UNITED STATES

                    SECURITIES AND EXCHANGE COMMISSION

                         Washington, D. C.  20549


                                FORM 10-K/A



[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
      THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]


      For the Fiscal Year Ended December 31, 1998

                                       or

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]


      For the transition period from          to

                 Registrant, State of
                 Incorporation, Address
Commission       of Principal Executive             I.R.S. Employer
File Number      Offices and Telephone Number       Identification No.


1-11327          ILLINOVA CORPORATION                   37-1319890
                 (an Illinois Corporation)
                 500 S. 27th Street
                 Decatur, IL  62521-2200
                 (217) 424-6600


1-3004           ILLINOIS POWER COMPANY                 37-0344645
                 (an Illinois Corporation)
                 500 S. 27th Street
                 Decatur, IL  62521-2200
                 (217) 424-6600





                                       1
<PAGE>

Securities registered pursuant to Section 12(b) of the Act:

Each of the  following  securities  registered  pursuant to Section 12(b) of the
Act are listed on the New York Stock Exchange.

Title of each class                        Registrant
-------------------                        ----------

Common Stock (a)                           Illinova Corporation


Preferred stock, cumulative,               Illinois Power Company
$50 par value
4.08% Series   4.26% Series   4.70% Series
4.20% Series   4.42% Series

Mandatorily redeemable preferred securities of subsidiary
(Illinois Power Capital, L.P.)
9.45% Series

Trust originated preferred securities of subsidiary
(Illinois Power Financing 1)
8.00% Series

First mortgage bonds

7.95% Series due 2004

New mortgage bonds
6 1/8% Series due 2000                      6 3/4% Series due 2005
5.625% Series due 2000                          8% Series due 2023
6 1/2% Series due 2003                      7 1/2% Series due 2025
6.25% Series due 2002                       6.0% Series due 2003

(a) Illinova Common Stock is also listed on the Chicago Stock Exchange.

         Indicate  by check  mark  whether  the  registrants  (1) have filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrants  were required to file such  reports),  and (2) have been subject to
such filing requirements for the past 90 days.

                  Illinova Corporation     Yes [X]     No
                  Illinois Power Company   Yes [X]     No

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

                  Illinova Corporation        [X]
                  Illinois Power Company      [X]


                                       2
<PAGE>

      The aggregate market value of the common stock held by  non-affiliates  of
Illinova  Corporation  at February 28, 1999,  was  approximately  $1.7  billion.
Illinova  Corporation  is the sole holder of the common stock of Illinois  Power
Company.  The  aggregate  market  value of the  voting  preferred  stock held by
non-affiliates of Illinois Power Company at February 28, 1999, was approximately
$46.6 million.  The determination of stock ownership by non-affiliates  was made
solely for the purpose of responding to this requirement and the registrants are
not bound by this determination for any other purpose.

      The number of shares of Illinova  Corporation  Common  Stock,  without par
value, outstanding on February 28, 1999, was 69,919,287.

      The number of shares of Illinois Power Company  Common Stock,  without par
value,  outstanding on February 28, 1999, was 62,892,213,  all of which is owned
by Illinova Corporation.





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<PAGE>



                              ILLINOVA CORPORATION

                             ILLINOIS POWER COMPANY

                                   FORM 10-K/A

                  For the Fiscal Year Ended December 31, 1998

     This combined Form 10-K/A is separately  filed by Illinova  Corporation and
Illinois Power Company.  Information contained herein relating to Illinois Power
Company is filed by  Illinova  Corporation  and  separately  by  Illinois  Power
Company on its own behalf.  Illinois Power Company makes no representation as to
information relating to Illinova  Corporation or its subsidiaries,  except as it
may relate to Illinois Power Company.

                                 TABLE OF CONTENTS

Part I                                                                 Page

     Item 1.   Business                                                  6
                  General                                                6
                     Dividends                                           7
                     Open Access and Competition                         8
                     Customer and Revenue Data                          10
                  IP Electric Business                                  10
                     Overview                                           10
                     Soyland Power Cooperative, Inc.                    12
                     Clinton Power Station                              12
                       General                                          12
                       Decommissioning Costs                            13
                     Fuel Supply                                        13
                     Construction Program                               16
                     Accounting Matters                                 16
                  IP Gas Business                                       18
                     Gas Supply                                         18
                  Diversified Business Activities                       18
                  Environmental Matters                                 19
                     Air Quality                                        19
                     Clean Air Act                                      20
                     Global Warming                                     20
                     Manufactured-Gas Plant Sites                       20
                     Water Quality                                      20
                     Other Issues                                       21
                     Electric and Magnetic Fields                       21
                     Environmental Expenditures                         21
                  Year 2000 Data Processing                             22
                  Research and Development                              22
                  Regulation                                            22
                  Important Information                                 23
                  Executive Officers of Illinova Corporation            25
                  Executive Officers of Illinois Power Company          26
                  Operating Statistics                                  27
     Item 2.   Properties                                               28
     Item 3.   Legal Proceedings                                        28
     Item 4.   Submission of Matters to a Vote of
                Security Holders                                        29



                                       4
<PAGE>



                           TABLE OF CONTENTS (Continued)

Part II

     Item 5.   Market for Registrants' Common Equity
                and Related Stockholder Matters                         29
     Item 6.   Selected Financial Data                                  29
     Item 7.   Management's Discussion and Analysis
                of Financial Condition and
                Results of Operations                                   29
     Item 7A.  Quantitative and Qualitative
                Disclosures About Market Risk                           29
     Item 8.   Financial Statements and Supplementary
                Data                                                    29
     Item 9.   Changes in and Disagreements with
                Accountants on Accounting and
                Financial Disclosure                                    30

Part III

     Item 10.  Directors and Executive Officers of
                the Registrants                                         30
     Item 11.  Executive Compensation                                   30
     Item 12.  Security Ownership of Certain
                Beneficial Owners and Management                        30
     Item 13.  Certain Relationships and Related
                Transactions                                            31

Part IV

     Item 14.  Exhibits, Financial Statement
                Schedules, and Reports on Form 8-K                      31


Signatures                                                              34-37

Exhibit Index                                                           38


                                       5
<PAGE>



                                     PART I
--------------------------------------------------------------------------------

ITEM 1.   Business
-------
                                    General
                                    -------


         Illinois  Power  Company  (IP) was  incorporated  under the laws of the
State of Illinois on May 25, 1923.

         Illinova Corporation  (Illinova) was incorporated under the laws of the
State of Illinois on May 27,  1994 and serves as the parent  holding  company of
five principal  operating  subsidiaries:  IP, Illinova Generating Company (IGC),
Illinova Energy  Partners,  Inc. (IEP),  Illinova  Insurance  Company (IIC), and
Illinova Business Enterprises,  Inc. (IBE). IBE was incorporated in 1998. In May
1996,  another  Illinova  subsidiary,  Illinova Power  Marketing,  Inc.  (IPMI),
consolidated its business  activities with those of Illinova Energy Services and
with the non-regulated  marketing activities of Illinova, in a new company named
IEP.  On April  1,  1997,  IEP and  IPMI  merged.  In the  merger,  IPMI was the
surviving corporation and subsequently changed its name to IEP.

         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.  IP is  affected  by  changes  in the  electric  utility
industry  driven  by  regulatory  and   legislative   initiatives  to  introduce
competition  and end monopoly  franchises.  One aspect of this change is "direct
access,"  meaning  giving  customers  the freedom to purchase  electricity  from
suppliers  they choose.  In December  1997,  electric  regulatory  restructuring
legislation was enacted by the Illinois  General  Assembly and was signed by the
Governor.  For a more detailed  discussion of these  developments,  refer to the
"Open Access and Competition" section of this item.

         IP provides funds to Illinova for operations and investments.  Illinova
accrues  interest due to IP on any borrowed  funds at a rate equal to the higher
of the rate that Illinova  would have to pay if it used a currently  outstanding
line of credit,  or IP's actual  cost of the funds  provided.  Quarterly  during
1998,  when  needed,  IP effected a common  stock  repurchase  from  Illinova by
accepting  shares  having a  market  value  equivalent  to the  amount  of funds
provided  to  Illinova  during the quarter  plus the  accrued  interest  for the
quarter. During 1998, IP provided approximately $79 million in funds to Illinova
through these stock repurchases.  IP also provided funds to Illinova in the form
of cash dividends payable on the common stock of IP. In 1998, approximately $105
million in such dividends were declared and paid. For further  information on IP
common stock  repurchases,  see Item 7 "Management's  Discussion and Analysis of
Financial  Condition  and  Results  of  Operations"  of this  report.  For  more
information   regarding  cash  dividend   restrictions   and  stock   repurchase
restrictions, see the "Dividends" section later in this item.

         IGC  is  Illinova's  wholly-owned  independent  power  subsidiary.  IGC
invests in energy  supply  projects  throughout  the world and  competes  in the
independent  power market.  For further  discussion of IGC, see the "Diversified
Business Activities" section later in this item.

         IEP is Illinova's wholly-owned subsidiary that engages in the brokering
and  marketing  of  electric  power  and  gas and the  development  and  sale of
energy-related  services to the unregulated  energy market throughout the United
States and Canada. For further discussion of IEP, see the "Diversified  Business
Activities" section later in this item.

                                       6
<PAGE>

         IIC was  licensed  in August  1996 by the State of Vermont as a captive
insurance  company.  The  primary  business of IIC is to insure the risks of the
subsidiaries  of Illinova and risks related to or associated with their business
enterprises.

         IBE is Illinova's  wholly-owned  subsidiary  which was  incorporated in
1998.  The  primary  business of IBE is to account  for  miscellaneous  business
activities  not  regulated  by the  Illinois  Commerce  Commission  (ICC) or the
Federal Energy Regulatory  Commission (FERC) and not falling within the business
scope of other Illinova subsidiaries.

         The Illinova consolidated  financial statements include the accounts of
Illinova  Corporation,  a holding  company;  IP, a combination  electric and gas
utility;  IGC, a wholly-owned  subsidiary that invests in energy supply projects
and competes in the  independent  power market;  IEP, a wholly-owned  subsidiary
that  develops and markets  energy-related  services to the  unregulated  energy
market;  IIC, a  wholly-owned  subsidiary  whose  primary  business is to insure
certain  risks  of  Illinova  and its  subsidiaries;  and IBE,  a  wholly  owned
subsidiary which was incorporated in 1998 to account for miscellaneous  business
activities  not regulated by the ICC or FERC and not falling within the business
scope of other subsidiaries.

         All  significant  intercompany  balances  and  transactions  have  been
eliminated from the  consolidated  financial  statements.  All  transactions for
Illinova's  unregulated   subsidiaries  are  included  in  the  sections  titled
"Diversified Enterprises," "Interest Charges," "Income Taxes," and "Other Income
and Deductions," in Illinova's Consolidated Statements of Income.

         The IP  consolidated  financial  statements  include  the  accounts  of
Illinois  Power Capital,  L.P., a limited  partnership in which IP serves as the
general partner; Illinois Power Financing I, a statutory business trust in which
IP serves as sponsor;  Illinois Power  Securitization  Limited Liability Company
(LLC),  a special  purpose  Delaware  LLC whose sole member is IP; and  Illinois
Power Special  Purpose Trust, a special  purpose  Delaware  business trust whose
sole owner is Illinois Power Securitization Limited Liability Company.

         To the extent that information incorporated by reference herein appears
identically  in  both  the  1998  Annual  Report  to  Shareholders  of  Illinova
Corporation  and the 1998  Annual  Report  to  Shareholders  of  Illinois  Power
Company,  reference  will be made  herein  only to the  1998  Annual  Report  to
Shareholders  of  Illinova  Corporation,  and such  reference  will be deemed to
include a reference to the 1998 Annual Report of Illinois Power Company.

Dividends
---------

         On  December  9, 1998,  Illinova  declared  a  quarterly  common  stock
dividend at $.31 per share  payable  February 1, 1999.  On  February  10,  1999,
Illinova  declared a quarterly  common stock  dividend at $.31 per share payable
May 1, 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.


                                       7
<PAGE>
         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.  The Federal Power Act
precludes  declaration  or payment of  dividends by electric  utilities  "out of
money 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 stock and scheduled preferred dividends.  Illinova will secure payment of
IP preferred dividends through 1999.

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

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

Open Access and Competition
---------------------------

         Competition  has  become a  dominant  issue  for the  electric  utility
industry. It has been promoted by federal legislation,  starting with the Public
Utility  Regulatory  Policies Act of 1978, which  facilitated the development of
co-generators and independent power producers.  Federal promotion of competition
continued with enactment of the Energy Policy Act of 1992,  which authorized the
FERC to mandate wholesale wheeling of electricity by utilities at the request of
certain authorized generating entities and electric service providers.  Wheeling
is the transport of electricity  generated by one entity over  transmission  and
distribution lines belonging to another entity.

         Competition  arises not only from  co-generation  or independent  power
production,  but also  from  municipalities  seeking  to  extend  their  service
boundaries  to  include  customers  being  served  by  utilities.  The  right of
municipalities  to have power  wheeled to them by utilities was  established  in
1973. IP has been obligated to wheel power for  municipalities  and cooperatives
in its territory since 1976.

         Further  competition may be introduced by state action, as has occurred
in Illinois,  or by federal  regulatory  action,  although the Energy Policy Act
currently  precludes the FERC from mandating  retail  wheeling.  Retail wheeling
involves the transport of electricity to end-use customers.  It is a significant
departure from traditional regulation in which public utilities have a universal
obligation to serve the public in return for protected  service  territories and
regulated  pricing designed to allow a reasonable  return on prudent  investment
and recovery of operating costs.

         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  on 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.

                                       8
<PAGE>

         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 will be free to choose their electric generation suppliers ("direct
access") starting October 1999. Direct access for the remaining  non-residential
customers  will occur in two phases:  customers  representing  one-third  of the
remaining  load in the  non-residential  class in  October  1999  and  customers
representing  the entire  remaining  non-residential  load on December 31, 2000.
Direct  access will be available to all  residential  customers in May 2002.  IP
remains obligated to serve all customers who continue to take service from IP at
tariff  rates and  remains  obligated  to  provide  delivery  service  to all at
regulated  rates.  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 the 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  management to continue cost  reduction  efforts and generate
     new sources of revenue;

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

3)   Utilities are permitted to seek rate relief in the event that the change in
     law leads to their return on equity falling below a specified minimum based
     on a prescribed test. Utilities are also subject to an "over-earnings" test
     which requires them, in effect, to share with customers  earnings in excess
     of specified levels.  See "Note 5 - Commitments and Contingencies" on pages
     156 to 164 of the 1998 Annual Report to  Shareholders  in the appendix to
     the Illinova Proxy Statement which is incorporated herein by reference.

     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 service territory.  The impact on
net income will depend on, among other things, the amount of revenues earned and
the cost of doing business.

         Competition  creates both risks and  opportunities.  At this time,  the
ultimate effect of competition on Illinova's consolidated financial position and
results of operations is uncertain.

                                       9
<PAGE>

Customer and Revenue Data
-------------------------

         In  1998,  approximately  73  percent  and  12  percent  of  Illinova's
operating  revenues were derived from IP's sale of electricity and IP's sale and
transportation  of  natural  gas,  respectively.  Approximately  15  percent  of
Illinova's operating revenues came from its diversified enterprises in 1998. The
territory  served by IP comprises  substantial  areas in  northern,  central and
southern  Illinois,  including nine cities with populations  greater than 30,000
and twenty  cities with a population of over 10,000 (1996 U.S.  Census  Bureau's
Estimated  Populations).  IP supplies electric service at retail to an estimated
aggregate population of 1,278,000 in 311 incorporated  municipalities,  adjacent
suburban and rural areas,  and numerous  unincorporated  communities  and retail
natural gas service to an estimated  population  of 962,000 in 266  incorporated
municipalities  and  adjacent  areas.  IP  holds  franchises  in all of the  311
incorporated municipalities in which it furnishes retail electric service and in
all of the 266  incorporated  municipalities  in which it  furnishes  retail gas
service. At March 1, 1999, IP served 580,628 active electric customers (billable
meters) and 408,632 active gas customers (billable meters). These numbers do not
include  non-metered  customers such as street lights.  Sales of electricity and
gas sales and  transportation  are affected by seasonal weather  patterns,  and,
therefore,   operating  revenues  and  associated  operating  expenses  are  not
distributed evenly during the year.

         For more  information,  see "Note 14 - Segments of  Business"  on pages
177 through 183 of the 1998 Annual Report to  Shareholders  in the appendix to
the Illinova Proxy Statement which is incorporated herein by reference.


                                IP Electric Business
                                --------------------

Overview
--------

         IP supplies  electric service at retail to residential,  commercial and
industrial consumers in substantial  portions of northern,  central and southern
Illinois.  Electric  service at wholesale is supplied to numerous  utilities and
power marketing  entities,  as well as to the Illinois Municipal Electric Agency
(IMEA) as agent for 11  municipalities  and to Soyland Power  Cooperative,  Inc.
(Soyland)  for resale to its member  cooperatives.  For  additional  information
related to Soyland,  see "Note 7 -  Facilities  Agreements"  on page 165 of the
1998  Annual  Report to  Shareholders  in the  appendix  to the  Illinova  Proxy
Statement  which is  incorporated  herein by  reference.  In 1998,  IP  provided
interchange power to 81 entities, including 69 power marketers.

         IP's highest  system peak hourly demand (native load) in 1998 was
 3,694,000 kilowatts on July 21, 1998. This establishes a new IP record for peak
 load.

         IP owns and  operates  generating  facilities  with a total net  summer
capability of 4,571,250  kilowatts.  The  generating  capability  comes from six
major steam  generating  plants and three  peaking  service  combustion  turbine
plants. See Item 2, "Properties" for further information.

         IP is a  participant,  together  with Ameren - Union  Electric  Company
(AmerenUE) and Ameren - Central Illinois Public Service Company (AmerenCIPS), in
the  Illinois-Missouri  Power Pool which was formed in 1952.  The Pool  operates
under an  interconnection  agreement which provides for the  interconnection  of


                                       10
<PAGE>

transmission  lines.  This  agreement has no expiration  date, but any party may
withdraw from the agreement by giving 36 months notice to the other parties.

         IP has  agreements  with all  major  wholesale  marketing  and  trading
entities  operating in the Midwest.  These  agreements are used for the purchase
and sale of energy in the wholesale market.

         IP,  AmerenCIPS and AmerenUE have a contract with the Tennessee  Valley
Authority (TVA) providing for the  interconnection  of the TVA system with those
of the three  companies to exchange  economy and  emergency  power and for other
working  arrangements.  This contract has no expiration  date, but any party may
withdraw  from the  agreement by giving five years  written  notice to the other
parties.

         IP also  has  interconnections  with  Indiana-Michigan  Power  Company,
Commonwealth Edison Company, Central Illinois Light Company, Mid-American Energy
Corporation,  Louisville Gas & Electric,  Southern  Illinois Power  Cooperative,
Electric Energy Inc. (EEI),  Soyland, the City of Springfield,  Illinois and the
TVA.

         IP is a member of the Mid-America  Interconnected  Network,  one of ten
regional  reliability councils established to coordinate plans and operations of
member companies regionally and nationally.

         In   January   1998,    IP,   in    conjunction    with   eight   other
transmission-owning  entities,  filed with FERC for all  approvals  necessary to
create and implement the Midwest Independent  Transmission System Operator, Inc.
(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 the FERC's Transmission Open Access Notice of Proposed Rulemaking,
Order No. 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  stated  a goal to  begin  limited  operation  in 1999 and to be fully
operational in 2000.

     In 1996,  IP  transferred,  through a dividend,  its 20%  ownership  of the
capital stock of EEI to Illinova.  Illinova's interest was transferred to IGC in
1996. EEI was organized to own and operate a steam electric  generating  station
and related  transmission  facilities  near Joppa,  Illinois to supply  electric
energy to the U.S.  Department  of Energy  (DOE) for its project  near  Paducah,
Kentucky.

Soyland Power Cooperative, Inc.
-------------------------------

         For  discussion  of the  transfer to IP of  Soyland's  share of Clinton
Power Station  (Clinton) and the amended Power  Coordination  Agreement  between
Soyland and IP, see "Note 7 -  Facilities  Agreements"  on page 165 of the 1998
Annual Report to  Shareholders  in the appendix to the Illinova Proxy  Statement
which is incorporated herein by reference.



                                       11
<PAGE>
Clinton Power Station
---------------------

     General
     -------

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

         Clinton was placed in service in 1987 and represents  approximately 20%
of IP's installed generation capacity. For more information on the Clinton Power
Station,  see "Note 4 - Clinton  Power  Station" on page 155 of the 1998 Annual
Report to  Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference.

         Due to uncertainties of deregulated  generation pricing in Illinois and
due to various operation and management  factors,  Illinova's and IP's Boards of
Directors voted in December 1998 to sell or close Clinton. The 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 $1,523.7  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 of
the  decommissioning  liability,  terms  of any  purchase  agreement  for  power
generated by Clinton,  including  the length of any  agreement  and the price of
electricity in any agreement,  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"  on pages
148 through 153 of the 1998 Annual Report to  Shareholders  in the appendix to
the Illinova Proxy Statement which is incorporated herein by reference.


     Decommissioning Costs
     ---------------------

         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


                                       12
<PAGE>

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.

         On December 9, 1998,  Illinova's  and IP's Boards of Directors  decided
that IP would exit the nuclear business. The ultimate disposition of Clinton, as
well as the decommissioning  method chosen,  could have a material impact on the
total  decommissioning  liability.  For more information on the  decommissioning
costs related to Clinton,  see  "Decommissioning  and Nuclear Fuel  Disposal" in
"Note 5 - Commitments and  Contingencies" on page 156 of the 1998 Annual Report
to  Shareholders  in the  appendix  to the  Illinova  Proxy  Statement  which is
incorporated herein by reference.

Fuel Supply
-----------

         Coal was used to generate approximately 97% of the electricity produced
by IP during 1998, with other fuels generating the remaining 3%. For 1999, after
Clinton  returns to service,  the  percentages  of  generation  attributable  to
nuclear fuel is projected to increase while projected  generation from coal will
decline. As explained in "Note 2 - Clinton Impairment and  Quasi-Reorganization"
on pages 148  through  153 of the 1998 Annual  Report to  Shareholders  in the
appendix  to the  Illinova  Proxy  Statement,  which is  incorporated  herein by
reference,  Illinova's  and IP's  Boards  of  Directors  voted  to exit  nuclear
operations. See this note for further information.

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

         For additional information,  see the information under the sub-captions
"Revenue  and  Energy  Cost"  of "Note 1 -  Summary  of  Significant  Accounting
Policies" on pages 145 and 146 and "Fuel Cost Recovery" of "Note 5 Commitments
and Contingencies" on page 157 of the 1998 Annual Report to Shareholders in the
appendix  to the  Illinova  Proxy  Statement  which is  incorporated  herein  by
reference.

COAL - Coal is expected to be the primary source of fuel for future  generation.
Through both long-term and short-term contracts, IP has obtained commitments for
a major portion of its future coal  requirements.  IP announced in November 1998


                                       13
<PAGE>

that it will  comply with Phase II of the Clean Air Act  Amendments  that become
effective January 1, 2000, by switching to low sulfur Powder River Basin coal at
its Baldwin and Hennepin Power Stations. IP will continue to comply during 1999,
the final year of Phase I of the Clean Air Act,  with  Illinois high sulfur coal
and emission allowances.  IP renegotiated one contract in 1998 that will provide
Powder River Basin coal through 2010. IP also has short-term  contracts with two
suppliers which last through 2000 and a third contract which lasts through 2002.

         Spot purchases of coal in 1998  represented  less than 5% of IP's total
coal purchases. Given the above-mentioned  commitments, IP believes that it will
be able to obtain  sufficient coal to meet its future  generating  requirements.
However, IP is unable to predict the extent to which coal availability and price
may  fluctuate  in the future.  Coal  inventories  on hand at December 31, 1998,
represented  a 43-day supply based on IP's average  daily burn  projections  for
1999.

NUCLEAR  - IP leases  nuclear  fuel  from  Illinois  Power  Fuel  Company  (Fuel
Company). The Fuel Company, which is 50% owned by IP, was formed in 1981 for the
purpose of leasing  nuclear fuel to IP for Clinton.  Lease payments are equal to
the Fuel Company's  cost of fuel as consumed  (including  related  financing and
administrative  costs). IP is obligated to make  subordinated  loans to the Fuel
Company  at any  time the  obligations  of the Fuel  Company  which  are due and
payable exceed the funds available to the Fuel Company. At December 31, 1998, IP
had outstanding loans to the Fuel Company of approximately  $1.96 million.  This
amount was repaid in January  1999.  Lease terms  stipulate  that,  in the event
Clinton is out of service for 24 consecutive months, IP is obligated to purchase
Clinton's  in-core  nuclear fuel from the Fuel Company.  In accordance with this
provision,  IP purchased  $62.1 million of fuel in the first quarter of 1999. IP
has an obligation  for nuclear fuel disposal  costs of leased  nuclear fuel. For
additional information relating to the nuclear fuel lease, see "Note 9 - Capital
Leases" on page 1699 of the 1998 Annual Report to  Shareholders  in the appendix
to the Illinova Proxy Statement which is  incorporated  herein by reference.  At
December 31, 1998, IP's net investment in nuclear fuel was $20.4 million.

     IP has one long-term  contract for the supply of uranium  concentrates with
Cameco, a Canadian corporation.  The Cameco contract was renegotiated in 1994 to
lower the price and provide 55% to 65% of Clinton's  estimated fuel requirements
approximately  through 2000.  The decision to utilize  Cameco for the additional
10% of Clinton's  fuel  requirements  is made the year before each  delivery and
depends on the estimated price and availability  from the spot market versus the
estimated  contract  price.  The contract with Cameco is stated in terms of U.S.
dollars.  It is expected  that this  contract  will be  terminated  in 1999 as a
result of the decision to exit Clinton operations. Accordingly, termination fees
were accrued at December 31, 1998.

         Conversion  services  for the  period  1991-2005  are  contracted  with
Sequoyah Fuels.  Sequoyah Fuels closed its Oklahoma conversion plant in 1992 and
joined with Allied Chemical Company to form a marketing  company named CoverDyn.
All  conversion  services  will be  performed at Allied's  Metropolis,  Illinois
facility,  but Sequoyah  Fuels retains the contract with IP. It is expected that
this  contract  will be  terminated  in 1999 as a result of the decision to exit
Clinton operations.  Accordingly,  termination fees were accrued at December 31,
1998.

         IP has a utility services contract for uranium enrichment  requirements
with the DOE  which  provides  70% of the  enrichment  requirements  of  Clinton
through  1999.  The remaining  30% has been  contracted  with the DOE through an
amendment to its incentive  pricing plan through 1999. This amendment  allows IP


                                       14
<PAGE>

to either  purchase  the  enrichment  services at the DOE's  incentive  price or
provide  electricity at DOE's Paducah,  Kentucky  enrichment  plant at an agreed
exchange rate.

         A contract with General  Electric  Company  provides  fuel  fabrication
requirements for the initial core and 11 reloads, or approximately through 2011.
The contract was renegotiated in 1998 to lower the price and reduce the duration
from  approximately  19  reloads.  It is  expected  that this  contract  will be
terminated  in 1999 as a result  of the  decision  to exit  Clinton  operations.
Accordingly, termination fees were accrued at December 31, 1998.

         Under the Nuclear Waste Policy Act (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  (D.C.)  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.

         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.

         Under the Energy Policy Act of 1992, IP is responsible for a portion of
the  cost  to  decontaminate  and  decommission  the  DOE's  uranium  enrichment
facilities. Each utility is assessed an annual fee for a period of fifteen years
based on quantities  purchased from the DOE  facilities  prior to passage of the
Act.  At  December  31,  1998,  IP has a  remaining  liability  of $5.9  million
representing  future  assessments.  IP  had  been  recovering  these  costs,  as
amortized,  through its UFAC  subject to UFAC  limitations  discussed  under the
heading "Fuel Supply" previously in this item.

OIL and GAS - IP used  natural gas and oil to generate  1.8% of the  electricity
produced  in 1998.  IP has not  experienced  difficulty  in  obtaining  adequate
supplies  of these  resources.  However,  IP is unable to predict  the extent to
which oil and gas availability and price may fluctuate in the future.

                                       15
<PAGE>

         Reference is made to the section "Environmental  Matters" hereunder for
information regarding pollution control matters relating to IP's fuel supply.

Construction Program
--------------------

         To  meet  anticipated  needs,  Illinova  and IP  have  used  internally
generated  funds and  external  financings.  The timing  and amount of  external
financings  depend primarily on economic and financial market  conditions,  cash
needs and capitalization ratio objectives.

         For more information on Illinova's  construction program and liquidity,
see "Note 5 -  Commitments  and  Contingencies"  on page 156 of the 1998 Annual
Report to  Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated  herein  by  reference;  "Note 6 - Lines of Credit  and  Short-Term
Loans" on page 164 of the 1998 Annual Report to Shareholders in the appendix to
the Illinova Proxy  Statement  which is  incorporated  herein by reference;  and
"Liquidity and Capital  Resources" in "Management's  Discussion and Analysis" on
pages  126  through  131 of the 1998  Annual  Report  to  Shareholders  in the
appendix  to the  Illinova  Proxy  Statement  which is  incorporated  herein  by
reference.

         For more information on IP's  construction  program and liquidity,  see
"Note 4 -  Commitments  and  Contingencies"  on pages  253 and 261 of the 1998
Annual Report to Shareholders in the appendix to the Illinois Power  Information
Statement which is incorporated  herein by reference;  "Note 5 - Lines of Credit
and Short-Term  Loans" on page 261 of the 1998 Annual Report to Shareholders in
the appendix to the Illinois Power  Information  Statement which is incorporated
herein by reference;  and  "Liquidity  and Capital  Resources" in  "Management's
Discussion and Analysis" on pages 226 through 231 of the 1998 Annual Report to
Shareholders in the appendix to the Illinois Power  Information  Statement which
is incorporated herein by reference.

Accounting Matters
------------------

Prior to the enactment of P.A. 90-561,  IP prepared its  consolidated  financial
statements in accordance with Statement of Financial  Accounting Standards (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  assets on their  balance  sheets  representing  costs  they  expect to
recover from customers,  through  inclusion of such costs in their future rates.
In July  1997,  the  Emerging  Issues  Task  Force of the  Financial  Accounting
Standards Board (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 as of December 1997. IP evaluated its regulatory  assets and liabilities
associated  with its generation  segment and  determined  that recovery of these
costs was not probable  through rates charged to transmission  and  distribution
customers, the regulated portion of the business.

         In December 1997, IP wrote off generation-related regulatory assets and
liabilities  of  approximately  $195  million (net of income  taxes).  These net


                                       16
<PAGE>

assets  related  to  previously  incurred  costs  that had been  expected  to be
collected through future revenues,  including deferred Clinton post construction
costs, unamortized gains and losses on reacquired debt, recoverable income taxes
and other  generation-related  regulatory assets. At December 31, 1998, IP's net
investment in non-nuclear generation facilities was $2.9 billion.

         As discussed above,  Illinova's and IP's Boards of Directors decided to
exit the nuclear portion of the business, by either sale or shutdown of Clinton.
FAS 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets  to be  Disposed  of,"  requires  that all  long-lived  assets  for which
management  has  committed  to a plan of  disposal  be  reported at the lower of
carrying amount or fair value less cost to sell. Consequently,  IP wrote off the
value of Clinton and accrued  Clinton-related  exit costs,  which resulted in an
accumulated deficit in Illinova's retained earnings of $1,616.0 million.

         Illinova's and IP's Boards of Directors also approved in December 1998,
quasi-reorganization   accounting   for   Illinova  and  IP.  The  SEC  provided
concurrence with this accounting in November 1998. 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 balance in the retained
earnings  account is then  eliminated by a transfer from other 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"  on pages 148 through  153 of the 1998 Annual  Report to
Shareholders   in  the  appendix  to  the  Illinova  Proxy  Statement  which  is
incorporated herein by reference.


                             IP Gas Business
                             ---------------

         IP  supplies  retail  natural  gas  service to an  estimated  aggregate
population  of 962,000 in 266  incorporated  municipalities,  adjacent  suburban
areas and numerous unincorporated communities. IP does not sell gas for resale.

         IP's rate schedules  contain  provisions for passing through to its gas
customers  increases or decreases in the cost of purchased gas. For  information
on revenue and energy costs,  see the  sub-caption  "Revenue and Energy Cost" of
"Note 1 - Summary of Significant  Accounting Policies" on pages 145 and 146 of
the 1998 Annual  Report to  Shareholders  in the appendix to the Illinova  Proxy
Statement that is incorporated herein by reference.

         IP has eight  underground gas storage fields having a total capacity of
approximately  15.2 million  MMBtu and a total  deliverability  on a peak day of
about  347,000  MMBtu.  In  addition to the  capacity  of the eight  underground
storage  fields,  IP has  contracts  with  various  natural  gas  suppliers  and
producers  for 9.9 million  MMBtu of  underground  storage  capacity and a total
deliverability on a peak day of 160,000 MMBtu.  Operation of underground storage
permits IP to increase  deliverability to its customers during peak load periods
by taking gas into storage during the off-peak months.

         IP owns one active  liquefied  petroleum  gas plant having an aggregate
peak-day  deliverability  of about 20,000 MMBtu for peak-shaving  purposes.  Gas
properties include approximately 8,000 miles of mains.

                                       17
<PAGE>

         IP  experienced  its 1998 peak-day send out of 572,067 MMBtu of natural
gas on December 30, 1998.  This compares  with IP's record  peak-day send out of
857,324 MMBtu of natural gas on January 10, 1982.

Gas Supply
----------

         IP has  contracts  with  six  interstate  pipeline  companies  for firm
transportation  and storage  services.  These contracts have varying  expiration
dates  ranging  from  1999  to  2004.  IP also  enters  into  contracts  for the
acquisition of natural gas supply. Those contracts range in duration from one to
five months.


                         Diversified Business Activities
                         -------------------------------

         IGC, a  wholly-owned  subsidiary of Illinova,  invests in energy supply
projects  throughout the world.  IGC is an equity partner with Tenaska,  Inc. in
four  natural  gas-fired  generation  plants,  of which  three  plants  totaling
approximately  700 megawatts (MW) are in operation and one 830 MW plant is under
construction. Tenaska, Inc. is an Omaha, Nebraska-based developer of independent
power projects  throughout  the United States.  IGC also owns 100 percent of the
North American  Energy Services  Company (NAES).  NAES supplies a broad range of
operations, maintenance and support services to the world-wide independent power
generation  industry and operates the Tenaska generation plants in which IGC has
an equity interest.  IGC is an equity partner in the Indeck North American Power
Fund (Fund).  The Fund has generation  projects in Long Beach,  California,  and
Pepperell,  Massachusetts.  In  addition to these  ventures,  IGC is involved in
generation  projects in Teesside,  England;  Puerto Cortez,  Honduras;  Zhejiang
Province  and  Hunan  Province,  People's  Republic  of China;  Aguaytia,  Peru;
Tilaran,  Costa  Rica;  Old  Harbour,  Jamaica;   Barranquilla,   Columbia;  and
Balochistan,  Pakistan. In August 1996, Illinois Power's interest in the 1000 MW
coal-fired plant in Joppa, Illinois was transferred to IGC.

         IEP is Illinova's wholly-owned subsidiary that engages in the brokering
and  marketing  of  electric  power  and gas,  and the  development  and sale of
energy-related products and services to the unregulated energy market throughout
the United States and Canada.  In May 1995, IEP obtained  approval from the FERC
to conduct business as a marketer of electric power and gas to various customers
outside of IP's present service  territory.  In September 1995, IEP began buying
and selling  wholesale  electricity in the Western  United  States.  IEP owns 50
percent  of Tenaska  Marketing  Ventures  (TMV).  TMV  focuses  on  natural  gas
marketing  in the  Midwestern  United  States.  IEP and TMV have formed  Tenaska
Marketing Canada to market natural gas in Canada. In July 1996, IP received FERC
approval to sell  electricity  to IEP without  prior  transaction  approval from
FERC.  In  October  1998,  IEP  acquired  a 51%  ownership  interest  in EMC Gas
Transmission  Company,  a retail gas marketer in Michigan.  IEP consolidates the
accounts of EMC Gas Transmission Company.

         For more  information on the  activities of the Illinova's  diversified
enterprises,  see  "Note 3 -  Illinova  Subsidiaries"  on page  153 of the 1998
Annual Report to  Shareholders  in the appendix to the Illinova Proxy  Statement
which is incorporated herein by reference.



                                       18
<PAGE>


                             Environmental Matters
                             ---------------------

         IP is subject to regulation by certain federal and Illinois authorities
with respect to  environmental  matters and may in the future become  subject to
additional  regulation by such authorities or by other federal,  state and local
governmental bodies.  Existing regulations  affecting IP are principally related
to air and water quality, hazardous wastes and toxic substances.

Air Quality
-----------

         Pursuant  to the  Federal  Clean  Air  Act  (Act),  the  United  States
Environmental  Protection  Agency  (USEPA) has  established  ambient air quality
standards for air pollutants  which, in its judgment,  have an adverse effect on
public  health  or  welfare.  The Act  requires  each  state to  adopt  laws and
regulations,  subject to USEPA  approval,  designed to achieve  such  standards.
Pursuant to the Illinois  Environmental  Protection Act, the Illinois  Pollution
Control  Board  (Board)  adopted  and,  along  with the  Illinois  Environmental
Protection  Agency  (IEPA),  is enforcing a  comprehensive  set of air pollution
control  regulations  which  include  emission  limitations,  permit  issuances,
monitoring and reporting requirements.

         The air  pollution  regulations  of the  Board  impose  limitations  on
emissions of particulate,  sulfur dioxide, carbon monoxide,  nitrogen oxides and
various other pollutants. Enforcement of emission limitations is accomplished in
part through the regulatory  permitting  process.  IP's practice is to obtain an
operating  permit for each source of regulated  emissions.  Presently,  it has a
total of  approximately  100 permits for emission  sources at its power stations
and other  facilities,  expiring  at various  times.  In  addition to having the
requisite operating permits, each source of regulated emissions must be operated
within the regulatory limitations on emissions.  Verification of such compliance
is usually accomplished by reports to regulatory  authorities and inspections by
such authorities.

