1998 PROXY STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS  
Notice of Annual Meeting of Shareholders


PROXY STATEMENT TABLE OF CONTENTS
Notice of Annual Meeting............................   2
Proxy Statement.....................................   3
Appendix: 1998 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,  May 5, 1999,  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  that may properly come before the meeting
      or any adjournment.

   Shareholders  of  record  at the  close of  business  on March 8,  1999,  are
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 31, 1999


IMPORTANT
Illinova  invites each of its  approximately  32,100  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.
Illinova has enclosed a prepaid, self-addressed envelope for that purpose.

   You will ensure that you are  represented at the Annual Meeting by returning
your executed proxy. Your cooperation is appreciated.


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,  May 5, 1999, 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,  March 8, 1999 (the
"Record Date"),  will be entitled to receive notice of and to vote at the Annual
Meeting. As of that date,  Illinova had outstanding  69,919,287 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.

    All shareholders will be entitled to 10 votes (the number of directors to be
elected)  for  each of  their  shares  for  candidates  nominated  to  serve  as
directors.  Shareholders 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  candidates.  Election  of  directors  requires  the
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy and entitled to vote.

   Shareholders will be entitled to one vote for each share of Common Stock held
of record at the  close of  business  on the  Record  Date when  voting on other
matters presented for consideration at the Annual Meeting.


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 1998. This Proxy Statement and  accompanying  documents are first being
mailed to shareholders on or about March 31, 1999.


BOARD OF DIRECTORS

Information Regarding the Board of Directors
The Board of  Directors  held nine Board  meetings  during 1998.  All  directors
attended  at least  75  percent  of the  aggregate  meetings  of the  Board  and
Committees of which they were members  during 1998. 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;

5)   Recommend to the Board the appointment of the independent accountants; and

6)   Approve the services  performed by the independent  accountants.  

     The Audit Committee met three times during 1998.

     This Committee consists of the following directors who are not employees of
the  Company  ("Outside  Directors"):  Robert M.  Powers  (Chairman),  C. Steven
McMillan, Sheli Z. Rosenberg, Marilou von Ferstel and John D. Zeglis.

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, and
     investment objectives;

3)   Review the  performance of Illinois  Power's pension and other trust funds,
     evaluate fund managers,  and make  recommendations  to the Board concerning
     such matters;

4)   Review Illinova's risk management  programs,  including insurance coverage,
     and make recommendations to the Board; and

5)   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 five times during 1998.

     This Committee  consists of the following  members of the Board:  Walter D.
Scott (Chairman),  Charles E. Bayless,  C. Steven McMillan,  Sheli Z. Rosenberg,
Joe J. Stewart, and Walter M. Vannoy.

Compensation and  Nominating  Committee
1)   Review   performance  of  and  recommend   salaries  plus  other  forms  of
     compensation for elected Illinova officers and the Board of Directors;

2)   Review  Illinova's  benefit  plans for elected  Illinova  officers and make
     recommendations to the Board;

3)   Review  with the  Chairman,  President  and  Chief  Executive  Officer  any
     organizational or other personnel matters; and

4)   Recommend  to the  Board  candidates  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 candidates for director made in writing and 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  candidates and a statement of the
candidates'  willingness to serve. 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 three times during 1998.

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

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 $2,500
per year. Outside Directors receive a grant of 650 shares of Common Stock on the
date of each Annual Shareholders Meeting. 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. Other than the foregoing,  there are no  attendance-based
fees.

   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. 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.

   In 1996, the Board of Directors  adopted a Comprehensive  Deferred Stock Plan
for Outside  Directors,  replacing 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 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 to the  director in
cash, in a lump sum or  installments,  on termination  of service,  based on the
then market value of Illinova Common Stock, plus dividend equivalents.

   In addition,  each Outside  Director  receives an annual award of stock units
having a value of $6,000.  This award is paid to the Outside Director in cash on
retirement,  at once or in installments as the director may elect. The amount of
such  payment is  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.

   Illinova  has a Deferred  Compensation  Plan for Certain  Directors.  Outside
Directors  may elect to defer all or any portion of their fees and stock  grants
until  termination of their services as directors.  Deferred fees and grants 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 deferred fees and stock grants is made in shares of Common
Stock in an amount  equal to the  aggregate  number of stock  units  credited to
their accounts.

   Illinova  amended the plan 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.  Directors  receive no other  payments  after their  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 10  directors  nominated
by Illinova's Board of Directors. Their names and certain additional information
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.


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

J. Joe Adorjan, 60                                                          1997
Chairman 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, Hussmann Corporation and Goss Graphics Systems, Inc.


Charles E. Bayless, 56                                                      1998
Chairman of Illinova and Illinois  Power since August 1998,  and  President  and
Chief  Executive  Officer since July 1998. He was Chairman,  President and Chief
Executive  Officer of Tucson  Electric  Power from 1992 to 1998,  President  and
Chief  Executive  Officer from 1990 to 1992, and Senior Vice President and Chief
Financial  Officer  from  1989  to  1990.  He is a  director  of  Trigen  Energy
Corporation.


C. Steven McMillan, 53                                                      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 a director of Pharmacia
and Upjohn.


Robert M. Powers, 67                                                        1984
From 1980 until  retirement  in December  1988,  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, 57                                                     1997
President and Chief  Executive  Officer  since 1994 and General  Counsel 1980 to
1994 of Equity Group Investments,  LLC, Chicago, Ill., a privately held business
conglomerate holding controlling interests in seven publicly traded corporations
involved in basic manufacturing,  radio stations,  retail,  insurance,  and real
estate. She is a director of Jacor Communications,  Inc.; Capitol Trust; Anixter
International,   Inc.;  Equity  Office  Properties  Trust;   Equity  Residential
Properties Trust; CVS Corporation; and Manufactured Home Communities, Inc.


Walter D. Scott, 67                                                         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
Neodesic Corporation and Intermatic Incorporated.


Joe J. Stewart, 60                                                          1998
From  1995  until  retirement  in 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). 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.

Ronald L.  Thompson,  49                                                    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. 

Marilou von Ferstel,  61                                                    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,  51                                                         1993
President   and  Director  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,  and
Sara Lee Corporation.


SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below shows shares of Illinova Common Stock  beneficially  owned as of
December 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                       1,650            205               (3)
Charles E. Bayless                   2,501          2,000               (3)
Larry D. Haab                       88,822          5,420               (3)
C. Steven McMillan                   1,950            777               (3)
Robert M. Powers                     9,200          4,937               (3)
Sheli Z. Rosenberg                   1,000          3,704               (3)
Walter D. Scott                      6,125          3,664               (3)
Joe J. Stewart                       1,500            851               (3)
Ronald L. Thompson                   3,806          6,091               (3)
Marilou von Ferstel                  4,579          4,620               (3)
John D. Zeglis                       2,714          3,170               (3)
Larry F. Altenbaumer                30,092          2,157               (3)
David W. Butts (4)                  13,944          1,742               (3)
Alec G. Dreyer                      13,673          3,035               (3)
Paul L. Lang (5)                    27,991          2,402               (3)
Princeton Services, Inc (6)      6,321,253                               9%
Merrill Lynch Asset
Management, L.P. (7)             5,765,450                               8%
Franklin Resources, Inc (8)      5,030,560                               7%
The Prudential Insurance
Company of America (9)           3,620,611                               5%


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

(2)  Includes  the  following   shares   issuable   pursuant  to  stock  options
     exercisable June 30, 1998: Mr. Haab, 76,900; Mr.  Altenbaumer,  24,300; Mr.
     Butts, 12,900; Mr. Dreyer, 11,250; and Mr. Lang, 24,300.

(3)  No  director or  executive  officer  owns any other  equity  securities  of
     Illinova or as much as 1 percent of the Common Stock. As a group, directors
     and executive officers of Illinova and Illinois Power own 244,324 shares of
     Common Stock (less than 1 percent).

(4)  Includes 135 shares owned by family members.

(5)  Includes 910 shares owned by spouse.

(6)  With  shared  voting and  dispositive  power,  per its  January  27,  1999,
     Schedule 13G, Princeton Services, Inc., 800 Scudders Mill Road, Plainsboro,
     N.J. 08536

(7)  With  shared  voting and  dispositive  power,  per its  January  27,  1999,
     Schedule 13G, Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road,
     Plainsboro, N.J. 08536.

(8)  Per its January 27, 1999,  Schedule  13G,  Franklin  Resources,  Inc.,  777
     Mariners Island Blvd., San Mateo,  Calif.  94403.  Adviser  Subsidiaries of
     Franklin Resources, Inc. have sole voting and dispositive power.

(9)  Sole voting and  dispositive  power for 9,300 shares and shared  voting and
     dispositive power for 3,611,311 shares, per its February 1, 1999,  Schedule
     13G, The Prudential Insurance Company of America, 751 Broad Street, Newark,
     N.J. 07102.


EXECUTIVE COMPENSATION

The  following  table  sets  forth a summary  of the  compensation  of the Chief
Executive Officer,  the retired 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>
<CAPTION>

                                                      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            (4)
<S>                                  <C>      <C>          <C>          <C>          <C>           <C>              <C>     
LARRY D. HAAB                        1998     $338,625     $ 16,931     $ 46,025     $      0       27,000 shs.     $  2,660
  Retired Chairman, President        1997      514,952       41,840       16,557       41,840       20,000 shs.        2,614
  and Chief Executive Officer        1996      493,709       69,267       15,973       69,267       22,000 shs.        2,615
  of Illinova and Illinois Power

CHARLES E. BAYLESS                   1998     $272,372     $137,500     $  2,868     $309,625(3)   165,000 shs.     $      0
  Chairman, President and
  Chief Executive Officer of
  Illinova and Illinois Power

PAUL L. LANG                         1998     $250,875     $ 24,304     $  7,705     $ 24,304        8,000 shs.     $  2,697
  Senior Vice President              1997      242,325       10,602        8,305       10,601        6,500 shs.        2,615
  of Illinois Power                  1996      233,450       19,747        8,863       19,747        6,500 shs.        2,595

LARRY F. ALTENBAUMER                 1998     $244,375     $ 19,855     $  7,010     $ 19,855       10,000 shs.     $  2,500
  Chief Financial Officer,           1997      232,048        8,992        9,521        8,992        6,500 shs.        1,985
  Treasurer and Controller           1996      222,374       19,832        8,459       19,832        7,500 shs.        1,976
  of Illinova, and Senior
  Vice President and Chief
  Financial Officer of
  Illinois Power

ALEC G. DREYER                       1998     $215,251     $ 27,338     $  4,676     $ 27,338       10,000 shs.     $  2,691
  Senior Vice President of           1997      185,875       31,060        4,793       31,060        6,000 shs.        2,585
  Illinova and Illinois Power        1996      171,971       17,790        4,088       17,790        6,500 shs.        2,615
  and President of Illinova
  Generating Company

DAVID W. BUTTS                       1998     $214,732     $ 14,441     $  6,884     $ 14,441       10,000 shs.     $  2,339
  Senior Vice President of           1997      188,227        7,529        7,185        7,529        6,000 shs.        2,595
  Illinois Power and President       1996      181,402       17,314        7,350       17,314        6,500 shs.        2,595
  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  1998,  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 1998 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, 1998, 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, 1998:  Mr. Haab,  5,420 units
     valued  at  $135,513;   Mr.  Lang,  2,402  units  valued  at  $60,069;  Mr.
     Altenbaumer,  2,157 units valued at $53,927; Mr. Dreyer, 3,035 units valued
     at $75,889; Mr. Butts, 1,742 units valued at $43,572.  Although stock units
     have been  rounded,  valuation  is based on total  stock  units,  including
     partial shares.

(3)  In December the Company  granted Mr.  Bayless an award of 6,000 share units
     which vest in three equal annual  installments of 2,000 share units and may
     be deferred by Mr.  Bayless at his option.  These units are converted  into
     Illinova common stock when paid.

(4)  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).

     The following  tables  summarize  grants during 1998 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>
<CAPTION>

                                                              OPTION GRANTS IN 1998
                                         Individual Grants

                     Number of Securities     % of Total Options
                      Underlying Options      Granted to Employees       Exercise or Base                             Grant Date
                        Granted (1)                 in 1998             Price Per Share (1)     Expiration Date    Present Value (2)
<S>                           <C>                      <C>                         <C>             <C>                  <C>    
Larry D. Haab                  27,000                   9.5%                      $29.094          2/11/2008           $129,600

Charles E. Bayless             50,000(3)               17.5%                       30.25           6/23/2008            261,500
                              115,000(4)               40.3%                       30.25           6/23/2008            478,400

Paul L. Lang                    8,000                   2.8%                       29.094          2/11/2008             38,400

Larry F. Altenbaumer           10,000                   3.5%                       29.094          2/11/2008             48,000

Alec G. Dreyer                 10,000                   3.5%                       29.094          2/11/2008             48,000

David W. Butts                 10,000                   3.5%                       29.094          2/11/2008             48,000
</TABLE>


(1)  Each option  becomes  exercisable  on February 11, 2001. 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 11, 2001, 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 1998 those percentages ranged between 20 and 45 percent. This
     range does not apply to Mr.  Bayless's  stock  options as  described in his
     employment  agreement  on  page  10.  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 2001, 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 .1808. After
     discounting  for  risk  of  forfeiture  at  three  percent  per  year  over
     Illinova's three-year vesting schedule, the ratio is reduced to .1650; (ii)
     An  annual  dividend  yield on  Illinova  Common  Stock of  4.48%;  (iii) A
     risk-free  interest  rate of  5.76%,  based on the  yield of a  zero-coupon
     government  bond  maturing  at the end of the option  term;  and (iv) Stock
     volatility of 18.65%.

(3)  The Grant Date Present Value for Mr. Bayless's 50,000 time-vesting  options
     was  calculated  based on the  following  assumptions:  (i) As of the grant
     date,   Illinova's   calculated   Black-Scholes   ratio  was  .1836.  After
     discounting  for risk of  forfeiture  by three  percent  per year  over the
     option  vesting  schedule,  the ratio is reduced  to .1728;  (ii) An annual
     dividend  yield on  Illinova  Common  Stock  of  4.46%;  (iii) a  risk-free
     interest rate of 5.64%, based on the yield of a zero-coupon government bond
     maturing  at the end of the  option  term;  and (iv)  Stock  Volatility  of
     19.30%.

(4)  Mr. Bayless has 115,000  options which will vest based on the  satisfaction
     of certain  performance  criteria --  specifically,  when Illinova's  stock
     price appreciates to specified levels above the market price on the date of
     grant. As a result,  The Grant Date Present Value for Mr. Bayless's 115,000
     performance-vesting options was calculated based on the same assumptions as
     were  used for the  time-vesting  options,  with the  exception  of risk of
     forfeiture  which was assumed to be somewhat greater since the options will
     vest  sooner  than  9.5  years  only if the  performance  restrictions  are
     satisfied.   As  a   result,   the   Black-Scholes   ratio   used  for  the
     performance-vesting options was reduced to .1375.

<TABLE>
<CAPTION>

                                       AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUE TABLE
                                                     Number of Securities Underlying Unexercised   Value of Unexercised In-the-Money
                    Shares Acquired       Value             Options at Fiscal Year-End                 Options at Fiscal Year-End
Name                on Exercise (#)    Realized ($)         Exercisable/Unexercisable                 Exercisable/Unexercisable (1)
<S>                     <C>            <C>                   <C>         <C>                                    <C>     <C>
Larry D. Haab                                                76,900 shs./69,000 shs.                           $129,712/$0

Charles E. Bayless                                               0 shs./165,000 shs.                                 $0/$0

Paul L. Lang                                                 24,300 shs./21,000 shs.                            $41,487/$0

Larry F. Altenbaumer                                         24,300 shs./24,000 shs.                            $41,487/$0


Alec G. Dreyer          2,000          $7,750                11,250 shs./22,500 shs.                            $16,656/$0

David W. Butts                                               12,900 shs./22,500 shs.                            $22,713/$0
</TABLE>

(1)  None of the  unexercisable  options  were in the money at  fiscal  year-end
     1998.


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 the Social  Security  offset,  but any actual
pension benefit payments would be subject to this offset.


                          Estimated Annual Benefits (rounded)

 Annual          15 Yrs.       20 Yrs.       25 Yrs.      30 Yrs.       35 Yrs.
 Average        Credited      Credited      Credited     Credited      Credited
Earnings         Service       Service       Service      Service       Service

$125,000         $37,500       $50,000       $62,500       $75,000       $87,500
 150,000          45,000        60,000        75,000        90,000       105,000
 175,000          52,500        70,000        87,500       105,000       122,500
 200,000          60,000        80,000       100,000       120,000       140,000
 250,000          75,000       100,000       125,000       150,000       175,000
 300,000          90,000       120,000       150,000       180,000       210,000
 350,000         105,000       140,000       175,000       210,000       245,000
 400,000         120,000       160,000       200,000       240,000       280,000
 450,000         135,000       180,000       225,000       270,000       315,000
 500,000         150,000       200,000       250,000       300,000       350,000
 550,000         165,000       220,000       275,000       330,000       385,000
 600,000         180,000       240,000       300,000       360,000       420,000
 650,000         195,000       260,000       325,000       390,000       455,000
 700,000         210,000       280,000       350,000       420,000       490,000
 750,000         225,000       300,000       375,000       450,000       525,000
 800,000         240,000       320,000       400,000       480,000       560,000


     The earnings used in determining pension benefits under the Retirement Plan
are the participants'  regular base  compensation,  as set forth under Salary in
the Summary Compensation Table.

     See Employment  Agreement for information relating to Mr. Bayless's pension
agreement.

     At December 31,  1998,  for  purposes of both the  Retirement  Plan and the
Supplemental  Plan, Messrs.  Bayless,  Lang,  Altenbaumer,  Dreyer and Butts had
completed 0, 17, 26, 6 and 20 years of credited service, respectively. As of the
date of his retirement, Mr. Haab had completed 33 years of credited service.


EMPLOYMENT AGREEMENT

Charles Bayless was hired in July 1998 and elected  Chairman,  President and CEO
in August 1998.  Mr. Bayless  received a base salary of $560,000,  which will be
subject to periodic  review.  The 1998 bonus  opportunity  for Mr. Bayless had a
minimum guarantee of $232,000 with an opportunity for payment of up to $302,000.
Mr. Bayless has an option to purchase  165,000 shares of Illinova stock based on
the following vesting schedule:

If employed through                                     Options available
the following date                                         to Exercise

One-year anniversary of grant date                        16,667 shares
Two-year anniversary of grant date                        16,667 shares
Three-year anniversary of grant date                      16,667 shares
The first date on which the stock
price is $35.00                                           57,500 shares
The first date on which the stock
price is $40.00                                           57,500 shares

     An additional  grant of 6,000 share units of Illinova stock was awarded Mr.
Bayless in December  1998.  Mr.  Bayless has a right to receive  these shares in
2,000-share blocks in calendar years 1998, 1999, and 2000. These share units may
be deferred by Mr. Bayless at his option.

     For future years, Mr. Bayless will  participate in the Executive  Incentive
Compensation  Plan and the Long- Term Incentive  Compensation  Plan. Mr. Bayless
was  provided  with a Retention  Agreement  comparable  to those issued to other
named Executives.  Mr. Bayless will be entitled to a supplemental  pension which
fully vests on December 31, 2004. Supplemental pension will pay an equivalent of
40 percent of his highest 36  consecutive  months of his final 60 months of base
pay and bonus,  less any payment made through the  qualified  pension  plan.  To
compensate  for  benefits  or  payments  he was  entitled  to from his  previous
employer but will not receive because of his departure, a $500,000 loan was made
to Mr. Bayless. This loan, plus all applicable taxes resulting from its receipt,
will be forgiven in 20 percent increments over a period of five years.


RETIREMENT AND CONSULTING AGREEMENT

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.  Mr. Haab retired from Illinova on August
12, 1998. Following his retirement,  Illinova entered into a two-year retirement
and consulting  agreement with Mr. Haab.  Consulting services are to be provided
on request and Mr. Haab is compensated with a fee of $25,000 per month. Mr. Haab
is also entitled to office space and  secretarial  assistance  for the period of
his  consulting  term.  Financial  consulting and tax  preparation  services are
provided to Mr. Haab for the five years  following  the year of his  retirement.
Mr. Haab is also provided with certain personal property previously provided for
his business use.  Additionally,  the Board of Directors at its  discretion  may
elect to make a pro rata  incentive  compensation  payment  to Mr.  Haab for the
period  he was  actually  employed  in  1998.  As  part  of his  retirement  and
consulting agreement,  Mr. Haab agrees to assist with any claims for a period of
48  months;  will  keep  all  non-public   information   regarding  the  company
confidential;  will not make any  disclosure  or  disparaging  remarks about the
company;  or solicit,  employ, or offer to employ any person who was an employee
of the company in the previous year.


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  acquiror.  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.


COMPENSATION AND NOMINATING COMMITTEE REPORT ON OFFICER COMPENSATION

The five-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 the Company'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   established
performance  goals for the officers and approves  payments to Illinova  officers
made pursuant to the Annual Incentive  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.

   In 1998 it was  determined  that the company  would  broaden its  competitive
reference beyond the regulated utility industry in order to compete sufficiently
for talent in the changing industry.  Illinova's current  compensation policy is
to  provide  a total  compensation  opportunity  targeted  to the  median of the
appropriate  comparable markets in which it competes for executive talent.  Thus
the  comparison  markets will  consist of Utility  Industry,  Independent  Power
Producers,   Energy  Marketing  and  Trading  Companies,  and  General  Industry
companies,  which is a  considerably  broader  reference  than the S&P Utilities
Index  which  is  used to  relate  Illinova's  shareholder  value  in the  proxy
performance  graphs.  The S&P Utilities Index covers the utility industry widely
and includes electric and gas utilities.

   The  compensation  program  for  officers  consists  of base  salary,  annual
incentive,  and long-term incentive components.  The Committee believes that 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  approximately  30 percent and 60 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  for  similarly  sized  companies in both the energy
specific and general  industries.  Officer salaries  correspond to approximately
the median of the companies in the  appropriate  comparison  market.  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 Illinova  officer group as a whole and
consideration of each 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 performance  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  performance  year. The officer's  interest in the stock
units vests at the end of the three-year period, which begins the year after the
performance  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,  1998 awards under the  Compensation  Plan were
based on achievement in the following  performance areas where applicable:  cash
flow,  earnings  per  share,  return  on  invested  capital,   sales,   customer
satisfaction,  safety, employee teamwork, and cost management.  Up to 20 percent
of the awarded  amount is based on an  assessment  of the  individual  officer's
performance during the year.

   Awards shown under Bonus in the Summary  Compensation  Table for  performance
during 1998 were based on  achievement  of Business Unit  Operational  Goals and
Individual Goals for the Officer.  Corporate  Financial Goals were not satisfied
in 1998.

   For the  unregulated  subsidiaries,  Illinova  Generating and Illinova Energy
Partners,  1998 officer awards were based on  achievement of specific  marketing
objectives,  earnings objectives, and cash flow. Up to 30 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  calibrated  to median  utility  industry and the
general  industry and are based on corporate  performance  as well as individual
officer's  contributions to corporate  performance subject to the review of this
Committee.  The LTIC value  granted to the officers for 1998  represent an award
based on market  levels as well as on Illinova  and  individual  performance  as
evaluated  by the  Chairman  and  reviewed  by the  Committee.  In 1998,  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 on the date of the award. The other half of
the LTIC plan award is  distributed  to  officers  in cash  based on  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.  Based on  performance,  no award was earned in 1998 for payment in
1999. No future payments will be made as a result of the SVA program.

   In 1998 the Board elected to eliminate SVA as a criteria for the cash portion
of the LTIC.  The  rationale  for this change was a desire for the  component to
have a closer alignment to shareholder  return. The SVA Plan was replaced with a
Total  Shareholder-Return  Performance Plan (TSR Plan). Awards from the TSR Plan
will be based on Illinova's stock price  appreciation plus dividends compared to
a broad peer  group of  publicly  traded  utility  companies.  The plan has been
changed for 1999 to be awarded in restricted stock.

   Beginning with plan year 1998, Illinova Generating replaced its SVA component
with an Economic Value Added Sharing Plan. Under this plan, participants receive
a percentage of IG's net income in excess of cost of capital.


CEO COMPENSATION

Charles E. Bayless became Chairman,  President and Chief Executive Officer (CEO)
of Illinova and Illinois Power on August 13, 1998.  Illinova and the Board based
Mr.  Bayless's  contract on the competitive  market for CEOs in both the Utility
Industry as well as the broader  competitive  market for executive  talent.  The
Committee involves all outside Directors in reviewing Mr. Bayless's  performance
before it makes  recommendations  regarding his  compensation.  The Committee is
responsible  for  administering  the processes for completing  this review.  The
annual process begins the first of each year when the Board of Directors and Mr.
Bayless  establish his personal goals and short- and long-term  strategic  goals
for  Illinova.  Mr.  Bayless  was  hired in July  1998 and  interim  goals  were
developed.  At the conclusion of the year, Mr. Bayless  reviews his  performance
with  the  outside   Directors.   The  Committee  then  recommends   appropriate
compensation  adjustments to the Board. The Committee with the  participation of
all outside Directors  developed a contract with Mr. Bayless that recognizes his
experience and ability to lead Illinova into the future.  Progress has been made
to advance strategic objectives of the Company.

   The 1998 Annual  Incentive  Compensation  Plan award for the Chief  Executive
Officer was  consistent  with the terms of the contract  between Mr. Bayless and
the Board.

   The option shares granted to the CEO reflect the  Committee's  recognition of
Mr.  Bayless's work in directing  Illinova  toward its long-term  objectives and
provide a strong incentive to maximize the creation of shareholder value.


COMPENSATION AND NOMINATING COMMITTEE

Ronald L. Thompson, Chairman
J. Joe Adorjan
Robert M. Powers
Marilou von Ferstel
John D. Zeglis


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, 1993, through
December 31, 1998, and (ii) December 31, 1995, through December 31, 1998.


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, 1993, 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, 1995, in Illinova  Common Stock,  S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.

     Fiscal year ended December 31.


INDEPENDENT AUDITORS

The Board of  Directors  of  Illinova  has  selected  PricewaterhouseCoopers  as
independent  auditors for Illinova for 1999. 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 1998 Summary Annual Report to Shareholders was mailed to shareholders
on or about March 31, 1999. 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, 1999. Requests should be addressed to Investor
Relations, G-21, Illinova Corporation,  500 South 27th Street, Decatur, Illinois
62521-2202.  

