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


Information Statement Table of Contents
Notice of Annual Meeting.............................  2
Information Statement................................  3
Appendix: 1998 Annual Report to Shareholders.........a-1


TO THE SHAREHOLDERS OF ILLINOIS POWER:
Notice is hereby given that the Annual Meeting of Shareholders of Illinois Power
Company  ("Illinois  Power")  will  be at 10 a.m.  Wednesday,  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,  will be
entitled to receive notice of and to vote at the Annual Meeting.

By Order of the Board of Directors,




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

Decatur, Illinois
March 31, 1999


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


Information Statement


FIRST SENT OR GIVEN TO SECURITY HOLDERS ON OR ABOUT MARCH 31, 1999.

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

This Information Statement is furnished in connection with the Annual Meeting of
Shareholders  of  Illinois  Power.  The Annual  Meeting  will be held at 10 a.m.
Wednesday,  May 5,  1999,  at  Shilling  Community  Education  Center,  Richland
Community College,  One College Park, Decatur,  Illinois 62521, for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders.

   On  March  8,  1999  ("Record  Date"),   Illinova  Corporation   ("Illinova")
beneficially  owned all of the 62,892,213  shares of Illinois Power Common Stock
then  outstanding and there were 1,139,110  shares of  Illinois Power  Preferred
Stock then outstanding, none of which was held by Illinova.


VOTING RIGHTS

Shareholders  of record  at the close of  business  on the  Record  Date will be
entitled to receive  notice of and to vote at the Annual  Meeting.  Shareholders
who are  present at the Annual  Meeting  will be  entitled  to one vote for each
share of Illinois Power  Preferred  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 such  candidates.  Shareholders  will be entitled to one
vote for each share of  Preferred  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 AND INFORMATION STATEMENT

Accompanying this Information  Statement,  which includes Consolidated Financial
Statements, is a Notice of Annual Meeting of Shareholders and the Summary Annual
Report to Shareholders  covering  operations of Illinova for the year 1998. This
Information  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 six Board  meetings in 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 four standing committees: the
Audit  Committee,   the  Finance  Committee,  the  Compensation  and  Nominating
Committee, and the Nuclear Operations Committee.

   The duties and members of the standing committees are:

Audit Committee
     1)   Review with the Chairman,  President and Chief  Executive  Officer and
          the independent accountants the scope and adequacy of Illinois Power's
          system of internal controls;

     2)   Review the scope and results of the annual  examination  performed  by
          the independent accountants;

     3)   Review the activities of Illinois Power's internal auditors;

     4)   Report its  findings to the Board and provide a line of  communication
          between the Board and both the internal  auditors and the  independent
          accountants;

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

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

     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 Illinois  Power.  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 Illinois  Power 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.

Nuclear Operations Committee
     1)   Review the safety, reliability and quality of nuclear operations;

     2)   Review the effectiveness of the management of nuclear operations;

     3)   Review the strategic plan for nuclear operations;

     4)   Review various nuclear reports; and

     5)   Report its findings to the Board.

     The Nuclear Operations Committee met six times during 1998.

     This  Committee  consists  of the  following  members of the Board:  Joe J.
Stewart (Chairman),  J. Joe Adorjan, Charles E. Bayless, Walter D. Scott, Ronald
L. Thompson, and Walter M. Vannoy.

Board Compensation
The Outside  Directors of Illinois Power, all of whom also serve on the Board of
Illinova,  receive a total retainer fee of $18,000 per year for their service on
these  boards.  Outside  Directors  who also chair Board  Committees  receive an
additional  $2,500 per year.  Outside Directors receive a grant of 650 shares of
Illinova 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 of Illinois  Power 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 Common
Stock with the value of each stock unit based on the last  reported  sales price
of such  stock.  Additional  credits  are made to the  participating  director's
account in dollar  amounts equal to the dividends paid on the Common Stock which
the  director  would have  received if the director had been the record owner of
the shares  represented  by stock units,  and these amounts are  converted  into
additional stock units. On termination of the participating  directors' services
as  directors,  payment of deferred  fees and stock  grants is made in shares of
Illinova 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

Illinois  Power's entire Board of Directors is elected at each Annual Meeting of
Shareholders.   Directors   hold  office  until  the  next  Annual   Meeting  of
Shareholders or until their successors are elected and qualified.  At the Annual
Meeting a vote will be taken on a proposal to elect the 10  directors  nominated
by Illinois  Power's  Board of  Directors.  Their  names and certain  additional
information  are set forth on the following  pages. If any nominee should become
unable to serve as a  director,  another  nominee may be selected by the current
Board of Directors.

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

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 and the executive  officers named in
the Summary Compensation Table. All of Illinois Power's Common Stock is owned by
Illinova. To the best of Illinois Power's knowledge,  no owner holds more than 5
percent of Illinois Power Preferred Stock.


                             Number      Number of Stock
                           of Shares     Units in Deferred
  Name of                Beneficially      Compensation       Percent
Beneficial Owner         Owned (1)(2)        Plans            of Class

J. Joe Adorjan              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)


     (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.


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 Illinois Power for the years indicated.
The compensation  shown includes all  compensation  paid for service to Illinois
Power, its parent and subsidiaries.

<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

LEAH MANNING STETZNER                  1998      $ 191,375      $ 15,310       $  6,083      $ 15,310        5,000 shs.       $2,100
  General Counsel and                  1997        175,862         5,276          7,277         5,276        4,000 shs.        2,006
  Corporate Secretary of               1996        168,674        11,880          7,080        11,879        4,500 shs.        1,996
  Illinova, and Vice President,
  General Counsel and
  Corporate Secretary of
  Illinois Power

ROBERT A. SCHULTZ                      1998      $ 187,395      $ 14,956       $  7,002      $ 14,956        5,000 shs.       $2,700
  Vice President of                    1997        185,560             0          8,480             0        6,000 shs.        2,214
  Illinois Power                       1996        176,170        23,604          6,957        23,604        6,500 shs.        2,114
</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; Ms. Stetzner, 1,826 units
          valued at  $45,663;  Mr.  Schultz,  1,390  units  valued  at  $34,740.
          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.


