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

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Proxy Statement
Table of Contents

Notice of Annual Meeting                                2

Proxy Statement                                         3

Appendix: 1997 Annual Report to Shareholders          a-1

To the Shareholders 
of Illinova Corporation:

Notice is Hereby  Given that the  Annual  Meeting of  Shareholders  of  Illinova
Corporation  ("Illinova") 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 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,
General Counsel and Corporate Secretary

Decatur, Illinois
March 10, 1998

IMPORTANT

Illinova  invites each of its  approximately  35,000  shareholders 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. If you are unable to be present at the meeting,  it is important
that you sign and return the enclosed  proxy, no matter how many shares you own.
An envelope  on which  postage  will be paid by  Illinova  is enclosed  for that
purpose.

     Return of your executed  proxy will ensure that you are  represented at the
Annual Meeting. Your cooperation is appreciated.
<PAGE>

PROXY STATEMENT

Solicitation and Revocation of Proxies

This Proxy  Statement is furnished in connection  with a solicitation of proxies
by the  Board  of  Directors  of  Illinova,  for use at the  Annual  Meeting  of
Shareholders  to be  held  at  Shilling  Community  Education  Center,  Richland
Community  College,  One  College  Park,  Decatur,  Illinois  62521,  at 10 a.m.
Wednesday, April 8, 1998, and at any adjournment thereof (the "Annual Meeting").
Any shareholder giving a proxy may revoke it at any time by giving a later proxy
or by giving written notice of revocation to the Corporate Secretary of Illinova
prior to the Annual  Meeting.  All duly executed  proxies  received prior to the
Annual Meeting will be voted.

     Shares credited to the accounts of  participants  in Illinova's  Investment
Plus Plan and Illinois Power Company's  Incentive Savings Plans will be voted in
accordance with the  instructions of the participants or otherwise in accordance
with the terms of those plans.

Voting Rights

Shareholders of record at the close of business on Monday, February 9, 1998 (the
"Record Date"),  will be entitled to receive notice of and to vote at the Annual
Meeting. As of that date,  Illinova had outstanding  71,701,937 shares of Common
Stock.  Shareholders who are present at the Annual Meeting in person or by proxy
will be entitled  to one vote for each share of  Illinova's  Common  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
Common  Stock held of record at the close of  business on the Record  Date.  The
affirmative  vote of the  holders  of a majority  of the shares of Common  Stock
present in person or  represented  by proxy and  entitled  to vote at the Annual
Meeting is required for the election of directors.

Annual Report, Proxy and Proxy Statement

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

Board of Directors

Information Regarding the Board of Directors

The Board of Directors  held eight Board  meetings  during 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 percent of the
aggregate meetings of the Board and Committees of which they were members during
1997. The Board has three standing committees:  the Audit Committee, the Finance
Committee, and the Compensation and Nominating 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 Illinova'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 Illinova'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.
<PAGE>

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  Illinova'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 Illinova'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 Illinova  officers and the Board of Directors;  (2) review Illinova'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 on 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
Illinova.   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 Illinova
not less than 90 nor more than 120 days prior to the Annual Meeting.

     The Compensation and Nominating Committee met seven 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.
<PAGE>

Board Compensation

The Outside  Directors  of Illinova  receive a retainer fee of $18,000 per year.
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  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,
the  Outside  Directors  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's 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 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  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

Illinova'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 Illinova's Board of Directors.  The names and certain additional  information
concerning  each of the director  nominees is set forth on the following  pages.
The dates  shown for  service as a  director  include  service as a director  of
Illinois  Power  prior to the May 1994  restructuring  in which  Illinois  Power
became a subsidiary of Illinova. 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  would  normally  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 Illinova

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                                                          1998

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  and 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 and 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,   Babcock  and  Wilcox,  and  Vice  Chairman  of  McDermott
International.

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,  executive  officers  named in the
Summary Compensation Table, and entities owning more than 5 percent.

                                     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)
Robert A. Schultz                        8,551               0              (3)
Hotchkis & Wiley (4)                 6,321,233                              8.8%
Merrill Lynch Asset
Management, L.P.(5)                  6,321,253                              8.8%
State of Michigan
Retirement Systems(6)                3,714,300                             5.18%

(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. Schultz, 6,750.

(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%).

(4) With sole voting and dispositive  power, as of January 31, 1998,  Hotchkis &
Wiley, 800 W. 6th Street, 5th Floor, Los Angeles, CA 90017.

(5) With shared voting and  dispositive  power,  per February 2, 1998,  Schedule
13G, Merrill Lynch Asset Management,  L.P., 800 Scudders Mill Road,  Plainsboro,
NJ 08536.

(6) With sole voting and  dispositive  power,  as of January 31, 1998,  State of
Michigan Retirement Systems, 430 W. Allegan, Lansing, MI 48909.
<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  Illinova  subsidiaries  for the  years  indicated.  The  compensation  shown
includes all  compensation  paid for service to Illinova  and its  subsidiaries,
including  Illinois  Power,  Illinova  Generating  Company,  and Illinova Energy
Partners.
<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

Robert A. Schultz                      1997      $185,560      $     -       $  8,480      $      -       6,000 shs.       $ 2,214
  Vice President of Illinois           1996       176,170       23,604          6,957        23,604       6,500 shs.         2,114
  Power, formerly President            1995       150,000       20,539          7,316        20,639       4,000 shs.         2,584
  of Illinova Energy Partners
</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. Schultz,  1,509 units valued at $40,635.  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>
                                                           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)
<S>                       <C>                          <C>                   <C>                 <C>                    <C>    
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

Robert A. Schultz         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 5 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  three  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>

                              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
<S>                              <C>                                                      <C>    
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

Robert A. Schultz                 6,750 shs./16,500 shs                                    $29,165/$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.
<TABLE>

                    Estimated Annual Benefits (rounded)
<S>         <C>        <C>        <C>        <C>        <C>    
   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
</TABLE>

     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  Schultz  had
completed 32, 16, 25, 23 and 16 years of credited service, respectively.

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  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.  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 who elect early retirement.
<PAGE>

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 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 Utilities Index
is used to relate  Illinova's  shareholder  value in the  following  performance
graphs.  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.

