<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations

In 1998 and prior years, the financial condition and operating
results of CILCORP Inc. and its subsidiaries (the Company)
primarily reflected the operations of Central Illinois Light
Company (CILCO), QST Enterprises Inc. (QST), and their
subsidiaries.  On November 23, 1998, the Company announced that
The AES Corporation (AES) has offered to buy 100% of the Company's
outstanding common stock for $65 per share, subject to CILCORP
shareholder approval and various regulatory approvals.  On March
10, 1999, the Illinois Commerce Commission issued its approval of
CILCORP's merger with AES.  Other required approvals are in
process.  The Company anticipates that this transaction will close
in mid 1999.

As a result of the pending acquisition and after reviewing its
business plans, the Company decided in late 1998 to sell its 100%
ownership interest in QST Environmental Inc. (QST Environmental),
a first-tier subsidiary of QST that provides environmental
consulting and engineering services.  An offering memorandum was
sent to potential purchasers in early 1999.  QST had sold another
of its subsidiaries, QST Communications Inc., in August 1998.

In June 1998, QST Energy Inc. (QST Energy), another first-tier
subsidiary of QST, incurred a material loss related to wholesale
electricity contracts, triggered by an unprecedented increase in
short-term wholesale electricity prices.  QST Energy closed its
electric and gas non-retail positions and, in the fourth quarter
of 1998, closed its Houston energy trading office and transferred
its Pennsylvania retail electric and gas customers to other
marketers.  In late 1998, QST Energy began negotiating with its
remaining non-Illinois commercial customers to end its obligations
to provide electric service over the remaining terms of its
contracts with them.

Due to uncertainties related to electric deregulation across the
country, the illiquidity of certain energy markets, and its
pending acquisition by AES, the Company will focus in the future
on the opportunities in the Illinois energy market resulting from
the deregulation of electricity under the Electric Service
Customer Choice and Rate Relief Law of 1997 (see Competition).
This law will enable CILCO, the Company's regulated public utility
that generates and distributes electricity and purchases,
transports and distributes natural gas, to serve Illinois
customers outside its traditional service territory in Central
Illinois.  As a result of these events, the Company is reporting
the results of QST Enterprises and its subsidiaries as
discontinued operations (see Note 10).  During the fourth quarter
of 1997, QST Environmental sold substantially all of the assets of
ESE Land Corporation (ESE Land), its wholly-owned subsidiary that
acquired environmentally impaired property for remediation and
resale.  The operations of ESE Land are included in discontinued
operations in 1997 and 1996.

The Other Businesses segment includes the operations of the
holding company itself (Holding Company), its investment
subsidiary, CILCORP Investment Management Inc. (CIM), and CILCORP
Ventures Inc. (CVI).
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 1

                             OVERVIEW

Contributions to the Company's earnings per share for the last
three calendar years are shown below:

<TABLE>
<CAPTION>
                             1998        1997        1996
<S>                         <C>         <C>         <C>
CILCO (excluding                                  
  extraordinary item)       $ 3.02      $ 3.39      $ 3.11
CILCO Extraordinary Item        --         .30          --
Other Businesses              (.21)       (.18)       (.30)
QST Enterprises Discontinued                                    
  Operations                 (1.61)      (2.31)       (.74)
                            ------      ------      ------
Earnings Per Common                                 
  Share - Basic             $ 1.20      $ 1.20      $ 2.07
                            ======      ======      ======
</TABLE>

CILCO's earnings, excluding the extraordinary item, decreased by
11% in 1998 primarily due to increased power plant maintenance
expense, repairs to the electric distribution system resulting
from a severe storm in June 1998, higher gas maintenance expenses,
and higher information technology costs.  Electric gross margin
increased by 5% as a result of warmer than normal summer weather.
However, this increase was partially offset by a 9% decrease in
gas gross margin due to warmer than normal weather during the
heating season.  CILCO's 1997 earnings included a credit of $4.1
million ($.30 per share) for an after-tax extraordinary item
related to the write-off of regulatory assets and liabilities
associated with electric generating plant (see Note 1).

CILCO's earnings before the extraordinary item increased by 9% in
1997 primarily due to a decline in operations and maintenance
expense.  Results for 1996 included a $5.4 million after-tax
charge ($.40 per share) related to an early retirement program.
Decreased residential gas sales resulting from warmer weather
during the heating season and increased power plant maintenance
expense due to a scheduled outage at the Duck Creek generating
station partially offset the decline in 1997 expenses resulting
from the early retirement program.

An unprecedented short-term increase in wholesale electricity
prices during June 1998 contributed to a $10.6 million, or $.47
per share, reduction in QST's electric gross margin in the second
quarter.  QST Energy's electric gross margin for 1998 was $(14.3)
million compared to $(.8) million in 1997, a reduction of $.60 per
share from 1997 results.  In addition, as a result of
discontinuing its operations at December 31, 1998, QST Energy
adjusted to market value its future contractual commitments to
sell electricity and natural gas, resulting in a $5.2 million pre-
tax charge against income, or $.23 per share.  Additional losses
were recognized in 1998 related to the disposal of QST assets,
termination of leases and other agreements, severance costs, and
estimated operating expenses which will be incurred until QST is
able to completely exit the non-Illinois markets.

In August 1998, QST sold its 100% interest in QST Communications
Inc., realizing an after-tax gain of $8.3 million or $.60 per
share, partially offset by the $.05 per share 1998 loss from
discontinued operations prior to the sale.

In 1997, $22.6 million ($1.66 per share) of goodwill related to
QST Environmental was written off (see Note 1).  The results of
QST Environmental were adversely affected in 1998 by continued
losses at its laboratory operations and by the estimated loss from
the discontinuance of the business.  The loss includes estimated
severance costs and other closing costs related to laboratory and
other operations that will not be sold and which are being
discontinued.

                                 
                                 2

These amounts were partially offset by net income, approximating
$.05 per share, earned at its consulting business.

Other Businesses results for 1998 were approximately the same as
1997.  CIM realized a gain from the refinancing of a leveraged
lease investment and also shared in the after-tax gain resulting
from the sale of facilities of the Energy Investors Fund, L.P., in
which CIM has a 3% interest.  These items were offset by reduced
income from CIM's affordable housing investments and costs
incurred by the Holding Company related to the AES transaction.

Other Businesses results improved in 1997 due to an after-tax gain
resulting from CIM's share in the sale of another facility owned
by the Energy Investors Fund.  Increased tax credits from
affordable housing investments, a decline in Holding Company costs
related to corporate repositioning, and increased income resulting
from CIM's investment in a new leveraged lease also contributed to
improved results, partially offset by increased costs related to
services provided to Caterpillar Inc. (see Competition).

Return on average common equity was 4.7% in 1998, compared to 4.5%
in 1997 and 7.7% in 1996.  Excluding discontinued operations and
extraordinary items, return on average common equity was 9.8% in
1998, compared to 11.5% in 1997 and 10.4% in 1996.  The ratio of
common equity to total capitalization, including short-term debt,
was 43% in 1998, 44% in 1997, and 46% in 1996.  The fixed charge
coverage ratio decreased to 1.5 in 1998 (2.5 excluding
discontinued operations), compared to 1.9 in 1997 (3.7 without
discontinued operations and the extraordinary item) and 2.1 in
1996 (2.5 excluding discontinued operations).

Inflation may have a significant impact on the Company's future
operations and its ability to contain costs.  To help protect
CILCO from the effects of inflation, substantially all electric
and gas sales rates include a fuel adjustment clause (FAC) or a
purchased gas adjustment (PGA) to provide for changes in electric
fuel costs, excluding coal transportation, and changes in the cost
of natural gas.  Over the past five years, the annual rate of
inflation, as measured by the Consumer Price Index, has ranged
from 1.6% to 2.9%.

                    Forward-Looking Information

Forward-looking information is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations
(MD&A).  Certain material contingencies are also described in Note
9 to the Consolidated Financial Statements.

Some important factors could cause actual results or outcomes to
differ materially from those expressed or implied in MD&A.  The
business and profitability of CILCORP and its subsidiaries are
influenced by economic and geographic factors, including ongoing
changes in environmental laws and weather conditions; the extent
and pace of development of competition for retail and wholesale
energy customers; changes in technology; third party compliance
with Year 2000 requirements; the inability to identify and
remediate or replace embedded computer chips in affected
equipment; pricing and transportation of commodities; market
supply and demand for energy and energy derivative financial
instruments; inflation; capital market conditions; and
environmental protection and compliance costs.  Prevailing
governmental policies, statutory changes, and regulatory actions
with respect to rates, industry structure and recovery of various
costs incurred by CILCO in the course of its business and
increasing wholesale and retail competition in the electric and
gas business affect its earnings.  All such factors are difficult
to predict, contain uncertainties that may materially affect
actual results and, to a significant degree, are beyond the
control of CILCORP and its subsidiaries.  CILCORP and its
subsidiaries undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of changes in
actual results, assumptions or other factors.