     Under the Securities and Exchange Commission rules, a shareholder  proposal
submitted  for  inclusion  in next year's  proxy  statement  must be received at
Illinova's executive offices not later than November 10, 1999.

     A shareholder  proposal submitted for presentation at the Annual Meeting in
2000 will be  considered  untimely  if notice of the  proposal  is  received  by
Illinova after January 24, 2000.


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 31, 1999


Appendix: 1998 Annual Report to Shareholders


TABLE OF CONTENTS
Management's Discussion and Analysis......................................  a-2
Responsibility for Information............................................ a-19
Report of Independent Accountants......................................... a-20
Consolidated Statements of Income......................................... a-21
Consolidated Balance Sheets............................................... a-22
Consolidated Statements of Cash Flows..................................... a-23
Consolidated Statements of Retained Earnings.............................. a-23
Notes to Consolidated Financial Statements................................ a-24
Selected Consolidated Financial Data...................................... a-52
Selected Illinois Power Company Statistics................................ a-53


ABBREVIATIONS USED THROUGHOUT THIS REPORT

AICPA           American Institute of Certified Public Accountants
AFUDC           Allowance for Funds Used During Construction
Baldwin         Baldwin Power Station
Clinton         Clinton Power Station
DOE             U.S. 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
Hennepin        Hennepin Power Station
IBE             Illinova Business Enterprises, Inc.
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
IPSPT           Illinois Power Special Purpose Trust
ISA             Integrated Safety Assessment
ISO             Independent System Operator
IT              Information Technology
ITC             Investment Tax Credits
kw              Kilowatt
kwh             Kilowatt-Hour
MAIN            Mid-America Interconnected Network
MGP             Manufactured-Gas Plant
MIPS            Monthly Income Preferred Securities
MISO            Midwest Independent Transmission System Operator, Inc.
MW              Megawatt
MWH             Megawatt-Hour
NAES            North American Energy Services Company
NERC            North American Electric Reliability Council
NOPR            Notice of Proposed Rulemaking
NOx             Nitrogen Oxide
NRC             U.S. Nuclear Regulatory Commission
NWPA            Nuclear Waste Policy Act of 1992
P.A. 90-561     Electric Service Customer Choice and Rate Relief Law of 1997
PCA             Power Coordination Agreement
PECO            PECO Energy Company
ROE             Return on Equity
S&P             Standard & Poor's
SCR             Selective Catalytic Reduction
SEC             U.S. Securities and Exchange Commission
SFP             Secondary Financial Protection
SO2             Sulfur Dioxide
SOP             Statement of Position
Soyland         Soyland Power Cooperative, Inc.
TOPrS           Trust Originated Preferred Securities
UFAC            Uniform Fuel Adjustment Clause
UGAC            Uniform Gas Adjustment Clause
U.S. EPA        U.S. Environmental Protection Agency
VaR             Value-at-Risk
Vermilion       Vermilion Power Station
Wood River      Wood River Power Station


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.  Below is discussion
of the factors having significant impact on consolidated  financial position and
results of operations since January 1, 1996.


ILLINOVA SUBSIDIARIES

The  Consolidated   Financial   Statements  include  the  accounts  of  Illinova
Corporation, a holding company, and its subsidiaries: Illinois Power Company, an
electric  and gas  utility;  Illinova  Generating  Company,  which  invests  in,
develops,  and  operates   energy-related  projects  and  facilities  worldwide;
Illinova Energy Partners, Inc., which markets energy and energy-related services
in the United  States and Canada;  Illinova  Insurance  Company,  which  insures
certain  risks  of  Illinova  and  its   subsidiaries;   and  Illinova  Business
Enterprises,   Inc.,  which  accounts  for  miscellaneous  unregulated  business
activities.  IGC,  IEP,  IIC,  and IBE are  wholly  owned  by  Illinova.  IP has
preferred stock  outstanding,  but its common stock is wholly owned by Illinova.
See "Note 3 -- Illinova Subsidiaries" for additional information.


OPEN ACCESS AND WHEELING

On March 29,  1995,  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
was accepted by FERC.

   FERC currently does not exercise  jurisdiction  over public utilities serving
customers  at retail and FERC does not require  public  utilities to give retail
customers access to alternate energy suppliers or direct transmission service.

   In 1996,  IP received  approval from both the ICC and FERC to conduct an open
access  experiment  beginning  in 1996 and ending on  September  30,  1999.  The
experiment  allows  certain  industrial  customers to purchase  electricity  and
related services from other sources.  Currently,  15 customers are participating
in the experiment.  Since  inception,  the experiment has cost IP  approximately
$19.2 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 $4.8 million in transmission service charges.

   In January  1998,  IP, in  conjunction  with eight other  transmission-owning
entities,  filed with FERC for all  approvals  necessary to create and implement
the MISO. On September 16, 1998,  FERC issued an order  authorizing the creation
of a  MISO.  The  MISO  is  governed  by a  seven-person  independent  board  of
directors.  The goals of the MISO are to: 

1)   Put in  place a  tariff  allowing  easy  and  nondiscriminatory  access  to
     transmission facilities in a multi-state region;

2)   Enhance regional reliability; and

3)   Establish an entity that operates independent of any transmission  owner(s)
     or other market participants,  thus furthering competition in the wholesale
     generation market consistent with the objectives of FERC's Order 888.

   Since January 1998, four other transmission-owning  entities joined the MISO.
Participation in an ISO is a requirement of P.A.  90-561.  The MISO has a stated
goal to begin limited operation in 1999 and to be fully operational in 2000.


COMPETITION

P.A. 90-561, Illinois electric utility restructuring legislation, was enacted in
December  1997.  P.A.  90-561  gives  IP's  residential  customers  a 15 percent
decrease in base electric  rates  beginning  August 1, 1998, and an additional 5
percent decrease  effective May 1, 2002. The rate decreases  resulted in revenue
reductions of approximately $35 million in 1998 and expected revenue  reductions
of  approximately   $70  million  in  each  of  the  years  1999  through  2001,
approximately $90 million in 2002, and approximately $100 million in 2003, based
on current consumption.

   Under P.A.  90-561,  customers with demand greater than 4 MW at a single site
and  customers  with at least 10 sites which  aggregate at least 9.5 MW in total
demand are allowed to choose electric  generation  suppliers  ("direct  access")
starting  in  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 customers
at regulated  rates. In 1999,  rates for delivery  services for  non-residential
customers  will be  established  in  proceedings  mandated by P.A.  90-561.  The
transition  charges departing  customers must pay to IP are not designed to hold
IP completely  harmless from resulting  revenue loss,  because of the mitigation
factor  described  below.  IP will be able to  estimate  the  revenue  impact of
customer  choice  more   accurately  when  its  delivery   service  charges  are
established.

     Although the specified  residential rate reductions and the introduction of
direct  access will lead to lower  electric  service  revenues,  P.A.  90-561 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.  The  transition  charges are
     applicable  through  2006 and can be extended two  additional  years by the
     ICC. The transition charges are calculated by subtracting from a customer's
     fully bundled rate an amount equal to a) delivery  charges the utility will
     continue  to receive  from the  customer,  b) the market  value of freed-up
     energy, and c) a mitigation factor, which is the higher of a fixed rate per
     kwh or a percentage of the  customer's  bundled base rate.  The  mitigation
     factor  increases  during the transition  period and is designed to provide
     incentive for utilities to continue cost reduction efforts and generate new
     sources of revenue;

2)   Utilities are provided the opportunity to lower their financing and capital
     costs through the issuance of "securitized" bonds, also called transitional
     funding instruments; and

3)   Utilities  are permitted to seek rate relief in the event the change in law
     leads to their ROE falling below a specified  minimum based on a prescribed
     test.  Utilities are also subject to an "over-earnings" test which requires
     them, in effect,  to share with  customers  earnings in excess of specified
     levels.  See "Note 5 -- Commitments and  Contingencies" for a more detailed
     description of the earnings floor and ceiling.

   The extent to which  revenues  are  affected by P.A.  90-561 will depend on a
number of  factors  including  future  market  prices for  wholesale  and retail
energy,  load growth and demand levels in the current IP service territory,  and
success in marketing to customers outside IP's existing service  territory.  The
impact on net income will depend on, among other things,  the amount of revenues
earned and the cost of doing business.


CLINTON POWER STATION

See "Note 4 -- Clinton Power Station" for a discussion of Clinton.

     Due to uncertainties of deregulated  generation  pricing in Illinois and to
various  operation  and  management  factors,  Illinova's  and  IP's  Boards  of
Directors  voted  in  December  1998 to sell or  close  Clinton.  This  decision
resulted in an impairment of Clinton-related  assets and accrual of exit-related
costs.  The  impairment  and accrual of related  charges  resulted in a $1,327.2
million, net of income taxes, charge against earnings.

   IP has  entered  into  discussions  with  parties  interested  in  purchasing
Clinton. Principal concerns of interested parties are plant restart, funding the
decommissioning  liability,  terms of any purchase agreement for power generated
by Clinton,  including  the length of any  agreement  and price of  electricity,
market price projections for electricity in the region, property tax obligations
of the  purchaser,  and income tax issues.  These  concerns  create  substantial
uncertainty  with regard to the ability to convert any tentative  agreement into
an  executable  transaction.  Therefore,  IP has  accounted for the Clinton exit
based on the  expectation  of plant closure as of August 31, 1999. An August 31,
1999, closure allows IP to pursue  opportunities to sell Clinton,  which has the
potential   economic   benefit  of   reducing   IP's   financial   exposure   to
decommissioning.  An August 31, 1999, closure also allows IP to refine its plans
to close and decommission  Clinton if a tentative  agreement cannot be converted
into an executable transaction.  In addition, Clinton would be available for the
summer cooling  season.  The estimated  Clinton other  operating and maintenance
expense,  including expensed capital  expenditures,  is $151 million for January
through August 1999.

   See "Note 2 -- Clinton  Impairment and  Quasi-Reorganization"  for additional
information.


ACCOUNTING MATTERS

1998:  Concurrent  with the  decision to exit Clinton  operations,  as discussed
above,  Illinova's  and  IP's  Boards  of  Directors  also  voted  to  effect  a
quasi-reorganization  in which Illinova's  consolidated  accumulated  deficit in
retained earnings of $1,419.5 million was eliminated.  A quasi-reorganization is
an  accounting  procedure  whereby a company  adjusts  its  accounts to obtain a
"fresh  start." In a  quasi-reorganization,  a company  restates  its assets and
liabilities to their fair value, adopts accounting pronouncements issued but not
yet adopted,  and  eliminates  any remaining  deficit in retained  earnings by a
transfer from other paid-in capital.

     See "Note 2 -- Clinton Impairment and  Quasi-Reorganization" for additional
information.

     See  "Note  5  --  Commitments  and  Contingencies"  for  a  discussion  of
decommissioning.

1997:  Prior to the  enactment  of P.A.  90-561,  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  balance sheet assets
representing  costs they expect to recover from customers  through  inclusion of
such costs in future rates.  In July 1997, the EITF concluded that, for business
segments for which a plan of deregulation has been established, accounting under
FAS 71 should be discontinued when such deregulation legislation is enacted. The
EITF further concluded that regulatory assets and liabilities originating in the
business segment being deregulated  should be written off, unless their recovery
is  specifically  provided  for  through  future  cash flows from the  regulated
portion of the business.

   Based  on this  conclusion  and  because  P.A.  90-561  provides  for  future
market-based   pricing  of  electric   generation   services,   IP  discontinued
application  of FAS 71 for its generating  segment.  IP evaluated the 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 had been  expected  to be
collected  through  future  revenues,  including  deferred  costs  for  Clinton,
unamortized losses on reacquired debt, previously  recoverable income taxes, and
other  generation-related  regulatory  assets.  At December 31,  1998,  IP's net
investment in generation facilities was $2.9 billion.

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


REGULATORY MATTERS

In accordance  with P.A.  90-561,  ICC  rulemakings are completed or in progress
covering issues such as limits on affiliate  interaction and reliability.  These
regulatory proceedings,  alone or in combination, could significantly impact the
way IP  operates  and is  organized,  but they are not likely to have a material
impact on financial results.

   Under  the new  reliability  rules,  Illinois  utilities  must  keep  records
identifying  service  interruptions  experienced  by  each  customer.   Illinois
utilities  must also file an annual report  detailing the  reliability  of their
service and explaining  their plans for reliability  improvements.  In addition,
each  utility  must also  report the number and causes of service  interruptions
that were within the utility's  control.  Outage  targets were  established  for
service to individual customers and for system performance.

   In March 1999, IP submitted a filing to the ICC to determine:

1)   The rates and terms  associated  with the  provision of unbundled  delivery
     services for select customer classes;

2)   The methodology,  terms, and conditions associated with billing competitive
     transition charges; and

3)   Terms and conditions  associated  with accepting  service under IP's Market
     Value Power  Purchase  Option  tariff,  a service  option  mandated by P.A.
     90-561 which allows  customers to purchase  electricity  from IP at current
     market prices.

ICC orders on the  foregoing  rulemakings  and filing are  expected by September
1999.

   Additionally,   the  ICC  has  initiated  a  proceeding  to  investigate  the
feasibility  of  breaking  out and  unbundling  various  components  of delivery
service, such as meter reading.

   Delivery  tariff  revenues  approved by the ICC are to be set at a level that
allows IP to recover all just and  reasonable  costs  associated  with providing
delivery  services to those customers who choose to acquire power from alternate
retail electric suppliers.

   P.A. 90-561 includes  provisions  allowing utilities to unbundle or segregate
assets.  Illinova  and IP are  evaluating  the  benefits  of creating a separate
Illinova   subsidiary  to  which  the  IP  fossil  generation  assets  would  be
transferred.  IP  would  be  required  to  demonstrate  to the ICC  that it will
continue to be able to serve its retail customers reliably and that the transfer
is not  likely  to  cause  IP to  seek  a rate  increase  during  the  mandatory
transition  period,  which extends through 2004. The new subsidiary,  if formed,
will be regulated by FERC.

     See "Note 5 -- Commitments and Contingencies" for a discussion of Fuel Cost
Recovery.

     See "Note 7 -- Facilities  Agreements"  for a discussion of Soyland and the
Soyland PCA.


POWER SUPPLY AND RELIABILITY

See "Note 5 -- Commitments and  Contingencies"  for a discussion of Power Supply
and Reliability.


YEAR 2000

Passing  from 1999 into 2000  creates a risk that  computer-dependent  processes
will fail because the date will be read as "1900."  Illinova began its Year 2000
project in  November  1996.  The project  scope  encompasses  all of  Illinova's
subsidiaries  including  IP, IGC, and IEP. A central  organization  is providing
overall guidance and coordination among the business groups,  meeting monthly to
share information,  conducting  internal project reviews,  and producing monthly
status  reports  to all  levels of  Illinova  management.  Bi-monthly  Year 2000
readiness reports are provided to Illinova's and IP's Boards of Directors.

   The Year 2000 project involves evaluation and testing of software,  hardware,
and business  processes,  including mainframe and personal computer software and
hardware,   process  computer   software  and  hardware,   end-user   computing,
telecommunications and networks,  vendor- purchased packages,  embedded systems,
facility  control  systems,   vendors/suppliers,   financial  institutions,  and
electronic interfaces with outside agencies.

   The Year 2000 efforts are focused on those systems and processes necessary to
provide safe, reliable service and essential administrative support. Priority is
given to "mission critical" and "important to operations"  systems,  components,
and  processes,  including  generation  facilities  (e.g.  power plants and fuel
suppliers),   transmission  and  distribution   facilities  (e.g.  power  lines,
transformers, gas lines, and meters), building systems (e.g. climate control and
security),  and  administrative  systems (e.g.  billing,  payroll,  and accounts
payable).

   The  project  is  divided  into two  focus  areas.  The first  deals  with IT
software,  hardware,  and  infrastructure.  This  includes  the billing  system,
payroll system, accounts payable system, personal computers, telecommunications,
networks, and mainframes.

   The second focus area targets non-IT operational systems and processes, which
encompass  most of the systems and business  processes  actually used to deliver
electricity and gas to customers.  This is also the area where embedded  systems
and  microprocessors  are found.  Included  in this  focus area are power  plant
facilities,  transportation systems such as railways and barges, fuel suppliers,
electric and gas  transmission  and  distribution  facilities,  substations  and
transformers,  meters, building systems such as HVAC and security, and financial
institutions.

   The  project  has  six  phases:  awareness,   inventory,   process  analysis,
assessment,  implementation,  and  contingency  planning.  The  awareness  phase
focuses  on  raising  visibility  of the Year 2000  issue  with  employees,  top
management,  customers,  suppliers,  and  other  business  partners.  This is an
on-going  activity.  The inventory and process analysis phases identify systems,
hardware,  and business processes that may be affected by the Year 2000 problem.
In the assessment  phase, an analysis is performed on each  inventoried  item to
determine how it will be affected by Year 2000 and how critical the item may be.
In this phase,  implementation  plans and budgets are developed and  documented.
The implementation phase consists of upgrading, replacing, or repairing "mission
critical" and "important to operations" items affected by Year 2000. Testing and
production  implementation  occur in this  phase.  In the  contingency  planning
phase, plans are developed and documented to ensure business  continuity.  These
plans address various ways of handling unusual and unexpected circumstances that
may occur due to Year 2000 problems.

   Internal project reviews are performed to help ensure  consistency of project
tasks and documentation and to identify weaknesses that need to be addressed. In
addition,  these reviews help identify any issues that overlap  business  groups
which may need project sponsorship for resolution.

   The overall status of Illinova's  Year 2000 project is presented in the table
below.

Illinova Status -- February 1999
                             IT                             Non-IT
                        %      Completion              %       Completion
                     Complete    Date         *     Complete     Date        *

Awareness              100      02/01/97      a       100       05/31/98     a
Inventory              100      01/20/97      a       100       02/28/99     a
Assessment             100      05/09/97      a       100       02/28/99     a
Process Analysis       100      11/30/98      a        94       03/31/99     e
Implementation --
  (Mission Critical)    69      06/30/99      e        50       11/30/99     e**
Implementation --
  (Important to
  Operations)           78      06/30/99      e        51       08/31/99     e
Contingency Planning    10      06/30/99      e        22       06/30/99     e

* "a" = Actual    "e" = Estimated

** With the  exception  of four  process  computing  systems at  Clinton,  it is
projected that all IP Year 2000  implementation  activities will be completed by
June 30,  1999.  However,  Clinton  still plans to be Year 2000  ready,  per NRC
requirements, by developing contingency plans that will allow operation.

   IP has completed its awareness,  inventory,  assessment, and process analysis
phases. The table below provides further details  differentiating between IT and
non-IT.


IP Status -- February 1999
                             IT                             Non-IT
                        %      Completion              %       Completion
                     Complete     Date        *     Complete      Date       *

Awareness              100      02/01/97      a       100       04/29/98     a
Inventory              100      01/20/97      a       100       07/31/98     a
Assessment             100      05/09/97      a       100       09/30/98     a
Process Analysis       100      11/30/98      a       100       02/28/99     a
Implementation --
  (Mission Critical)    69      06/30/99      e        52       11/30/99     e**
Implementation --
  (Important to
  Operations)           78      06/30/99      e        58       06/30/99     e
Contingency Planning    10      06/30/99      e        27       06/30/99     e

* "a" = Actual    "e" = Estimated

** With the  exception  of four  process  computing  systems at  Clinton,  it is
projected that all IP Year 2000  implementation  activities will be completed by
June 30,  1999.  However,  Clinton  still plans to be Year 2000  ready,  per NRC
requirements, by developing contingency plans that will allow operation.

   IEP has completed the awareness, inventory,  assessment, and process analysis
phases. IGC has completed the awareness, inventory, and assessment phases.


IEP and IGC Status -- February 1999
                             IEP                            IGC
                        %      Completion              %       Completion
                     Complete     Date        *     Complete      Date       *

Awareness              100      04/24/98      a       100       05/31/98     a
Inventory              100      11/30/98      a       100       02/28/99     a
Assessment             100      01/29/99      a       100       02/28/99     a
Process Analysis       100      11/30/98      a        76       03/31/99     e
Implementation --
  (Mission Critical)    36      06/30/99      e        49       06/30/99     e
Implementation --
  (Important to
  Operations)           39      06/30/99      e        25       08/31/99     e
Contingency Planning     5      06/30/99      e        11       06/30/99     e

* "a" = Actual    "e" = Estimated

   IT systems and  infrastructure  are  approximately  74%  complete,  with 100%
completion  projected by June 30, 1999. The customer  billing system,  materials
management system, accounts payable system, and power plant maintenance planning
system have been remediated and are now Year 2000 compliant.  The payroll system
and shareholder  system remediation will be completed during first quarter 1999.
Year  2000  work has not  caused  any IT  projects  to be  delayed,  and thus no
maintenance costs have been deferred.

   The DOE has  charged  the NERC with  taking  the lead in  facilitating  North
America-wide   coordination  of  electric  utilities'  Year  2000  efforts.  The
collective  efforts of the industry will minimize  risks imposed by Year 2000 to
the  reliable  supply of  electricity.  NERC has in turn  assigned  the regional
reliability  councils the responsibility of assessing their respective  networks
to ensure  reliable  electric  supply.  IP is taking an active  role  within its
regional  council  (MAIN)  in  assessment  and  renovation  of the  grid  and in
developing contingency plans to minimize any unexpected Year 2000 grid problems.

   NERC's second status report presented to the DOE on January 11, 1999,  stated
that "with more than 44% of mission-critical  components tested through November
30, 1998,  findings  continue to indicate that transition  through critical Year
2000 (Y2k) rollover dates is expected to have minimal impact on electric  system
operations  in  North  America."  IP's  electric  system  operations  Year  2000
completion status through November 30, 1998, is at 57%, which compares favorably
to the average status of all utilities reported to NERC.

   NERC has  recommended  that all  "mission  critical"  systems  needed to meet
demand and  reliability  obligations  be Year 2000 ready by June 30, 1999. IP is
working  diligently  to meet  the  June  30,  1999,  deadline.  It is  currently
projected  that  all  IP  fossil  power  plants  and  field   transmission   and
distribution  items  will be  fully  Year  2000  ready  by that  date.  With the
exception of four process computing systems at Clinton, it is projected that all
IP Year 2000  implementation  activities  will be  completed  by June 30,  1999.
However,  Clinton still plans to be Year 2000 ready,  per NRC  requirements,  by
developing contingency plans that will allow operation.

   IP  is   participating   in  the  Year  2000   activities  of  other  utility
organizations,  such  as  Electric  Power  Research  Institute,  Nuclear  Energy
Institute,  American Gas  Association,  and Edison Electric  Institute.  Through
involvement in these organizations,  IP is leveraging the combined knowledge and
expertise of all utilities to accelerate progress in resolving Year 2000 issues.

   The total cost for achieving Year 2000 readiness for Illinova is estimated to
be  approximately  $20.6  million  through 1999.  Through the end of 1998,  $8.4
million, or 41%, of the total $20.6 million had been spent. Expenditures in 1999
are  expected to be higher than in 1998 due to $9.1  million yet to be spent for
Clinton.

   Illinova has recently initiated  contingency  planning efforts.  This work is
planned for  completion  by June 30,  1999.  The  majority  of the work  already
completed involves IP's role in MAIN's contingency planning efforts for electric
systems operations in accordance with NERC's guidelines.

   The  primary  contingency  planning  activities  in 1999  involve  Illinova's
"mission  critical" business  processes.  Contingency plans will be developed in
accordance  with  industry  guidelines  such as those  of NERC  and the  General
Accounting Office and will require senior management review and approval.  These
plans will address  business  continuity and the ability to maintain and deliver
essential  products and services to  customers in the event of  unexpected  Year
2000 problems.

   Illinova and IP are currently assessing potential worst-case scenarios.  Such
a scenario  might  include one or both of the  following  events:  winter storms
coupled with a significant  Year 2000 system  problem that  compounds  emergency
response efforts and/or loss of a major  telecommunications  carrier that causes
disruptions in dispatching generation, dispatching emergency response crews, and
communicating with financial institutions.

   Contingency  plans  will  address  the above  scenarios  as well as any other
potential  scenarios  that could  affect  the  ability  to serve  customers  and
maintain the financial viability of Illinova.

   Illinova is taking a proactive  role in working  with  vendors and  suppliers
with respect to Year 2000 issues.  Each business group within Illinova has taken
responsibility  for  contacting  vendors for each of the "mission  critical" and
"important to operations"  items  supplied by them.  Each vendor is requested to
provide  detailed  information  on Year 2000  functionality  and  operability on
products  supplied by them. In addition,  the  Purchasing  and Material  Control
Group has sent letters to more than 3,600 IP vendors used in recent years. These
letters  provide an  overview  of the Year 2000  problem  and ask the vendors to
provide  a  summary  of their  Year  2000  efforts  so that IP can gain a better
understanding  of their ability to provide  products and services beyond January
1, 2000.

   In addition to letters,  face-to-face discussions were conducted with IP's 16
alliance  suppliers.  Alliance  suppliers  are key  suppliers  with which IP has
worked to establish a business  relationship  based on mutual  expectations  and
trust.  Both parties work together to achieve a single set of  objectives  which
result in reduced costs to IP. IP's  alliance  suppliers  currently  account for
roughly  80% of IP's  purchasing  volume.  Because  of this high  percentage,  a
dialogue was established  with each supplier to assess its approach to Year 2000
compliance.  Based on these discussions,  IP believes each of these 16 suppliers
has adequately addressed Year 2000 concerns.

   Illinova  is also taking  numerous  steps to keep  customers  informed of the
status of the Year 2000 efforts.  Illinova can best address customers'  concerns
by  providing  open,  forthright  communications  on a timely  basis.  Year 2000
communication  efforts are  multi-faceted to deal with all classes of customers,
from residential to major industries.


CONSOLIDATED RESULTS OF OPERATIONS

1998
Illinova is comprised of eight business  groups.  The business  groups and their
principal services are as follows:
                                                               
-    IP Customer Service Business Group -- transmission,  distribution, and sale
     of electric energy; distribution, transportation, and sale of natural gas.

-    IP Wholesale  Energy Business Group -- fossil-fueled  electric  generation,
     wholesale electricity transactions, and dispatching activities.

-    IP Nuclear Generation Business Group -- nuclear-fueled electric generation.