     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.
<PAGE>

     Awards shown under Bonus in the Summary  Compensation Table for performance
during 1997 were based on achievement of officer's  individual goals.  There was
no payout for the identified performance areas.

     For the unregulated  subsidiaries,  Illinova Generating and Illinova Energy
Partners,  1997 officer awards were based on  achievement of specific  marketing
objectives and earnings objectives of the units. Up to 50 percent of the awarded
amount is based on an assessment of the individual officer's  performance during
the year.

Long-Term Incentive Compensation (LTIC) Plan

     Awards  under the LTIC plan are based on corporate  performance  as well as
individual  officer's  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 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.  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 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>

Stock Performance Graphs

The following performance graphs compare the cumulative total shareholder return
on Illinova's  Common Stock to the cumulative total return on the S&P 500 Index,
S&P MidCap 400 Index and S&P Utilities Index from (i) December 31, 1992, through
December 31, 1997, and (ii) December 31, 1994, through December 31, 1997.

Comparison of Five-Year Cumulative Total Return

Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities

     Assumes $100 invested on December 31, 1992, in Illinova  Common Stock,  S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.

     Fiscal year ended December 31.

Comparison of Three-Year Cumulative Total Return

Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities

     Assumes $100 invested on December 31, 1994, in Illinova  Common Stock,  S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.

     Fiscal year ended December 31.
<PAGE>

Independent Auditors

The  Board of  Directors  of  Illinova  has  selected  Price  Waterhouse  LLP as
independent  auditors for Illinova 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 shareholders
commencing  on or about March 10, 1998.  Copies of  Illinova'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, Illinova Corporation,  500 South 27th
Street, Decatur, Illinois 62525-1805.

     Any proposal by a  shareholder  to be presented at the next Annual  Meeting
must be received at  Illinova'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,
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

IEP              Illinova Energy Partners, Inc.

IGC              Illinova Generating Company

IIC              Illinova Insurance Company

Illinova         Illinova Corporation

IP               Illinois Power Company

IPFI             Illinois Power Financing I

IPMI             Illinova Power Marketing, Inc.

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   Illinois  Power  Company   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 Illinova and its  subsidiaries;  the
effects of increased competition on the utility businesses;  risks of owning and
operating  a  nuclear  facility;  changes  in prices  and cost of fuel;  factors
affecting non-utility investments, such as the risk of doing business in foreign
countries;  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.

Illinova Subsidiaries

The  Consolidated   Financial   Statements  include  the  accounts  of  Illinova
Corporation,  a holding company;  Illinois Power Company, a combination electric
and gas utility;  Illinova Generating  Company,  which invests in energy-related
projects  throughout the world;  Illinova Energy Partners,  Inc., which develops
and markets energy-related services throughout the United States and Canada; and
Illinova  Insurance  Company,  whose  purpose  is to  insure  the  risks  of the
subsidiaries  of Illinova and risks related to or associated with their business
enterprises.  On February 12, 1997, the Illinova  Board of Directors  approved a
merger of Illinova Energy  Partners,  Inc. and Illinova Power  Marketing,  Inc.,
another Illinova subsidiary.  In the merger, Illinova Power Marketing,  Inc. was
the  surviving  entity but changed its name to Illinova  Energy  Partners,  Inc.
Illinova Generating Company and Illinova Energy Partners,  Inc. are wholly owned
subsidiaries of Illinova.  Illinois Power has preferred shares outstanding,  but
its  common  stock  is  wholly  owned  by  Illinova.  See  "Note  2  -  Illinova
Subsidiaries" for additional information.

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 use  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  supplier ("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  (i.e.,
     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;
<PAGE>

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.

     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 its 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 4
- 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 1997 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
August  1998  and  certain  customers  will  be free to  choose  their  electric
generation  supplier  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,   Illinova   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.  Illinova 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 $(90)  million for 1997,  $190
million for 1996, and $148 million for 1995.  Basic and diluted  earnings (loss)
per common  share were  $(1.22) for 1997 ($1.41  before the  extraordinary  item
related to discontinued application of FAS 71 for the generation segment), $2.51
for 1996,  and $1.96 for 1995 ($2.26  before the one-time  charge of $38 million
for enhanced  retirement and severance).  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,  IEP losses and an increase in  uncollectible  accounts
expense.  The increase in 1996 earnings per share 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 basic and diluted  earnings per share include $(.30)  net-of-tax
for the enhanced  retirement  and severance  program and $(.05) for the carrying
amount  under  consideration  paid for IP 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 service
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.

Illinova and Illinois Power - Results of Operations

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.
<PAGE>

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.

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.

Diversified  Enterprises Due primarily to increased power sales activity at IEP,
diversified  enterprises  revenues  increased  $678  million for 1997.  However,
diversified  enterprises expenses increased $705 million,  offsetting the growth
in revenues.  Diversified expenses primarily reflect the cost of power purchased
for resale.

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.

Miscellaneous  - Net The 1997  decrease  of $5.1  million  in  Miscellaneous-net
deductions  is  due  primarily  to  1996  accruals   recorded  for  the  planned
disposition  of  property.   The  1996  and  1995  change  in  Miscellaneous-net
deductions was negligible.

Equity  Earnings in  Affiliates  The increase of $11.1  million in 1997 and $3.7
million in 1996 in equity  earnings in  affiliates is primarily due to increased
earnings from IGC investments.

Interest Charges Total interest charges,  including AFUDC and preferred dividend
requirements,  increased $2.8 million in 1997,  decreased $15.8 million in 1996,
and increased $2.4 million in 1995. The 1997 increase is primarily due to higher
Illinova  debt  expenses,  increased IP short-term  borrowings  and lower AFUDC,
partially  offset  by the  continued  benefits  of IP  refinancing  efforts  and
capitalization  reductions.  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,  Illinova  declared the quarterly common stock dividend at
$.31 per share payable February 1, 1998, to stockholders of record as of January
9, 1998. On December 11, 1996,  Illinova  increased  the quarterly  common stock
dividend by 11%  declaring  the common stock  dividend for the first  quarter of
1997 at $.31 per share. On December 13, 1995,  Illinova  increased the quarterly
common stock  dividend 12%,  declaring  the common stock  dividend for the first
quarter of 1996 at $.28 per share.
<PAGE>

Capital Resources and Requirements

Illinova  and IP  need  cash  for  operating  expenses,  interest  and  dividend
payments, debt and certain IP preferred stock retirements, construction programs
and non-regulated subsidiary funding requirements. To meet these needs, Illinova
and IP have 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.