                                 
                                 3

                  CAPITAL RESOURCES AND LIQUIDITY

The Company believes that internal and external sources of capital
which are or are expected to be available to the Holding Company
and its subsidiaries will be adequate to fund its capital
expenditures, pay its financial obligations, meet working capital
needs and retire or refinance debt as it matures.  The Agreement
and Plan of Merger (The Agreement) between the Company and The AES
Corporation provides for the ongoing payment of common dividends,
not to exceed the average for the four quarterly dividend payments
prior to the effective date of The Agreement, pending the merger.

THE COMPANY

CILCORP is currently authorized by its Board of Directors to
borrow up to $60 million on a short-term basis and had $60 million
of committed bank lines at the end of 1998 and 1997.  At December
31, 1998, $55.6 million of the lines were used, compared to $40.9
million in use at December 31, 1997.

The Company had $30.5 million of medium-term notes outstanding at
year-end and may issue an additional $27 million under its
existing medium-term note program to retire maturing debt and to
provide funds for other purposes.

CILCO

In 1998, CILCO spent $67.1 million for capital additions and
improvements, consisting primarily of replacements and
improvements to the existing electric transmission and
distribution and natural gas distribution systems and information
technology projects.  Estimated 1999 and 2000 capital expenditures
are $56.6 million and $51 million, respectively.  The 1999
expenditures include $14.2 million for electric energy supply and
transmission projects, $.6 million for gas supply and transmission
projects, $28.7 million for electric and gas distribution systems
improvements, and $11.8 million for information technology
projects.  Actual capital expenditures may vary from these
estimates due to a number of factors, including changes in costs
of labor, equipment, capital, environmental regulations, and load
growth estimates.

CILCO's short-term debt increased to $40.6 million at December 31,
1998, from $21.3 million at December 31, 1997.  CILCO retired
$10.65 million of medium-term notes in June 1998 and $20 million
of first mortgage bonds in March 1997.  Also, in 1998, CILCO paid
$20 million of dividends to CILCORP in addition to regular
quarterly dividends.  CILCO expects to issue commercial paper
periodically during 1999, and is currently authorized by its Board
of Directors to issue up to $66 million of short-term debt.  At
December 31, 1998, committed bank lines of credit totaled
$45 million, all of which were unused except in support of
commercial paper issuance.  During 1999, CILCO expects the support
of commercial paper issuance to be the sole use of these bank
lines of credit.  CILCO plans to finance its 1999 and 2000 capital
expenditures primarily with funds provided by operations.  Future
funds provided by operations may be affected by the deregulation
of the electric and natural gas utility industries (see
Competition).

QST

Capital expenditures, excluding those of QST Environmental,
totaled approximately $7.6 million for 1998, primarily for
construction of fiber optic and other communications facilities by
QST Communications Inc. prior to its sale in August 1998 (see Note
10).  Working capital balances at QST (excluding QST
Environmental) increased by $8.6 million during 1998, primarily
due to an increase in accounts receivable and unbilled revenue
related to QST Energy's business in California.

QST is currently involved in a billing dispute with two of its
large California commercial customers who, as a result, have not
paid QST for energy delivered.

                                 4

In February 1999, QST notified these customers that they were in
default of their contract with QST.  QST filed suit in Federal
District Court in February to recover the $11 million owed at that
date; the customers have responded.  QST cannot predict the
ultimate outcome of this matter, but intends to vigorously pursue
its claim.

QST expects to finance working capital needs prior to its exit
from the non-Illinois markets with funds provided by the Holding
Company.  At December 31, 1998, QST (excluding QST Environmental)
had no outstanding debt.

QST Environmental spent $1.3 million for capital additions and
improvements in 1998 and plans to spend $.5 million in 1999 on
capital additions.  QST Environmental generated $3.3 million of
cash from operations in 1998.

QST Environmental has a line of credit with CILCORP under which it
may borrow up to $15 million, depending upon the amount of QST
Environmental's receivables and fixed assets.  This line of credit
expires in May 2000.  At December 31, 1998, QST Environmental had
borrowed $7 million from CILCORP.  Based upon its current
receivables and fixed assets, QST Environmental has an additional
$8 million available under this revolving line of credit.  QST
Environmental's outstanding term debt at December 31, 1997, was
$12.5 million.  QST Environmental anticipates that cash and short-
term investments, funds generated by operations and amounts
available under the Holding Company line of credit will be
sufficient to meet its anticipated working capital requirements
prior to its sale.

CIM

CIM had outstanding debt of $37.7 million and $37.2 million (all
to the Holding Company) at the end of 1998 and 1997, respectively.

During 1997 and prior years, CIM committed to invest $16.6 million
in affordable housing funds.  Through December 31, 1998, CIM has
paid $14 million to fund these commitments, $3.8 million of which
was paid during 1998.  CIM expects to pay approximately
$1.6 million of the remaining $2.6 million commitment in 1999, and
lesser amounts in each year thereafter through 2006.  CIM funded
these commitments with cash borrowed from the Holding Company.
CIM expects to finance it capital needs during 1999 with a
combination of funds generated internally and with funds provided
by the Holding Company.

                             YEAR 2000

The Company is continuing its progress toward making its computer
systems and operations ready for the year 2000.  CILCO began
evaluating its information technology systems in 1996.  Systems
were reviewed and a schedule was developed for the analysis of all
computer application code and for the replacement or modification
of those systems that were identified as obsolete and/or having
potential Year 2000 (Y2K) issues.  Replacement of several major
computer systems with Y2K issues began in 1997.  A Y2K team was
established in March 1998, consisting of personnel from each
operating division of CILCO.  In conjunction with the formation of
the Y2K team, an outside firm specializing in Y2K projects was
retained to assist CILCO with its overall Y2K project plans.
CILCO has also worked with an independent audit team to evaluate
the status of the Y2K project.  The project was divided into three
phases, as follows:

Phase I tasks included an inventory of all present systems for
embedded chips having potential Y2K issues, contacting all
manufacturers of embedded chip devices for the Y2K status of these
devices, identifying and surveying all critical suppliers, and
conducting an inventory of all information technology hardware and
software for analysis of Y2K problems.  Phase I was completed in
August 1998.


                                 
                                 5

Phase II is currently in progress.  This phase includes Y2K
compliance testing of all suspect embedded chip devices identified
in Phase I in the power plants, service centers, and business
offices.  In addition, two separate groups of outside consultants
evaluated all mainframe application code to identify specific
instances of date problems in each application program for systems
that are not being replaced.  Phase II has been completed except
for the testing of power plant embedded chip devices.  This
testing will occur during scheduled power plant outages in 1999.

Phase III is also in progress and includes the upgrade/replacement
and re-testing of embedded chip devices found not to be Y2K
compliant during Phase II.  This phase includes completion of
mainframe computer operating software upgrades to current Y2K
compliant versions and defining Y2K contingency plans for each
business unit.  Computer application code that was determined to
have Y2K date related problems during Phase II will be corrected.
Testing of all applications which have undergone Y2K
upgrades/modifications, testing of operating system software, and
development and testing of contingency plans through simulation or
actual tests, where practical, will complete Phase III, which is
expected to be completed by October 1999.  Systems identified as
critical to the continued provision of utility services will be of
particular focus during the testing portion of Phase III.  These
critical systems are generating station equipment, electric
transmission and distribution control systems, gas delivery
control systems, and telecommunications systems.

An estimated $2 million (historical and future costs) will be
spent for embedded chip analysis, vendor management, application
code scanning, remediation, testing and contingency planning at
CILCO.  Approximately $30.7 million will have been spent prior to
the year 2000 for system replacements or hardware upgrades
initiated for business purposes other than solely for Y2K
compliance.

QST Environmental is scheduled to complete the upgrade of its
billing and project accounting system to a Y2K compliant version
by June 1999.  Replacement of this system will cost approximately
$1 million, $624,000 of which was spent in 1998.

CILCO is working both internally and with utility industry groups,
including the Mid-America Interconnected Network (MAIN) and the
North American Electric Reliability Council (NERC), to identify
and plan for all identified risks associated with the Y2K issue.
While these groups are modeling potential worst case scenarios,
the probability of extreme disruptions due to Y2K issues is
considered extremely low.  CILCO's Y2K team has identified the
most likely worst case scenario to be an interruption in service
by a critical supplier.  Consequently, alternate sources for
supplies have been identified and the need for CILCO to stock
additional inventories of critical items is being evaluated.

CILCO is also following the contingency planning process
recognized by MAIN and NERC.  Accordingly, CILCO has established a
Y2K contingency planning team that has received training in
contingency planning techniques and goals.  The team is collecting
data and contingency planning began in March 1999.  Within this
structure, CILCO is required to submit its contingency plans to
MAIN by March 31, 1999.  MAIN is then required to submit plans to
NERC by June 30, 1999.  This contingency planning process is
expected to continue through the fourth quarter 1999, and will
include CILCO's participation in the NERC industry-wide drills
during the spring and fall of 1999.