-    Illinova  Energy  Partners --  develops  and markets  energy  products  and
     energy-related services throughout the United States and Canada.

-    Illinova  Generating  Company  ---  invests  in,  develops,   and  operates
     independent power projects throughout the world.

-    IP Financial Business Group -- provides financial support functions such as
     accounting,  finance, corporate performance, audit and compliance, investor
     relations,  legal, corporate development,  regulatory, risk management, and
     tax services.

-    IP  Support  Services  Business  Group  --  provides   specialized  support
     functions, including information technology, human resources, environmental
     resources, purchasing and materials management, and public affairs.

-    Corporate -- includes  Illinova  Insurance  Company and  Illinova  Business
     Enterprises.

These  business  groups review  information  monthly that provides  contribution
margin,  cash flow, and return on net invested capital measures.  These measures
for Customer  Service  were  favorable.  Generally,  the other  business  groups
reflected  unfavorable  results as the Clinton  restart  activity and the summer
supply  situation  negatively  impacted their outcomes.  IGC benefitted from the
settlement  of a  litigation,  while  IEP  continued  to  work  past a  negative
transaction which occurred three years ago.

Customer Service
Transmission,  Distribution  and Sale of Electric  Energy The  Customer  Service
Business Group derives its revenues  through  regulated  tariffs.  Its source of
electricity is the Wholesale Energy Business Group;  electricity was provided to
the Customer Service Business Group at a fixed 2.5 cents per kwh.

   Retail electric revenues,  excluding interchange sales, decreased 1.6% due to
decreased sales to residential and commercial  customers and the 15% residential
rate decrease  mandated by P.A.  90-561,  which became effective August 1, 1998.
Also  contributing  to the decrease in revenue was a voluntary  one-time  August
rate  reduction  of  7.5%  for  residential  and  small  commercial   customers.

Transmission,  Distribution and Sale of Natural Gas Revenues are derived through
regulated tariffs.  Revenues from gas sales and transportation  were down 18.6%,
while therms sold and  transported  were down 8.9%.  The decrease in therm sales
was  caused  by  milder  than  usual  weather.  The  margin  on  gas  sales  and
transportation  decreased 5.5%, resulting from decreases in both therms sold and
therms transported, partially offset by decreased gas costs.

Wholesale Energy
Contracts for increased interchange sales were entered into with the expectation
that the Clinton nuclear  generating station would operate during 1998. When the
station did not operate,  it was necessary to purchase  replacement power on the
market.  This  replacement  power was much more expensive  than normal,  causing
electric margin to decrease.

   Wholesale Energy provided  interchange power to the Customer Service Business
Group at 2.5 cents per kwh.

Nuclear
Illinova's  only  nuclear  generating   station,   Clinton,   did  not  generate
electricity  during 1998.  Its only revenues were those paid by customers  under
tariff  riders  to  fund  the  decommissioning  trust.  Nuclear's  results  were
unfavorably  affected by higher  operating and maintenance  expenses and capital
expenditures  associated  with the  Clinton  outage.  Additionally,  Nuclear was
assessed a cost of 1.43 cents  (which  represents  a higher  level of costs over
internal pricing due to market  conditions) times its actual historical  average
generation to simulate the cost of replacement power.

Illinova Energy Partners, Inc.
IEP's  results  were due to  losses  primarily  related  to a single  three-year
transaction entered into prior to 1998, which is now fully hedged.

Illinova Generating Company
IGC's positive  contribution  margin,  cash flow, and return on invested capital
results  reflect  receipt of proceeds from a favorable  ruling by an arbitration
panel in connection  with a lawsuit  involving an IGC  investment,  contribution
from the Aguaytia plant in Peru which became  operational in 1998, and continued
earnings  and  cash  flow   contributions   from  existing   investments.   Also
contributing  to the results was the purchase of the  remaining  shares in North
American Energy Services late in 1998.

Other
Included in this category are the Financial Business Group, the Support Services
Business  Group,  and Corporate.  These segments did not  individually  meet the
minimum threshold requirements for separate disclosure.

   See "Note 14 -- Segments of Business" for  additional  information  regarding
Illinova's segments.


Overview

(Millions of dollars
except per share amounts)                 1998            1997             1996

Net income (loss) applicable
  to common stock                      $(1,383)       $   (90)            $  190
Net income (loss) applicable
  to common stock excluding
  Clinton plant impairment
  loss in 1998, extraordinary
  item in 1997 and carrying
  amount over (under)
  consideration paid for
  redeemed preferred stock
  in 1997 and 1996                     $   (56)       $   104             $  191
Basic and diluted earnings
  (loss) per share                     $(19.30)       $ (1.22)            $ 2.51
Basic and diluted earnings
  (loss) per share excluding
  Clinton plant impairment
  loss in 1998, extraordinary
  item in 1997 and carrying
  amount over (under)
  consideration paid for
  redeemed preferred stock
  in 1997 and 1996                     $  (.78)       $  1.41             $ 2.52


1998:  The decrease in 1998  earnings  compared to 1997 was due primarily to the
Clinton  impairment,  an increase in power  purchased cost due to  unprecedented
summer price spikes,  additional  power purchases to serve increased  volumes of
interchange  sales,  market losses  recorded on forward power purchase and sales
contracts as part of the wholesale  trading  business,  and higher operation and
maintenance expenses due to the extended outage at Clinton.

1997:  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 the
extended  outage at  Clinton,  higher  power  purchased  costs due to outages at
Clinton and Wood River, IEP losses,  and an increase in  uncollectible  accounts
expense.

1996: 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 reduction in number of employees,  and lower
financing costs.

   Regulators  historically have determined IP's rates for electric service: the
ICC at the retail level and 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 reasonable rate of
return.  As  described  under  "Competition"  above,  P.A.  90-561  phases  in a
competitive  marketplace for electric  generation while  maintaining  cost-based
regulation  for  electric  delivery  services and gas  service,  protecting  the
financial integrity of the company during the transition period. Future electric
and natural gas sales, including interchange sales, will continue to be affected
by  an  increasingly   competitive   marketplace,   changes  in  the  regulatory
environment,  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  1996  through  1998,  electric  revenues,
including  interchange,  increased 32.9% and the gross electric margin decreased
22.5% as follows:

(Millions of dollars)               1998            1997            1996

Electric revenues                $1,224.2        $1,244.4        $1,202.9
Interchange revenues                557.2           175.6           137.6
Fuel cost & power
  purchased                        (985.4)         (450.3)         (313.3)

  Electric margin                $  796.0         $ 969.7        $1,027.2


The components of annual changes in electric revenues were:

(Millions of dollars)               1998            1997            1996

Price                            $  (65.5)        $ (11.5)        $  (7.2)
Volume and other                     35.1             9.7             6.4
Fuel cost recoveries                 10.2            43.3           (48.9)

  Revenue increase
    (decrease)                   $  (20.2)        $  41.5         $ (49.7)

1998:  Electric revenues  excluding  interchange sales decreased 1.6% due to the
15% residential  rate decrease  mandated by P.A. 90-561 and effective  August 1,
1998.  Also  contributing  to the  decrease in revenue was the  one-time  August
billing rate reduction of 7.5% for  residential and small  commercial  customers
and the discontinuance of certain revenue related taxes, in accordance with P.A.
90-561.  Interchange  revenues  increased  217.4%  primarily  due  to  increased
activity on the interchange  market.  Electric margin decreased primarily due to
higher power purchased costs and the elimination of the UFAC.

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  under the  amended PCA and  increased  interchange  activity.  Electric
margin decreased primarily due to increased power purchased costs as a result of
outages at Clinton and the fossil stations.

1996: Electric revenues excluding  interchange sales decreased 4%, primarily due
to a 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.

   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)               1998            1997            1996

Fuel for electric plants
  Volume and other                $  28.3        $  (37.7)         $ 15.4
  Price                               5.7            (8.5)          (12.0)
  Emission allowances                (7.5)           12.3              .8
  Fuel cost recoveries               (8.7)           18.2           (30.0)

                                     17.8           (15.7)          (25.8)

Power purchased                     517.3           152.7             5.7
   Total increase (decrease)      $ 535.1        $  137.0          $(20.1)

Weighted average system
  generating fuel cost
  ($/MWH)                         $ 12.79        $  12.06          $  11.01


   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
detailed below:

                                    1998            1997            1996

Increase (decrease)
  in generation                      10.9%          (25.4)%           5.4%

Generation mix
  Coal and other                      100%            100%             78%
  Nuclear                               0%              0%             22%


1998: The cost of fuel increased 7.6% and electric  generation  increased 10.9%.
The increase in fuel cost was  primarily a result of running  peaking  units and
reactivation  of  oil-fired  plants  from  cold  shutdown.  These  factors  were
partially  offset by effects of the 1997 UFAC and decreased  emission  allowance
costs.

   Power purchased  increased  $517.3 million.  This amount  consisted of higher
prices  resulting in an increase of $274  million,  a $215  million  increase to
serve increased  volumes of interchange  sales, and market losses of $28 million
recorded on forward power purchase and sales contracts.  Income from interchange
sales was $382 million  higher than in 1997 due to increased  sales  volumes and
higher prices. Although IP's margin on volumes between 1998 and 1997 resulted in
IP being a net seller,  higher  prices  resulted in a $135  million net purchase
margin.   See  "Note  5  --  Commitments  and   Contingencies"   for  additional
information.

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 Clinton outage. Clinton's equivalent
availability and generation were lower than in 1995 due to that outage.

Gas  Operations:  For the years  1996  through  1998,  gas  revenues,  including
transportation,  decreased  17.3%,  while  the  gross  margin  on  gas  revenues
decreased 5.1% as follows:

(Millions of dollars)               1998            1997            1996

Gas revenues                      $ 281.1         $ 345.2         $ 341.4
Gas cost                           (149.6)         (207.7)         (202.6)
Transportation revenues               6.7             8.7             6.8

  Gas margin                      $ 138.2         $ 146.2         $ 145.6

(Millions of therms)
Therms sold                           503             537             703
Therms transported                    267             309             251

  Total consumption                   770             846             954


Changes in the cost of gas purchased for resale were:

(Millions of dollars)               1998            1997            1996

Gas purchased for resale
  Cost                             $ (5.3)        $   8.0         $ 49.0
  Volume                            (23.2)          (30.0)           8.5
  Gas cost recoveries               (29.6)           27.1            6.3

  Total increase (decrease)        $(58.1)        $   5.1         $ 63.8

Average cost per therm
  delivered                          27.1(cents)     28.0(cents)     26.7(cents)


   The 1998  decrease  in gas costs was due to low gas prices and a decrease  in
therm sales caused by mild  weather.  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.

Diversified  Enterprises:  Due primarily to decreased power trading  activity at
IEP in 1998,  diversified  enterprises revenues decreased $374 million which was
offset  by  a  $400  million  decrease  in  diversified   enterprise   expenses.
Diversified  enterprises  revenues increased $678 million for 1997 primarily due
to increased power trading activity at IEP. However, the diversified enterprises
expenses  increased  $705  million in 1997,  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)               1998            1997            1996

Other operating expenses          $  91.1         $  40.6         $  (9.8)
Maintenance                          44.6            12.0             (.3)
Depreciation and amortization         4.8             8.8             3.5


   The increase in operating and maintenance  expenses for 1998 is primarily due
to the outage at Clinton.  Other  increases  include  outside  consulting  fees,
customer marketing activities, and employee benefits.

   The increase in operating and maintenance  expenses for 1997 is primarily due
to increased  company and contractor labor at Clinton and the 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 1995 enhanced retirement and severance program, partially offset by the
costs of the 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 increases in depreciation  and  amortization  for each of the three years
were due to increases in utility plant  balances.

General  Taxes:  The  decrease  in  general  taxes of $10.6  million  in 1998 is
primarily the result of P.A.  90-561,  which shifted the revenue tax burden from
IP_to  its  customers.  The  decrease  was  partially  offset by costs to fund a
program,  provided for in P.A.  90-561,  that helps  low-income  customers avoid
shutoffs. The 1997 and 1996 changes in general taxes were negligible.

Clinton  Plant  Impairment   Loss:  See  "Note  2  --  Clinton   Impairment  and
Quasi-Reorganization" for additional information.

Miscellaneous -- Net: The 1998 decrease in  miscellaneous--  net was negligible.
The 1997  decrease  of $4.7  million in  miscellaneous--net  deductions  was due
primarily to 1996 accruals recorded for the planned disposition of property. The
1996 change in miscellaneous--net deductions was negligible.

Equity Earnings in Affiliates:  The increase in equity earnings in affiliates of
$5.0  million  in 1998,  $11.1  million  in 1997,  and $3.7  million  in 1996 is
primarily due to increased earnings from IGC investments.

Interest Charges: Total interest charges, including AFUDC and preferred dividend
requirements,  increased  $1.9 million in 1998,  increased $2.4 million in 1997,
and  decreased  $15.2  million in 1996.  The  increases in 1998 and 1997 are due
primarily 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.

Inflation:  Inflation,  as measured by the Consumer Price Index, was 1.6%, 2.3%,
and 3.0% in 1998, 1997, and 1996,  respectively.  IP recovers  historical rather
than current plant costs in its regulated rates.


FINANCIAL CONDITION

Liquidity and Capital Resources
Illinova's financial condition is a product of its historical capital structure,
the terms of its existing  indebtedness,  various regulatory  considerations and
the cash flow generated by its businesses. In general, Illinova historically has
been able to  either  generate  sufficient  funds or raise  sufficient  funds at
investment  grade  credit  quality to meet  substantially  all of its  financial
needs.  Illinova's sources of funds and primary  non-operating uses of funds are
described below. See "Note 10 -- Long-Term Debt" and "Note 11 -- Preferred Stock
of  Subsidiary"  for  additional   information  regarding  Illinova's  and  IP's
outstanding indebtedness.  


Mortgages:  Historically,  a substantial  portion of the funds needed by IP have
been  provided  by  indebtedness  issued  pursuant  to  its  general  obligation
mortgages.  These include a 1943 mortgage  (First  Mortgage) and a 1992 mortgage
(New Mortgage) that is intended,  over time, to replace the First Mortgage. Both
mortgages  are  secured by liens on  substantially  all of IP's  properties.  In
general, IP is able to issue debt secured by the mortgages provided that (i) its
"adjusted  net   earnings"   are  at  least  two  times  its  "annual   interest
requirements,"  and (ii) the  aggregate  amount of  indebtedness  secured by the
mortgages  does not exceed  three-quarters  of the original cost of the property
subjected to the lien of the  mortgages,  reduced to reflect  property  that has
been retired or sold. It also generally can issue  indebtedness  in exchange for
repurchased and retired indebtedness  independent of whether these two tests are
met.

   At December  31,  1998,  IP had  outstanding  approximately  $1.6  billion in
indebtedness  pursuant to the mortgages and could have issued approximately $550
million in additional indebtedness based on its property levels. In addition, IP
could have issued  approximately  $334 million in exchange for previously issued
indebtedness that had been repurchased by IP. The sale or shutdown of Clinton or
IP's fossil plants, or both, would eliminate IP's capacity to issue indebtedness
under these  mortgages  based on property  additions.  As a  consequence,  IP is
exploring various  strategies under which the mortgages may be amended to permit
further  issuances  or means to  release  the  indebtedness  from the  mortgage.
Regardless of the status of Clinton,  IP is still able to issue new indebtedness
pursuant to the mortgage based on repurchased and retired indebtedness. Also, IP
had  unsecured  non-mortgage  borrowing  capacity  totaling  approximately  $450
million at December 31, 1998. This capacity is higher than normal as a result of
securitization  proceeds  received in December 1998. 

Cash  Requirements  and Cash  Flow:  Illinova  and IP need  cash  for  operating
expenses,  interest and dividend  payments,  debt and certain IP preferred stock
retirements,   construction   programs,   decommissioning,   and   non-regulated
subsidiary  funding  requirements.  Illinova  and IP have met these  needs  with
internally generated funds and external financings, including debt and revolving
lines of credit.  The timing and amount of external  financings depend primarily
on  cash  needs,   economic   conditions,   financial  market  conditions,   and
capitalization ratio objectives.

   Cash  flows  from  operations  during  1998  were  supplemented  by  external
financings to meet ongoing operating requirements and to service existing common
and  preferred   stock   dividends,   debt   requirements,   IP's   construction
requirements, and Illinova's investments in its subsidiaries.  Liquidity at both
Illinova and IP has decreased in 1998 as a result of higher than expected  costs
for purchased  power and for Clinton  expenditures,  coupled with lower electric
revenues resulting from the rate decrease mandated by P.A. 90-561.

   Illinova expects that future cash flows,  supplemented by external financing,
will  continue  to be  adequate to meet  operating  requirements  and to service
existing  debt,  IP  preferred  and  Illinova   common   dividends,   Illinova's
anticipated   subsidiary   investments,   and  IP's   anticipated   construction
requirements and  decommissioning  costs. It is anticipated there will be a need
for  external  financing  to  supplement  cash flows for at least the years 1999
through  2003.  

Dividends:  On February 10,  1999,  Illinova  declared a quarterly  common stock
dividend of $.31 per share,  payable May 1, 1999. Illinova paid common dividends
of $.31 per share  each  quarter  during  1998 and 1997,  having  increased  the
dividend by 11%,  from $.28 to $.31 per share,  in December  1996 for  dividends
payable in February 1997.

   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, 1998. Under the Restated  Articles of  Incorporation,  common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock

   IP is also  limited  in its  payment  of  dividends  by the  Illinois  Public
Utilities  Act, which  requires  retained  earnings equal to or greater than the
amount of any proposed dividend declaration or payment, and by the Federal Power
Act, which precludes  declaration or payment of dividends by electric  utilities
"out of money  properly  stated in a capital  account." At December 31, 1998, IP
had a zero  balance  in  retained  earnings  and was thus  unable  to  declare a
dividend on its common or preferred  stock.  Payment of  preferred  dividends on
February  1, 1999,  was made out of a trust  created in  November  1998 for this
purpose.  IP's retained earnings balance is expected to grow sufficiently during
1999 to support payment of IP common and scheduled preferred dividends. Illinova
will secure payment of IP preferred dividends through 1999.

   IP typically pays dividends on its common stock to provide  Illinova cash for
operations.  Contingent  on IP  meeting  a free  cash  flow  test,  the  ICC has
authorized IP to periodically  repurchase its common stock from Illinova. IP did
not satisfy the test at year-end  1998 and does not  anticipate  satisfying  the
test in 1999.

   Illinova and IP periodically  review their dividend policies based on several
factors,  including their present and anticipated  future use of cash,  level of
retained earnings, and business strategy. 


Debt  Ratings:  The  availability  and cost of  external  financing  depend to a
significant  degree 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 and the willingness of investors to invest in these  securities.
Illinova's  and IP's  securities are currently  rated by four  principal  rating
agencies as follows:

                                          Standard      Duff &      Fitch
                             Moody's      & Poor's      Phelps      IBCA

Illinova long-term debt       Baa3          BBB-         --         BBB-
IP first/new mortgage
  bonds                       Baa1          BBB          BBB+       BBB+
IP preferred stock            baa2          BB+          BBB-       BBB-
IP commercial paper           P-2           A-2          D-2        F2
IP transitional funding
  trust notes                 Aaa           AAA          AAA        AAA


   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

   In April 1994,  S&P lowered IP's  mortgage  bond rating to BBB from BBB+.  In
July 1996, Moody's upgraded IP's securities,  raising mortgage bond ratings from
Baa2 to Baa1 and preferred  stock ratings from baa3 to baa2. In July 1998,  both
Moody's and S&P revised  their  ratings  outlook for  Illinova  and IP.  Moody's
rating went from stable to negative and S&P from positive to stable,  reflecting
effects of the extended  Clinton outage and  unprecedented  prices for purchased
power during late June 1998. In November  1998,  Fitch IBCA affirmed the ratings
of IP's first and new mortgage bonds at BBB+ and IP's  preferred  stock at BBB-.
Fitch IBCA also established a new commercial paper rating of F2 for IP.

   In February 1999, S&P announced it had implemented a new single credit rating
scale for both  debt and  preferred  stock.  As a result,  S&P  rerated  all the
preferred  stock issues and similar  debt/equity  issues that carry ratings from
S&P to conform to the new scale. As a result of this change,  the rating on IP's
preferred  stock was changed to BB+ from BBB-. On March 4, 1999,  Moody's placed
all of the  securities  of Illinova and IP under review for possible  downgrade,
citing erosion of cash flow and an expected  increase in leverage  caused by the
extended  Clinton outage.  Moody's also  acknowledged the positive impact of the
decision to exit  Clinton and the  progress  made in  bringing  Clinton  back to
on-line  status.  This review does not include the $864 million of  Transitional
Funding Trust Notes issued by IPSPT, which are expected to remain rated Aaa.

   In December  1998,  IPSPT issued $864 million of  Transitional  Funding Trust
Notes as allowed under the Illinois Electric Utility  Transition  Funding Law in
P.A.  90-561.  All four  agencies  rated this debt triple A. See  discussion  of
"Securitization."

   In 1997,  Moody's  and S&P  established  initial  ratings  of Baa3 and  BBB-,
respectively,  for  Illinova  long-term  debt.  In  November  1998,  Fitch  IBCA
established a BBB- rating for Illinova senior  unsecured debt.  Illinova did not
ask Duff & Phelps  to rate its  long-term  debt.

Recent  Financing:  Changes in  principal  amounts of capital  sources for 1998,
1997, and 1996,  including normal maturities and elective  redemptions,  were as
follows:

(Millions of dollars)                1998            1997            1996

Illinova long-term debt             $  70           $ 100          $   --
IP long-term debt                      64             (11)           (154)
IP preferred stock                     --             (39)              71
Illinova common stock
  outstanding                         (49)            (90)             --
Transitional funding
  trust notes*                        864              --              --

Total increase (decrease)           $ 949           $ (40)          $ (83)

*See discussion of "Securitization."

   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 10 --
Long-Term Debt" and "Note 11 -- Preferred Stock of Subsidiary."

   In January  1998,  Illinova  issued  $40  million  principal  amount of 6.46%
medium-term  notes due October 1, 2002,  under an existing  $300  million  shelf
registration  statement.  In September  1998,  Illinova issued an additional $30
million  principal  amount of 6.15%  medium-term  notes due  September 10, 2001,
under the same shelf registration. In January 1999, Illinova replaced its former
$110  million  revolving  credit  facility  with a new  $130  million  facility.
Illinova's current $130 million capacity under the existing shelf  registration,
in  conjunction  with  its  revolving  credit  facility,  are  expected  to meet
currently  estimated  cash  requirements  for the  balance of 1999.  Illinova is
developing  additional  financing  capabilities  to meet future and  contingency
needs in the form of a universal shelf registration to allow the future issuance
of debt or equity.

   In March 1998,  IP issued $18.7  million  principal  amount and $33.8 million
principal  amount of 5.40%  Pollution  Control New Mortgage  Bonds due 2028.  In
April 1998, IP redeemed all principal amounts outstanding of its 6.00% Pollution
Control First  Mortgage Bonds due 2007 ($18.7  million) and its 8.30%  Pollution
Control  First  Mortgage  Bonds due 2017 ($33.8  million).  In May 1998,  a $200
million debt shelf registration for IP debt securities became effective. In July
1998, IP issued $100 million  principal  amount of 6.25% New Mortgage  Bonds due
2002  against  this  registration.  In  September  1998,  IP issued $100 million
principal  amount of 6.00% New  Mortgage  Bonds due 2003 against this same shelf
registration. In September 1998, IP issued a call notice on the principal amount
outstanding  of its 6.60% Series A Pollution  Control First  Mortgage  Bonds due
2004 ($6.0  million).  The bonds were called at par in November 1998. All of the
remaining $68 million  principal  amount IP  medium-term  notes matured and were
retired in 1998.

Securitization:  In December  1998,  IPSPT issued $864  million of  Transitional
Funding Trust Notes, with IP as servicer.  This debt,  secured by collections of
future electric energy deliveries,  represents 25% of IP's total  capitalization
at December 31, 1996, as allowed by the 1997 Electric Utility Transition Funding
Law and  approved  by the ICC.  The law allows IP to use this lower cost debt to
repurchase debt and equity, which lowers IP's overall cost of capital. IP has to
have at least a 40% common equity ratio, exclusive of securitized debt, when the
process is completed.

   On September 16, 1998, IP filed a SEC Form S-3 shelf  registration  statement
for this $864 million  offering.  On September  30, 1998,  the Internal  Revenue
Service issued to IP a private letter ruling that, among other things, the notes
will be obligations of IP for federal income tax purposes.  Interest paid on the
notes  generally  will be  taxable to a United  States  Noteholder  as  ordinary
interest income

   IP has used  funds  from  this  offering  to  redeem  all  principal  amounts
outstanding of its 6.60%  Pollution  Control First Mortgage Bonds due 2004 ($6.0
million), its 8.75% First Mortgage Bonds due 2021 ($57.1 million), and its 8.00%
New Mortgage Bonds due 2023 ($229  million).  A redemption  notice was issued in
December  1998,  and the 8.75% First  Mortgage  Bonds and the 8.00% New Mortgage
Bonds were called  January 11,  1999.  Through  March 9, 1999,  IP has also used
funds from the IPSPT  issuance to  repurchase  in the open market $36.8  million
principal  amount of its 6.5%  First  Mortgage  Bonds due  1999,  $55.9  million
principal  amount of its 7.95% First  Mortgage Bonds due 2004, and $28.5 million
principal  amount of its 7.50% New Mortgage Bonds due 2025. In addition,  IP has
repurchased  $6.6 million,  net of premiums and discounts,  of various series of
preferred  stock and MIPS.  IP has used another  $49.3 million from the IPSPT to
repurchase  approximately 2.3 million of its shares from Illinova, which in turn
used the $49.3 million  received from IP to repurchase 1.8 million of its common
shares in the open market.  


Preferred  Stock:  At a special  meeting in May 1998, IP preferred  shareholders
voted  on a  proposal  to  amend  the  Articles  of  Incorporation  to  remove a
limitation  on the amount of  unsecured  debt IP can issue.  A majority of votes
cast favored the proposal, but not the two-thirds majority required.

Capital  Expenditures:  Construction  expenditures  for 1996  through  1998 were
approximately $723 million, including $14.7 million of AFUDC. Illinova estimates
that it will spend  approximately $370 million for IP construction  expenditures
in 1999.  IP  construction  expenditures  for 1999  through 2003 are expected to
total approximately $1.2 billion. In light of the December 1998 decision to exit
Clinton and resulting Clinton  impairment  entries,  no nuclear  construction is
included in the above estimates.