         In  accordance  with the  requirements  of the  Illinois  Clean Air Act
Permit Program (CAAPP), IP submitted new air permit applications for each of its
generating  facilities in 1995. The IEPA will review these  applications  and is
expected to issue CAAPP permits in 1999.

         In addition to the sulfur  dioxide  emission  limitations  for existing
facilities,  both  the  USEPA  and the  State of  Illinois  adopted  New  Source
Performance  Standards (NSPS) applicable to coal-fired generating units limiting
emissions  to 1.2 pounds of sulfur  dioxide per million Btu of heat input.  This
standard is applicable to IP's Unit 6 at the Havana Power  Station.  The federal
NSPS also limit nitrogen oxides,  opacity and particulate  emissions and imposes
certain monitoring requirements. In 1977 and 1990, the Act was amended and, as a
result,  USEPA has adopted more  stringent  emission  standards for new sources.
These standards would apply to any new plant constructed by IP.

Clean Air Act
-------------

         For information on the impacts of the Clean Air Act Amendments of 1990,
see "Environmental Matters" in "Note 5 - Commitments and Contingencies" on pages
162 and 163 of the 1998 Annual Report to  Shareholders  in the appendix to the
Illinova Proxy Statement which is incorporated herein by reference.



                                       19
<PAGE>

Global Warming
--------------

         For  information on the impacts of the  international  negotiations  to
reduce  greenhouse  gas emissions  and the Kyoto  Protocol,  see  "Environmental
Matters" in "Note 5 - Commitments  and  Contingencies"  on page 162 of the 1998
Annual Report to  Shareholders  in the appendix to the Illinova Proxy  Statement
which is incorporated herein by reference.

Manufactured-Gas Plant Sites
----------------------------

         IP's estimated liability for MGP site remediation is $61 million.  This
amount  represents IP's current best estimate of the costs that 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  presently  determine  its
ultimate liability for remediation of the sites.

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

Water Quality
-------------

         The Federal Water Pollution Control Act Amendments of 1972 require that
National Pollutant Discharge Elimination System (NPDES) permits be obtained from
USEPA (or, when delegated, from individual state pollution control agencies) for
any discharge into  navigable  waters.  Such  discharges are required to conform
with the  standards,  including  thermal,  established  by USEPA  and also  with
applicable state standards.

         Enforcement of discharge  limitations is  accomplished  in part through
the regulatory  permitting  process similar to that described  previously  under
"Air Quality." Presently,  IP has approximately two dozen permits for discharges
at its power stations and other facilities, which must be periodically renewed.

         In  addition  to  obtaining  such  permits,  each  source of  regulated
discharges  must be operated  within the  limitations  prescribed  by applicable
regulations.   Verification  of  such  compliance  is  usually  accomplished  by
monitoring  results  reported to regulatory  authorities and inspections by such
authorities.

         The  Clinton  permit was  reissued  in the third  quarter of 1995.  The
Havana  Power  Station  permit was  reissued in the first  quarter of 1996.  The
Hennepin  Power Station permit  application  for reissuance was submitted in the
fourth  quarter of 1996.  The permit is not  expected  until the third or fourth
quarter of 1999.  The Vermilion  Power Station permit was reissued in the fourth
quarter of 1996.  The Wood River Power Station  permit was reissued in the first
quarter of 1996.  The Baldwin  Power  Station  permit was  reissued in the first
quarter of 1998.


                                       20
<PAGE>

Other Issues
------------

         Hazardous and  non-hazardous  wastes generated by IP must be managed in
accordance  with  federal  regulations  under the Toxic  Substances  Control Act
(TSCA), the Comprehensive Environmental Response, Compensation and Liability Act
and the  Resource  Conservation  and Recovery  Act (RCRA) and  additional  state
regulations  promulgated under both RCRA and state law. Regulations  promulgated
in 1988  under RCRA  govern  IP's use of  underground  storage  tanks.  The use,
storage,  and  disposal of certain  toxic  substances,  such as  polychlorinated
biphenyls  (PCBs)  in  electrical  equipment,  are  regulated  under  the  TSCA.
Hazardous substances used by IP are subject to reporting  requirements under the
Emergency  Planning and  Community-Right-To-Know  Act. The State of Illinois has
been delegated authority for enforcement of these regulations under the Illinois
Environmental  Protection  Act and state  statutes.  These  requirements  impose
certain monitoring, recordkeeping,  reporting and operational requirements which
IP has  implemented  or is  implementing  to  assure  compliance.  IP  does  not
anticipate that compliance will have a material  adverse impact on its financial
position or results of operations.

Electric and Magnetic Fields
----------------------------

         For  information  on Electric and Magnetic  Fields,  see  "Electric and
Magnetic Fields" in "Note 5 Commitments and  Contingencies"  on page 163 of the
1998  Annual  Report to  Shareholders  in the  appendix  to the  Illinova  Proxy
Statement which is incorporated herein by reference.

Environmental Expenditures
--------------------------

         Operating  expenses  for  environmentally-related  activities  were $53
million in 1998  (including the incremental  costs of alternative  fuels to meet
environmental requirements).  IP's net capital expenditures (including AFUDC and
capitalized  interest) for environmental  protection programs were approximately
$28.4  million in 1998.  Accumulated  net capital  expenditures  since 1969 have
reached approximately $822 million.


                           Year 2000 Data Processing
                           -------------------------

         For  information  on Year 2000  Data  Processing,  see  "Year  2000" in
"Management's  Discussion  and  Analysis"  on pages 114  through 119 of the 1998
Annual Report to  Shareholders  in the appendix to the Illinova Proxy  Statement
which is incorporated herein by reference.

                            Research and Development
                            ------------------------

         Illinova's   research  and  development   expenditures  for  1998  were
comprised  entirely of IP expenditures of approximately  $5.1 million.  In 1997,
Illinova's research and development expenditures were approximately $5.4 million
for IP and $2.0  million  for  Illinova.  Illinova's  research  and  development
expenditures for 1996 consisted entirely of IP expenditures of $5.4 million.



                                       21
<PAGE>

                                  Regulation
                                  ----------

         The Illinois Public Utilities Act was significantly modified in 1997 by
P.A.  90-561,  but the ICC  continues  to have broad powers of  supervision  and
regulation  with  respect  to the rates and  charges  of IP,  its  services  and
facilities,  extensions or abandonment of service,  classification  of accounts,
valuation and depreciation of property, issuance of securities and various other
matters.  Before a significant plant addition may be included in IP's rate base,
the ICC must determine that the addition is reasonable in cost, prudent and used
and useful in  providing  utility  service to  customers.  IP must  continue  to
provide  bundled retail  electric  service to all who choose to continue to take
service at tariff rates,  and IP must provide  unbundled  electric  distribution
services  to all  eligible  customers  as defined by P.A.  90-561 at rates to be
determined  by the ICC as early as September 1, 1999.  During 1998,  pursuant to
authority  granted in P.A.  90-561,  the ICC issued  rules  associated  with (i)
transactions  between the utility and its affiliates;  (ii) service reliability;
(iii)  environmental  disclosure;  and (iv) alternative retail electric supplier
certification criteria and procedures.  During 1999, it is expected that the ICC
will rule on (i) the rates and terms  associated  with the provision of delivery
services for commercial and industrial customers;  (ii) establishing the neutral
fact finder price utilized in (a) calculating  competitive  transition costs and
(b)  IP's  power  purchase  tariff;   (iii)  the  competitive   transition  cost
methodology;  and (iv) guidelines  regarding standards of conduct and functional
separation.  Additionally, the ICC has initiated a proceeding to investigate the
further unbundling of the utility's delivery services and expects to rule on the
issue in early 1999.

         Illinova  and IP are  exempt  from  all the  provisions  of the  Public
Utility Holding Company Act of 1935 except Section 9(a)(2) thereof. That section
requires  approval of the  Securities and Exchange  Commission  prior to certain
acquisitions  of any  securities  of other  public  utility  companies or public
utility holding companies.

         IP is subject to regulation  under the Federal Power Act by the FERC as
to rates and charges in connection  with the  transmission of electric energy in
interstate  commerce  and the sale of such  energy at  wholesale  in  interstate
commerce,  the issuance of debt securities  maturing in not more than 12 months,
accounting and depreciation policies,  interaction with affiliates,  and certain
other  matters.  The FERC has  declared  IP exempt  from the Natural Gas Act and
related FERC orders, rules and regulations.

         IP is subject to the  jurisdiction  of the NRC with respect to Clinton.
NRC   regulations   control  the  granting  of  permits  and  licenses  for  the
construction  and operation of nuclear power  stations and subject such stations
to continuing review and regulation. Additionally, the NRC review and regulatory
process   covers   decommissioning,   radioactive   waste,   environmental   and
radiological aspects of such stations.

         IP is subject to the jurisdiction of the Illinois Department of Nuclear
Safety (IDNS) with respect to Clinton.  IDNS and the NRC entered a memorandum of
understanding which allows IDNS to review and regulate nuclear safety matters at
state  nuclear  facilities.  The  IDNS  review  and  regulatory  process  covers
radiation safety,  environmental safety, non-nuclear pressure vessels, emergency
preparedness and emergency response.

                              Important Information
                              ---------------------
         Certain of the statements contained in this report,  including those in
Management's  Discussion  and Analysis are  forward-looking.  Other  statements,


                                       22
<PAGE>

particularly those using words like "expect," "intend,"  "predict,"  "estimate,"
and "believe," also are forward-looking.  Although Illinova and IP believe these
statements  are accurate,  its  businesses  are dependent on various  regulatory
issues,  general  economic  conditions and future trends,  and these factors can
cause actual results to differ  materially from the  forward-looking  statements
that have been made. In particular:

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

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

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

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

         3. Utilities are permitted to seek rate relief in the event the change
            in law leads to their ROE falling below a specified minimum based on
            a prescribed test.

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

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

         Clinton is a nuclear-fueled  generation facility.  Although IP believes
         that it  operates  this  facility  in  accordance  with all  regulatory
         guidelines and in a safe manner,  accidents can occur.  Liabilities and


                                       23
<PAGE>

         costs from such accidents could exceed insurance provisions established
         for the Company and have a significantly negative effect on IP.

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

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

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

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

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

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

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



                                       24
<PAGE>
                   Executive Officers of Illinova Corporation
                   ------------------------------------------

Name of Officer                 Age               Position

Charles E. Bayless               56       Chairman, President and Chief
                                          Executive Officer
Larry F. Altenbaumer             51       Chief Financial Officer, Treasurer
                                          and Controller
Alec G. Dreyer                   41       Senior Vice President
George W. Miraben                57       Senior Vice President and Chief
                                          Administrative Officer
Leah Manning Stetzner            50       General Counsel and Corporate
                                          Secretary

     Mr. Bayless  joined  Illinova as President and Chief  Executive  Officer in
July of 1998 and was elected chairman in August 1998. Prior to joining Illinova,
Mr.  Bayless was  Chairman,  President,  and Chief  Executive  Officer of Tucson
Electric Power Company.

     Mr.  Altenbaumer  was  elected  Chief  Financial  Officer,   Treasurer  and
Controller in June 1994.

     Mr. Dreyer was elected  Senior Vice  President in February 1999 in addition
to his position as President of IGC, a subsidiary of Illinova, which he has held
since  September 1995.  Prior to being elected  President of IGC, Mr. Dreyer was
Treasurer and  Controller of IP since  December 1994 and  Controller  since June
1992.

     Mr.  Miraben  joined  Illinova in January 1999 and was elected  Senior Vice
President in February 1999.  Prior to joining  Illinova,  Mr. Miraben was Senior
Vice President of UniSource  Energy  Corporation and Executive Vice President of
Tucson Electric Power Company, a subsidiary of UniSource.

     Ms. Stetzner was elected  General  Counsel and Corporate  Secretary in June
1994.

        The executive officers are elected annually by the Board of Directors at
the first  meeting of the Board held after the annual  meeting of  shareholders,
and hold office  until their  successors  are duly elected or until their death,
resignation or removal by the Board.

        For Illinova,  the information under the caption "Board of Directors" on
pages 3 through 7 of Illinova's  Proxy  Statement for its 1999 Annual Meeting of
Stockholders is incorporated herein by reference.

                                       25
<PAGE>
                  Executive Officers of Illinois Power Company
                  --------------------------------------------
Name of Officer                 Age                 Position

Charles E. Bayless               56       Chairman, President and Chief
                                          Executive Officer
Larry F. Altenbaumer             51       Senior Vice President and Chief
                                          Financial Officer
David W. Butts                   44       Senior Vice President
Alec G. Dreyer                   41       Senior Vice President
Paul L. Lang                     58       Senior Vice President
George W. Miraben                57       Senior Vice President and Chief
                                          Administrative Officer
Richard W. Eimer, Jr.            50       Vice President
Kim B. Leftwich                  51       Vice President
Robert D. Reynolds               42       Vice President
Robert A. Schultz                58       Vice President
Leah Manning Stetzner            50       Vice President, General Counsel
                                          and Corporate Secretary
Cynthia G. Steward               41       Controller
Eric B. Weekes                   47       Treasurer
John P. McElwain                 48       Chief Nuclear Officer


     Mr. Bayless joined IP as President and Chief Executive Officer in July 1998
and was elected Chairman in August 1998. Prior to joining Illinova,  Mr. Bayless
was Chairman,  President and Chief  Executive  Officer of Tucson  Electric Power
Company.

     Mr.  Altenbaumer  was elected  Senior Vice  President  and Chief  Financial
Officer  in June 1992.  Prior to being  elected  Senior  Vice  President  he was
previously Vice President, Chief Financial Officer, and Controller.

        Mr. Butts was elected Senior Vice President in February 1999 in addition
to his position as President of IEP, a subsidiary of Illinova, which he has held
since  February 1998.  Prior to being elected  President of IEP, Mr. Butts was a
Senior Vice  President at Illinois  Power  Company.  From  November 1993 through
August 1995, he was President of IGC, an Illinova subsidiary.

        Mr.  Dreyer was  elected  Senior  Vice  President  in  February  1999 in
addition to his position as President of IGC, a subsidiary of Illinova, which he
has held since September 1995. Prior to being elected President of IGC, Mr.
Dreyer was Treasurer and Controller of IP from December 1994.

     Mr. Lang was elected  Senior Vice  President in June 1992.  He joined IP as
Vice President in July 1986.

     Mr. Miraben joined IP in January 1999 and was elected Senior Vice President
and Chief  Administrative  Officer in  February  1999.  Prior to joining IP, Mr.
Miraben was Senior Vice President of UniSource Energy  Corporation and Executive
Vice President of Tucson Electric Power Company, a subsidiary of UniSource.

     Mr. Eimer was elected Vice President in December  1995. He previously  held
the positions of Assistant to the Vice President and Manager of Marketing.

     Mr.  Leftwich was elected Vice  President in February  1998.  He previously
held the  positions of Managing  Director - Customer  Management  Processes  and
Manager of Marketing.

                                       26
<PAGE>

     Mr. Reynolds was elected Vice President in May 1996.  Prior to his election
to Vice  President,  Mr.  Reynolds  served as Director of Pricing and Manager of
Electric Supply.

     Mr. Schultz was elected Vice President in February 1998. He previously held
the  positions of President of IEP,  President of Illinova  Power  Marketing and
Treasurer of IP.

     Ms.  Stetzner was elected Vice  President,  General  Counsel and  Corporate
Secretary  in February  1993.  She joined IP as General  Counsel  and  Corporate
Secretary in October 1989.

     Ms. Steward was elected  Controller in September  1995. She previously held
the positions of Manager of Employee Services and Director of Accounting.

     Mr. Weekes joined IP as Treasurer in January 1997. He previously  served as
Senior Financial Manager with a unit of Kraft Foods.

     Mr.  McElwain was contracted  from PECO Energy Company in  Philadelphia  in
December 1998 and  appointed  Chief  Nuclear  Officer in January 1999.  Prior to
joining IP, as a contractor  from PECO, Mr.  McElwain held the positions of Vice
President, Nuclear Projects and Director of Outage Management for PECO.

     The present term of office of each of the above executive  officers extends
to the first meeting of Illinova's and IP's Boards of Directors after the Annual
Election  of  Directors.  There  are no  family  relationships  among any of the
executive officers and directors of Illinova and IP.

     For IP, the  information  under the caption "Board of Directors" on pages 3
through  7 of  IP's  Information  Statement  for  its  1999  Annual  Meeting  of
Stockholders is incorporated herein by reference.


                              Operating Statistics
                             ---------------------

        For Illinova the information under the caption "Selected  Illinois Power
Company  Statistics" on page 190 of the 1998 Annual Report to  Shareholders  in
the  appendix  to  the  Illinova  Proxy  Statement  is  incorporated  herein  by
reference.

        For IP the  information  under  the  caption  "Selected  Illinois  Power
Company  Statistics" on page 284 of the 1998 Annual Report to  Shareholders  in
the  appendix  to  the  IP  Information  Statement  is  incorporated  herein  by
reference.

Item 2.   Properties
-------

        IP owns and operates six steam  generating  stations with  composite net
summer capacity of 4,421,000  kilowatts.  In addition,  IP owns nine quick start
combustion  turbine  peaking units at three locations with a combined net summer
capacity of 147,000 kilowatts.  All of IP's generating stations are in the State
of Illinois,  including IP's only nuclear generating  station,  Clinton. IP owns
50% of three combustion turbine units,  located in Bloomington,  Illinois,  with
combined net capacity of 5,250 kilowatts.  State Farm Insurance Company owns the
other 50% of these  units.  The total IP  available  net  summer  capability  is
4,571,250 kilowatts.

        The major coal-fired units at Baldwin, Havana,  Hennepin,  Vermilion and
Wood  River  make up  3,491,000  kilowatts  of summer  capacity.  Three  natural


                                       27
<PAGE>

gas-fired  units at Wood  River were  reactivated  in 1997.  These  units have a
combined  net summer  capacity of 139,000  kilowatts.  Five  oil-fired  units at
Havana were reactivated in 1998. These units have a combined net summer capacity
of 238,500 kilowatts.

        IP owns an interconnected  electric transmission system of approximately
2,800 circuit  miles,  operating from 69,000 to 345,000 volts and a distribution
system which  includes  about 36,000  circuit miles of overhead and  underground
lines.

        All outstanding  First Mortgage Bonds issued under the Mortgage and Deed
of  Trust  dated  November  1,  1943 are  secured  by a first  mortgage  lien on
substantially  all of the  fixed  property,  franchises  and  rights  of IP with
certain  exceptions  expressly  provided in the mortgage securing the bonds. All
outstanding  New Mortgage  Bonds  issued under the General  Mortgage and Deed of
Trust dated November 1, 1992, are secured by a lien on IP's  properties  used in
the generation, purchase, transmission, distribution and sale of electricity and
gas. In December of 1997, the Mortgage and Deed of Trust dated November 1, 1943,
was amended to  generally  conform  with the General  Mortgage and Deed of Trust
dated November 1, 1992, following a bondholder vote and approval of the IP Board
of Directors.

Item 3.   Legal Proceedings
-------

         See  discussion of legal  proceedings  in  "Manufactured-Gas  Plant" in
"Note 5 - Commitments and  Contingencies" on page a-36 of the 1998 Annual Report
to  Shareholders  in the  appendix  to the  Illinova  Proxy  Statement  which is
incorporated herein by reference.

        See  "Environmental  Matters"  reported  under Item 1 of this report for
information regarding legal proceedings concerning environmental matters.

        See "Fuel Supply"  reported under Item 1 of this report for  information
regarding legal proceedings concerning nuclear fuel disposal.

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

None.


                                       28
<PAGE>
                                       PART II
-------------------------------------------------------------------------------

Item 5.   Market for Registrants' Common Equity and Related
-------   Stockholder Matters

     For  Illinova,  the  information  is under the caption "Note 18 - Quarterly
Consolidated  Financial  Information  and Common Stock Data  (Unaudited)" of the
1998  Annual  Report to  Shareholders  in the  appendix  to the  Illinova  Proxy
Statement on page 190 of this report.

     For  IP  the  information  is  under  the  caption  "Note  17  -  Quarterly
Consolidated  Financial  Information  and Common Stock Data  (Unaudited)" of the
1998  Annual  Report  to  Shareholders  in the  appendix  to the IP  Information
Statement on page 286 of this report.

Item 6.   Selected Financial Data
-------

     For Illinova,  the information is under the caption "Selected  Consolidated
Financial Data" of the 1998 Annual Report to Shareholders in the appendix to the
Illinova Proxy Statement on page 192 of this report.

     For  IP  the  information  is  under  the  caption  "Selected  Consolidated
Financial Data" of the 1998 Annual Report to Shareholders in the appendix to the
IP Information Statement on page 287 of this report.

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

     For Illinova, the information is under the caption "Management's Discussion
and Analysis" of the 1998 Annual Report to  Shareholders  in the appendix to the
Illinova Proxy Statement on pages 110 through 136 of this report.

     For IP the  information is under the caption  "Management's  Discussion and
Analysis" of the 1998 Annual  Report to  Shareholders  in the appendix to the IP
Information Statement on pages 214 through 237 of this report.

     Item 7A.  Quantitative  and  Qualitative  Disclosures  About  Market  Risk.
-------- For  information on  Quantitative  and  Qualitative  Disclosures  About
Market Risk, see "Market Risk" in "Management's  Discussion and Analysis" of the
1998  Annual  Report to  Shareholders  in the  appendix  to the  Illinova  Proxy
Statement on pages 132 through 134 of this report..


Item 8.   Financial Statements and Supplementary Data
-------

     For Illinova,  the consolidated  financial statements and related notes and
Report of Independent  Accountants of the 1998 Annual Report to  Shareholders is
in the  appendix to the  Illinova  Proxy  Statement on pages 139 through 189 and
page 138 respectively,  of this report. With the exception of the aforementioned
information and the information incorporated in Items 1, 3, 5, 6 and 7, the 1998
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement is
not to be deemed filed as part of this Form 10-K/A Annual Report.

                                       29
<PAGE>

     For IP the consolidated  financial  statements and related notes and Report
of Independent  Accountants of the 1998 Annual Report to  Shareholders is in the
appendix to the IP  Information  Statement on pages 240 through 286 and page 239
respectively,   of  this  report.  With  the  exception  of  the  aforementioned
information and the information incorporated in Items 1, 3, 5, 6 and 7, the 1998
Annual Report to Shareholders in the appendix to the IP Information Statement is
not to be deemed filed as part of this form 10-K/A Annual Report.

Item 9.   Changes in and Disagreements With Accountants on
-------   Accounting and Financial Disclosure

     None.



                                       30
<PAGE>

                                       PART III
-------------------------------------------------------------------------------

Item 10.  Directors and Executive Officers of the Registrants
--------

        For Illinova,  the information  under the caption "Board of Directors"
on pages 89  through 93 of  Illinova's  Proxy  Statement  for its 1999 Annual
Meeting of Stockholders  is  incorporated herein by reference.  The information
relating to Illinova's executive officers is set forth in Part I of this Annual
Report on Form 10-K/A.

        For IP the information under the caption "Board of Directors" on pages
193 through  196 of  IP's  Information  Statement  for  its  1999 Annual Meeting
of Stockholders is incorporated  herein by reference.  The information  relating
to Illinois  Power  Company's  executive  officers  is set  forth in Part I of
this Annual Report on Form 10-K/A.

Item 11.  Executive Compensation
--------

         For   Illinova,   the   information   under  the   caption   "Executive
Compensation" on pages 94 through 105 of Illinova's Proxy Statement for its 1999
Annual Meeting of Stockholders is incorporated herein by reference.

         For IP the information  under the caption  "Executive  Compensation" on
pages 197 through 208 of IP's Information  Statement for its 1999 Annual Meeting
of Stockholders is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
--------

         For Illinova,  the information under the caption "Security Ownership of
Management and  Certain  Beneficial  Owners"  on  page  93 and  the  information
regarding  securities  owned by certain officers and directors under the caption
"Board of Directors" on pages 3 through 7 of Illinova's  Proxy Statement for its
1999 Annual Meeting of Stockholders is incorporated herein by reference.

         For IP  the  information  under  the  caption  "Security  Ownership  of
Management  and  Certain  Beneficial  Owners" on  page 196 and  the  information
regarding  securities  owned by certain officers and directors under the caption
"Board of Directors" on pages 89 through 196 of IP's Information Statement for
its 1999 Annual Meeting of Stockholders is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions
--------

         None.


                                       31
<PAGE>



                               PART IV
--------------------------------------------------------------------------------

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

     (a)  Documents filed as part of this report.
          (1a)  Financial Statements:
                                                         Page in 1998
                                                         Annual Report
                                                        to Shareholders
                                                        in the appendix
                                                        to the Illinova
                                                       Proxy Statement
                                                    Included in this Report
                                                    -----------------------
                Report of Independent Accountants                  137
                Consolidated Statements of Income for the
                   three years ended December 31, 1998,
                      1997, 1996                                   138
                Consolidated Balance Sheets at
                   December 31, 1998 and 1997                  139-140
                Consolidated Statements of Cash Flows for
                   the three years ended December 31, 1998,
                      1997, 1996                                   141
                Consolidated Statements of Retained
                   Earnings for the three years
                   ended December 31, 1998, 1997, 1996             142
                Notes to Consolidated Financial Statements   143 - 189


          (1b)  Financial Statements:
                                                         Page in 1998
                                                         Annual Report
                                                        to Shareholders
                                                        in the appendix
                                                           to the IP
                                                          Information
                                                           Statement
                                                       Included in this report
                                                       -----------------------
                Report of Independent Accountants                  235
                Consolidated Statements of Income for the
                   three years ended December 31, 1998,
                      1997, 1996                                   237
                Consolidated Balance Sheets at
                   December 31, 1998 and 1997                  238-239
                Consolidated Statements of Cash Flows for
                   the three years ended December 31, 1998,
                      1997, 1996                                   240
                Consolidated Statements of Retained
                   Earnings for the three years
                   ended December 31, 1998, 1997, 1996             241
                Notes to Consolidated Financial Statements   242 - 283



                                       32
<PAGE>

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

          (2)  Financial Statement Schedules:

   All Financial Statement Schedules are omitted because they are not applicable
or the  required  information  is shown  in the  financial  statements  or notes
thereto.

          (3)  Exhibits

The exhibits filed with this Form 10-K/A are listed in the Exhibit Index located
elsewhere   herein.   All  management   contracts  and  compensatory   plans  or
arrangements set forth in such list are marked with a ~.

     (b) Reports on Form 8-K since September 30, 1998:

            Report filed on Form 8-K on October 20, 1998
                 Other Events:  Illinova releases results of
                                third-quarter  earnings  and Board of  Directors
                                approval   of  common   stock   repurchase.   IP
                                announces  status of  progress  made to  restart
                                Clinton Power Station, new restart date, and new
                                estimation   of  costs  to  return   Clinton  to
                                operation.

            Report filed on Form 8-K on November 25, 1998
                 Other Events:  IP announces SEC acceptance of quasi-
                                reorganization accounting procedures if
                                the company decides to exit the nuclear
                                business.

            Report filed on Form 8-K on December 14, 1998
                 Other Events:  Illinova announces it will exit the
                                nuclear    business    and   proceed    with   a
                                quasi-reorganization  to  position  itself  as a
                                competitive leader in new energy markets.

            Report filed on Form 8-K on December 22, 1998
                 Other Events:  Illinois Power Special Purpose Trust
                                offers transitional funding trust notes
                                on Form S-3

                 Financial
                 Statements,
                 Pro Forma
                 Financial
                 Information
                 and Exhibits:  Exhibits



                                       33
<PAGE>



            Report filed on Form 8-K on January 13, 1999
                 Other Events:  Illinois Power Securitization Limited
                                Liability company files a corrected copy of Form
                                T-1,  Statement of  Eligibility  Under the Trust
                                Indenture Act of 1939.

                 Financial
                 Statements,
                 Pro Forma
                 Financial
                 Information
                 and Exhibits:  Exhibits

            Report filed on Form 8-K on February 12, 1999
                 Other Events:  Illinois Power announces potential
                                impact  of  quasi  on  financial  reorganization
                                entries  and  discusses  progress  in  restoring
                                Clinton to service  and status of the company in
                                exiting the nuclear business.

            Report filed on Form 8-K/A on February 28, 2000
                 Other Events:  Illinova releases 1998 earnings
                                and discusses impact of the Clinton
                                Power Station impairment and
                                quasi-reorganization


                                       34

<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                         ILLINOIS POWER COMPANY
                                              (REGISTRANT)



                                         By /s/Larry F. Altenbaumer
                                            Larry F. Altenbaumer
                                            President on behalf of
                                            Illinois Power Company

Date: February 28, 2000



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

Signature                              Title                            Date

/s/Charles E. Bayless               Chairman, President, Chief
Charles E. Bayless                  Executive Officer and Director
(Principal Executive Officer)

/s/Larry F. Altenbaumer             Senior Vice President and
Larry F. Altenbaumer                Chief Financial Officer
(Principal Financial Officer)

/s/Cynthia G. Steward               Controller
Cynthia G. Steward
(Principal Accounting Officer)

/s/J. Joe Adorjan
J. Joe Adorjan

/s/C. Steven McMillan
C. Steven McMillan

/s/Robert M. Powers
Robert M. Powers

/s/Sheli Z. Rosenberg
Sheli Z. Rosenberg                  Director                  February 28, 2000

/s/Walter D. Scott
Walter D. Scott

/s/Joe J. Stewart
Joe J. Stewart

/s/Ronald L. Thompson
Ronald L. Thompson

/s/Walter M. Vannoy
Walter M. Vannoy

/s/Marilou von Ferstel
Marilou von Ferstel

/s/John D. Zeglis
John D. Zeglis


                                       35
<PAGE>


                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                         ILLINOVA CORPORATION
                                             (REGISTRANT)

                                         By /s/ Larry F. Altenbaumer
                                                Larry F. Altenbaumer
                                                President on behalf of
                                                Illinova Corporation

                                                Date: February 28, 2000

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

Signature                              Title                            Date

/s/Charles E. Bayless               Chairman, President, Chief
Charles E. Bayless                  Executive Officer and Director
(Principal Executive Officer)

/s/Larry F. Altenbaumer             Chief Financial Officer,
Larry F. Altenbaumer                Treasurer and Controller
(Principal Financial
and Accounting Officer)

/s/J. Joe Adorjan
J. Joe Adorjan

/s/C. Steven McMillan
C. Steven McMillan

/s/Robert M. Powers
Robert M. Powers

/s/Sheli Z. Rosenberg
Sheli Z. Rosenberg

/s/Walter D. Scott
Walter D. Scott                     Director                 February 28, 2000

/s/Joe J. Stewart
Joe J. Stewart

/s/Ronald L. Thompson
Ronald L. Thompson

/s/Walter M. Vannoy
Walter M. Vannoy

/s/Marilou von Ferstel
Marilou von Ferstel

/s/John D. Zeglis
John D. Zeglis

                                       36
<PAGE>

                         Exhibit Index

Exhibit                          Description
-------                          -----------

(3)(i) Articles of Incorporation                                 Page
                                                                 ----
Illinova Corporation

(a)(1)   Articles of Amendment to the Articles of
         Incorporation of Illinova Corporation, filed as
         of October 31, 1994.  Filed as Exhibit 3(a) to
         the Quarterly Report on Form 10-Q under the
         Securities Exchange Act of 1934 for the quarter
         ended September 30, 1994 (File No. 1-11327).                *

(a)(2)   Statement of Correction to the Articles of
         Incorporation of Illinova Corporation, filed as
         of October 31, 1994.  Filed as Exhibit 3(b) to
         the Quarterly Report on Form 10-Q under the
         Securities Exchange Act of 1934 for the quarter
         ended September 30, 1994 (File No. 1-11327).                *

Illinois Power Company

(b)(1)   Amended and Restated Articles of Incorporation
         of Illinois Power Company, dated September 7, 1994.
         Filed as Exhibit 3(a) to the Current Report on
         Form 8-K dated September 7, 1994 (File No. 1-3004).         *

(3)(ii) By-Laws

(a)      By-laws of Illinova  Corporation,  as amended,
         April 8, 1998. Filed as Exhibit  3(a)(1) to the
         Annual Report on Form 10-K under the Securities
         and Exchange Act of 1934 for the year ended
         December 31, 1998.                                         47

(b)      By-laws of Illinova Corporation, as amended
         December 14, 1994. Filed as Exhibit  3(b)(2)
         to the Annual Report on Form 10-K under
         the Securities Exchange Act of 1934 for the
         year ended December 31, 1994 (File No. 1-11327).            *

(c)      By-laws of Illinois Power Company, as amended
         December 14, 1994.  Filed as Exhibit 3(b)(1)
         to the Annual Report on Form 10-K under
         the Securities Exchange Act of 1934 for the
         year ended December 31, 1994 (File No. 1-3004).             *

(4) Instruments Defining Rights of Security Holders,
    Including Indentures


                                       37
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------

Illinova Corporation

(a)(1)   See (4)(b) below for instruments defining the rights
         of holders of long-term debt of Illinois Power Company.

(a)(2)   Indenture dated February 1, 1997, between Illinova
         Corporation and The First National Bank of Chicago,
         as trustee. Filed as Exhibit (4)(a)(2) to the Annual
         Report on Form 10-K under the Securities Exchange Act
         of 1934 for the year ended December 31, 1996
         (File No. 1-11327).                                          *

(a)(3)   Distribution Agreement dated January 16, 1998, and
         Officers' Certificate and Issuer Order of Illinova
         Corporation, dated January 16, 1998 (with forms of
         Fixed Rate Note and Floating Rate Note attached),
         delivered pursuant to the terms of the Indenture
         dated as of February 1, 1997, between Illinova
         Corporation and The First National Bank of Chicago.
         Filed as Exhibit (1) and (4) of Form 8-K under the
         Securities Exchange Act of 1934 dated January 21,
         1998 (File No. 1-11327).                                    *

Illinois Power Company

(b)(1)   Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 2(b) Registration No. 2-14066.             *

(b)(2)   Supplemental Indenture dated July 1, 1991, providing
         for $84,710,000 principal amount of 7 3/8% First
         Mortgage Bonds due July 1, 2021.  Filed as Exhibit
         4(mm) to the Annual Report on Form 10-K under the
         Securities Exchange Act of 1934 for the year ended
         December 31, 1991 (File No. 1-3004).                        *

(b)(3)   Supplemental Indenture No. 1 dated June 1, 1992.
         Filed as Exhibit 4(nn) to the Quarterly Report
         on Form 10-Q for the quarter ended June 30, 1992
         (File No. 1-3004).                                          *

(b)(4)   Supplemental Indenture No. 2 dated June 1, 1992.
         Filed as Exhibit 4(oo) to the Quarterly Report
         on Form 10-Q for the quarter ended June 30, 1992
         (File No. 1-3004).                                          *

(b)(5)   Supplemental Indenture No. 1 dated July 1, 1992.
         Filed as Exhibit 4(pp) to the Quarterly Report
         on Form 10-Q for the quarter ended June 30, 1992
         (File No. 1-3004).                                          *

(b)(6)   Supplemental Indenture No. 2 dated July 1, 1992.
         Filed as Exhibit 4(qq) to the Quarterly Report
         on Form 10-Q for the quarter ended June 30, 1992
         (File No. 1-3004).                                          *

                                       38
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------

(b)(7)   Supplemental Indenture dated September 1, 1992,
         providing for $72,000,000 principal amount of 6 1/2%
         First Mortgage Bonds due September 1, 1999.  Filed
         as Exhibit 4(rr) to the Quarterly Report on Form
         10-Q for the quarter ended September 30, 1992
         (File No. 1-3004).                                          *

(b)(8)   General Mortgage Indenture and Deed of Trust dated
         as of November 1, 1992.  Filed as Exhibit 4(cc) to
         the Annual Report on Form 10-K under the Securities
         Exchange Act of 1934 for the year ended December
         31, 1992 (File No. 1-3004).                                 *

(b)(9)   Supplemental Indenture dated February 15, 1993, to
         Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(dd) to the Annual Report on Form
         10-K under the Securities Exchange Act of 1934 for
         the year ended December 31, 1992 (File No. 1-3004).         *

(b)(10)  Supplemental Indenture dated February 15, 1993, to
         General Mortgage Indenture and Deed of Trust dated as
         of November 1, 1992.  Filed as Exhibit 4(ee) to the
         Annual Report on Form 10-K under the Securities
         Exchange Act of 1934 for the year ended December 31,
         1992 (File No. 1-3004).                                     *

(b)(11)  Supplemental Indenture No. 1 dated March 15, 1993,
         to Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(ff) to the Annual Report on Form
         10-K under the Securities Exchange Act of 1934 for
         the year ended December 31, 1992 (File No. 1-3004).         *

(b)(12)  Supplemental Indenture No. 1 dated March 15, 1993,
         to General Mortgage Indenture and Deed of Trust
         dated as of November 1, 1992.  Filed as Exhibit
         4(gg) to the Annual Report on Form 10-K under the
         Securities Exchange Act of 1934 for the year ended
         December 31, 1992 (File No. 1-3004).                        *

(b)(13)  Supplemental Indenture No. 2 dated March 15, 1993,
         to Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(hh) to the Annual Report on Form
         10-K under the Securities Exchange Act of 1934 for
         the year ended December 31, 1992 (File No. 1-3004).         *

(b)(14)  Supplemental Indenture No. 2 dated March 15, 1993,
         to General Mortgage Indenture and Deed of Trust
         dated as of November 1, 1992.  Filed as Exhibit
         4(ii) to the Annual Report on Form 10-K under the
         Securities Exchange Act of 1934 for the year ended
         December 31, 1992 (File No. 1-3004).                        *


                                       39
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------

(b)(15)  Supplemental Indenture dated July 15, 1993, to
         Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(jj) to the Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1993
         (File No. 1-3004).                                          *

(b)(16)  Supplemental Indenture dated July 15, 1993, to
         General Mortgage Indenture and Deed of Trust
         dated as of November 1, 1992.  Filed as Exhibit
         4(kk)to the Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1993 (File No. 1-3004).          *

(b)(17)  Supplemental Indenture dated August 1, 1993, to
         Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(ll) to the Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1993
         (File No. 1-3004).                                          *

 (b)(18)  Supplemental Indenture dated August 1, 1993, to
         General Mortgage Indenture and Deed of Trust
         dated as of November 1, 1992.  Filed as Exhibit
         4(mm) to the Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1993 (File No. 1-3004).          *

(b)(19)  Supplemental Indenture dated October 15, 1993, to
         Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(nn) to the Quarterly Report on
         Form 10-Q for the quarter ended September 30, 1993
         (File No. 1-3004).                                          *

(b)(20)  Supplemental Indenture dated October 15, 1993, to
         General Mortgage Indenture and Deed of Trust dated
         as of November 1, 1992.  Filed as Exhibit 4(oo) to
         the Quarterly Report on Form 10-Q for the quarter
         ended September 30, 1993 (File No. 1-3004).                 *

(b)(21)  Supplemental Indenture dated November 1, 1993, to
         Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(pp) to the Quarterly Report on
         Form 10-Q for the quarter ended September 30, 1993
         (File No. 1-3004).                                          *

(b)(22)  Supplemental Indenture dated November 1, 1993, to
         General Mortgage Indenture and Deed of Trust dated
         as of November 1, 1992.  Filed as Exhibit 4(qq) to
         the Quarterly Report on Form 10-Q for the quarter
         ended September 30, 1993 (File No. 1-3004).                 *

(b)(23)  Supplemental Indenture dated February 1, 1994, to
         Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(hh) to the Annual Report on
         Form 10-K under the Securities Exchange Act of 1934
         for the year ended December 31, 1993
         (File No. 1-3004).                                          *

                                       40
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------

 (b)(24)  Indenture dated October 1, 1994 between Illinois
         Power Company and The First National Bank of
         Chicago.  Filed as Exhibit 4(a) to the Quarterly
         Report on Form 10-Q for the quarter ended
         September 30, 1994 (File No. 1-3004).                       *

(b)(25)  Supplemental Indenture dated October 1, 1994, to
         Indenture dated as of October 1, 1994.  Filed as
         Exhibit 4(b) to the Quarterly Report on Form
         10-Q for the quarter ended September 30, 1994
         (File No. 1-3004).                                          *

(b)(26)  Indenture dated January 1, 1996 between Illinois
         Power Company and Wilmington Trust Company.  Filed
         as Exhibit 4(b)(36) to the Annual Report on Form
         10-K under the Securities Exchange Act of 1934 for
         the year ended December 31, 1995 (File No. 1-3004).         *

(b)(27)  First Supplemental Indenture dated January 1, 1996,
         between Illinois Power Company and Wilmington Trust
         Company. Filed as Exhibit 4(b)(37) to the Annual
         Report on Form 10-K under the Securities Exchange
         Act of 1934 for the year ended December 31, 1995
         (File No. 1-3004).                                          *

(b)(28)  Supplemental Indenture dated April 1, 1997, to
         Mortgage and Deed of Trust dated November 1, 1943.
         Filed as Exhibit 4(a) to the Quarterly Report on
         Form 10-Q for the quarter ended March 31, 1997
         (File No. 1-3004).                                           *

(b)(29)  Supplemental Indenture dated April 1, 1997 to General
         Mortgage Indenture and Deed of Trust dated November 1,
         1992.  Filed as Exhibit 4(b) to the Quarterly Report
         on Form 10-Q for the quarter ended March 31, 1997
         (File No. 1-3004).                                           *

(b)(30)  Supplemental Indenture dated December 1, 1997 to
         Mortgage and Deed of Trust dated November 1, 1943.          *

(b)(31)  Supplemental Indenture dated as of March 1, 1998 to
         General Mortgage Indenture and Deed of Trust dated
         as of November 1, 1992 providing for the issuance of
         $18,700,000 principal amount of 5.40% pollution
         control bonds.  Filed as Exhibit 4.41 to the
         Registration Statement on Form S-3, filed January
         22, 1999 (File No. 333-71061).