                                                         OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
                                                                       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>            <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

Leah Manning stetzner            5,000                      1.7%               29.094               2/11/2008             24,000

Robert A. Schultz                5,000                      1.7%               29.094               2/11/2008             24,000


</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
                                           Options at Fiscal Year-End                    Options at Fiscal Year-End
Name                                        Exercisable/Unexercisable                   Exercisable/Unexercisable (1)

<S>                                          <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

Leah Manning stetzner                        13,300 shs./13,500 shs.                            $ 24,047/$0

Robert A. Schultz                            10,750 shs./17,500 shs.                            $ 16,594/$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,  Ms. Stetzner and Mr.
Schultz  had  completed  0,  17,  26,  9  and  17  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  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.  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.


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,  Illinois  Power,  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.


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


INDEPENDENT AUDITORS

The Board of Directors of Illinois Power has selected  PricewaterhouseCoopers as
independent  auditors 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 Illinois
Power's  shareholders  on or about March 31,  1999.  Copies of Illinois  Power's
Annual Report on Form 10-K will be available to  shareholders,  after its filing
with the  Securities  and  Exchange  Commission  on or before  March  31,  1999.
Requests should be addressed to Investor Relations,  G-21,  IIllinois Power, 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
Illinois Power'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
Illinois Power 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,
Vice President, 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-17
Report of Independent Accountants...................... a-18
Consolidated Statements of Income...................... a-19
Consolidated Balance Sheets............................ a-20
Consolidated Statements of Cash Flows.................. a-21
Consolidated Statements of Retained Earnings........... a-21
Notes to Consolidated Financial Statements............. a-22
Selected Consolidated Financial Data................... a-48
Selected Illinois Power Company Statistics............. a-49


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
ICC             Illinois Commerce Commission
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.

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


OPEN ACCESS AND WHEELING

On March 29,  1995,  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 4 -- 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 3 -- Clinton Power Station" for a discussion of Clinton.

   Due to  uncertainties  of deregulated  generation  pricing in Illinois and to
various  operation and  management  factors,  IP's Board 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,  IP's Board of Directors also voted to effect a  quasi-reorganization  in
which IP's  consolidated  accumulated  deficit in retained  earnings of $1,369.4
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  4  --  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 4 -- Commitments and Contingencies" for a discussion of Fuel Cost
Recovery.  

     See "Note 6 -- Facilities  Agreements"  for a discussion of Soyland and the
Soyland PCA.


POWER SUPPLY AND RELIABILITY

See "Note 4 -- 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."  IP began  its Year 2000
project in November 1996. 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 IP management.  Bi-monthly Year 2000 readiness  reports
are  provided  to IP's  Board 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.


     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.

     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 IP 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.

   IP 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 IP'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.

   IP is 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 IP.

   IP is taking a proactive  role in working  with  vendors and  suppliers  with
respect  to  Year  2000  issues.   Each  business  group  within  IP  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.

   IP is also taking numerous steps to keep customers  informed of the status of
the Year 2000  efforts.  IP 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

IP is comprised of five 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.

-    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.


     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.


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
IP'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.

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

   See "Note 13 -- Segments of Business" for  additional  information  regarding
IP's segments.

Overview

(Millions of dollars)                    1998         1997        1996

Net income (loss) applicable
  to common stock                     $ (1,376)     $   (65)     $  206
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                    $    (49)     $   129      $  206


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, 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.

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  4  --  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.

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 1996  through 1998  changes in  miscellaneous-net  were
negligible.

Interest Charges: Total interest charges, including AFUDC and preferred dividend
requirements, increased $.8 million in 1998, decreased $3.4 million in 1997, and
decreased  $20.8  million in 1996.  The  increase  in 1998 was  negligible.  The
decrease in 1997 is primarily  due to the continued  benefits of IP  refinancing
efforts  and  capitalization  reductions,   partially  offset  by  increased  IP
short-term  borrowings  and  lower  AFUDC.  The 1996  decrease  was due to lower
short-term  interest  rates  and  the  impact  of  IP  refinancing  efforts  and
capitalization reduction during 1996.

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
IP'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, IP historically has been able
to either  generate  sufficient  funds or raise  sufficient  funds at investment
grade credit quality to meet all of its financial  needs.  IP's sources of funds
and primary  non-operating  uses of funds are  described  below.  See "Note 9 --
Long-Term  Debt" and "Note 10 --  Preferred  Stock" for  additional  information
regarding 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: IP needs cash for operating expenses,  interest
and  dividend  payments,  debt  and  certain  IP  preferred  stock  retirements,
construction  programs,  and  decommissioning.  IP  has  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,   and  IP's  construction
requirements.  Liquidity at 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.

   IP expects that future cash flows,  supplemented by external financing,  will
continue to be adequate to meet operating  requirements  and to service existing
debt,   preferred  dividends,   anticipated   construction   requirements,   and
decommissioning  costs.

Dividends:  Illinova is a holding company and depends upon its  subsidiaries for
its  non-financing  cash flow. IP, as the provider of substantially  all of this
cash flow, 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.

   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  periodically  reviews its  dividend  policies  based on several  factors,
including  its 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.
IP's  securities  are  currently  rated by four  principal  rating  agencies  as
follows:

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

First/New mortgage
  bonds                         Baa1        BBB          BBB+     BBB+
Preferred stock                 baa2        BB+          BBB-     BBB-
Commercial paper                P-2         A-2          D-2      F2
Transitional funding
  trust notes                   Aaa         AAA          AAA      AAA

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

   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 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."

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

Long-term debt                              64          (11)       (154)
Preferred stock                             --          (39)         71
Transitional funding
  trust notes*                             864           --          --

Total increase (decrease)               $  928       $ (50)       $ (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 9 --
Long-Term Debt" and "Note 10 -- Preferred Stock."

   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
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.

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. IP estimates that
it will spend approximately $370 million for 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's construction  expenditures,  IP capital  expenditures for
1999  through  2003 are  expected to include  $522  million for  mandatory  debt
retirements.  In addition,  IPSPT has long-term debt maturities of $86.4 million
in each of the above years.

Decommissioning:  Because of IP's Board 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 4 -- 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 4 --  Commitments  and  Contingencies"  for a
discussion of environmental  matters that impact or could potentially impact IP.
Tax Matters See "Note 7 -- Income Taxes" for a discussion of effective tax rates
and other tax issues.