   Due to the failure of Clinton to restart by January 31,  1999, a provision in
the lease agreement  between IP and the Fuel Company  requires IP to deposit $62
million  cash, in March 1999,  with the Fuel Company  Trustee for the benefit of
investors in secured notes of the Fuel Company.  These notes mature  December 1,
1999,  at which time these funds will be used to pay  principal  and interest on
the notes' principal amount of $60 million.

   Additional expenditures may be required during this period to accommodate the
transition  to  a  competitive  environment,  environmental  compliance,  system
upgrades, and other costs which cannot be determined at this time.

   In addition to IP construction expenditures,  Illinova's capital expenditures
for 1999 through 2003 are  expected to include $592 million for  mandatory  debt
retirement  and   approximately   $600  million  target  levels  for  investment
opportunities  by  the  non-regulated  subsidiaries.   In  addition,  IPSPT  has
long-term  debt  maturities  of  $86.4  million  in  each  of the  above  years.

Decommissioning: Because of Illinova's and IP's Boards of Directors' decision to
exit Clinton, IP must be prepared to fund the cost of decommissioning the plant.
Assuming the most conservative immediate decommissioning method, IP estimates it
will cost approximately $376 million between 1999 and 2003. IP currently has $84
million in decommissioning  trust funds and would expect this amount to be used,
as well as $37  million in  additional  collections  from  customers,  including
interest on the trust,  during this time period.  In  addition,  IP will need to
fund approximately $255 million from other sources. IP is pursuing insurance and
other  options,  including  a  delayed  decommissioning  method  which  requires
significantly less cash in the next few years.

   IP  continues  to pursue  discussions  with  various  parties  interested  in
purchasing  Clinton. In the event of a sale of Clinton, IP expects to incur some
amount of obligation to provide  decommissioning funds. The timing and amount of
such obligations cannot be determined at this time.

   See "Note 5 -- Commitments  and  Contingencies"  for additional  information.
Internally  generated cash,  supplemented by external  financing,  will meet all
decommissioning,  construction, and capital requirements.  

Environmental  Matters:  See "Note 5 --  Commitments  and  Contingencies"  for a
discussion  of  environmental  matters that impact or could  potentially  impact
Illinova and IP.

Tax  Matters:  See "Note 8 -- Income  Taxes" for a discussion  of effective  tax
rates and other tax issues.


MARKET RISK

Risk  Management:  Illinova is exposed to both  non-trading  and trading  market
risks.  Market risk is the risk of loss arising  from adverse  changes in market
rates and prices,  such as interest  rates,  foreign  currency  exchange  rates,
commodity prices,  and other relevant market rate or price changes.  Non-trading
market risks include interest rate risk, equity price risk,  foreign  operations
risk, and commodity  price risk.  Trading market risk is comprised  basically of
commodity price risk. For a discussion of credit risk exposure,  see "Note 16 --
Financial and Other Derivative  Instruments."  Illinova's risk management policy
allows the use of  derivative  financial  instruments  to manage  its  financial
exposures.  Market risk is measured through various means, including VaR models.
VaR  represents  the potential  losses for an instrument or portfolio  resulting
from hypothetical  adverse changes in market factors for a specified time period
and  confidence  level.  It does not  represent the maximum loss that may occur.
Future  gains and  losses  will  differ  from those  estimated,  based on actual
fluctuations in market rates,  operating exposures,  and the timing thereof, and
changes in the portfolio of derivative financial instruments during the year.

Interest  Rate Risk:  Illinova is or can be exposed to  interest  rate risk as a
result  of  financing  through  its  issuance  of fixed or  variable-rate  debt.
Interest rate risk is the exposure of an entity's financial condition to adverse
movements in interest rates. Illinova has no short-term  borrowings  outstanding
at December 31, 1998. IP is exposed to interest rate risk as the result of fixed
or  variable-rate  debt  including  commercial  paper  issuances  or bank  notes
obtained  by IP.  Interest  rate  exposure  is  managed  according  to policy by
limiting  variable-rate  exposure  to a certain  percentage  of  capitalization,
utilizing  derivative  instruments when deemed  appropriate,  and monitoring the
effects of market changes in interest rates. At December 31, 1998, there were no
derivative financial instruments in use related to interest rate risk.

   Illinova's   debt   portfolio   VaR  was   calculated   quarterly   based  on
variance/covariance methodology using the RiskMetrics FourFifteen(TM) model. VaR
was calculated based on a 95 percent  confidence  factor and a holding period of
one business day. Interest rate risk as measured by VaR for 1998 follows:

                                      Low             High          Average
(Millions of dollars)                 VaR             VaR             VaR

ILN, including IP debt             $  7.1          $  14.9         $  10.5
IP debt only                       $  6.7          $  14.2         $   9.9


Other Market Risk:  Illinova is exposed to equity price risk  primarily  through
IP.  Equity  price risk is the risk of loss on equity  investments  arising from
unfavorable movements in equity prices. IP maintains trust funds, as required by
the NRC,  to fund  certain  costs of  nuclear  decommissioning.  See  "Note 5 --
Commitments  and  Contingencies."  As of  December  31,  1998,  these funds were
invested  in  domestic  and  international   equity  securities,   fixed  income
securities,  and cash and cash  equivalents.  By  maintaining  a portfolio  that
includes  equity  investments,  IP is  maximizing  the return to be used to fund
nuclear  decommissioning,  which in the long term  will  correlate  better  with
inflationary  increases in decommissioning costs. The equity securities included
in the  corporation's  portfolio  are  exposed to price  fluctuations  in equity
markets, and the fixed-rate,  fixed-income securities are exposed to market risk
as a result  of  fluctuations  in  interest  rates.  IP  actively  monitors  its
portfolio by benchmarking the performance of its investments  against equity and
fixed-income  indexes. It maintains and periodically  reviews established target
allocations  of the trust assets  approved in the investment  policy  statement.
Nuclear  decommissioning  costs have  historically  been recovered  through IP's
electric rates and the Soyland PCA. Therefore,  fluctuations in equity prices or
interest rates have not affected the earnings of the corporation. In the future,
changes in the investments' fair value will be reflected in the regulatory asset
for probable  future  collections  from customers of  decommissioning  costs and
fluctuations in interest rates will be reflected in earnings.

Foreign  Operations:  Risk IP's foreign  operations risk is its inherent risk of
loss due to the potential  volatility of emerging  countries and fluctuations in
foreign currency  exchange rates in relation to the U.S. dollar. At December 31,
1998, IGC had invested $146 million in several international operations, many of
which are joint  ventures.  Primarily,  these  investments  are with  affiliates
owning energy-related production, generation, and transmission facilities.

   IGC is exposed to foreign  currency risk,  sovereign  risk, and other foreign
operations risks,  primarily through investments in affiliates of $40 million in
Asia and $103 million in South and Central America. To mitigate risks associated
with foreign currency  fluctuations,  the majority of contracts  entered into by
IGC or its  affiliates  are  denominated  in or  indexed  to  the  U.S.  dollar.


Commodity  Price  Risk:  Illinova  is exposed to  trading  commodity  price risk
through IEP and to both trading and non-trading commodity price risk through IP.
Commodity  price risk is the risk of loss  arising  from  adverse  movements  in
commodity prices.

   IEP and IP are exposed to commodity  price risks through their energy trading
businesses.  To measure,  monitor,  and manage the  commodity  price risk of the
trading and  marketing  portfolio,  IP utilizes a "Monte  Carlo"  simulation  of
trading positions based on a 95 percent  confidence level and a four-day holding
period. IP's trading VaR at December 31, 1998, was $1.3 million.

   IEP utilizes a variance/covariance  approach similar to RiskMetrics(TM).  VaR
measures the amount that could potentially be lost given a 95 percent confidence
level and a four- day holding  period.  Based on the VaR analysis of its overall
commodity  price  risk  exposure  at  December  31,  1998,  management  does not
anticipate a materially adverse effect on the company's  consolidated  financial
statements as a result of market  fluctuations.  IEP's trading  commodity  price
risk as measured by VaR for 1998 follows:

                                     Low             High          Average
(Millions of dollars)                VaR             VaR             VaR

IEP                                 $ .1            $ .9            $ .3

   IP is also  exposed to  non-trading  commodity  price risk through its energy
generation  business.  IP uses  derivative  financial  instruments to manage its
native load requirements.  To measure,  monitor,  and manage the commodity price
risk of its  non-trading  portfolio,  IP utilizes a "Monte Carlo"  simulation of
non-trading  positions  based on a 95  percent  confidence  level and a one-year
holding period.  IP's non-trading  commodity price VaR at December 31, 1998, was
$13.7 million.


SAFE HARBOR

Certain  of  the  statements  contained  in  this  report,  including  those  in
Management's  Discussion  and Analysis are  forward-looking.  Other  statements,
particularly those using words like "expect," "intend,"  "predict,"  "estimate,"
and  "believe,"  also are  forward-looking.  Although  Illinova  believes  these
statements are accurate, its business is dependent on various regulatory issues,
general  economic  conditions  and future  trends,  and these  factors can cause
actual results to differ  materially  from the  forward-looking  statements that
have been made. In particular:

-    Illinova's  activities,  particularly  the  utility  activities  of IP, are
     heavily regulated by both the federal government and the State of Illinois.
     This regulation has changed  substantially over the past several years. The
     impacts of these  changes  include  reductions  in rates  pursuant  to P.A.
     90-561  and a phasing in of the  opportunity  for an  increasing  number of
     customers to choose  alternative  energy  suppliers.  In  addition,  future
     regulatory  changes are certain to occur and their nature and impact cannot
     be predicted.

-    IP is likely to face increased  competition in the future.  Deregulation of
     certain  aspects of IP's  business at both the state and federal  levels is
     occurring,  the  primary  results  of  which  so  far  are  that  competing
     generators  of  electricity  will  increasingly  have the  ability  to sell
     electricity  to IP's customers and to require IP to transmit and distribute
     that electricity. In addition,  alternative sources of electricity, such as
     co-generation facilities, are becoming increasingly popular. When customers
     elect suppliers other than IP for their  electricity,  IP can avoid certain
     costs  and  can  gain  revenue  from  transmitting  and  distributing  that
     electricity;  however,  the net effect of these  elections  generally  is a
     decrease in IP's revenue and operating income.  Illinois  transition law is
     designed to protect utilities in three principal ways:

     1)   Departing  customers are obligated to pay transition  charges based on
          the utility's lost revenue from that customer;

     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 the change in
          law leads to their ROE falling  below a specified  minimum  based on a
          prescribed test.



-    Illinova is exploring  various  strategies  to best respond to its changing
     business and regulatory environment. These strategies include acquisitions,
     focused  growth of  unregulated  businesses,  and other  options.  Although
     Illinova would only plan to undertake  transactions that it believes are in
     the best interests of its shareholders,  there can be no certainty that any
     transaction will fulfill these expectations.

-    To meet IP customers' electricity requirements,  IP produces electricity in
     Company-owned generation plants. Although IP has in place programs designed
     to match its supplies with its needs,  many  circumstances  can occur which
     upset this balance.  Specifically,  generation  facilities  may  experience
     unplanned outages forcing the Company to acquire additional supplies in the
     electricity  marketplace.  The  availability  and price of these additional
     supplies are uncertain and at times highly  volatile.  Such  situations can
     lead to less profitable or even unprofitable outcomes.

-    Clinton is a nuclear-fueled generation facility.  Although IP believes that
     it operates this facility in accordance with all regulatory  guidelines and
     in a safe  manner,  accidents  can occur.  Liabilities  and costs from such
     accidents could exceed insurance provisions established for the Company and
     have a significantly negative effect on IP.

-    There are various  financial  risks  attendant to selling or shutting  down
     Clinton. These risks include the possibility that IP has underestimated the
     costs necessary to effect a particular exit strategy.  No nuclear  facility
     sale  has  been  completed  and  relatively  little  financial  information
     regarding  these  transactions  is available.  Although the amounts used in
     IP's  analyses  and in  recording  year-end  accounting  results  represent
     estimates  based on guidance from industry  experts,  actual results may be
     materially different from the estimates. In addition, the Company continues
     to have ongoing  nuclear  operational  exposures until the plant is sold or
     shut down.

-    Illinova  does not  currently  foresee any  inability  to obtain  necessary
     financing on reasonably favorable terms.  However,  events can occur in the
     Company's business  operations or in general economic conditions that could
     negatively  impact  the  Company's  financial  flexibility.   In  addition,
     restructuring   activities,   such  as  the  formation  of  an  unregulated
     generation  subsidiary,  can introduce  other factors that could impact the
     Company's financial  flexibility.  Further, the sale or shutdown of Clinton
     will substantially reduce the Company's ability to issue indebtedness under
     its  existing  mortgages.  While the Company  does not foresee any of these
     events resulting in significant  difficulties in obtaining future financing
     on reasonably favorable terms, there can be no assurances that difficulties
     will not occur.

-    The impact of  environmental  regulations on utilities is significant;  and
     the expectation is that more stringent requirements will be introduced over
     time.  Although Illinova believes it is in substantial  compliance with all
     current   regulations,   Illinova  cannot  predict  the  future  impact  of
     environmental  compliance.  However,  if more  stringent  requirements  are
     introduced they are likely to have a negative financial effect.

-    IGC  has  interests  in  foreign  facilities  and  is  likely  to  purchase
     additional  foreign interests in the future. The risks of doing business in
     foreign  countries are different from those  attendant to doing business in
     the  United  States.   These  include   business  risks  such  as  currency
     fluctuations,  cyclical and  sustained  economic  downturns,  and political
     risks. The adverse impact of these risks could be significant.

-    Illinova,  through IEP and IP, actively purchases and sells electricity and
     natural gas  futures and similar  contracts  with  respect  thereto.  While
     Illinova has adopted various risk management practices intended to minimize
     the  risk of  significant  loss,  trading  in  assets  of  these  types  is
     inherently risky and these risk management  practices cannot guarantee that
     losses will not occur.

-    Although  Illinova believes that it will complete its Year 2000 preparation
     in a timely  fashion,  there  can be no  assurances  that it will,  or that
     unforeseen  problems will not arise. The consequences of Year 2000 problems
     are so varied that Illinova can not predict this ultimate impact, if any.

   All  forward-looking  statements in this report are based on information that
currently  is  available.  Illinova  disclaims  any  obligation  to  update  any
forward-looking  statement.


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,   PricewaterhouseCoopers   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  PricewaterhouseCoopers  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
PricewaterhouseCoopers  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  PricewaterhouseCoopers  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.




Charles E. Bayless
Chairman, President
and Chief Executive Officer




Larry F. Altenbaumer
Chief Financial Officer,
Treasurer and Controller


ILLINOVA CORPORATION
Report of Independent Accountants

PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Illinova Corporation

In our opinion,  the  accompanying  consolidated  balance sheets and the related
statements  of income,  statements  of cash  flows and  statements  of  retained
earnings present fairly,  in all material  respects,  the financial  position of
Illinova  Corporation and its subsidiaries  (the "Company") at December 31, 1998
and 1997,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1998,  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 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 requires 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  explained  in  Note  2 to  the  consolidated  financial  statements,  the
Company's commitment to exit nuclear operations resulted in an impairment of the
Clinton  Power  Station in  accordance  with  Statement of Financial  Accounting
Standards No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived Assets to Be Disposed Of," in December 1998.

   As explained in Note 2 to the consolidated financial statements,  the Company
effected a  quasi-reorganization  in  December  1998.  In  conjunction  with the
accounting for a  quasi-reorganization,  the Company adjusted the recorded value
of specific  assets and  liabilities  to fair value,  including its fossil power
generation  stations.  In addition,  the Company adopted  Statement of Financial
Accounting   Standards  No.  133,   "Accounting   for  Derivatives  and  Hedging
Activities"  and Emerging  Issues Task Force  Statement  98-10,  "Accounting for
Energy Trading and Risk Management Activities."

   As explained 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 Regulation,"
for its generation segment of the business in December 1997.




PricewaterhouseCoopers LLP
St. Louis, Missouri
February 26, 1999


<TABLE>
<CAPTION>
Illinova Corporation
C O N S O L I D A T E D   S T A T E M E N T S   O F    I N C O M E
-----------------------------------------------------------------------------------------------------------------------

                                                                      (Millions of dollars except per share amounts)
-----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,                                               1998           1997               1996
Operating Revenues
<S>                                                                          <C>            <C>               <C>      
Electric                                                                     $1,224.2       $1,244.4          $ 1,202.9
Electric interchange                                                            557.2          175.6              137.6
Gas                                                                             287.8          353.9              348.2
Diversified enterprises                                                         361.4          735.6               57.6
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                   2,430.6        2,509.5            1,746.3
-----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel for electric plants                                                        250.2          232.4              248.1
Power purchased                                                                 735.2          217.9               65.2
Gas purchased for resale                                                        149.6          207.7              202.6
Diversified enterprises                                                         392.0          792.3               87.5
Other operating expenses                                                        381.6          290.5              249.9
Maintenance                                                                     156.3          111.7               99.7
Depreciation and amortization                                                   203.6          198.8              190.0
General taxes                                                                   123.2          133.8              131.3
Clinton plant impairment loss (Note 2)                                        2,341.2            -                  -
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                   4,732.9        2,185.1            1,274.3
------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                      (2,302.3)         324.4              472.0
-----------------------------------------------------------------------------------------------------------------------
Other Income
Miscellaneous-net                                                                 3.1            3.5               (1.2)
Equity earnings in affiliates                                                    22.5           17.5                6.4
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                      25.6           21.0                5.2
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before interest charges and income taxes                       (2,276.7)         345.4              477.2
-----------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest expense                                                                146.0          144.2              142.5
Allowance for borrowed funds used during construction                            (3.2)          (5.0)              (6.5)
Preferred dividend requirements of subsidiary                                    19.8           21.5               22.3
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                     162.6          160.7              158.3
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                            (2,439.3)         184.7              318.9
-----------------------------------------------------------------------------------------------------------------------
Income Taxes
Income tax - impairment loss                                                   (853.6)           -                  -
ITC - Clinton impairment                                                       (160.4)           -                  -
Other                                                                           (42.3)          80.3              127.9
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                  (1,056.3)          80.3              127.9
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item                                  (1,383.0)         104.4              191.0
Extraordinary item net of income tax benefit
    of $118.0 million (Note 1)                                                    -           (195.0)               -
-----------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                            (1,383.0)         (90.6)             191.0
Carrying amount over (under) consideration paid
    for redeemed preferred stock of subsidiary                                    -               .2                (.7)
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock                                $(1,383.0)       $ (90.4)          $  190.3
-----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share before
    extraordinary item (basic and diluted)                                  $  (19.30)       $  1.41            $  2.51
Extraordinary item per common share (basic and diluted)                     $    -           $ (2.63)           $    -
-----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share (basic and diluted)                        $  (19.30)       $ (1.22)           $  2.51
Cash dividends declared per common share                                    $    1.24        $  1.24            $  1.15
Cash dividends paid per common share                                        $    1.24        $  1.24            $  1.12

Weighted average common shares                                             71,666,864     73,991,651         75,681,937

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

</TABLE>


<TABLE>
<CAPTION>
Illinova Corporation
C O N S O L I D A T E D   B A L A N C E   S H E E T S
                                                                                      (Millions of dollars)
-----------------------------------------------------------------------------------------------------------
December 31,                                                                   1998                  1997
ASSETS
Utility Plant
<S>                                                                          <C>                   <C>     
Electric (includes construction work in progress
     of $177.7 million and $214.3 million, respectively)                     $5,481.8              $6,690.4
Gas (includes construction work in progress of
     $15.3 million and $10.7 million, respectively)                             686.9                 663.0
-----------------------------------------------------------------------------------------------------------
                                                                              6,168.7               7,353.4
Less -- accumulated depreciation                                              1,713.7               2,808.1
-----------------------------------------------------------------------------------------------------------
                                                                              4,455.0               4,545.3
Nuclear fuel in process                                                           -                     6.3
Nuclear fuel under capital lease                                                 20.3                 126.7
-----------------------------------------------------------------------------------------------------------
                                                                              4,475.3               4,678.3
-----------------------------------------------------------------------------------------------------------
Investments and Other Assets                                                    246.9                 198.8
-----------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents                                                       518.1                  33.0
Accounts receivable (less allowance for doubtful accounts
     of $5.5 million)
     Service                                                                    105.9                 115.6
     Other                                                                      116.1                 102.3
Accrued unbilled revenue                                                         82.6                  86.3
Materials and supplies, at average cost
     Fossil fuel                                                                 25.6                  12.6
     Gas in underground storage                                                  28.9                  29.3
     Operating materials                                                         36.3                  76.7
Assets from commodity price risk management activities                           51.5                   -
Prepayments and other                                                            51.5                  64.4
-----------------------------------------------------------------------------------------------------------
                                                                              1,016.5                 520.2
-----------------------------------------------------------------------------------------------------------
Deferred Charges
Transition period cost recovery                                                 783.0                   -
Other                                                                           279.6                 185.7
-----------------------------------------------------------------------------------------------------------
                                                                              1,062.6                 185.7
-----------------------------------------------------------------------------------------------------------
                                                                             $6,801.3              $5,583.0
-----------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES
Capitalization
Common stock -- No par value, 200,000,000 shares
     authorized; 69,919,287 and 71,681,937 shares
     outstanding, respectively, stated at                                    $1,319.7              $1,425.7
Less -- Deferred compensation -- ESOP                                             6.8                  10.2
Retained earnings                                                                 -                    51.7
Less -- Capital stock expense                                                     7.3                   7.3
Less --5,762,650 and 4,000,000 shares of common stock
     in treasury, respectively, at cost                                         138.7                  90.4
-----------------------------------------------------------------------------------------------------------
     Total common stock equity                                                1,166.9               1,369.5
Preferred stock of subsidiary                                                    57.1                  57.1
Mandatorily redeemable preferred stock of subsidiary                            199.0                 197.0
Long-term debt                                                                2,334.6               1,717.5
-----------------------------------------------------------------------------------------------------------
     Total capitalization                                                     3,757.6               3,341.1
-----------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable                                                                256.5                 177.3
Notes payable                                                                   147.6                 415.3
Long-term debt and lease obligations of subsidiary
     maturing within one year                                                   506.6                  87.5
Dividends declared                                                               21.7                  22.9
Taxes accrued                                                                    30.6                  26.7
Interest accrued                                                                 39.5                  36.0
Liabilities from commodity price risk management activities                      99.8                   -
Other                                                                           112.0                  96.0
-----------------------------------------------------------------------------------------------------------
                                                                              1,214.3                 861.7
-----------------------------------------------------------------------------------------------------------
Deferred Credits
Accumulated deferred income taxes                                               964.0                 969.0
Accumulated deferred investment tax credits                                      39.6                 208.3
Decommissioning liability                                                       567.4                  62.5
Other                                                                           258.4                 140.4
-----------------------------------------------------------------------------------------------------------
                                                                              1,829.4               1,380.2
-----------------------------------------------------------------------------------------------------------
                                                                             $6,801.3              $5,583.0
-----------------------------------------------------------------------------------------------------------
(Commitments and Contingencies Note 5)
See notes to  consolidated  financial  statements  which are an integral part of
these  statements.  Prior  year  restated  to conform  to new  financial  format.
</TABLE>


<TABLE>
<CAPTION>
ILLINOVA CORPORATION
C O N S O L I D a T E D   S T a T E M E N T S   O F    C a S H   Fl O W S
-----------------------------------------------------------------------------------------------------------------------

                                                                                     (Millions of dollars)
-----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,                                                1998             1997             1996
Cash Flows from Operating Activities
<S>                                                                        <C>                 <C>               <C>   
Net income (loss)                                                          ($1,383.0)          ($90.6)           $191.0
Items not requiring (providing) cash --
      Depreciation and amortization                                            203.4            202.1             195.3
      Allowance for funds used during construction                              (3.2)            (5.0)             (6.5)
      Deferred income taxes                                                    (43.9)            30.8              57.4
      Extraordinary item                                                         -              195.0               -
      Impairment loss, net of tax                                            1,327.2              -                 -
Changes in assets and liabilities --
      Accounts and notes receivable                                             24.4            (19.4)            (52.2)
      Accrued unbilled revenue                                                   3.7             19.7             (16.9)
      Materials and supplies                                                   (15.1)            (5.4)             (2.1)
      Accounts payable                                                          (5.6)            26.4              46.8
      Deferred revenue                                                          87.4              -                 -
      Interest accrued and other, net                                           72.7             14.7              (5.4)
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                      268.0            368.3             407.4
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Construction expenditures                                                     (311.5)          (223.9)           (187.3)
Allowance for funds used during construction                                     3.2              5.0               6.5
Other investing activities                                                     (53.7)           (33.5)            (75.0)
-----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                         (362.0)          (252.4)           (255.8)
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock                                                      (88.9)           (92.4)            (84.7)
Repurchase of common stock                                                     (49.1)           (90.4)              -
Reissuance of common stock                                                       0.8              -                 -
      Redemptions --
           Short-term debt                                                    (607.9)          (241.1)           (355.8)
           Long-term debt                                                     (188.3)          (160.8)           (153.7)
           Preferred stock of subsidiary                                           -            (39.0)            (29.5)
      Issuances --
           Short-term debt                                                     340.2            269.5             383.2
           Long-term debt                                                    1,186.5            250.0               -
           Preferred stock of subsidiary                                           -                -             100.0
           Common stock                                                            -                -               1.1
      Other financing activities                                               (14.2)            (3.3)              1.1
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                            579.1           (107.5)           (138.3)
-----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                                        485.1              8.4              13.3
Cash and cash equivalents at beginning of year                                  33.0             24.6              11.3
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                      $518.1            $33.0             $24.6
-----------------------------------------------------------------------------------------------------------------------

</TABLE>


<TABLE>
<CAPTION>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
---------------------------------------------------------------------------------------------------------------------------

                                                                                                   (Millions of dollars)
---------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,                                                       1998           1997            1996
<S>                                                                                <C>              <C>              <C>  
Balance at beginning of year                                                       $   51.7    $     233.0     $     129.6
Net income (loss) before dividends and carrying amount adjustments                 (1,363.2)         (69.1)          213.3
--------------------------------------------------------------------------------------------------------------------------
                                                                                   (1,311.5)         163.9           342.9
--------------------------------------------------------------------------------------------------------------------------
Less-
      Dividends-
          Preferred stock of subsidiary                                                19.9           21.7            22.6
          Common stock                                                                 88.1           90.7            86.6

Plus-
      Carrying amount over (under) consideration paid for redeemed
         preferred stock of subsidiary                                                  -              0.2            (0.7)
      Quasi-Reorganization adjustment (Note 2)                                      1,313.3            -               -   
      Transfer from other paid-in capital to
          eliminate retained earnings deficit (Note 2)                                106.2            -               -   
--------------------------------------------------------------------------------------------------------------------------
                                                                                    1,311.5         (112.2)         (109.9)
--------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                             $    -         $   51.7     $     233.0
--------------------------------------------------------------------------------------------------------------------------
See notes to  consolidated  financial  statements  which are an integral part of
these statements.