     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, Illinova expects that future cash flows
and  external  financings  will  enable it to meet  operating  requirements  and
continue to service  IP's and  Illinova's  existing  debt,  IP's  preferred  and
Illinova's  common 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  Illinova's  and IP's  securities  by three
principal securities rating agencies are as follows:


                                                     Standard        Duff &
                                           Moody's   & Poor's        Phelps

Illinova long-term debt                     Baa3         BBB-          -
IP first/new mortgage bonds                 Baa1         BBB          BBB+
IP preferred stock                          baa2         BBB-         BBB-
IP commercial paper                         P-2          A-2          D-2


     Under current market conditions, these ratings would afford Illinova and IP
the ability to issue additional securities through external financing.  Illinova
and IP have 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.  Illinova did not petition
Duff & Phelps for a rating of its long-term debt.

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


(Millions of dollars)                   1997     1996       1995

Illinova long-term debt               $ 100    $    -     $    -
IP long-term debt                       (11)     (154)       (5)
Preferred stock                         (39)       71      (135)
Common stock                            (90)        -         -

  Total decrease                      $ (40)    $ (83)    $(140)



     The  amounts  shown in the  preceding  table  for debt  retirements  do not
include all  mortgage  sinking fund  requirements.  IP has  generally  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 9 - Long-Term  Debt"  and "Note 10 - Preferred  Stock of
Subsidiary."

     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.

     In January 1997, a $300 million shelf  registration  statement for Illinova
debt  securities  became  effective.  On February 5, 1997,  Illinova issued $100
million of 7 1/8% Senior Notes due 2004.  The  proceeds  were used to redeem $77
million of  short-term  borrowings,  and to invest in  Illinova's  non-regulated
subsidiaries. On January 28, 1998, Illinova issued (under its $300 million shelf
registration  statement) $40 million of 6.46%  medium-term  notes due October 1,
2002. During 1997, Illinova  repurchased four million shares of its common stock
through an open market program.
<PAGE>

     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.

     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 Illinova and IP total bank lines of credit was $465  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 transitional  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.  Illinova
estimates  that  it will  spend  approximately  $225  million  for  construction
expenditures  for IP 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.

     Illinova's  capital  expenditures  for the  years  1998  through  2002,  in
addition to the IP  construction  expenditures,  are  expected  to include  $129
million for nuclear fuel,  $331 million for mandatory  debt  retirement and $762
million for investments by the non-regulated subsidiaries.

     See "Note 4 - Commitments and  Contingencies"  for additional  information.
Internal cash generation will meet  substantially  all  construction and capital
requirements.

Environmental Matters

See "Note 4 - Commitments and  Contingencies"  for a discussion of environmental
matters that impact or could potentially impact Illinova and IP.

Tax Matters

See "Note 7 - Income  Taxes"  for a discussion  of effective tax rates and other
tax issues.
<PAGE>

ILLINOVA CORPORATION

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  Illinova's  financial  position,  results of operations and cash
flows.

Illinova  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  Illinova'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,  Illinova  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 Illinova.  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, Illinova'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
Chief Financial Officer,
Treasurer and Controller

ILLINOVA CORPORATION

REPORT OF INDEPENDENT ACCOUNTANTS

PRICE WATERHOUSE LLP

To the Board of Directors and Shareholders of Illinova Corporation

In our opinion,  the consolidated  financial  statements of Illinova Corporation
and its subsidiaries appearing on pages a-11 through a-31 of this report present
fairly, in all material respects, the financial position of Illinova Corporation
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 the Company'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,  the Company
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>

ILLINOVA CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S>                                                                              <C>                <C>              <C>    

                                                                                  (Millions of dollars except per share amounts)

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
Diversified enterprises                                                              735.6              57.6               2.0

  Total                                                                            2,509.5           1,746.3           1,643.4

Operating Expenses
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
Diversified enterprises                                                              792.3              87.5              15.2
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

  Total                                                                            2,185.1           1,274.3           1,206.4

Operating income                                                                     324.4             472.0             437.0

Other Income and Deductions
Miscellaneous-net                                                                     (3.9)             (9.0)             (7.8)
Equity earnings in affiliates                                                         17.5               6.4               2.7

  Total                                                                               13.6              (2.6)             (5.1)

Income before interest charges and income taxes                                      338.0             469.4             431.9

Interest Charges
Interest expense                                                                     136.8             134.7             148.6
Allowance for borrowed funds used during construction                                 (5.0)             (6.5)             (6.0)
Preferred dividend requirements of subsidiary                                         21.5              22.3              23.7

  Total                                                                              153.3             150.5             166.3

Income before income taxes                                                           184.7             318.9             265.6
Income taxes                                                                          80.3             127.9             114.0
Net income before extraordinary item                                                 104.4             191.0             151.6

Extraordinary item net of income tax benefit of $118.0 million (Note 1)             (195.0)              -                 -

Net income (loss)                                                                    (90.6)            191.0             151.6
Carrying amount over (under) consideration paid
  for redeemed preferred stock of subsidiary                                            .2               (.7)             (3.5)

Net income (loss) applicable to common stock                                       $ (90.4)         $   190.3          $ 148.1

Earnings per common share before extraordinary item (basic and diluted)            $   1.41         $   2.51           $ 1.96
Extraordinary item per common share (basic and diluted)                            $  (2.63)               -           $    -
Earnings (loss) per common share (basic and diluted)                               $  (1.22         $   2.51           $ 1.96
Cash dividends declared per common share                                           $   1.24         $   1.15           $ 1.03
Cash dividends paid per common share                                               $   1.24         $   1.12           $ 1.00

Weighted average common shares                                                    73,991,651       75,681,937      75,643,937

</TABLE>


See notes to  consolidated  financial  statements  which are an integral part of
these statements. Prior years restated to conform to new financial format.
<PAGE>