MARKET RISK

Risk Management:  IP 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, and commodity price risk.
Trading  market risk is comprised of commodity  price risk.  For a discussion of
credit  risk  exposure,   see  "Note  15  --  Financial  and  Other   Derivative
Instruments." IP'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  possible loss or an expected 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: IP is exposed to interest rate risk as a result of financing
through its issuance of fixed or variable-rate debt,  including commercial paper
issuances  or bank  notes.  Interest  rate risk is the  exposure  of an entity's
financial  condition  to adverse  movements  in interest  rates.  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.

   IP'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

IP                         $ 6.7       $14.2     $ 9.9


Other Market Risk: IP is exposed to equity price risk.  Equity price risk is the
risk of loss on equity investments from unfavorable  movements in equity prices.
IP  maintains  trust  funds,  as required by the NRC, to fund  certain  costs of
nuclear  decommissioning.  See "Note 4 -- 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
fluctuation 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  statements.   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.

Commodity  Price Risk:  Commodity  price risk is the risk of loss  arising  from
adverse  movements  in commodity  prices.  IP is exposed to the impact of market
fluctuations  in the price of electricity.  Established  policies and procedures
are employed to manage its risks associated with those market fluctuations using
various commodity derivatives,  including futures,  forwards, swaps and options.
IP is  exposed to  trading  commodity  price  risk  through  its energy  trading
business and  non-trading  commodity  price risk  through its energy  generation
business. To measure,  monitor, and manage its commodity price risk, IP utilizes
"Monte Carlo"  simulations of both trading and non-trading  positions based on a
95 percent  confidence  level.  At December  31, 1998,  trading VaR  utilizing a
four-day  holding period was $1.3 million.  Non-trading VaR utilizing a one-year
holding period 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 IP 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:

-    IP's  activities 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.

-    IP 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 IP 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.

-    IP 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 Illinova  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 IP believes it is in substantial compliance with all current
     regulations,   IP  cannot  predict  the  future  impact  of   environmental
     compliance. However, if more stringent requirements are introduced they are
     likely to have a negative financial effect.

-    IP actively  purchases  and sells  electricity  and natural gas futures and
     similar  contracts with respect thereto.  While IP 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 IP 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  IP  can  not  predict  this  ultimate  impact,  if  any.  All
     forward-looking  statements  in this report are based on  information  that
     currently  is  available.   IP  disclaims  any  obligation  to  update  any
     forward-looking statement.


ILLINOIS POWER COMPANY
Responsibility for Information

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

   Illinois Power believes that its accounting and internal  accounting  control
systems are maintained so that these systems provide  reasonable  assurance that
assets are  safeguarded  against loss from  unauthorized  use or disposition and
that the financial records are reliable for preparing the consolidated financial
statements.

   The consolidated  financial  statements have been audited by Illinois Power's
independent   accountants,   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,  Illinois Power  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 Illinois  Power.  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,  Illinois  Power's  internal  accounting  controls and  financial
reporting  matters.  The Audit  Committee  meets with the  internal  auditors to
assess the internal audit work performed, including tests of internal accounting
controls.




Charles E. Bayless
Chairman, President
and Chief Executive Officer




Larry F. Altenbaumer
Senior Vice President
and Chief Financial Officer


ILLINOIS POWER COMPANY
Report of Independent Accountants

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
Illinois Power Company 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>
Illinois Power Company
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)
-------------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------------
         Total                                                                 2,069.2           1,773.9          1,688.7
-------------------------------------------------------------------------------------------------------------------------

Operating Expenses and Taxes
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
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
Income taxes                                                                     (30.9)            102.4            140.5
Income tax - impairment loss                                                    (853.6)              -                - 
Clinton plant impairment loss (Note 2)                                         2,341.2               -                - 
-------------------------------------------------------------------------------------------------------------------------
         Total                                                                 3,456.4           1,495.2          1,327.3
-------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                       (1,387.2)            278.7            361.4
-------------------------------------------------------------------------------------------------------------------------

Other Income
ITC - Clinton impairment                                                         160.4               -                 - 
Miscellaneous - net                                                                2.6               3.0              1.5
-------------------------------------------------------------------------------------------------------------------------
         Total                                                                   163.0               3.0              1.5
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest charges                                         (1,224.2)            281.7            362.9
-------------------------------------------------------------------------------------------------------------------------

Interest Charges
Interest expense                                                                 134.9             135.9            140.8
Allowance for borrowed funds used during construction                             (3.2)             (5.0)            (6.5)
-------------------------------------------------------------------------------------------------------------------------
         Total                                                                   131.7             130.9            134.3
-------------------------------------------------------------------------------------------------------------------------

Net income (loss) before extraordinary item                                   (1,355.9)            150.8            228.6
Extraordinary item net of income tax benefit
    of $ 118.0 million (Note 1)                                                    -              (195.0)             -  
-------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                             (1,355.9)            (44.2)           228.6
Less - Preferred dividend requirements                                            19.8              21.5             22.3
Plus - Carrying amount over (under) consideration
       paid for redeemed preferred stock                                           -                 0.2             (0.7)
-------------------------------------------------------------------------------------------------------------------------
 Net income (loss) applicable to common stock                               $ (1,375.7)         $  (65.5)        $  205.6
-------------------------------------------------------------------------------------------------------------------------