The Company currently believes it will be able to achieve Y2K
compliance, as discussed above, through a combination of
modifications of certain existing programs and systems, the
replacement of others with new software that is Y2K compliant, and
the development of contingency plans.  If such modifications and
conversions are not made, however, or are not made in a timely
manner, the Y2K issue could have a material impact on the
Company's operations.  In addition, management cannot predict the
nature or impact on operations of third-party noncompliance with
Y2K requirements beyond the assurances given during critical
vendor assessments.

                                 
                                 6

                            COMPETITION

The electric utility industry will change significantly during the
coming years at both the wholesale and retail levels.  In
Illinois, the Electric Service Customer Choice and Rate Relief Law
of 1997 (Customer Choice Law) began a transition process to a
fully competitive market for electricity.  Large industrial
customers and customers representing one-third of remaining non-
residential kwh sales will be able to choose their electric
supplier beginning October 1, 1999, with all other non-residential
customers having a choice after December 31, 2000.  Residential
electric customers will be able to choose their electric supplier
on May 1, 2002.

If a customer chooses to leave its present electricity supplier,
that utility will collect a fee for delivering power and may
assess an additional transition charge on the customer.  This
charge must be filed with the Illinois Commerce Commission (ICC)
and is designed to help utilities recover the cost of past
investments made under a regulated system.  The transition charge
will reduce a customer's economic incentive to switch suppliers.
Transition charges may be collected through 2006 (2008 upon the
ICC's finding that a utility's financial condition is impaired).

The Customer Choice Law also requires electric base rate
reductions that vary by utility.  CILCO reduced its residential
base rates by 2% in August 1998 and must reduce base rates by an
additional 2% in October 2000 and 1% in October 2002. Also,
CILCO's return on common equity will, in general, be capped (the
Equity Cap) at an index (a 12 month average yield for 30 year U.S.
Treasury bonds plus 8% for calendar years 1998 and 1999 and a 12
month average yield for U.S. Treasury bonds plus 9% for calendar
years 2000 through 2004) plus 1.5 percentage points.  If CILCO's
two-year average return on common equity exceeds the two-year
average of the Equity Cap, fifty percent of the earnings in excess
of the average Equity Cap must be refunded to customers in the
following year.

With the enactment of the Customer Choice Law, electric generation
in Illinois will become deregulated and competitive.  As a result,
the accounting principles applicable to rate-regulated enterprises
will no longer apply to the electric generation portion of CILCO's
business (see Note 1).  Also, the cost of any assets whose
recovery is impaired by the transition to a competitive
marketplace must be written-off.  CILCO has not determined its
electric generating asset values to be impaired; its ability to
keep total production costs competitive in a deregulated market
will determine whether and to what extent the value of these
assets may be impaired in the future.

In 1996, CILCO began Power Quest, which consisted of two electric
and one gas pilot retail competition programs.  The retail
competition program for industrial electric customers ended as
scheduled on April 30, 1998.  That program allowed CILCO's eight
largest industrial customers to secure up to 50 megawatts in
aggregate (10% of CILCO's industrial load) from suppliers other
than CILCO.  Seven of these customers participated in the program.
Caterpillar Inc., with three eligible accounts, elected to form a
strategic alliance with CILCORP rather than take its entire Power
Quest allocation from suppliers other than CILCO.  In December
1998, CILCO received approval from the ICC to eliminate the other
electric pilot program (for residential and commercial customers
in six areas in its service territory) effective May 1, 1999.  At
the end of 1998, approximately 1,400 residential and commercial
customers participated in this program.  CILCORP experienced a
$2.4 million reduction in 1998 pre-tax income as a result of the
electric industrial pilot program (including electric margin lost
by CILCO, CVI costs associated with the Caterpillar alliance and
QST margin on Power Quest customers).  The other electric pilot
program reduced CILCORP's 1998 pre-tax income by $.9 million.

While CILCO has not filed with the ICC to terminate the gas pilot
program, its affiliate QST Energy withdrew from participation in
the program in August 1998. Most gas customers that had been
served by QST have returned to CILCO or other


                                 7

affiliates.  Participation in the gas pilot program by marketers
other than QST has been minimal.  This program did not have a
material impact on CILCORP's 1998 financial position or results of
operation.

With the coming of electric choice in 1999 to its industrial
customers and some of its commercial customers, CILCO has entered
into contracts with six of its largest customers, representing
approximately 12% of total 1998 electric revenue.  These
contracts, which expire from 2001 to 2002, were designed to
capture at least the same revenue that the customers paid to CILCO
and QST in 1997 when they participated in the Power Quest pilot
program.  They cover each customer's full electric requirements
for a period which extends at least 18 months past the
implementation of customer choice.

The ultimate market price for electricity, the cost for a utility
to produce or buy electricity, and the number of customers that
may be gained or lost due to customer choice of supplier in
Illinois cannot be predicted.  As a result, management cannot
predict the ultimate impact that the Customer Choice Law will have
on CILCORP's financial position or results of operation, but the
effect could be significant.  However, CILCO is currently a low-
cost provider of electricity, and management will continue to
position CILCO for competition by controlling costs, maintaining
good customer relations, and developing flexibility to meet
individual customer requirements.

ENVIRONMENTAL MATTERS

CILCO's capital expenditures related to pollution control
facilities are estimated to be $4.9 million in 1999.  The acid
rain provisions of the Clean Air Act Amendments of 1990
(Amendments) require additional sulfur dioxide (SO2) and nitrogen
oxide (NOx) emission reductions at CILCO's generating facilities.
CILCO's facilities are exempt from Phase I of the Amendments due
to previous emission reductions, but are subject to Phase II of
the Amendments, which require further emission reductions
beginning in the year 2000.

The U.S. Environmental Protection Agency (USEPA) has issued a
State Implementation Plan Call to Illinois under Title I of the
Amendments requiring additional NOx emission reductions from
CILCO's coal-fired power plants beginning May 2003.  Each of
CILCO's generating units would be allowed a targeted amount of NOx
emissions during the peak ozone months of May through September.
The Illinois Environmental Protection Agency (IEPA) must adopt
rules by September 1999 implementing this new requirement.
CILCO's capital expenditures to meet the NOx emission requirements
could total $59 million by 2003.

CILCO's near-term compliance strategy is being implemented based
upon regulations issued under the Amendments.  CILCO continues to
monitor regulatory actions and develop compliance strategies to
minimize any financial impact.  Due to the deregulation of the
electric industry resulting from the Customer Choice Law, recovery
of compliance costs in the future will depend upon the number of
retail customers CILCO serves and the marketability of the power
it generates in a competitive environment.  CILCO's present
strategy includes use of an existing SO2 scrubber, fuel switching
and SO2 allowance purchases to meet Phase II SO2 emissions
targets, and combustion control modifications to meet Phase II NOx
emissions targets.  The USEPA established SO2 emission allowance
reserves for power plants in Phase II.  Allowances are
transferable to third parties at market prices.  The cost of
purchased SO2 allowances may be recovered from customers through
the fuel adjustment clause.  CILCO continues to weigh the costs of
purchasing additional allowances against alternative operating
scenarios.  Under this strategy, CILCO's generating units will not
require additional SO2 scrubbers, but will require some fuel
switching.

Various initiatives are being discussed both in the United States
and worldwide to reduce so-called "greenhouse gases" such as
carbon dioxide and other by-products of burning fossil fuels.
Reductions of emissions below historical


                                 8

levels could result in significant capital outlays or material
increases in annual operating expenses.

Neither CILCORP, CILCO, nor any of their affiliates has been
identified as a potentially responsible party under federal or
state environmental laws governing waste storage or disposal.

CILCO continues to investigate and/or monitor four former gas
manufacturing plant sites located within its present gas service
territory.  The purpose of these studies is to determine if waste
materials, principally coal tar, are present, whether such waste
materials constitute an environmental or health risk and if CILCO
is responsible for the remediation of any remaining waste
materials at those sites.  Remediation work at one of the four
sites was substantially completed in 1991.  Based on the operation
of a groundwater collection system and other controls, CILCO
expects to request a "No Further Remediation" letter for this site
in 1999.  A remedial action plan for the second site was
determined during 1997 and site remediation was completed in 1998.
CILCO has a request for a "No Further Remediation" letter pending
with the IEPA for the second site.  CILCO has not determined the
ultimate extent of its liability for, or the ultimate cost of any
remediation of, the remaining two sites, pending further studies.
Investigation of the third site is planned for 1999.

CILCO spent approximately $1.7 million for former gas
manufacturing plant site monitoring, legal fees and feasibility
studies in 1998.  A $1.6 million regulatory asset and a
corresponding liability are recorded on the Balance Sheet
representing the minimum amount of future coal tar investigation
and remediation costs CILCO expects to incur.  Coal tar
remediation costs incurred through December 1998 have been
deferred on the Balance Sheets, net of amounts recovered from
customers (see Note 1).