ILLINOVA CORPORATION

CONSOLIDATED BALANCE SHEETS
<TABLE>

                                                                                                             (Millions of dollars)

<S>                                                                                                         <C>        <C>   

December 31,                                                                                                    1997        1996

Assets
Utility Plant, at original cost
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                                                                                     198.8      146.2
Current Assets
Cash and cash equivalents                                                                                         33.0       24.6
Accounts receivable (less allowance for doubtful accounts of $5.5 million and $3.0 million, respectively)
  Service                                                                                                        115.6      138.8
  Other                                                                                                          102.3       62.0
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                                                                                             76.7       78.1
Prepayments and other                                                                                             64.4       24.1
                                                                                                                 520.2      468.7

Deferred Charges
Deferred Clinton costs                                                                                             -        103.9
Recoverable income taxes                                                                                           -        101.3
Other                                                                                                            185.7      229.2
                                                                                                                 185.7      434.4
                                                                                                            $  5,583.0 $  5,712.8

Capital and Liabilities
Capitalization
Common stock - No par value, 200,000,000 shares authorized; 71,681,937 and 75,681,937 shares outstanding,
  respectively, stated at                                                                                   $  1,425.7 $  1,425.7
Less - Deferred compensation - ESOP                                                                               10.2       14.3
Retained earnings                                                                                                 51.7      233.0
Less - Capital stock expense                                                                                       7.3        8.2
Less - 4,000,000 shares of common stock in treasury at cost                                                       90.4        -
  Total common stock equity                                                                                    1,369.5    1,636.2
Preferred stock of subsidiary                                                                                     57.1       96.2
Mandatorily redeemable preferred stock of subsidiary                                                             197.0      197.0
Long-term debt                                                                                                 1,717.5    1,636.4
  Total capitalization                                                                                         3,341.1    3,565.8

Current Liabilities
Accounts payable                                                                                                 177.3      166.7
Notes payable                                                                                                    415.3      387.0
Long-term debt and lease obligations of subsidiary maturing within one year                                       87.5       47.7
Dividends declared                                                                                                22.9       24.7
Taxes accrued                                                                                                     26.7       43.9
Interest accrued                                                                                                  36.0       34.3
Other                                                                                                             96.0       43.7
                                                                                                                 861.7      748.0

Deferred Credits
Accumulated deferred income taxes                                                                                969.0    1,034.9
Accumulated deferred investment tax credits                                                                      208.3      215.5
Other                                                                                                            202.9      148.6
                                                                                                               1,380.2    1,399.0
                                                                                                            $  5,583.0 $  5,712.8

</TABLE>


(Commitments and Contingencies Note 4)

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

ILLINOVA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>

                                                                                                          (Millions of dollars)
<S>                                                                             <C>                <C>                <C>    

For the Years Ended December 31,                                                       1997              1996           1995
Cash Flows from Operating Activities
Net income (loss)                                                               $     (90.6)       $     191.0        $  151.6
Items not requiring (providing) cash -
  Depreciation and amortization                                                       202.1              195.3           190.0
  Allowance for funds used during construction                                         (5.0)              (6.5)           (6.0)
  Deferred income taxes                                                                30.8               57.4            39.1
  Enhanced retirement and severance                                                     -                  -              37.8
  Extraordinary item                                                                  195.0                -               - 
Changes in assets and liabilities -
  Accounts receivable                                                                 (19.4)             (52.2)           (7.8)
  Accrued unbilled revenue                                                             19.7              (16.9)          (10.2)
  Materials and supplies                                                               (5.4)              (2.1)           22.8
  Accounts payable                                                                     26.4               46.8           (13.6)
  Interest accrued and other, net                                                      14.7               (5.4)            9.5 

Net cash provided by operating activities                                             368.3               407.4          413.2

Cash Flows from Investing Activities
Construction expenditures                                                            (223.9)             (187.3)        (209.3)
Allowance for funds used during construction                                            5.0                 6.5            6.0
Other investing activities                                                            (33.5)              (75.0)         (34.9)

Net cash used in investing activities                                                (252.4)             (255.8)        (238.2)

Cash Flows from Financing Activities
Dividends on common stock                                                             (92.4)              (84.7)         (75.6)
Repurchase of common stock                                                            (90.4)                -              -
Redemptions -
  Short-term debt                                                                    (241.1)             (355.8)        (213.6)
  Long-term debt                                                                     (160.8)             (153.7)          (5.2)
  Preferred stock of subsidiary                                                       (39.0)              (29.5)        (134.5)
Issuances -
  Short-term debt                                                                     269.5               383.2          209.5
  Long-term debt                                                                      250.0                 -              -
  Preferred stock of subsidiary                                                         -                 100.0            - 
  Common stock                                                                          -                   1.1            -
Other financing activities                                                             (3.3)                1.1            5.0

Net cash used in financing activities                                                (107.5)             (138.3)        (214.4)

Net change in cash and cash equivalents                                                 8.4                13.3          (39.4)
Cash and cash equivalents at beginning of year                                         24.6                11.3           50.7

Cash and cash equivalents at end of year                                           $   33.0            $   24.6       $   11.3
</TABLE>



ILLINOVA CORPORATION

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>

                                                                                                       (Millions of dollars)


For the Years Ended December 31,                                                                    1997      1996      1995

<S>                                                                                              <C>       <C>       <C>    

Balance at beginning of year                                                                     $  233.0  $  129.6  $   58.8
Net income (loss) before dividends and carrying amount adjustment                                   (69.1)    213.3     175.3

                                                                                                    163.9     342.9     234.1

Less -
  Dividends -
    Preferred stock of subsidiary                                                                    21.7      22.6      23.6
    Common stock                                                                                     90.7      86.6      77.4
Plus -
    Carrying amount over (under) consideration paid for redeemed preferred stock of subsidiary         .2       (.7)     (3.5)
                                                                                                   (112.2)   (109.9)   (104.5)
Balance at end of year                                                                           $   51.7  $  233.0  $  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 The consolidated  financial  statements  include the
accounts of Illinova, a holding company, and its subsidiaries: IP, IGC, IIC, and
IEP. IP is a combination electric and gas utility. IGC invests in energy-related
projects and  competes in the  independent  power  market.  IIC's  purpose is to
insure  the  risks of the  subsidiaries  of  Illinova  and risks  related  to or
associated   with  their   business   enterprises.   IEP  develops  and  markets
energy-related  services to the unregulated  energy market throughout the United
States and Canada,  and engages in the brokering and marketing of electric power
and gas. On February 12, 1997, the Illinova Board of Directors approved a merger
of IEP and  IPMI,  another  Illinova  subsidiary.  In the  merger,  IPMI was the
surviving  entity  but  changed  its  name  to  IEP.  See  "Note  2  -  Illinova
Subsidiaries" for additional information.