(b)(32)  Supplemental Indenture dated as of March 1, 1998
         to Mortgage and Deed of Trust dated November 1, 1943
         providing for the issuance of $18,700,000 principal
         amount of pollution control bonds.  Filed as Exhibit
         4.39 to the Registration Statement on Form S-3, filed
         January 22, 1999 (File No. 333-71061).


                                       41
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------

(b)(33)  Supplemental  Indenture  dated as of March 1, 1998 to
         General  Mortgage Indenture and Deed of Trust dated
         as of November 1, 1992  providing for the issuance
         of $33,755,000 principal amount of pollution control
         bonds. Filed as Exhibit 4.42 to the Registration
         Statement on Form S-3, filed January 22, 1999
         (File No. 333-71061).

(b)(34)  Supplemental Indenture dated as of March 1, 1998 to
         Mortgage and Deed of Trust dated November 1, 1943
         providing for the issuance of $33,755,000 principal
         amount of pollution control bonds.  Filed as Exhibit
         4.40 to the Registration Statement on Form S-3,
         filed January 22, 1999 (File No. 333-71061).

(b)(35)  Supplemental Indenture dated as of July 15, 1998
         to General Mortgage Indenture and Deed of Trust
         dated as of November 1, 1992 providing for the
         issuance of $100,000,000 principal amount of 6.25%
         New Mortgage Bonds.  Filed as Exhibit 4.44 to the
         Registration Statement on Form S-3, filed January
         22, 1999 (File No. 333-71061).

(b)(36)  Supplemental Indenture dated as of July 15, 1998 to
         Mortgage and Deed of Trust dated November 1, 1943
         providing for the issuance of $100,000,000 principal
         amount of 6.25% First Mortgage Bonds.  Filed as Exhibit
         4.43 to the Registration Statement on Form S-3, filed
         January 22, 1999 (File No. 333-71061).

(b)(37)  Supplemental Indenture dated as of September 15, 1998
         to General Mortgage Indenture and Deed of Trust dated
         as of November 1, 1992 providing for the issuance of
         $100,000,000  principal  amount of 6.00% New Mortgage
         Bonds. Filed as Exhibit 4.46 to the Registration
         Statement on Form S-3, filed January 22, 1999
         (File No. 333-71061).

(b)(38)  Supplemental  Indenture  dated as of September 15,
         1998 to Mortgage and Deed of Trust dated  November 1,
         1943  providing  for the  issuance of $100,000,000
         principal amount of 6.00% First Mortgage Bonds.
         Filed as Exhibit 4.45 to the Registration Statement
         on Form S-3, filed January 22, 1999 (File No. 333-71061).

(b)(39)  Supplemental  Indenture dated as of October 1, 1998
         to General Mortgage Indenture and Deed of Trust dated
         as of November 1, 1992  providing for the transfer of
         Letter of Credit providers on three series of pollution
         control bonds totaling $111,770,000. Filed as Exhibit
         4.47 to the Registration Statement on Form S-3, filed
         January 22, 1999  (File No. 333-71061).

                                       42
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------
(10) Material Contracts

Illinova Corporation

(a)(1)   Illinova Corporation Deferred Compensation Plan
         for Certain Directors, as amended April 10, 1991.
         Filed as Exhibit 10(b) to the Annual Report on
         Form 10-K under the Securities Exchange Act of
         1934 for the year ended December 31, 1991
         (File No. 1-3004). ~                                         *

(a)(2)   Illinova Corporation Director Emeritus Plan for
         Outside Directors.  Filed as Exhibit 10(e) to
         the Annual Report on Form 10-K under the
         Securities Exchange Act of 1934 for the year
         ended December 31, 1989 (File No. 1-3004). ~                 *

(a)(3)   Illinova Corporation Stock Plan for Outside
         Directors as amended and restated by the Board of
         Directors on April 9, 1992 and as further amended
         April 14, 1993.  Filed as Exhibit 10(h) to the
         Annual Report on Form 10-K under the Securities
         Exchange Act of 1934 for the year ended December
         31, 1993 (File No. 1-3004). ~                                *

(a)(4)   Illinova Corporation Retirement Plan for Outside
         Directors,  as amended through  December 11, 1991.
         Filed as Exhibit 10(j) to the Annual Report on Form
         10-K  under the Securities Exchange Act of 1934 for
         the year ended December 31, 1991 (File No. 1-3004). ~        *

(a)(5)   Illinova Corporation 1992 Long-Term Incentive
         Compensation Plan.  Filed as Exhibit 10(k) to the
         Quarterly Report on Form 10-Q for the quarter ended
         March 31, 1992 (File No. 1-3004). ~                          *

(a)(6)   Illinova Corporation Comprehensive Deferred  Stock
         Plan for  Outside Directors, as approved by the Board
         of Directors on February 7, 1996.  Filed as Exhibit 10
         (a)(6) to the Annual  Report on Form 10-K under the
         Securities  Exchange  Act of 1934 for the year ended
         December 31, 1995 (File No. 1-11327).  ~                     *

(a)(7)   Form of Employee Retention Agreement in place between
         Illinova Corporation and its elected officers,
         Illinois Power Company's elected officers, and the
         Presidents of Illinova  Corporation's  subsidiaries.
         Filed as  Exhibit  10(g) to the  Annual  Report on Form
         10-K under the Securities Exchange Act of 1934 for
         the year ended  December 31, 1989 (File No. 1-3004). ~       *

(a)(8)   Illinova Corporation Leadership Incentive Program,
         effective January 1, 1996.  ~                                *

                                       43
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------
(a)(9)   Illinova Corporation Retirement Plan for Outside
         Directors, as amended by resolutions adopted by the
         Board of Directors on February 7, 1996. ~                   *

(a)(10)  Illinova Corporation Employee Retention Agreement,
         as amended by resolutions adopted by the Board of
         Directors on February 7, 1996.  ~                           *

(a)(11)  Illinova Corporation Deferred Compensation Plan for
         Certain Directors as amended October 9, 1996, effective
         January 1, 1997. ~                                          *

(a)(12)  Illinova Corporation Employee Retention Agreement,
         as amended by resolutions adopted by the Board of
         Directors on June 10-11, 1997.  ~                           *

(a)(13)  Illinova Corporation Deferred Compensation Plan for
         Certain Directors, as amended by resolutions adopted
         by the Board of Directors on June 10-11, 1997. ~            *

(a)(14)  Employment Agreement entered into as of August 13,
         1998 between Illinova Corporation and Charles E.
         Bayless. ~                                                  *

(a)(15)  Employment Agreement entered into as of January 18,
         1999  between Illinova Corporation and George W.
         Miraben.  ~                                                54

Illinois Power Company

(b)(1)   Group Insurance Benefits for Managerial Employees
         of Illinois Power Company as amended January 1, 1983.
         Filed as Exhibit 10(a) to the Annual Report on Form
         10-K under the Securities Exchange Act of 1934 for
         the year ended December 31, 1983 (File No. 1-3004).~        *

(b)(2)   Illinois Power Company Incentive Savings Trust and
         Illinois Power Company Incentive Savings Plan and
         Amendment I thereto.  Filed as Exhibit 10(d) to the
         Annual Report on Form 10-K under the Securities
         Exchange Act of 1934 for the year ended December 31,
         1984 (File No. 1-3004).  ~                                  *

(b)(3)   Illinois Power Company's Executive Incentive
         Compensation Plan.  Filed as Exhibit 10(f) to the
         Annual Report on Form 10-K under the Securities
         Exchange Act of 1934 for the year ended December 31,
         1989 (File No. 1-3004). ~                                   *




                                       44
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------

(b)(4)   Illinois Power Company Incentive Savings Plan, as
         amended and restated effective January 1, 1991.
         Filed as Exhibit 10(h) to the Annual Report on
         Form 10-K under the Securities Exchange Act of
         1934 for the year ended December 31, 1990
         (File No. 1-3004). ~                                        *

(b)(5)   Illinois Power Company Executive Deferred
         Compensation Plan.  Filed as Exhibit 10(l) to
         the Annual Report on Form 10-K under the
         Securities Exchange Act of 1934 for the year
         ended December 31, 1993 (File No. 1-3004). ~                *

(b)(6)   Illinois Power Company Retirement Income Plan for
         salaried employees as amended and restated effective
         January 1, 1989, as further amended through January
         1, 1994. Filed as Exhibit 10(m) to the Annual Report
         on Form 10-K under the Securities Exchange Act of
         1934 for the year ended December 31, 1994
         (File No. 1-3004). ~                                        *

(b)(7)   Illinois Power Company Retirement Income Plan for
         employees covered under a collective bargaining
         agreement as amended and restated effective as of
         January 1, 1994. Filed as Exhibit 10(n) to the Annual
         Report on Form 10-K under the Securities Exchange Act
         of 1934 for the year ended December 31, 1994
         (File No. 1-3004). ~                                        *

(b)(8)   Illinois Power Company Incentive Savings Plan as
         amended and restated effective January 1, 1991 and
         as further amended through amendments adopted
         December 28, 1994.  Filed as Exhibit 10(o)to the
         Annual Report on Form 10-K under the Securities
         Exchange Act of 1934 for the year ended December
         31, 1994 (File No. 1-3004). ~                               *

(b)(9)   Illinois Power Company Incentive Savings Plan for
         employees covered under a collective bargaining
         agreement as amended and restated effective January
         1, 1991 and as further amended through amendments
         adopted December 28, 1994.  Filed as Exhibit 10(p)
         to the Annual Report on Form 10-K under the
         Securities Exchange Act of 1934 for the year ended
         December 31, 1994 (File No. 1-3004).  ~                     *

(b)(10)  Illinois Power Company Executive Incentive Compensation
         Plan, as amended, effective January 1, 1997. ~              *

(b)(11)  Illinois Power Company Executive Deferred
         Compensation Plan as amended by resolutions adopted
         by the Board of Directors on June 10-11, 1997. ~            *




                                       45
<PAGE>

                            Exhibit Index (Continued)
Exhibit                           Description
-------                           -----------

(b)(12)  Illinois Power Company Supplemental Retirement
         Income Plan for Salaried Employees of Illinois
         Power Company as amended by resolutions adopted
         by the Board of Directors on June 10-11, 1997. ~            *

(b)(13)  Retirement and Consulting Agreement entered into
         as of June 30, 1997 between Illinois Power Company
         and Wilfred Connell. ~                                      *

(12) Statement Re Computation of Ratios

(a)      Computation of ratio of earnings to fixed
         charges for Illinova Corporation.                         83

(b)      Computation of ratio of earnings to fixed
         charges for Illinois Power Company.                       85

(13) Annual Reports to Shareholders

(a)      Illinova Corporation Proxy Statement and 1998
         Annual Report to Shareholders.                            87

(b)      Illinois Power Company Information Statement
         and 1998 Annual Report to Shareholders.                  192

(21) Subsidiaries of Registrants

(a)      Subsidiaries of Illinova Corporation and Illinois
         Power Company.                                           286

(23) Consents of Experts

         Consent of Independent Accountants for Illinova
         Corporation.                                             290

(27)     Financial Data Schedules

(a)      Illinova Corporation

(b)      Illinois Power Company

--------------------------------------
*     Incorporated herein by reference.

~     Management contract and compensatory plans or arrangements.


                                       46
<PAGE>

                                     BYLAWS

                              ILLINOVA CORPORATION
                            (An Illinois Corporation)

                            As Amended April 8, 1998


                                    ARTICLE I

                                  Stockholders

                           Section 1. The annual meeting of the  stockholders of
         the  Corporation  shall be held on such date and at such time and place
         as may be fixed  from  time to time by the  Board of  Directors  of the
         Corporation  pursuant  to a  resolution  adopted by a  majority  of the
         members  of the Board  then in  office,  for the  purpose  of  electing
         directors  and of  transacting  such other  business as may properly be
         brought before the meeting.

                           Section 2. Special  meetings of the  stockholders may
         be held upon call of the Chairman,  the  President,  or of the Board of
         Directors  or of  stockholders  holding not less than  one-fifth of the
         shares of the capital stock of the Corporation  issued and outstanding,
         at such time and as such place  within the State of  Illinois as may be
         stated in the call and notice. In the event of war,  rebellion or other
         catastrophe,  if the surviving  members of the Board of Directors shall
         be reduced to less than a majority of the number fixed by these Bylaws,
         then any  surviving  member  of the  Board of  Directors  may so call a
         special meeting of stockholders,  at such time and at such place as may
         be stated in the call and notice.

                           Section 3. Notice stating the place,  day and hour of
         every meeting of the stockholders, and in the case of a special meeting
         further stating the purpose for which such meeting is called,  shall be
         mailed at least ten days  before  the  meeting to each  stockholder  of
         record who shall be  entitled to vote  thereat,  at the last known post
         office address of each such stockholder as it appears upon the books of
         the   Corporation.   Such  further  notice  shall  be  given  by  mail,
         publication or otherwise, as may be required by law. Any meeting may be
         held  without  notice if all of the  stockholders  entitled to vote are
         present  or  represented  at the  meeting,  or all of the  stockholders
         entitled to notice of the meeting sign a waiver thereof in writing.

                           Section 4. The holders of record of a majority of the
         shares of the capital stock of the Corporation  issued and outstanding,
         entitled to vote thereat,  present in person or  represented  by proxy,
         shall constitute a quorum at all meetings of the stockholders,  and the
         vote  of  a  majority  of  such  quorum  shall  be  necessary  for  the
         transaction of any business,  unless otherwise  provided by law, by the
         Articles of  Incorporation  or by the Bylaws.  If at any meeting  there
         shall be no  quorum,  the  holders of record,  entitled  to vote,  of a
         majority of such shares of stock so present or represented  may adjourn
         the meeting from time to time,  without notice other than  announcement
         at the  meeting,  until a quorum  shall  have been  obtained,  when any
         business  may be  transacted  which might have been  transacted  at the
         meeting as first convened had there been a quorum.



                                       47
<PAGE>

                           Section  5.  Meetings  of the  stockholders  shall be
         presided over by the Chairman, or, if he is not present, the President,
         or a Vice President,  in that order, or, if no such officer is present,
         by a  chairman  to be  chosen  at the  meeting.  The  Secretary  of the
         Corporation,  or, if he is not present,  an Assistant  Secretary of the
         Corporation, or, if neither the Secretary nor an Assistant Secretary is
         present,  a  secretary  to be  chosen  at  the  meeting,  shall  act as
         secretary of the meeting.

                           Section 6. At all meetings of the stockholders  every
         holder of record of the shares of the capital stock of the Corporation,
         entitled  to vote  thereat,  may vote  thereat  either  in person or by
         proxy, provided that no stockholder may appoint more than three persons
         as proxies at any time,  and that no proxy shall be valid after  eleven
         months  from the  date of its  execution,  except  where  the  stock is
         pledged as security for a debt to the person holding the Proxy.

                           Section 7. At all  elections of directors  the voting
         shall be by written ballot and stockholders may cumulate their votes.

                           Section   8.  The   stock   transfer   books  of  the
         Corporation may, if so determined by the Board of Directors,  be closed
         before any  meeting  of the  stockholders,  and for any other  purpose,
         including the payment of any  dividend,  for such length of time as the
         Board may from time to time determine.


                                       48
<PAGE>

                                   ARTICLE II

                                    Directors

                           Section 1.  Initially,  the Board of Directors of the
         Corporation  shall  consist of between one and five members  unless and
         until IP Merging  Corporation  shall have merged with and into Illinois
         Power Company,  with Illinois Power Company  surviving such merger (the
         "Merger").  Upon consummation of the Merger,  the Board of Directors of
         the Corporation shall consist of between ten and fifteen members,  with
         all of the directors of Illinois Power Company  replacing the directors
         of the Corporation and serving in such capacity until their  successors
         are duly elected at the next regular annual meeting of the stockholders
         of the  Corporation.  The  directors  shall be elected  at the  regular
         annual meeting of the stockholders; but if the election of directors is
         not held on the day of the annual  meeting,  the directors  shall cause
         the election to be held as soon thereafter as conveniently  may be. The
         directors  shall  hold  office  for a term of one year and until  their
         successors  are elected and  qualified.  No director who is not also an
         employee of the Corporation  shall be elected to serve more than twelve
         (12) terms as a member of the Board of Directors  with the initial term
         beginning in April,  1992, with respect to those  directors  elected in
         April of 1994 or earlier.  A majority of the members of the Board shall
         constitute  a quorum for the  transaction  of  business,  but if at any
         meeting  of the  Board  there  shall be less than a quorum  present,  a
         majority of the directors  present may adjourn the meeting from time to
         time,  without notice other than  announcement at the meeting,  until a
         quorum shall have been  obtained,  when any business may be  transacted
         which might have been  transacted at the meeting as first  convened had
         there been a quorum. The acts of a majority of the directors present at

                                       49
<PAGE>

         any  meeting  at which  there is a quorum  shall,  except as  otherwise
         provided by law, by the Articles of Incorporation or by the Bylaws,  be
         the acts of the Board.

                           No  person  shall  be  eligible  for  election  as  a
         director  after  he has  attained  the  age of 70,  and no  officer  or
         employee of the  Corporation  other than the Chairman or the President,
         shall be eligible  for  election as director  after he has attained the
         age of 65.

                           Section  2.  Vacancies  in the  Board  of  Directors,
         caused by death, resignation or otherwise, may be filled at any meeting
         of the Board of  Directors  and the  directors  so  elected  shall hold
         office  until the next  annual  meeting of the  stockholders  and until
         their successors are elected and qualified.

                           Section 3.  Meetings of the Board of Directors  shall
         be held at such place  within or without  the State of  Illinois as may
         from  time to time be fixed  by  resolution  of the  Board or as may be
         specified  in the call of any  meeting.  Regular  meetings of the Board
         shall  be held  at  such  time as may  from  time to time be  fixed  by
         resolution of the Board, and notice of such meetings need not be given.
         Special  meetings of the Board may be held at any time upon call of the
         President or a Vice President,  by oral  telegraphic or written notice,
         duly  served on or sent or mailed  to each  director  not less than two
         days  before  any such  meeting.  A  meeting  of the  Board may be held
         without notice immediately after the annual meeting of the stockholders
         at the same place at which such  meeting is held.  Any  meeting  may be
         held without notice if all of the directors are present at the meeting,
         or if all of the directors sign a waiver thereof in writing.

                           Section 4.  Meetings of the Board of Directors  shall
         be  presided  over  by  the  Chairman  or,  if he is not  present,  the
         President,  or a Vice President,  in that order, or, if no such officer
         if present, by a chairman to be chosen at the meeting. The Secretary of
         the Corporation or, if he is not present, an Assistant Secretary of the
         Corporation or, if neither the Secretary nor an Assistant  Secretary is
         present, a secretary to be chosen at the meeting shall act as secretary
         of the meeting.

                           Section 5. The Board of Directors, by the affirmative
         vote  of a  majority  of the  whole  Board  may  appoint  an  Executive
         Committee  and a Finance  Committee,  in each case to include  three or
         more  Directors,  one of whom  shall  be a  resident  of the  State  of
         Illinois,  as the  Board  may from  time to time  determine.  Each such
         Committee  shall have and may exercise  such powers as may from time to
         time be  specified in the  resolution  or  resolutions  of the Board of
         Directors creating such Committee,  respectively.  The Board shall have
         the power at any time to fill vacancies in, to change the membership of
         or to dissolve,  either such  Committee.  Each Committee may make rules
         for the conduct of its business,  and may appoint such  committees  and
         assistants as it shall from time to time deem necessary.  A majority of

                                       50
<PAGE>

         the members of each Committee shall  constitute a quorum and the action
         of a  majority  thereof  shall be the  action  of such  Committee.  All
         actions taken by such  Committee  shall be reported to the Board at its
         meeting next succeeding such action.

                           Section 6. The Board of  Directors  may also  appoint
         one or more other committees to consist of such number of directors and
         to have such powers as the Board may from time to time  determine.  The
         Board shall have the power at any time to fill  vacancies in, to change
         the membership of, or to dissolve,  any such  committee.  A majority of
         the members of any such  committee  shall  constitute  a quorum and may
         determine its action and fix the time and place of its meetings  unless
         the  Board  shall  otherwise  provide.  All  action  taken  by any such
         committee shall be reported to the Board at its meeting next succeeding
         such action.

                           Section 7. Each member of the Board of Directors  who
         is not a  salaried  officer or  employee  of the  Corporation  shall be
         compensated  for his  services  as a director of the  Corporation.  The
         Board of Directors shall fix the amount of such compensation.

                           Section 8.  Nomination of persons for election to the
         Board of Directors of the  Corporation  shall be made only at a meeting
         of  stockholders  and only (i) by or at the  direction  of the Board of
         Directors  or a  Committee  thereof or (ii) by any  stockholder  of the
         Corporation  entitled  to vote for the  election  of  Directors  at the
         meeting  who  complies  with the  notice  procedure  set  forth in this
         Section. Such nominations, other than those made by or at the direction
         of the Board, shall be made pursuant to timely notice in writing to the
         committee  of the  Board of  Directors  which  has  responsibility  for
         nominating  persons for election to the Board of  Directors,  or in the
         event  there  is no such  committee  to the  Chairman  of the  Board of
         Directors,  or in the event there is no such person to the President of
         the Company (the "Notice").  To be timely,  a Notice shall be delivered
         to, or mailed and received at, the principal  executive  offices of the
         Corporation  not less than  ninety  (90) days nor more than one hundred
         twenty (120) days prior to the Annual Meeting; provided,  however, that
         in the event that  Directors are to be elected by the  stockholders  at
         any other  time,  the  Notice  shall be  delivered  to,  or mailed  and
         received at, the principal  executive  offices of the  Corporation  not
         later than the tenth day  following the day on which Notice of the date
         of the meeting was first mailed to  stockholders.  For purposes of this
         Section,  any  adjournment  or  postponement  of the  original  meeting
         whereby the meeting  will  reconvene  within  thirty (30) days from the
         original   date  will  be  deemed  for  purposes  of  Notice  to  be  a
         continuation  of  the  original  meeting,   and  no  nominations  by  a
         stockholder of persons to be elected  Directors of the  Corporation may
         be made at any such  reconvened  meeting  unless  pursuant  to a Notice
         which was timely for the meeting on the date originally scheduled.

                           The  Notice  shall set forth:  (i) as to each  person
         whom the  stockholder  proposes to nominate for election or re-election
         as a Director, all information relating to such person that is required
         to be disclosed in  solicitations of proxies for election of Directors,
         or as  otherwise  required,  in each case  pursuant  to the  Securities
         Exchange Act of 1934 (including such person's  written consent to being

                                       51
<PAGE>

         named in the proxy  statement as a nominee and to serving as a Director
         if elected);  and (ii) as to the stockholder  giving the Notice (A) the
         name and address of the  stockholder (B) the class and number of shares
         of voting stock of the Corporation which are beneficially owned by such
         stockholder,  and (C) a representation  that the stockholder intends to
         appear in person or by proxy at the meeting to  nominate  the person or
         persons specified in the Notice. Notwithstanding the foregoing, nothing
         in this  Section  shall be  interpreted  or  construed  to require  the
         inclusion of information  about any such nominee in any proxy statement
         distributed by, at the direction of, or on the behalf of, the Board.


                                   ARTICLE III

                                    Officers

                           Section 1. As soon as may be after the election  held
         in each year, the Board of Directors shall elect a President (who shall
         be a director), one or more Vice Presidents, one or more of whom may be
         designated as Executive Vice President or Senior Vice President,  and a
         Secretary and a Treasurer  and a  Controller,  and may elect a Chairman
         (who shall be a director); provided, however, that unless and until the
         consummation of the Merger, the officers of the Corporation may consist
         only of a President (who shall be a director), a Treasurer, a Secretary
         and a Chairman  (who shall be a director).  The Board of Directors  may
         from  time  to  time  appoint  such  Assistant  Secretaries,  Assistant
         Treasurers and other  officers and agents of the  Corporation as it may
         deem  proper.  The same person may be elected or appointed to more than
         one office.

                           Section 2. The term of office of all  officers  shall
         be one year or until their respective  successors are elected,  but any
         officer or agent may be removed,  with or without cause, at any time by
         the affirmative  vote of a majority of the members of the Board then in
         office.

                           Section 3. The officers of the Corporation shall each
         have such powers and duties as may be  prescribed  from time to time by
         the Board of  Directors  or, in the absence of such  prescription,  the
         officers of the  Corporation  shall each have such powers and duties as
         generally  pertain to their  respective  offices.  The  Treasurer,  the
         Assistant  Treasurers  and  any  other  officers  or  employees  of the
         Corporation may be required to give bond for the faithful  discharge of
         their duties,  in such sum and of such  character as the Board may from
         time to time prescribe.

                           Section 4. The salaries of all officers and agents of
         the Corporation  shall be fixed by the Board of Directors,  or pursuant
         to such authority as the Board may from time to time prescribe.


                                   ARTICLE IV

                              Certificates of Stock

                                       52
<PAGE>

                           Section 1. The  interest of each  stockholder  in the
         Corporation  shall be evidenced by a certificate  or  certificates  for
         shares  of  stock  of the  Corporation,  in such  form as the  Board of
         Directors may from time to time prescribe.  The certificates for shares
         of stock of the Corporation  shall be signed by the President or a Vice
         President and the Secretary or an Assistant Secretary,  sealed with the
         seal of the Corporation  (which seal may be a facsimile),  and shall be
         countersigned  and registered in such manner,  if any, as the Board may
         by resolution prescribe.

                           Section  2. The  shares  of stock of the  Corporation
         shall be  transferable  on the books of the  Corporation by the holders
         thereof in person or by a duly authorized attorney,  upon surrender for
         cancellation  of  certificates  for a like number of shares of the same
         class of stock,  with a duly executed  assignment and power of transfer
         endorsed thereon or attached thereto and such proof of the authenticity
         of the  signatures  as the  Corporation  or its agents  may  reasonably
         require.

                           Section 3. No certificate  for shares of stock of the
         Corporation shall be issued in place of any certificate alleged to have
         been lost, stolen or destroyed, except upon production of such evidence
         of the loss,  theft, or destruction,  and upon  indemnification  of the
         Corporation  and its agents to such  extent  and in such  manner as the
         Board of Directors may from time to time prescribe.


                                    ARTICLE V

                               Checks, Notes, etc.

                           All  checks  and  drafts  on the  Corporation's  bank
         accounts  and all  bills of  exchange  and  promissory  notes,  and all
         acceptances,  obligations  and other  instruments  for the  payment  of
         money,  shall be signed by such  officer or officers or agent or agents
         as shall be  thereunto  authorized  from  time to time by the  Board of
         Directors;  provided  that  checks  drawn  on  the  Corporation's  bank
         accounts may bear facsimile signature or signatures, affixed thereto by
         a mechanical device, of such officer or officers and/or agent or agents
         as the Board of Directors shall authorize.



                                   ARTICLE VI

                                   Fiscal Year

                           The fiscal year of the Corporation shall begin on the
         first day of January in each year and shall end on the thirty-first day
         of December following.


                                      53
<PAGE>


                                   ARTICLE VII

                                 Corporate Seal

                           The corporate seal shall have inscribed thereon, the
name of the Corporation and the words "Corporate Seal 1994 Illinois."


                                  ARTICLE VIII

                                 Indemnification

                           Section 1. Indemnification of Directors, Officers and
         Employees.  The Corporation shall, to the fullest extent to which it is
         empowered to do so by the Business Corporation Act of 1983 or any other
         applicable  laws, as may from time to time be in effect,  indemnify any
         person who was or is a party or is threatened to be made a party to any
         threatened,  pending or completed action,  suit or proceeding,  whether
         civil, criminal, administrative or investigative, by reason of the fact
         that he is or was a director,  officer, employee, trustee, or fiduciary
         of    the    Corporation,    or   of   a    Corporation-sponsored    or
         Corporation-administered trust or benefit plan, or is or was serving at
         the request of the Board of Directors of the Corporation as a director,
         officer,  employee,  trustee,  or  fiduciary  of  another  corporation,
         partnership,  joint venture,  trust, benefit plan, or other enterprise,
         against all expenses (including attorneys' fees), judgments,  fines and
         amounts paid in settlement  actually and reasonably  incurred by him in
         connection with such action, suit or proceedings.

                           Section 2. The  provisions of this Article VIII shall
         be deemed to be a contract between the Corporation and each director or
         officer who serves in any such  capacity at any time while this Article
         is in effect,  and any repeal or modification of this Article shall not
         affect any rights or obligations hereunder with respect to any state of
         facts then or  theretofore  existing or any action,  suit or proceeding
         theretofore  or thereafter  brought or threatened  based in whole or in
         part upon any such state of facts.

                           Section 3. The indemnification  provided or permitted
         by this  Article  shall not be deemed  exclusive of any other rights to
         which those indemnified may be entitled by law or otherwise,  and shall
         continue  as to a person  who has  ceased  to be a  director,  officer,
         employee  or  agent  and  shall  inure  to the  benefit  of the  heirs,
         executors and administrators of such person.

                           Section 4. The  provisions  of this Article are to be
         given retroactive effect.

                                   ARTICLE IX

                                   Amendments

                           These Bylaws,  or any part  thereof,  may be altered,
         amended or repealed at any meeting of the Board of Directors,  provided
         that  notice of such  meeting  shall set  forth the  substance  of such
         proposed change.


                                    --END--


                                       54
<PAGE>


                                January 18, 1999




George W. Miraben
Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521

Dear Mr. Miraben:

This  letter  is  to  confirm  the  terms  of  your   employment  with  Illinova
Corporation.

1.   Salary.  Your  annual base  salary  will be  $325,000,  subject to periodic
     review to determine whether an increase is appropriate.

2.   Bonus.  You will be  entitled to  participate  in the  Executive  Incentive
     Compensation  Plan. Your bonus under the Executive  Incentive  Compensation
     Plan will be $130,000  (which is 40% of your salary) if the target level of
     performance is achieved,  and your bonus will be $195,000  (which is 60% of
     your salary) at the maximum achievement level.

3.   Long-Term  Incentive Award. For 1999, your entire long-term incentive award
     will be in the form of a stock option,  the terms of which are reflected in
     the enclosed  stock option  agreement.  After 1999,  50% of your  long-term
     incentive award will be made as a stock option grant, and the remaining 50%
     will be made as performance share grant.

4.   Supplemental   Pension.   In  lieu  of   participation   in  the  Company's
     Supplemental Executive Retirement Plan, you will be covered by the enclosed
     Supplemental Pension Plan.

5.   Retention Agreement. You will be covered by the enclosed Employee Retention
     Agreement, which provides benefits in the event of a Change in Control.

6.   Loan.  To  compensate  you for amounts you have  foregone by leaving Tucson
     Electric Power Company to join Illinova  Corporation,  you will be entitled
     to a loan from the Company of $250,000. The terms of the loan are reflected
     in the enclosed letter and promissory note.

7.   Lump Sum Death Benefits.  If your death should occur while you are employed
     by the Company, your surviving spouse (or, if she does not survive you, the
     beneficiary designated by you) will be entitled to a lump sum death benefit
     of two times the amount of your salary  plus your target  bonus at the time
     of your  death.  In lieu of  receiving  this lump sum death  benefit,  your
     surviving  spouse may elect to receive the surviving  spouse  benefit under
     the  Supplemental  Pension Plan. (If your spouse does not survive you, only
     the death benefit described in this paragraph is payable.  The Supplemental
     Pension Plan does not provide for other survivor benefits.)

8.   Termination.  You may resign  from the  Company at any time for any reason,
     and the Board of Directors of the Company may terminate your  employment at
     any time for any reason. At the time of your termination of employment, you
     (or  your  estate)  will  be  entitled  to the  compensation  and  benefits
     specified in this letter and the enclosed material, as well as to the other
     benefits  you earned  while  employed  by the  Company,  to the extent such
     compensation and benefits are payable on your termination of employment.

                                       55
<PAGE>

         If the  foregoing  reflects  your  understanding  of the  terms of your
agreement  with the Company,  please so indicate by signing and returning a copy
of this  letter  to the  undersigned,  along  with a signed  copy of each of the
enclosures.

                                                     Very truly yours,

                                                     ILLINOVA CORPORATION



                                                     ---------------------------
                                                     Charles E. Bayless

Accepted and agreed to this
18th Day of January, 1999



-------------------------
    George W. Miraben



                                       56
<PAGE>


George W. Miraben
Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521

Dear Mr. Miraben:

This letter is to confirm our verbal  agreement that Illinova  Corporation  (the
"Company")  will  loan  you  $250,000.00.  The  Company  is  making  the loan to
compensate  you for amounts you have foregone by leaving  Tucson  Electric Power
Company to join the Company. As a condition of receiving the loan, you must sign
and return one copy of this letter and the enclosed promissory note.

As indicated in the  promissory  note,  20% of the principal  amount of the loan
will be forgiven on each of the first through fifth anniversaries of February 2,
1999, if you are employed by the Company on such  anniversary.  Also, as of each
such  anniversary,  the entire  amount of  interest  accrued on the  outstanding
principal during the prior one-year period shall be forgiven.

As of each  anniversary,  the amount of the forgiveness of principal or interest
on that  date  will  be  taxable  income  to you as of each  date on  which  the
forgiveness  occurs. You will become entitled to a tax gross-up payment from the
Company in an amount equal to the aggregate of the additional Federal, state and
local income taxes payable by you by reason of the  forgiveness  of the interest
amount (but not by reason of the  forgiveness of the principal  amount),  and by
reason of your receipt of the gross-up payment.

If, prior to February 2, 2004,  your employment is terminated by the Company for
reasons  other than Cause (as  defined in the  attached  promissory  note),  the
amount of any  outstanding  balance of principal  and interest will be forgiven,
and you will become entitled to a tax gross-up payment in an amount equal to the
aggregate of the additional Federal, state and local income taxes payable by you
by reason of the  forgiveness  of the interest  amount (but not by reason of the
forgiveness  of the  principal  amount),  and by reason of your  receipt  of the
gross-up payment.  However,  if your employment is terminated (i) by the Company
for Cause, or (ii) by reason of your death, disability, or voluntary resignation
then the amount of any outstanding balance of principal and interest will become
immediately due and payable. Furthermore, if termination of employment occurs at
any time without  cause or with good reason,  as those terms are defined in your
Employee Retention  Agreement (whether or not such agreement is then in effect),
while there is a remaining  balance under this agreement,  then such outstanding
balance  of  principal  and  interest  shall be  forgiven,  and you will  become
entitled to a tax  gross-up  payment  from the Company in an amount equal to the
aggregate of the additional Federal, state and local income taxes payable by you
by reason of the  forgiveness  of the interest  amount (but not by reason of the
forgiveness  of the  principal  amount),  and by reason of your  receipt  of the
gross-up payment. After termination of your employment,  if amounts are due from
you to repay the loan,  and such  amounts  are  otherwise  unpaid,  the  Company
retains the right to offset such liability  against amounts otherwise due to you
from the Company.