</TABLE>


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, IEP,
IIC, and IBE. IP is an electric and gas  utility.  IGC invests in energy  supply
projects and competes in the independent power market.  IEP develops and markets
energy-related services to the unregulated energy market and brokers and markets
electric  power and natural gas. IIC insures the risks of Illinova  subsidiaries
and risks  related to or associated  with their  business  enterprises.  IBE was
incorporated  on  February  23,  1998,  to account  for  miscellaneous  business
activities  not  regulated  by the ICC or the FERC and not  falling  within  the
business  scope  of  other  Illinova  subsidiaries.   See  "Note  3  -  Illinova
Subsidiaries" for additional information.

   All significant  intercompany  balances and transactions have been eliminated
from the  consolidated  financial  statements.  All  transactions for Illinova's
unregulated subsidiaries are included in the sections "Diversified Enterprises,"
"Interest  Charges,"  "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.

Clinton Impairment and  Quasi-Reorganization:  In December 1998,  Illinova's and
IP's Boards of Directors  decided to exit the nuclear portion of the business by
either sale or shutdown of Clinton.  FAS 121,  "Accounting for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of," requires that
all long-lived  assets for which  management has committed to a plan of disposal
be  reported  at the lower of  carrying  amount or fair value less cost to sell.
Consequently, IP wrote off the value of Clinton and accrued Clinton-related exit
costs, which resulted in an accumulated deficit in retained earnings.

   Illinova's and IP's Boards of Directors also voted in December 1998 to effect
a  quasi-reorganization.  A quasi-reorganization is an accounting procedure that
eliminates an accumulated  deficit in retained  earnings and permits the company
to  proceed  on much the same  basis as if it had been  legally  reorganized.  A
quasi-reorganization  involves  restating a company's  assets and liabilities to
their fair values, with the net amount of these adjustments added to or deducted
from the deficit.  Any remaining deficit in retained earnings is then eliminated
by a transfer  from paid-in  capital,  giving the company a "fresh start" with a
zero balance in retained earnings.

     For  additional   information,   see  "Note  2  -  Clinton  Impairment  and
Quasi-Reorganization."

Regulation:  IP is regulated  primarily by the ICC,  FERC, and the NRC. Prior to
the enactment of P.A. 90-561, 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  balance sheet assets  representing  costs
they expect to recover through inclusion in 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 P.A. 90-561 provides for market-based  pricing of electric generation
services,  IP discontinued  application of FAS 71 for its generating  segment in
December 1997 when P.A. 90-561 was enacted.  IP evaluated the 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,  i.e., the regulated  portion of its business.  In
December 1997, IP wrote off generation-related regulatory assets and liabilities
of approximately $195 million (net of income taxes). These net assets related to
previously  incurred costs expected to be recoverable  through future  revenues,
including  deferred  Clinton  post-construction  costs,  unamortized  losses  on
reacquired   debt,    previously    recoverable    income   taxes,   and   other
generation-related  regulatory  assets.  At December 31, 1998, the value of IP's
non-nuclear  generation  facilities  was  $2.9  billion.   

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)                               1998            1997

Unamortized losses on reacquired debt            $  40.1         $  32.3
Manufactured-gas plant
  site cleanup costs                             $  44.7         $  64.8
DOE decontamination and
  decommissioning fees                              --           $   6.3
Transition period cost recovery                  $ 783.0            --
Clinton decommissioning cost recovery            $  72.3            --


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.

     After 1998's  write-off of Clinton,  costs which would have been considered
capital additions at Clinton will be expensed.  See "Note 2 - Clinton Impairment
and Quasi-Reorganization."

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 1998,
1997,  and 1996, the pre-tax rate used for all  construction  projects was 5.7%,
5.6%, and 5.8%,  respectively.  Although cash is not currently realized from the
allowance,  it is realized through 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 each of the years 1996  through
1998, the provision for  depreciation  was 2.8% of the average  depreciable cost
for Clinton. Provisions for depreciation for all other electric plant facilities
were 2.3%, 2.8%, and 2.6% in 1998, 1997, and 1996, respectively.  Provisions for
depreciation  of gas utility plant,  as a percentage of the average  depreciable
cost, were 3.5% in 1998, 3.3% in 1997, and 3.9% in 1996.

     Depreciation  of  Clinton  has been  discontinued  in 1999.  See  "Note 2 -
Clinton Impairment and Quasi-Reorganization."

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 5 -
Commitments and  Contingencies"  for discussion of  decommissioning  and nuclear
fuel disposal costs. See "Note 2 - Clinton Impairment and  Quasi-Reorganization"
for discussion of the effect of the Clinton impairment on nuclear fuel.

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:  To more  closely  match  revenues  with  expenses,  IP
records  revenue for  services  provided but not yet billed.  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.  Until
August 1998,  operating  revenues included related taxes that had been billed to
customers.  In August 1998, the practice of including  revenue-related  taxes in
operating  revenues was  discontinued  for the electric portion of the business.
Taxes  included in operating  revenues were $54 million in 1998,  $71 million in
1997, and $68 million in 1996. The cost of gas purchased for resale is recovered
from customers pursuant to the UGAC.  Accordingly,  allowable gas costs that are
to be passed on to customers in a subsequent accounting period are deferred. The
recovery of costs  deferred  under this clause is subject to review and approval
by the ICC. Prior to March 1998,  the costs of fuel for electric  generation and
purchased power costs were deferred and recovered from customers pursuant to the
UFAC. On March 6, 1998, IP initiated an ICC  proceeding to eliminate the UFAC in
accordance  with  P.A.  90-561.  A new base  fuel cost  recoverable  under  IP's
electric  tariffs was  established,  effective  on the date of the filing.  UFAC
elimination prevents IP from automatically passing cost increases through to its
customers and exposes IP to the risks and opportunities of cost fluctuations and
operating efficiencies.

   Under UFAC, IP was subject to annual ICC audits of its actual  allowable fuel
costs.  Costs could be disallowed,  resulting in negotiations  and/or litigation
with the ICC. In 1998,  IP agreed to  settlements  with the ICC which closed the
audits for all previously  disputed  years. As a result of the  settlements,  IP
electric  customers are receiving  refunds  totaling  $15.1 million in the first
quarter of 1999.  These refunds  complete the process of eliminating the UFAC at
IP. 

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 and
depreciation.

     Prior to December 31, 1998,  investment  tax credits used to reduce federal
income  taxes had been  deferred  and were being  amortized  to income  over the
service  life of the  property  that  gave rise to the  credits.  As a result of
Illinova's  decision  to  exit  Clinton  operations,   all  previously  deferred
investment  tax credits  associated  with nuclear  property  were  recorded as a
credit to income at December 31, 1998. For further discussion of Clinton-related
investment   tax   credits,    see   "Note   2   -   Clinton    Impairment   and
Quasi-Reorganization."

     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 8 - 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.

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

(Millions of dollars)                1998            1997            1996

Net income (loss) before
  extraordinary item
  (basic and diluted)               $(1,383.0)       $  104.6         $ 190.3
Extraordinary item
  (basic and diluted)                    --          $ (195.0)           --
Net income (loss) applicable
  to common stock
  (basic and diluted)               $(1,383.0)       $  (90.4)        $ 190.3

Weighted average common
  shares for basic EPS             71,666,864      73,991,651      75,681,937

Effect of dilutive securities
  --stock options                      33,807           6,161          32,272

Adjusted weighted average
  common shares for
  diluted EPS                      71,700,671      73,997,812      75,714,209

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
$5  million,  $30  million,  and  $31  million  during  1998,  1997,  and  1996,
respectively. Income taxes and interest paid are as follows:

                                                 Years ended December 31,

(Millions of dollars)                1998            1997            1996

Income taxes                      $  13.4         $  78.3         $  58.0
Interest                          $ 160.8         $ 145.3         $ 167.1

New Accounting Pronouncements: Implementation of a quasi-reorganization requires
the adoption of any accounting  standards that had not yet been adopted  because
their required  implementation date had not occurred.  All applicable accounting
standards  were adopted as of December 1998.  For  additional  information,  see
"Note 2 - Clinton Impairment and Quasi-Reorganization."

     The FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. FAS 133  supersedes  FAS 80,  "Accounting  for Futures
Contracts," FAS 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial  Instruments with  Concentrations of Credit
Risk," and FAS 119, "Disclosure about Derivative Financial  Instruments and Fair
Value of Financial  Instruments."  FAS 133 establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  and for hedging activities.  FAS 133 requires that
an entity  recognize  all  derivatives  as either assets or  liabilities  in the
statement of financial position and measure those instruments at fair value. FAS
133   was   adopted   early   in   connection   with   the    requirements   for
quasi-reorganization  accounting.  It did  not  have  a  significant  impact  on
Illinova's 1998 financial statements. For additional information, see "Note 16 -
Financial and Other Derivative Instruments."

     The  EITF  reached  a final  consensus  on  Issue  98-10,  "Accounting  for
Contracts Involved in Energy Trading and Risk Management Activities" in November
1998,  effective for fiscal years  beginning after December 15, 1998. EITF Issue
98-10 creates a distinction  between energy trading and  non-trading  activities
and  establishes  guidance for the  accounting  treatment  of contracts  used in
energy trading activities.  The EITF concluded that contracts involved in energy
trading activities should be measured at fair value as of the balance sheet date
with gains and losses  included in earnings.  EITF Issue 98-10 was adopted early
in connection with the requirements for quasi-reorganization  accounting. It did
not have a  significant  impact on Illinova's  1998  financial  statements.  For
additional   information,   see  "Note  16  -  Financial  and  Other  Derivative
Instruments."

     The Accounting  Standards Executive Committee of the AICPA issued SOP 98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal Use" in March 1998, effective for financial statements for fiscal years
beginning after December 15, 1998. SOP 98-1 provides  guidance on accounting for
the  costs  of  computer  software  developed  or  obtained  for  internal  use.
Specifically,  the  nature  of the  costs  incurred,  not the  timing  of  their
occurrence,  determines whether costs are capitalized or expensed.  SOP 98-1 was
adopted  early in  connection  with the  requirements  for  quasi-reorganization
accounting.  It did not have a significant  impact on Illinova's  1998 financial
statements.

     The Accounting  Standards Executive Committee of the AICPA issued SOP 98-5,
"Reporting  on the Costs of Start-Up  Activities"  in April 1998,  effective for
financial  statements  for fiscal years  beginning  after December 15, 1998. SOP
98-5 provides  guidance on the financial  reporting of start-up and organization
costs.  It requires costs of start-up  activities and  organization  costs to be
expensed  as  incurred.  SOP  98-5 was  adopted  early  in  connection  with the
requirements for quasi-reorganization  accounting. It did not have a significant
impact on Illinova's 1998 financial statements.

     The FASB issued FAS 132,  "Employers'  Disclosures about Pensions and Other
Postretirement Benefits" in February 1998, effective for periods beginning after
December 15, 1997.  FAS 132 revises  employers'  disclosures  about  pension and
other  postretirement  benefit  plans.  It does not  change the  measurement  or
recognition of those plans.  It  standardizes  the disclosure  requirements  for
pensions and other postretirement  benefits to the extent practicable,  requires
additional  information on changes in the benefit obligations and fair values of
plan assets that will  facilitate  financial  analysis,  and eliminates  certain
disclosures  that are not as useful  as they  were  when  they  were  originally
adopted. The statement suggests combined formats for presentation of pension and
other  postretirement  benefit  disclosures.  Illinova  has  complied  with  the
requirements of FAS 132. See "Note 13 - Pension and Other Benefits Costs."

NOTE 2 -- CLINTON IMPAIRMENT
AND QUASI-REORGANIZATION

In December 1998,  Illinova's and IP's Boards of Directors voted to exit Clinton
operations,  resulting in an impairment of Clinton-related assets and accrual of
exit-related  costs.  The impairment and accrual of costs resulted in a $1,327.2
million,  net of income taxes,  charge  against  earnings.  Concurrent  with the
decision to exit Clinton,  Illinova's and IP's Boards of Directors also voted to
effect a  quasi-reorganization,  in which  Illinova's  consolidated  accumulated
deficit  in   retained   earnings  of  $1,419.5   million  was   eliminated.   A
quasi-reorganization  is an accounting  procedure  whereby a company adjusts its
accounts  to  obtain a  "fresh  start."  In a  quasi-reorganization,  a  company
restates  its assets and  liabilities  to their fair  value,  adopts  accounting
pronouncements  issued but not yet adopted, and eliminates any remaining deficit
in retained earnings by a transfer from other paid-in capital.

Background
IP owns one  nuclear  generating  station,  Clinton,  a  930-megawatt  unit that
represents  approximately  20 percent of IP's generating  capacity.  Significant
Clinton  write-offs  have  weakened  earnings  and led to a 10-year  decline  in
Illinova's and IP's retained earnings  balances.  Clinton has not operated since
September 1996. See "Note 4 - Clinton Power Station" for additional information.

     In December 1997, the State of Illinois  enacted P.A.  90-561,  legislation
designed to introduce competition for electric generation service over a defined
transition  period.  P.A. 90-561 creates  uncertainty  regarding IP's ability to
recover  electric  generating  costs  and earn a  reasonable  rate of  return on
generating  assets.   Uncertainties  about  deregulated  generation  pricing  in
Illinois,  coupled with IP's experience with nuclear operations,  led management
to several conclusions:

-    Efficiency  in  nuclear  operations  can best be  attained  through  scale,
     including  ownership  of  multiple  plants  over which to spread  costs and
     leverage talent and management systems.

-    Clinton requires disproportionate management attention.

-    Success in a deregulated  generation  market will require  generation  cost
     efficiency.

   Beginning  in late 1997 and  continuing  through  1998,  Illinova's  and IP's
management prepared detailed  evaluations of the expected shareholder value from
various options related to Clinton.  These analyses  ultimately  identified that
either the sale or closure of Clinton would create more  shareholder  value than
its continued  operation.  Management  determined  that this strategic  decision
would  provide a  fundamental  change  necessary  for Illinova and IP to achieve
success in the new environment of deregulation and competition.

   In anticipation of a possible decision to exit Clinton, IP submitted a letter
to the SEC describing IP's proposed  accounting for an impairment loss under the
"assets to be disposed  of"  provisions  of FAS 121.  The letter also  requested
concurrence with IP's proposed  accounting for a  quasi-reorganization,  whereby
the  fossil   generation  assets  would  be  written  up  to  their  fair  value
simultaneous  with recording the impairment loss for Clinton.  In November 1998,
the SEC confirmed that it would not object to IP's proposed accounting.

   In  December  1998,  Illinova's  and IP's Boards of  Directors  voted to exit
Clinton  operations and proceed with the  quasi-reorganization.  The decision to
implement the quasi-reorganization did not require the approval of shareholders.

   IP is pursuing potential opportunities to sell Clinton. However,  substantial
uncertainty exists with regard to the ability to convert any tentative agreement
into an executable  transaction.  As a result,  IP has accounted for the Clinton
exit based on the  expectation of plant closure as of August 31, 1999. See "Note
4 - Clinton Power Station" for additional information.


Clinton Impairment and Accrual of Exit Costs
Prior to  impairment,  the book value of Clinton plant,  including  construction
work in progress,  nuclear fuel,  and material and supplies,  net of accumulated
depreciation,  was $2,594.4 million. FAS 121 requires that assets to be disposed
of be stated at the lower of their carrying amount or their fair value. The fair
value of Clinton is  estimated  to be zero.  This  estimate is  consistent  with
possible  management  decisions  to sell or close  Clinton.  The  adjustment  of
Clinton  plant,  nuclear fuel, and materials and supplies to fair value resulted
in  impairments  of  $1,385.6  million,   $68.4  million,   and  $25.9  million,
respectively,   for  a  total  impairment  loss  of  $1,479.9  million,  net  of
accumulated depreciation,  income taxes, and ITC. Nuclear fuel and materials and
supplies  of $23.2  million  remain on IP's books  after the  impairment,  given
management's  expectation  that such  amounts  will be consumed in 1999 prior to
Clinton's ultimate disposal.  The impairment of Clinton plant, nuclear fuel, and
materials and supplies was recognized as a charge to earnings.  Consistent  with
Clinton's  estimated  fair  value  of  zero  and  the  provisions  of  FAS  121,
depreciation of Clinton has been discontinued.  Clinton depreciation expense was
$94.4 million in 1998.

   Concurrent  with the  decision  to exit  Clinton  operations,  IP accrued the
estimated cost to decommission the facility.  Recognition of this liability, net
of  previously  accrued  amounts,  resulted in a $293.5  million,  net of income
taxes,  charge to  earnings.  This  liability  is based on the  DECON  method of
decommissioning.  The DECON method  requires the prompt  removal of  radioactive
materials  from the site  following the  cessation of operations  and results in
significant  expenditures in the early years of the decommissioning  process. IP
expects  to  complete  decommissioning  in 2028.  The  ultimate  disposition  of
Clinton,  as well as the  decommissioning  method chosen,  could have a material
impact on IP's ultimate  decommissioning  liability.   See "Note 5 - Commitments
and Contingencies."

   Also  concurrent  with the decision to exit Clinton  operations,  IP recorded
$4.3 million, net of income taxes, of contract termination fees for nuclear fuel
contracts and $46.5  million,  net of income taxes,  of costs to transition  the
plant from an operating mode to a decommissioning mode. In addition, IP recorded
employee  severance  costs  of  $25.8  million,  net of  income  taxes;  pension
curtailment  benefits  of  $(7.2)  million,  net  of  income  taxes;  and  other
postretirement  benefit costs of $.4 million,  net of income taxes. See "Note 13
- Pension and Other  Benefits  Costs" for additional  information.   These costs
were  recognized as charges to earnings.  Costs to transition  the plant from an
operating mode to a decommissioning  mode and employee  severance costs would be
paid within 11 months of the expected plant closure date of August 31, 1999.

Regulatory Assets
P.A. 90-561 allows utilities to recover potentially  non-competitive  investment
costs ("stranded  costs") from retail  customers  during the transition  period,
which extends until December 31, 2006,  with possible  extension to December 31,
2008. During this period, IP is allowed to recover stranded costs through frozen
bundled rates and  transition  charges from  customers who select other electric
suppliers.

   P.A. 90-561 contains floor and ceiling provisions for utilities' allowed ROE.
During the  transition  period,  a utility  may  request an increase in its base
rates if its ROE falls below a specified  minimum  based on a  prescribed  test.
Utilities are also subject to an  overearnings  test which  requires  sharing of
earnings  in  excess  of  specified  levels  with  customers.  See  "Note  5  --
Commitments and Contingencies" for additional information.

   In May 1998, the SEC staff issued  interpretive  guidance on the  appropriate
accounting treatment during regulatory  transition periods for asset impairments
and the related regulated cash flows designed to recover such  impairments.  The
staff's guidance established that an impaired portion of plant assets identified
in a state's legislation or rate order for recovery by means of a regulated cash
flow should be treated as a  regulatory  asset in the  separable  portion of the
enterprise  from  which the  regulated  cash  flows are  derived.  Based on this
guidance and on provisions  of P.A.  90-561,  IP recorded a regulatory  asset of
$472.4  million,  net of income  taxes,  for the portion of its stranded  costs
deemed probable of recovery during the transition  period.  The regulatory asset
was  recognized  as a credit to  earnings,  offsetting  a portion of the Clinton
impairment.  Under P.A. 90-561, amortization of the regulatory asset is included
in the  overearnings  test but is not included in the  calculation for the floor
test.

   IP also recorded a regulatory  asset of $43.6  million,  net of income taxes,
reflecting probable future collections from customers of decommissioning  costs.
This regulatory asset was also recognized as a credit to earnings,  offsetting a
portion of the Clinton  impairment.  This regulatory asset is also based on P.A.
90-561,  which allows for continued recovery of  decommissioning  costs over the
originally  anticipated  27-year  remaining  life  of  Clinton.  See  "Note 5 -
Commitments and Contingencies" for additional information.

Revaluation of Assets and Liabilities
In conjunction with effecting its  quasi-reorganization,  IP reviewed its assets
and  liabilities to determine  whether the book value of such items needed to be
adjusted to reflect their fair value. IP determined  that its fossil  generation
assets were not stated at fair value. With the help of a third-party consultant,
management  conducted an economic  assessment of its fossil generation assets to
determine their fair value.  The assessment was based on projections of on-going
operating  costs,   future  prices  for  fossil  fuels,  and  market  prices  of
electricity in IP's service area.

   Management  concluded that IP's fossil generation assets have a fair value of
$2,867.0 million.  This fair value was determined using the after-tax cash flows
of the fossil assets. Prior to the  quasi-reorganization,  the fossil generation
assets' book value,  net of accumulated  depreciation,  was $631.7 million.  The
adjustment  to fair value  resulted in a write-up of  $1,348.6  million,  net of
income  taxes,  which was  recognized as an increase in retained  earnings.  The
estimated amortization of the adjustment to fair value is $71 million in 1999.

   Illinova  determined  that the book value of its  long-term  debt required an
adjustment  to fair value of $3.7 million,  net of income  taxes.  IP determined
that the book value of its mandatorily  redeemable preferred stock and long-term
debt  attributable  to the  generation  portion  of  the  business  required  an
adjustment  to  fair  value  of  $16.4  million,  net  of  income  taxes.  These
adjustments to fair value were recognized as decreases in retained earnings. The
book value of current  assets and  liabilities  equals fair value and  therefore
required no adjustments.  IP's electric transmission and distribution assets and
its gas distribution  assets are still subject to cost-based rate regulation and
therefore required no adjustment.

   In conjunction with effecting  Illinova's  quasi-reorganization,  IGC and IEP
reviewed  their  assets and  liabilities  and adjusted the book value of certain
assets to fair value. These adjustments  resulted in a net $5.7 million decrease
in retained earnings.

Early Adoption of Accounting Pronouncements
As part of the quasi-reorganization, Illinova and its subsidiaries were required
to adopt  all  existing  accounting  pronouncements.  The  following  accounting
pronouncements,  which have future  mandatory  adoption  dates,  were adopted in
connection with the quasi-reorganization:

-    FAS 133, "Accounting for Derivatives and Hedging Activities"

-    EITF 98-10, "Accounting for Energy Trading and Risk Management Activities"

-    SOP 98-1,  "Accounting  for the Costs of  Computer  Software  Developed  or
     Obtained for Internal Use"

-    SOP 98-5, "Reporting on the Costs of Start-up Activities"

     The effect of adopting the accounting  pronouncements was $9.5 million, net
of income taxes,  which was recognized as a direct charge to retained  earnings.
See  "Note 1 -  Summary  of  Significant  Accounting  Policies"  and  "Note 16 -
Financial and Other Derivative Instruments."

Remaining Deficit in Retained Earnings
After the  revaluation  of other assets and  liabilities to their fair value and
the early  adoption of accounting  pronouncements,  the  accumulated  deficit in
retained  earnings was $106.2  million,  which was eliminated by a transfer from
other paid-in capital.

   A summary of  consolidated  retained  earnings and the effects of the Clinton
impairment and quasi-reorganization on the retained earnings balance follows:

(Millions of dollars)

Retained  earnings at December  31, 1998,
  prior to Clinton  impairment and
  quasi-reorganization                                           $   (92.3)

Clinton impairment (charged)/credited to earnings:
  Clinton  plant, nuclear fuel, and materials
  and supplies*                                                   (1,479.9)
  Decommissioning costs, net of regulatory asset*                   (249.9)
  Other exit costs*                                                  (69.8)
                                                                  ---------
                                                                  (1,799.6)
  Transition period cost recovery*                                   472.4
                                                                  ---------
Total Clinton impairment                                          (1,327.2)
                                                                  ---------
Accumulated deficit in retained earnings                          (1,419.5)
                                                                  ---------
Quasi-reorganization (charged)/credited to retained earnings:
  Generation assets fair value  adjustment*                        1,348.6
  Mandatorily  redeemable  preferred stock and
    long-term debt fair value  adjustment*                           (20.1)
  Fair value adjustment of IGC and IEP investments                    (5.7)
  Early adoption of accounting  pronouncements*                       (9.5)
                                                                  ---------
 Total quasi-reorganization                                        1,313.3
                                                                  ---------
Retained earnings deficit at December 31, 1998                      (106.2)

Transfer from other paid-in capital                                  106.2
                                                                  ---------
Retained earnings balance at December 31, 1998,
  after quasi-reorganization                                         $ 0.0
                                                                  =========

*Amounts are net of income taxes.

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


NOTE 3 -- ILLINOVA SUBSIDIARIES

Illinova,  a holding  company,  is the parent of subsidiaries IP, IGC, IEP, IIC,
and IBE. IP has  preferred  shares  outstanding,  but its common stock is wholly
owned by  Illinova,  as is the  common  stock of the other  subsidiaries.  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 competes in the  independent  power  market and invests in energy  supply
projects and power-producing facilities throughout the world, some operating and
some under  construction.  The following  table  summarizes  its  investments in
power-producing facilities:

                                   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
  Grimes County, Texas               1998      Natural Gas     830       2000

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
  Teleran, Costa Rica                1998        Wind           20       1995

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


   IGC's  ownership  interest totals 600 MW for the domestic and English plants,
290 MW for the Latin  American  plants,  and 130 MW for the Asian plants.  As of
December 31, 1998, IGC has  approximately  $210 million invested in the 1,020 MW
it owns. IGC's investments are primarily accounted for under the equity method.

   IGC has owned 50  percent  of NAES  since  1994,  and in  October  1998,  IGC
purchased the remaining 50 percent.  NAES supplies a broad range of  operations,
maintenance,  and support services to the worldwide independent power generation
industry.