     All significant intercompany balances and transactions have been eliminated
from  the   consolidated   financial   statements.   All  nonutility   operating
transactions are included in the sections "Diversified  enterprises,"  "Interest
expense,"  "Income  taxes" and  "Other  Income and  Deductions,"  in  Illinova's
Consolidated  Statements  of Income.  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.

Illinova'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 4 -
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  applying  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.

     Illinova  and its  subsidiaries  file a  consolidated  federal  income  tax
return.  Income taxes are allocated to the individual  companies  based on their
respective  taxable  income or loss.  See "Note 7 - Income Taxes" for additional
discussion.

Preferred Dividend Requirements of Subsidiary Preferred dividend requirements of
IP  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                  $        96.2     $       65.9     $         64.7
Interest                      $       145.3     $      148.5     $        152.4
<PAGE>

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.

Forward  Contracts of Subsidiary  In the normal  course of business,  IEP enters
into  contracts for the purchase and sale  (physical  delivery) of  electricity.
When, through use of a market price analysis,  it is deemed probable that a loss
will occur on  fulfillment  of a  contract,  a loss  (contingent  liability)  is
recorded.  When markets allow,  IEP will hedge price exposure through the use of
electricity futures contracts and swaps.

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.  Reconciliations  of the income  (loss) and
number of shares for the basic and diluted EPS calculations are as follows:

(Millions of dollars)               1997             1996              1995

Net income before
  extraordinary item
  (basic and diluted)             $ 104.6          $ 190.3           $ 148.1
Extraordinary item
  (basic and diluted)             $(195.0)         $   -             $   -
Net income (loss)
  applicable to common
  stock (basic and diluted)       $ (90.4)         $  190.3          $ 148.1

Weighted average common
  shares for basic EPS         73,991,651        75,681,937       75,643,937

Effect of dilutive securities -
  stock options                     7,745            33,745           19,914

Adjusted weighted average
  common shares for
  diluted EPS                  73,999,396        75,715,682       75,663,851



     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 Illinova 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.  Illinova  continues to analyze FAS 130 and does
not currently expect it to have a significant impact on its financial  statement
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.  Illinova continues to evaluate the provisions of FAS 131
and  determine  the impact of the revised  disclosure  requirements  on its 1998
financial statements.

Note 2 - Illinova Subsidiaries

Illinova,  a holding  company,  is the  parent of IP,  IGC,  IEP and IIC.  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.  IGC invests in  energy-related  projects  throughout the world and
competes  in  the   independent   power   market.   IEP   develops  and  markets
energy-related  services to the unregulated  energy market throughout the United
States and  Canada.  On February  12,  1997,  the  Illinova  Board of  Directors
approved a merger of IEP and IPMI,  another wholly owned subsidiary of Illinova.
IPMI formerly  engaged in the brokering and marketing of electric power and gas.
In the merger, IPMI was the surviving entity but changed its name to IEP. IIC is
a captive insurance company whose primary business is to insure the risks of the
subsidiaries  of Illinova and risks related to or associated with their business
enterprises.  IGC and IEP are wholly  owned  subsidiaries  of  Illinova.  IP has
preferred shares outstanding, but its common stock is wholly owned by Illinova.
<PAGE>

     IGC has  investments in  power-producing  facilities  throughout the world,
some operating and some under  construction.  The following table summarizes its
investments:

                          Year of      Fuel     Total      In Service
Location                 Investment    Type      MW           Date

Domestic & England
  Teesside, England          1993   Natural Gas  1875         1993
  Ferndale, Washington       1994   Natural Gas   245         1994
  Paris, Texas               1994   Natural Gas   230         1989
  Cleburne, Texas            1994   Natural Gas   258         1996
  Long Beach, California     1995   Natural Gas    70         1989
  Pepperell, Massachusetts   1995   Natural Gas    38         1995
  Joppa, Illinois            1996   Coal         1015         1955

Latin America
  Puerto Cortez, Honduras    1994   Diesel         80      1994/95
  Old Harbour, Jamaica       1995   Diesel         74         1995
  Aguaytia, Peru             1995   Natural Gas   155         1998
  Barranquilla, Colombia     1996   Natural Gas   400   1995/96/98

Asia
  Zhejiang Province, China   1995   Coal           24         1996
  Balochistan, Pakistan      1996   Natural Gas   586         1998
  Hunan Province, China      1997   Coal           24         1999



     IGC's ownership interest totals 440 MW for the domestic and English plants,
259 MW for the Latin  American  plants,  and 130 MW for the Asian plants.  As of
December 31, 1997, IGC has approximately  $160 million invested in the 829 MW it
owns. IGC's investments are primarily accounted for under the equity method.

     At December 31, 1997, Illinova's net investment in IGC was $180 million.

     IEP  focuses  on the  development  and sale of  energy  and  energy-related
services  primarily in the Midwestern and Western regions of North America.  IEP
develops and sells  energy-related  services designed to assist target customers
in assessing  current energy  consumption  patterns,  and to enable customers to
reduce  energy usage  through  increased  efficiency  by changing  practices and
upgrading equipment and facilities.  Currently IEP is developing and marketing a
series of energy-related information collection and analysis tools, collectively
known as EQ services.  These services include software tools that a customer may
utilize  to  conduct  its own  analysis  as well as a service  bureau  that will
perform these  services and bill  consolidation  for the customer.  IEP has also
expanded the project  management and  engineered  solutions  business,  formerly
known  as  Illinova  Energy  Services,   to  provide  delivery   capability  for
energy-related  equipment and facilities  improvements throughout the Midwestern
and Western United States.