Through December 31, 1998, CILCO has recovered approximately
$6.2 million in coal tar remediation costs from its customers
through a gas rate rider approved by the ICC.  Currently, that
rider allows recovery of coal tar remediation costs in the year
they are incurred.  Under these circumstances, management believes
that the cost of coal tar remediation will not have a material
adverse effect on CILCO's financial position or results of
operations.

                   NEW ACCOUNTING PRONOUNCEMENTS

In December 1998, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached consensus on Issue
No. 98-10, Accounting for Contracts Involved in Energy Trading and
Risk Management Activities.  EITF 98-10 requires energy trading
contracts to be recorded at fair value on the balance sheet,
starting January 1999, with changes in fair value recorded in
earnings.  QST's energy trading activities, as defined by EITF 98-
10, were marked to market at December 31, 1998, and accounted for
as discontinued operations.  The resulting loss of $5.2 million,
representing losses on net open energy sales commitments, is
included in Discontinued Operations on the Income Statement (see
QST Enterprises Discontinued Operations).  CILCORP currently
anticipates that its future activities will not be classified as
energy trading operations under EITF 98-10.  Management therefore
does not expect EITF 98-10 to have a material effect on CILCORP's
1999 results of operations unless there is a material change in
the market value of the open energy sale commitments included in
discontinued operations in 1998.

In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities.
Effective January 1, 2000, SFAS 133 establishes accounting and
reporting standards requiring that derivative financial
instruments (including those embedded in other contracts) be
recorded on the balance sheet as either an asset or liability
measured at its fair value.  Changes in the derivative's fair
value are to be recognized currently in earnings, unless certain
specified criteria are met which allow the derivative to be
treated as a hedge.  Special accounting

                                 
                                 9

for qualifying hedges allows a derivative's gains or losses to
offset related results of the hedged item in the income statement.
The effect of adopting SFAS 133 on CILCORP's net income or
financial position has not yet been determined; however,
volatility of earnings and comprehensive income could be
increased.

                       PRICE RISK MANAGEMENT

The majority of CILCORP's energy sales at the end of 1998 were to
CILCO retail customers in Illinois under tariffs regulated by the
ICC.  Although the Illinois retail electric market is becoming
deregulated (see Competition), prudently incurred costs of fuel
used to generate electricity, purchased power costs and gas
purchased for resale may be recovered from retail customers that
purchase energy through regulated tariffs.  Thus, there is very
limited commodity price risk associated with CILCO's traditional
regulated sales.  However, as more customers in Illinois purchase
energy on a competitive basis pursuant to the current Illinois
deregulation timetable, CILCO's exposure to commodity price risk
will increase.  At December 31, 1998, QST's non-Illinois electric
operations and gas trading activities have been accounted for as
discontinued operations (see Note 10).

The market risk inherent in the activities of CILCORP (exclusive
of regulated Illinois tariff customers) is the potential loss
arising from adverse changes in natural gas and electric commodity
prices relative to the physical and financial positions that the
Company maintains.  The prices of natural gas and electricity are
subject to fluctuations resulting from changes in supply and
demand.  At December 31, 1998, CILCORP engaged in deregulated
electric retail and natural gas sales in Illinois, including
wholesale power purchases and sales to utilize its electric
generating capability.  These deregulated activities had net open
market price risk positions of approximately 14,000 MWh of
electricity and 1.3 Bcf of natural gas.  A market price
sensitivity of 10% applied to these positions is not material to
the Company.  At December 31, 1998, QST's discontinued operations
had a net open market price risk in electricity of approximately
1.3 million MWh (see New Accounting Pronouncements).  Assuming a
10% adverse change in market prices, the Company would record an
additional loss of $3.1 million.  Actual results may differ
materially.  See Note 12 for a discussion of CILCORP's use of
financial derivatives for hedging purposes.  Due to the high
correlation between the changes in the value of the financial
instruments owned by CILCORP to the change in price of the
underlying commodity, the net effect on CILCORP's net income
resulting from the change in value of these financial instruments
is not expected to be material.
























                                 
                                10

RESULTS OF OPERATIONS

CILCO ELECTRIC OPERATIONS

The following table summarizes electric operating revenue and
expenses by component.

<TABLE>
<CAPTION>
Components of Electric Income     1998       1997        1996
                                          (In thousands)
<S>                            <C>         <C>         <C>
Revenue:                                                       
Electric retail                $341,143    $318,130    $307,579
Sales for resale                 18,866      19,966      15,206
                               --------    --------    --------
     Total revenue              360,009     338,096     322,785
                               --------    --------    --------
Cost of sales:                                                 
Cost of fuel                     94,490      92,230      90,715
Purchased power expense          29,568      22,851      10,907
Revenue taxes                    18,581      15,388      14,504
                               --------    --------    --------
     Total cost of sales        142,639     130,469     116,126
                               --------    --------    --------
        Gross margin            217,370     207,627     206,659
                               --------    --------    --------
Operating expenses:                                            
Operation and maintenance                                      
  expenses                       84,502      78,648      84,174
Depreciation and amortization    46,017      43,858      42,530
Other taxes                       8,660       8,583       8,266
                               --------    --------    --------
     Total operating expenses   139,179     131,089     134,970
                               --------    --------    --------
Fixed charges and other:                                       
Cost of equity funds                                           
  capitalized                        --         (35)        (36)
Interest on long-term debt       13,921      14,317      15,171
Cost of borrowed funds                                         
  capitalized                       (34)        (99)        (54)
Other interest                    2,340       1,875       2,274
                               --------    --------    --------
     Total                       16,227      16,058      17,355
                               --------    --------    --------
Income before taxes              61,964      60,480      54,334
  Income taxes                   21,645      21,901      19,576
                               --------    --------    --------
     Electric income           $ 40,319    $ 38,579    $ 34,758
                               ========    ========    ========
</TABLE>
Electric gross margin increased 5% and retail kilowatt hour (kwh)
sales increased 6% in 1998.  Residential sales volumes increased
4% while commercial sales increased 6%.  Cooling degree days were
28% higher in 1998 than 1997.  Industrial sales volumes increased
8% compared to 1997.  Industrial sales were favorably impacted by
customers returning to retail supply due to the completion of
CILCO's Power Quest industrial program.

Electric gross margin remained constant in 1997 primarily due to
level retail kwh sales.  Residential sales volumes increased 1%
while commercial sales volumes remained constant.  Cooling degree
days were 5% higher in 1997 than in 1996.  Industrial sales
volumes increased 1% compared to 1996.


                                 
                                11

Sales for resale decreased 6% in 1998 as a result of lower
available capacity for bulk sales due to unscheduled generating
station outages.  Sales for resale increased 31% in 1997 due to
favorable market conditions.  Sales for resale vary based on the
energy requirements of native load customers, neighboring
utilities and power marketers, CILCO's available capacity for bulk
power sales and the price of power available for sale.  In the
future, CILCO expects increased activity in the sales for resale
and purchased power markets.

The overall level of business activity in CILCO's service
territory and weather conditions are expected to continue to be
the primary factors affecting electric sales in the near term.
CILCO's electric sales will also be affected in the long term by
deregulation and increased competition in the electric utility
industry.

The cost of fuel for generation increased 2% in 1998 primarily due
to an increase in generation, partially offset by a decrease in
the cost of coal burned.  Substantially all of CILCO's electric
generation capacity is coal-fired.  The cost per ton of coal
burned, including transportation cost, decreased 1% in 1998
compared to 1997.

Purchased power expense varies based on CILCO's need for energy
and the price of power available for purchase.  CILCO makes use of
purchased power when it is economical to do so, and when required
during maintenance outages at CILCO plants.  The costs of energy
purchased for retail customers are passed through to those
customers via the fuel adjustment clause (FAC).

Electric operations and maintenance expenses increased 7% in 1998
compared to 1997.  The 1998 increases were primarily due to
increases in steam generation expenses arising from outages at
CILCO's E. D. Edwards facility, and increased electric
distribution overhead line maintenance expense due to a severe
storm in June, which, at its peak, affected power delivery to
approximately half of CILCO's electric customers.  Also
contributing to the increases were higher information technology
costs.  The increases were partially offset by lower outside
service costs and decreases in the actuarially-determined costs
for pensions and post-employment benefits.  The 1997 decreases
were primarily due to lower pension and benefits, outside
services, and injury and damages costs partially offset by
increased power plant maintenance expenses due to a scheduled
outage at the Duck Creek generating station.

The increase in depreciation and amortization expense in 1998 and
1997 reflects additions and replacements of utility plant at costs
in excess of the original cost of the property retired and
increased amortization associated with the implementation of new
computer systems.






















                                12

CILCO GAS OPERATIONS

The following table summarizes gas operating revenue and expenses
by component.