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>
Illinois Power Company
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
Electric (includes construction work in progress
<S>      <C>                <C>                                                     <C>              <C>      
      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                                                              2.6              5.9
--------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents                                                               504.5             17.8
Accounts receivable (less allowance for doubtful accounts
      of $5.5 million)
      Service                                                                           105.9            115.6
      Other                                                                              32.5             16.6
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                                                                35.9             75.4
Assets from commodity price risk management activities                                   26.0              -
Prepayments and other                                                                    42.8             61.2
--------------------------------------------------------------------------------------------------------------
                                                                                        884.7            414.8
--------------------------------------------------------------------------------------------------------------
Deferred Charges
Transition period cost recovery                                                         783.0              -
Other                                                                                   284.2            192.5
--------------------------------------------------------------------------------------------------------------
                                                                                      1,067.2            192.5
--------------------------------------------------------------------------------------------------------------
                                                                                    $ 6,429.8        $ 5,291.5
--------------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES
Capitalization
Common stock -- No par value, 100,000,000 shares
      authorized; 75,643,937 shares issued, stated at                               $ 1,382.4        $ 1,424.6
Retained earnings                                                                         -               89.5
Less -- Capital stock expense                                                             7.3              7.3
Less -- 12,751,724 and 9,428,645 shares of common stock in treasury,
      respectively, at cost                                                             286.4            207.7
--------------------------------------------------------------------------------------------------------------
      Total common stock equity                                                       1,088.7          1,299.1
Preferred stock                                                                          57.1             57.1
Mandatorily redeemable preferred stock                                                  199.0            197.0
Long-term debt                                                                        2,158.5          1,617.5
--------------------------------------------------------------------------------------------------------------
      Total capitalization                                                            3,503.3          3,170.7
--------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable                                                                        216.2            102.7
Notes payable                                                                           147.6            376.8
Long-term debt and lease obligations maturing within
      one year                                                                          506.6             87.5
Dividends declared                                                                        -               22.9
Taxes accrued                                                                            29.4             27.5
Interest accrued                                                                         34.9             33.0
Liabilities from commodity price risk management activities                              61.6              -
Other                                                                                    86.2             78.7
--------------------------------------------------------------------------------------------------------------
                                                                                      1,082.5            729.1
--------------------------------------------------------------------------------------------------------------
Deferred Credits
Accumulated deferred income taxes                                                       978.7            980.6
Accumulated deferred investment tax credits                                              39.6            208.3
Decommissioning liability                                                               567.4             62.5
Other                                                                                   258.3            140.3
--------------------------------------------------------------------------------------------------------------
                                                                                      1,844.0          1,391.7
--------------------------------------------------------------------------------------------------------------
                                                                                    $ 6,429.8        $ 5,291.5
--------------------------------------------------------------------------------------------------------------
(Commitments and Contingencies Note 4)
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>
ILLINOIS POWER COMPANY
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)                                                        ($1,355.9)          ($44.2)           $228.6
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                                                   (37.8)            29.4             64.2
      Extraordinary item                                                        -              195.0              -
      Impairment loss, net of tax                                           1,327.2              -                -
Changes in assets and liabilities--
      Accounts and notes receivable                                            11.9             57.7            (35.2)
      Accrued unbilled revenue                                                  3.7             19.7            (16.9)
      Materials and supplies                                                  (15.9)            (5.1)            (1.2)
      Accounts payable                                                         38.3            (31.2)            29.8
      Deferred revenue                                                         87.4              -                -
      Interest accrued and other, net                                          51.0              0.3            (14.8)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                     310.1            418.7            443.3
----------------------------------------------------------------------------------------------------------------------
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                                                      5.1             27.8              5.0
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                        (303.2)          (191.1)          (175.8)
----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock and preferred stock                                (126.1)          (114.6)          (107.9)
Repurchase of common stock                                                    (78.6)          (121.5)           (18.9)
Redemptions--
      Short-term debt                                                        (560.5)          (164.1)          (355.8)
      Long-term debt                                                         (188.3)          (160.8)          (153.7)
      Preferred stock                                                           -              (39.0)           (29.5)
Issuances--
      Short-term debt                                                         331.3            231.0            306.2
      Long-term debt                                                        1,116.5            150.0              -
      Preferred stock                                                           -                -              100.0
      Other financing activities                                              (14.5)            (3.3)             0.3
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                           479.8           (222.3)          (259.3)
----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                                       486.7              5.3              8.2
Cash and cash equivalents at beginning of year                                 17.8             12.5              4.3
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                     $504.5            $17.8            $12.5
----------------------------------------------------------------------------------------------------------------------

</TABLE>


<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
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                                                       $   89.5        $  245.9        $ 129.6
Net income (loss) before dividends and carrying amount adjustment                  (1,355.9)          (44.2)         228.6
--------------------------------------------------------------------------------------------------------------------------
                                                                                   (1,266.4)          201.7          358.2
--------------------------------------------------------------------------------------------------------------------------
Less-
      Dividends-
          Preferred stock                                                              20.1            21.7           22.6
          Common stock                                                                 82.9            90.7           86.6
          Investment transfer to Illinova                                               -               -              2.4
Plus-
      Carrying amount over (under) consideration
         paid for redeemed preferred stock                                              -               0.2           (0.7)
      Quasi-Reorganization adjustment (Note 2)                                      1,327.2             -              - 
      Transfer from other paid-in capital to
         eliminate retained earnings deficit (Note 2)                                  42.2             -              -
--------------------------------------------------------------------------------------------------------------------------
                                                                                    1,266.4         (112.2)         (112.3)
--------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                             $    -          $   89.5        $ 245.9
--------------------------------------------------------------------------------------------------------------------------
See notes to  consolidated  financial  statements  which are an integral part of
these statements.

</TABLE>


Notes to Consolidated Financial Statements

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

IP is a  subsidiary  of  Illinova,  a  holding  company.  IP is  engaged  in the
generation,  transmission,  distribution,  and sale of  electric  energy and the
distribution,  transportation, and sale of natural gas in the state of Illinois.
The consolidated financial statements include the accounts of IP; Illinois Power
Securitization  Limited  Liability  Company,  a special  purpose  LLC whose sole
member is IP; IPSPT, a special  purpose trust whose sole owner is Illinois Power
Securitization  Limited  Liability  Company;  Illinois Power Capital,  L.P.; and
IPFI.  See  "Note 9 --  Long-Term  Debt" and "Note 10 --  Preferred  Stock"  for
additional information.

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

Clinton  Impairment and  Quasi-Reorganization:  In December 1998,  IP's Board 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.

   IP's  Board  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.

IP's principal accounting policies are:

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

(Millions of dollars)                             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 4 --
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 IP'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."

   IP is included in Illinova's  consolidated federal income tax return.  Income
taxes  are  allocated  to the  individual  companies  based on their  respective
taxable income or loss. See "Note 7 -- Income Taxes" for additional  discussion.