     IEP owns 50% of Tenaska  Marketing  Ventures,  in partnership  with Tenaska
Marketing,  Inc. Tenaska Marketing  Ventures focuses on natural gas marketing in
the Midwestern  United States.  In the Western United States,  IEP is one of the
largest power  marketers,  purchasing  and selling  electricity in the wholesale
market. In the Midwest, IEP has developed a retail natural gas business, serving
industrial and commercial customers.

     During 1997, IEP incurred losses of $30 million  (before taxes)  associated
with the wholesale power marketing  business,  including accrued losses of $13.5
million  (before  taxes)  for  contracts  not yet  settled.  These  losses  were
primarily caused by a single contract entered into by IEP during 1996. See "Note
4 - Commitments and Contingencies" for information about IEP contingencies.

     At December 31, 1997, Illinova's net investment in IEP was $28 million.

     In 1997, IIC insured certain risks of IP for a premium of $16.7 million. In
turn,  IIC will  reinsure  this risk with a  reinsurer.  At December  31,  1997,
Illinova's net investment in IIC was approximately $1.5 million.

Note 3 - 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 1997 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>

     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.

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 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 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 54% of Illinova'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 Illinova's 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 4 - Commitments and Contingencies"
for additional information.
<PAGE>

Note 4 - Commitments and Contingencies

Commitments

Illinova   estimates  that  it  will  spend   approximately   $225  million  for
construction  expenditures for IP 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.

     Illinova's  capital  expenditures  for the  years  1998  through  2002,  in
addition to the IP  construction  expenditures,  are  expected  to include  $129
million for nuclear fuel,  $331 million for mandatory  debt  retirement and $762
million for investments by the non-regulated subsidiaries.

     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.  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 3 - 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.  Upon 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 supplier 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.
<PAGE>

     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 Illinova's and IP's financial positions.

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 fuel. 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
since 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 Illinova and IP.

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.
<PAGE>

     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 have also 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 and Illinova's  consolidated
financial  positions.  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
ten 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 8 - 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 and
Illinova's  consolidated  financial  positions or results of  operations.  For a
detailed discussion of income taxes, see "Note 7 - Income Taxes."

Illinova  Energy  Partners,  Inc. IEP buys and sells  electricity in the Western
United States. In the normal course of business,  IEP is required to incur price
exposure on the electricity  bought or sold.  Where the markets allow,  IEP will
hedge such exposure through the use of electricity  futures contracts or through
swaps with qualified  counterparties.  The aggregate  notional value, fair value
and  unrealized  gain related to futures  contracts  outstanding at December 31,
1997,  are  immaterial.  In addition,  IEP  considers  the risk of  counterparty
non-performance to be remote.

     At December  31, 1997,  IEP had  electricity  sales and purchase  contracts
which exposed the company to risk as a result of price volatility.  For the year
ended  December 31, 1997,  IEP accrued  losses of $13.5 million  (before  taxes)

<PAGE>

relating to contracts not yet settled.  Illinova  guarantees the  performance of
IEP and Tenaska Marketing  Ventures up to an aggregate of $80 million for credit
support.  The level of credit  support in place at December  31,  1997,  was $45
million. See "Note 2 - Illinova  Subsidiaries"  for additional information about
IEP.


Note 5 - 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.  In addition,  Illinova's total lines of credit  represented by bank
commitments  amount to $150  million,  of which  $111.5  million  was  unused at
December 31, 1997. Illinova's letters of credit total $31.1 million.

     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.

     Illinova  had $38.5  million of  borrowings  against its lines of credit at
December 31, 1997. For the years 1997,  1996 and 1995,  Illinova  (including 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,                              $  415.3    $  387.0    $  359.6

Weighted average interest
  rate at December 31,                              6.1%       5.8%        6.0%

Maximum amount
  outstanding
  at any month end                             $  415.3   $  387.0    $  359.6

Average daily borrowings
  outstanding during
  the year                                     $  298.5   $  261.9    $  306.5

Weighted average interest
  rate during the year                              5.8%       5.7%       6.2%

     Interest rate cap  agreements  are used to reduce the  potential  impact of
increases  in interest  rates on  floating-rate  debt.  IP's two  variable  rate
interest rate cap  agreements  cover 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 6 - 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  ten  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 is 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 7 - 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              51.9             78.9

                                                     371.8            473.1

            Total deferred tax assets           $    383.0       $    480.8



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                    $   70.3        $   64.7            $   78.3

Deferred taxes-
  Property related differences        8.8            70.6                71.9
  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                      (34.1)           (2.2)              (15.1)
  Investment tax credit              (7.3)           (7.3)               (6.9)

   Total deferred taxes              10.0            63.2                35.7

Total income taxes from
  continuing operations          $   80.3        $  127.9            $  114.0

Income tax -
  Extraordinary item
    Current tax expense             (17.8)            -                    -
    Deferred tax expense           (100.2)            -                    -

    Total extraordinary item       (118.0)            -                    -

Total income taxes               $  (37.7)       $  127.9             $  114.0
<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 $         64.7        $  111.4         $   92.9

Increases/(decreases) in taxes
resulting from-
  State taxes, 
    net of federal effect               8.7            11.4             12.4
  Investment tax credit
    amortization                       (7.3)           (7.3)            (6.9)
Depreciation not normalized            11.3             9.4              7.4
Preferred dividend requirement
  of subsidiary                         1.7             2.5              5.8

Other-net                               1.2              .5              2.4

Total income taxes from
  continuing operations             $  80.3        $  127.9         $  114.0



     Combined federal and state effective income tax rates were 43.4%, 40.2% and
42.9% for the years 1997, 1996 and 1995, respectively.