<TABLE>
<CAPTION>
Components of Gas Income          1998        1997        1996
                                         (In thousands)
<S>                            <C>          <C>         <C>
Revenue:                                                        
Sale of gas                    $166,416     $202,274    $187,432
Transportation services           5,911        6,484       8,338
                               --------     --------    --------
     Total revenue              172,327      208,758     195,770
                               --------     --------    --------
Cost of sales:                                                  
Cost of gas                      93,586      123,531     108,286
Revenue taxes                     7,921        7,079       7,500
                               --------     --------    --------
     Total cost of sales        101,507      130,610     115,786
                               --------     --------    --------
          Gross margin           70,820       78,148      79,984
                               --------     --------    --------
Operating expenses:                                             
Operation and  maintenance                                      
  expenses                       34,205       31,185      35,160
Depreciation and amortization    19,256       17,647      17,134
Other taxes                       2,747        3,225       3,153
                               --------     --------    --------
     Total operating expenses    56,208       52,057      55,447
                               --------     --------    --------
Fixed charges and other:                                        
Cost of equity funds                 --           --          --
  capitalized
Interest on long-term debt        5,577        5,707       5,841
Cost of borrowed funds                                          
  capitalized                        --           --          --
Other interest                      937          747         875
                               --------     --------    --------
     Total                        6,514        6,454       6,716
                               --------     --------    --------
Income before taxes               8,098       19,637      17,821
   Income taxes                   3,443        7,416       6,972
                               --------     --------    --------
     Gas income                $  4,655     $ 12,221    $ 10,849
                               ========     ========    ========
</TABLE>

Gas gross margin decreased 9% in 1998 compared to 1997.
Residential and commercial sales volumes decreased 17% and 12%,
respectively, primarily due to warmer weather during the heating
season.  Heating degree days were 19% lower in 1998 than in 1997.
The overall level of business activity in CILCO's service
territory and weather conditions are expected to be the primary
factors affecting gas sales in the near term.  CILCO's gas sales
may also be affected by further deregulation in the natural gas
industry.

Gas gross margin decreased 2% in 1997 compared to 1996.
Residential sales volumes decreased 9%, primarily due to warmer
weather during the heating season.  Heating degree days were 6%
lower in 1997 than in 1996.  Commercial sales increased 10% in
1997 due to customers switching from gas transportation to CILCO
system supply.

The cost of gas decreased 24% in 1998 and increased 14% in 1997,
primarily due to changes in natural gas prices.  These changes
were passed through to customers via the PGA.

                                 
                                13

Gas operations and maintenance expenses increased 10% in 1998 and
decreased 11% in 1997.  The increase for 1998 was due to higher
maintenance and information technology costs, partially offset by
lower outside service costs and decreases in the actuarially-
determined costs for pension and post-employment benefits.  The
decrease for 1997 was due to lower pension and benefits, outside
services and injury and damages expenses.

Revenue from gas transportation services decreased 9% in 1998 and
22% in 1997, while the volume of gas transported decreased 2% in
1998 and increased 4% in 1997.  Transportation revenues have
decreased primarily due to a continuing decline in the number of
commercial transportation customers.  Despite increased
transportation sales volumes in 1997, transportation revenues
decreased due to increased gas transportation by customers using
Rate 800 contract service, which has a lower per unit charge than
other classes of transportation service.  Rate 800 customers have
the ability to connect directly to interstate pipelines and bypass
CILCO's gas system and may negotiate rates individually with
CILCO.

The increases in depreciation and amortization expenses in 1998
and 1997 reflect additions and replacements of utility plant at
costs in excess of the original cost of the property retired and
increased amortization associated with the implementation of new
computer systems.

CILCO OTHER

The following table summarizes other income and deductions:

<TABLE>
<CAPTION>
Components of Other                                  
Income and Deductions             1998       1997        1996
                                       (In thousands)
<S>                            <C>        <C>        <C>
Revenue                        $ 1,743    $    --    $    --
Interest income                    228        239        680
Amortization                      (713)      (713)      (713)
Operating expenses              (3,600)    (2,831)    (2,234)
Preferred stock dividends       (3,194)    (3,216)    (3,188)
Other                           (1,013)    (1,177)      (679)
                               -------    -------    -------
Other income (deductions)       (6,549)    (7,698)    (6,134)
  Income taxes (benefit)        (2,616)    (3,049)    (2,466)
                               -------    -------    -------
    Other income
      (deductions), net        $(3,933)   $(4,649)   $(3,668)
                               =======    =======    =======
</TABLE>



















                                14

OTHER BUSINESSES

The following table summarizes Other Businesses revenue and
expenses.  Other Businesses results include income earned and
expenses incurred at the Holding Company, CIM, and CVI.

<TABLE>
<CAPTION>
Components of Other Businesses
Net Loss                      1998        1997       1996
                                   (In thousands)
<S>                         <C>         <C>         <C>
Revenue:                                            
Leveraged lease revenue     $ 7,102     $ 6,539     $ 5,933
Other revenue                17,615       4,328       1,892
                            -------     -------     -------
  Total revenue              24,717      10,867       7,825
                            -------     -------     -------
Expenses:                                           
Operating expenses           23,366      12,189      10,107
Depreciation and amort.         193         198         197
Interest expense              6,698       4,816       4,803
Other taxes                      56          25          97
                            -------     -------     -------
  Total expenses             30,313      17,228      15,204
                            -------     -------     -------
Loss before income taxes     (5,596)     (6,361)     (7,379)
  Income taxes               (2,773)     (3,919)     (3,380)
                            -------     -------     -------
  Other businesses net loss $(2,823)    $(2,442)    $(3,999)
                            =======     =======     =======
</TABLE>

Leveraged lease revenue increased in 1998 due to a full year's
revenue from CIM's investment in an additional leveraged lease in
July 1997.  The income tax expense related to leveraged lease
income was $2.7 million, $2.5 million and $2.3 million for 1998,
1997 and 1996, respectively.

Other revenue increased in 1998 due to a $3.9 million pre-tax gain
resulting from CIM's refinancing of a leveraged lease investment
and an increase of $10.4 million in gas marketing revenues of
CILCORP Energy Services Inc. (CESI), a subsidiary of CVI.

Operating expenses increased in 1998 primarily due to an increase
of $10 million in the cost of gas for CESI's gas marketing
program.  CIM recorded an additional charge of approximately $1
million during 1998 related to a decrease in the residual value of
one of its leveraged leases (see Note 6).  In addition, the
Holding Company incurred $2 million in transaction costs related
to the AES acquisition.

Interest expense increased in 1998 due to higher average short-
term debt balances.

The income tax benefit decreased in 1998 due to higher net income
at CIM and expenses related to the AES transaction.

QST ENTERPRISES DISCONTINUED OPERATIONS

The results of QST and its past and present subsidiaries - QST
Communications, QST Environmental and QST Energy - are reported in
1998 and prior periods as discontinued operations (see Note 10).
The tables below show the components of the discontinued
operations.


                                 
                                15

Loss from operations of discontinued businesses, net of tax:

<TABLE>
<CAPTION>
                                      1998       1997       1996
<S>                                <C>        <C>        <C>
QST Communications, net of tax of                        
  $(463), $(576) and $(334)        $   (704)  $   (876)  $   (508)
QST Enterprises (excluding QST                           
  Environmental and QST                                  
  Communications), net of tax of                         
  $(15,331), $(5,893) and $(2,296)  (23,369)    (8,967)    (3,490)
QST Environmental, net of tax of                         
  $(484), $(829) and $(3,567)          (952)   (24,283)    (5,999)
                                   --------   --------   --------
                                   $(25,025)  $(34,126)  $ (9,997)
                                   ========   ========   ========
</TABLE>

Estimated (loss) realized gain on sale/disposal of assets of
discontinued businesses, net of tax:

<TABLE>
<CAPTION>
                                     1998       1997       1996
<S>                                <C>        <C>        <C>
QST Enterprises (excluding QST                           
  Environmental), net of tax of   
  $4,640                           $ 7,057    $    --    $    --
QST Environmental, net of tax of                         
  $(2,626) and $1,889               (3,940)     2,712         --
                                   -------    -------    -------
                                   $ 3,117    $ 2,712    $    --
                                   =======    =======    =======

In August 1998, QST Enterprises sold its wholly-owned fiber optic-
based telecommunications subsidiary, QST Communications, to McLeod
USA for $20 million cash and McLeod stock options valued at $5.5
million, resulting in an after-tax gain of approximately $8.3
million which is included in the second table above. Operating
losses incurred by QST Communications prior to the sale are shown
in the first table.  The gain from the sale of QST Communications
is partially offset by the estimated loss on discontinuance of QST
Energy.