   At December 31, 1998, Illinova's net investment in IGC was $208 million.

   IEP focuses on the development and sale of energy and energy-related services
primarily in the Midwestern and Western regions of North America. 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.

   IEP is  aggressively  growing its level of commercial  and  industrial  (C&I)
sales activity.  The C&I business  commenced in 1996, with sales increasing 300%
in 1997 and increasing a further 500% in 1998.

   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.  IEP has also  developed a
series of energy-related information collection and analysis tools, collectively
known as EQ services. These services include software that customers may utilize
to  conduct  their own energy  analysis  as well as a service  bureau  that will
perform these services along with bill  consolidation  for the customer.  IEP is
also involved in the project  management  and engineered  solutions  business to
provide  delivery   capability  for  energy-related   equipment  and  facilities
improvements.

   IEP owns 50  percent of  Tenaska  Marketing  Ventures,  in  partnership  with
Tenaska  Marketing,  Inc.  Tenaska  Marketing  Ventures  focuses on natural  gas
marketing in the  Midwestern  United  States.  IEP accounts for this  investment
under the equity method.  In October 1998,  IEP acquired a 51 percent  ownership
interest in EMC Gas Transmission Company, a retail gas marketer in Michigan. IEP
consolidates the accounts of EMC Gas Transmission Company.

   During the period 1996 through 1998, IEP incurred total  after-tax  losses of
$22.5 million associated with the wholesale power marketing business,  including
accrued after-tax losses of $7.7 million for contracts not settled. These losses
were primarily related to a single three-year  transaction entered into prior to
1998, which is now fully hedged.  See "Note 5 - Commitments and  Contingencies"
for information about IEP contingencies.

   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.  In  1998,  IIC  insured  certain  risks of IP for
premiums of $5.3 million.

   IBE was incorporated in 1998 to account for miscellaneous business activities
not regulated by the ICC or the FERC and not falling  within the business  scope
of other Illinova subsidiaries.


NOTE 4 -- CLINTON POWER STATION

Clinton Operations
Clinton was placed in service in 1987 and represents  approximately  20% of IP's
installed  generation  capacity.  Clinton has not operated since September 1996,
when a leak in a recirculation pump seal caused IP operations  personnel to shut
down the plant.

   In  January  1997,  the NRC  named  Clinton  among  plants  having a trend of
declining  performance and, in January 1998,  placed Clinton on its "Watch List"
of nuclear plants that require additional regulatory oversight.

   In late 1997,  an  independent  team  conducted an ISA to  thoroughly  assess
Clinton's  performance,  and an NRC team performed an evaluation to validate the
ISA results.  Both teams  concluded  that the  underlying  reasons for Clinton's
performance problems were ineffective  leadership throughout the organization in
providing  standards of excellence,  complacency  throughout  the  organization,
barrier weaknesses, and weaknesses in teamwork.

   In January 1998, IP and PECO announced an agreement under which PECO provides
management  services for Clinton,  with IP maintaining the operating license and
ultimate  oversight for the plant.  PECO employees have assumed senior positions
at Clinton but the plant remains staffed primarily by IP employees.  IP selected
PECO because it believed that  bringing in PECO's  experienced  management  team
would be the fastest and most  efficient way to return Clinton to service and to
a superior level of operation.

   In  February  1998,  IP  filed  with  the  NRC  Clinton's  Summary  Plan  for
Excellence,  a comprehensive set of strategies and associated  actions necessary
to improve performance, permit safe restart of the plant, and achieve excellence
in operations.  IP is implementing  the actions required prior to plant restart.
The NRC is conducting a formal review process in parallel with IP's recovery and
restart program.

   In November 1998, a resource-loaded  integrated  schedule was developed which
identified work to be completed prior to restart.  This schedule  indicated that
restart of the plant would occur in the spring of 1999. As of early March,  work
on the schedule has generally occurred as planned with restart still expected in
the spring of 1999.

     Public  meetings  with  the NRC to  review  remaining  restart  issues  are
occuring  approximately  every two or three weeks. Major on-site NRC inspections
to  evaluate  key  plant  areas  were  initiated  in  February  and are still in
progress.

Transfer of Soyland's Ownership Share to IP
For discussion of the transfer of Soyland's  ownership  share to IP, see "Note 7
- Facilities Agreements."

Clinton Cost and Risks
IP's  Clinton-related  costs  represented  41% of  Illinova's  total  1998 other
operating and maintenance expenses. Clinton's equivalent availability was 0% for
1998 and 1997 and 66% for 1996.

   Currently,  commercial  reprocessing  of spent nuclear fuel is not allowed in
the United  States.  The NWPA was enacted to  establish a  government  policy on
disposal of spent nuclear fuel and/or high-level radioactive waste. Although the
DOE has failed to comply  with its  obligation  under the NWPA to provide  spent
nuclear fuel  retrieval and storage by 1998, IP has on-site  underwater  storage
capacity that will accommodate its spent fuel storage needs for approximately 10
years. IP is currently an equity partner with seven other utilities in an effort
to develop a private  temporary  repository.  A spent fuel  storage  license was
filed with the NRC in 1997,  initiating a process  which will take the NRC up to
three years to complete.  Safe, dry, on-site storage is technologically feasible
but is subject to licensing and local permitting  requirements,  for which there
may be effective  opposition.  See "Note 5 - Commitments and Contingencies" for
additional information.

   Ownership  of a 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.

Exiting the Nuclear Business
In December  1998,  Illinova's  and IP's Boards of  Directors  voted to exit the
nuclear  business by selling Clinton or closing it  permanently.  IP has entered
into  discussions  with parties  interested  in  purchasing  Clinton.  Principal
concerns of interested  parties are plant restart,  funding the  decommissioning
liability,  terms of any  purchase  agreement  for power  generated  by  Clinton
including the length of the agreement and price of the electricity  sold, market
price projections for electricity in the region, property tax obligations of the
purchaser,  and income tax issues. These concerns create substantial uncertainty
with regard to the ability to convert any tentative agreement into an executable
transaction.  In light of these significant  uncertainties  with respect to IP's
ability  to sell  Clinton,  IP is  preparing  to  permanently  decommission  the
facility.  See "Note 5 - Commitments  and  Contingencies"  and "Note 2 - Clinton
Impairment and Quasi-Reorganization" for additional information.


NOTE 5 -- COMMITMENTS AND CONTINGENCIES

Commitments
Illinova   estimates  that  it  will  spend   approximately   $370  million  for
construction  expenditures for IP in 1999. IP construction  expenditures for the
period 1999  through  2003 are  expected to total about $1.2  billion.  With the
planned sale or shutdown of Clinton, no nuclear  construction is included in the
above estimates.  Nuclear construction will be expensed.  In addition,  in March
1999,  IP will be required to deposit $62 million in cash with the Fuel  Company
Trustee for noteholders and take title to the partially depleted nuclear fuel in
the  reactor at Clinton.  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 1999 through  2003,  in addition to IP
construction  expenditures,  are expected to include $592 million for  mandatory
debt  retirement  and  approximately  $600 million  target level for  investment
opportunities  by  the  non-regulated  subsidiaries.   In  addition,  IPSPT  has
long-term debt maturities of $86.4 million in each of the above years.

     In addition,  IP has  substantial  commitments for the purchase of coal and
coal  transportation   under  long-term   contracts.   Estimated  coal  contract
commitments for 1999 through 2003 are $664 million  (excluding  price escalation
provisions).  Total coal  purchases  were $210 million in 1998,  $181 million in
1997,  and $184  million in 1996.  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  for 1999  through  2003  total $81
million.  Total natural gas purchased was $157 million in 1998,  $185 million in
1997, and $207 million in 1996. 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. IP has accrued  contract  cancellation  fees of $7.1
million  to  cover  minimum  purchase  commitments  under  uranium  procurement,
conversion,  and  enrichment  contracts.  For more  information,  see  "Note 2 -
Clinton  Impairment  and  Quasi-Reorganization."  IP is  committed  to  purchase
approximately  $9  million of  emission  allowances  in 1999 and has  contingent
commitments  for up to $5.5  million  in  additional  1999  emission  allowances
purchases, depending on whether certain options are exercised.

Fuel Cost  Recovery:  On March 6,  1998,  IP  initiated  an ICC  proceeding  for
elimination of the UFAC. This established a new base fuel cost recoverable under
IP's electric tariffs which includes a component for recovery of fuel costs, but
not a direct  pass-through of such costs.  Elimination of the UFAC exposes IP to
the  risks  and   opportunities   of  market  price   volatility  and  operating
efficiencies.  By  eliminating  the UFAC, IP  eliminated  exposure for potential
disallowed  fuel and purchased  power costs for the periods  after  December 31,
1996.  Whether  electric energy  production  costs will continue to be recovered
depends on a number of factors, including the number of customers served, demand
for electric  service,  and changes in fuel cost components.  Furthermore,  IP's
base electric  rates to residential  customers were reduced  beginning in August
1998 and certain  customers  will be free to choose  their  electric  generation
suppliers  beginning in October 1999.  These  variables will be  influenced,  in
turn,  by  market  conditions,   availability  of  generating  capacity,  future
regulatory proceedings,  and environmental protection costs, among other things.
IP's electric  customers are receiving refunds totaling $15.1 million during the
first quarter of 1999 related to fuel cost  disallowances  as the final phase of
the elimination of the UFAC.  These refunds close the ICC review process related
to the UFAC cost pass-through for the years 1989, 1994, 1995, and 1996.

Utility  Earnings Cap: P.A.  90-561 also contains  floor and ceiling  provisions
regarding  ROE.  During  the  transition  period  ending in 2006 (or 2008 at the
option of the  utility),  a utility may request an increase in its base rates if
the  two-year  average of its earned ROE is below the  two-year  average for the
same two years of the monthly  average  yields of 30-year U.S.  Treasury  bonds.
Conversely,  if during the transition  period the two-year average of its earned
ROE exceeds the two-year  average for the same two years of the monthly  average
yields of the 30-year U.S.  Treasury bonds for annual  periods ending  September
30, plus 5.5% in 1999 or 6.5% in 2000 through  2004,  the utility must refund to
customers 50 percent of the  "overearnings."  Regulatory  asset  amortization is
included in the calculation of ROE for the ceiling, or overearnings, test but is
not included in the calculation for the floor test.

Insurance:  IP maintains insurance for certain losses involving the operation of
Clinton.  For  physical  damage to the  plant,  IP  purchases  $1.6  billion  of
insurance coverage from an industry-owned mutual insurance company. In the event
of a major nuclear 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.   Coverage  is  provided   for  a  shortfall   in  the
Decommissioning  Trust  Fund if  premature  decommissioning  of the  reactor  is
required due to an accident.  If insurance limits are not exhausted by the above
coverages, the remaining coverage is applied to property damage and a portion of
the value of the undamaged  property.  If a major nuclear  accident  occurred at
Clinton,  claims for property  damage and other costs could exceed the limits of
current or available insurance coverage.

   IP purchases business interruption coverage through the industry-owned mutual
insurance  company.  After a 17-week  waiting  period,  the  insurance  provides
coverage if Clinton is out of service due to an accidental property damage loss.
Thereafter,  the insurance  provides weekly indemnity for up to 162 weeks. Total
coverage  from this  business  interruption  insurance,  if Clinton  were out of
service for the entire 162 weeks, would be $223.8 million. Multiple major losses
covered under the current  property damage and business  interruption  insurance
coverages  involving  Clinton or other  stations  insured by the  industry-owned
mutual insurance company could result in retrospective premium assessments up to
$11.6 million. IP is not collecting any business interruption insurance payments
for Clinton.

   All U.S.  nuclear  reactor  licensees are subject to the  Price-Anderson  Act
which currently  limits public liability for a nuclear incident to $9.7 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 $88.1 million per incident,  not including any
premium taxes assessed by the State of Illinois which may be applicable, payable
in annual installments of not more than $10 million.

   As a licensee of a commercial nuclear power plant in the United States, IP is
required to maintain  financial  protection  to cover claims of certain  nuclear
workers. Prior to January 1998, IP met this requirement with insurance purchased
under a Master Worker  Policy.  On January 1, 1998, a new  insurance  policy was
issued that applies to claims first  reported on or after January 1, 1998.  This
policy has a limit of $200 million  (reinstated  annually if certain  conditions
are met) for  radiation  injury  claims  against IP or other  licensees  who are
insured by this policy. If these claims exceed the $200 million limit of primary
coverage,  the SFP  provisions  of the  Price-Anderson  Act would  apply.  Since
reserves for outstanding  claims under former policies would be insufficient and
certain  claims  may still be made  under  former  policies  due to a  discovery
period,  IP could be assessed  under these former  policies along with the other
policyholders. IP's share could be up to $3.1 million in any one year.

   IP may be subject to other  risks that are not  insurable,  or its  insurance
coverage  to offset the  various  risks may be  insufficient  to meet  potential
liabilities  and losses.  There is no assurance that IP will be able to maintain
insurance coverage at its present level. Under those circumstances,  such losses
or  liabilities  could have a material  adverse  effect on  Illinova's  and IP's
financial positions.

     If  Clinton  is  sold,  the  purchaser  will  assume  the   decision-making
responsibilities for securing required insurance coverages.

     If Clinton is  decommissioned,  IP will work jointly with the regulators to
modify its nuclear  insurance  program to reflect  decommissioned  plant status.
Nuclear  property  insurance  will  initially be reduced to the Property  Rule's
minimum  coverage limits of $1.06 billion.  IP will proceed with filing a waiver
of the Property  Rule's minimum  insurance  requirements  which will reflect the
maximum probable  decontamination  event applicable to the decommissioned plant.
Regulations  require any licensed plant to continue its purchase of full nuclear
liability  limits and  participation  in the SFP program for a specified  period
following shutdown or until decay heat removal capacity is reduced to acceptable
levels. IP will consider requesting a waiver to suspend participation in the SFP
program  and reduce the level of  liability  insurance  limits.  Since  business
interruption  coverage is optional,  IP will review the value of continuing this
coverage and adjust accordingly.

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 of  approximately $6
million were transferred to IP.

   P.A.  90-561  provides for the continued  recovery of  decommissioning  costs
through  rates  charged to IP's  delivery  service  customers.  An ICC  approved
site-specific  decommissioning  study  projected a cost of $538  million in 1996
dollars for decommissioning  based on the assumption of the DECON method (prompt
removal and dismantlement of Clinton), which results in material expenditures in
the early years of decommissioning  Clinton. The projected cost estimate in 2026
dollars,  assuming a 2 percent annual inflation  factor,  is $988 million.  This
estimate  continues  as the basis for  assessing  decommissioning  costs to IP's
customers.

   External decommissioning trusts, as prescribed by Illinois law and authorized
by the ICC, accumulate funds for the future  decommissioning of Clinton based on
the expected  service life of the plant.  Decommissioning  funds are recorded as
assets on the balance sheet.  Beginning in 1999, IP will recognize  earnings and
expenses of the trust on the income  statement as they occur.  The trust summary
is as follows:

                                                       Years Ended December 31,

(Millions of dollars)                 1998            1997            1996

Market value,
  beginning of period               $  62.5          $ 41.4          $ 32.7
Company contributions                   6.5             5.3             3.9
Appreciation in market value           15.1            15.8             4.8

Market value, end of period         $  84.1          $ 62.5          $ 41.4


   In  December  1998,  Illinova's  and IP's Boards of  Directors  voted to exit
Clinton operations which resulted in an impairment of Clinton-related assets and
accrual of  exit-related  costs.  As a result of the  decision  to exit  Clinton
operations,  IP accrued the estimated  cost to  decommission  the  facility.  IP
recognized  the present value of the  decommissioning  liability for Clinton not
previously  accrued,  in the amount of $293.5  million,  net of income taxes. IP
also recorded a regulatory  asset for the present value of the estimated  future
collections  from  customers  for  decommissioning  costs in the amount of $43.6
million,  net of taxes. A discount rate of 5.10%, the 30-year Treasury bond rate
at  December  31,  1998,  was  used  to  calculate  the  regulatory   asset  and
decommissioning  liability.  The ultimate disposition of Clinton, as well as the
decommissioning  method  chosen,  could  have a  material  impact  on the  total
decommissioning liability.

   If Clinton is closed,  the estimated  decommissioning  expenditures under the
DECON method for the next five years are $376.2  million.  IP currently  has $84
million in decommissioning  trust funds and would expect this amount to be used,
as well as $37  million in  additional  collections  from  customers,  including
interest on the trust,  during this time period.  In  addition,  IP will need to
fund   approximately   $255   million   from  other   sources.   The   estimated
decommissioning expenditures to be incurred as follows:

                                           (Millions of dollars)

1999                                              $  21.0
2000                                                 63.9
2001                                                 79.3
2002                                                105.0
2003                                                107.0
  Thereafter                                        405.8

Total estimated liability                           782.0
Discount at 5.10%                                   214.6

Total discounted liability                        $ 567.4

     Under  the NWPA,  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, at the request of
nuclear-owning utilities and state regulatory agencies, the District of Columbia
Circuit  Court  of  Appeals  issued  an  order  confirming  DOE's  unconditional
obligation to take responsibility for spent nuclear fuel commencing in 1998. The
DOE argued that it had no such  obligation  because of its inability to site and
license a permanent repository. Notwithstanding this decision, which the DOE did
not  appeal,  the  DOE  has  indicated  to all  nuclear  utilities  that it will
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.  Nuclear plant owners and others are
pursuing  litigation  against  DOE at the D.C.  Circuit  Court of  Appeals,  the
Federal  Court  of  Claims,   federal  district  court,  and  in  administrative
proceedings.  These  lawsuits  are focused on  establishing  DOE  liability  for
damages caused by its failure to perform,  the scope of those damages, and other
remedies.  IP is participating in such litigation  before the D.C. Circuit Court
of Appeals.  To date,  the  unconditional  nature of DOE's  obligation  has been
upheld but no court has yet quantified damages or ordered specific  performance.
The outcome of these lawsuits is uncertain. See "Note 4 - Clinton Power Station"
for additional information.

Power Supply and  Reliability:  Electricity  was in short supply during the 1998
summer  cooling  season  because of an unusually high number of plant outages in
the Midwest region.  IP bought  generation and transmission  capacity to prevent
firm  load  curtailment  and  took  additional  steps to  avoid  power  outages,
including  upgrading  transmission  lines  and  equipment,   readying  emergency
procedures,  and returning to service five units that had been in cold shutdown.
Expenses incurred as a result of the shortage have had a material adverse impact
on Illinova and IP.

     The  electric  energy  market  experienced  unprecedented  prices for power
purchases  during the last week of June 1998. IP's power purchases for 1998 were
$517 million  higher than 1997 due to summer  price  spikes  resulting in a $274
million  increase in power  purchased,  additional  purchases of $215 million to
serve increased  volumes of interchange  sales, and market losses of $28 million
recorded on forward power purchase and sales  contracts as part of the wholesale
trading business.  Income from interchange sales was $382 million higher than in
1997 due to increased  sales volumes and higher prices.  Although IP's margin on
volumes  between 1998 and 1997 resulted in IP being a net seller,  higher prices
resulted in a $135  million  net  purchase  margin.  For more  information,  see
subcaption  below titled "IP Wholesale  Energy Markets" and "Note 16 - Financial
and Other Derivative Instruments."

     IP expects to have in excess of 400 MW of additional generation on line for
the summer of 1999. This includes approximately 235 MW from five oil-fired units
which were  brought up from cold  shutdown  during the summer of 1998 and 176 MW
from four  natural gas  turbines  that IP plans to install  before the summer of
1999. Total cost for the two projects is estimated at $87 million. IP also plans
to refurbish nine gas turbines  already in service at a cost of $13 million.  At
an October 1998 public ICC proceeding on  reliability,  IP said that even though
it expects  Clinton to be  available  by summer  1999,  for  purposes of advance
coverage  of  anticipated  summer  demand  it is  assuming  Clinton  will not be
operating.  However, IP expects to have sufficient  generating capacity to serve
firm load  during the  periods  of peak  summer  demand  using  demand-side  and
supply-side initiatives taken in response to the 1998 regional supply crisis. If
generation  is lost or demand is at  unprecedented  levels,  firm load  could be
curtailed.  In addition,  the restructuring of the Soyland PCA agreement is also
expected to free up an additional 287 MW of capacity. For more information,  see
"Note 7 - Facilities Agreements" concerning the Soyland PCA.

IP Wholesale Energy Markets: IP buys and sells electricity in markets throughout
the United States. In the normal course of business, IP incurs price exposure on
the  electricity  bought or sold.  Where the markets  allow,  IP will hedge such
exposure through the use of electricity  futures,  forward, and option contracts
with  qualified  counterparties.  In 1998,  market losses of  approximately  $33
million  were  recorded in  connection  with these  agreements  based on forward
market  prices.  Of this  amount,  approximately  $28  million  was  charged  to
purchased  power.  The remaining $5 million  resulted from the early adoption of
FAS 133 and was accounted for as part of the quasi-reorganization.  The ultimate
financial  impact of these contracts will depend  primarily on wholesale  prices
and IP's  system  availability.  If system  availability  is limited  and market
conditions  cause wholesale  prices to rise to the levels seen in 1998, IP could
incur significant  costs to meet its wholesale  contract  obligations.  For more
information,  see  "Note  1  -  Summary  of  Significant  Accounting  Policies,"
subcaption New Accounting  Pronouncements  and "Note 2 - Clinton  Impairment and
Quasi-Reorganization."

Environmental Matters
Clean Air Act: IP continues to purchase  emission  allowances to comply with the
SO2 emission  reduction  requirements  of Phase I  (1995-1999)  of the Acid Rain
Program  (Title 4) of the 1990  Clean Air Act  Amendments  (CAAA).  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 cover more than 70 percent of its  anticipated  needs for 1999 and
expects to purchase the  remainder on the spot market.  Baldwin and Hennepin are
switching from  high-sulfur  Illinois coal to low-sulfur  Wyoming coal to attain
compliance  with Phase II (2000 and beyond) of the Acid Rain SO2  provisions  of
the CAAA.  The cost to convert  Baldwin  and  Hennepin is  estimated  to be $125
million.

   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 and
continues to be 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. Capital  expenditures for IP's
NOx  Compliance  Plan are  expected  to total $118  million  when the project is
complete in early 2000.  Approximately  $58 million was spent through the end of
1998. The majority of this  investment is for  installation  of SCR equipment on
Baldwin Units 1 and 2. This work is being done in conjunction  with  replacement
of the air heaters on these units.

     In addition,  regulators  are  continuing to finalize  rulemaking to comply
with current  federal air quality  standards for ozone. On October 27, 1998, the
U.S. EPA finalized air pollution rules that will require substantial  reductions
of NOx  emissions  in Illinois and 21 other  states.  This rule will require the
installation  of NOx controls by May 2003,  with each Illinois  utility's  exact
reduction  requirement  to be  specified in 1999.  Preliminary  estimates of the
capital  expenditures  needed in 2000  through 2003 to comply with these new NOx
limitations  are $90 million to $140  million.  The  legality of this  proposal,
along with its technical feasibility, is being challenged by a number of states,
utility groups, and utilities, including IP.

Global  Warming:  In  December  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
percent below 1990 levels during the years 2008 through 2012 and to make further
reductions thereafter. Before it can take effect, this Protocol must be ratified
by the U.S.  Senate.  However,  U.S. Senate  Resolution 98, which passed 95-0 in
July 1997,  says the Senate would not ratify an agreement  that fails to involve
all  countries  or would  damage the  economy of the  United  States.  Since the
Protocol does not contain key elements  that Senate  Resolution 98 specifies are
necessary,  ratification will be a major political issue. It is anticipated that
a  ratification  vote will be delayed until the current  administration  decides
whether it can meet the provisions of Senate Resolution 98.

   IP will face major changes in the way 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 $61
million. This amount represents IP's current estimate of the costs it will incur
to  remediate  the 24 MGP  sites  for which it is  responsible.  Because  of the
unknown and unique  characteristics at each site, IP cannot currently  determine
its ultimate liability for remediation of the sites.

   In October 1995, to offset some of the burden  imposed on its  customers,  IP
initiated  litigation  against a number of its  insurance  carriers.  As of June
1998,  settlements  or settlements in principle have been reached with all 30 of
the  carriers.  Settlement  proceeds  recovered  from the carriers will offset a
significant  portion  of the MGP  remediation  costs  and  will be  credited  to
customers  through  the  tariff  rider  mechanism  which the ICC has  previously
approved.  Cleanup costs in excess of insurance proceeds will be fully recovered
from IP's transmission and distribution customers.

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
adjacent to power lines, substations,  and other such sources of EMF. The number
of EMF cases has  declined  as national  and  international  science  commission
studies have failed to confirm EMF health  risks.  Additional  research is being
conducted.  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 impact,  if any,  these actions
may have on IP's and Illinova's consolidated financial positions.

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, 1998,
59%, 24%, and 17% 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.  The reserve for  doubtful  accounts  remained at $5.5  million in
1998.

Contingencies
Soyland:  For  more  information,  see  "Note  7 -  Facilities  Agreements"  for
discussion of Soyland contingencies.

Nuclear  Fuel Lease:  For more  information,  see "Note 9 - 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 1994 through  1997.  At
this time,  the outcome of the audit cannot be determined.  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 8 - Income Taxes."

Illinova Energy  Partners,  Inc.: IEP buys and sells  electricity in the Western
United  States.  In the normal course of business,  IEP incurs price exposure on
the  electricity  bought or sold.  Where the  market  allows,  IEP  hedges  such
exposure through the use of electricity  futures contracts or through swaps with
qualified  counterparties.   The  aggregate  notional  value,  fair  value,  and
unrealized gain and losses related to futures contracts  outstanding at December
31, 1998, are  immaterial.  In addition,  IEP considers the risk of counterparty
non-performance to be remote.

   At December 31, 1998, IEP had electricity sales and purchase  contracts which
exposed the company to  approximately  $87,000 of financial  risk as a result of
price  volatility.  For the year ended December 31, 1998, IEP has accrued losses
of $12.7 million (before taxes).

   Illinova provides credit support for IEP, EMC Gas Transmission  Company,  and
Tenaska Marketing Ventures up to an aggregate limit of $80 million. The level of
credit support utilized at December 31, 1998, was $64.8 million.  See "Note 3 -
Illinova Subsidiaries" for additional information about IEP.