                                       57
<PAGE>

If the foregoing reflects your understanding of the terms of your agreement with
the Company,  please so indicate by signing and  returning a copy of this letter
to the undersigned, along with a signed copy of each of the enclosures.

                                                     Very truly yours,

                                                     Illinova Corporation


                                                     By:________________________
                                                        Charles E. Bayless


Accepted and agreed to this
18th day of January, 1999.


----------------------------
George W. Miraben




                                       58
<PAGE>


                                 PROMISSORY NOTE

                                                                   $250,000.00


                                                               February 2, 1999
                                                               Decatur, Illinois


FOR VALUE  RECEIVED,  the  undersigned,  George W. Miraben,  an individual  (the
"Employee"),  promises to pay to the order of Illinova Corporation,  an Illinois
corporation (the "Company"), on the date on which the Employee's employment with
the Company  terminates (the "Maturity Date"),  the principal sum of $250,000.00
and any accrued  interest on this Note,  subject to the  provisions of this Note
relating to forgiveness of such obligations.

This Note evidences obligations in connection with a loan made by the Company to
the Employee as part of the inducement to the Employee to become employed by the
Company.

The unpaid  principal  amount of this Note from time to time  outstanding  shall
bear  interest at a rate per annum  (based upon a 365/366 day year) equal to the
applicable  Federal rate as of February 2, 1999, as  determined  for purposes of
section  1274(d) of the Internal  Revenue Code of 1986,  as amended,  compounded
annually.  After the Maturity Date, any unpaid and unforgiven  principal  amount
and  accrued  unforgiven  interest on the unpaid  principal  amount of this Note
shall be payable on demand.

As of each of the first five one-year  anniversaries of February 2, 1999, if the
Employee  is employed by the  Company on such  anniversary,  an amount  equal to
$50,000.00 of the principal amount due under this Note, together with the amount
of interest  that has accrued with respect to the entire  unpaid  principal  and
interest  amount  since the  preceding  February  2, shall be  forgiven.  If the
Employee's  employment with the Company  terminates  prior to December 31, 1999,
and such  termination  is the  result of being  discharged  by the  Company  for
reasons  other  than  Cause,  any  remaining  principal  and  interest  shall be
forgiven.  If the Employee's employment with the Company terminates (i) prior to
December  31, 1999 by the Company for Cause,  (ii) prior to December 31, 1999 by
reason of the Employee's death,  disability,  voluntary resignation or any other
reason,  except by the Company other than for Cause,  or (iii) for any reason on


                                       59

<PAGE>



or after  December 31, 1999,  then any remaining  principal  and interest  shall
become  due and  payable  on the date of such  termination  of  employment.  For
purposes of this Note, the term "Cause" shall mean:

     (a)  the  Employee's   conviction  of  any  criminal  violation   involving
     dishonesty, fraud, or breach of trust,

     (b) the Employee's  willful engagement in any misconduct in the performance
     of the Employee's duty that materially injures the Company,

     (c)  the  Employee's  performance  of  any  act  which,  if  known  to  the
     shareholders or regulators of the Company or any of its subsidiaries, would
     materially  and adversely  affect the business of the Company or any of its
     subsidiaries, or

     (d) the  Employee's  willful  and  substantial  nonperformance  of assigned
     duties;  provided that such nonperformance has continued more than ten days
     after the Company has given written  notice of such  nonperformance  and of
     its  intention  to  terminate  the  Employee's  employment  because of such
     nonperformance.

Notwithstanding  the foregoing,  if termination of employment occurs at any time
without  cause or with good  reason,  as those terms are  defined in  Employee's
Employee  Retention  Agreement,  while there is a remaining  balance  under this
promissory note, then such  outstanding  balance of principal and interest shall
be forgiven.

Subject to the other terms and conditions  hereof,  the Employee may voluntarily
prepay all or any portion of the unpaid and unforgiven  principal amount of this
Note from time to time  outstanding  and any  accrued  and  unforgiven  interest
thereon, without premium or penalty.

All payment of principal of and interest on this Note shall be payable in lawful
currency  of the United  States of America at  Decatur,  Illinois  or such other
place as the Company shall  designate to the Employee in writing,  in cash or by
check.  If  payment  hereunder  falls due on a day  which is either a  Saturday,
Sunday or any other day on which banks in Decatur,  Illinois  are not  generally
open for business to the public (i.e., not a "Business Day"), then such due date
shall be extended to the  immediately  succeeding  Business Day, and  additional
interest shall accrue and be payable for the period of any such extension.

                                       60

<PAGE>


The  Employee  agrees that if any of the  following  events of default  (each an
"Event of Default") shall occur and be continuing:

          (i) default in the  performance or observance of any other  agreements
          of the Employee contained herein, or
          (ii) the  institution of any bankruptcy,  insolvency,  receivership or
          similar proceeding relating to the Employee or his assets, and if such
          case or proceeding  is not commenced by the Employee,  it is consented
          to  or   acquiesced  in  by  the  Employee  or  remains  for  60  days
          undismissed;

then the Company may declare this Note and all unpaid and  unforgiven  principal
of and interest on this Note and all accrued  costs,  expenses and other amounts
under  this  Note  be due and  payable,  whereupon  all  unpaid  and  unforgiven
principal  of and  interest on this Note and all such  costs,  expense and other
amounts shall immediately become due and payable following such declaration.

The Employee hereby represents and warrants to the Company as of the date hereof
(i) that this Note is the legally valid and binding  obligation of the Employee,
enforceable against the Employee in accordance with its terms, and (ii) that the
execution,  delivery  and  performance  by the  Employee  of this  Note does not
conflict  with or contravene  (a) any law,  rule or regulation  binding upon the
Employee or affecting  any of the  employee's  assets,  (b) any provision of any
contract,  instrument or agreement binding upon the Employee or affecting any of
the Employee's assets, or (c) any writ, order,  judgment,  decree or decision of
any court or governmental instrumentality binding upon the Employee or affecting
any of the Employee's assets.

All notices,  certificates and other communications  ("Notices") hereunder shall
be in writing and may be either delivered  personally,  by nationally recognized
express  courier for  overnight  delivery,  or by  facsimile  (with  request for
assurance of receipt in a manner  appropriate with respect to  communications of
that  type,  provided  that  a  confirmation  copy  is  concurrently  sent  by a
nationally recognized express courier for overnight delivery) or mailed, postage
prepaid, by certified or registered mail, return receipt requested, addressed as
follows:

                                         If to the Company: Illinova Corporation
                                         500 South 27th Street


                                       61

<PAGE>



                                         Decatur, Illinois 62521
                                         Attention:  General Counsel

                                         If to the Employee: George W. Miraben
                                         Illinova Corporation
                                         500 South 27th Street
                                         Decatur, Illinois 62521

All  notices  hereunder  shall be in  writing  (including,  without  limitation,
facsimile  transmission)  and shall be sent to the Employee or the  Company,  as
appropriate,  at such party's  address shown above,  or at such other address as
such party may,  by written  notice  received by the other  party  hereto,  have
designated  as its or his address for such  purpose.  Notices  sent by facsimile
transmission  shall be deemed to have been given five days after the date mailed
by  registered  or certified  mail,  postage  prepaid;  and notices sent by hand
delivery shall be deemed to have been given when received.

This  Note has  been  made and  delivered  at  Decatur,  Illinois  and  shall be
construed in  accordance  with and governed by the internal laws of the State of
Illinois. Wherever possible, each provision of this Note shall be interpreted in
such  manner as to be  effective  and valid  under  applicable  law,  but if any
provision of this Note shall be prohibited by or invalid under  applicable  law,
such provision  shall be ineffective to the least extent of such  prohibition or
invalidity,  without  invalidating  the  remainder  of  such  provision  or  the
remaining provisions of this Note.

IN WITNESS  WHEREOF,  the Employee has caused this Note to be executed as of the
day and year first above written.





                                                     ---------------------------
                                                     George W. Miraben



                                      62



<PAGE>



                              ILLINOVA CORPORATION
                            SUPPLEMENTAL PENSION PLAN


         The Supplemental Pension Plan (the "Plan") is adopted effective January
18, 1999. The Plan is established and maintained by Illinova Corporation for the
purpose  of  providing   benefits  for  the  Participant,   George  W.  Miraben.
Accordingly,  Illinova  Corporation hereby adopts the Plan pursuant to the terms
and provisions set forth below:

                                    ARTICLE I

                                   Definitions

         Wherever  used  herein the  following  terms  shall  have the  meanings
hereinafter set forth:

         1.1 "Accrued Vested Benefit" of the Participant  shall have the meaning
determined in accordance with Section 3.1.

               1.2 "Board" means the Board of Directors of the Company.

               1.3 "Cause" means:

               (a)  the  Participant's  conviction  of  any  criminal  violation
               involving dishonesty, fraud, or breach of trust,

               (b)  the  Participant's  engagement  in  any  misconduct  in  the
               performance of the Participant's duty that materially injures the
               Company,

               (c) the  Participant's  performance of any act which, if known to
               the  shareholders  or  regulators  of the  Company  or any of its
               subsidiaries,  would materially and adversely affect the business
               of the Company or any of its subsidiaries, or

               (d) the Participant's  willful and substantial  nonperformance of
               assigned duties provided that such  nonperformance  has continued
               more than ten days after the Company has given written  notice of
               such  nonperformance  and  of  its  intention  to  terminate  the
               Participant's employment because of such nonperformance.

               1.4 "Code"  means the Internal  Revenue Code of 1986,  as amended
          from time to time, and any regulations relating thereto.



                                       63
<PAGE>






               1.5   "Company"   means   Illinova   Corporation,   an   Illinois
          corporation,  or, to the extent  provided in Section 7.8 any successor
          corporation or other entity  resulting from a merger or  consolidation
          into or with the Company or a transfer or sale of substantially all of
          the assets of the Company.

               1.6  "Earnings" of the  Participant  for any calendar month means
          the  Participant's  accrued  salary and bonus for that month and,  for
          this  purpose,  shall include any portion of such salary or bonus that
          would  otherwise have been includible for the month but is contributed
          by  the  Company  on  behalf  of  the  Participant   pursuant  to  the
          Participant's   election   under  a   "qualified   cash  or   deferred
          arrangement"  (as defined in section  401(k) of the Code) that is part
          of any qualified  profit sharing plan  maintained by the Company.  For
          purposes of this definition,  the Participant's bonus for any month is
          the bonus amount  earned under the  Executive  Incentive  Compensation
          Plan (or any other  successor  plan providing for an annual bonus) for
          that month. For each calendar year the annual bonus shall be deemed to
          be earned  evenly  during each of the months in which the  Participant
          was employed by the Company during that year.

               1.7  "Final   Average   Earnings"   means  the   average  of  the
          Participant's  monthly  Earnings  during the 36  consecutive  calendar
          months that  produces the highest  average and that occurs  during the
          last 60 calendar  months  ending with the calendar  month in which the
          Participant's   employment  with  the  Company   terminates.   If  the
          Participant  total employment  period with the Company is less than 36
          calendar  months,  his Final Average  Earnings  shall be determined by
          averaging  (on a calendar  month basis) the  Earnings  received by him
          from the Company during his entire period of employment.

               1.8 "Normal  Retirement Date" means the first day of the calendar
          month  coinciding  with  or  next  following  the  Participant's  65th
          birthday.

               1.9 "Participant" means George W. Miraben.

               1.10 "Plan" means the Illinova  Corporation  Supplemental Pension
          Plan.

                                       64

<PAGE>


               1.11 "Qualified Plan" means the Illinois Power Company Retirement
          Income Plan for Salaried Employees or any successor plan.

               1.12  "Qualified  Plan  Retirement  Benefit"  means  the  benefit
          payable to a Participant  pursuant to the Qualified  Plan by reason of
          his  termination  of employment  with the Company for any reason other
          than death.

               1.13 "Qualified Plan Surviving  Spouse Benefit" means the benefit
          payable to the  Surviving  Spouse of the  Participant  pursuant to the
          Qualified  Plan in the  event of the death of the  Participant  at any
          time prior to commencement of payment of his Qualified Plan Retirement
          Benefit.

               1.14 "Supplemental  Retirement Benefit" means the benefit payable
          to the  Participant  pursuant to the Plan by reason of his termination
          of employment with the Company for any reason other than death.

               1.15  "Surviving  Spouse"  means a person  who is  married to the
          Participant  at the date of his death and for at least one year  prior
          thereto.

               1.16  "Supplemental  Surviving  Spouse Benefit" means the benefit
          payable to a Surviving Spouse pursuant to the Plan.

               1.17  The  Participant's  "termination"  of  employment  with the
          Company shall be deemed to occur on the day immediately  following the
          date on which he is last employed by the Company.

               1.18 Words in the masculine gender shall include the feminine and
          the  singular  shall  include  the  plural,  and  vice  versa,  unless
          qualified  by the context.  Any headings  used herein are included for
          ease of reference only, and are not to be construed so as to alter the
          terms hereof.

                                   ARTICLE II
                                   Eligibility

         The Participant shall be eligible to receive a Supplemental  Retirement
Benefit to the extent  provided in Article III of the Plan.  If the  Participant
dies prior to commencement of payment of his Qualified Plan Retirement  Benefit,
the  Surviving  Spouse  of the  Participant  shall  be  eligible  to  receive  a
Supplemental  Surviving  Spouse Benefit to the extent  provided in Article IV of
the Plan.


                                       65

<PAGE>



                                   ARTICLE III
                         Supplemental Retirement Benefit

         3.1  Amount.  The  Supplemental   Retirement  Benefit  payable  to  the
Participant  in the form of a straight  life  annuity  over the  lifetime of the
Participant  only,  commencing on his Normal Retirement Date, shall be a monthly
amount equal to the excess of the amount  described  in  paragraph  (a) over the
amount described in paragraph (b) below:

                  (a)  the Participant's Accrued Vested Benefit;

                                      LESS

                  (b)  the  monthly  amount  of the  Qualified  Plan  Retirement
                  Benefit  actually   payable  to  the  Participant   under  the
                  Qualified Plan.

         The amounts  described  in (a) and (b) shall be computed as of the date
of termination of employment of the Participant  with the Company in the form of
a straight  life  annuity  payable  over the  lifetime of the  Participant  only
commencing on his Normal Retirement Date.

         The  Participant's  "Accrued  Vested  Benefit"  shall be  determined in
accordance with the following:

         (i) if the Participant's  employment with the Company  terminates prior
         to January  1, 2000 for any reason  except  circumstances  pursuant  to
         which benefits are owed under the Employee Retention  Agreement between
         the Company and  Participant,  whether or not such agreement is then in
         effect  ("Retention  Agreement"),  his Accrued  Vested Benefit shall be
         zero, and he shall not be entitled to any benefits under the Plan;

         (ii) if the Participant's employment with the Company terminates before
         December  31,  1999 as a  result  of  circumstances  pursuant  to which
         benefits are owed under the Retention Agreement,  or after December 31,
         1999 and prior to February 1, 2004,  by reason of his being  discharged
         by the Company without Cause or as a result of  circumstances  pursuant
         to which  benefits are owed under the  Retention  Agreement,  or if the
         Participant's  employment  with  the  Company  terminates  on or  after
         February  1, 2004 for any  reason,  the  Participant's  accrued  Vested
         Benefit  shall  be  equal  to 40% of the  Participant's  Final  Average
         Earnings as of the date of his termination of employment; and

                                       66

<PAGE>



         (iii) if the Participant's employment with the Company terminates after
         December  31, 1999 and prior to February 1, 2004,  and the  termination
         occurs for any reason  other than his being  discharged  by the Company
         without  Cause or under  circumstances  pursuant to which  benefits are
         owed under the Retention  Agreement,  the Participant's  Accrued Vested
         Benefit  shall  be  equal  to 40% of the  Participant's  Final  Average
         Earnings as of the date of his termination of employment, multiplied by
         the vesting  percentage  determined  in  accordance  with the following
         schedule:

--------------------------------------------------------------------------------
If the Participant's employment with            The vesting percentage shall be:
the Company terminates during this period:
--------------------------------------------------------------------------------
On or after February 1, 2000, and                                20%
      before February 1, 2001
--------------------------------------------------------------------------------
On or after February 1, 2001, and                                40%
      before February 1, 2002
--------------------------------------------------------------------------------
On or after February 1, 2002, and                                60%
      before February 1, 2003
--------------------------------------------------------------------------------
On or after February 1, 2003, and                                80%
      before February 1, 2004
--------------------------------------------------------------------------------
      After February 1, 2004                                     100%
--------------------------------------------------------------------------------


         3.2 Form of Benefit. The Supplemental Retirement Benefit payable to the
Participant  shall be paid in the same  form  under  which  the  Qualified  Plan
Retirement  Benefit is payable to the Participant.  The  Participant's  election
under the Qualified  Plan of any optional form of payment of his Qualified  Plan
Retirement  Benefit shall also be applicable to the payment of his  Supplemental
Retirement Benefit.

         3.3  Commencement of Benefit.  Payment of the  Supplemental  Retirement
Benefit to the  Participant  shall  commence  on the same date as payment of the
Qualified Plan  Retirement  Benefit to the Participant  commences.  Any election
under  the  Qualified  Plan  made  by  the  Participant   with  respect  to  the
commencement of payment of his Qualified Plan  Retirement  Benefit shall also be
applicable  with  respect to the  commencement  of  payment of his  Supplemental
Retirement Benefit.

         3.4 Approval of Company. Notwithstanding the provisions of Sections 3.2
and 3.3 above, an election made by the Participant under the Qualified Plan with
respect to the form of payment of his Qualified Plan  Retirement  Benefit or the
date for  commencement of payment thereof shall not be effective with respect to


                                       67

<PAGE>



the form of payment  or date for  commencement  of  payment of his  Supplemental
Retirement  Benefit  hereunder  unless such  election is  expressly  approved in
writing by the Company with respect to his Supplemental  Retirement  Benefit. If
the Company shall not approve such election in writing, then the form of payment
or date for commencement of payment of the Participant's Supplemental Retirement
Benefit shall be selected by the Company in its sole discretion. If benefits are
payable to the  Participant  under this Plan, but no benefits are payable to the
Participant  under the  Qualified  Plan,  the time and form of benefit  shall be
selected by the Participant,  subject to the consent of the Company, from among
the alternatives  that would be available under the Qualifed Plan (or such other
alternatives permitted by the Company).

         3.5 Actuarial  Equivalent.  A Supplemental  Retirement Benefit which is
payable in any form other than a straight  life annuity over the lifetime of the
Participant,  or which commences at any time prior to the  Participant's  Normal
Retirement  Date,  shall  be  the  actuarial   equivalent  of  the  Supplemental
Retirement  Benefit  set forth in Section  3.1 above as  determined  by the same
actuarial  adjustments as those  specified in the Qualified Plan with respect to
determination of the amount of the Qualified Plan Retirement Benefit.

                                   ARTICLE IV
                      Supplemental Surviving Spouse Benefit

         4.1 Amount. If the Participant dies either:

                  (i)  while employed by the Company; or

                  (ii) prior to  commencement  of  payment  of his  Supplemental
                  Retirement  Benefit under this Plan,  but after his employment
                  with the Company has terminated with an Accrued Vested Benefit
                  that is greater than zero;

then a Supplemental  Surviving Spouse Benefit is payable to his Surviving Spouse
as hereinafter provided. The monthly amount of the Supplemental Surviving Spouse
Benefit payable to a Surviving Spouse shall be equal to the excess of the amount
described in paragraph (a) over the amount described in paragraph (b) below:

                  (a) the monthly amount of the Qualified Plan Surviving  Spouse
                  Benefit to which the Surviving Spouse of the Participant would
                  have been entitled  under the Qualifed Plan, but determined by
                  applying  the  Surviving  Spouse  Benefit  provisions  of  the


                                       68

<PAGE>



                  Qualified  Plan as though  the amount of the  monthly  benefit
                  (payable in the form of a straight life annuity  commencing at
                  the   Participant's   Normal   Retirement   Date)   which  the
                  Participant had earned on the date of his death had been equal
                  to the amount of his  Accrued  Vested  Benefit  (as defined in
                  Section 3.1 of this Plan);

                                      LESS

                  (b) the monthly amount of the Qualifed Plan  Surviving  Spouse
                  Benefit  actually  payable to the  Surviving  Spouse under the
                  Qualified Plan.

         Notwithstanding  any other provision of the Plan, the surviving  Spouse
shall be  entitled  to  benefits  under this  Section 4.1 only if she waives all
rights to receive the lump sum death  benefits to which she would  otherwise  be
entitled  under the provisons of the January 13, 1999 letter to the  Participant
from  the  Company,  with  such  waiver  to be made  within  90 days  after  the
Participant's  death  in  accordance  with  the  procedures  established  by the
Company.

         4.2 Form and Commencement of Benefit.  A Supplemental  Surviving Spouse
Benefit  shall be payable  over the  lifetime  of the  Surviving  Spouse only in
monthly  installments  commencing on the date for commencement of payment of the
Qualified Plan Surviving  Spouse Benefit to the Surviving Spouse and termination
on the date of the last payment of the Qualified Plan  Surviving  Spouse Benefit
made before the Surviving Spouse's death.

                                    ARTICLE V
                           Administration of the Plan

         5.1 Administration by the Company. The Company shall be responsible for
the general  operation and  administration  of the Plan and for carrying out the
provisions thereof.

         5.2 General Powers of  Administration.  All provisions set forth in the
Qualified  Plan with  respect  to the  administrative  powers  and duties of the
Company,  expenses of administration and procedures for filing claims shall also
be  applicable  with respect to the Plan.  The Company shall be entitled to rely
conclusively  upon all tables,  valuations,  certificates,  opinions and reports
furnished  by any  actuary,  accountant,  controller,  counsel  or other  person
employed or engaged by the Company with respect to the Plan.


                                       69

<PAGE>



                                   ARTICLE VI
                            Amendment or Termination.

         The  Plan  may be  amended  or  terminated  at any  time by the  Board,
provided  however  that,  notwithstanding  any other  provision of the Plan,  no
amendment  or  termination  that  would  adversely  affect  the  rights  of  the
Participant or his Surviving Spouse (including, without limitation, his right to
accrue  future  benefits)  may be made by the  Company  except  with the written
consent of the  Participant  (or,  in the event of his death,  with the  written
consent of the Surviving Spouse).




                                  ARTICLE VII
                               General Provisions

         7.1  Funding.  The Plan at all times shall be entirely  unfunded and no
provision  shall at any time be made with respect to  segregating  any assets of
the Company for payment of any benefits  hereunder.  No  Participant,  Surviving
Spouse or any other person shall have any interest in any  particular  assets of
the  Company by reason of the right to receive a benefit  under the Plan and any
such Participant, Surviving Spouse or other person shall have only the rights of
a general unsecured creditor of the Company with respect to any rights under the
Plan.

         7.2 General Conditions.  Except as otherwise expressly provided herein,
all terms and  conditions of the Qualified  Plan  applicable to a Qualified Plan
Retirement  Benefit or a Qualified Plan  Surviving  Spouse Benefit shall also be
applicable to a  Supplemental  Retirement  Benefit or a  Supplemental  Surviving
Spouse  Benefit  payable  hereunder.  Any Qualified Plan  Retirement  Benefit or
Qualified Plan Surviving Spouse Benefit,  or any other benefit payable under the
Qualified Plan, shall be paid solely in accordance with the terms and conditions
of the Qualified  Plan and nothing in this Plan shall operate or be construed in
any way to modify,  amend or affect the terms and  provisions  of the  Qualified
Plan.

         7.3 No  Guaranty  of  Benefits.  Nothing  contained  in the Plan  shall
constitute  a guaranty  by the  Company or any other  entity or person  that the
assets of the Company will be sufficient to pay any benefit hereunder.

                                       70

<PAGE>



         7.4 No Enlargement of the Employee Rights.  No Participant or Surviving
Spouse  shall have any right to a benefit  under the Plan  except in  accordance
with the terms of the Plan.  Establishment of the Plan shall not be construed to
give any Participant the right to be retained in the service of the Company.

         7.5 Spendthrift  Provision.  No interest of any person or entity in, or
right to  receive a benefit  under,  the Plan  shall be subject in any manner to
sale, transfer, assignment, pledge, attachment, garnishment, or other alienation
or  encumbrance of any kind; nor may such interest or right to receive a benefit
be taken, either voluntarily or involuntarily, for the satisfaction of the debts
of, or other  obligation  or claims  against,  such person or entity,  including
claims for  alimony,  support,  separate  maintenance  and claims in  bankruptcy
proceedings.


         7.6  Applicable  Law. The Plan shall be construed  and  administered
under the laws of the State of Illinois.


         7.7  Incapacity  of  Recipient.  If any  person  entitled  to a benefit
payment  under the Plan is deemed by the Company to be incapable  of  personally
receiving and giving a valid receipt for such  payment,  then,  unless and until
claim therefor shall have been made by a duly appointed  guardian or other legal
representative  of such person,  the Company may provide for such payment or any
part thereof to be made to any other  person or  institution  then  contributing
toward  or  providing  for the care and  maintenance  of such  person.  Any such
payment  shall be a  payment  for the  account  of such  person  and a  complete
discharge of any liability of the Company and the Plan therefor.


         7.8 Corporate Successors.  The Plan shall be binding upon, and inure to
the benefit of, the Company and its  successors  and assigns and upon any person
acquiring,  whether by merger,  consolidation,  purchase of assets or otherwise,
all or substantially all of the Company's assets and business, and the successor
shall be substituted for the Company under the Plan.


         7.9 Unclaimed Benefit. Each Participant shall keep the Company informed
of his current address and the current address of his spouse.  The Company shall
not be obligated to search for the whereabouts of any person. If the location of


                                       71

<PAGE>



the  Participant  is not made known to the Company  within three (3) years after
the date on which payment of the Participant's  Supplemental  Retirement Benefit
may first be made, payment may be made as though the Participant had died at the
end of the  three-year  period.  If,  within  one  additional  year  after  such
three-year  period has elapsed,  or within three years after the actual death of
the  Participant,  the Company is unable to locate any  Surviving  Spouse of the
Participant,  then the  Company  shall  have no  further  obligation  to pay any
benefit  hereunder to such  Participant or Surviving  Spouse or any other person
and such benefit shall be irrevocably forfeited.

7.10 Limitations on Liability.  Notwithstanding any of the preceding  provisions
of the Plan,  neither the Company  nor any  individual  acting as an employee or
agent of the Company  shall be liable to any  Participant,  former  Participant,
Surviving Spouse or any other person for any claim,  loss,  liability or expense
incurred in connection with the Plan.

         IN WITNESS WHEREOF,  the undersigned director of the Company, on behalf
of the Company, has executed this Plan to witness its adoption by the Company as
of January 18, 1999, and the  Participant  has executed this Plan to witness his
understanding that it reflects his agreement with the Company.


                                                     ILLINOVA CORPORATION



                                                     By:________________________


Accepted and agreed to this
18th day of January, 1999.


-------------------------
George W. Miraben



                                       72

<PAGE>



                              ILLINOVA CORPORATION
                           EMPLOYEE RETENTION AGREEMENT

     THIS EMPLOYEE RETENTION AGREENENT (the "Agreement") is entered into this 18
day of January 1999 by and between ILLINOVA CORPORATION, an Illinois corporation
(the "Company") and George W. Miraben (the "Employee").

     WHEREAS,  the  Company  desires  to retain the  services  of  Employee.  In
connection with any change in control of the Company;

     NOW, THEREFORE, in consideration of continued employment and for other good
and  valuable  consideration,  the receipt and  sufficiency  of which are hereby
acknowledged, the Company and the Employee agree as follows:


     1.  Change in Control  Benefits.  In the event of a  Termination  Event (as
defined below) the Company shall,  within 30 days of the Termination Event, make
a lump sum cash payment to the Employee equal to thirty-six  (36) months' salary
at the  greater of (I) the  Employee's  salary rate in effect on the date of the
Change in Control,  or (II) the Employee's  salary rate in effect on the date of
the  Termination  Event;  plus three times the latest  bonus  earned by Employee
during the three calendar years last preceding the Termination Event.

         Also in such  event the  Employee  and his or her  dependents,  if any,
shall, for thirty-six (36) months  following the Termination  Event or until the
Employee reaches 65 years of age, or is employed by another employer, if sooner,
continue to participate in any benefit plans of the Company which provide health
(including  medical  and  dental), life  or disability   insurance,  or  similar
coverage,  and if the Employee becomes 50 years of age prior to the beginning of
such  period  then  for so long  as the  Employee  is not  employed  by  another
employer, the Employee and dependents,  if any, shall continue to participate in
any benefit  plans of the Company  which  provide  health and life  insurance or
similar   coverage  until the  Employee  becomes 55 years of age  whereupon  the
Employee and  dependents,  if any,  shall be eligible to participate in any such
benefits as are then extended


                                      73

<PAGE>





to  employees of the Company  electing  early  retirement  at age 55 on the same
terms and subject to the same  conditions as are  applicable to such  employees;
provided  that such  coverage  shall not be  furnished  if the  Employee  waives
coverage by giving written notice of waiver to the Company.  For purposes of all
incentive  and  retirement  plans of the  Company, the  Employee  shall be given
service  credit for all  purposes  for, and shall be deemed to be an employee of
the  Company  during,  the period  the  Employee  continues  to be  eligible  to
participate  in  benefit  plans  hereunder,  notwithstanding  the fact  that the
Employee is not an employee of the Company during such period; provided that, if
the  terms of any  such  plan do not  permit  such  credit  or  deemed  employee
treatment,  the Company  will make  payments and  distributions  to the Employee
outside  the plans in  amounts  substantially  equivalent  to the  payments  and
distributions,  the Employee  would have  received  pursuant to the terms of the
plans and  attributable  to such credit or deemed employee  treatment,  had such
credit or deemed employee  treatment been permitted pursuant to the terms of the
plans.  The Employee shall not be required to mitigate  damages by seeking other
employment or otherwise.  Except as specifically provided above with the respect
to the  Employee's  becoming  an  employee of another  employer,  the  Company's
obligations  under  this  section 2 shall not be reduced in any way by reason of
any  compensation  received by the Employee  from sources other than the Company
after the termination of the Employee's employment with the Company.

     Notwithstanding  any  provision  in this  Agreement  to the  contrary,  the
benefits under this paragraph 1 shall be in lieu of, and not in addition to, any
benefits to which the  Employee  might  otherwise  be  entitled  under any other
severance plan maintained by the Company.

     For purposes of this  paragraph 1 (including the defined terms used herein)
references to the "Company" shall include any subsidiary of the Company by which
the Employee is employed.

     2.   Definitions.
          (a)  For purposes of this Agreement:
               (i)  "Good Cause" shall mean:
                    (A) the  Employee's  conviction  of any  criminal  violation
                    involving dishonesty, fraud, or breach of trust.


                                       74

<PAGE>





                    (B) the Employee's  willful  engagement in any misconduct in
                    the  performance  of the  Employee's  duty  that  materially
                    injures the Company,
                    (C) the Employee's performance of any act, which if known to
                    the  shareholders or regulators of the Company or any of its
                    subsidiaries,  would  materially  and  adversely  affect the
                    business of the Company or any of its subsidiaries, or
                    (D) the Employee's willful and substantial nonperformance of
                    assigned  duties;  provided  that  such  nonperformance  has
                    continued  more than ten days  after the  Company  has given
                    written notice of such  nonperformance  and of its intention
                    to  terminate  the  Employee's  employment  because  of such
                    nonperformance.

               (ii) "Good Reason" shall exist if, without an Employee's  express
               written consent, the Company shall:

                    (A) reduce the salary of the Employee; or
                    (B) materially  reduce the amount of paid vacations to which
                    the Employee is entitled,  or the Employee's fringe benefits
                    and perquisites; or
                    (C) significantly change the nature or decrease the scope of
                    the Employee's authority; or
                    (D)  change by 50 miles or more the  principal  location  in
                    which the Employee is required to perform services.

               (iii)  "Change  in  Control"  shall  be  deemed  to  occur on the
               earliest of the existence of one of the following and the receipt
               of  all  necessary  regulatory   approvals  tberefore:
                    (A) The  acquisition  other  than from the  company,  by any
                    entity,   person  or  group  (including  all  Affiliates  or
                    Associates  of such entity,  person or group) of  beneficial
                    ownership,  as that term is defined in Rule 13d-3  under the
                    Securities  Exchange  Act of 1934,  of more  than 20% of the
                    outstanding  shares of capital stock of the Company entitled
                    to  vote  generally  in  the  election  of  directors,   but
                    excluding  for  this  purpose  any such  acquisition  by the
                    Company or any of its  subsidiaries or any employee  benefit
                    plan (or related trust) or the Company or its  subsidiaries,
                    or any  corporation  with respect to which,  following  such
                    acquisition,  more  than  80%  of,  respectively,  the  then
                    outstanding  shares of common stock of such  corporation and
                    the  combined  vote  power  of the then  outstanding  voting
                    securities of such corporation entitled to vote generally in
                    the  election  of  directors  is  then  beneficially  owned,
                    directly or indirectly,  by all or substantially  all of the
                    individuals and entities who



                                       75

<PAGE>


                    were the beneficial owners respectively, of the common stock
                    and voting  securities of the Company  immediately  prior to
                    such  acquisition in  substantially  the same  proportion as
                    their ownership,  immediately  prior to such  acquisition of
                    the then  outstanding  shares of common stock of the Company
                    or the combined voting power of the then outstanding  voting
                    securities of the Company  entitled to vote generally in the
                    election of directors, as the case may be;
                    (B)  The  effective  time  of a  reorganization,  merger  or
                    consolidation of the Company,  in each case, with respect to
                    which  all  or  substantially  all of  the  individuals  and
                    entities who were the respective  beneficial  owners  of the
                    common   stock  and  voting    securities   of  the  Company
                    immediately   prior  to  such   reorganization,   merger  or
                    consolidation do not, following such reorganization,  merger
                    or consolidation, beneficially own, directly and indirectly,
                    more than 80% of respectively,  the then outstanding  shares
                    of common  stock or the  combined  voting  power of the then
                    outstanding voting securities  entitled to vote generally in
                    the  election  of  directors,  as the  case  may be,  of the
                    corporation  resulting from such  reorganization,  merger or
                    consolidation,  or of a complete  liquidation or dissolution
                    of the  Company  or of the  sale or other  disposition  of a
                    Substantial Portion of the Property of the Company, or
                    (C) The  election to the Board of  Directors of the Company,
                    of  directors  constituting  a majority of the number of the
                    directors in office unless such directors  were  recommended
                    for election by the existing Board of Directors.

               (iv) A  "Termination  Event"  means the date that the  Employee's
               employment with the Company terminates under one of the following
               circumstances:
                    (A) The  Employee's  employment is terminated by the Company
                    without Good Cause  within two (2) years  following a Change
                    in Control.
                    (B) The Employee voluntarily terminates employment with Good
                    Reason within two (2) years following a Change in Control.
                    (C) The  Employee's  employment  is  terminated  prior  to a
                    Change in Control at the request of a potential acquiror.

                                       76

<PAGE>



     For purposes of the  foregoing,  a  termination  will not be deemed to have
occurred  solely  because of the transfer of the Employee from one subsidiary of
the Company to another.


     (b) For purposes of the foregoing,  (i)  "Affiliate"  or "Associate"  shall
have the meaning set forth in Rule 12b-2 under the  Securities  Exchange  Act of
1934; and (ii)  "Substantial  Portion of the Property of the Company" shall mean
80% of the aggregate  book value of the assets of the Company and its Affiliates
and  Associates  as set forth on the most recent  balance  sheet of the Company,
prepared on a  consolidated  basis,  but its  regularly  employed,  independent,
certified public accountant.

     (c) Notwithstanding the foregoing, a Change  in Control shall not be deemed
to occur for the Employee by virtue of any transaction in which such an Employee
is a participant in a group effecting an acquisition  that  constitutes a Change
in Control if, after such acquisition,  the Employee holds an equity interest in
the entity that has made the acquisition.  3. Litigation  Expenses.  The Company
shall pay to the Employee all out-of-pocket expenses, including attorneys' fees,
incurred  by the  Employee  in  connection  with any  claim or legal  action  or
proceeding involving the Agreement,  whether brought by the Employee or by or on
behalf of the Employee or by another party; provided, however, the Company shall
not  be  obligated  to pay to the  Employee  out-of-pocket  expenses,  including
attorneys'  fees,  incurred  by the  Employee  in any  claim or legal  action or
proceeding  in which the  Employee  is a party  adverse  to the  Company  if the
Company  prevails in such  litigation.  If so  requested by the  Employee,  such
expenses  shall be advanced to the  Employee as they are  incurred  from time to
time during the  pendency of such claim,  legal action or  proceeding;  provided
that if the proviso of the preceding sentence becomes  applicable,  the Employee
shall, within ten (10) days after the Company has prevailed,  repay all advanced
amounts with  interest from the date or dates on which they were advanced at the
rate described in the next sentence.  The Company shall pay prejudgment interest
on any money  judgment  obtained by the  Employee,  calculated  at the published
prime interest rate charged by the Company's principal banking connection, as in
effect from time to time,  from the date that  payment(s) to the Employee should
have been made under the Plan.

                                       77

<PAGE>



     4. Post-termination  Payment Obligations Absolute. The Company's obligation
to pay the Employee the amounts and to make the other arrangements  provided for
herein to be paid and made after  termination of the Employee's  employment with
the Company shall be absolute and unconditional and shall not be affected by any
circumstances,   including  without  limitation,   any  set-off,   counterclaim,
recoupment,  defense  or other  right  that the  Company  may have  against  the
Employee  or anyone  else.  The Company  hereby  waives any  contract  formation
defenses  that it may have with  respect to the Employee  Retention  program and
this Agreement.

     5.  Withholding.  The Company  may  withhold  from any  payment  that it is
required  to make  under  the Plan  amounts  sufficient  to  satisfy  applicable
withholding requirements under any federal, state, or local law.