     Illinova  is subject  to the  provisions  of the  Alternative  Minimum  Tax
System. As a result, Illinova 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  Illinova'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 8 - 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 in-core
nuclear fuel for $62 million from the Fuel  Company.  IP has an  obligation  for
nuclear fuel disposal  costs of leased  nuclear fuel.  See "Note 4 - Commitments
and Contingencies"  for discussion of decommissioning  and nuclear fuel disposal
costs.  Nuclear fuel lease payments are included with "Fuel for electric plants"
on Illinova'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 9 - Long-Term Debt
<TABLE>

                                                                                                 (Millions of dollars)
December 31,                                                                                     1997             1996
<S>                                                                                      <C>               <C>    
First mortgage bonds of subsidiary-
  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 of subsidiary                                                      464.3            614.5

New mortgage bonds of subsidiary-
  6 1/8%    series due 2000                                                                      40.0             40.0
  5.625%    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 of subsidiary                                                        987.8            837.8

  Total mortgage bonds of subsidiary                                                          1,452.1          1,452.3

Medium-term notes of subsidiary, series A                                                        68.0             78.5
Variable rate long-term debt of subsidiary due 2017                                              75.0             75.0
Illinova 7 1/8% Senior Notes due 2004                                                           100.0              -

  Total other long-term debt                                                                    243.0            153.5

                                                                                              1,695.1          1,605.8

Unamortized discount on debt                                                                    (16.8)           (18.1)
  Total long-term debt excluding capital lease obligations                                    1,678.3          1,587.7
  Obligations under capital leases of subsidiary                                                126.7             96.4

                                                                                              1,805.0          1,684.1

Long-term debt and lease obligations of subsidiary maturing within one year                     (87.5)           (47.7)

  Total long-term debt                                                                $       1,717.5     $     1,636.4
</TABLE>

In February 1997,  Illinova issued $100 million of 7 1/8% Senior Notes due 2004.
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 8 - 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 10 - Preferred Stock of Subsidiary
<TABLE>

                                                                                                              (Millions of dollars)
<S>                                                                                                      <C>                <C>    

December 31,                                                                                                  1997             1996

Serial Preferred Stock of Subsidiary, 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 of Subsidiary, $50 par value                                                      $   57.1          $  61.3

Serial Preferred Stock of Subsidiary, 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 of Subsidiary, without par value                                                  $    -            $  34.9

Preference Stock of Subsidiary, cumulative, without par value-
Authorized 5,000,000 shares; none outstanding                                                                  -                -
  Total Serial Preferred Stock, Preference Stock and Preferred Securities of Subsidiary                   $   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 of Subsidiary                                              $  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 11 - Common Stock and Retained Earnings

In 1997, Illinova  repurchased  4,000,000 shares of its common stock on the open
market.  Illinova  holds the common stock as treasury  stock and deducts it from
common equity at the cost of the shares.

     In 1996,  Illinova  amended the Automatic  Reinvestment  and Stock Purchase
Plan and the ESOP.  These plans were replaced with the Illinova  Investment Plus
Plan for which  5,000,000  shares of common stock were  designated for issuance.
Illinova  administers the Illinova Investment Plus Plan. The Illinova Investment
Plus Plan provides investors a convenient way to purchase shares of common stock
and reinvest all or a portion of the cash dividends paid on eligible  securities
in additional shares of common stock. It allows purchases of common stock on the
open market,  as well as purchases of new issue shares  directly from  Illinova.
Under this plan,  4,608,712  shares of common stock were designated for issuance
at December  31,  1997.  All  accounts,  elections,  notices,  instructions  and
authorizations under the Automatic  Reinvestment and Stock Purchase Plan and the
ESOP  automatically  continue  under the  Illinova  Investment  Plus  Plan,  and
participants in the Automatic  Reinvestment and Stock Purchase Plan and the ESOP
continue as participants in the Illinova Investment Plus Plan.

     The  ESOP  includes  an  incentive  compensation  feature  which is tied to
employee 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.
Restricted stock,  incentive stock options,  non-qualified stock options,  stock
appreciation  rights,  dividend  equivalents and other stock-based awards may be
granted under the plan, 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 No. 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.  Illinova  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
preferred and preference stock.

Note 12 -  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 values 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,

(Millions 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  value 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 13 - Segments of Business
<TABLE>
<S>                     <C>      <C> <C>         <C>         <C>       <C>   <C>        <C>       <C>      <C>     <C>    <C>

                                                                                                               (Millions of dollars)
                                     1997                                   1996                                        1995
                                       Diversified                            Diversified                         Diversified      
                                       Enterprises   Total                    Enterprises Total                   Enterprises Total
                         Electric  Gas               Corp.    Electric    Gas             Corp.    Electric   Gas             Corp.
Operation information -
 Operating revenues      $1,420.0 $353.9  $735.6   $2,509.5   $1,340.5   $348.2  $57.6  $1,746.3   $1,368.9  $272.5   $1.9  $1,643.3
 Operating expenses,
  excluding provision
  for income taxes        1,081.3  311.5   792.3    2,185.1      886.2    300.5   87.5   1,274.2      946.2   245.0   15.1   1,206.3

 Pre-tax operating income   338.7   42.4   (56.7)    324.4      454.3    47.7    (29.9)    472.1      422.7    27.5  (13.2)    437.0
 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  $(56.7)  $ 329.4   $  460.6   $47.9   $(29.9)  $ 478.6   $  428.2  $ 28.0  $(13.2) $ 443.0

 Other deductions, net                               (13.6)                                  2.6                                 5.1
 Interest charges                                    136.8                                 134.7                               148.6
 Provision for
   income taxes                                       80.3                                 128.0                               114.0
 Preferred dividend
   requirements
   of subsidiary                                      21.5                                  22.3                                23.7

 Net income                                          104.4                                 191.0                               151.6

 Extraordinary item
   (net of taxes)                                   (195.0)                                  -                                   -
 Carrying value over
   (under) consideration
   paid for redeemed
   preferred stock
   of subsidiary                                        .2                                   (.7)                              (3.5)

Net income (loss)
  applicable
  to common stock                                  $ (90.4)                               $190.3                             $ 148.1

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    $1.2   $4,963.1   $4,578.1  $481.9   $ -     $5,060.0   $4,580.4  $446.3  $ -    $5,026.7

  Nonutility plant and
    other investments                                184.0                                132.4                                65.5
  Assets utilized for
    overall operations                               435.9                                520.4                               517.6

  Total assets                                    $5,583.0                             $5,712.8                            $5,609.8

</TABLE>
<PAGE>


Note 14 - 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         33.0       33.0       24.6       24.6
Mandatorily redeemable
  preferred stock
  of subsidiary                  197.0      202.7      197.0      199.3
Long-term debt                 1,678.3    1,730.1    1,587.7    1,629.3
Notes payable                    415.3      415.3      387.0      387.0


     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 of Subsidiary and Long-Term Debt The fair
value of IP mandatorily  redeemable  preferred stock and Illinova (including IP)
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 to Illinova
for debt of the same remaining maturities, as advised by Illinova's bankers.