NOTE 6 -- 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,  1998.  These lines of credit
are renewable in May 1999,  November 1999, 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  IP
activities.  At  December  31,  1998,  the  level  of  IP  short-term  debt  was
significantly   lower  than   historical   levels  due  to  using  the  December
securitization  proceeds to redeem  commercial paper and short-term  borrowings.
This level is expected to  increase  as funds are  expended to redeem  long-term
debt  and  equity.   Illinova's  total  lines  of  credit  represented  by  bank
commitments  amount to $110  million,  of which all was unused at  December  31,
1998. Illinova's letters of credit total $32.9 million at December 31, 1998.

   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  capacity  totaling $201 million,  all of which were
undrawn at December 31,  1998.  IP pays fees up to .95% per annum on the undrawn
amount of credit.  On February 12,  1999,  IP acquired an  additional  letter of
credit  for $30  million  with a .425% per annum  fee on the  undrawn  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 no borrowings  against its lines of credit at December 31, 1998.
For the years 1998,  1997,  and 1996,  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)       1998            1997            1996

Short-term borrowings
  at December 31,                       $ 147.6         $ 415.3         $ 387.0

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

Maximum amount outstanding
  at any month end                      $ 370.9         $ 415.3         $ 387.0

Average daily borrowings
  outstanding during
  the year                              $ 321.0         $ 298.5         $ 261.9

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


NOTE 7 -- 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 were  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.

   FERC approved an amended PCA between Soyland and IP in July 1997. The amended
PCA  obligates  Soyland to purchase all of its capacity and energy needs from IP
for at least 10 years. The amended PCA provides that a contract cancellation fee
will be paid by Soyland to IP in the event that a Soyland member  terminates its
membership  in Soyland.  In May 1997,  three  distribution  cooperative  members
terminated  their  membership  by  buying  out  of  their  respective  long-term
wholesale power contracts with Soyland. This action resulted in Soyland paying a
fee of $20.8  million  to IP in June 1997 to reduce  its  future  base  capacity
charges.  Fee  proceeds  of $2.9  million  were  used to  offset  IP's  costs of
acquiring  Soyland's  share of  Clinton,  and the  remaining  $17.9  million was
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,
approximately  $70  million.   Soyland  received  the  necessary  financing  and
regulatory  approvals in the second quarter of 1998. IP received $30 million and
$40  million  from  Soyland  during  the  first  and  second  quarter  of  1998,
respectively. The prepayment was deferred and is being recognized as interchange
revenue  evenly over the initial  term of the PCA,  September  1, 1996,  through
August 31,  2006.  In  December  1998,  Soyland  and IP signed an  agreement  to
restructure  the PCA in which IP acts as an agent for Soyland in  obtaining  and
scheduling power and energy and related transmission from other parties. The two
parties intend to establish a final  agreement in March 1999.


NOTE 8 -- INCOME TAXES

Deferred tax assets and liabilities were comprised of the following:

                                               Balances as of December 31,
(Millions of dollars)                                1998            1997

Deferred tax assets:
Current:
  Misc. book/tax recognition differences           $    9.2         $  11.2

Noncurrent:
  Depreciation and other property related             150.4            46.2
  Alternative minimum tax                             140.5           156.8
  Unamortized investment tax credit                    18.1           116.9
  Misc. book/tax recognition differences              389.7            51.9
                                                      698.7           371.8

    Total deferred tax assets                      $  707.9         $ 383.0


Deferred tax liabilities:
Current:
  Misc. book/tax recognition differences           $     .1        $     .9

Noncurrent:
  Depreciation and other property related           1,292.8         1,348.0
  Misc. book/tax recognition differences              369.9            (7.1)
                                                    1,662.7         1,340.9

    Total deferred tax liabilities                 $1,662.8        $1,341.8

     Income taxes included in the  Consolidated  Statements of Income consist of
the following components:
 
                                                    Years Ended December 31,
(Millions of dollars)                     1998        1997            1996

Current taxes                         $    3.4     $  70.3         $  64.7

Deferred taxes--
  Property related differences           (30.0)        8.8            70.6
  Alternative minimum tax                 16.4        41.7             1.1
  Gain/loss on reacquired debt             3.4          .4            (1.6)
  Clinton plant impairment              (853.6)        --              --
  Enhanced retirement
    and severance                          --           .5             2.6
  Misc. book/tax recognition
    differences                          (27.2)      (34.1)           (2.2)
  Investment tax credit                   (8.3)       (7.3)           (7.3)
  Investment tax credit --
    Clinton plant impairment            (160.4)        --              --

      Total deferred taxes            (1,059.7)       10.0            63.2

Total income taxes from
  continuing operations              $(1,056.3)    $  80.3        $  127.9

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

      Total extraordinary item             --       (118.0)            --

Total income taxes                   $(1,056.3)    $ (37.7)       $  127.9

     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 out below:


                                                     Years Ended December 31,

(Millions of dollars)                      1998            1997          1996

Income tax expense at the
  federal statutory tax rate         $   (792.5)        $ 64.7          $ 111.4

Increases/(decreases) in taxes
resulting from--
  State taxes,
    net of federal effect                (175.1)           8.7             11.4
  Investment tax credit
    amortization                           (8.3)          (7.3)            (7.3)
Clinton plant impairment                  (85.4)           --               --
Depreciation not normalized                 4.4           11.3              9.4
Preferred dividend
  requirement of subsidiary                 1.0            1.7              2.5
Other--net                                  (.4)           1.2               .5

Total income taxes from
  continuing operations              $(1,056.3)         $ 80.3          $ 127.9

     Combined  federal and state effective  income tax rates were 43.3%,  43.4%,
and 40.2% for the years 1998, 1997, and 1996, 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, 1998, of approximately  $140.5 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  Illinova's  consolidated
federal  income tax returns for the years 1994 through 1997.  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.

     The tax  effect of the  Clinton  impairment  and  quasi-reorganization  are
included  in  the  above  amounts.   See  "Note  2  -  Clinton   Impairment  and
Quasi-Reorganization" for additional information.

   Because  of the  passage of P.A.  90-561 in 1997,  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 9 -- CAPITAL LEASES

The Fuel  Company,  which is 50 percent  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 were $4 million in
1998, $4 million in 1997, and $35 million in 1996,  including financing costs of
$4 million,  $4 million,  and $5  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  Clinton is out of  service  for 24
consecutive  months, IP is obligated to purchase  Clinton's in-core nuclear fuel
from the Fuel Company.  In accordance with this provision,  IP will purchase the
fuel for $62.1 million in the first  quarter of 1999.  IP has an obligation  for
nuclear fuel disposal  costs of leased  nuclear fuel.  See "Note 5 - 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.

     Current obligations under capital lease for nuclear fuel were $62.1 million
at December 31, 1998, and $18.7 million at December 31, 1997.


<TABLE>
<CAPTION>
NOTE 10 - LONG-TERM DEBT
                                                                                                           (Millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------
December 31,                                                                                                 1998          1997
--------------------------------------------------------------------------------------------------------------------------------

First mortgage bonds of subsidiary--
<S> <C>                <C>                                                                                  <C>           <C>  
    6 1/2%  series due 1999                                                                                 $72.0         $72.0
    6.60%   series due 2004 (Pollution Control Series A)                                                        -           6.3
    7.95%   series due 2004                                                                                  39.0          72.0
    6.0%    series due 2007 (Pollution Control Series B)                                                        -          18.7
    8.30%   series due 2017 (Pollution Control Series I)                                                        -          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                                                                 372.5         464.3
-------------------------------------------------------------------------------------------------------------------------------
New mortgage bonds of subsidiary--
    6 1/8%  series due 2000                                                                                  40.0          40.0
    5.625%  series due 2000                                                                                 110.0         110.0
    6.25%   series due 2002                                                                                 100.0           -
    6.0%    series due 2003                                                                                 100.0           -
    6 1/2%  series due 2003                                                                                 100.0         100.0
    6 3/4%  series due 2005                                                                                  70.0          70.0
    8.0%    series due 2023                                                                                 229.0         229.0
    7 1/2%  series due 2025                                                                                 148.5         177.0
    5.40%   series due 2028 (Pollution Control Series A)                                                     18.7           -
    5.40%   series due 2028 (Pollution Control Series B)                                                     33.8           -
    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         150.0
-------------------------------------------------------------------------------------------------------------------------------
   Total new mortgage bonds of subsidiary                                                                 1,211.8         987.8
-------------------------------------------------------------------------------------------------------------------------------
   Total mortgage bonds of subsidiary                                                                     1,584.3       1,452.1
-------------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes of subsidiary--
    5.39% due 2000                                                                                          110.0           -
    5.26% due 2001                                                                                          100.0           -
    5.31% due 2002                                                                                           80.0           -
    5.34% due 2003                                                                                           85.0           -
    5.38% due 2005                                                                                          175.0           -
    5.54% due 2007                                                                                          175.0           -
    5.65% due 2008                                                                                          139.0           -
-------------------------------------------------------------------------------------------------------------------------------
   Total transitional funding trust notes of subsidiary                                                     864.0           -
-------------------------------------------------------------------------------------------------------------------------------
Medium-term notes of subsidiary, series A                                                                       -          68.0
Variable rate long-term debt of subsidiary due 2017                                                          75.0          75.0
Illinova 6.15% Senior Notes due 2001                                                                         30.0           -
Illinova 6.46% Senior Notes due 2002                                                                         40.0           -
Illinova 7 1/8% Senior Notes due 2004                                                                       100.0         100.0
-------------------------------------------------------------------------------------------------------------------------------
   Total other long-term debt                                                                               245.0         243.0
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                          2,693.3       1,695.1
Adjustment to Fair Value                                                                                     31.4           -
Unamortized discount on debt                                                                               (15.5)         (16.8)
-------------------------------------------------------------------------------------------------------------------------------
   Total long-term debt excluding capital lease obligations                                               2,709.2       1,678.3
   Obligations under capital leases of subsidiary                                                           132.0         126.7
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                          2,841.2       1,805.0
Long-term debt and lease obligations of subsidiary maturing within one year                               (506.6)        (87.5)
-------------------------------------------------------------------------------------------------------------------------------
         Total long-term debt                                                                            $2,334.6      $1,717.5
</TABLE>

In the above table,  the "adjustment to fair value" is the total  adjustments of
debt to fair  value in the  quasi-reorganization.  The  adjustments  to the fair
value of each debt series will be amortized  over its remaining life to interest
expense.  See "Note 2 -- Clinton Impairment and  Quasi-Reorganization"  for more
information.

     In January 1998, Illinova issued $40 million of 6.46% Medium-term Notes due
2002. In September 1998,  Illinova issued $30 million of 6.15% Medium-term Notes
due 2001.

   In March 1998, IP issued $18.7 million of 5.4% Pollution Control Bonds Series
A due 2028 and used the  proceeds  to redeem  $18.7  million  of 6.0%  Pollution
Control  Bonds Series B due 2007 in April 1998.  In March 1998,  IP issued $33.8
million of 5.4%  Pollution  Control  Bonds Series B due 2028 to refinance  $33.8
million of 8.3%  Pollution  Control  Bond Series I due 2017 in April 1998.  $100
million of 6.25% New Mortgage  Bonds due 2002 were issued in July 1998, and $100
million of 6% New Mortgage Bonds due 2003 were issued in September 1998.

   In December  1998,  IPSPT issued $864 million of  Transitional  Funding Trust
Notes as allowed under the Illinois  Electric Utility  Transition Funding Law in
P.A. 90-561. The proceeds of the notes were used by IP to retire debt and equity
securities.  These notes have maturity dates ranging from one to 10 years,  with
an average interest rate of 5.41%.

   In November  1998,  IP called $6.3 million of 6.6%  Pollution  Control  Bonds
Series A due 2004. In December  1998,  $28.5 million of 7.50% New Mortgage Bonds
due 2025 and $33.0 million of 7.95% First  Mortgage  Bonds were purchased on the
open market.

   In January  1999,  $57.1 million of 8.75% First  Mortgage  Bonds due 2021 and
$229  million  of 8% New  Mortgage  Bonds  due 2023  were  purchased  through  a
redemption  notice.  IP also redeemed $5.4 million of 7.95% First Mortgage Bonds
due 2004 in January  1999. In February  1999, IP redeemed  $36.8 million of 6.5%
First  Mortgage  Bonds due 1999 and $5 million of 7.95% First Mortgage Bonds due
2004.

   In 1989 and 1991,  IP issued a series of fixed  rate  medium-term  notes.  At
December 31, 1998, all these notes have matured and been retired. Interest rates
on variable  rate  long-term  debt due 2017 are adjusted  weekly and ranged from
3.75% to 4.20% at December 31, 1998.

   For the years  1999,  2000,  2001,  2002,  and 2003,  IP has  long-term  debt
maturities in the  aggregate of (in millions)  $72,  $150,  $0, $100,  and $200,
respectively.  In addition, IPSPT has long-term debt maturities of $86.4 million
in each of the above years.  These amounts exclude  capital lease  requirements.
See "Note 9 - Capital Leases."

   At December 31, 1998,  the aggregate  total of  unamortized  debt expense and
unamortized loss on reacquired debt was approximately $66.1 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, 1998, was approximately $1.9 billion.


NOTE 11 -- PREFERRED STOCK OF SUBSIDIARY
<TABLE>
<CAPTION>
                                                                                                  (Millions of dollars)
December 31,                                                                                         1998          1997

Serial  Preferred Stock of Subsidiary,  cumulative,  $50 par value--  Authorized
5,000,000 shares; 1,139,110 shares outstanding

<S>         <C>             <C>                   <C>                                             <C>           <C>
           Series           Shares        Redemption Prices
            4.08%           283,290           $   51.50                                           $  14.1       $  14.1
            4.26%           136,000               51.50                                               6.8           6.8
            4.70%           176,000               51.50                                               8.8           8.8
            4.42%           134,400               51.50                                               6.7           6.7
            4.20%           167,720               52.00                                               8.4           8.4
            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       $  57.1

Serial Preferred Stock of Subsidiary, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding                                                        --            --

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       $  57.1

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

Adjustment to Fair Value                                                                              2.0           --
  Total Mandatorily Redeemable Preferred Stock of Subsidiary                                      $ 199.0       $  197.0

</TABLE>

In the above table, only the MIPS and TOPrS were restated to their fair value in
the quasi-reorganization. The serial preferred stock was not restated because it
is equity rather than an asset or a liability.  The increase in the value of the
MIPS and the TOPrS will be amortized to interest expense over the remaining life
of these securities.  See "Note 2 - Clinton Impairment and Quasi-Reorganization"
for more information.

     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.

     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, L.P.

     IPFI 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.


NOTE 12 -- COMMON STOCK AND RETAINED EARNINGS

As  of  December  31,   1998,   Illinova   and  its   subsidiaries   effected  a
quasi-reorganization  in which Illinova's  consolidated  accumulated  deficit in
retained  earnings of  $1,419.5  million was  eliminated  by a $1,313.3  million
restatement  of other assets and  liabilities to their fair value and a transfer
of $106.2  million  from  additional  paid-in  capital.  See "Note 2 --  Clinton
Impairment and  Quasi-Reorganization"  for additional  information regarding the
effects upon retained earnings.

   On December 22, 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes,  with IP as servicer.  As of December 31, 1998,  IP used $49.3 million of
the funds to repurchase 2.3 million of its common shares from Illinova, which in
turn used the $49.3 million to repurchase 1.8 million shares of Illinova  common
shares via open market repurchases.  Illinova holds the common stock as treasury
stock and deducts it from common equity at the cost of the shares repurchased.

   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,  4,403,142  shares of common stock were designated for issuance
at December  31, 1998.  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, 1998,  86,020 common shares were allocated to
salaried  employees and 77,019 shares to employees  covered under the Collective
Bargaining  Agreement  through  the  matching  contribution  feature of the ESOP
arrangement. Under the incentive compensation feature, 56,315 common shares were
allocated to employees  for the year ended  December 31, 1998.  During 1998,  IP
contributed  $4.7 million to the ESOP and,  using the shares  allocated  method,
recognized  $5.2  million  of  expense.  Interest  paid  on the  ESOP  debt  was
approximately  $.9  million in 1998 and  dividends  used for debt  service  were
approximately $2.2 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, 1998.
No options were exercised through February 1999.


 Year     Options    Grant     Year        Expiration       Options     Options
Granted   Granted    Price    Exercisable     Date         Exercised   Forfeited

1992       62,000   $23.375      1996        6/10/02         20,000       10,500
1993       73,500   $24.250      1997        6/09/03         22,000       10,500
1994       82,650   $20.875      1997        6/08/04         29,450        4,400
1995       69,300   $24.875      1998        6/14/05          3,900       11,000
1996       80,500   $29.750      1999        2/07/06            --         6,500
1997       82,000   $26.125      2000        2/12/07            --         6,000
1998      120,500   $29.094      2001        2/11/08            --           --
1998      165,000   $30.250      2001        6/24/08            --           --


   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.  As permitted by FAS 123,  Illinova  continues to account for
its stock options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."

   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, 1998. Under the Restated  Articles of  Incorporation,  common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock.


NOTE 13 -- PENSION AND OTHER BENEFITS COSTS

Illinova offers certain benefit plans to employees of Illinova and its principal
subsidiaries.  IP is sponsor and  administrator  of the benefit plans  disclosed
below.

   IP is reimbursed by the other  Illinova  subsidiaries  for their share of the
expenses of the benefit  plans.  The values and discussion  below  represent the
plans in total, including the amounts attributable to the other subsidiaries.

<TABLE>
<CAPTION>
 
                                                                                                               (Millions of dollars)
                                                                             Pension Benefits                   Other Benefits
                                                                           1998            1997             1998               1997

Change in benefit obligation
Benefit obligation at beginning of year                                  $ 417.6         $ 361.6          $  89.4           $  81.7
Service cost                                                                12.8            10.2              2.6               1.9
Interest cost                                                               30.4            28.2              6.3               5.9
Plan participants' contributions                                            --              --                 .4                .4
Amendments                                                                   2.0            --               --                --
Actuarial (gain)/loss                                                       45.2            43.1              3.8               5.4
Benefits paid                                                              (32.8)          (25.5)            (7.0)             (5.9)

Benefit obligation at end of year                                       $  475.2         $ 417.6          $  95.5           $  89.4


Change in plan assets
<S>                                                                     <C>              <C>              <C>               <C>    
Fair value of plan assets at beginning of year                          $  432.1         $ 357.2          $  49.7           $  34.3
Actual return on plan assets                                                73.7            95.6              9.2               8.0
Employer contribution                                                        4.5             4.8             11.4              12.9
Plan participants' contributions                                            --              --                 .4                .4
Benefits paid                                                              (32.8)          (25.5)            (7.0)             (5.9)

Fair value of plan assets at end of year                                $  477.5         $ 432.1          $  63.7           $  49.7

Fair value of plan assets greater/(less) than benefit obligation        $    2.3         $  14.5          $ (31.8)          $ (39.7)
Unrecognized net actuarial (gain)/loss                                     (32.1)          (38.9)            (7.3)             (6.3)
Unrecognized prior service cost                                             17.6            17.4             --                --
Unrecognized net asset/liability at transition                             (21.9)          (26.1)            36.0              38.7
Net amounts recognized                                                  $  (34.1)        $ (33.1)         $  (3.1)          $  (7.3)

Net amounts recognized consist of:
Prepaid benefit cost                                                    $    1.9         $   1.9          $  --             $  --
Accrued benefit liability                                                  (36.0)          (35.0)            (3.1)             (7.3)
Net amounts recognized                                                  $  (34.1)        $ (33.1)         $  (3.1)          $  (7.3)
</TABLE>


<TABLE>
<CAPTION>

                                                                             Pension Benefits                   Other Benefits
                                                                           1998            1997             1998               1997

Weighted-average assumptions as of December 31
<S>                                                                          <C>             <C>              <C>              <C> 
Discount rate                                                                7.0%            7.5%             7.0%             7.0%
Expected return on plan assets                                               9.5%            9.5%             9.5%             9.0%
Rate of compensation increase                                                4.5%            4.5%             5.5%             5.5%


</TABLE>




<TABLE>
<CAPTION>

                                                                                                              (Millions of dollars)
                                                               Pension Benefits                           Other Benefits
                                                      1998           1997        1996           1998           1997           1996

Components of net periodic benefit cost
<S>                                                   <C>            <C>         <C>             <C>            <C>            <C>  
Service cost                                        $  12.8        $  10.2      $ 10.1        $   2.6        $   1.9        $   2.2
Interest cost                                          30.4           28.2        26.8            6.3            5.9            6.1
Expected return on plan assets                        (35.3)         (31.7)      (30.4)          (4.4)          (3.0)          (2.2)
Amortization of prior service cost                      1.9            1.9         1.9            --             --             --
Amortization of transitional liability/(asset)         (4.2)          (4.2)       (4.2)           2.7            2.7            2.7
Recognized net actuarial (gain)/loss                    --             4.2         --             --             (.3)           --
Net periodic benefit cost                           $   5.6        $   8.6      $  4.2        $   7.2        $   7.2        $   8.8

</TABLE>


   For  measurement  purposes,  a 6.9% health care trend rate was used for 1999.
Trend  rates were  assumed to decrease  gradually  to 5.5% in 2005 and remain at
this  level  going  forward.  Assumed  health  care  cost  trend  rates  have  a
significant effect on the amounts reported for the health care plan.

   A one  percentage  point change in assumed health care cost trend rates would
have the following effects for 1998:

                                               1 Percentage       1 Percentage
(Millions of dollars)                         Point Increase     Point Decrease

Effect on total of service and
  interest cost components                         $ 1.2             $ (1.0)
Effect on postretirement
  benefit obligation                                11.3               (9.5)


   IP changed the measurement  date for the pension  obligation of the plan from
September 30 to December 31 which is  reflected  in the 1998 fiscal  year.  As a
result, the time frame for the 1998 reporting period is October 1, 1997, through
December  31,  1998.  The  unrecognized  prior  service  cost is  amortized on a
straight-line  basis over the average  remaining service period of employees who
are expected to receive benefits under the plan.

   The projected benefit obligation,  accumulated  benefit obligation,  and fair
value of plan assets for the pension plans with accumulated  benefit obligations
in excess of plan assets,  specifically the nonqualified supplemental retirement
plan for management  employees,  were $6.3 million,  $5.6 million,  and $0 as of
December 31, 1998,  and $4.8 million,  $3.9  million,  and $0 as of December 31,
1997.

     On December 9, 1998,  Illinova's and IP's Boards of Directors voted to exit
Clinton operations.  Concurrent with the decision to exit Clinton operations, IP
accrued estimated employee  severance and retention costs of $25.8 million,  net
of income taxes;  pension curtailment  benefits of $(7.2) million, net of income
taxes;  and other  postretirement  benefit  costs of $.4 million,  net of income
taxes.  These amounts are not reflected in the above tables.  If the decision is
made to  permanently  close  Clinton,  the  number of  Clinton  employees  would
decrease from 950 to 240 over an 11-month  transition  period as the plant moves
from an operating to a decommissioning  mode.  Employees expected to be released
include engineering, plant technical and operational, office administration, and
maintenance    employees.    See    "Note   2   -   Clinton    Impairment    and
Quasi-Reorganization" for additional information.


NOTE 14 -- SEGMENTS OF BUSINESS

In 1997, the FASB issued FAS 131,  "Disclosures  about Segments of an Enterprise
and Related Information." This statement supersedes FAS 14, "Financial Reporting
for  Segments of a Business  Enterprise,"  and  establishes  new  standards  for
defining a company's segments and disclosing information about them.

   The new statement  requires that segments be based on the internal  structure
and reporting of a company's operations.  Because of the realignment of Illinova
into eight operating  segments  during 1998,  Illinova has determined that it is
not practicable to present the new segment information for 1997 and 1996 because
it is not  available  and the cost to develop it is  excessive.  Therefore,  the
information  for 1998 is  presented  under the format  specified by FAS 131; the
comparative information for 1998, 1997, and 1996 is presented in accordance with
FAS 14.

1998
Illinova is comprised of eight business  groups.  The business  groups and their
principal  services  are as follows:

-    IP Customer Service Business Group -- transmission,  distribution, and sale
     of electric energy; distribution, transportation, and sale of natural gas.

-    IP Wholesale  Energy Business Group -- fossil-fueled  electric  generation,
     wholesale electricity transactions, and dispatching activities.

-    IP Nuclear Generation Business Group -- nuclear-fueled electric generation.

-    Illinova  Energy Partners -- develops and markets  energy-related  services
     throughout the United States and Canada.

-    Illinova Generating -- invests in, develops, and operates independent power
     projects throughout the world.

-    IP Financial Business Group -- provides financial support functions such as
     accounting,  finance, corporate performance, audit and compliance, investor
     relations,  legal, corporate development,  regulatory, risk management, and
     tax services.

-    IP  Support  Services  Business  Group  --  provides   specialized  support
     functions, including information technology, human resources, environmental
     resources, purchasing and materials management, and public affairs.

-    Corporate -- includes  Illinova  Insurance  Company and  Illinova  Business
     Enterprises.
   

     Of the  above-listed  segments,  the  IP Financial  Business Group,  the IP
Support Services  Business Group,  and Corporate did not  individually  meet the
minimum threshold  requirements for separate  disclosure and are combined in the
Other category.

     Three measures were used to judge segment performance: contribution margin,
cash flow, and return on net invested capital.