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


Consolidated Statements of Cash Flows: Cash and cash equivalents include cash on
hand and  temporary  investments  purchased  with an initial  maturity  of three
months or less.  Capital lease obligations not affecting cash flows increased by
$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                             $  14.6     $  94.3    $  65.9
Interest                                 $  151.6    $ 140.0    $ 147.4


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 IP's
1998 financial statements. For additional information, see "Note 15 -- 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 IP's 1998 financial statements.

     For additional information,  see "Note 15 -- 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.  SOP 98-1 did not have a significant  impact on IP'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.  SOP  98-5  did not  have a
significant impact on IP'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.  IP has complied with the requirements
of FAS 132. See "Note 12 -- Pension and Other Benefits Costs."


NOTE 2 -- CLINTON IMPAIRMENT AND QUASI-REORGANIZATION

In December  1998,  IP's Board 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, IP's Board of Directors also voted to effect a quasi-reorganization, in
which IP's  consolidated  accumulated  deficit in retained  earnings of $1,369.4
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 IP's
retained  earnings  balance.  Clinton has not operated since September 1996. See
"Note 3 -- 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, 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 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,  IP's Board 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
3 -- 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 materials 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 4 -- 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 12
-- 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  4  --
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 4 --
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.

   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. This
adjustment to fair value was recognized as a decrease 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.

Early Adoption of Accounting Pronouncements
As part of the  quasi-reorganization,  IP was  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 $5.0 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 15 -- 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 $42.2  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                                               $   (42.2)
-------------------------------------------------------------------------------
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                              (1,369.4)
-------------------------------------------------------------------------------
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*                                (16.4)
  Early adoption of accounting pronouncements*                            (5.0)
-------------------------------------------------------------------------------
Total quasi-reorganization                                             1,327.2
-------------------------------------------------------------------------------
Retained earnings deficit at December 31, 1998                           (42.2)
Transfer from other paid-in capital                                       42.2
-------------------------------------------------------------------------------
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--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 occurring
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 6
-- Facilities  Agreements."

Clinton Cost and Risks
IP's  Clinton-related  costs  represented 41% of IP'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 4 -- 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, IP's Board 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 4
--  Commitments  and  Contingencies"  and  "Note  2 --  Clinton  Impairment  and
Quasi-Reorganization" for additional information.


NOTE 4 -- COMMITMENTS AND CONTINGENCIES

Commitments
IP estimates  that it will spend  approximately  $370  million for  construction
expenditures 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.

     IP's  capital  expenditures  for  1999  through  2003,  in  addition  to IP
construction  expenditures,  are expected to include $522 million for  mandatory
debt  retirement.  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 four 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 of 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 IP's financial position.

     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,  IP's Board 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 3 --  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 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 15 -- 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 the Midwest,
Southern,  and Northeastern U.S. markets.  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,  United States 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 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 decision,  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 financial position.

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 6 --  Facilities  Agreements"  for
discussion of Soyland contingencies.

Nuclear Fuel Lease:  For more  information,  see "Note 8 -- Capital  Leases" for
discussion of contingencies related to IP's nuclear fuel lease.

Internal  Revenue  Service  Audit:  The  Internal  Revenue  Service is currently
auditing  IP's federal  income tax returns for the years 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  financial
position or results of  operations.  For a detailed  discussion of income taxes,
see "Note 7 -Income Taxes."


NOTE 5--LINES OF CREDIT AND SHORT-TERM LOANS

IP has total lines of credit  represented by bank commitments  amounting to $354
million,  all of which were unused at December 31,  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.

   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.

   For the years 1998, 1997, and 1996, 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    $  376.8   $  310.0

Weighted average interest
  rate at December 31,                                6.0%        6.0%      5.7%

Maximum amount outstanding
  at any month end                               $  370.9    $  376.8   $  310.0

Average daily borrowings
  outstanding during
  the year                                       $  317.2    $  284.4   $  261.9

Weighted average interest
  rate during the year                                5.7%        5.8%      5.6%


NOTE 6--FACILITIES AGREEMENTS

On March 13,  1997,  the NRC  issued an order  approving  transfer  to IP of the
Clinton  operating  license related to Soyland's 13.2% ownership  obligations in
connection with the transfer from Soyland to IP of all of Soyland's  interest in
Clinton pursuant to an agreement  reached in 1996.  Soyland's title to the plant
and directly  related assets such as nuclear fuel 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  quarters  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 7 -- 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                    375.0          40.3
--------------------------------------------------------------------------------
                                                            684.0         360.2
--------------------------------------------------------------------------------
    Total deferred tax assets                           $   693.2       $ 371.4
--------------------------------------------------------------------------------

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--
  Included in operating
    expenses and taxes                 $     7.6      $     72.7          $79.2
  Included in other income
    and deductions                          (4.2)            (.7)         (14.5)
--------------------------------------------------------------------------------
    Total current taxes                      3.4            72.0           64.7
--------------------------------------------------------------------------------

Deferred taxes--
  Included in operating
  expenses and taxes
    Property related differences           (30.0)            9.2           60.4
    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                          (20.0)          (16.7)           6.1

   Included in other income
   and deductions
     Property related differences             .3             (.4)          10.2
     Misc. book/tax recognition
       differences                            .3             1.5            1.7
--------------------------------------------------------------------------------

     Total deferred taxes                 (883.2)           36.2            80.5
--------------------------------------------------------------------------------
Deferred investment tax
credit--net
  Included in operating
    expenses and taxes                      (8.3)           (7.3)          (7.3)
  Included in other income
    and deductions--
      Clinton plant impairment            (160.4)           --              --
--------------------------------------------------------------------------------
    Total investment
      tax credit                          (168.7)           (7.3)          (7.3)
--------------------------------------------------------------------------------
Total income taxes from
  continuing operations                 (1,048.5)          100.9          137.9
--------------------------------------------------------------------------------
Income tax--
  Extraordinary item
    Current tax expense                     --             (17.8)          --
    Deferred tax expense                    --            (100.2)          --
--------------------------------------------------------------------------------
    Total extraordinary item                --            (118.0)          --
--------------------------------------------------------------------------------
Total income taxes                     $(1,048.5)      $   (17.1)       $ 137.9
--------------------------------------------------------------------------------

   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            $ (781.1)       $   88.1        $ 128.3

Increases/(decreases) in taxes
resulting from--
  State taxes,
    net of federal effect                 (172.6)           11.8           13.7
  Investment tax credit
    amortization                            (8.3)           (7.3)          (7.3)
  Clinton plant impairment                 (85.4)           --             --
  Depreciation not normalized                4.4            11.3            9.4
  Interest expense on
    preferred securities                    (6.8)           (6.9)          (6.9)
Other--net                                   1.3             3.9             .7
--------------------------------------------------------------------------------
Total income taxes from
  continuing operations                $(1,048.5)       $  100.9        $ 137.9
--------------------------------------------------------------------------------

     Combined  federal and state effective  income tax rates were 43.6%,  40.1%,
and 37.6% for the years 1998, 1997, and 1996 respectively.