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

Note 15 - Quarterly  Consolidated  Financial  Information  and Common Stock Data
(unaudited)
<TABLE>

                                                                          (Millions of dollars except per common share amounts)
<S>                                               <C>              <C>                     <C>                   <C>   
                                                  First Quarter    Second Quarter          Third Quarter         Fourth Quarter
                                                       1997              1997                 1997                  1997

Operating revenues                                   $ 570.4          $ 542.9               $ 841.8              $  554.4
Operating income (loss)                                114.4             95.1                 144.2                 (29.3)
Net income (loss) before extraordinary item             44.0             31.4                  63.3                 (34.3)  
Net income (loss) after extraordinary item              44.0             31.4                  63.3                (229.3)
Net income (loss) applicable to common stock            44.0             31.4                  64.4                (230.2)
Earnings (loss) per common share
  before extraordinary item (basic and diluted)      $    .58         $    .42              $    .87             $    (.46)
Earnings (loss) per common share
  after extraordinary item (basic and diluted)       $    .58         $    .42              $    .87             $   (3.09)
Common stock prices and dividends
  High                                               $ 27 1/2         $ 23 3/4              $ 23 3/4             $  27 3/16
  Low                                                $ 22 3/4         $ 20 1/8              $ 21 1/2             $  20 3/8
  Dividends declared                                 $    .31         $    .31              $    .31             $     .31



                                                  First Quarter   Second Quarter           Third Quarter        Fourth Quarter
                                                      1996              1996                   1996                  1996

Operating revenues (1)                             $  453.1          $  373.4               $  479.1             $    440.7
Operating income (1)                                  121.4              89.7                  189.6                   71.3
Net income                                             43.3              36.7                   91.0                   20.0
Net income applicable to common stock                  43.3              36.2                   90.7                   20.1
Earnings per common share (basic and diluted)     $      .57               .48              $    1.20            $       .26
Common stock prices and dividends
  High                                            $   30 3/8         $     29               $  29 1/4            $    28 5/8
  Low                                             $   27             $     24 5/8           $  25 1/4            $    26 1/4
  Dividends declared                              $     .28          $     .28              $    .28             $       .31
</TABLE>

(1) Amounts have been restated to conform with 1997 changes in income  statement
format.

Illinova  common stock is listed on the New York Stock  Exchange and the Chicago
Stock Exchange.  The stock prices above are the prices reported on the Composite
Tape. There were 35,123 registered holders of common stock at January 10, 1998.
<PAGE>

ILLINOVA CORPORATION

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
  Diversified enterprises                             735.6           57.6           1.9           -             -              -
   Total operating revenues                    $    2,509.5   $    1,746.3  $    1,643.3      $1,589.5      $1,581.2     $  1,311.9

Extraordinary item net of income tax benefit   $     (195.0)  $        -       $     -        $    -        $    -       $      -
Net income (loss) after extraordinary item     $      (90.6)  $      191.0     $   151.6      $  151.8      $  (81.9)    $    251.9
Effective income tax rate                              43.4%          40.2%         42.9%         42.0%        (39.8)%         21.3%
Net income (loss) applicable to common stock   $      (90.4)  $      190.3     $   148.1      $  158.2      $  (81.9)    $    251.9
Earnings (loss) per common share
  (basic and diluted)                          $      (1.22)  $       2.51     $    1.96      $    2.09     $  (1.08)   $      3.75
Cash dividends declared per common share       $       1.24   $       1.15     $    1.03      $     .65     $    .40    $      2.64
Dividend payout ratio (declared)                       N/A           45.5%          52.3%         30.7%         N/A           70.9%
Book value per common share                    $      19.11   $      21.62     $    20.19     $   19.17     $  17.46    $     26.85
Price range of common shares
   High                                        $      27 1/2  $     30 3/8     $    30        $   22 5/8    $  25 7/8   $   31 1/2
   Low                                         $      20 1/8  $     24 5/8     $    21 1/4    $   18 1/8    $  20 1/8   $   21 1/4
Weighted average number of common shares
  outstanding during the period (thousands)          73,992         75,682          75,644        75,644      75,644         67,251

  Total assets                                 $    5,583.0   $     5,712.8    $ 5,609.8      $  5,576.7    $ 5,423.5   $   5,922.7

Capitalization
  Common stock equity                          $    1,369.5   $    1,636.2     $ 1,527.0      $  1,450.2    $ 1,321.0   $   1,841.4
  Preferred stock of subsidiary                        57.1           96.2         125.6           224.7        303.7         315.2
  Mandatorily redeemable
   preferred stock of subsidiary                      197.0          197.0          97.0           133.0         48.0         160.0
  Long-term debt                                    1,717.5        1,636.4       1,739.3         1,946.1      1,926.3       2,279.2

  Total capitalization                         $    3,341.1   $    3,565.8     $ 3,488.9      $  3,754.0    $ 3,599.0   $   4,595.8

Retained earnings (deficit)                    $       51.7   $      233.0     $   129.6      $     58.8    $   (64.6)  $     554.8

Capital expenditures                           $      223.9   $      187.3     $   209.3      $    193.7    $   277.7   $     263.5
Cash flows from operations                     $      368.4   $      407.4     $   413.2      $    268.6    $   369.7   $     232.3
AFUDC as a percent of earnings
  applicable to common stock                           N/A             3.4%         4.1%             5.9%       N/A            80.2%
Return on average common equity                        (6.0)%         12.0%         9.9%            11.4%       (6.0)%         14.3%
Ratio of earnings to fixed charges                       .93           3.07         2.56             2.56         .66           2.51
</TABLE>

* Millions of dollars except  earnings  (loss) per common share,  cash dividends
declared per common share, book value per common share and price range of common
shares.
<PAGE>

ILLINOVA CORPORATION

SELECTED ILLINOIS POWER COMPANY 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         35

  Revenues from ultimate consumers                        335        335        257        289        302        293

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   $    310

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     553,86    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