (195.0)  $       -    $       -    $       -    $       -     $       - 
Net income (loss) after extraordinary item     $     (44.2)  $     228.6  $     182.7  $     180.3  $     (56.1)  $     289.6
Effective income tax rate                             40.1%         37.6%        39.1%        38.4%       (72.4)%        19.1%
Net income (loss) applicable to common stock   $     (65.5)  $     205.6  $     155.5  $     161.8  $     (82.2)  $     251.9
Cash dividends declared on common stock        $      91.1   $      87.1  $      77.9  $      49.1  $      30.2   $     178.5
Cash dividends paid on common stock                   92.4          84.8         75.3         60.5         60.5         176.2
Total assets                                   $   5,291.5   $   5,568.5  $   5,567.2  $   5,595.8  $   5,445.1   $   5,922.7
Capitalization
  Common stock equity                          $   1,299.1   $   1,576.1  $   1,478.1  $   1,466.0  $   1,342.8   $   1,841.4
  Preferred stock                                     57.1          96.2        125.6        224.7        303.7         315.2
  Mandatorily redeemable
    preferred stock                                  197.0         197.0         97.0        133.0         48.0         160.0
  Long-term debt                                   1,617.5       1,636.4      1,739.3      1,946.1      1,926.3       2,279.2
  Total capitalization                            $3,170.7      $3,505.7  $   3,440.0  $   3,769.8  $   3,620.8   $   4,595.8
Retained earnings (deficit)                    $      89.5   $     245.9  $     129.6  $      51.1  $     (71.0)  $     554.8
Capital expenditures                           $     223.9   $     187.3  $     209.3  $     193.7  $     277.7   $     263.5
Cash flows from operations                     $     418.7   $     443.3  $     473.7  $     280.2  $     396.6   $     232.3
AFUDC as a percent of earnings
  applicable to common stock                          (7.6)%         3.2%         3.9%         5.7%       N/A            80.2%
Ratio of earnings to fixed charges                     1.24          3.40         2.77         2.73          .80          2.51
</TABLE>

<PAGE>

Illinois Power Company
SELECTED STATISTICS
<TABLE>
<S>                                                     <C>       <C>        <C>         <C>        <C>       <C>

                                                         1997       1996       1995       1994       1993       1987
Electric Sales in KWH (Millions)
Residential                                             4,734      4,782      4,754      4,537      4,546      4,241
Commercial                                              3,943      3,894      3,804      3,517      3,246      2,862
Industrial                                              8,403      8,493      8,670      8,685      8,120      7,323
Other                                                     426        367        367        536        337        910
            Sales to ultimate consumers                17,506     17,536     17,595     17,275     16,249     15,336
Interchange                                             7,230      5,454      4,444      4,837      6,015      3,682
Wheeling                                                3,253        928        642        622        569          -
            Total electric sales                       27,989     23,918     22,681     22,734     22,833     19,018
Electric Revenues (Millions)
Residential                                               489   $    483   $    500   $    471   $    463   $    352
Commercial                                                325        318        321        295        269        209
Industrial                                                376        360        392        378        360        325
Other                                                      40         38         37         30         40         25
            Revenues from ultimate consumers            1,230      1,199      1,250      1,174      1,132        911
Interchange                                               176        138        116        110        131         92
Wheeling                                                   14          4          3          3          3          -
            Total electric revenues                    $1,420   $  1,341   $  1,369   $  1,287   $  1,266   $  1,003
Gas Sales in Therms (Millions)
Residential                                            $  343        427        356        359        371        332
Commercial                                                147        177        144        144        148        137
Industrial                                                 47         99         88         81         78         96
            Sales to ultimate consumers                   537        703        588        584        597        565
Transportation of customer-owned gas                      309        251        273        262        229        327
            Total gas sold and transported                846        954        861        846        826        892
Interdepartmental sales                                    19          9         21          5          7          5
            Total gas delivered                           865        963        882        851        833        897
Gas Revenues (Millions)
Residential                                            $  238   $    216   $    173   $    192   $    200   $    192
Commercial                                                 77         79         60         66         68         66
Industrial                                                 20         40         24         31         34         34
            Revenues from ultimate consumers              335        335        257        289        302        292
Transportation of customer-owned gas                        9          7          8          9          8         15
Miscellaneous                                              10          6          7          4          5          2
            Total gas revenues                       $    354   $    348   $    272   $    302   $    315   $    309
System peak demand (native load) in kw (thousands)      3,532      3,492      3,667      3,395      3,415      3,083
Firm peak demand (native load) in kw (thousands)        3,469      3,381      3,576      3,232      3,254      2,923
Net generating capability in kw (thousands)             3,289      4,148      3,862      4,121      4,045      3,400
Electric customers (end of year)                      580,257    549,957    529,966    553,869    554,270    542,848
Gas customers (end of year)                           405,710    389,223    374,299    388,170    394,379    384,091
Employees (end of year)                                 3,655      3,635      3,559      4,350      4,540      4,616
</TABLE>


500 south 27th street, decatur, illinois 62521 n http://www.illinova.com
unlocking the power 1997
This entire report is printed on recycled paper