     IP is subject to the provisions of the Alternative Minimum Tax System. As a
result,  IP has an Alternative  Minimum Tax credit  carryforward at December 31,
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  IP'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 IP's  consolidated  financial
position or results of operations.

     The tax effect of the Clinton plant 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 8 -- 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 incore 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 4 -- Commitments
and Contingencies"  for discussion of decommissioning  and nuclear fuel disposal
costs.  Nuclear fuel lease payments are included with "Fuel for electric plants"
on IP'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.


NOTE 9 -- LONG-TERM DEBT

<TABLE>
<CAPTION>

                                                                                                     (Millions of dollars)
--------------------------------------------------------------------------------------------------------------------------
December 31,                                                                                         1998            1997
--------------------------------------------------------------------------------------------------------------------------

First mortgage bonds--
<S>                                                                                              <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                                                                      372.5           464.3
--------------------------------------------------------------------------------------------------------------------------
New mortgage bonds--
      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                                                                      1,211.8           987.8
--------------------------------------------------------------------------------------------------------------------------
     Total mortgage bonds                                                                          1,584.3         1,452.1
--------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes--
      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                                                          864.0             -
 -------------------------------------------------------------------------------------------------------------------------
Medium-term notes, series A                                                                            -              68.0
Variable rate long-term debt due 2017                                                                 75.0            75.0
--------------------------------------------------------------------------------------------------------------------------
     Total other long-term debt                                                                       75.0           143.0
--------------------------------------------------------------------------------------------------------------------------
                                                                                                   2,523.3         1,595.1
Adjustment to Fair Value                                                                              25.3             -
Unamortized discount on debt                                                                         (15.5)          (16.8)
                      
--------------------------------------------------------------------------------------------------------------------------
     Total long-term debt excluding capital lease obligations                                      2,533.1         1,578.3
     Obligations under capital leases                                                                132.0           126.7
--------------------------------------------------------------------------------------------------------------------------
                                                                                                   2,665.1         1,705.0
Long-term debt and lease obligations maturing within one year                                       (506.6)          (87.5)
--------------------------------------------------------------------------------------------------------------------------
         Total long-term debt                                                                    $ 2,158.5       $ 1,617.5
--------------------------------------------------------------------------------------------------------------------------
</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 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 redeemded  $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 8 -- Capital Leases."

     At December 31, 1998, the aggregate  total of unamortized  debt expense and
unamortized loss on reacquired debt was approximately $64.7 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 10 -- PREFERRED STOCK

<TABLE>
<CAPTION>

                                                                                                               (Millions of dollars)

December 31,                                                                                             1998                  1997

Serial Preferred Stock, cumulative, $50 par value--
Authorized 5,000,000 shares; 1,139,110 shares outstanding
<S>                                                                                                   <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, $50 par value                                                                $  57.1               $  57.1
-----------------------------------------------------------------------------------------------------------------------------------
Serial Preferred Stock, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding                                                            --                    --
-----------------------------------------------------------------------------------------------------------------------------------
Preference Stock, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding                                                            --                    --
-----------------------------------------------------------------------------------------------------------------------------------
   Total Serial Preferred Stock, Preference Stock and Preferred Securities                            $  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                                                        $ 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 11 -- COMMON STOCK AND RETAINED EARNINGS

As of  December  31,  1998,  IP  effected a  quasi-reorganization  in which IP's
accumulated deficit in retained earnings of $1,369.4 million was eliminated by a
$1,327.2 million restatement of other assets and liabilities to their fair value
and a transfer of $42.2 million from additional paid-in capital.  See "Note 2 --
Clinton  Impairment  and   Quasi-Reorganization"   for  additional   information
regarding the effects upon retained earnings.

     On May 31,  1994,  common  shares of IP began  trading as common  shares of
Illinova. Illinova is the sole shareholder of IP common stock.

     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.

     In 1998, IP repurchased 3,323,079 shares of its common stock from Illinova.
In  1997  and  1996,  IP  repurchased   6,017,748  shares  and  714,811  shares,
respectively, of its common stock from Illinova. Under Illinois law, such shares
may be held as treasury stock and treated as authorized but unissued,  or may be
canceled by resolution  of the Board of Directors.  IP holds the common stock as
treasury stock and deducts it from common equity at the cost of the shares.

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

     For the year ended  December 31, 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.
The types of awards  that may be granted  under the Plan are  restricted  stock,
incentive stock options, non-qualified stock options, stock appreciation rights,
dividend  equivalents and other stock-based  awards.  The Plan provides that any
one or more  types of  awards  may be  granted  for up to  1,500,000  shares  of
Illinova's  common stock.  The following  table outlines the activity under this
Plan at December 31, 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 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, IP  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 12 -- 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
<S>                                                                      <C>              <C>              <C>              <C>    
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                                             -                -                0.4              0.4
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
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                                             -                -                0.4              0.4
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)
------------------------------------------------------------------------------------------------------------------------------------


                                                                             Pension Benefits                    Other Benefits
                                                                           1998             1997             1998              1997
Weighted-average assumptions as of December 31
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          -            -           (0.3)         -
------------------------------------------------------------------------------------------------------------------------------------
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,  IP's  Board  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 13 -- 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 Illinois
Power into five operating  segments  during 1998,  Illinois Power 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
IP is comprised of five 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.

-    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.