At December 31, 1998, QST Enterprises and QST Energy had ceased
operations, except for fulfillment of contractual commitments
extending beyond 1998.  The 1998 loss from operations of QST
Enterprises (excluding QST Environmental and QST Communications)
shown in the first table primarily results from energy trading
operations, negative electric margin generated by QST Energy's
commercial customers, and the marking to market under EITF 98-10
at December 31, 1998 of QST's contractual commitments to supply
electricity or natural gas to customers after 1998.  Pre-tax gross
margin for 1998 was ($14.3) million for electricity and ($3.9)
million for natural gas, compared to ($.8) million and ($4.9)
million in 1997 for electricity and natural gas, respectively.  An
unprecedented, sudden increase in wholesale electricity prices
during June 1998, transmission congestion problems in the
deregulated California market, and other California market
dynamics contributed to the decline in electric gross margin. QST
accrued a loss of $5.2 million to mark its contractual commitments
to deliver energy to market value.  Increased administrative and
general costs and estimated administrative and operating costs
that will be incurred prior to QST's exit from the non-Illinois
markets also contributed to the increased loss in 1998.

Increased losses on gas trading operations in late 1997, increased
electric supply and delivery costs during the summer of 1997 and
higher administrative and general costs were the primary factors
contributing to QST Enterprises'

                                16

(excluding QST Environmental and QST Communications) increased
losses in 1997 compared to 1996.

As shown in the second table above, QST Environmental recorded an
after-tax charge to income of $3.9 million in 1998 to record
estimated losses related to the sale or discontinuance of its
business, including estimated losses related to assets and
obligations, such as the laboratories, not integral to the
environmental consulting business activities to be sold.  QST
Environmental's 1998 loss from operations of discontinued
business, as shown in the first table, resulted primarily from
losses at its analytical laboratory operations, partially offset
by approximately $.6 million earned by its consulting business.

QST Environmental's net loss increased in 1997 compared to 1996
primarily due to the write-off of $22.6 million in goodwill,
partially offset by improved performance of the environmental
consulting operations due to cost control.  An after-tax gain of
$2.7 million from the sale of the discontinued operations of QST
Environmental's subsidiary, ESE Land, is shown in the second table
above.















































                                 
                                17

<PAGE>

Management's Report
To the Stockholders of CILCORP Inc.:

Management has prepared the accompanying financial statements and
notes for CILCORP Inc. and its consolidated subsidiaries in
accordance with generally accepted accounting principles.
Estimates and judgments used in developing these statements are
the responsibility of management.  Financial data presented
throughout this report is consistent with these statements.

CILCORP Inc. maintains a system of internal accounting controls
which management believes is adequate to provide reasonable
assurance as to the integrity of accounting records and the
protection of assets.  Such controls include established policies
and procedures, a program of internal audit and the careful
selection and training of qualified personnel.

The financial statements have been audited by CILCORP's
independent public accountants, Arthur Andersen LLP.  Their audit
was conducted in accordance with generally accepted auditing
standards and included an assessment of selected internal
accounting controls only to determine the scope of their audit
procedures.  The report of the independent public accountants is
contained in this annual report.

The Audit Committee of the Board of Directors, consisting solely
of outside directors, meets periodically with the independent
public accountants, internal auditors and management to review
accounting, auditing, internal accounting control, and financial
reporting matters.  The independent public accountants have direct
access to the Audit Committee.  The Audit Committee meets
separately with the independent public accountants.



R. O. Viets
President and Chief Executive Officer



T. D. Hutchinson
Controller

























                                18

<PAGE>
Report of Independent Public Accountants
To the Stockholders of CILCORP Inc.:

We have audited the accompanying consolidated balance sheets of
CILCORP Inc. (an Illinois corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated
statements of income, cash flows, stockholders' equity and
segments of business for each of the three years in the period
ended December 31, 1998.  These financial statements are the
responsibility of the Company's management.  Our responsibility is
to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with generally accepted
auditing standards.  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
CILCORP Inc. and subsidiaries as of 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.



Arthur Andersen LLP
Chicago, Illinois
January 27, 1999

































                                19


<PAGE>

</TABLE>
<TABLE>
Consolidated Statements of Income
CILCORP Inc. and Subsidiaries
<CAPTION>
For the Years Ended December 31   1998      1997       1996
                           (In thousands except per share amounts)
<S>                             <C>       <C>        <C>
Revenue:
Electric                        $360,009  $338,096   $322,785
Gas                              172,327   208,758    195,770
Other Businesses                  26,688    11,106      8,505
                                --------  --------   --------
   Total                         559,024   557,960    527,060
                                --------  --------   --------
Operating Expenses:                                  
Fuel for Generation and                              
   Purchased Power               124,058   115,081    101,622
Gas Purchased for Resale          93,586   123,532    108,286
Other Operations and
  Maintenance                    145,673   124,852    131,675
Depreciation and Amortization     66,179    62,416     60,574
State and Local Revenue Taxes     26,502    22,467     22,004
Other Taxes                       11,463    11,833     11,516
                                --------  --------   --------
   Total                         467,461   460,181    435,677
                                --------  --------   --------
Fixed Charges and Other:                             
Interest Expense                  29,473    27,462     28,964
Preferred Stock Dividends                            
   of Subsidiary                   3,194     3,216      3,188
Allowance for Funds Used                             
  During Construction                (34)     (134)       (90)
Other                              1,013     1,177        679
                                --------  --------   --------
   Total                          33,646    31,721     32,741
                                --------  --------   --------
Income from Continuing                               
  Operations Before Income Taxes  57,917    66,058     58,642
Income Taxes                      19,699    22,349     20,702
                                --------  --------   --------
   Net Income from Continuing                     
     Operations Before                          
     Extraordinary Item           38,218    43,709     37,940
Loss from Operations of                              
  Discontinued Businesses, Net                       
  of Tax of $(16,278),                               
  $(7,298) and $(6,197)          (25,025)  (34,126)    (9,997)
Gain on Sale/Disposal of                             
  Assets of Discontinued                             
  Businesses, Net of Tax of
    $2,014 and $1,889              3,117     2,712         --
Extraordinary Item (see Note 1)       --     4,100         --
                                --------  --------   --------
Net Income                      $ 16,310  $ 16,395   $ 27,943
                                                     
Other Comprehensive Income          (169)     (317)        (5)
                                --------  --------   --------
Comprehensive Income            $ 16,141  $ 16,078   $ 27,938
                                ========  ========   ========







                                20

Average Common Shares                                        
  Outstanding - Basic           13,611    13,611     13,480
Earnings Per Common Share -                                  
  Basic
   Continuing Operations        $ 2.81    $ 3.21     $ 2.81
   Discontinued Operations       (1.61)    (2.31)      (.74)
   Extraordinary Item               --       .30         --
                                ------    ------     ------
Net Income Per Common Share -
  Basic                         $ 1.20    $ 1.20     $ 2.07
                                ======    ======     ======
                                                     
Average Common Shares                                
  Outstanding - Diluted         13,707    13,627     13,480
Earnings Per Common Share -                          
  Diluted
   Continuing Operations        $ 2.79    $ 3.21     $ 2.81
   Discontinued Operations       (1.60)    (2.31)      (.74)
   Extraordinary Item               --       .30         --
                                ------    ------     ------
Net Income Per Common Share -                        
  Diluted                       $ 1.19    $ 1.20     $ 2.07
                                ======    ======     ======
Dividends per Common Share      $ 2.46    $ 2.46     $ 2.46
<FN>
The accompanying Notes to Financial Statements are an integral part of these
statements.
</TABLE>






































                                 
                                21
                                 
<PAGE>
<TABLE>
Consolidated Balance Sheets
CILCORP Inc. and Subsidiaries
<CAPTION>
Assets (As of December 31)                      1998         1997
                                                (In thousands)
<S>                                         <C>          <C>
Current Assets:                                              
Cash and Temporary Cash Investments         $    1,669   $   10,576
Receivables, Less Reserves of $3,411 and
  $2,518                                       134,666      141,234
Accrued Unbilled Revenue                        39,220       38,775
Fuel, at Average Cost                           13,431        7,816
Materials and Supplies, at Average Cost         15,062       13,685
Gas in Underground Storage, at Average Cost     20,767       22,666
Prepayments and Other                            7,706       10,971
                                            ----------   ----------
     Total Current Assets                      232,521      245,723
                                            ----------   ----------
Investments and Other Property:                                
Investment in Leveraged Leases                 146,990      146,458
Other Investments                               19,500       21,074
                                            ----------   ----------
   Total Investments and Other Property        166,490      167,532
                                            ----------   ----------
Property, Plant and Equipment:                                 
Utility Plant, at Original Cost                                
   Electric                                  1,237,885    1,213,585
   Gas                                         417,585      401,870
                                            ----------   ----------
                                             1,655,470    1,615,455
Less - Accumulated Provision for
  Depreciation                                 812,630      769,792
                                            ----------   ----------
                                               842,840      845,663
Construction Work in Progress                   30,075       21,550
Other, Net of Depreciation                       7,796       22,188
                                            ----------   ----------
     Total Property, Plant and Equipment       880,711      889,401
                                            ----------   ----------
Other Assets:                                   33,218       32,163
                                            ----------   ----------
                                                               