     6. Successors. The obligations of the Company provided for in the Agreement
shall be the  binding  legal  obligations  of any  successor  to the  Company by
purchase, merger,  consolidation,  or otherwise.  Rights under the Agreement may
not be assigned  by the   Employee   during the  Employee's  life,  and upon the
Employee's  death will ensure to the benefit of the Employee's  heirs,  legatees
and the legal representatives of the Employee's estate.

     7.   Interpretation.   The  validity,   interpretation,   construction  and
performance  of the  Agreement  shall be  governed  by the laws of the  State of
Illinois.  The invalidity of  unenforceability of any provision of the Agreement
shall not effect the validity or enforceability of any other provision.

     8. Amendment and  Termination.  This agreement may be amended or terminated
by the Board of Directors of the Company,  provided that from and after the date
of a Change in  Control  or during  any  period  of time  when the  Company  has
knowledge that any third person has taken steps reasonably  calculated to effect
a Change in  Control  until  twelve  (12)  months  after the  third  person  has
abandoned or terminated  the efforts to effect Change in Control,  the Agreement
may not be terminated and may not be amended in a manner that adversely  affects
the rights of the Employee.



                                      78

<PAGE>


     9. Tax Documents.  This paragraph  shall apply if all or any portion of the
payments and benefits  provided to an Employee under the Agreement,  any benefit
(including  any such plan adopted in the  future),  would  otherwise  constitute
"excess  parachute  payments" within the meaning of Section 280G of the Internal
Revenue  Code of 1986 as  amended  (the  "Code"),  that are  subject  to the tax
imposed by Section 4999 of the Code (or similar tax and/or assessment). If after
the  application of such tax and/or  assessment,  the amount of such payment and
benefits would be less than if the payment and benefits had been,  reduced to an
amount that would result in there being no excess  parachute  payments then such
payments and benefits shall be so reduced (the minimum extent  necessary so that
no excess parachute payments result). If reduction is necessary  hereunder,  the
Employee  shall  elect  which of the  payments  and  benefits  shall be reduced.
Determination of whether payments and benefits would constitute excess parachute
payments, and the amount of reduction so that no excess parachute payments shall
exist,  shall be made, at the Company's expense,  by the independent  accounting
firm employed by the Company  immediately  prior to the occurrence of any change
of control of the Company which will result in the imposition of such tax.

     IN  WITNESS  WHEREOF,  the  Company  and the  Employee  have  executed  the
Agreement on and as of the 18 day of January,  1999.  This Agreement  supersedes
and  replaces  any prior  agreement  between  the  company  and the  undersigned
regarding this subject.



                                                            ILLINOVA CORPORATION


                                                            By:
                                                               -----------------



                                                               -----------------
                                                                Employee



                                       79

<PAGE>




                              NON-QUALIFIED STOCK OPTION AGREEMENT
                                      ILLINOVA CORPORATION
                           1992 LONG-TERM INCENTIVE COMPENSATION PLAN



THIS  AGREEMENT,  entered  into as of the 18th day of January,  1999 (the "Grant
Date") by and  between  ILLINOVA  CORPORATION,  an  Illinois  corporation,  (the
"Company") and George W. Miraben (the "Employee"),


                                   WITNESSETH THAT:

WHEREAS, the Company maintains the Illinova Corporation 1992 Long-Term Incentive
Compensation  Plan (the "Plan"),  which is incorporated and forms a part of this
Agreement, for the benefit of key employees of the Company and its Subsidiaries;

WHEREAS, to induce the Employee to accept employment by the Company, the Company
has agreed to grant to the Employee the option described in this Agreement; and

WHEREAS,  the  Employee  and the  Company  desire to enter  into this  Agreement
reflecting the award of such option;

NOW,  THEREFORE,  IT IS AGREED,  by and between the Company and the  Employee as
follows:


                                   SECTION ONE
                                      GRANT

Subject to the terms and conditions of the Plan and this Agreement, the Employee
is hereby awarded an option to purchase  30,000 shares of Stock (the  "Option").
The Option is not  intended,  and shall not be treated,  as an  incentive  stock
option (as that term is used in Section 422 of the Code).

<PAGE>




                                   SECTION TWO
                                   OPTION PRICE

The option price of each share of stock subject to the Option is $24.688.




                                   SECTION THREE
                         EXERCISE, EXPIRATION AND CANCELLATION
                                     OF OPTION

The option  shall be  exercisable  by the Employee at any time  subsequent  to a
Change in Control as defined in the  Employee  Retention  Agreement  between the
Company and the Employee  (whether or not such  agreement is then in effect) and
otherwise in accordance with the following schedule:

                                       80
<PAGE>

--------------------------------------------------------------------------------
If the Employee is employed through          The Option shall become exercisable
          the following date:                with respect to the following
                                             number of shares on and after that
                                             date:
--------------------------------------------------------------------------------
One-year anniversary of Grant Date              10,000 shares
--------------------------------------------------------------------------------
Two-year anniversary of Grant Date              10,000 shares
--------------------------------------------------------------------------------
Three-year anniversary of Grant Date            10,000 shares
--------------------------------------------------------------------------------

If the  Employee's  employment by the Company  continues  through the 9-1/2 year
anniversary of the Grant Date, then any portion of the Option herein granted and
not  previously   exercisable  shall  become   exercisable  on  such  9-1/2-year
anniversary.

The Option shall expire as to any unexercised portion on the earliest of:

    (a)          the tenth anniversary of the date first above written;

    (b)          the first anniversary of the Employee's death;

    (c)          five years following the Employee's date of retirement; or

    (d)          the date of the Employee's  Termination as defined in the Plan;
                 provided that if the Employee's  employment ceases because of a
                 Termination,  any exercise of the Option  occurring on or after
                 the Employee's  date of Termination  shall be void and shall be
                 ineffective.


For purposes of this Agreement, the Employee's "date of retirement" shall be the
date of Retirement, Early Retirement or Disability Retirement as those terms are
defined in the Plan.

If the Employee exercises the Option with respect to a portion,  but not all, of
the shares of Stock subject  thereto,  the Option shall  thereafter  cease to be
exercisable  with respect to the shares of Stock for which it was exercised but,
subject  to the  terms  and  conditions  of the Plan and this  Agreement,  shall
continue to be  exercisable  with respect to the shares of Stock with respect to
which it was not exercised.

If the Employee's  Termination  occurs prior to the date on which any portion of
the Option has become exercisable, that portion of the Option shall be forfeited
upon  such  Termination.   Notwithstanding  the  foregoing  provisions  of  this
Agreement, the Option shall not become exercisable and shall be forfeited if the
Participant does not become an employee of the Company,  and the Option shall be
forfeited if the Participant  becomes an employee of the Company but voluntarily
resigns within 30 days after his initial date of employment.


                                       81
<PAGE>

                                   SECTION FOUR
                                 METHOD OF EXERCISE

Subject to the terms and conditions of the Plan and this  Agreement,  the Option
may be  exercised,  in whole or in part,  by  filing a written  notice  with the
Secretary  of the  Company at its  corporate  headquarters  prior to the date on
which the Option  expires or is otherwise  cancelled.  Such notice shall specify
the date as of which the  exercise is to occur and the number of shares of Stock
which  the  Employee  elects  to  purchase  and  shall be in such form and shall
contain such other  information  as the Secretary of the Company may  reasonably
require.  The election  shall be  accompanied by payment of the option price for
such shares of Stock  indicated by the  Employee's  election,  together with the
amount of any required  state,  federal or local  withholding  taxes  arising in
connection  with the purchase of such Stock.  Subject to the  provisions  of the
preceding  sentence and the terms of the Plan, payment shall be by cash or check
payable to the Company,  by delivery of shares of Stock having an aggregate Fair
Market Value  (determined as of the date of exercise) equal to the option price,
and if elected in accordance with this Section 4, the Employee's tax withholding
obligation for the shares of Stock,  indicated by the Employee's election,  or a
combination of both.


                                   SECTION FIVE
                                  TRANSFERABILITY

The Option shall not be  transferable  by the Employee other than by will or the
laws of  descent  and  distribution  and,  during the life of the  Employee,  is
exercisable only by the Employee or Employee's guardian or legal representative.




                                   SECTION SIX
                           NOTICE OF DISPOSITION OF SHARES

The Employee  agrees to notify the Company  promptly in the event of disposal of
any shares of Stock  acquired  upon the  exercise  of the  Option,  including  a
disposal by sale, exchange, gift or transfer of legal title.



                                   SECTION SEVEN
                                  ADMINISTRATION

The  authority to manage and control the operation  and  administration  of this
Agreement  shall be vested in the  Committee,  and the Committee  shall have all
powers with respect to this  Agreement that it has with respect to the Plan. Any
interpretation  of this  Agreement by the  Committee and any decision made by it
with respect to the Agreement is final and binding on all persons.


                                   SECTION EIGHT
                                   PLAN GOVERNS

Notwithstanding  anything in this  Agreement to the contrary,  the terms of this
Agreement  shall be  subject  to the terms of the  Plan,  a copy of which may be
obtained by the Employee from the office of the Secretary of the Company. Unless
the context  clearly  implies or indicates the contrary,  a word, term or phrase
used or defined in the Plan is  similarly  used or defined for  purposes of this
Agreement.


                                       82
<PAGE>

                                   SECTION NINE
                                    AMENDMENT

This  Agreement  may be amended by written  agreement  of the  Employee  and the
Company, acting pursuant to authority from the Committee, without the consent of
any other person.


                                   SECTION TEN
                     CONTINUED EMPLOYMENT, RIGHTS AS SHAREHOLDER

This Agreement  does not constitute a contract of employment,  and does not give
the Employee the right to be employed by the Company or its  Subsidiaries.  This
Agreement  does not confer on the  Employee any rights as a  shareholder  of the
Company  prior to the date on which the  Employee  fulfills all  conditions  for
receipt of Stock pursuant to this Agreement and the Plan.



                                   SECTION ELEVEN
                                   GOVERNING LAW

This Agreement  shall be construed and  administered in accordance with the laws
of the State of Illinois, without regard to the principles of conflicts of law.

IN WITNESS WHEREOF,  the parties have caused this Agreement to be executed as of
the day and year first above written.



                                                --------------------------------
                                                GEORGE W. MIRABEN




                                                ILLINOVA CORPORATION


                                                BY:_____________________________
                                                   CHARLES E. BAYLESS
                                                   CHAIRMAN, PRESIDENT AND CHIEF
                                                   EXECUTIVE OFFICER


ATTEST:



------------------------------------
LEAH MANNING STETZNER
CORPORATE SECRETARY

                                       83
<PAGE>

<TABLE>
<CAPTION>

                                                                                                                     Exhibit (12)(a)


                                                                 ILLINOVA CORPORATION
                                                   STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
                                                                     FIXED CHARGES
                                                                (Thousands of Dollars)

<S>                             <C>      <C>       <C>      <C>      <C>      <C>       <C>       <C>           <C>           <C>
                 Year Ended December 31,      Supplemental 1                    Supplemental 2                Supplemental 3
                   -----------------------------------------------------------------------------------------------------------------
                               1992     1993      1993      1994     1995     1996     1997      1997          1998          1998

Earnings Available for
Fixed Charges:                                                                                                    As Restated
Net Income (Loss)           $122,100  ($55,800)  ($55,800) $176,700 $175,312 $213,379 ($69,057) ($69,057)  ($1,559,779) ($1,559,779)
   Add:
    Income Taxes:
      Current                 22,930    25,260     25,260    58,354   98,578  163,873   70,975    70,975         7,556        7,556
      Deferred - Net          63,739    82,057     82,057    71,177   34,137  (16,028)  36,963    36,963       309,070      309,070
    Allocated income taxes    (6,632)  (12,599)   (12,599)   (8,285) (11,851) (12,641) (20,345)  (20,345)      (11,330)     (11,330)
    Investment tax
      credit - deferred         (519)     (782)      (782)  (11,331)  (6,894)  (7,278)  (7,278)   (7,278)       (8,256)      (8,256)
    Income tax effect of
      disallowed costs            -    (70,638)   (70,638)       -        -        -        -         -             -             -
    Income tax effect of
      FAS 71 write-off            -         -          -         -        -        -  (117,998) (117,998)           -             -
    Income tax effect of
      CPS Impairment              -         -          -         -        -        -        -         -     (1,143,252)  (1,143,252)
    Interest on
      long-term debt         160,795   154,110    154,110    135,115 125,581  118,438  116,137   116,137       116,968      116,968
    Amortization of debt
      expense and premium-net,
      and other interest
      charges                 12,195    17,007     17,007     15,826  29,558   24,031   27,984    27,984        29,064       29,064
    One-third of all rentals
      (Estimated to be
      representative of the
      interest component)      5,117     5,992      5,992      5,847   5,221    4,346    4,229     4,229         4,054        4,054
    Interest on
      in-core fuel             8,278     6,174      6,174      7,185   6,716    4,757    3,842     3,842         3,716        3,716
    Disallowed Clinton
      plant costs                 -         -     270,956         -       -        -        -         -             -            -
    FAS 71 Regulatory
      Write-Offs                  -         -          -          -       -        -        -    313,030            -            -
    CPS Impairment                -         -          -          -       -        -        -         -             -     2,666,909
                               -------- --------  --------  -------- -------- -------- --------  --------  -----------   -----------
Earnings (loss) available
  for fixed charges           $388,003 $150,781  $421,737   $450,588 $456,358 $492,877  $45,452  $358,482  ($2,252,189)    $414,720
                               ======== ========  ========  ======== ======== ========  ======== ========  ===========   ===========

Fixed charges:
  Interest on long-
    term debt                 $160,795 $154,110  $154,110   $135,115 $125,581 $118,438  $116,137  $116,137    $116,968     $116,968
  Amortization of debt
   expense and premium-net,
   and other interest charges   25,785   27,619    27,619     25,381   38,147   30,663    32,928    32,928      36,787       36,787
  One-third of all rentals
   (Estimated to be
    representative of the
    interest component)          5,117    5,992     5,992      5,847    5,221    4,346     4,229     4,229       4,054        4,054
                               ------- ---------  --------  -------- --------  -------  --------  --------      --------   ---------
Total Fixed Charges          $191,697  $187,721  $187,721   $166,343 $168,949 $153,447  $153,294  $153,294     $157,809    $157,809
                             ========  ========  ========   ======== ======== ========  ========  ========   ===========  ==========

Ratio of earnings to
  fixed charges                  2.02    N/A *      2.25        2.71     2.70     3.21     N/A *      2.34        N/A  *       2.63
                             ======== ========   ========    =======  ======== =======   ========  ========   =========== ==========



     * Earnings  are  inadequate  to cover fixed  charges.  Additional  earnings
(thousands)  for 1993 , 1997  and 1998 of  $36,940,  $107,842,  and  $2,409,998,
respectively,  are  required to attain a  one-to-one  ratio of Earnings to Fixed
Charges.

     1  Supplemental  ratio of earnings to fixed  charges  presented  to exclude
nonrecurring item - Disallowed Clinton plant costs.

     2  Supplemental  ratio of earnings to fixed  charges  presented  to exclude
write-off  related to the  discontinued  application  of  provisions of SFAS 71,
"Accounting  for the Effects of Certain Types of Regulation"  for the generation
segment of the business.

     3  Supplemental  ratio of earnings to fixed  charges  presented  to exclude
write-off related to Clinton impairment.


                                       85
<PAGE>

</TABLE>

<TABLE>
<CAPTION>

                                                                                                                       Exhibit 12(b)


                                          ILLINOIS POWER COMPANY
                             STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
                                               FIXED CHARGES
                                          (Thousands of Dollars)

<S>                              <C>       <C>       <C>       <C>      <C>      <C>      <C>       <C>         <C>         <C>
              Year Ended December 31,           Supplemental 1                                 Supplemental 2         Supplemental 3
              ----------------------------------------------------------------------------------------------------------------------
                                 1992      1993      1993      1994     1995     1996     1997      1997       1998         1998
                                 ----      ----      ----      ----     ----     ----     ----      ----       ----         ----

Earnings Available for
Fixed Charges:                                                                                                    As Restated
Net Income (Loss)              $122,088 ($56,038) ($56,038) $180,242 $182,713 $228,618 ($44,173) ($44,173) ($1,552,435) ($1,552,435)
  Add:
    Income Taxes:
      Current                    22,930   25,260    25,260    58,354   98,578  163,873   72,680    72,680        7,556        7,556
      Deferred - Net             63,739   82,057    82,057    71,177   34,137  (16,028)  36,963    36,963      309,070      309,070
    Allocated income taxes      (6,632)  (12,599)  (12,599)   (8,285)  (8,417)  (2,642)  (1,446)   (1,446)       3,506        3,506
    Investment tax
      credit- deferred            (519)     (782)     (782)  (11,331)  (6,894)  (7,278)  (7,278)   (7,278)      (8,256)      (8,256)
    Income tax effect of
      disallowed costs              -    (70,638)  (70,638)       -        -        -        -         -            -            -
    Income tax effect of
      FAS 71 write-off              -         -         -         -        -        -  (117,998) (117,998)          -            -
    Income tax effect of
      CPS impairment                -         -         -         -        -        -        -         -    (1,143,252)  (1,143,252)
    Interest on
      long-term debt            160,795  154,110   154,110   135,115  125,581  118,438  109,595   109,595      106,879      106,879
    Amortization of debt
      expense and premium-net,
      and other interest
      charges                    12,195   17,007    17,007    15,826   29,558   22,325   26,260    26,260       28,107       28,107
    One-third of all rentals
      (Estimated to be
      representative of the
      interest component)         5,117    5,992     5,992     5,847    5,221    4,346    4,229     4,229        4,054        4,054
    Interest on
      in-core fuel                8,278    6,174     6,174     7,185    6,716    4,757    3,842     3,842        3,716        3,716
    Disallowed Clinton
      plant costs                    -        -    270,956        -        -        -        -         -            -            -
    FAS 71 Regulatory
      Write-Off                      -        -         -         -        -        -        -    313,030           -            -
    CPS Impairment                   -        -         -         -        -        -        -         -            -     2,666,909
                               --------  --------  -------- -------- --------  -------  --------  ----------- ----------- ----------
Earnings (loss) available
  for fixed charges            $387,991 $150,543  $421,499  $454,130 $467,193 $516,409  $82,674  $395,704   ($2,241,055)   $425,854

                               ========  ======== ======== ======== ========  ========  ======== =========   ============  =========

Fixed charges:
  Interest on long-
    term debt                  $160,795 $154,110  $154,110  $135,115 $125,581 $118,438 $109,595  $109,595     $106,879     $106,879
  Amortization of debt
    expense and premium-net,
    and other interest charges   25,785   27,619    27,619    25,381   38,147   28,957   31,204    31,204       35,829       35,829
  One-third of all rentals
    (Estimated to be
    representative of the
    interest component)           5,117    5,992     5,992     5,847    5,221    4,346    4,229     4,229        4,054        4,054
                               --------  --------  -------- -------- -------- --------  -------- --------     ---------   ----------
Total Fixed Charges            $191,697 $187,721  $187,721  $166,343 $168,949 $151,741 $145,028  $145,028     $146,762     $146,762
                               ======== ========  ========  ======== ======== ======== ========  ========     ========    ==========

Ratio of earnings to
  fixed charges                    2.02     N/A *     2.25      2.73     2.77     3.40     N/A *     2.73        N/A  *        2.90
                               ========  ========  ========  ======== ======== ======== ========  ========  ===========   ==========


     * Earnings  are  inadequate  to cover fixed  charges.  Additional  earnings
(thousands)  for 1993,  1997,  and 1998 of  $37,178,  $62,354,  and  $2,387,817,
respectively,  are  required to attain a  one-to-one  ratio of Earnings to Fixed
Charges.

     1  Supplemental  ratio of earnings to fixed  charges  presented  to exclude
nonrecurring item Disallowed Clinton plant costs.

     2  Supplemental  ratio of earnings to fixed  charges  presented  to exclude
write-off  related to the  discontinued  application  of  provisions of SFAS 71,
"Accounting  for the Effects of Certain Types of Regulation"  for the generation
segment of the business.

     3  Supplemental  ratio of earnings to fixed  charges  presented  to exclude
write-off related to Clinton Impairment.


                                       87
<PAGE>

</TABLE>

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


PROXY STATEMENT TABLE OF CONTENTS
Notice of Annual Meeting............................   87
Proxy Statement.....................................   88
Appendix: 1998 Annual Report to Shareholders....... . 107


TO THE SHAREHOLDERS OF ILLINOVA CORPORATION:
Notice is hereby  given that the  Annual  Meeting of  Shareholders  of  Illinova
Corporation  ("Illinova")  will be held at 10 a.m.  Wednesday,  May 5, 1999,  at
Shilling Community  Education Center,  Richland  Community College,  One College
Park, Decatur, Illinois 62521, for the following purposes:

   1) To elect the Board of Directors for the ensuing year.
   2) To transact any other  business  that may properly come before the meeting
      or any adjournment.

   Shareholders  of  record  at the  close of  business  on March 8,  1999,  are
entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,

Leah Manning Stetzner,
General Counsel and Corporate Secretary
Decatur, Illinois
March 31, 1999


IMPORTANT
Illinova  invites each of its  approximately  32,100  shareholders to attend the
Annual  Meeting.  Shareholders  will be admitted on verification of record share
ownership at the admission  desk.  Shareholders  who own shares  through  banks,
brokerage  firms,  nominees or other  account  custodians  must present proof of
beneficial  share  ownership  (such as a  brokerage  account  statement)  at the
admission desk. If you are unable to be present at the meeting,  it is important
that you sign and return the enclosed  proxy, no matter how many shares you own.
Illinova has enclosed a prepaid, self-addressed envelope for that purpose.

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


                                       88
<PAGE>

Proxy Statement


SOLICITATION AND REVOCATION OF PROXIES

This Proxy  Statement is furnished in connection  with a solicitation of proxies
by the  Board  of  Directors  of  Illinova,  for use at the  Annual  Meeting  of
Shareholders  to be  held  at  Shilling  Community  Education  Center,  Richland
Community  College,  One  College  Park,  Decatur,  Illinois  62521,  at 10 a.m.
Wednesday,  May 5, 1999, and at any adjournment  thereof (the "Annual Meeting").
Any shareholder giving a proxy may revoke it at any time by giving a later proxy
or by giving written notice of revocation to the Corporate Secretary of Illinova
prior to the Annual  Meeting.  All duly executed  proxies  received prior to the
Annual Meeting will be voted.

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


VOTING RIGHTS

Shareholders  of record at the close of business  on Monday,  March 8, 1999 (the
"Record Date"),  will be entitled to receive notice of and to vote at the Annual
Meeting. As of that date,  Illinova had outstanding  69,919,287 shares of Common
Stock.  Shareholders who are present at the Annual Meeting in person or by proxy
will be entitled  to one vote for each share of  Illinova's  Common  Stock which
they held of record at the close of business on the Record Date.

    All shareholders will be entitled to 10 votes (the number of directors to be
elected)  for  each of  their  shares  for  candidates  nominated  to  serve  as
directors.  Shareholders may cast all of their votes for any one candidate whose
name has been placed in  nomination  prior to the voting,  or  distribute  their
votes  among  two  or  more  candidates.  Election  of  directors  requires  the
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy and entitled to vote.

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


ANNUAL REPORT, PROXY AND PROXY STATEMENT

Accompanying  this  Proxy  Statement,   which  includes  Consolidated  Financial
Statements,  is a Notice of Annual Meeting of Shareholders,  a form of Proxy and
the Summary Annual Report to  Shareholders  covering  operations of Illinova for
the year 1998. This Proxy Statement and  accompanying  documents are first being
mailed to shareholders on or about March 31, 1999.


                                       89
<PAGE>

BOARD OF DIRECTORS

Information Regarding the Board of Directors
The Board of  Directors  held nine Board  meetings  during 1998.  All  directors
attended  at least  75  percent  of the  aggregate  meetings  of the  Board  and
Committees of which they were members  during 1998. The Board has three standing
committees: the Audit Committee, the Finance Committee, and the Compensation and
Nominating Committee.

   The duties and members of the standing committees are:

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

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

3)   Review the activities of Illinova's internal auditors;

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

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

6)   Approve the services  performed by the independent  accountants.

     The Audit Committee met three times during 1998.

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

Finance Committee
1)   Review management's cash flow forecasts,  financial forecasts and financing
     program,  and make  recommendations  to the Board regarding the approval of
     such plans;

2)   Review Illinova's banking relationships, short-term borrowing arrangements,
     dividend policies,  arrangements with the transfer agent and registrar, and
     investment objectives;

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

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

5)   Act in an advisory capacity to management,  the Board of Directors, and the
     Chairman,  President and Chief Executive Officer on other financial matters
     as they may arise.

     The Finance Committee met five times during 1998.

                                       90
<PAGE>

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

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

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

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

4)   Recommend  to the  Board  candidates  for  election  as  director  to  fill
     vacancies on the Board of Directors as they occur.

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

     The Compensation and Nominating Committee met three times during 1998.

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

Board Compensation
The Outside  Directors  of Illinova  receive a retainer fee of $18,000 per year.
Outside  Directors who also chair Board Committees  receive an additional $2,500
per year. Outside Directors receive a grant of 650 shares of Common Stock on the
date of each Annual Shareholders Meeting. Outside Directors elected to the Board
between Annual Shareholders  Meetings are paid $850 for each Board and Committee
meeting  attended  prior to the first Annual  Shareholders  Meeting  after their
election to the Board. Other than the foregoing,  there are no  attendance-based
fees.

   Illinova had a Retirement Plan for Outside  Directors.  Under this plan, each
Outside  Director who attained age 65 and served on the Board for a period of 60
or more consecutive  months was eligible for annual  retirement  benefits at the
rate of the annual retainer fee in effect when the director retired. Each former
Outside  Director  whose  right to receive  the  retirement  benefit  had vested
continues  to  receive  such  benefits  in  accordance  with  the  terms  of the
Retirement Plan.

   In 1996, the Board of Directors  adopted a Comprehensive  Deferred Stock Plan
for Outside  Directors,  replacing the Retirement  Plan.  All Outside  Directors

                                       91
<PAGE>

serving  at the time this new plan was  adopted  were  granted a lump sum amount
based on the net  present  value of these  benefits  to them,  were they to have
retired under the Retirement  Plan,  based on the number of years they served on
the Board but not to exceed 10.  This  dollar  amount was  converted  into stock
units,  based on the then market value of Illinova Common Stock, and placed into
an  account.  The value of these  stock  units is to be paid to the  director in
cash, in a lump sum or  installments,  on termination  of service,  based on the
then market value of Illinova Common Stock, plus dividend equivalents.

   In addition,  each Outside  Director  receives an annual award of stock units
having a value of $6,000.  This award is paid to the Outside Director in cash on
retirement,  at once or in installments as the director may elect. The amount of
such  payment is  determined  by  multiplying  the number of stock  units in the
account  times the then market value of Illinova  Common  Stock,  and adding the
dividend equivalents attributable to such stock units.

   Illinova  has a Deferred  Compensation  Plan for Certain  Directors.  Outside
Directors  may elect to defer all or any portion of their fees and stock  grants
until  termination of their services as directors.  Deferred fees and grants are
converted into stock units  representing  shares of Illinova's Common Stock with
the value of each  stock  unit based on the last  reported  sales  price of such
stock.  Additional  credits are made to the participating  director's account in
dollar  amounts equal to the  dividends  paid on Common Stock which the director
would have  received  if the  director  had been the record  owner of the shares
represented  by stock units,  and these  amounts are converted  into  additional
stock  units.  On  termination  of  the  participating  directors'  services  as
directors, payment of deferred fees and stock grants is made in shares of Common
Stock in an amount  equal to the  aggregate  number of stock  units  credited to
their accounts.

   Illinova  amended the plan in 1997 to provide for a payout in cash instead of
shares of Common Stock.  Deferred  amounts are still  converted into stock units
representing  shares of Common  Stock with the value of each stock unit based on
the last reported sales price of such stock.  Payment is made in cash, in a lump
sum or installments,  as soon as practical  following a director's  termination.
The cash paid on  termination  equals the number of stock  units times the share
price at the  close of market on the last  business  day of the month  preceding
termination.  Directors  receive no other  payments  after their  service on the
Board ceases.


ELECTION OF DIRECTORS

Illinova's  entire  Board of  Directors  is  elected at each  Annual  Meeting of
Shareholders.   Directors   hold  office  until  the  next  Annual   Meeting  of
Shareholders or until their successors are elected and qualified.  At the Annual
Meeting a vote will be taken on a proposal to elect the 10  directors  nominated
by Illinova's Board of Directors. Their names and certain additional information
is set forth on the following  pages.  The dates shown for service as a director
include  service  as a  director  of  Illinois  Power  prior  to  the  May  1994
restructuring  in which Illinois  Power became a subsidiary of Illinova.  If any
nominee  should  become  unable to serve as a director,  another  nominee may be
selected by the current Board of Directors.

                                       92
<PAGE>


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

J. Joe Adorjan, 60                                                          1997
Chairman of Borg-Warner Security Corporation,  Chicago, Ill., a security systems
services  firm,  since 1995. He was President of Emerson  Electric  Company from
1993 to 1995. Prior to that, he was Chairman and Chief Executive Officer of ESCO
Electronics  Corporation.  He is a director  of The  Earthgrains  Company,  ESCO
Electronics Corporation, Hussmann Corporation and Goss Graphics Systems, Inc.


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


C. Steven McMillan, 53                                                      1996
President,  Chief  Operating  Officer,  and  Director  of Sara Lee  Corporation,
Chicago, Ill., a global packaged food and consumer products company, since 1997.
He was  Executive  Vice  President of Sara Lee from 1993 to 1997 and Senior Vice
President-Strategy  Development from 1986 to 1993. He is a director of Pharmacia
and Upjohn.


Robert M. Powers, 67                                                        1984
From 1980 until  retirement  in December  1988,  President  and Chief  Executive
Officer of A. E. Staley  Manufacturing  Company,  Decatur,  Ill., a processor of
grain and oil seeds. He is a director of A. E. Staley Manufacturing Company.


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


Walter D. Scott, 67                                                         1990
Professor of Management and Senior Austin Fellow,  J. L. Kellogg Graduate School
of  Management,  Northwestern  University,  Evanston,  Ill.,  since 1988. He was
Chairman of GrandMet  USA from 1984 to 1986 and  President  and Chief  Executive
Officer  of IDS  Financial  Services  from  1980 to 1984.  He is a  director  of
Neodesic Corporation and Intermatic Incorporated.


Joe J. Stewart, 60                                                          1998
From  1995  until  retirement  in 1998,  President  of BWX  Technologies,  Inc.,
formerly The Babcock & Wilcox  Government Group,  Lynchburg,  Va., a diversified
energy equipment and services company, and Executive Vice President of McDermott
International,  Inc. (parent of BWX Technologies,  Inc. and The Babcock & Wilcox
Company). He was President and Chief Operating Officer of The Babcock and Wilcox
Company and Executive Vice President of McDermott International, Inc., from 1993
to 1995 and  Executive  Vice  President  of the  Power  Generation  Group of The
Babcock  and  Wilcox  Company  from 1987 to 1993.

                                       93
<PAGE>

Ronald L.  Thompson,  49                                                    1991
Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing  Co.,
Bowling Green,  Ohio, a  manufacturer  of automotive  parts,  since 1993. He was
President and Chief Executive Officer and a director of The GR Group,  Inc., St.
Louis,  Mo.,  from 1980 to 1993.  He is a director  of  Teachers  Insurance  and
Annuity  Association,  and Ryerson Tull.

Marilou von Ferstel,  61                                                    1990
Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a
public relations firm in Chicago, Ill., from June 1990 until retirement in April
1997. She was Managing  Director and Senior Vice President of Hill and Knowlton,
Chicago, Ill., from 1981 to 1990. She is a director of Walgreen Company.

John D. Zeglis,  51                                                         1993
President   and  Director  of  AT&T,   Basking   Ridge,   N.J.,  a   diversified
communications  company, since October 1997. He was Vice Chairman from June 1997
to October 1997, Senior Executive Vice President and General Counsel,  from 1995
to June 1997 and Senior Vice President -- General Counsel and Government Affairs
from 1989 to 1995.  He is a director of the Helmerich & Payne  Corporation,  and
Sara Lee Corporation.


SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below shows shares of Illinova Common Stock  beneficially  owned as of
December 31, 1998, by each director  nominee,  executive  officers  named in the
Summary Compensation Table, and entities owning more than 5 percent.


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

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


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

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

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

(4)  Includes 135 shares owned by family members.

(5)  Includes 910 shares owned by spouse.

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

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

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

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


EXECUTIVE COMPENSATION

The  following  table  sets  forth a summary  of the  compensation  of the Chief
Executive Officer,  the retired Chief Executive Officer, and the four other most
highly  compensated  executive  officers of Illinova  subsidiaries for the years
indicated.  The compensation shown includes all compensation paid for service to
Illinova and its subsidiaries,  including  Illinois Power,  Illinova  Generating
Company, and Illinova Energy Partners.

                                       95
<PAGE>

<TABLE>
<CAPTION>

                                                      SUMMARY COMPENSATION TABLE
                                                                                          Long-Term Compensation
                                                    Annual Compensation                     Awards
<S>                                  <C>      <C>          <C>          <C>          <C>           <C>              <C>
                                                                        Other      Restricted      Securities        All Other
                                                          Bonus        Annual     Stock Awards     Underlying      Compensation
Name and Principal Position          Year      Salary      (1)      Compensation      (2)            Options            (4)

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

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

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

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

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

DAVID W. BUTTS                       1998     $214,732     $ 14,441     $  6,884     $ 14,441       10,000 shs.     $  2,339
  Senior Vice President of           1997      188,227        7,529        7,185        7,529        6,000 shs.        2,595
  Illinois Power and President       1996      181,402       17,314        7,350       17,314        6,500 shs.        2,595
  of Illinova Energy Partners
</TABLE>


(1)  The amounts  shown in this column are the cash award portion of grants made
     to these  individuals  under  the  Executive  Incentive  Compensation  Plan
     ("Compensation  Plan")  for  1998,  including  amounts  deferred  under the
     Executive Deferred Compensation Plan. See the Compensation Plan description
     in footnote (2) below.

(2)  This  table sets forth  stock unit  awards for 1998 under the  Compensation
     Plan. One-half of each year's award under this plan is converted into stock

                                       96
<PAGE>

     units  representing  shares of Illinova  Common  Stock based on the closing
     price of Common Stock on the last trading day of the award year.  The other
     one-half  of the award is cash and is  included  under Bonus in the Summary
     Compensation Table. Stock units awarded in a given year, together with cash
     representing  the  accumulated  dividend  equivalents on those stock units,
     become  fully vested after a  three-year  holding  period.  Stock units are
     converted into cash based on the closing price of Common Stock on the first
     trading day of the distribution  year.  Participants  (or  beneficiaries of
     deceased  participants)  whose employment is terminated by retirement on or
     after age 55, disability,  or death receive the present value of all unpaid
     awards on the date of such  termination.  Participants  whose employment is
     terminated for reasons other than retirement,  disability, or death forfeit
     all unvested awards. In the event of a termination of employment within two
     years after a change in control of  Illinova,  without good cause or by any
     participant  with good reason,  all awards of the participant  become fully
     vested and payable.  As of December 31, 1998, named executive officers were
     credited with the following total aggregate  number of unvested stock units
     under the Compensation Plan since its inception, valued on the basis of the
     closing price of Common Stock on December 31, 1998:  Mr. Haab,  5,420 units
     valued  at  $135,513;   Mr.  Lang,  2,402  units  valued  at  $60,069;  Mr.
     Altenbaumer,  2,157 units valued at $53,927; Mr. Dreyer, 3,035 units valued
     at $75,889; Mr. Butts, 1,742 units valued at $43,572.  Although stock units
     have been  rounded,  valuation  is based on total  stock  units,  including
     partial shares.

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

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

     The following  tables  summarize  grants during 1998 of stock options under
Illinova's  1992  Long-Term  Incentive  Compensation  Plan  ("LTIC")  and awards
outstanding at year end for the  individuals  named in the Summary  Compensation
Table.

                                       97
<PAGE>

<TABLE>
<CAPTION>

                                                              OPTION GRANTS IN 1998
                                                                 Individual Grants
<S>                           <C>                      <C>                         <C>             <C>                  <C>
                     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)

Larry D. Haab                  27,000                   9.5%                      $29.094          2/11/2008           $129,600

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

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

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

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

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


(1)  Each option  becomes  exercisable  on February 11, 2001. In addition to the
     specified  expiration  date, the grant expires on the first  anniversary of
     the recipient's  death and/or 5 years following date of retirement,  and is
     not exercisable in the event a recipient's  employment  terminates.  In the
     event of certain  change-in-control  circumstances,  the  Compensation  and
     Nominating  Committee may declare the option immediately  exercisable.  The
     exercise  price of each  option  is equal to the fair  market  value of the
     Common Stock on the date of the grant. Recipients shall also receive, on or
     shortly after February 11, 2001, a target performance award,  determined by
     calculating  the  difference  between the return  earned by Illinova on its
     invested  capital and its cost of capital (the  "spread"),  then  comparing
     this spread to that of a peer group and reducing or  increasing  the target
     award depending on Illinova's  relative  performance,  but not reducing the
     payment below zero.  The target award is equal to one-half of the mid-point
     of compensation  for each officer's  salary grade (a  market-based  number)
     times  a  percentage,   determined  by  the   Compensation  and  Nominating
     Committee. In 1998 those percentages ranged between 20 and 45 percent. This
     range does not apply to Mr.  Bayless's  stock  options as  described in his
     employment  agreement  on  page  10.  At the  discretion  of the  Board  of
     Directors, the foregoing payment may be made in the form of Illinova Common
     Stock of  equivalent  value based on the  average  New York Stock  Exchange
     price of the stock during February 2001, or in cash.