<TABLE>
<CAPTION>
                                                                                                              (Millions of dollars)
                                                                                  Illinova
                                          Customer      Wholesale                  Energy     Illinova
1998                                      Service        Energy         Nuclear   Partners   Generating       Other     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>               <C>      <C>           <C>           <C>        <C>    
Revenues from external customers       $   1,505.7    $     557.2    $      6.3   $   --        $  --        $  --      $   2,069.2
Diversified enterprise revenue                --             --            --        339.8         15.9          5.7          361.4
Intersegment revenue(1)                       --            482.3          (2.4)      --           --           --            479.9
------------------------------------------------------------------------------------------------------------------------------------
   Total Revenue                           1,505.7        1,039.5           3.9      339.8         15.9          5.7        2,910.5
Depreciation and
  amortization expense                        68.3           30.3          99.1       --           --            5.9          203.6
Other operating expenses(1)                  894.4          999.0         379.2      354.5         28.7         12.2        2,668.0
------------------------------------------------------------------------------------------------------------------------------------
   Operating income (loss)                   543.0           10.2        (474.4)     (14.7)       (12.8)       (12.4)          38.9
Interest expense                              70.4           13.8          59.3       --           --            2.5          146.0
AFUDC                                         (0.1)          (0.9)         (2.5)      --           --            0.3           (3.2)
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss) before taxes            472.7           (2.7)       (531.2)     (14.7)       (12.8)       (15.2)        (103.9)
Income tax expense (benefit)                 194.4           (1.9)       (232.3)      (4.2)         2.4         (0.7)         (42.3)
Miscellaneous-net                              0.5           (1.0)          0.1       --           (4.7)         3.5           (1.6)
Equity earnings in subsidiaries               --             --            --         (4.0)       (18.6)         0.1          (22.5)
Interest revenue                              --             --            --         --           --           (1.5)          (1.5)
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss) after taxes             277.8            0.2        (299.0)      (6.5)         8.1        (16.6)         (36.0)
Preferred dividend requirement                 9.7            2.2           7.9       --           --           --              19.8
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss(2)                 $     268.1    $      (2.0)   $   (306.9)  $   (6.5)   $     8.1    $   (16.6)   $     (55.8)
Clinton plant impairment loss                                           1,327.2                                             1,327.2
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss)
     available to common               $     268.1    $      (2.0)   $ (1,634.1)  $   (6.5)   $     8.1    $   (16.6)   $  (1,383.0)
------------------------------------------------------------------------------------------------------------------------------------
Other information --
   Total assets(3)                     $   1,831.8    $   3,039.0    $  1,010.2   $   74.3    $   222.4    $   623.6    $   6,801.3
   Subsidiary's investment in
     equity method investees                --               --            --          9.2        166.4         --            175.6
   Total expenditures for additions
     to long-lived assets                    124.4          116.0          62.5       --           --            8.6          311.5
------------------------------------------------------------------------------------------------------------------------------------
Corporate Measures --
   Contribution margin(4)              $     315.7    $       7.0    $   (268.5)  $   (6.5)   $     8.1    $   (16.3)   $      39.5
   Cash flow(5)                              237.4           27.2        (280.8)     (18.7)        26.0        (27.9)         (36.8)
   Return on net
     invested capital(6)                     24.28%          0.33%        N/A       (33.50)%       4.06%       (2.93)%         0.92%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Intersegment  revenue priced at 2.5 cents per kwh  delivered.  Intersegment
     expense is reflected  in other  operating  expenses  for Customer  Service.
     Nuclear  reflects a  replacement  power expense for the increment of market
     price over the intersegment price.

(2)  Net income (loss) before Clinton plant impairment loss.

(3)  Primary  assets  for  Nuclear  include  transition  period  cost  recovery,
     decommissioning  assets,  shared general and intangible  plant, and nuclear
     fuel.

(4)  Contribution  margin  represented by net income before financing costs (net
     of tax), preferred dividend requirement, and Clinton plant impairment loss.

(5)  Cash flow before financing activities.

(6)  Return on net invested capital calculated as contribution margin divided by
     net  invested   capital   (includes   Clinton  plant  impairment  loss  and
     quasi-reorganization).


GEOGRAPHIC INFORMATION
                                                           (Millions of dollars)
For the Years Ended December 31,             1998          1997           1996

Revenues: (1)
  United States                           $ 2,425.8    $  2,509.5     $  1,739.0
  Foreign countries (Seven)                     4.8          --              7.3
                                          $ 2,430.6    $  2,509.5     $  1,746.3


                                                           (Millions of dollars)
December 31,                                 1998          1997           1996

Long-lived assets: (2)
  United States                           $ 4,513.9    $  4,590.4     $  4,596.6
  Foreign countries (Nine)                    135.8         120.8           80.7
                                          $ 4,649.7    $  4,711.2     $  4,677.3

(1)  Revenues  are  attributed  to  geographic  regions  based  on  location  of
     customer.

(2)  Long-lived   assets   include   plant,   equipment,   and   investments  in
     subsidiaries.


<TABLE>
<CAPTION>

1998, 1997, and 1996
                                                                                                              (Millions of dollars)
                                     1998                                1997                                 1996
                                       Diversified   Total                  Diversified   Total                  Diversified  Total
                       Electric  Gas   Enterprises   Corp.  Electric  Gas   Enterprises   Corp.   Electric  Gas  Enterprises  Corp.
Operation information-
<S>                    <C>      <C>     <C>        <C>      <C>      <C>     <C>        <C>      <C>      <C>      <C>      <C>
  Operating revenues   $1,781.4 $287.8  $ 361.4    $2,430.6 $1,420.0 $353.9  $ 735.6    $2,509.5 $1,340.5 $348.2   $  57.6  1,746.3
  Operating expenses,
   excluding provision
   for income taxes     1,747.6  252.1    392.0     2,391.7  1,081.3  311.5    792.3     2,185.1    886.2  300.5      87.5  1,274.2
  Clinton plant
   impairment loss      2,341.2    -        -       2,341.2      -      -        -           -        -      -         -        -
  
  Pre-tax
   operating income    (2,307.4)  35.7    (30.6)   (2,302.3)   338.7   42.4    (56.7)      324.4    454.3   47.7     (29.9)   472.1
  AFUDC                     3.1     .1      -           3.2      4.9     .1      -           5.0      6.3     .2       -        6.5
  
  Pre-tax operating
   income, including
   AFUDC              ($2,304.3) $35.8   ($30.6)  ($2,299.1)  $343.6  $42.5   ($56.7)    $ 329.4   $460.6 $ 47.9   $ (29.9) $ 478.6
  
Other deductions, net                                 (25.6)                               (21.0)                              (5.2)
  Interest charges                                    146.0                                144.2                              142.5
  Income tax - Clinton
   impairment                                      (1,014.0)                                 -                                  -
  Provision for
   income taxes                                       (42.3)                                80.3                              128.0
  Preferred dividend
   requirements
   of subsidiary                                       19.8                                 21.5                               22.3
  
Net income                                         (1,383.0)                               104.4                              191.0
  Extraordinary item
   (net of taxes)                                       -                                 (195.0)                               -
  Carrying value over
   (under) consideration
   paid for redeemed
   preferred stock
   of subsidiary                                        -                                     .2                                (.7)
  
Net income (loss)
  applicable
  to common stock                                 $(1,383.0)                            $  (90.4)                            $190.3

Other information-
  Depreciation           $177.9 $ 25.7   $  -        $203.6   $171.5 $ 24.1   $  -      $  195.6   $164.0  $22.5    $  -     $186.5
  Capital expenditures   $285.6 $ 25.9   $  -        $311.5   $201.3 $ 22.6   $  -      $  223.9   $164.0  $23.3    $  -     $187.3
Investment information-
  Identifiable assets* $5,169.0 $457.9   $ 25.8    $5,652.7 $4,508.1 $453.8   $  1.2    $4,963.1 $4,578.1 $481.9    $  -   $5,060.0
  Nonutility plant and
    other investments                                 228.6                                184.0                              132.4
  Assets utilized for
    overall operations                                920.0                                435.9                              520.4
  
  Total assets                                     $6,801.3                             $5,583.0                           $5,712.8
</TABLE>

* 1998:  Utility  plant,  nuclear  fuel,  materials  and  supplies,  prepaid and
  deferred energy costs, and transition period cost recovery.

  1997 and 1996:  Utility plant, nuclear fuel,  materials and supplies, deferred
  Clinton costs, and prepaid and deferred energy costs.


NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is
presented in accordance with the requirements of FAS 107, "Disclosures about the
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined  by the Company  using  available  market  information  and valuation
methodologies  discussed below. 

     Illinova  and  its  subsidiaries  have  early-adopted  FAS  133  due to the
quasi-reorganization.  Accordingly,  assets and  liabilities  were  adjusted  to
reflect   current   fair   value.   See  "Note  2  -  Clinton   Impairment   and
Quasi-Reorganization" for more information.


                                             1998                    1997
                                    Carrying      Fair      Carrying      Fair
(Millions of dollars)                 Value       Value       Value       Value

Nuclear decommissioning
  trust funds                      $   84.1    $   84.1    $   62.5    $   62.5
Cash and cash equivalents             518.1       518.1        33.0        33.0
Mandatorily redeemable
  preferred stock
  of subsidiary*                      199.0       200.0       197.0       202.7
Long-term debt*                     2,709.2     2,721.3     1,678.3     1,730.1

Notes payable                         147.6       147.6       415.3       415.3

Other Financial Instruments:
  Trading/Energy
  Futures and forward contracts
    IEP                                12.7        12.7        --          --
    IP                                 28.0        28.0        --          --

Non-trading/Energy
  Futures and forward contracts
    IP                                  5.4         5.4        --           --

Non-trading/Emission Allowances
  Forward Contracts-- IP                2.0         2.0        --          --
  Option Contracts-- IP                  .2          .2        --          --


*    In the above  table,  the 1998  carrying  value of  mandatorily  redeemable
     preferred  stock and long-term debt reflect an adjustment in carrying value
     to fair value due to the  quasi-reorganization.  The portion of these items
     which relate to electric  generation  has been adjusted to fair value.  The
     remainder  is  attributed  to the  regulated  part of the business in which
     return on assets is based on book value of debt. Therefore no adjustment to
     fair value was made for the  portion of  mandatorily  redeemable  preferred
     stock and long-term debt relating to Illinois Power's  regulated  business.
     The fair  values in the above  table  represent  100 percent of the current
     fair value for mandatorily redeemable preferred stock and long-term debt.

     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.

Other  Financial  Instruments:  Other  financial  instruments  are  comprised of
derivative instruments which have been restated to market value according to FAS
133.  See  "Note 16 -  Financial  and  Other  Derivative  Instruments"  for more
information. Fair value is determined using quoted market prices or indices.


NOTE 16 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS

Trading Activities:  Illinova, through its subsidiaries,  IP and IEP, engages in
the  brokering and  marketing of  electricity  and natural gas. IP and IEP use a
variety of instruments,  including  fixed-price swap agreements,  variable-price
swap  agreements,  exchange-traded  energy  futures and options  contracts,  and
over-the-counter  forwards, swaps, and options. At December 31, 1998, there were
no natural gas derivative instruments in use.

     As of December 31, 1998, Illinova and its subsidiaries  adopted EITF 98-10.
IP and IEP have recorded  their trading  instruments at fair value in accordance
with  EITF  98-10's  application   criteria.   For  more  information  regarding
Illinova's adoption of new accounting  pronouncements,  see "Note 1 - Summary of
Significant   Accounting  Policies."  At  December  31,  1998,  IP's  and  IEP's
derivative  assets and  liabilities  were recorded in the  Consolidated  Balance
Sheets  at  fair  value  with  unrealized  gains  and  losses  shown  net in the
Consolidated  Statements of Income.  IP and IEP record realized gains and losses
as components of operating  revenues and operating  expenses in the Consolidated
Statements of Income.

     The notional quantities and maximum terms of commodity instruments held for
trading purposes at December 31, 1998, are presented below:

                     Volume-Fixed        Volume-Fixed        Average
                     Price Payor        Price Receiver        Term

Electricity
  IP                   5,174 MW           5,524 MW            1 yr
  IEP                 10,394 MW          10,305 MW            1 yr


   All notional  amounts reflect the volume of transactions but do not represent
the  dollar  amounts  or  actual  megawatts  exchanged  by  the  parties  to the
contracts.  Accordingly,  notional amounts do not accurately  measure Illinova's
exposure to market or credit risk.

   The estimated fair value of commodity  instruments  held for trading purposes
at December 31, 1998, are presented below:

                                       Fair Value        Fair Value
(Millions of dollars)                   Assets           Liabilities

Electricity
  IP                                  $  21.8             $  49.8
  IEP                                    25.5                38.2
                                      $  47.3             $  88.0


   The fair value was estimated  using quoted prices and indices where available
and considering the liquidity of the market for the instrument.  The fair values
are subject to volatility based on changing market conditions.

   The weighted average term of the trading portfolio,  based on volume, is less
than one year. The maximum and average terms disclosed herein are not indicative
of  likely  future  cash  flows  as  these  positions  may  be  modified  by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity, and Illinova's risk management portfolio needs and
strategies.  Terms  regarding  cash  settlements  of these  contracts  vary with
respect  to the  actual  timing  of  cash  receipts  and  payments.

Non-Trading Activities: To reduce the risk from market fluctuations in the price
of electricity and related  transmission,  Illinova,  through its subsidiary IP,
enters into forward transactions, swaps, and options (energy derivatives). These
instruments are used to hedge expected  purchases,  sales,  and  transmission of
electricity  (a portion of which are firm  commitments  at the  inception of the
hedge).  The weighted  average  maturity of these  instruments  is less than one
year.

   Periodically, IP has utilized interest rate derivatives (principally interest
rate swaps and caps) to adjust the portion of its overall  borrowings subject to
interest  rate risk.  As of  December  31,  1998,  there were no  interest  rate
derivatives outstanding.

   In order to hedge expected purchases of emission  allowances,  IP has entered
into swap  agreements,  forward  contracts,  and written put options  with other
utilities  to  mitigate  the risk from market  fluctuations  in the price of the
allowances.  At December 31, 1998, the notional amount of two emission allowance
swaps was 126,925 units,  with a recorded  liability of $15.6 million,  based on
fair value at delivery date. The maximum  maturity of the swap  agreements is 10
years.  These  agreements  do not fall under the scope of FAS 133.  The notional
amount of the two forward  contracts  is 32,000  emission  allowances  with fair
value of $2 million.  The maximum  term of the forward  contracts is five years,
commencing in 1993.  Both  contracts  expired in January 1999. Due to the remote
probability  of exercise,  three put options  written by IP are considered to be
immaterial.

   As of December 31, 1998,  Illinova and its subsidiaries  adopted FAS 133. For
more information regarding Illinova's adoption of new accounting pronouncements,
see "Note 1 - Summary of  Significant  Accounting  Policies."  At December  31,
1998, IP's derivative  assets and liabilities  were recorded in the Consolidated
Balance Sheets at fair value with  unrealized  gains and losses shown net in the
equity   section  of  the   Consolidated   Balance  Sheets  as  a  part  of  the
quasi-reorganization.    See    "Note    2    -    Clinton    Impairment    and
Quasi-Reorganization"  for  more  information.   In  the  future,  unless  hedge
accounting  is  applied,  unrealized  gains and losses  will be shown net in the
Consolidated  Statements  of  Income.  IP records  realized  gains and losses as
components  of operating  revenues and  operating  expenses in the  Consolidated
Statements of Income.

   Hedge  accounting  is  appropriate  only if the  derivative  is  effective at
offsetting cash flows from or changes in the fair value of the underlying hedged
item and is designated as a hedge at its inception. Additionally, changes in the
market value of the hedge must move in an inverse  direction or limit an adverse
result  from  changes  in the  market  value  of the  item  being  hedged,  (the
effectiveness  of  the  hedge).  This  effectiveness  is  measured  both  at the
inception  of the hedge and on an ongoing  basis,  with an  acceptable  level of
effectiveness  being at least 80 percent and not more than 125 percent for hedge
designation.  If and when effectiveness  ceases to exist at an acceptable level,
hedge accounting ceases and mark-to-market accounting is applied. As of December
31, 1998,  all  non-trading  derivative  instruments  were  accounted  for using
mark-to-market accounting.

   The  notional  quantities  and  the  average  term of the  energy  derivative
commodity instruments held for other than trading purposes at December 31, 1998,
follows:


                     Volume-Fixed       Volume-Fixed         Average
                     Price Payor       Price Receiver         Term

Electricity
  IP                   1,450 MW           1,050 MW            1 yr


     In addition to the fixed-price notional volumes above, IP has also recorded
a $25 million  liability in 1998 for two "commodity  for commodity"  energy swap
agreements  totaling  350 MW.  However,  these swap  agreements  do not meet the
definition of a derivative under FAS 133.

     The notional  amount is intended to be  indicative of the level of activity
in such  derivatives,  although  the amounts at risk are  significantly  smaller
because changes in the market value of these derivatives generally are offset by
changes in the value associated with the underlying physical  transactions or in
other  derivatives.  When  energy  derivatives  are closed out in advance of the
underlying commitment or anticipated  transaction,  the market value changes may
not be offset  because  price  movement  correlation  ceases  to exist  when the
positions are closed.

     The estimated fair values of energy derivative commodity instruments,  held
for non-trading purposes at December 31, 1998, are presented below:

                                  Fair Value            Fair Value
(Millions of dollars)               Assets              Liabilities

Electricity
  IP                                $  4.2                $  9.6

     The fair  value  was  estimated  using  quoted  prices  and  indices  where
available,  and considering the liquidity of the market for the instrument.  The
fair  values are subject to  significant  volatility  based on  changing  market
conditions.

     The average  maturity and fair values  discussed  above are not necessarily
indicative of likely future cash flows.  These  positions may be modified by new
offsetting transactions at any time in response to changing generation forecast,
market conditions,  market liquidity,  and Illinova's risk management  portfolio
needs and strategies.  Terms regarding cash  settlements of these contracts vary
with respect to the actual timing of cash receipts and payments.

Trading and  Non-trading -- General  Policy:  In addition to the risk associated
with  price  movements,  credit  risk  is  also a part  of  Illinova's  and  its
subsidiaries'  risk  management  activities.  Credit risk relates to the risk of
loss  resulting   from   non-performance   of   contractual   obligations  by  a
counterparty.   While  Illinova  and  its   subsidiaries   have  experienced  no
significant  losses due to credit  risk,  off-balance-sheet  risk  exists to the
extent that counterparties to these transactions may fail to perform as required
by the terms of each contract.  In order to minimize this risk,  Illinova and/or
its subsidiaries enter into such contracts with those  counterparties only after
an appropriate  credit review has been performed.  Illinova and its subsidiaries
periodically  review the effectiveness of these financial contracts in achieving
corporate  objectives.  Should the  counterparties  to these  contracts  fail to
perform, Illinova could be forced to acquire alternative hedging arrangements or
be required to honor the underlying commitment at then current market prices. In
such an event, Illinova might incur additional loss to the extent of amounts, if
any, already paid to the  counterparties.  In view of its criteria for selecting
counterparties  and its  experience  to date in  successfully  completing  these
transactions,  Illinova  believes  that  the  risk of  incurring  a  significant
financial  statement loss due to the  non-performance of counterparties to these
transactions is remote.

     Illinova has established an Executive Risk Management  Committee to oversee
all  corporate  risk  management.  The  Executive  Risk  Management  Committee's
responsibilities include reviewing Illinova's and its subsidiaries' overall risk
management  strategies,  as well as monitoring  and assessing  risk exposure and
risk  management  activities  to  ensure  compliance  with all  applicable  risk
management limitations, policies, and procedures.


<TABLE>
<CAPTION>
Illinova Corporation

N O T E   1 7   QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA (UNAUDITED)

(Millions of dollars except per common share amounts)
--------------------------------------------------------------------------------------------------------------------------
                                                          First Quarter   Second Quarter    Third Quarter   Fourth Quarter
                                                                  1998             1998             1998             1998
--------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>              <C>             <C>     
Operating revenues                                             $  575.4         $  547.3         $  823.3         $  484.6
Operating income (loss)                                            63.7            (51.1)            90.1        (2,405.0)
Net income (loss)                                                  23.0            (47.0)            26.6        (1,385.6)
Net income (loss) applicable to common stock                       23.0            (47.0)            26.6        (1,385.6)
Earnings (loss) per common share
     (basic and diluted)                                           $.32           ($0.66)            $.37         ($19.38)
Common stock prices and dividends
     High                                                        30 1/2               31               31         30  3/16
     Low                                                         26 5/8          27 3/16           23 1/2           23 3/8
     Dividends declared                                            $.31             $.31             $.31             $.31

                                                          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           ($0.49)
Earnings (loss) per common share after
  extraordinary item (basic and diluted)                           $.58             $.42             $.87           ($3.21)
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
</TABLE>




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 31,945 registered holders of common stock at January 11, 1999.


<TABLE>
<CAPTION>
Illinova Corporation
Selected Consolidated Financial Data*
                                                                                                             (Millions of dollars)
                                                          1998        1997        1996          1995          1994          1988
----------------------------------------------------------------------------------------------------------------------------
Operating revenues
<S>                                                    <C>         <C>         <C>         <C>          <C>             <C>       
    Electric                                           $ 1,224.2   $ 1,244.4   $ 1,202.9   $   1,252.6  $    1,177.5    $    949.9
    Electric interchange                                   557.2       175.6       137.6         116.3         110.0         109.7
    Gas                                                    287.8       353.9       348.2         272.5         302.0         334.8
    Diversified enterprises                                361.4       735.6        57.6           1.9          --            --
                                                                                                                                    
       Total operating revenues                        $ 2,430.6     2,509.5     1,746.3       1,643.3       1,589.5       1,394.4
                                                                                                                                    
Extraordinary item net of income tax benefit           $    --        (195.0)       --            --            --            --
Cumulative effect of change in
    accounting principle net of income taxes           $    --          --          --            --            --            34.0
Net income (loss) after extraordinary item and
    change in accounting principle                     $(1,383.0)      (90.6)      191.0         151.6         151.8         151.9
Effective income tax rate                                   43.3%       43.4%       40.2%         42.9%         42.0%         34.2%
                                                                                                                                    
Net income (loss) applicable
    to common stock                                    $(1,383.0)      (90.4)      190.3         148.1         158.2         151.9
Earnings (loss) per common share (basic and diluted)   $  (19.30)      (1.22)       2.51          1.96          2.09          2.14
Cash dividends declared per common share               $    1.24        1.24        1.15          1.03          0.65          2.64
Dividend payout ratio (declared)                          N/A         N/A           45.5%         52.3%         30.7%        124.3%
Book value per common share                            $   16.28       19.11       21.62         20.19         19.17         25.80
Price range of common shares
    High                                               $   31         27 1/2      30 3/8        30            22 5/8        22 1/8
    Low                                                $   23 3/8     20 1/8      24 5/8        21 1/4        18 1/8        16 1/2
Weighted average number of common shares
    outstanding during the period (thousands)             71,667      73,992      75,682        75,644        75,644        70,901
                                                                                                                                    
       Total assets                                    $ 6,801.3     5,583.0     5,712.8       5,609.8       5,576.7       6,053.1
                                                                                                                                    
Capitalization
    Common stock equity                                $ 1,166.9     1,369.5     1,636.2       1,527.0       1,450.2       1,895.6
    Preferred stock of subsidiary                           57.1        57.1        96.2         125.6         224.7         315.2
    Mandatorily redeemable preferred
         stock of subsidiary                               199.0       197.0       197.0          97.0         133.0         160.0
    Long-term debt                                       2,334.6     1,717.5     1,636.4       1,739.3       1,946.1       2,341.2
                                                                                                                                    
       Total capitalization                            $ 3,757.6     3,341.1     3,565.8       3,488.9       3,754.0       4,712.0
                                                                                                                                    
Retained earnings                                      $    --          51.7       233.0         129.6          58.8         517.9
                                                                                                                                    
Capital expenditures                                   $   311.5       223.9       187.3         209.3         193.7         115.5
Cash flows from operations                             $   268.0       368.3       407.4         413.2         268.6         225.2
AFUDC as a percent of earnings
    applicable to common stock                             N/A         N/A           3.4%          4.1%          5.9%         40.3%
Return on average common equity                            N/A        (6.0%)        12.0%          9.9%         11.4%          8.1%
Ratio of earnings to fixed charges                         N/A           0.30       3.21          2.70          2.71          1.83


*    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.

</TABLE>


<TABLE>
<CAPTION>
Illinova Corporation
Selected Illinois Power Company Statistics

                                                          1998        1997        1996        1995        1994        1988
--------------------------------------------------------------------------------------------------------------------------
Electric Sales in kwh (Millions)
<S>                                                     <C>         <C>         <C>         <C>         <C>         <C>   
Residential                                              4,893       4,734       4,782       4,754       4,537       4,411
Commercial                                               4,053       3,943       3,894       3,804       3,517       2,939
Industrial                                               8,701       8,403       8,493       8,670       8,685       7,415
Other                                                      375         426         367         367         536         964

    Sales to ultimate consumers                         18,022      17,506      17,536      17,595      17,275      15,729
Interchange                                             16,199       7,230       5,454       4,444       4,837       4,903
Wheeling                                                 2,710       3,253         928         642         622          -

    Total electric sales                                36,931      27,989      23,918      22,681      22,734      20,632

Electric Revenues (Millions of dollars)
Residential                                          $     469   $     489   $     483   $     500   $     471   $     373
Commercial                                                 329         325         318         321         295         215
Industrial                                                 374         376         360         392         378         312
Other                                                       39          40          38          37          30          50

    Revenues from ultimate consumers                     1,211       1,230       1,199       1,250       1,174         950

Interchange                                                557         176         138         116         110         110
Wheeling                                                    13          14           4           3           3          -

    Total electric revenues                          $   1,781   $   1,420   $   1,341   $   1,369   $   1,287   $   1,060

Gas Sales in Therms (Millions)
Residential                                                305         343         427         356         359         367
Commercial                                                 131         147         177         144         144         148
Industrial                                                  67          47          99          88          81         155

    Sales to ultimate consumers                            503         537         703         588         584         670
Transportation of customer-owned gas                       267         309         251         273         262         235

    Total gas sold and transported                         770         846         954         861         846         905

Interdepartmental sales                                     26          19           9          21           5           9

    Total gas delivered                                    796         865         963         882         851         914

Gas Revenues (Millions of dollars)
Residential                                          $     183   $     238   $     216   $     173   $     192   $     207
Commercial                                                  65          77          79          60          66          71
Industrial                                                  24          20          40          24          31          48

    Revenues from ultimate consumers                       272         335         335         257         289         326

Transportation of customer-owned gas                         7           9           7           8           9          13
Miscellaneous                                                9          10           6           7           4          (4)

    Total gas revenues                               $     288   $     354   $     348   $     272   $     302   $     335

System peak demand (native load) in kw (thousands)       3,694       3,532       3,492       3,667       3,395       3,508
Firm peak demand (native load) in kw (thousands)         3,617       3,469       3,381       3,576       3,232       3,077
Net generating capability in kw (thousands)              3,838       3,289       4,148       3,862       4,121       3,938

Electric customers (end of year)                       580,356     580,257     549,957     529,966     553,869     546,443
Gas customers (end of year)                            408,428     405,710     389,223     374,299     388,170     385,336
Employees (end of year)                                  3,965       3,655       3,635       3,559       4,350       4,663

</TABLE>