     Total Assets                           $1,312,940   $1,334,819
                                            ==========   ==========
<FN>
The accompanying Notes to Financial Statements are an integral
part of these balance sheets.
</TABLE>

















                                22

<PAGE>
<TABLE>
Consolidated Balance Sheets
CILCORP Inc. and Subsidiaries
<CAPTION>
Liabilities and Stockholders' Equity (As of December 31)
                                               1998         1997
                                                (In thousands)
<S>                                        <C>          <C>
Current Liabilities:
Current Portion of Long-Term Debt          $   13,027   $   22,185
Notes Payable                                  96,200       62,150
Accounts Payable                              136,840      132,286
Accrued Taxes                                   8,185        2,810
Accrued Interest                               10,102        9,473
FCA/PGA Over-Recoveries                           304        1,666
Other                                           8,881       19,798
                                           ----------   ----------
     Total Current Liabilities                273,539      250,368
                                           ----------   ----------
Long-Term Debt                                285,552      298,528
                                           ----------   ----------
Deferred Credits and Other Liabilities:              
Deferred Income Taxes                         239,306      241,013
Regulatory Liab. of Regulated Subsidiary       46,346       56,807
Deferred Investment Tax Credit                 19,450       21,117
Other                                          47,089       48,273
                                           ----------   ----------
     Total Deferred Credits                   352,191      367,210
                                           ----------   ----------
Preferred Stock of Subsidiary                  66,120       66,120
                                           ----------   ----------
Stockholders' Equity:                                
Common Stock, no par value; Authorized               
  50,000,000 shares - Outstanding                    
  13,610,680 and 13,610,680 shares            192,853      192,567
Retained Earnings                             143,530      160,702
Accumulated Other Comprehensive Income           (845)        (676)
                                           ----------   ----------
     Total Stockholders' Equity               335,538      352,593
                                           ----------   ----------
     Total Liabilities and
       Stockholders' Equity                $1,312,940   $1,334,819
                                           ==========   ==========
<FN>

The accompanying Notes to Financial Statements are an integral
part of these balance sheets.

</TABLE>



































                                23

<PAGE>
<TABLE>
Statements of Segments of Business
CILCORP Inc. and Subsidiaries
<CAPTION>

1998

                 CILCO    CILCO     CILCO    Other      Discont.            
                Electric   Gas      Other  Businesses  Operations    Totals
                                     (In thousands)
<S>             <C>       <C>       <C>     <C>         <C>        <C>
Revenues        $360,009  $172,327  $ 1,743 $  24,717   $  --      $  558,796
Interest income                         228                               228
                --------  --------  ------- ---------              ----------
   Total         360,009   172,327    1,971    24,717                 559,024
                --------  --------  ------- ---------              ----------
Operating                                                    
  expenses       235,801   138,459    3,600    23,422                 401,282
Depreciation                                                 
and amortization  46,017    19,256      713       193                  66,179
                --------  --------  ------- ---------              ----------
   Total         281,818   157,715    4,313    23,615                 467,461
                --------  --------  ------- ---------              ----------
Interest expense  16,261     6,514              6,698                  29,473
Preferred stock                                                   
  dividends                           3,194                             3,194
Fixed charges                                                
  and other exp.     (34)             1,013                               979
                --------  --------  ------- ---------              ----------
   Total          16,227     6,514    4,207     6,698                  33,646
                --------  --------  ------- ---------              ----------
Income from                                                  
  continuing                                                 
  oper. before                                               
  income taxes    61,964     8,098   (6,549)   (5,596)                 57,917
Income taxes      21,645     3,443   (2,616)   (2,773)                 19,699
                --------  --------  ------- ---------              ----------
Net income from                                                  
  continuing                                                         
  operations      40,319     4,655   (3,933)   (2,823)                 38,218
Effect of                                                    
  discontinued                                               
  operations                                              (21,908)    (21,908)
                --------  --------  ------- ---------  ----------  ----------
Segment net                                                  
  income        $ 40,319  $  4,655  $(3,933)$  (2,823) $  (21,908) $   16,310
                ========  ========  ======= =========  ==========  ==========
                                                             
Capital                                                      
  expenditures  $ 44,213  $ 22,889  $    -- $      10  $    8,916  $   76,028
                                                             
Revenue from                                                 
  major                                                      
  customer                                                     
  Caterpillar   
  Inc.          $ 39,354  $    948  $    -- $   7,669  $    1,130  $   49,101
                                                             
Segment assets  $730,354  $286,737  $ 5,072 $ 594,734  $  121,647  $1,738,544
Consolidation                                                
  adjustments     (1,304)     (507)      --  (423,789)         (4)   (425,604)
                --------  --------  ------- ---------  ----------  ----------
Total assets    $729,050  $286,230  $ 5,072 $ 170,945  $  121,643  $1,312,940
                ========  ========  ======= =========  ==========  ==========








                                24

1997

                 CILCO     CILCO    CILCO    Other     Discont.            
                Electric    Gas     Other  Businesses Operations    Totals
                                    (In thousands)
<S>             <C>       <C>       <C>     <C>       <C>         <C>
Revenues        $338,096  $208,758  $    -- $ 10,867  $       --  $  557,721
Interest income                         239                              239
                --------  --------  ------- --------              ----------
   Total         338,096   208,758      239   10,867                 557,960
                --------  --------  ------- --------              ----------
Operating                                                    
  expenses       217,700   165,020    2,831   12,214                 397,765
Depreciation                                                 
  and amort.      43,858    17,647      713      198                  62,416
                --------  --------  ------- --------              ----------
   Total         261,558   182,667    3,544   12,412                 460,181
                --------  --------  ------- --------              ----------
Interest exp.     16,192     6,454             4,816                  27,462
Preferred stock                                                  
  dividends                           3,216                            3,216
Fixed charges                                                
  and other exp.    (134)             1,177                            1,043
                --------  --------  ------- --------              ----------
   Total          16,058     6,454    4,393    4,816                  31,721
                --------  --------  ------- --------              ----------
Income from                                                  
  continuing                                                 
  oper. before                                               
  income taxes    60,480    19,637   (7,698)  (6,361)                 66,058
Income taxes      21,901     7,416   (3,049)  (3,919)                 22,349
                --------  --------  ------- --------              ----------
Net income                                                   
  from cont.                                                 
  oper. before                                               
  extraord.
  item            38,579    12,221   (4,649)  (2,442)                 43,709
Effect of                                                    
  discontinued                                               
  operations and                                                
  extraord. item   4,100                                 (31,414)    (27,314)
                --------  --------  ------- --------   ---------  ----------
Segment net                                                  
  income        $ 42,679  $ 12,221  $(4,649)$ (2,442)  $ (31,414) $   16,395
                ========  ========  ======= ========   =========  ==========
                                                             
Capital                                                      
  expenditures  $ 35,196  $ 19,830  $    -- $     29   $   6,188  $   61,243
                                                             
Revenue from                                                 
  major                                                      
  customer                                                     
  Caterpillar 
  Inc.          $ 40,106  $    934  $    -- $  1,208   $   1,870  $   44,118
                                                             
Segment assets  $724,869  $290,958  $ 5,639 $606,786   $ 144,412  $1,772,664
Consolidation                                                
  adjustments     (1,070)     (416)      -- (436,345)        (14)   (437,845)
                --------  --------  ------- --------   ---------  ----------
  Total assets  $723,799  $290,542  $ 5,639 $170,441   $ 144,398  $1,334,819
                ========  ========  ======= ========   =========  ==========












                                25

1996

                 CILCO    CILCO   CILCO     Other    Discont.               
                Electric   Gas    Other  Businesses Operations   Totals
                                   (In thousands)
<S>             <C>      <C>      <C>      <C>        <C>      <C>
Revenues        $322,785 $195,770 $    --  $   7,825  $    --  $  526,380
Interest income                       680                             680
                -------- -------- -------  ---------           ----------
   Total         322,785  195,770     680      7,825              527,060
                -------- -------- -------  ---------           ----------
Operating                                                     
  expenses       208,566  154,099   2,234     10,204              375,103
Depreciation                                                  
  and amort.      42,530   17,134     713        197               60,574
                -------- -------- -------  ---------           ----------
   Total         251,096  171,233   2,947     10,401              435,677
                -------- -------- -------  ---------           ----------
Interest exp.     17,445    6,716              4,803               28,964
Preferred stock                                                     
  dividends                         3,188                           3,188
Fixed charges                                                 
  and other exp.     (90)             679                             589
                -------- -------- -------  ---------           ----------
   Total          17,355    6,716   3,867      4,803               32,741
                -------- -------- -------  ---------           ----------
Income from                                                   
  continuing                                                  
  oper. before                                                
  income taxes    54,334   17,821  (6,134)    (7,379)              58,642
Income taxes      19,576    6,972  (2,466)    (3,380)              20,702
                -------- -------- -------  ---------           ----------     
Net income
  from                                                          
  continuing
  operations      34,758   10,849  (3,668)    (3,999)              37,940
Effect of                                                     
  discontinued                                                
  operations                                           (9,997)     (9,997)
                -------- -------- -------  ---------  -------  ----------
Segment net                                                   
  income        $ 34,758 $ 10,849 $(3,668) $  (3,999) $(9,997) $   27,943
                ======== ======== =======  =========  =======  ==========
                                                              