                                       98
<PAGE>

(2)  The Grant Date Present Value has been  calculated  using the  Black-Scholes
     option  pricing model.  Disclosure of the Grant Date Present Value,  or the
     potential  realizable value of option grants assuming 5% and 10% annualized
     growth  rates,  is  mandated  by  regulation;  however,  Illinova  does not
     necessarily  view  the  Black-Scholes  pricing  methodology,  or any  other
     present  methodology,  as a valid or accurate means of valuing stock option
     grants. The calculation was based on the following  assumptions:  (i) As of
     the grant date, Illinova's calculated  Black-Scholes ratio was .1808. After
     discounting  for  risk  of  forfeiture  at  three  percent  per  year  over
     Illinova's three-year vesting schedule, the ratio is reduced to .1650; (ii)
     An  annual  dividend  yield on  Illinova  Common  Stock of  4.48%;  (iii) A
     risk-free  interest  rate of  5.76%,  based on the  yield of a  zero-coupon
     government  bond  maturing  at the end of the option  term;  and (iv) Stock
     volatility of 18.65%.

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

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


<TABLE>
<CAPTION>

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

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

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

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


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

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

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



PENSION BENEFITS

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

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


                          Estimated Annual Benefits (rounded)

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

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


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

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

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


                                       101
<PAGE>

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.

                                       102
<PAGE>


EMPLOYEE RETENTION AGREEMENTS

Illinova  has  entered  into  Employee  Retention  Agreements  with  each of its
executive officers and with officers of its subsidiaries. Under each agreement,
the officer  would be entitled to receive a lump sum cash  payment if his or her
employment were terminated  without good cause or voluntarily by the officer for
good  reason  within two years  following  a change in control of  Illinova  (as
defined  in the  Agreement)  or  terminated  prior to a change of control at the
request of a potential  acquiror.  The amount of the lump sum  payment  would be
equal to

1)   36 months' salary at the greater of the officer's  salary rate in effect on
     the date the change in control occurred or the salary rate in effect on the
     date the officer's employment with Illinova terminated; plus

2)   three  times the  latest  bonus  earned  by the  officer  during  the three
     calendar years preceding termination of employment.

   Under the agreement,  the officer would continue,  after any such termination
of employment,  to participate in and receive benefits under other benefit plans
of Illinova. Such coverage would continue for 36 months following termination of
employment,  or, if earlier, until the officer reached age 65 or was employed by
another employer;  provided that, if the officer was 50 years of age or older at
the time of such  termination,  then coverage  under health,  life insurance and
similar  welfare plans would  continue until the officer became 55 years of age,
at which time he or she would be eligible to receive  the  benefits  extended to
the employees of Illinova who elect early retirement.


COMPENSATION AND NOMINATING COMMITTEE REPORT ON OFFICER COMPENSATION

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


                                       103
<PAGE>

OFFICER COMPENSATION PHILOSOPHY

Illinova's  compensation philosophy reflects a commitment to compensate officers
competitively  with other  companies  while  rewarding  executives for achieving
levels of  operational  and  financial  excellence  consistent  with  continuous
improvement.

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

   The  compensation  program  for  officers  consists  of base  salary,  annual
incentive,  and long-term incentive components.  The Committee believes that the
combination  of these  three  elements  balances  short and  long-term  business
performance  goals and aligns officer financial rewards with those of Illinova's
shareholders.  The compensation  program is structured so that, depending on the
salary level,  between  approximately  30 percent and 60 percent of an officer's
total compensation target is composed of incentive compensation.


BASE SALARY PLAN

The Committee  determines  base salary ranges for  executive  officers  based on
competitive  pay  practices  for  similarly  sized  companies in both the energy
specific and general  industries.  Officer salaries  correspond to approximately
the median of the companies in the  appropriate  comparison  market.  Individual
increases are based on several  factors,  including  the  officer's  performance
during the year, the  relationship of the officer's  salary to the market salary
level for the position, and competitive industry salary increase practices.


ANNUAL INCENTIVE COMPENSATION PLAN
Annual  incentive  awards are earned based on the achievement of specific annual
financial  and  operational  goals by the Illinova  officer group as a whole and
consideration of each officer's  individual  contribution.  If payment is earned
under  this  Plan,  one-half  of the bonus is  payable  in cash  during the year
following the performance  year, and one-half is credited to the participants in
the form of Common Stock units,  the number of which is  determined  by dividing
half of the earned bonus amount by the closing  price of the Common Stock on the
last trading day of the  performance  year. The officer's  interest in the stock
units vests at the end of the three-year period, which begins the year after the
performance  year.  The  officer  receives  this  award in cash  equal to

1)   the closing stock price on the first trading day of the  distribution  year
     times the number of units held; plus

2)   dividend  equivalents  that  would  have  been  received  if the  stock had
     actually been issued.

                                       104
<PAGE>

   Maximum  awards under the plan may be up to 150 percent of target;  threshold
awards are 50 percent of target.

   For Illinois Power  officers,  1998 awards under the  Compensation  Plan were
based on achievement in the following  performance areas where applicable:  cash
flow,  earnings  per  share,  return  on  invested  capital,   sales,   customer
satisfaction,  safety, employee teamwork, and cost management.  Up to 20 percent
of the awarded  amount is based on an  assessment  of the  individual  officer's
performance during the year.

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

   For the  unregulated  subsidiaries,  Illinova  Generating and Illinova Energy
Partners,  1998 officer awards were based on  achievement of specific  marketing
objectives,  earnings objectives, and cash flow. Up to 30 percent of the awarded
amount is based on an assessment of the individual officer's  performance during
the year.


LONG-TERM INCENTIVE COMPENSATION (LTIC) PLAN

Awards under the LTIC Plan are  calibrated  to median  utility  industry and the
general  industry and are based on corporate  performance  as well as individual
officer's  contributions to corporate  performance subject to the review of this
Committee.  The LTIC value  granted to the officers for 1998  represent an award
based on market  levels as well as on Illinova  and  individual  performance  as
evaluated  by the  Chairman  and  reviewed  by the  Committee.  In 1998,  it was
determined  that  awards  under the LTIC plan be  delivered  in two  components.
One-half of each  officer's  LTIC plan award is  delivered  in the form of stock
options granted at fair market value on the date of the award. The other half of
the LTIC plan award is  distributed  to  officers  in cash  based on  Illinova's
Shareholder  Value-Added (SVA)  performance  relative to a peer group of utility
companies,   as  measured  in  overlapping   three-year  periods.  SVA  measures
Illinova's  return  on the  Company's  weighted  average  cost of  capital.  SVA
performance  at the median of the peer group will result in target award levels.
Performance  above the median  will result in payouts  greater  than target to a
maximum of two times target;  performance significantly below the median results
in no payouts.  Since 1996  represented  the first year of the SVA plan's  first
three-year  measurement  cycle,  no awards are due to be paid out under the plan
until  1999.  Based on  performance,  no award was earned in 1998 for payment in
1999. No future payments will be made as a result of the SVA program.

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

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


                                       105
<PAGE>

CEO COMPENSATION

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

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

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


COMPENSATION AND NOMINATING COMMITTEE

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


STOCK PERFORMANCE GRAPHS
The following performance graphs compare the cumulative total shareholder return
on Illinova's  Common Stock to the cumulative total return on the S&P 500 Index,
S&P MidCap 400 Index and S&P Utilities Index from (i) December 31, 1993, through
December 31, 1998, and (ii) December 31, 1995, through December 31, 1998.


COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities
     Assumes $100 invested on December 31, 1993, in Illinova  Common Stock,  S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.

     Fiscal year ended December 31.


                                       106
<PAGE>

COMPARISON OF THREE-YEAR CUMULATIVE TOTAL RETURN

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

     Assumes $100 invested on December 31, 1995, in Illinova  Common Stock,  S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.

     Fiscal year ended December 31.


INDEPENDENT AUDITORS

The Board of  Directors  of  Illinova  has  selected  PricewaterhouseCoopers  as
independent  auditors for Illinova for 1999. A representative  of that firm will
be  present at the Annual  Meeting  and  available  to make a  statement  and to
respond to questions.


OTHER MATTERS

Illinova's 1998 Summary Annual Report to Shareholders was mailed to shareholders
on or about March 31, 1999. Copies of Illinova's Annual Report on Form 10-K will
be available to shareholders,  after its filing with the Securities and Exchange
Commission on or before March 31, 1999. Requests should be addressed to Investor
Relations, G-21, Illinova Corporation,  500 South 27th Street, Decatur, Illinois
62521-2202.

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

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


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

By Order of the Board of Directors,


Leah Manning Stetzner,
General Counsel and Corporate Secretary

Decatur, Illinois
March 31, 1999


                                       107
<PAGE>

Appendix: 1998 Annual Report to Shareholders


TABLE OF CONTENTS
Management's Discussion and Analysis.....................................   110
Responsibility for Information...........................................   137
Report of Independent Accountants........................................   138
Consolidated Statements of Income........................................   139
Consolidated Balance Sheets..............................................140-141
Consolidated Statements of Cash Flows....................................   142
Consolidated Statements of Retained Earnings.............................   143
Notes to Consolidated Financial Statements...............................   144
Selected Consolidated Financial Data.....................................   190
Selected Illinois Power Company Statistics...............................   192


                                       108
<PAGE>

ABBREVIATIONS USED THROUGHOUT THIS REPORT

AICPA           American Institute of Certified Public Accountants
AFUDC           Allowance for Funds Used During Construction
Baldwin         Baldwin Power Station
Clinton         Clinton Power Station
DOE             U.S. Department of Energy
EITF            Emerging Issues Task Force of the
                Financial Accounting Standards Board
EMF             Electric and Magnetic Fields
EPS             Earnings Per Share
ESOP            Employees' Stock Ownership Plan
FAS             Statement of Financial Accounting Standards
FASB            Financial Accounting Standards Board
FERC            Federal Energy Regulatory Commission
Fuel Company    Illinois Power Fuel Company
Hennepin        Hennepin Power Station
IBE             Illinova Business Enterprises, Inc.
ICC             Illinois Commerce Commission
IEP             Illinova Energy Partners, Inc.
IGC             Illinova Generating Company
IIC             Illinova Insurance Company
Illinova        Illinova Corporation
IP              Illinois Power Company
IPFI            Illinois Power Financing I
IPSPT           Illinois Power Special Purpose Trust
ISA             Integrated Safety Assessment
ISO             Independent System Operator
IT              Information Technology
ITC             Investment Tax Credits
kw              Kilowatt
kwh             Kilowatt-Hour
MAIN            Mid-America Interconnected Network
MGP             Manufactured-Gas Plant
MIPS            Monthly Income Preferred Securities
MISO            Midwest Independent Transmission System Operator, Inc.
MW              Megawatt
MWH             Megawatt-Hour
NAES            North American Energy Services Company
NERC            North American Electric Reliability Council
NOPR            Notice of Proposed Rulemaking
NOx             Nitrogen Oxide
NRC             U.S. Nuclear Regulatory Commission
NWPA            Nuclear Waste Policy Act of 1992
P.A. 90-561     Electric Service Customer Choice and Rate Relief Law of 1997
PCA             Power Coordination Agreement
PECO            PECO Energy Company
ROE             Return on Equity
S&P             Standard & Poor's
SCR             Selective Catalytic Reduction
SEC             U.S. Securities and Exchange Commission
SFP             Secondary Financial Protection
SO2             Sulfur Dioxide
SOP             Statement of Position
Soyland         Soyland Power Cooperative, Inc.

                                       109
<PAGE>

TOPrS           Trust Originated Preferred Securities
UFAC            Uniform Fuel Adjustment Clause
UGAC            Uniform Gas Adjustment Clause
U.S. EPA        U.S. Environmental Protection Agency
VaR             Value-at-Risk
Vermilion       Vermilion Power Station
Wood River      Wood River Power Station


MANAGEMENT'S DISCUSSION AND ANALYSIS

In this report, we refer to the Consolidated Financial Statements, related Notes
to Consolidated Financial Statements,  Selected Consolidated Financial Data, and
Selected   Illinois  Power  Company   Statistics  for   information   concerning
consolidated  financial position and results of operations.  Below is discussion
of the factors having significant impact on consolidated  financial position and
results of operations since January 1, 1996.


ILLINOVA SUBSIDIARIES

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


RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 1998

In February 2000, Illinova and IP restated its financial statements for the year
ended  December  31, 1998 to reflect a revision  to the initial  estimate of the
"Transition period cost recovery"  regulatory asset established in December 1998
coincident with the impairment of the Clinton Power Station.  The effect of this
revision  was to decrease  the amount of the  regulatory  asset at December  31,
1998,  and  correspondingly  increase  the related  impairment  charge by $325.7
million  ($196.5  million net of tax).  The net effect of this  revision  was to
increase the previously reported net loss by $196.5 million, or $2.74 per common
share (basic and  diluted).  As a result of the  quasi-reorganization  described
below,  there was no effect of this  revision on "Retained  earnings;"  however,
"Total  common  stock  equity"  was  reduced by $196.5  million.  The  following
discussion,  as well as all  financial  tables  and  statements  throughout  the
10-K/A, have been modified to reflect these changes.

                                       110
<PAGE>

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.


                                       111
<PAGE>

COMPETITION

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

   Under P.A.  90-561,  customers with demand greater than 4 MW at a single site
and  customers  with at least 10 sites which  aggregate at least 9.5 MW in total
demand are allowed to choose electric  generation  suppliers  ("direct  access")
starting  in  October  1999.  Direct  access for the  remaining  non-residential
customers  will occur in two phases:  customers  representing  one-third  of the
remaining  load in the  non-residential  class in  October  1999  and  customers
representing  the entire  remaining  non-residential  load on December 31, 2000.
Direct  access will be available to all  residential  customers in May 2002.  IP
remains obligated to serve all customers who continue to take service from IP at
tariff rates and remains  obligated to provide delivery service to all customers
at regulated  rates. In 1999,  rates for delivery  services for  non-residential
customers  will be  established  in  proceedings  mandated by P.A.  90-561.  The
transition  charges departing  customers must pay to IP are not designed to hold
IP completely  harmless from resulting  revenue loss,  because of the mitigation
factor  described  below.  IP will be able to  estimate  the  revenue  impact of
customer  choice  more   accurately  when  its  delivery   service  charges  are
established.

     Although the specified  residential rate reductions and the introduction of
direct  access will lead to lower  electric  service  revenues,  P.A.  90-561 is
designed to protect the  financial  integrity  of  electric  utilities  in three
principal ways:

1)   Departing customers are obligated to pay transition  charges,  based on the
     utility's  lost  revenue from that  customer.  The  transition  charges are
     applicable  through  2006 and can be extended two  additional  years by the
     ICC. The transition charges are calculated by subtracting from a customer's
     fully bundled rate an amount equal to a) delivery  charges the utility will
     continue  to receive  from the  customer,  b) the market  value of freed-up
     energy, and c) a mitigation factor, which is the higher of a fixed rate per
     kwh or a percentage of the  customer's  bundled base rate.  The  mitigation
     factor  increases  during the transition  period and is designed to provide
     incentive for utilities to continue cost reduction efforts and generate new
     sources of revenue;

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

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

                                       112
<PAGE>

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


CLINTON POWER STATION

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

     Due to uncertainties of deregulated  generation  pricing in Illinois and to
various  operation  and  management  factors,  Illinova's  and  IP's  Boards  of
Directors  voted  in  December  1998 to sell or  close  Clinton.  This  decision
resulted in an impairment of Clinton-related  assets and accrual of exit-related
costs.  The  impairment  and accrual of related  charges  resulted in a $1,523.7
million, net of income taxes, charge against earnings.

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

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



ACCOUNTING MATTERS

1998:  Concurrent  with the  decision to exit Clinton  operations,  as discussed
above,  Illinova's  and  IP's  Boards  of  Directors  also  voted  to  effect  a
quasi-reorganization  in which Illinova's  consolidated  accumulated  deficit in
retained earnings of $1,616.0 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.

                                       113
<PAGE>

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

1997:  Prior to the  enactment  of P.A.  90-561,  IP prepared  its  consolidated
financial  statements in accordance with FAS 71,  "Accounting for the Effects of
Certain Types of  Regulation."  Reporting  under FAS 71 allows  companies  whose
service  obligations  and prices are regulated to maintain  balance sheet assets
representing  costs they expect to recover from customers  through  inclusion of
such costs in future rates.  In July 1997, the EITF concluded that, for business
segments for which a plan of deregulation has been established, accounting under
FAS 71 should be discontinued when such deregulation legislation is enacted. The
EITF further concluded that regulatory assets and liabilities originating in the
business segment being deregulated  should be written off, unless their recovery
is  specifically  provided  for  through  future  cash flows from the  regulated
portion of the business.

   Based  on this  conclusion  and  because  P.A.  90-561  provides  for  future
market-based   pricing  of  electric   generation   services,   IP  discontinued
application  of FAS 71 for its generating  segment.  IP evaluated the regulatory
assets and  liabilities  associated  with its generation  segment and determined
that  recovery  of  these  costs  was not  probable  through  rates  charged  to
transmission and distribution customers, the regulated portion of the business.

   IP  wrote  off  generation-related   regulatory  assets  and  liabilities  of
approximately  $195 million,  net of income taxes,  in December 1997.  These net
assets  related  to  previously  incurred  costs  that had been  expected  to be
collected  through  future  revenues,  including  deferred  costs  for  Clinton,
unamortized losses on reacquired debt, previously  recoverable income taxes, and
other  generation-related  regulatory  assets.  At December 31,  1998,  IP's net
investment in generation facilities was $2.9 billion.

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


REGULATORY MATTERS

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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

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


POWER SUPPLY AND RELIABILITY

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


YEAR 2000

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

   The Year 2000 project involves evaluation and testing of software,  hardware,
and business  processes,  including mainframe and personal computer software and

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hardware,   process  computer   software  and  hardware,   end-user   computing,
telecommunications and networks,  vendor- purchased packages,  embedded systems,
facility  control  systems,   vendors/suppliers,   financial  institutions,  and
electronic interfaces with outside agencies.

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

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

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

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

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

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

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

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

* "a" = Actual    "e" = Estimated

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

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


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

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

* "a" = Actual    "e" = Estimated

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

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


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

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

* "a" = Actual    "e" = Estimated

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

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

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

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

   IP  is   participating   in  the  Year  2000   activities  of  other  utility
organizations,  such  as  Electric  Power  Research  Institute,  Nuclear  Energy
Institute,  American Gas  Association,  and Edison Electric  Institute.  Through

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involvement in these organizations,  IP is leveraging the combined knowledge and
expertise of all utilities to accelerate progress in resolving Year 2000 issues.

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

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

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

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

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

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

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

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<PAGE>

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


CONSOLIDATED RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

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

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

   Retail electric revenues,  excluding interchange sales, decreased 1.6% due to
decreased sales to residential and commercial  customers and the 15% residential
rate decrease  mandated by P.A.  90-561,  which became effective August 1, 1998.

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<PAGE>

Also  contributing  to the decrease in revenue was a voluntary  one-time  August
rate  reduction  of  7.5%  for  residential  and  small  commercial   customers.

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

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

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

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

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

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

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

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

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Overview

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

Net income (loss) applicable
  to common stock                      $(1,580)       $   (90)            $  190
Net income (loss) applicable
  to common stock excluding
  Clinton plant impairment
  loss in 1998, extraordinary
  item in 1997 and carrying
  amount over (under)
  consideration paid for
  redeemed preferred stock
  in 1997 and 1996                     $   (56)       $   104             $  191
Basic and diluted earnings
  (loss) per share                     $(22.04)       $ (1.22)            $ 2.51
Basic and diluted earnings
  (loss) per share excluding
  Clinton plant impairment
  loss in 1998, extraordinary
  item in 1997 and carrying
  amount over (under)
  consideration paid for
  redeemed preferred stock
  in 1997 and 1996                     $  (.78)       $  1.41             $ 2.52


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

1997:  The decrease in 1997  earnings  compared to 1996 was due primarily to the
extraordinary  item  related  to  discontinued  application  of FAS  71 for  the
generation  segment,  higher  operation  and  maintenance  expenses  due  to the
extended  outage at  Clinton,  higher  power  purchased  costs due to outages at
Clinton and Wood River, IEP losses,  and an increase in  uncollectible  accounts
expense.

1996: The increase in 1996 earnings per share over 1995 was due primarily to the
one-time  charge in 1995 for the enhanced  retirement  and  severance  programs,
lower operations expense due to the reduction in number of employees,  and lower
financing costs.

   Regulators  historically have determined IP's rates for electric service: the
ICC at the retail level and FERC _at the  wholesale  level.  The ICC  determines
IP's rates for gas service.  These rates have been  designed to recover the cost
of service and allow  shareholders  the opportunity to earn a reasonable rate of
return.  As  described  under  "Competition"  above,  P.A.  90-561  phases  in a
competitive  marketplace for electric  generation while  maintaining  cost-based
regulation  for  electric  delivery  services and gas  service,  protecting  the

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financial integrity of the company during the transition period. Future electric
and natural gas sales, including interchange sales, will continue to be affected
by  an  increasingly   competitive   marketplace,   changes  in  the  regulatory
environment,  transmission access,  weather conditions,  competing fuel sources,
interchange  market  conditions,  plant  availability,   fuel  cost  recoveries,
customer conservation efforts, and the overall economy.

Illinova and Illinois Power -- Results of Operations
Electric  Operations:  For the  years  1996  through  1998,  electric  revenues,
including  interchange,  increased 32.9% and the gross electric margin decreased
22.5% as follows:

(Millions of dollars)               1998            1997            1996

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

  Electric margin                $  796.0         $ 969.7        $1,027.2


The components of annual changes in electric revenues were:

(Millions of dollars)               1998            1997            1996

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

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

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

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

1996: Electric revenues excluding  interchange sales decreased 4%, primarily due
to a reduction in revenues under the UFAC. Volume changes by customer class were
insignificant,  as kwh sales to ultimate consumers (excluding  interchange sales
and wheeling) decreased .3%. Interchange revenues increased 18.3% as a result of
higher plant availability in the first half of the year.

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

(Millions of dollars)               1998            1997            1996

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

                                     17.8           (15.7)          (25.8)

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

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


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

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

                                    1998            1997            1996

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

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


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

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

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<PAGE>

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.

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

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

(Millions of dollars)               1998            1997            1996

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


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

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

   The decrease in operating  expenses for 1996 is due  primarily to the savings
from the 1995 enhanced retirement and severance program, partially offset by the
costs of the Clinton outage and increased amortization of MGP site expenses. The
ICC  approved  tariff  riders  in  March  1996  that  resulted  in  the  current
recognition  of MGP site  remediation  costs  in  operating  expenses.  The 1996
increase amounted to $5.5 million. This increase is offset by increased revenues
collected under the riders.

   The increases in depreciation  and  amortization  for each of the three years
were due to increases in utility plant  balances.

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

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

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

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

Interest Charges: Total interest charges, including AFUDC and preferred dividend
requirements,  increased  $1.9 million in 1998,  increased $2.4 million in 1997,
and  decreased  $15.2  million in 1996.  The  increases in 1998 and 1997 are due
primarily to higher Illinova debt expenses,  increased IP short-term borrowings,
and lower AFUDC,  partially  offset by the continued  benefits of IP refinancing
efforts  and  capitalization  reductions.  The  1996  decrease  was due to lower
short-term  interest  rates  and  the  impact  of  IP  refinancing  efforts  and
capitalization reduction during 1996.

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


FINANCIAL CONDITION

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


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

   At December  31,  1998,  IP had  outstanding  approximately  $1.6  billion in
indebtedness  pursuant to the mortgages and could have issued approximately $550
million in additional indebtedness based on its property levels. In addition, IP
could have issued  approximately  $334 million in exchange for previously issued
indebtedness that had been repurchased by IP. The sale or shutdown of Clinton or
IP's fossil plants, or both, would eliminate IP's capacity to issue indebtedness
under these  mortgages  based on property  additions.  As a  consequence,  IP is
exploring various  strategies under which the mortgages may be amended to permit

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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  $410
million at December 31, 1998. This capacity is higher than normal as a result of
securitization  proceeds  received in December 1998.

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

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

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

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

   The provisions of Supplemental  Indentures to IP's General Mortgage Indenture
and Deed of Trust contain certain  restrictions  with respect to the declaration
and payment of  dividends.  IP was not limited by any of these  restrictions  at
December 31, 1998. Under the Restated  Articles of  Incorporation,  common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock.

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

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purpose.  IP's retained earnings balance is expected to grow sufficiently during
1999 to support payment of IP common and scheduled preferred dividends. Illinova
will secure payment of IP preferred dividends through 1999.

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

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


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

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

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


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

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

   In February 1999, S&P announced it had implemented a new single credit rating
scale for both  debt and  preferred  stock.  As a result,  S&P  rerated  all the
preferred  stock issues and similar  debt/equity  issues that carry ratings from
S&P to conform to the new scale. As a result of this change,  the rating on IP's
preferred  stock was changed to BB+ from BBB-. On March 4, 1999,  Moody's placed
all of the  securities  of Illinova and IP under review for possible  downgrade,
citing erosion of cash flow and an expected  increase in leverage  caused by the

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extended  Clinton outage.  Moody's also  acknowledged the positive impact of the
decision to exit  Clinton and the  progress  made in  bringing  Clinton  back to
on-line  status.  This review does not include the $864 million of  Transitional
Funding Trust Notes issued by IPSPT, which are expected to remain rated Aaa.

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

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

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

(Millions of dollars)                1998            1997            1996

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

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

*See discussion of "Securitization."

   The amounts shown in the preceding table for debt  retirements do not include
all mortgage sinking fund requirements.  IP has generally met these requirements
by pledging property additions as permitted under IP's 1943 Mortgage and Deed of
Trust and the 1992 New Mortgage.  For  additional  information,  see "Note 10 --
Long-Term Debt" and "Note 11 -- Preferred Stock of Subsidiary."

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

   In March 1998,  IP issued $18.7  million  principal  amount and $33.8 million
principal  amount of 5.40%  Pollution  Control New Mortgage  Bonds due 2028.  In

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

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

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

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


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

Capital  Expenditures:  Construction  expenditures  for 1996  through  1998 were
approximately $723 million, including $14.7 million of AFUDC. Illinova estimates
that it will spend  approximately $370 million for IP construction  expenditures

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in 1999.  IP  construction  expenditures  for 1999  through 2003 are expected to
total approximately $1.2 billion. In light of the December 1998 decision to exit
Clinton and resulting Clinton  impairment  entries,  no nuclear  construction is
included in the above estimates.

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

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

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

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

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

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

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

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


MARKET RISK

Risk  Management:  Illinova is exposed to both  non-trading  and trading  market
risks.  Market risk is the risk of loss arising  from adverse  changes in market
rates and prices,  such as interest  rates,  foreign  currency  exchange  rates,


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

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

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

                                      Low             High          Average
(Millions of dollars)                 VaR             VaR             VaR

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


Other Market Risk:  Illinova is exposed to equity price risk  primarily  through
IP.  Equity  price risk is the risk of loss on equity  investments  arising from
unfavorable movements in equity prices. IP maintains trust funds, as required by
the NRC,  to fund  certain  costs of  nuclear  decommissioning.  See  "Note 5 --
Commitments  and  Contingencies."  As of  December  31,  1998,  these funds were
invested  in  domestic  and  international   equity  securities,   fixed  income
securities,  and cash and cash  equivalents.  By  maintaining  a portfolio  that
includes  equity  investments,  IP is  maximizing  the return to be used to fund
nuclear  decommissioning,  which in the long term  will  correlate  better  with
inflationary  increases in decommissioning costs. The equity securities included
in the  corporation's  portfolio  are  exposed to price  fluctuations  in equity
markets, and the fixed-rate,  fixed-income securities are exposed to market risk
as a result  of  fluctuations  in  interest  rates.  IP  actively  monitors  its
portfolio by benchmarking the performance of its investments  against equity and
fixed-income  indexes. It maintains and periodically  reviews established target


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allocations  of the trust assets  approved in the investment  policy  statement.
Nuclear  decommissioning  costs have  historically  been recovered  through IP's
electric rates and the Soyland PCA. Therefore,  fluctuations in equity prices or
interest rates have not affected the earnings of the corporation. In the future,
changes in the investments' fair value will be reflected in the regulatory asset
for probable  future  collections  from customers of  decommissioning  costs and
fluctuations in interest rates will be reflected in earnings.

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

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


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

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

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

                                     Low             High          Average
(Millions of dollars)                VaR             VaR             VaR

IEP                                 $ .1            $ .9            $ .3

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


                                       134
<PAGE>

SAFE HARBOR

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

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

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

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

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

     3)   Utilities are permitted to seek rate relief in the event the change in
          law leads to their ROE falling  below a specified  minimum  based on a
          prescribed test.



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

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

                                       135
<PAGE>

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

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

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

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

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

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

                                       136
<PAGE>

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

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


ILLINOVA CORPORATION
Responsibility for Information

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

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

   The  consolidated  financial  statements  have  been  audited  by  Illinova's
independent   accountants,   PricewaterhouseCoopers   LLP,  in  accordance  with
generally accepted auditing standards.  Such standards include the evaluation of
internal  accounting  controls to establish a basis for  developing the scope of
the examination of the consolidated financial statements. In addition to the use
of independent accountants,  Illinova maintains a professional staff of internal
auditors who conduct financial,  procedural, and special audits. To assure their
independence,  both  PricewaterhouseCoopers  LLP and the internal  auditors have
direct access to the Audit Committee of the Board of Directors.

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




Charles E. Bayless
Chairman, President
and Chief Executive Officer




Larry F. Altenbaumer
Chief Financial Officer,
Treasurer and Controller


                                       137
<PAGE>

ILLINOVA CORPORATION
Report of Independent Accountants

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

In our opinion,  the  accompanying  consolidated  balance sheets and the related
statements  of income,  statements  of cash  flows and  statements  of  retained
earnings,  after the restatement  described  in  Note 17 presents fairly  in all
material  respects,  the  financial  position  of Illinova  Corporation  and its
subsidiaries  (the  "Company") at December 31, 1998 and 1997, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
requires  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.

   As  explained  in  Note  2 to  the  consolidated  financial  statements,  the
Company's commitment to exit nuclear operations resulted in an impairment of the
Clinton  Power  Station in  accordance  with  Statement of Financial  Accounting
Standards No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived Assets to Be Disposed Of," in December 1998.

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

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




PricewaterhouseCoopers LLP
St. Louis, Missouri
February 26, 1999, except for Note 17
as to which date is February 28, 2000

                                       138
<PAGE>


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

                                                                      (Millions of dollars except per share amounts)
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>                 <C>
For the Years Ended December 31,                                               1998           1997               1996
Operating Revenues                                                           As Restated
Electric                                                                     $1,224.2       $1,244.4          $ 1,202.9
Electric interchange                                                            557.2          175.6              137.6
Gas                                                                             287.8          353.9              348.2
Diversified enterprises                                                         361.4          735.6               57.6
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                   2,430.6        2,509.5            1,746.3
-----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel for electric plants                                                        250.2          232.4              248.1
Power purchased                                                                 735.2          217.9               65.2
Gas purchased for resale                                                        149.6          207.7              202.6
Diversified enterprises                                                         392.0          792.3               87.5
Other operating expenses                                                        381.6          290.5              249.9
Maintenance                                                                     156.3          111.7               99.7
Depreciation and amortization                                                   203.6          198.8              190.0
General taxes                                                                   123.2          133.8              131.3
Clinton plant impairment loss (Note 2)                                        2,666.9            -                  -
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                   5,058.6        2,185.1            1,274.3
------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                      (2,628.0)         324.4              472.0
-----------------------------------------------------------------------------------------------------------------------
Other Income
Miscellaneous-net                                                                 3.1            3.5               (1.2)
Equity earnings in affiliates                                                    22.5           17.5                6.4
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                      25.6           21.0                5.2
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before interest charges and income taxes                       (2,602.4)         345.4              477.2
-----------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest expense                                                                146.0          144.2              142.5
Allowance for borrowed funds used during construction                            (3.2)          (5.0)              (6.5)
Preferred dividend requirements of subsidiary                                    19.8           21.5               22.3
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                     162.6          160.7              158.3
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                            (2,765.0)         184.7              318.9
-----------------------------------------------------------------------------------------------------------------------
Income Taxes
Income tax - impairment loss                                                   (982.8)           -                  -
ITC - Clinton impairment                                                       (160.4)           -                  -
Other                                                                           (42.3)          80.3              127.9
-----------------------------------------------------------------------------------------------------------------------
      Total                                                                  (1,185.5)          80.3              127.9
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item                                  (1,579.5)         104.4              191.0
Extraordinary item net of income tax benefit
    of $118.0 million (Note 1)                                                    -           (195.0)               -
-----------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                            (1,579.5)         (90.6)             191.0
Carrying amount over (under) consideration paid
    for redeemed preferred stock of subsidiary                                    -               .2                (.7)
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock                                $(1,579.5)       $ (90.4)           $ 190.3
-----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share before
    extraordinary item (basic and diluted)                                  $  (22.40)       $  1.41            $  2.51
Extraordinary item per common share (basic and diluted)                     $    -           $ (2.63)           $    -
-----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share (basic and diluted)                        $  (22.40)       $ (1.22)           $  2.51
Cash dividends declared per common share                                    $    1.24        $  1.24            $  1.15
Cash dividends paid per common share                                        $    1.24        $  1.24            $  1.12

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

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


</TABLE>


<TABLE>
<CAPTION>
Illinova Corporation
C O N S O L I D A T E D   B A L A N C E   S H E E T S
                                                                                      (Millions of dollars)
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                   <C>
December 31,                                                                   1998                  1997
ASSETS                                                                      As Restated
Utility Plant

Electric  (includes  construction  work in progress of $177.7 million and $214.3
million,  respectively)  $5,481.8  $6,690.4 Gas (includes  construction  work in
progress  of  $15.3  million  and  $10.7  million,   respectively)  686.9  663.0
-----------------------------------------------------------------------------------------------------------
6,168.7   7,353.4   Less   --   accumulated    depreciation    1,713.7   2,808.1
-----------------------------------------------------------------------------------------------------------
4,455.0  4,545.3  Nuclear fuel in process - 6.3 Nuclear fuel under capital lease
20.3                                                                       126.7
-----------------------------------------------------------------------------------------------------------
4,475.3                                                                  4,678.3
-----------------------------------------------------------------------------------------------------------
Investments         and         Other         Assets         246.9         198.8
-----------------------------------------------------------------------------------------------------------
Current Assets Cash and cash  equivalents  518.1 33.0 Accounts  receivable (less
allowance for doubtful accounts of $5.5 million) Service 105.9 115.6 Other 116.1
102.3 Accrued unbilled revenue 82.6 86.3 Materials and supplies, at average cost
Fossil fuel 25.6 12.6 Gas in underground  storage 28.9 29.3 Operating  materials
36.3  76.7  Assets  from  commodity  price  risk  management  activities  51.5 -
Prepayments              and             other             51.5             64.4
-----------------------------------------------------------------------------------------------------------
1,016.5                                                                    520.2
-----------------------------------------------------------------------------------------------------------
Deferred  Charges  Transition  period  cost  recovery  457.3 - Other 279.6 185.7
-----------------------------------------------------------------------------------------------------------
736.9                                                                      185.7
-----------------------------------------------------------------------------------------------------------
$6,475.6                                                                $5,583.0
-----------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES Capitalization Common stock -- No par value, 200,000,000
shares authorized;  69,919,287 and 71,681,937 shares outstanding,  respectively,
stated at  $1,123.2  $1,425.7  Less --  Deferred  compensation  -- ESOP 6.8 10.2
Retained  earnings - 51.7 Less -- Capital stock expense 7.3 7.3 Less --5,762,650
and 4,000,000  shares of common stock in treasury,  respectively,  at cost 138.7
90.4
-----------------------------------------------------------------------------------------------------------
Total common stock equity 970.4 1,369.5  Preferred stock of subsidiary 57.1 57.1
Mandatorily  redeemable preferred stock of subsidiary 199.0 197.0 Long-term debt
2,334.6                                                                  1,717.5
-----------------------------------------------------------------------------------------------------------
Total                capitalization                3,561.1               3,341.1
-----------------------------------------------------------------------------------------------------------
Current  Liabilities  Accounts  payable  256.5 177.3 Notes  payable  147.6 415.3
Long-term  debt and lease  obligations  of subsidiary  maturing  within one year
506.6 87.5 Dividends declared 21.7 22.9 Taxes accrued 30.6 26.7 Interest accrued
39.5 36.0  Liabilities  from commodity price risk  management  activities 99.8 -
Other                                 112.0                                 96.0
-----------------------------------------------------------------------------------------------------------
1,214.3                                                                    861.7
-----------------------------------------------------------------------------------------------------------
Deferred  Credits  Accumulated  deferred  income  taxes 834.8 969.0  Accumulated
deferred investment tax credits 39.6 208.3 Decommissioning  liability 567.4 62.5
Other                                 258.4                                140.4
-----------------------------------------------------------------------------------------------------------
1,700.2                                                                  1,380.2
-----------------------------------------------------------------------------------------------------------
$6,475.6                                                                $5,583.0
-----------------------------------------------------------------------------------------------------------
(Commitments  and  Contingencies  Note 5) See  notes to  consolidated  financial
statements which are an integral part of these statements.  Prior years restated
to conform to new financial format.