   Of the  above-listed  segments,  the IP Financial  Business  Group and the IP
Support Services  Business Group 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)


                                              Customer    Wholesale                            Total
1998                                           Service     Energy       Nuclear     Other     Company
------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>           <C>       <C>    
Revenues from external customers              $1,505.7    $  557.2     $   6.3     $   -      $2,069.2
Intersegment revenue  (1)                          -         482.3        (2.4)        -         479.9
------------------------------------------------------------------------------------------------------
   Total revenue                               1,505.7     1,039.5         3.9         -       2,549.1
Depreciation and amortization expense             68.3        30.3        99.1         5.9       203.6
Other operating expenses(1)                      894.4       999.0       379.2         3.4     2,276.0
------------------------------------------------------------------------------------------------------
   Operating income (loss)                       543.0        10.2      (474.4)       (9.3)       69.5
Interest expense                                  70.4        13.8        59.3        (8.6)      134.9
AFUDC                                             (0.1)       (0.9)       (2.5)        0.3        (3.2)
------------------------------------------------------------------------------------------------------
   Net income (loss) before taxes                472.7        (2.7)     (531.2)       (1.0)      (62.2)
Income tax expense (benefit)                     194.4        (1.9)     (232.3)        5.4       (34.4)
Miscellaneous--net                                  0.5        (1.0)        0.1         3.2         2.8
Interest revenue                                   -           -           -          (1.9)       (1.9)
------------------------------------------------------------------------------------------------------
   Net income (loss) after taxes                 277.8         0.2      (299.0)       (7.7)      (28.7)
Preferred dividend requirement                     9.7         2.2         7.9         0.0        19.8
------------------------------------------------------------------------------------------------------
   Net income (loss)(2)                       $  268.1    $   (2.0)  $  (306.9)     $ (7.7)  $   (48.5)
Clinton plant impairment loss                                          1,327.2                 1,327.2
------------------------------------------------------------------------------------------------------
   Net income (loss) available to common      $  268.1    $   (2.0)  $(1,634.1)     $ (7.7)  $(1,375.7)
------------------------------------------------------------------------------------------------------
Other information --
   Total assets(3)                            $1,831.8    $3,039.0   $ 1,010.2      $548.8   $ 6,429.8
   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)     $(13.7)  $    40.5
   Cash flow(5)                                  237.4        27.2      (280.8)       23.1         6.9
   Return on net invested capital(6)             24.28%       0.33%      N/A         (2.65)%      1.01%

------------------------------------------------------------------------------------------------------
</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)

December 31,                                1998          1997            1996

Revenues: (1)
  United States                           $2,069.2      $1,773.9        $1,688.7
--------------------------------------------------------------------------------
Long-lived assets: (2)
  United States                           $4,440.5      $4,534.1        $4,559.2
--------------------------------------------------------------------------------
(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
                                                               Total                         Total                           Total
                                          Electric    Gas     Company    Electric    Gas     Company    Electric    Gas     Company
------------------------------------------------------------------------------------------------------------------------------------
Operation information -
<S>                                      <C>        <C>      <C>        <C>        <C>      <C>        <C>        <C>      <C>     
   Operating revenues                    $1,781.4   $287.8   $2,069.2   $1,420.0   $353.9   $1,773.9   $1,340.5   $348.2   $1,688.7
   Operating expenses,
     excluding provision for
     income taxes                         1,747.6    252.1    1,999.7    1,081.3    311.5    1,392.8      886.2    300.5    1,186.7
   Clinton plant impairment loss          2,341.2      -      2,341.2        -        -          -          -        -          -  
------------------------------------------------------------------------------------------------------------------------------------
   Pre-tax operating income              (2,307.4)    35.7   (2,271.7)     338.7     42.4      381.1      454.3     47.7      502.0
   AFUDC                                      3.1      0.1        3.2        4.9      0.1        5.0        6.3      0.2        6.5
------------------------------------------------------------------------------------------------------------------------------------
   Pre-tax operating income,
     including AFUDC                    $(2,304.3)  $ 35.8  $(2,268.5)    $343.6    $42.5     $386.1     $460.6   $ 47.9     $508.5
----------------------------------------------------------             ------------------             ------------------
   Other deductions, net                                          1.0                           (1.5)                           1.2
   Interest charges                                             134.9                          135.9                          140.8
   Income tax - Clinton impairment                           (1,014.0)                           -                              -  
   Provision for income taxes                                   (34.5)                         100.9                          137.9
------------------------------------------------------------------------------------------------------------------------------------
   Net income                                                (1,355.9)                         150.8                          228.6
   Extraordinary item
     (net of taxes)                                               -                           (195.0)                           -  
   Preferred dividend
     requirements                                               (19.8)                         (21.5)                         (22.3)
   Carrying value over
     (under) consideration
     paid for redeemed
     preferred stock                                              -                              0.2                           (0.7)
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss) 
      applicable to common stock                            $(1,375.7)                        $(65.5)                        $205.6
------------------------------------------------------------------------------------------------------------------------------------
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   $5,626.9   $4,508.1     $453.8 $4,961.9   $4,577.1   $481.9    $5,059.0
----------------------------------------------------------             --------------------           ------------------------------
   Nonutility plant and
     other investments                                            2.3                            5.7                           14.3
   Assets utilized for
     overall operations                                         800.6                          323.9                          495.2
------------------------------------------------------------------------------------------------------------------------------------
   Total assets                                              $6,429.8                       $5,291.5                       $5,568.5
------------------------------------------------------------------------------------------------------------------------------------
</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 14 -- 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.

     Illinois Power has 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          504.5        504.5          17.8         17.8
Mandatorily redeemable
  preferred stock*                 199.0        200.0         197.0        202.7
Long-term debt*                  2,533.1      2,545.2       1,578.3      1,627.6

Notes payable                      147.6        147.6         376.8        376.8

Other Financial Instruments:
  Trading/Energy futures
  and forward contracts             28.0         28.0          --           --

  Non-trading/Energy futures
  and forward contracts              5.4          5.4          --           --

  Non-trading/Emission Allowances
  Forward contracts                  2.0          2.0          --          --
  Option contracts                    .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  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 and Long-Term  Debt: The fair value of
mandatorily  redeemable preferred stock and long-term debt is estimated based on
the quoted  market  prices for similar  issues or by  discounting  expected cash
flows at the rates currently offered for debt of the same remaining  maturities,
as advised by IP's bankers.