</TABLE>


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

                                                                                     (Millions of dollars)
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                 <C>               <C>
For the Years Ended December 31,                                              1998             1997             1996
Cash Flows from Operating Activities                                       As Restated
Net income (loss)                                                          ($1,579.5)          ($90.6)           $191.0
Items not requiring (providing) cash --
      Depreciation and amortization                                            203.4            202.1             195.3
      Allowance for funds used during construction                              (3.2)            (5.0)             (6.5)
      Deferred income taxes                                                    (43.9)            30.8              57.4
      Extraordinary item                                                         -              195.0               -
      Impairment loss, net of tax                                            1,523.7              -                 -
Changes in assets and liabilities --
      Accounts and notes receivable                                             24.4            (19.4)            (52.2)
      Accrued unbilled revenue                                                   3.7             19.7             (16.9)
      Materials and supplies                                                   (15.1)            (5.4)             (2.1)
      Accounts payable                                                          (5.6)            26.4              46.8
      Deferred revenue                                                          87.4              -                 -
      Interest accrued and other, net                                           72.7             14.7              (5.4)
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                      268.0            368.3             407.4
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Construction expenditures                                                     (311.5)          (223.9)           (187.3)
Allowance for funds used during construction                                     3.2              5.0               6.5
Other investing activities                                                     (53.7)           (33.5)            (75.0)
-----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                         (362.0)          (252.4)           (255.8)
-----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock                                                      (88.9)           (92.4)            (84.7)
Repurchase of common stock                                                     (49.1)           (90.4)              -
Reissuance of common stock                                                       0.8              -                 -
      Redemptions --
           Short-term debt                                                    (607.9)          (241.1)           (355.8)
           Long-term debt                                                     (188.3)          (160.8)           (153.7)
           Preferred stock of subsidiary                                           -            (39.0)            (29.5)
      Issuances --
           Short-term debt                                                     340.2            269.5             383.2
           Long-term debt                                                    1,186.5            250.0               -
           Preferred stock of subsidiary                                           -                -             100.0
           Common stock                                                            -                -               1.1
      Other financing activities                                               (14.2)            (3.3)              1.1
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                            579.1           (107.5)           (138.3)
-----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                                        485.1              8.4              13.3
Cash and cash equivalents at beginning of year                                  33.0             24.6              11.3
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                      $518.1            $33.0             $24.6
-----------------------------------------------------------------------------------------------------------------------

</TABLE>


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

                                                                                                   (Millions of dollars)
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>              <C>
For the Years Ended December 31,                                                       1998           1997            1996
                                                                                    As Restated
Balance at beginning of year                                                       $   51.7    $     233.0     $     129.6
Net income (loss) before dividends and carrying amount adjustments                 (1,559.7)         (69.1)          213.3
--------------------------------------------------------------------------------------------------------------------------
                                                                                   (1,508.0)         163.9           342.9
--------------------------------------------------------------------------------------------------------------------------
Less-
      Dividends-
          Preferred stock of subsidiary                                                19.9           21.7            22.6
          Common stock                                                                 88.1           90.7            86.6

Plus-
      Carrying amount over (under) consideration paid for redeemed
         preferred stock of subsidiary                                                  -              0.2            (0.7)
      Quasi-Reorganization adjustment (Note 2)                                      1,313.3            -               -
      Transfer from other paid-in capital to
          eliminate retained earnings deficit (Note 2)                                302.7            -               -
--------------------------------------------------------------------------------------------------------------------------
                                                                                    1,508.0         (112.2)         (109.9)
--------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                             $    -         $   51.7     $     233.0
--------------------------------------------------------------------------------------------------------------------------
See notes to  consolidated  financial  statements  which are an integral part of
these statements.  Prior year restated to conform to new financial format.

</TABLE>


NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

   All significant  intercompany  balances and transactions have been eliminated
from the  consolidated  financial  statements.  All  transactions for Illinova's
unregulated subsidiaries are included in the sections "Diversified Enterprises,"
"Interest  Charges,"  "Income  Taxes,"  and  "Other  Income and  Deductions"  in
Illinova's   Consolidated   Statements  of  Income.   Preparation  of  financial
statements in conformity with generally accepted accounting  principles requires
the use of  management's  estimates.  Actual  results  could  differ  from those
estimates.

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

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

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

Regulation:  IP is regulated  primarily by the ICC,  FERC, and the NRC. Prior to
the enactment of P.A. 90-561, IP prepared its consolidated  financial statements
in  accordance  with FAS 71,  "Accounting  for the  Effects of Certain  Types of
Regulation."  Reporting under FAS 71 allows companies whose service  obligations
and prices are  regulated to maintain  balance sheet assets  representing  costs
they expect to recover through inclusion in future rates. In July 1997, the EITF
concluded that  application of FAS 71 accounting  should be  discontinued at the
date of enactment of deregulation  legislation for business segments for which a
plan of  deregulation  has been  established.  The EITF further  concluded  that

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regulatory assets and liabilities that originated in the portion of the business
being  deregulated  should be written off unless their recovery is  specifically
provided  for  through  future  cash  flows  from the  regulated  portion of the
business.

   Because P.A. 90-561 provides for market-based  pricing of electric generation
services,  IP discontinued  application of FAS 71 for its generating  segment in
December 1997 when P.A. 90-561 was enacted.  IP evaluated the regulatory  assets
and  liabilities  associated  with its generation  segment and  determined  that
recovery of these costs was not probable  through rates charged to  transmission
and  distribution  customers,  i.e., the regulated  portion of its business.  In
December 1997, IP wrote off generation-related regulatory assets and liabilities
of approximately $195 million (net of income taxes). These net assets related to
previously  incurred costs expected to be recoverable  through future  revenues,
including  deferred  Clinton  post-construction  costs,  unamortized  losses  on
reacquired   debt,    previously    recoverable    income   taxes,   and   other
generation-related  regulatory  assets.  At December 31, 1998, the value of IP's
non-nuclear  generation  facilities  was  $2.9  billion.

Illinova's  principal accounting  policies are:

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

(Millions of dollars)                               1998            1997

Unamortized losses on reacquired debt            $  40.1         $  32.3
Manufactured-gas plant
  site cleanup costs                             $  44.7         $  64.8
DOE decontamination and
  decommissioning fees                              --           $   6.3
Transition period cost recovery                  $ 457.3            --
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

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allowance,  it is realized through the ratemaking  process over the service life
of the related property through increased  revenues resulting from a higher rate
base and higher depreciation expense. Non-regulated business segments capitalize
interest under the guidelines in FAS 34, "Capitalization of Interest Cost."

Depreciation:  For financial  statement  purposes,  IP  depreciates  the various
classes of depreciable  property over their  estimated  useful lives by applying
composite  rates on a  straight-line  basis.  In each of the years 1996  through
1998, the provision for  depreciation  was 2.8% of the average  depreciable cost
for Clinton. Provisions for depreciation for all other electric plant facilities
were 2.3%, 2.8%, and 2.6% in 1998, 1997, and 1996, respectively.  Provisions for
depreciation  of gas utility plant,  as a percentage of the average  depreciable
cost, were 3.5% in 1998, 3.3% in 1997, and 3.9% in 1996.

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

Amortization of Nuclear Fuel: IP leases nuclear fuel from the Fuel Company under
a capital  lease.  Amortization  of nuclear fuel  (including  related  financing
costs) is determined on a unit of production  basis.  A provision for spent fuel
disposal costs is charged to fuel expense based on kwh generated.  See "Note 5--
Commitments and  Contingencies"  for discussion of  decommissioning  and nuclear
fuel disposal costs. See "Note 2 - Clinton Impairment and  Quasi-Reorganization"
for discussion of the effect of the Clinton impairment on nuclear fuel.

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

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

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   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 basis of assets and  liabilities  on
the balance sheet.  The temporary  differences  relate  principally to plant and
depreciation.

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

     Illinova  and its  subsidiaries  file a  consolidated  federal  income  tax
return.  Income taxes are allocated to the individual  companies  based on their
respective  taxable  income or loss.  See "Note 8 - Income Taxes" for additional
discussion.

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

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

(Millions of dollars)                1998            1997            1996

Net income (loss) before
  extraordinary item
  (basic and diluted)               $(1,579.5)       $  104.6         $ 190.3
Extraordinary item
  (basic and diluted)                    --          $ (195.0)           --
Net income (loss) applicable
  to common stock
  (basic and diluted)               $(1,579.5)       $  (90.4)        $ 190.3

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

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

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

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Consolidated  Statements of Cash Flows Cash and cash equivalents include cash on
hand and  temporary  investments  purchased  with an initial  maturity  of three
months or less.  Capital lease obligations not affecting cash flows increased by
$5  million,  $30  million,  and  $31  million  during  1998,  1997,  and  1996,
respectively. Income taxes and interest paid are as follows:

                                                 Years ended December 31,

(Millions of dollars)                1998            1997            1996

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

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

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

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

     The Accounting  Standards Executive Committee of the AICPA issued SOP 98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal Use" in March 1998, effective for financial statements for fiscal years
beginning after December 15, 1998. SOP 98-1 provides  guidance on accounting for
the  costs  of  computer  software  developed  or  obtained  for  internal  use.
Specifically,  the  nature  of the  costs  incurred,  not the  timing  of  their
occurrence,  determines whether costs are capitalized or expensed.  SOP 98-1 was

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adopted  early in  connection  with the  requirements  for  quasi-reorganization
accounting.  It did not have a significant  impact on Illinova's  1998 financial
statements.

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

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

NOTE 2 -- CLINTON IMPAIRMENT
AND QUASI-REORGANIZATION

In December 1998,  Illinova's and IP's Boards of Directors voted to exit Clinton
operations,  resulting in an impairment of Clinton-related assets and accrual of
exit-related  costs.  The impairment and accrual of costs resulted in a $1,523.7
million,  net of income taxes,  charge  against  earnings.  Concurrent  with the
decision to exit Clinton,  Illinova's and IP's Boards of Directors also voted to
effect a  quasi-reorganization,  in which  Illinova's  consolidated  accumulated
deficit  in   retained   earnings  of  $1,616.0   million  was   eliminated.   A
quasi-reorganization  is an accounting  procedure  whereby a company adjusts its
accounts  to  obtain a  "fresh  start."  In a  quasi-reorganization,  a  company
restates  its assets and  liabilities  to their fair  value,  adopts  accounting
pronouncements  issued but not yet adopted, and eliminates any remaining deficit
in retained earnings by a transfer from other paid-in capital.

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

     In December 1997, the State of Illinois  enacted P.A.  90-561,  legislation
designed to introduce competition for electric generation service over a defined
transition  period.  P.A. 90-561 creates  uncertainty  regarding IP's ability to

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recover  electric  generating  costs  and earn a  reasonable  rate of  return on
generating  assets.   Uncertainties  about  deregulated  generation  pricing  in
Illinois,  coupled with IP's experience with nuclear operations,  led management
to several conclusions:

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

-    Clinton requires disproportionate management attention.

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

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

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

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

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


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

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Clinton's ultimate disposal.  The impairment of Clinton plant, nuclear fuel, and
materials and supplies was recognized as a charge to earnings.  Consistent  with
Clinton's  estimated  fair  value  of  zero  and  the  provisions  of  FAS  121,
depreciation of Clinton has been discontinued.  Clinton depreciation expense was
$94.4 million in 1998.

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

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

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

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

   In May 1998, the SEC staff issued  interpretive  guidance on the  appropriate
accounting treatment during regulatory  transition periods for asset impairments
and the related regulated cash flows designed to recover such  impairments.  The
staff's guidance established that an impaired portion of plant assets identified
in a state's legislation or rate order for recovery by means of a regulated cash
flow should be treated as a  regulatory  asset in the  separable  portion of the
enterprise  from  which the  regulated  cash  flows are  derived.  Based on this
guidance and on provisions  of P.A.  90-561,  IP recorded a regulatory  asset of
$275.9  million,  net of income  taxes,  for the portion of its stranded  costs

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deemed probable of recovery during the transition  period.  The regulatory asset
was  recognized  as a credit to  earnings,  offsetting  a portion of the Clinton
impairment.  Under P.A. 90-561, amortization of the regulatory asset is included
in the  overearnings  test but is not included in the  calculation for the floor
test.

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

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

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

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

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

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

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<PAGE>

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

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

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

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

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

Remaining Deficit in Retained Earnings
After the  revaluation  of other assets and  liabilities to their fair value and
the early  adoption of accounting  pronouncements,  the  accumulated  deficit in
retained  earnings was $302.7  million,  which was eliminated by a transfer from
other paid-in capital.

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

(Millions of dollars)

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

Clinton impairment (charged)/credited to earnings:
  Clinton  plant, nuclear fuel, and materials
  and supplies*                                                   (1,479.9)
  Decommissioning costs, net of regulatory asset*                   (249.9)
  Other exit costs*                                                  (69.8)
                                                                  ---------
                                                                  (1,799.6)
  Transition period cost recovery*                                   275.9
                                                                  ---------
Total Clinton impairment                                          (1,523.7)
                                                                  ---------
Accumulated deficit in retained earnings                          (1,616.0)
                                                                  ---------
Quasi-reorganization (charged)/credited to retained earnings:
  Generation assets fair value  adjustment*                        1,348.6
  Mandatorily  redeemable  preferred stock and
    long-term debt fair value  adjustment*                           (20.1)
  Fair value adjustment of IGC and IEP investments                    (5.7)
  Early adoption of accounting  pronouncements*                       (9.5)
                                                                  ---------
 Total quasi-reorganization                                        1,313.3
                                                                  ---------
Retained earnings deficit at December 31, 1998                      (302.7)

Transfer from other paid-in capital                                  302.7
                                                                  ---------

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<PAGE>

Retained earnings balance at December 31, 1998,
  after quasi-reorganization                                         $ 0.0
                                                                  =========

*Amounts are net of income taxes.

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


NOTE 3 -- ILLINOVA SUBSIDIARIES

Illinova,  a holding  company,  is the parent of subsidiaries IP, IGC, IEP, IIC,
and IBE. IP has  preferred  shares  outstanding,  but its common stock is wholly
owned by  Illinova,  as is the  common  stock of the other  subsidiaries.  IP is
engaged in the  generation,  transmission,  distribution,  and sale of  electric
energy and the  distribution,  transportation,  and sale of  natural  gas in the
state of Illinois.

   IGC competes in the  independent  power  market and invests in energy  supply
projects and power-producing facilities throughout the world, some operating and
some under  construction.  The following  table  summarizes  its  investments in
power-producing facilities:

                                   Year of       Fuel         Total   In-Service
Location                          Investment     Type          MW        Date

Domestic & England
  Teesside, England                  1993      Natural Gas    1875       1993
  Ferndale, Washington               1994      Natural Gas     245       1994
  Paris, Texas                       1994      Natural Gas     230       1989
  Cleburne, Texas                    1994      Natural Gas     258       1996
  Long Beach, California             1995      Natural Gas      70       1989
  Pepperell, Massachusetts           1995      Natural Gas      38       1995
  Joppa, Illinois                    1996        Coal         1015       1955
  Grimes County, Texas               1998      Natural Gas     830       2000

Latin America
  Puerto Cortez, Honduras            1994      Diesel           80      1994/95
  Old Harbour, Jamaica               1995      Diesel           74       1995
  Aguaytia, Peru                     1995      Natural Gas     155       1998
  Barranquilla, Colombia             1996      Natural Gas     400    1995/96/98
  Teleran, Costa Rica                1998        Wind           20       1995

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


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

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<PAGE>

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

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

   IEP focuses on the development and sale of energy and energy-related services
primarily in the Midwestern and Western regions of North America. In the Western
United States, IEP is one of the largest power marketers, purchasing and selling
electricity in the wholesale market. In the Midwest,  IEP has developed a retail
natural gas business, serving industrial and commercial customers.

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

   IEP  develops and sells  energy-related  services  designed to assist  target
customers  in  assessing  current  energy  consumption  patterns  and to  enable
customers  to reduce  energy  usage  through  increased  efficiency  by changing
practices  and  upgrading  equipment and  facilities.  IEP has also  developed a
series of energy-related information collection and analysis tools, collectively
known as EQ services. These services include software that customers may utilize
to  conduct  their own energy  analysis  as well as a service  bureau  that will
perform these services along with bill  consolidation  for the customer.  IEP is
also involved in the project  management  and engineered  solutions  business to
provide  delivery   capability  for  energy-related   equipment  and  facilities
improvements.

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

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

   IIC is a captive  insurance  company whose primary  business is to insure the
risks of the  subsidiaries  of Illinova and risks related to or associated  with
their  business  enterprises.  In  1998,  IIC  insured  certain  risks of IP for
premiums of $5.3 million.

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


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<PAGE>

NOTE 4 -- CLINTON POWER STATION

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

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

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

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

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

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

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

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

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

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<PAGE>

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

   Ownership  of a nuclear  generating  unit  exposes IP to  significant  risks,
including   increased  and  changing   regulatory,   safety  and   environmental
requirements, and the uncertain future cost of closing and dismantling the unit.

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


NOTE 5 -- COMMITMENTS AND CONTINGENCIES

Commitments
Illinova   estimates  that  it  will  spend   approximately   $370  million  for
construction  expenditures for IP in 1999. IP construction  expenditures for the
period 1999  through  2003 are  expected to total about $1.2  billion.  With the
planned sale or shutdown of Clinton, no nuclear  construction is included in the
above estimates.  Nuclear construction will be expensed.  In addition,  in March
1999,  IP will be required to deposit $62 million in cash with the Fuel  Company
Trustee for noteholders and take title to the partially depleted nuclear fuel in
the  reactor at Clinton.  Additional  expenditures  may be required  during this
period  to  accommodate  transitional  expenditures  related  to  a  competitive
environment, environmental compliance costs and system upgrades, which cannot be
determined at this time.

   Illinova's  capital  expenditures  for 1999 through  2003,  in addition to IP
construction  expenditures,  are expected to include $592 million for  mandatory

                                       157
<PAGE>

debt  retirement  and  approximately  $600 million  target level for  investment
opportunities  by  the  non-regulated  subsidiaries.   In  addition,  IPSPT  has
long-term debt maturities of $86.4 million in each of the above years.

     In addition,  IP has  substantial  commitments for the purchase of coal and
coal  transportation   under  long-term   contracts.   Estimated  coal  contract
commitments for 1999 through 2003 are $664 million  (excluding  price escalation
provisions).  Total coal  purchases  were $210 million in 1998,  $181 million in
1997,  and $184  million in 1996.  IP has  contracts  with  various  natural gas
suppliers   and   interstate   pipelines   to  provide   natural   gas   supply,
transportation,   and  leased   storage.   Estimated   committed   natural  gas,
transportation,  and  leased  storage  costs  for 1999  through  2003  total $81
million.  Total natural gas purchased was $157 million in 1998,  $185 million in
1997, and $207 million in 1996. IP anticipates  that all gas-related  costs will
be recoverable  under IP's UGAC. See the subcaption  "Fuel Cost Recovery"  below
for discussion of the UFAC. IP has accrued  contract  cancellation  fees of $7.1
million  to  cover  minimum  purchase  commitments  under  uranium  procurement,
conversion,  and  enrichment  contracts.  For more  information,  see  "Note 2 -
Clinton  Impairment  and  Quasi-Reorganization."  IP is  committed  to  purchase
approximately  $9  million of  emission  allowances  in 1999 and has  contingent
commitments  for up to $5.5  million  in  additional  1999  emission  allowances
purchases, depending on whether certain options are exercised.

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

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

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<PAGE>

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

                                       159
<PAGE>

insurance coverage at its present level. Under those circumstances,  such losses
or  liabilities  could have a material  adverse  effect on  Illinova's  and IP's
financial positions.

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

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

Decommissioning  and Nuclear Fuel Disposal:  IP is responsible  for the costs of
decommissioning  Clinton and for spent nuclear fuel disposal costs. In May 1997,
consistent  with IP's  assumption of all of Soyland's  ownership  obligations of
Clinton,  Soyland's  nuclear  decommissioning  trust assets of  approximately $6
million were transferred to IP.

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

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

                                                       Years Ended December 31,

(Millions of dollars)                 1998            1997            1996

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

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


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<PAGE>

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

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

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<PAGE>

remedies.  IP is participating in such litigation  before the D.C. Circuit Court
of Appeals.  To date,  the  unconditional  nature of DOE's  obligation  has been
upheld but no court has yet quantified damages or ordered specific  performance.
The outcome of these lawsuits is uncertain. See "Note 4 - Clinton Power Station"
for additional information.

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

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

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

IP Wholesale Energy Markets: IP buys and sells electricity in markets throughout
the United States. In the normal course of business, IP incurs price exposure on
the  electricity  bought or sold.  Where the markets  allow,  IP will hedge such
exposure through the use of electricity  futures,  forward, and option contracts
with  qualified  counterparties.  In 1998,  market losses of  approximately  $33
million  were  recorded in  connection  with these  agreements  based on forward
market  prices.  Of this  amount,  approximately  $28  million  was  charged  to
purchased  power.  The remaining $5 million  resulted from the early adoption of

                                       162
<PAGE>

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

                                       163
<PAGE>

Protocol  requires the United  States to reduce  greenhouse  gas  emissions to 7
percent below 1990 levels during the years 2008 through 2012 and to make further
reductions thereafter. Before it can take effect, this Protocol must be ratified
by the U.S.  Senate.  However,  U.S. Senate  Resolution 98, which passed 95-0 in
July 1997,  says the Senate would not ratify an agreement  that fails to involve
all  countries  or would  damage the  economy of the  United  States.  Since the
Protocol does not contain key elements  that Senate  Resolution 98 specifies are
necessary,  ratification will be a major political issue. It is anticipated that
a  ratification  vote will be delayed until the current  administration  decides
whether it can meet the provisions of Senate Resolution 98.

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

Manufactured-Gas Plant: IP's estimated liability for MGP site remediation is $61
million. This amount represents IP's current estimate of the costs it will incur
to  remediate  the 24 MGP  sites  for which it is  responsible.  Because  of the
unknown and unique  characteristics at each site, IP cannot currently  determine
its ultimate liability for remediation of the sites.

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

Electric and Magnetic  Fields:  The  possibility  that exposure to EMF emanating
from power lines, household appliances, and other electric sources may result in
adverse  health   effects   continues  to  be  the  subject  of  litigation  and
governmental, medical, and media attention. Litigants have also claimed that EMF
concerns  justify recovery from utilities for the loss in value of real property
adjacent to power lines, substations,  and other such sources of EMF. The number
of EMF cases has  declined  as national  and  international  science  commission
studies have failed to confirm EMF health  risks.  Additional  research is being
conducted.  On July 3, 1997, President Clinton signed legislation  extending the
National EMF Research and Public Information Dissemination Program through 1998.
Research results,  policy decisions,  and public  information  developments will
continue  into 1999. It is too soon to tell what impact,  if any,  these actions
may have on IP's and Illinova's consolidated financial positions.

Other
Legal Proceedings:  IP is involved in legal or administrative proceedings before
various  courts and agencies  with respect to matters  occurring in the ordinary
course  of  business,  some of  which  involve  substantial  amounts  of  money.

                                       164
<PAGE>

Management  believes that the final  disposition of these  proceedings  will not
have a material  adverse effect on the  consolidated  financial  position or the
results of operations.

Accounts  Receivable:  IP sells electric  energy and natural gas to residential,
commercial,  and industrial customers throughout Illinois. At December 31, 1998,
59%, 24%, and 17% of "Accounts  receivable  -- Service"  were from  residential,
commercial,  and industrial customers,  respectively.  IP maintains reserves for
potential   credit  losses  and  such  losses  have  been  within   management's
expectations.  The reserve for  doubtful  accounts  remained at $5.5  million in
1998.

Contingencies

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

Nuclear  Fuel Lease:  For more  information,  see "Note 9 - Capital  Leases" for
discussion of contingencies related to IP's nuclear fuel lease.

Internal  Revenue  Service  Audit:  The  Internal  Revenue  Service is currently
auditing  IP's federal  income tax returns for the years 1994 through  1997.  At
this time,  the outcome of the audit cannot be determined.  Management  does not
expect  that  the  results  will  have a  material  adverse  effect  on IP's and
Illinova's  consolidated  financial  positions or results of  operations.  For a
detailed discussion of income taxes, see "Note 8 - Income Taxes."

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

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

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


NOTE 6 -- LINES OF CREDIT AND SHORT-TERM LOANS

IP has total lines of credit  represented by bank commitments  amounting to $354
million,  all of which were unused at December 31,  1998.  These lines of credit
are renewable in May 1999,  November 1999, and May 2002.  These bank commitments
support the amount of commercial paper outstanding at any time,  limited only by
the  amount  of  unused  bank  commitments,  and are  available  to  support  IP

                                       165
<PAGE>

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

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

   IP has letters of credit  capacity  totaling $201 million,  all of which were
undrawn at December 31,  1998.  IP pays fees up to .95% per annum on the undrawn
amount of credit.  On February 12,  1999,  IP acquired an  additional  letter of
credit  for $30  million  with a .425% per annum  fee on the  undrawn  amount of
credit.

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

   Illinova had no borrowings  against its lines of credit at December 31, 1998.
For the years 1998,  1997,  and 1996,  Illinova  (including  IP) had  short-term
borrowings consisting of bank loans,  commercial paper, extendible floating rate
notes, and other short-term debt outstanding at various times as follows:


(Millions of dollars, except rates)       1998            1997            1996

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

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

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

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

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


NOTE 7 -- FACILITIES AGREEMENTS

On March 13,  1997,  the NRC  issued an order  approving  transfer  to IP of the
Clinton  operating  license related to Soyland's 13.2% ownership  obligations in
connection with the transfer from Soyland to IP of all of Soyland's  interest in

                                       166
<PAGE>

Clinton pursuant to an agreement  reached in 1996.  Soyland's title to the plant
and directly  related assets such as nuclear fuel were  transferred to IP on May
1, 1997. Soyland's nuclear  decommissioning  trust assets were transferred to IP
on May 19, 1997,  consistent with IP's assumption of all of Soyland's  ownership
obligations, including those related to decommissioning.

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


NOTE 8 -- INCOME TAXES

Deferred tax assets and liabilities were comprised of the following:

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

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

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

    Total deferred tax assets                      $  707.9         $ 383.0


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

                                       167
<PAGE>

Noncurrent:
  Depreciation and other property related           1,292.8         1,348.0
  Misc. book/tax recognition differences              240.7            (7.1)
                                                    1,533.5         1,340.9

    Total deferred tax liabilities                 $1,533.6        $1,341.8

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

                                                    Years Ended December 31,
(Millions of dollars)                     1998        1997            1996

Current taxes                         $    3.4     $  70.3         $  64.7

Deferred taxes--
  Property related differences           (30.0)        8.8            70.6
  Alternative minimum tax                 16.4        41.7             1.1
  Gain/loss on reacquired debt             3.4          .4            (1.6)
  Clinton plant impairment              (982.8)        --              --
  Enhanced retirement
    and severance                          --           .5             2.6
  Misc. book/tax recognition
    differences                          (27.2)      (34.1)           (2.2)
  Investment tax credit                   (8.3)       (7.3)           (7.3)
  Investment tax credit --
    Clinton plant impairment            (160.4)        --              --

      Total deferred taxes            (1,188.9)       10.0            63.2

Total income taxes from
  continuing operations              $(1,185.5)    $  80.3        $  127.9

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

      Total extraordinary item             --       (118.0)            --

Total income taxes                   $(1,185.5)    $ (37.7)       $  127.9

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

                                       168
<PAGE>


                                                     Years Ended December 31,

(Millions of dollars)                      1998            1997          1996

Income tax expense at the
  federal statutory tax rate         $   (898.3)        $ 64.7          $ 111.4

Increases/(decreases) in taxes
resulting from--
  State taxes,
    net of federal effect                (198.5)           8.7             11.4
  Investment tax credit
    amortization                           (8.3)          (7.3)            (7.3)
Clinton plant impairment                  (85.4)           --               --
Depreciation not normalized                 4.4           11.3              9.4
Preferred dividend
  requirement of subsidiary                 1.0            1.7              2.5
Other--net                                  (.4)           1.2               .5

Total income taxes from
  continuing operations              $(1,185.5)         $ 80.3          $ 127.9

     Combined  federal and state effective  income tax rates were 42.9%,  43.4%,
and 40.2% for the years 1998, 1997, and 1996, respectively.

   Illinova is subject to the provisions of the Alternative  Minimum Tax System.
As a result,  Illinova has an  Alternative  Minimum Tax credit  carryforward  at
December 31, 1998, of approximately  $140.5 million.  This credit can be carried
forward  indefinitely  to offset future regular income tax liabilities in excess
of the tentative minimum tax.

   The Internal Revenue Service is currently  auditing  Illinova's  consolidated
federal  income tax returns for the years 1994 through 1997.  At this time,  the
outcome of the audit cannot be determined; however, the results of the audit are
not  expected  to have a  material  adverse  effect on  Illinova's  consolidated
financial position or results of operations.

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

   Because  of the  passage of P.A.  90-561 in 1997,  IP's  electric  generation
business no longer meets the criteria for  application of FAS 71. As required by
FAS  101,  "Regulated  Enterprises  --  Accounting  for the  Discontinuation  of
Application  of FASB  Statement No. 71," the income tax effects of the write-off
of  regulatory  assets  and  liabilities  related  to  electric  generation  are
reflected in the  extraordinary  item for the  cumulative  effect of a change in
accounting principle.


                                      169
<PAGE>

NOTE 9 -- CAPITAL LEASES

The Fuel  Company,  which is 50 percent  owned by IP, was formed in 1981 for the
purpose of leasing  nuclear fuel to IP for Clinton.  Lease payments are equal to
the Fuel Company's  cost of fuel as consumed  (including  related  financing and
administrative  costs).  Billings  under the lease  agreement were $4 million in
1998, $4 million in 1997, and $35 million in 1996,  including financing costs of
$4 million,  $4 million,  and $5  million,  respectively.  IP is required to pay
financing  costs  whether  or not  fuel is  consumed.  IP is  obligated  to make
subordinated  loans to the Fuel Company at any time the  obligations of the Fuel
Company that are due and payable exceed the funds available to the Fuel Company.
Lease  terms  stipulate  that,  in the event  Clinton is out of  service  for 24
consecutive  months, IP is obligated to purchase  Clinton's in-core nuclear fuel
from the Fuel Company.  In accordance with this provision,  IP will purchase the
fuel for $62.1 million in the first  quarter of 1999.  IP has an obligation  for
nuclear fuel disposal  costs of leased  nuclear fuel.  See "Note 5 - Commitments
and Contingencies"  for discussion of decommissioning  and nuclear fuel disposal
costs.  Nuclear fuel lease payments are included with "Fuel for electric plants"
on Illinova's Consolidated Statements of Income.

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


                                      170
<PAGE>

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

First mortgage bonds of subsidiary--
      <S>         <C>                <C>                                                                                  <C>
    6 1/2%  series due 1999                                                                                 $72.0         $72.0
    6.60%   series due 2004 (Pollution Control Series A)                                                        -           6.3
    7.95%   series due 2004                                                                                  39.0          72.0
    6.0%    series due 2007 (Pollution Control Series B)                                                        -          18.7
    8.30%   series due 2017 (Pollution Control Series I)                                                        -          33.8
    7 3/8%  series due 2021 (Pollution Control Series J)                                                     84.7          84.7
    8 3/4%  series due 2021                                                                                  57.1          57.1
    5.70%   series due 2024 (Pollution Control Series K)                                                     35.6          35.6
    7.40%   series due 2024 (Pollution Control Series L)                                                     84.1          84.1

-------------------------------------------------------------------------------------------------------------------------------
   Total first mortgage bonds of subsidiary                                                                 372.5         464.3
-------------------------------------------------------------------------------------------------------------------------------
New mortgage bonds of subsidiary--
    6 1/8%  series due 2000                                                                                  40.0          40.0
    5.625%  series due 2000                                                                                 110.0         110.0
    6.25%   series due 2002                                                                                 100.0           -
    6.0%    series due 2003                                                                                 100.0           -
    6 1/2%  series due 2003                                                                                 100.0         100.0
    6 3/4%  series due 2005                                                                                  70.0          70.0
    8.0%    series due 2023                                                                                 229.0         229.0
    7 1/2%  series due 2025                                                                                 148.5         177.0
    5.40%   series due 2028 (Pollution Control Series A)                                                     18.7           -
    5.40%   series due 2028 (Pollution Control Series B)                                                     33.8           -
    Adjustable rate series due 2028 (Pollution Control Series M, N, and O)                                  111.8         111.8
    Adjustable rate series due 2032 (Pollution Control Series P, Q, and R)                                  150.0         150.0
-------------------------------------------------------------------------------------------------------------------------------
   Total new mortgage bonds of subsidiary                                                                 1,211.8         987.8
-------------------------------------------------------------------------------------------------------------------------------
   Total mortgage bonds of subsidiary                                                                     1,584.3       1,452.1
-------------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes of subsidiary--
    5.39% due 2000                                                                                          110.0           -
    5.26% due 2001                                                                                          100.0           -
    5.31% due 2002                                                                                           80.0           -
    5.34% due 2003                                                                                           85.0           -
    5.38% due 2005                                                                                          175.0           -
    5.54% due 2007                                                                                          175.0           -
    5.65% due 2008                                                                                          139.0           -
-------------------------------------------------------------------------------------------------------------------------------
   Total transitional funding trust notes of subsidiary                                                     864.0           -
-------------------------------------------------------------------------------------------------------------------------------
Medium-term notes of subsidiary, series A                                                                       -          68.0
Variable rate long-term debt of subsidiary due 2017                                                          75.0          75.0
Illinova 6.15% Senior Notes due 2001                                                                         30.0           -
Illinova 6.46% Senior Notes due 2002                                                                         40.0           -
Illinova 7 1/8% Senior Notes due 2004                                                                       100.0         100.0
-------------------------------------------------------------------------------------------------------------------------------
   Total other long-term debt                                                                               245.0         243.0
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                          2,693.3       1,695.1
Adjustment to Fair Value                                                                                     31.4           -
Unamortized discount on debt                                                                               (15.5)         (16.8)
-------------------------------------------------------------------------------------------------------------------------------
   Total long-term debt excluding capital lease obligations                                               2,709.2       1,678.3
   Obligations under capital leases of subsidiary                                                           132.0         126.7
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                          2,841.2       1,805.0
Long-term debt and lease obligations of subsidiary maturing within one year                               (506.6)        (87.5)
-------------------------------------------------------------------------------------------------------------------------------
         Total long-term debt                                                                            $2,334.6      $1,717.5
</TABLE>

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

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

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

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

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

                                      172
<PAGE>

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

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

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

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

   In 1992,  IP executed a new general  obligation  mortgage  (New  Mortgage) to
replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage).  Both
mortgages  are  secured  by liens on  substantially  all of IP's  properties.  A
corresponding  issue of First Mortgage Bonds, under the First Mortgage,  secures
any  bonds  issued  under  the New  Mortgage.  In  October  1997,  at a  special
bondholders  meeting,  the 1943  First  Mortgage  was  amended  to be  generally
consistent  with  the  New  Mortgage.  The  remaining  balance  of net  bondable
additions at December 31, 1998, was approximately $1.9 billion.


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

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

             <S>             <C>                 <C>                                                <C>           <C>
           Series           Shares        Redemption Prices
            4.08%           283,290           $   51.50                                           $  14.1       $  14.1
            4.26%           136,000               51.50                                               6.8           6.8
            4.70%           176,000               51.50                                               8.8           8.8
            4.42%           134,400               51.50                                               6.7           6.7
            4.20%           167,720               52.00                                               8.4           8.4
            7.75%           241,700               50.00 after July 1, 2003                           12.1          12.1

            Net premium on preferred stock                                                             .2            .2

   Total Preferred Stock of Subsidiary, $50 par value                                             $  57.1       $  57.1

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



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

Total Serial  Preferred  Stock,  Preference  Stock and  Preferred  Securities of
Subsidiary                                                                                        $ 57.1         $ 57.1

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

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

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

</TABLE>

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

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

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

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


NOTE 12 -- COMMON STOCK AND RETAINED EARNINGS

As  of  December  31,   1998,   Illinova   and  its   subsidiaries   effected  a
quasi-reorganization  in which Illinova's  consolidated  accumulated  deficit in
retained  earnings of  $1,616.0  million was  eliminated  by a $1,313.3  million
restatement  of other assets and  liabilities to their fair value and a transfer

                                      174
<PAGE>

of $302.7  million  from  additional  paid-in  capital.  See "Note 2 --  Clinton
Impairment and  Quasi-Reorganization"  for additional  information regarding the
effects upon retained earnings.

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

   In 1996, Illinova amended the Automatic  Reinvestment and Stock Purchase Plan
and the ESOP.  These plans were replaced with the Illinova  Investment Plus Plan
for which  5,000,000  shares of  common  stock  were  designated  for  issuance.
Illinova  administers the Illinova Investment Plus Plan. The Illinova Investment
Plus Plan provides investors a convenient way to purchase shares of common stock
and reinvest all or a portion of the cash dividends paid on eligible  securities
in additional shares of common stock. It allows purchases of common stock on the
open market,  as well as purchases of new issue shares  directly from  Illinova.
Under this plan,  4,403,142  shares of common stock were designated for issuance
at December  31, 1998.  All  accounts,  elections,  notices,  instructions,  and
authorizations under the Automatic  Reinvestment and Stock Purchase Plan and the
ESOP  automatically  continue  under the  Illinova  Investment  Plus  Plan,  and
participants in the Automatic  Reinvestment and Stock Purchase Plan and the ESOP
continue as participants in the Illinova Investment Plus Plan.

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

   For the year ended December 31, 1998,  86,020 common shares were allocated to
salaried  employees and 77,019 shares to employees  covered under the Collective
Bargaining  Agreement  through  the  matching  contribution  feature of the ESOP
arrangement. Under the incentive compensation feature, 56,315 common shares were
allocated to employees  for the year ended  December 31, 1998.  During 1998,  IP
contributed  $4.7 million to the ESOP and,  using the shares  allocated  method,
recognized  $5.2  million  of  expense.  Interest  paid  on the  ESOP  debt  was
approximately  $.9  million in 1998 and  dividends  used for debt  service  were
approximately $2.2 million.

   In 1992,  the Board of  Directors  adopted  and the  shareholders  approved a
Long-Term  Incentive  Compensation  Plan (the  Plan) for  officers  or  employee
members of the Board, but excluding directors who are not officers or employees.

                                      175
<PAGE>

Restricted stock,  incentive stock options,  non-qualified stock options,  stock
appreciation rights,  dividend equivalents,  and other stock-based awards may be
granted under the Plan for up to 1,500,000  shares of  Illinova's  common stock.
The following  table outlines the activity under this Plan at December 31, 1998.
No options were exercised through February 1999.


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

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


   In October 1995,  the FASB issued FAS No. 123,  "Accounting  for  Stock-Based
Compensation,"  effective for fiscal years  beginning  after  December 15, 1995.
Based on the current and anticipated use of stock options, the impact of FAS 123
is not material on the current  period and is not  envisioned  to be material in
any future period.  As permitted by FAS 123,  Illinova  continues to account for
its stock options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."

   The provisions of Supplemental  Indentures to IP's General Mortgage Indenture
and Deed of Trust contain certain  restrictions  with respect to the declaration
and payment of  dividends.  IP was not limited by any of these  restrictions  at
December 31, 1998. Under the Restated  Articles of  Incorporation,  common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock.


NOTE 13 -- PENSION AND OTHER BENEFITS COSTS

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

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

<TABLE>
<CAPTION>

                                                                                                               (Millions of dollars)
                                                                             Pension Benefits                   Other Benefits
                                                                           1998            1997             1998               1997
<S>                                                                     <C>              <C>              <C>               <C>
Change in benefit obligation
Benefit obligation at beginning of year                                  $ 417.6         $ 361.6          $  89.4           $  81.7
Service cost                                                                12.8            10.2              2.6               1.9
Interest cost                                                               30.4            28.2              6.3               5.9
Plan participants' contributions                                            --              --                 .4                .4



Amendments                                                                   2.0            --               --                --
Actuarial (gain)/loss                                                       45.2            43.1              3.8               5.4
Benefits paid                                                              (32.8)          (25.5)            (7.0)             (5.9)

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


Change in plan assets

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

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

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

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


<TABLE>
<CAPTION>

                                                                             Pension Benefits                   Other Benefits
                                                                           1998            1997             1998               1997

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

<TABLE>
<CAPTION>

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

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

Recognized net actuarial (gain)/loss                    --             4.2         --             --             (.3)           --
Net periodic benefit cost                           $   5.6        $   8.6      $  4.2        $   7.2        $   7.2        $   8.8

</TABLE>


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

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

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

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


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

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

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


NOTE 14 -- SEGMENTS OF BUSINESS

In 1997, the FASB issued FAS 131,  "Disclosures  about Segments of an Enterprise
and Related Information." This statement supersedes FAS 14, "Financial Reporting

                                      178
<PAGE>

for  Segments of a Business  Enterprise,"  and  establishes  new  standards  for
defining a company's segments and disclosing information about them.

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

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

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

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

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

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

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

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

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

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


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

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


                                      179
<PAGE>

<TABLE>
<CAPTION>
                                                                                                              (Millions of dollars)
                                                                                  Illinova
                                          Customer      Wholesale                  Energy     Illinova
1998                                      Service        Energy         Nuclear   Partners   Generating       Other     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>               <C>      <C>           <C>           <C>        <C>
Revenues from external customers       $   1,505.7    $     557.2    $      6.3   $   --        $  --        $  --      $   2,069.2
Diversified enterprise revenue                --             --            --        339.8         15.9          5.7          361.4
Intersegment revenue(1)                       --            482.3          (2.4)      --           --           --            479.9
------------------------------------------------------------------------------------------------------------------------------------
   Total Revenue                           1,505.7        1,039.5           3.9      339.8         15.9          5.7        2,910.5
Depreciation and
  amortization expense                        68.3           30.3          99.1       --           --            5.9          203.6
Other operating expenses(1)                  894.4          999.0         379.2      354.5         28.7         12.2        2,668.0
------------------------------------------------------------------------------------------------------------------------------------
   Operating income (loss)                   543.0           10.2        (474.4)     (14.7)       (12.8)       (12.4)          38.9
Interest expense                              70.4           13.8          59.3       --           --            2.5          146.0
AFUDC                                         (0.1)          (0.9)         (2.5)      --           --            0.3           (3.2)
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss) before taxes            472.7           (2.7)       (531.2)     (14.7)       (12.8)       (15.2)        (103.9)
Income tax expense (benefit)                 194.4           (1.9)       (232.3)      (4.2)         2.4         (0.7)         (42.3)
Miscellaneous-net                              0.5           (1.0)          0.1       --           (4.7)         3.5           (1.6)
Equity earnings in subsidiaries               --             --            --         (4.0)       (18.6)         0.1          (22.5)
Interest revenue                              --             --            --         --           --           (1.5)          (1.5)
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss) after taxes             277.8            0.2        (299.0)      (6.5)         8.1        (16.6)         (36.0)
Preferred dividend requirement                 9.7            2.2           7.9       --           --           --              19.8
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss)(2)                $     268.1    $      (2.0)   $   (306.9)  $   (6.5)   $     8.1    $   (16.6)   $     (55.8)
Clinton plant impairment loss                                           1,523.7                                             1,523.7
------------------------------------------------------------------------------------------------------------------------------------
   Net income (loss)
     available to common               $     268.1    $      (2.0)   $ (1,830.6)  $   (6.5)   $     8.1    $   (16.6)   $  (1,579.5)
------------------------------------------------------------------------------------------------------------------------------------
Other information --
   Total assets(3)                     $   2,289.1    $   3,039.0    $    227.2   $   74.3    $   222.4    $   623.6    $   6,475.6
   Subsidiary's investment in
     equity method investees                --               --            --          9.2        166.4         --            175.6
   Total expenditures for additions
     to long-lived assets                    124.4          116.0          62.5       --           --            8.6          311.5
------------------------------------------------------------------------------------------------------------------------------------

Corporate Measures --
   Contribution margin(4)              $     315.7    $       7.0    $   (268.5)  $   (6.5)   $     8.1    $   (16.3)   $      39.5
   Cash flow(5)                              237.4           27.2        (280.8)     (18.7)        26.0        (27.9)         (36.8)
   Return on net
     invested capital(6)                     16.73%          0.33%        N/A       (33.50)%       4.06%       (2.93)%         0.97%
------------------------------------------------------------------------------------------------------------------------------------
</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  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).


                                      181
<PAGE>

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

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


                                                           (Millions of dollars)
December 31,                                 1998          1997           1996

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

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

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



<TABLE>
<CAPTION>

1998, 1997, and 1996
                                                                                                              (Millions of dollars)
                                     1998                                1997                                 1996
                                       Diversified   Total                  Diversified   Total                  Diversified  Total
                       Electric  Gas   Enterprises   Corp.  Electric  Gas   Enterprises   Corp.   Electric  Gas  Enterprises  Corp.
Operation information-
<S>                    <C>      <C>     <C>        <C>      <C>      <C>     <C>        <C>      <C>      <C>      <C>      <C>
  Operating revenues   $1,781.4 $287.8  $ 361.4    $2,430.6 $1,420.0 $353.9  $ 735.6    $2,509.5 $1,340.5 $348.2   $  57.6  1,746.3
  Operating expenses,
   excluding provision
   for income taxes     1,747.6  252.1    392.0     2,391.7  1,081.3  311.5    792.3     2,185.1    886.2  300.5      87.5  1,274.2
  Clinton plant
   impairment loss      2,666.9    -        -       2,666.9      -      -        -           -        -      -         -        -

  Pre-tax
   operating income    (2,633.1)  35.7    (30.6)   (2,628.0)   338.7   42.4    (56.7)      324.4    454.3   47.7     (29.9)   472.1
  AFUDC                     3.1     .1      -           3.2      4.9     .1      -           5.0      6.3     .2       -        6.5

  Pre-tax operating
   income, including
   AFUDC              ($2,630.0) $35.8   ($30.6)  ($2,624.8)  $343.6  $42.5   ($56.7)    $ 329.4   $460.6 $ 47.9   $ (29.9) $ 478.6

Other deductions, net                                 (25.6)                               (21.0)                              (5.2)
  Interest charges                                    146.0                                144.2                              142.5
  Income tax - Clinton
   impairment                                      (1,143.2)                                 -                                  -
  Provision for
   income taxes                                       (42.3)                                80.3                              128.0
  Preferred dividend
   requirements
   of subsidiary                                       19.8                                 21.5                               22.3

Net income                                         (1,579.5)                               104.4                              191.0
  Extraordinary item
   (net of taxes)                                       -                                 (195.0)                               -
  Carrying value over
   (under) consideration
   paid for redeemed
   preferred stock
   of subsidiary                                        -                                     .2                                (.7)

Net income (loss)
  applicable
  to common stock                                 $(1,579.5)                            $  (90.4)                            $190.3

Other information-
  Depreciation           $177.9 $ 25.7   $  -        $203.6   $171.5 $ 24.1   $  -      $  195.6   $164.0  $22.5    $  -     $186.5
  Capital expenditures   $285.6 $ 25.9   $  -        $311.5   $201.3 $ 22.6   $  -      $  223.9   $164.0  $23.3    $  -     $187.3
Investment information-
  Identifiable assets* $4,843.3 $457.9   $ 25.8    $5,327.0 $4,508.1 $453.8   $  1.2    $4,963.1 $4,578.1 $481.9    $  -   $5,060.0
  Nonutility plant and
    other investments                                 228.6                                184.0                              132.4
  Assets utilized for
    overall operations                                920.0                                435.9                              520.4

  Total assets                                     $6,475.6                             $5,583.0                           $5,712.8
</TABLE>

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

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


                                      184
<PAGE>

NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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


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

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

Notes payable                         147.6       147.6       415.3       415.3

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

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

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


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

                                      185
<PAGE>

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

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

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

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

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

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


NOTE 16 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS

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

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

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

                                      186
<PAGE>

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

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


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

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

                                       Fair Value        Fair Value
(Millions of dollars)                   Assets           Liabilities

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


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

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

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

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

   In order to hedge expected purchases of emission  allowances,  IP has entered
into swap  agreements,  forward  contracts,  and written put options  with other
utilities  to  mitigate  the risk from market  fluctuations  in the price of the

                                      187
<PAGE>

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

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

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

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


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

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


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

     The notional  amount is intended to be  indicative of the level of activity
in such  derivatives,  although  the amounts at risk are  significantly  smaller

                                      188
<PAGE>

because changes in the market value of these derivatives generally are offset by
changes in the value associated with the underlying physical  transactions or in
other  derivatives.  When  energy  derivatives  are closed out in advance of the
underlying commitment or anticipated  transaction,  the market value changes may
not be offset  because  price  movement  correlation  ceases  to exist  when the
positions are closed.

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

                                  Fair Value            Fair Value
(Millions of dollars)               Assets              Liabilities

Electricity
  IP                                $  4.2                $  9.6

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

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

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

     Illinova has established an Executive Risk Management  Committee to oversee
all  corporate  risk  management.  The  Executive  Risk  Management  Committee's
responsibilities include reviewing Illinova's and its subsidiaries' overall risk

                                      189
<PAGE>

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.


Note 17 RESTATEMENT OF THE CONSOLIDATED  FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1998

In February 2000, Illinova and IP restated its consolidated financial statements
for the year  ended  December  31,  1998 to reflect a  revision  to the  initial
estimate of the "Transition  period cost recovery"  regulatory asset established
in December 1998  coincident  with the  impairment of the Clinton Power Station.
The effect of this revision was to decrease the amount of the  regulatory  asset
at December 31, 1998, and correspondingly increase the related impairment charge
by $325.7 million ($196.5 million net of taxes).  The impact of this revision on
the net loss and the loss per common share for 1998 follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                             As Previously          As Restated
                                               Reported
--------------------------------------------------------------------------------
                                             (Millions of dollars
                                                  except per share amounts)
--------------------------------------------------------------------------------
      <S>                                       <C>                       <C>
Net loss                                     ($1,383.0)               ($1,579.5)

Loss per common share (basic and diluted)      ($19.30)                 ($22.04)

Common stock-No par value                     $1,319.7                 $1,123.2
--------------------------------------------------------------------------------
</TABLE>
As a result of the quasi-reorganization described in Note 2, there was no effect
of this revision on "Retained Earnings."

<TABLE>
<CAPTION>
Illinova Corporation

N O T E   1 8   QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA (UNAUDITED)

(Millions of dollars except per common share amounts)
--------------------------------------------------------------------------------------------------------------------------
                                                          First Quarter   Second Quarter    Third Quarter   Fourth Quarter
                                                                  1998             1998             1998             1998
--------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>              <C>             <C>
Operating revenues                                             $  575.4         $  547.3         $  823.3         $  484.6
Operating income (loss)                                            63.7            (51.1)            90.1        (2,730.7)
Net income (loss)                                                  23.0            (47.0)            26.6        (1,582.1)
Net income (loss) applicable to common stock                       23.0            (47.0)            26.6        (1,582.1)
Earnings (loss) per common share
     (basic and diluted)                                           $.32           ($0.66)            $.37         ($22.13)
Common stock prices and dividends
     High                                                        30 1/2               31               31         30  3/16
     Low                                                         26 5/8          27 3/16           23 1/2           23 3/8
     Dividends declared                                            $.31             $.31             $.31             $.31

                                                          First Quarter   Second Quarter    Third Quarter   Fourth Quarter
                                                                  1997             1997             1997             1997
--------------------------------------------------------------------------------------------------------------------------
Operating revenues                                             $  570.4         $  542.9         $  841.8         $  554.4
Operating income (loss)                                           114.4             95.1            144.2            (29.3)
Net income (loss) before extraordinary item                        44.0             31.4             63.3            (34.3)
Net income (loss) after extraordinary item                         44.0             31.4             63.3           (229.3)
Net income (loss) applicable to common stock                       44.0             31.4             64.4           (230.2)


Earnings (loss) per common share before
  extraordinary item (basic and diluted)                           $.58             $.42             $.87           ($0.49)
Earnings (loss) per common share after
  extraordinary item (basic and diluted)                           $.58             $.42             $.87           ($3.21)
Common stock prices and dividends
     High                                                        27 1/2           23 3/4           23 3/4          27 3/16
     Low                                                         22 3/4           20 1/8           21 1/2           20 3/8
     Dividends declared                                            $.31             $.31             $.31             $.31
</TABLE>




Illinova  common stock is listed on the New York Stock  Exchange and the Chicago
Stock Exchange.  The stock prices above are the prices reported on the Composite
Tape. There were 31,945 registered holders of common stock at January 11, 1999.


<TABLE>
<CAPTION>
Illinova Corporation
Selected Consolidated Financial Data*
                                                                                                             (Millions of dollars)
                                                          1998        1997        1996          1995          1994          1988
----------------------------------------------------------------------------------------------------------------------------
Operating revenues
<S>                                                    <C>         <C>         <C>         <C>          <C>             <C>
    Electric                                           $ 1,224.2   $ 1,244.4   $ 1,202.9   $   1,252.6  $    1,177.5    $    949.9
    Electric interchange                                   557.2       175.6       137.6         116.3         110.0         109.7
    Gas                                                    287.8       353.9       348.2         272.5         302.0         334.8
    Diversified enterprises                                361.4       735.6        57.6           1.9          --            --

       Total operating revenues                        $ 2,430.6     2,509.5     1,746.3       1,643.3       1,589.5       1,394.4

Extraordinary item net of income tax benefit           $    --        (195.0)       --            --            --            --
Cumulative effect of change in
    accounting principle net of income taxes           $    --          --          --            --            --            34.0
Net income (loss) after extraordinary item and
    change in accounting principle                     $(1,579.5)      (90.6)      191.0         151.6         151.8         151.9
Effective income tax rate                                   42.9%       43.4%       40.2%         42.9%         42.0%         34.2%

Net income (loss) applicable
    to common stock                                    $(1,579.5)      (90.4)      190.3         148.1         158.2         151.9
Earnings (loss) per common share (basic and diluted)   $  (22.04)      (1.22)       2.51          1.96          2.09          2.14
Cash dividends declared per common share               $    1.24        1.24        1.15          1.03          0.65          2.64
Dividend payout ratio (declared)                          N/A         N/A           45.5%         52.3%         30.7%        124.3%
Book value per common share                            $   13.88       19.11       21.62         20.19         19.17         25.80
Price range of common shares
    High                                               $   31         27 1/2      30 3/8        30            22 5/8        22 1/8
    Low                                                $   23 3/8     20 1/8      24 5/8        21 1/4        18 1/8        16 1/2
Weighted average number of common shares
    outstanding during the period (thousands)             71,667      73,992      75,682        75,644        75,644        70,901

       Total assets                                    $ 6,475.6     5,583.0     5,712.8       5,609.8       5,576.7       6,053.1


Capitalization
    Common stock equity                                $   970.4     1,369.5     1,636.2       1,527.0       1,450.2       1,895.6
    Preferred stock of subsidiary                           57.1        57.1        96.2         125.6         224.7         315.2
    Mandatorily redeemable preferred
         stock of subsidiary                               199.0       197.0       197.0          97.0         133.0         160.0
    Long-term debt                                       2,334.6     1,717.5     1,636.4       1,739.3       1,946.1       2,341.2

       Total capitalization                            $ 3,561.1     3,341.1     3,565.8       3,488.9       3,754.0       4,712.0

Retained earnings                                      $    --          51.7       233.0         129.6          58.8         517.9

Capital expenditures                                   $   311.5       223.9       187.3         209.3         193.7         115.5
Cash flows from operations                             $   268.0       368.3       407.4         413.2         268.6         225.2
AFUDC as a percent of earnings
    applicable to common stock                             N/A         N/A           3.4%          4.1%          5.9%         40.3%
Return on average common equity                            N/A        (6.0%)        12.0%          9.9%         11.4%          8.1%
Ratio of earnings to fixed charges                         N/A           0.30       3.21          2.70          2.71          1.83


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

</TABLE>


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

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

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

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

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

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

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

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

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

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

    Total gas sold and transported                         770         846         954         861         846         905


Interdepartmental sales                                     26          19           9          21           5           9

    Total gas delivered                                    796         865         963         882         851         914

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

    Revenues from ultimate consumers                       272         335         335         257         289         326

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

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

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

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

</TABLE>


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


Information Statement Table of Contents
Notice of Annual Meeting.............................  194
Information Statement................................  195
Appendix: 1998 Annual Report to Shareholders.........  213


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
                                      193
<PAGE>

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.


                                      194
<PAGE>

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;

                                      195
<PAGE>

     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.

                                      196
<PAGE>

     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.

                                      197
<PAGE>

   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.

                                      198
<PAGE>

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

                                      199
<PAGE>

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.

                                      200
<PAGE>

<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.

                                      201
<PAGE>

     (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.


                                      202
<PAGE>

                                                         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>
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.

                                      203
<PAGE>

(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.

                                      204
<PAGE>

<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>
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.


                                      205
<PAGE>

PENSION BENEFITS

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

   The following table shows the estimated annual pension benefits on a straight
life annuity basis payable upon  retirement  based on specified  annual  average
earnings and years of credited service classifications, assuming continuation of
the Retirement  Plan and  Supplemental  Plan and  employment  until age 65. This
table does not show 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.


                                      206
<PAGE>

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

                                      207
<PAGE>

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.

                                      208
<PAGE>


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

                                      209
<PAGE>

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.


                                      210
<PAGE>

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.

                                      211
<PAGE>

     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...................  214
Responsibility for Information.........................  238
Report of Independent Accountants......................  239
Consolidated Statements of Income......................  240
Consolidated Balance Sheets............................  241-242
Consolidated Statements of Cash Flows..................  243
Consolidated Statements of Retained Earnings...........  244
Notes to Consolidated Financial Statements.............  245
Selected Consolidated Financial Data...................  287
Selected Illinois Power Company Statistics.............  289


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


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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.

RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 1998

In  February  2000,  IP restated  its  financial  statements  for the year ended
December  31,  1998  to  reflect  a  revision  to the  initial  estimate  of the
"Transition period cost recovery"  regulatory asset established in December 1998
coincident with the impairment of the Clinton Power Station.  The effect of this
revision  was to decrease  the amount of the  regulatory  asset at December  31,
1998,  and  correspondingly  increase  the related  impairment  charge by $325.7
million  ($196.5  million net of tax).  The net effect of this  revision  was to
increase the previously  reported net loss by $196.5 million. As a result of the
quasi-reorganization  described  below,  there was no effect of this revision on
"Retained earnings;" however,  "Total common stock equity" was reduced by $196.5
million.  The  following  discussion,  as  well  as  all  financial  tables  and
statements throughout the 10-K/A, have been modified to reflect these changes.

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

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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

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<PAGE>

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 $1,523.7 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

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<PAGE>

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 $1,565.9
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.

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<PAGE>

   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

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<PAGE>

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

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<PAGE>

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.

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<PAGE>

     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.

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<PAGE>

   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:

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<PAGE>

-    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.

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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                     $ (1,572)     $   (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

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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.

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<PAGE>

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

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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

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<PAGE>

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

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<PAGE>

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  $410
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,

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<PAGE>

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

                                      230
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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:

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<PAGE>

(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

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<PAGE>

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.

                                      233
<PAGE>

   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


                                      234
<PAGE>

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.

                                      235
<PAGE>

-    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.

                                      236
<PAGE>

-    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.


                                      237
<PAGE>

ILLINOIS POWER COMPANY
Responsibility for Information

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

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

   The consolidated  financial  statements have been audited by Illinois Power's
independent   accountants,   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


                                      238
<PAGE>

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,  after the restatement  described in  Note 16  presents 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, except for Note 16
as to which date is February 28, 2000


                                      239
<PAGE>

<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
<S>                                                                            <C>                <C>              <C>
Operating Revenues                                                           As Restated

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                                                    (982.8)              -                -
Clinton plant impairment loss (Note 2)                                         2,666.9               -                -
-------------------------------------------------------------------------------------------------------------------------
         Total                                                                 3,652.9           1,495.2          1,327.3
-------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                       (1,583.7)            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                                         (1,420.7)            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                                   (1,552.4)            150.8            228.6
Extraordinary item net of income tax benefit
    of $ 118.0 million (Note 1)                                                    -              (195.0)             -
-------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                             (1,552.4)            (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                               $ (1,572.2)         $  (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)
--------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>              <C>
December 31,                                                                           1998            1997
ASSETS                                                                               As Restated
Utility Plant
Electric (includes construction work in progress
      of $177.7 million and $214.3 million, respectively)                           $ 5,481.8        $ 6,690.4
Gas (includes construction work in progress of
      $15.3 million and $10.7 million, respectively)                                    686.9            663.0
--------------------------------------------------------------------------------------------------------------
                                                                                      6,168.7          7,353.4
Less -- accumulated depreciation                                                      1,713.7          2,808.1
--------------------------------------------------------------------------------------------------------------
                                                                                      4,455.0          4,545.3
Nuclear fuel in process                                                                   -                6.3
Nuclear fuel under capital lease                                                         20.3            126.7
--------------------------------------------------------------------------------------------------------------
                                                                                      4,475.3          4,678.3
--------------------------------------------------------------------------------------------------------------
Investments and Other Assets                                                              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                                                         457.3              -
Other                                                                                   284.2            192.5
--------------------------------------------------------------------------------------------------------------
                                                                                        741.5            192.5
--------------------------------------------------------------------------------------------------------------
                                                                                    $ 6,104.1        $ 5,291.5
--------------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES
Capitalization
Common stock -- No par value, 100,000,000 shares
      authorized; 75,643,937 shares issued, stated at                               $ 1,185.9        $ 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                                                         892.2          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                                                            3,306.8          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                                                       849.5           980.6
Accumulated deferred investment tax credits                                              39.6            208.3
Decommissioning liability                                                               567.4             62.5
Other                                                                                   258.3            140.3
--------------------------------------------------------------------------------------------------------------
                                                                                      1,714.8          1,391.7
--------------------------------------------------------------------------------------------------------------
                                                                                    $ 6,104.1        $ 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)
----------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                 <C>               <C>
For the Years Ended December 31,                                             1998              1997              1996
Cash Flows from Operating Activities                                       As Restated
Net  income (loss)                                                        ($1,552.4)          ($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                                           1,523.7              -                -
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)
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                <C>            <C>
For the Years Ended December 31,                                                       1998            1997            1996
                                                                                     As Restated
Balance at beginning of year                                                       $   89.5        $  245.9        $ 129.6
Net income (loss) before dividends and carrying amount adjustment                  (1,552.4)          (44.2)         228.6
--------------------------------------------------------------------------------------------------------------------------
                                                                                   (1,462.9)          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)                                 238.7             -              -
--------------------------------------------------------------------------------------------------------------------------
                                                                                    1,462.9         (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

                                      245
<PAGE>

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                 $457.3         --
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%,

                                      246
<PAGE>

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

                                      247
<PAGE>

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."

                                      248
<PAGE>

   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

                                      249
<PAGE>

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 $1,523.7  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 $1,565.9
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.

                                      250
<PAGE>

   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

                                      251
<PAGE>

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
$275.9  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.

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<PAGE>

   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 $238.7 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:

                                      253
<PAGE>

(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*                                       275.9
-------------------------------------------------------------------------------
Total Clinton impairment                                              (1,523.7)
-------------------------------------------------------------------------------
Accumulated deficit in retained earnings                              (1,565.9)
-------------------------------------------------------------------------------
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                          (238.7)
Transfer from other paid-in capital                                      238.7
-------------------------------------------------------------------------------
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

                                      254
<PAGE>

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.

                                      255
<PAGE>

     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

                                      256
<PAGE>

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.

                                      257
<PAGE>

  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

                                      258
<PAGE>

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.

                                      259
<PAGE>

   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.

                                      260
<PAGE>

   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

                                      261
<PAGE>

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.

                                      262
<PAGE>

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

                                      263
<PAGE>

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

                                      264
<PAGE>

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                    240.7          (7.1)
--------------------------------------------------------------------------------
                                                          1,533.5       1,340.9
--------------------------------------------------------------------------------
    Total deferred tax liabilities                      $ 1,533.6     $ 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              (982.8)           --             --
    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               (1,012.4)           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                 (1,177.7)          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                     $(1,177.7)      $   (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            $ (886.9)       $   88.1        $ 128.3

Increases/(decreases) in taxes
resulting from--
  State taxes,
    net of federal effect                 (196.0)           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                $(1,177.7)       $  100.9        $ 137.9
--------------------------------------------------------------------------------

     Combined  federal and state effective  income tax rates were 43.1%,  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.


                                      268
<PAGE>

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 redeemed  $36.8 million of 6.5%
First  Mortgage  Bonds due 1999 and $5 million of 7.95% First Mortgage Bonds due
2004.

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

                                      270
<PAGE>

     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>                                                   <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 $1,565.9 million was eliminated by a
$1,327.2 million restatement of other assets and liabilities to their fair value
and a transfer of $238.7 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,

                                      272
<PAGE>

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.

                                      273
<PAGE>

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.


                                      274
<PAGE>

<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.

                                      276
<PAGE>

   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.

                                      277
<PAGE>

     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                                          1,523.7                 1,523.7
------------------------------------------------------------------------------------------------------
   Net income (loss) available to common      $  268.1    $   (2.0)  $(1,830.6)     $ (7.7)  $(1,572.2)
------------------------------------------------------------------------------------------------------
Other information --
   Total assets(3)                            $2,289.1    $3,039.0   $   227.2      $548.8   $ 6,104.1
   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)             16.73%       0.33%      N/A         (2.65)%      1.06%

------------------------------------------------------------------------------------------------------
</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.

                                      278
<PAGE>

(3)  Primary assets for Nuclear include 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.


                                      279
<PAGE>

<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          2,666.9      -      2,666.9        -        -          -          -        -          -
------------------------------------------------------------------------------------------------------------------------------------
   Pre-tax operating income              (2,633.1)    35.7   (2,597.4)     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                    $(2,630.0)  $ 35.8  $(2,594.2)    $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                           (1,143.2)                           -                              -
   Provision for income taxes                                   (34.5)                         100.9                          137.9
------------------------------------------------------------------------------------------------------------------------------------
   Net income                                                (1,552.4)                         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                            $(1,572.2)                        $(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*                 $ 4,843.3   $457.9   $5,301.2   $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                                              $6,104.1                       $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.

                                      280
<PAGE>


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.

                                      281
<PAGE>

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:

                                      282
<PAGE>


                                        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.

                                      283
<PAGE>

   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.

                                      284
<PAGE>

   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.


NOTE 16 - RESTATEMENT  OF THE  CONSOLIDATED  FINANCIAL  STATEMENTS  FOR THE YEAR
ENDED DECEMBER 31, 1998

In February 2000, IP restated its consolidated financial statements for the year
ended  December  31, 1998 to reflect a revision  to the initial  estimate of the
"Transition period cost recovery"  regulatory asset established in December 1998
coincident with the impairment of the Clinton Power Station.  The effect of this
revision  was to decrease  the amount of the  regulatory  asset at December  31,
1998,  and  correspondingly  increase  the related  impairment  charge by $325.7
million  ($196.5  million net of taxes).  The impact of this revision on the net
loss and the loss per common share for 1998 follows:

--------------------------------------------------------------------------------
                                             As Previously       As Restated
                                               Reported
--------------------------------------------------------------------------------
                                                  (Millions of Dollars)
--------------------------------------------------------------------------------
Net loss                                     ($1,375.7)          ($1,572.2)

Common stock-No par value                     $1,382.4            $1,185.9
--------------------------------------------------------------------------------
As a result of the quasi-reorganization described in Note 2, there was no effect
of this revision on "Retained Earnings."


                                      285
<PAGE>

<TABLE>
<CAPTION>

NOTE 17 - 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          (1,702.2)
Net income (loss)                                                30.4             (40.6)             35.4          (1,577.6)
Net income (loss) applicable to common stock                     25.5             (45.6)             30.4          (1,582.5)
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                   $ (1,552.4)        (44.2)        228.6         182.7         180.3       189.4
Effective income tax rate                                  43.1%         40.1%         37.6%         39.1%         38.4%       29.4%
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable
    to common stock                                   $(1,572.2)        (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                                    $ 6,104.1     $ 5,291.5     $ 5,568.5     $ 5,567.2     $ 5,595.8   $ 6,053.1
------------------------------------------------------------------------------------------------------------------------------------
Capitalization
    Common stock equity                               $   892.2     $ 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                            $ 3,306.8     $ 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>


                                                                   Exhibit 21(a)

Subsidiaries of Illinova Corporation and Illinois Power Company


                                                State or Jurisdiction
Name                                               of Incorporation
----                                            ---------------------

Illinova Corporation                                  Illinois
   Illinois Power Company                             Illinois
      IP Gas Supply Company                           Illinois
      Illinois Power Fuel Company (1)                 Illinois
      Illinois Power Capital, L.P. (2)                Delaware
      Illinois Power Financing I                      Delaware
      Illinois Power Securitization Limited
         Liability company (3)                        Delaware
      Illinois Power Special Purpose Trust (4)        Delaware
   Illinois Business Enterprises, Inc. (5)            Illinois
   Illinova Generating Company                        Illinois
      Electric Energy, Inc. (6)                       Illinois
      Illinova Resource Recovery, Inc.
         (formerly IPG Canfield Co.)                  Illinois
      IGC Krishnapatnam Company
         (formerly IPG Dominguez Co.)                 Illinois
      IPG Eastern, Inc.                               Illinois
      IPG Ferndale, Inc.                              Illinois
      IPG Frederickson, Inc.                          Illinois
      IGC Solutions, Inc.
         (formerly IPG LAP Cogen, Inc.)               Illinois
      IGC Grimes Frontier, Inc.
         (formerly IPG Panorama Co.)                  Illinois
      IPG Paris, Inc.                                 Illinois
      IPG Western, Inc.                               Illinois
      IGC Acquisition Co.
         (formerly IPG Aztec Co.)                     Illinois
      IGC Brazos, Inc.                                Illinois
      IGC Development Company                         Illinois
      IGC International, Inc.                         Cayman Islands
      IGC Grimes County, Inc.
         (formerly IGC Sub Co., Inc.)                 Illinois
      White Oak Energy Investors, Inc.                Illinois
      IGC Maranon, LLC                                Cayman Islands
      IGC Miel, Inc.                                  Cayman Islands
      IGC Azucar, Inc.                                Cayman Islands
      ECI Energy, Ltd. (7)                            Delaware
      North American Energy Services Co. (8)          Washington
      IGC ELCO Partnership, LLC (9)                   Cayman Islands
      ELCO Power Investment Company, LLC (10)         Cayman Islands
      IGC Jamaica Partnership, LLC (11)               Cayman Islands
      IGC International II, Inc. (12)                 Cayman Islands
      IGC Flores Partnership, LLC (13)                Cayman Islands
      IGC Flores Partnership II, LLC (14)             Cayman Islands
      IGC Flores Loanco, LLC                          Cayman Islands
      FIG Leasing International, Inc. (15)            Cayman Islands
      FIG Leasing International III, Inc. (16)        Cayman Islands
      FIG Equipment, LLC (17)                         Cayman Islands
      IGC Aguaytia Partners, LLC (18)                 Cayman Islands
      IGC Mauritius Holding Company
         (formerly IGC-ABC Shanghai Co.)(19)          Mauritius
      Illinova ZJ XC Company (20)                     Mauritius
      IGC Mauritius International Company (21)        Mauritius
      IGC Uch, LLC (22)                               Cayman Islands
      Operaciones de Arequipa, LLC (23)               Cayman Islands
      Tenaska-Illinova Generating
         International, LLC (24)                      Cayman Islands
      Fuerza Electrica de Latinoamerica,LLC (25)      Cayman Islands
      IGC (Encoe), LLC                                Cayman Islands
      IGC Vietnam Development, Inc.                   Cayman Islands
      IGC STI Guna Company (26)                       Mauritius
      COE (UK) Corp. (27)                             Connecticut
      COE (Gencoe) Corp. (28)                         Connecticut
      Charter Oak (Paris), Inc. (29)                  Connecticut
      IGC (Wind),LLC (30)                             Cayman Islands
   Illinova Energy Partners, Inc.                     Delaware
      Tenaska Marketing Ventures (31)                 Nebraska
      EMC/Illinova Energy Partners (32)               Oklahoma
   Illinova Insurance Company                         Vermont

(1)  Illinois  Power Company owns 50% of the common stock of Illinois Power Fuel
     Company.

(2)  Illinois  Power Company is the general  partner in Illinois  Power Capital,
     L.P.,  with  a  3%  equity  ownership  share.  Illinois  Power  Capital  is
     consolidated in the accounts of Illinois Power Company.

(3)  Illinois Power Company is the sole member of Illinois Power  Securitization
     Limited Liability Company.

(4)  Illinois Power  Securitization  Limited Liability Company is the sole owner
     of the Illinois Power Special Purpose Trust

(5)  Illinova  owns 100% of the common stock of Illinois  Business  Enterprises,
     Inc.

(6)  Illinova Generating Company owns 20% of the common stock of EEI.

(7)  Illinova  Generating  Company owns 47.5% of the voting  common stock of ECI
     Energy, Ltd.

(8)  Illinova Generating Company owns 100% of the common stock of North American
     Energy Services Company.

(9)  IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 99% and IGC International II Inc. (a wholly-owned  subsidiary
     of IGC  International,  Inc.)  owns  1% of the  common  stock  of IGC  ELCO
     Partnership, LLC.

(10) IGC ELCO Partnership, LLC (a subsidiary of IGC International,  Inc. and IGC
     International  II,  Inc.)  owns  66.7% of the  common  stock of ELCO  Power
     Investment Company, LLC.


(11) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
     of IGC  International,  Inc.)  owns 1% of the common  stock of IGC  Jamaica
     Partnership, LLC.

(12) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 100% of the equity of IGC International II, Inc.

(13) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
     of IGC  International,  Inc.)  owns 1% of the  common  stock of IGC  Flores
     Partnership, LLC.

(14) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
     of IGC  International,  Inc.)  owns 1% of the  common  stock of IGC  Flores
     Partnership II, LLC.

(15) IGC Flores  Partnership,  LLC (a subsidiary of IGC International,  Inc. and
     IGC  International  II,  Inc.) owns 51% of the common  stock of FIG Leasing
     International, LLC.

(16) IGC Flores  Partnership,  LLC (a subsidiary of IGC International,  Inc. and
     IGC  International  II,  Inc.) owns 51% of the common  stock of FIG Leasing
     International III, Inc..

(17) IGC Flores  Partnership,  LLC (a subsidiary of IGC International,  Inc. and
     IGC  International II, Inc.) owns 50% of the common stock of FIG Equipment,
     LLC.

(18) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 99% and IGC International II, Inc.(a wholly-owned  subsidiary
     of IGC  International,  Inc.) owns 1% of the common  stock of IGC  Aguaytia
     Partners, LLC.

(19) IGC  International   II,  Inc.  (a  wholly-owned   subsidiary  of  Illinova
     Generating Company) owns 100% of the equity of IGC Mauritius.

(20) IGC International II, Inc. (a wholly-owned subsidiary of IGC International,
     Inc.) owns 100% of the equity of Illinova ZJ XC Company.

(21) IGC International II, Inc. (a wholly-owned subsidiary of IGC International,
     Inc.) owns 100% of the equity of ICG Mauritius International Company.

(22) IGC International,II Inc. (a wholly-owned  subsidiary of IGC International,
     Inc.) owns 99% and IGC  International,  Inc. (a wholly-owned  subsidiary of
     Illinova Generating Company) owns 1% of the common stock of IGC Uch, LLC.

(23) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
     of IGC  International,  Inc.) owns 1% of the common stock of Operaciones de
     Arequipa, LLC.


(24) IGC Uch, LLC (a subsidiary of IGC International, Inc. and IGC International
     II, Inc.)owns 50% of the voting common stock of Tenaska-Illinova Generating
     International, LLC.

(25) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
     of IGC International, Inc.) owns 1% of the common stock of Fuerza Electrica
     de Latinoamerica, LLC.

(26) IGC International II, Inc. (a wholly-owned subsidiary of IGC International,
     Inc.) owns 100% the equity IGC STI Guna Company.

(27) IGC (Encoe), LLC (a wholly-owned subsidiary of Illinova Generating Company)
     owns 79.9% and COE  (Gencoe)  Corp.  (owned 49% by IGC  (Encoe),  LLC) owns
     20.1% of the common stock of COE (UK) Corp.

(28) IGC (Encoe), LLC (a wholly-owned subsidiary of Illinova Generating Company)
     owns 49% of the common stock of COE (Gencoe) Corp.

(29) IPG Paris, Inc. (a wholly-owned  subsidiary of Illinova Generating Company)
     owns 100% of the common stock of Charter Oak (Paris), Inc.

(30) IGC International,  Inc. (a wholly-owned  subsidiary of Illinova Generating
     Company) owns 100% of the equity of IGC (Wind) Inc.

(31) Illinova Energy Partners,  Inc. owns 50% of the equity of Tenaska Marketing
     Ventures.

(32) Illinova  Energy  Partners,  Inc.  owns 51% of the  equity of  EMC/Illinois
     Energy Partners.




                                                                    Exhibit 23.1



                        Consent of Independent Accountants

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statement on Form S-8 (No.  33-22068),  the  Registration  Statement on Form S-8
(No. 33-60278),  the Registration Statement on Form S-8 (No. 33-66124),  and the
Registration  Statement on Form S-3 (No. 333-17847) of our report dated February
26, 1999, except for Note 17 as to which date is February 25, 2000,  relating to
the financial statements, which appear in this Form 10-K/A.





/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

February 25, 2000