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

Other  Financial  Instruments:  Other  financial  instruments  are  comprised of
derivative financial instruments which have been restated to market according to
FAS 133. See "Note 15 -- Financial and Other  Derivative  Instruments"  for more
information. Fair Value is determined using quoted market prices or indices.


NOTE 15 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS

Trading Activities: IP engages in the brokering and marketing of electricity. IP
uses  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.

   As of December 31, 1998,  IP adopted EITF 98-10.  IP has recorded its trading
instruments at fair value in accordance with EITF 98-10's application  criteria.
For more  information  regarding  Illinois  Power's  adoption of new  accounting
pronouncements,  see "Note 1 -Summary of  Significant  Accounting  Policies." At
December  31,  1998,  derivative  assets and  liabilities  were  recorded on the
Consolidated Balance Sheets at fair value with unrealized gains and losses 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.

   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       5,174 MW              5,524 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 IP'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                             $    21.8             $    49.8

   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 IP'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,  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 a 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, IP adopted FAS 133. For more  information  regarding
IP's  adoption  of new  accounting  pronouncements,  see "Note 1 --  Summary  of
Significant  Accounting  Policies." IP's derivative  assets and liabilities were
recorded on the Consolidated  Balance Sheets at fair value with unrealized gains
and losses shown net in the equity section of the Consolidated Balance Sheets as
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 hedge  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                   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 value 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                       $   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 value  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 IP'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  part  of  IP's  risk  management
activities.   Credit  risk   relates  to  the  risk  of  loss   resulting   from
non-performance  of  contractual  obligations  by a  counterparty.  While IP has
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,  IP enters into such  contracts  with those  counterparties  only after an
appropriate  credit  review has been  performed.  IP  periodically  reviews  the
effectiveness of these financial  contracts in achieving  corporate  objectives.
Should the counterparties to these contracts fail to perform, IP 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, IP 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,  IP believes
that the risk of incurring a  significant  financial  statement  loss due to the
non-performance of counterparties to these transactions is remote.

   An Executive Risk  Management  Committee has been  established to oversee all
corporate   risk   management.   The  Executive  Risk   Management   Committee's
responsibilities  include reviewing IP's 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>
 
NOTE 16 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA (UNAUDITED)
                                                                                                          (Millions of dollars)
-------------------------------------------------------------------------------------------------------------------------------
                                                            First Quarter      Second Quarter   Third Quarter      Fourth Quarter
                                                                 1998              1998              1998              1998
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>               <C>   
Operating revenues                                             $489.5            $467.0            $715.3            $397.4
Operating income (loss)                                          61.8              (9.8)             66.5          (1,505.7)
Net income (loss)                                                30.4             (40.6)             35.4          (1,381.1)
Net income (loss) applicable to common stock                     25.5             (45.6)             30.4          (1,386.0)
Cash dividends declared on common stock                           -                42.8               -                40.4
Cash dividends paid on common stock                              22.2              20.5              22.2              40.4




                                                             First Quarter    Second Quarter     Third Quarter    Fourth Quarter
                                                                 1997              1997              1997              1997
--------------------------------------------------------------------------------------------------------------------------------
Operating revenues                                             $472.8            $415.3            $497.1            $388.7
Operating income                                                 88.9              82.6             101.8               5.4
Net income (loss) before extraordinary item                      55.0              51.4              71.9             (27.5)
Net income (loss) after extraordinary item                       55.0              51.4              71.9            (222.5)
Net income (loss) applicable to common stock                     49.5              46.0              67.5            (228.5)
Cash dividends declared on common stock                          23.5              23.2              22.2              22.2
Cash dividends paid on common stock                              23.5              23.5              23.2              22.2


</TABLE>


<TABLE>
<CAPTION>
Illinois Power Company
S E L E C T E D   C O N S O L I D A T E D   F I N A N CI A L   D A T A

                                                                                                               (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
------------------------------------------------------------------------------------------------------------------------------------
      Total operating revenues                        $ 2,069.2       1,773.9       1,688.7       1,641.4       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 &
    change in accounting principle                   $ (1,355.9)        (44.2)        228.6         182.7         180.3       189.4
Effective income tax rate                                  43.6%         40.1%         37.6%         39.1%         38.4%       29.4%
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable
    to common stock                                   $(1,375.7)        (65.5)        205.6         155.5         161.8       151.9
Cash dividends declared on common stock                    83.2          91.1          87.1          77.9          49.1       188.9
Cash dividends paid on common stock                       105.4          92.4          84.8          75.3          60.5       185.9
------------------------------------------------------------------------------------------------------------------------------------
      Total assets                                    $ 6,429.8     $ 5,291.5     $ 5,568.5     $ 5,567.2     $ 5,595.8   $ 6,053.1
------------------------------------------------------------------------------------------------------------------------------------
Capitalization
    Common stock equity                               $ 1,088.7     $ 1,299.1     $ 1,576.1     $ 1,478.1     $ 1,466.0   $ 1,895.6
    Preferred stock                                        57.1          57.1          96.2         125.6         224.7       315.2
    Mandatorily redeemable preferred stock                199.0         197.0         197.0          97.0         133.0       160.0
    Long-term debt                                      2,158.5       1,617.5       1,636.4       1,739.3       1,946.1     2,341.2
------------------------------------------------------------------------------------------------------------------------------------
      Total capitalization                            $ 3,503.3     $ 3,170.7     $ 3,505.7     $ 3,440.0     $ 3,769.8   $ 4,712.0
------------------------------------------------------------------------------------------------------------------------------------
Retained earnings                                     $     -       $    89.5     $   245.9      $  129.6     $    51.1    $  517.9
------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures                                  $   311.5     $   223.9     $   187.3      $  209.3     $   193.7    $  115.5
Cash flows from operations                            $   310.1     $   418.7     $   443.3      $  473.7     $   280.2    $  225.2
AFUDC as a percent of earnings
    applicable to common stock                            (0.2)%        (7.6)%          3.2%          3.9%          5.7%       40.3%
Ratio of earnings to fixed charges                         N/A           0.57          3.40          2.77          2.73        1.83
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

Illinois Power Company
SELECTED ILLINOIS POWER COMPANY STATISTICS
<TABLE>
<CAPTION>

                                                            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>