Capital                                                       
  expenditures  $ 28,032 $ 15,529 $    --  $     119  $ 3,061  $   46,741
                                                              
Revenue from                                                  
  major                                                       
  customer                                                      
  Caterpillar   
  Inc.          $ 37,724 $  1,053 $    --  $      68  $   119  $   38,964
                                                              
Segment assets  $732,219 $296,343 $ 6,424  $ 585,732  $94,492  $1,715,210
Consolidation                                                 
  adjustments       (352)    (137)     --   (428,815)    (213)   (429,517)
                -------- -------- -------  ---------  -------  ----------
  Total assets  $731,867 $296,206 $ 6,424  $ 156,917  $94,279  $1,285,693
                ======== ======== =======  =========  =======  ==========
</TABLE>

















                                26


<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
CILCORP Inc. and Subsidiaries
<CAPTION>

For the Years Ended December 31  1998      1997      1996
                                       (In thousands)
<S>                            <C>        <C>        <C>
Cash Flows from Operating Activities:

Net Income from Continuing                           
  Operations Before Preferred                        
  Dividends                    $ 41,412   $ 46,925   $ 41,128
                               --------   --------   --------
Adjustments to Reconcile Net                         
  Income to Net Cash Provided
  by Operating Activities:
   Non-Cash Income               (6,150)    (4,102)    (4,297)
   Cash Receipts in Excess of                        
     Debt Service on Leases       7,618         --         --
   Depreciation and Amort.       66,179     62,416     60,574
   Deferred Income Taxes,                            
     Investment Tax Credit                           
     and Regulatory Liability                        
     of Subsidiary, Net          (5,865)    (3,342)    (1,707)
Changes in Operating Assets                           
  and Liabilities:
   Decrease (Increase) in                           
     Accounts Receivable and                         
     Accrued Unbilled Revenue     5,430        (74)    (3,474)
   (Increase) Decrease in                            
     Inventories                 (5,093)     3,294     (5,310)
   Increase (Decrease) in                            
     Accounts Payable            14,188     (1,961)     6,809
   Increase (Decrease) in                            
     Accrued Taxes                   10      3,893     (5,843)
   (Increase) Decrease in                            
     Other Assets                   209    (17,027)     2,197
   Increase (Decrease)in                             
     Other Liabilities           (6,426)    (9,039)    11,036
                               --------   --------   --------
Total Adjustments                70,100     34,058     59,985
                               --------   --------   --------
Net Cash Provided by                                 
  Operating Activities          111,512     80,983    101,113
Net Cash Provided by (Used                           
  in) Operating Activities                          
  of Discontinued Operations    (43,202)    10,031      1,263
                               --------   --------   --------
Cash Flow from Operations        68,310     91,014    102,376
                               --------   --------   --------
Cash Flows from Investing                            
  Activities:
Additions to Plant              (67,112)   (55,055)   (43,680)
Purchase of Long-Term
  Investments                        --     (6,933)    (4,713)
Other                            (4,514)    (1,242)       482
                               --------   --------   --------
Net Cash Used in Investing                           
         Activities             (71,626)   (63,230)   (47,911)
Net Cash Provided by (Used                           
  in) Investing Activities of                        
  Discontinued Operations        19,169      3,310     (3,082)
                               --------   --------   --------
Cash Flow from Investing
  Activities                    (52,457)   (59,920)   (50,993)
                               --------   --------   --------




                                27

Cash Flows from Financing                            
Activities:
Net Increase (Decrease) in                           
  Short-Term Debt                34,050     34,250    (19,200)
Repayment of Long-Term Debt     (22,102)   (22,954)   (19,393)
Common Dividends Paid           (33,482)   (33,482)   (33,142)
Preferred Dividends Paid         (3,194)    (3,216)    (3,188)
Common Stock Issued                  --         --     11,430
                               --------   --------   --------
Net Cash Provided by (Used in)                        
  Financing Activities of
  Continuing Operations         (24,728)   (25,402)   (63,493)
Net Cash Provided by (Used                           
  in) Financing Activities of                        
  Discontinued Operations           (32)       (57)       (49)
                               --------   --------   --------
Net Cash Used in Financing                           
  Activities                    (24,760)   (25,459)   (63,542)
                               --------   --------   --------
Net Increase (Decrease) in                           
  Cash and Temporary
  Cash Investments               (8,907)     5,635    (12,159)
Cash and Temporary Cash                              
  Investments at
  Beginning of Year              10,576      4,941     17,100
                               --------   --------   --------
Cash and Temporary Cash                              
  Investments at End of Year   $  1,669   $ 10,576   $  4,941
                               ========   ========   ========
<FN>
The accompanying Notes to Financial Statements are an integral
part of these statements.
</TABLE>

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                28


<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
CILCORP Inc. and Subsidiaries
<CAPTION>

                                                        Other
                            Common Stock    Retained Comprehensive
                          Shares    Amount  Earnings    Income     Total
                                (In thousands except share amounts)
<S>                     <C>        <C>      <C>       <C>        <C>
Balance at December 31,
  1995                  13,335,606 $179,330 $183,002  $  (354)   $361,978
Common Stock Issued        275,074   11,430                        11,430
Cash Dividend Declared                                         
  on Common Stock ($2.46
  per share)                                 (33,141)             (33,141)
Additional Minimum                                             
  Liability of Non-                                            
  Qualified Pension Plan                                       
  at December 31, 1996,                                    
  net of $(3) taxes                                        (5)         (5)
Net Income                                    27,943               27,943
                        ---------- -------- --------  -------    --------       
                                                               
Balance at December 31,
  1996                  13,610,680 $190,760 $177,804  $  (359)   $368,205
CILCORP Shareholder                                            
  Return Incentive                                         
  Compensation                        1,807                         1,807
Cash Dividend Declared                                         
  on Common Stock                                                             
  ($2.46 per share)                          (33,482)             (33,482)
Additional Minimum                                             
  Liability of Non-                                            
  Qualified Pension Plan                                       
  at December 31, 1997,                                 
  net of $(208) taxes                                    (317)       (317)
Other                                            (15)                 (15)
Net Income                                    16,395               16,395
                        ---------- -------- --------  -------    --------
                                                               
Balance at December 31,
  1997                  13,610,680 $192,567 $160,702  $  (676)   $352,593
Cash Dividend Declared                                         
  on Common Stock                            
  ($2.46 per share)                          (33,482)             (33,482)     
Additional Minimum                                             
  Liability of Non-                                            
  Qualified Pension Plan                                       
  at December 31, 1998,                                 
  net of $(111) taxes                                    (169)       (169)
Other                                   286                           286
Net Income                                    16,310               16,310
                        ---------- -------- --------  -------    --------
                                                               
Balance at December 31,
  1998                  13,610,680 $192,853 $143,530  $  (845)   $335,538
                        ========== ======== ========  =======    ========
<FN>
The accompanying Notes to Financial Statements are an integral
part of these statements.
</TABLE>























                                29


<PAGE>
                   NOTES TO FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of
CILCORP Inc. (CILCORP or the Holding Company), Central Illinois
Light Company (CILCO), QST Enterprises Inc. (QST) and its
subsidiaries (QST Environmental Inc., formerly known as
Environmental Science & Engineering, Inc. (ESE) and QST Energy
Inc. (QST Energy))and CILCORP's other subsidiaries (collectively,
the Company) after elimination of significant intercompany
transactions.  In 1998, the operations of QST and its subsidiaries
were discontinued (see Note 10).  Prior year amounts have been
reclassified on a basis consistent with the 1998 presentation.

CILCORP is an investor-owned public utility holding company.
CILCO, the Company's principal business subsidiary, is engaged in
the generation, transmission, distribution and sale of electric
energy in an area of approximately 3,700 square miles in central
and east-central Illinois, and the purchase, distribution,
transportation and sale of natural gas in an area of approximately
4,500 square miles in central and east-central Illinois.  Other
CILCORP first-tier subsidiaries are CILCORP Investment Management
Inc. (CIM), which manages the Company's investment portfolio and
CILCORP Ventures Inc. (CVI), which pursues investment
opportunities in energy-related products and services.

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those estimates.

See Management's Discussion and Analysis of Financial Condition
and Results of Operations - New Accounting Pronouncements for a
discussion of accounting pronouncements issued by the Financial
Accounting Standards Board which are effective in 1998 or
thereafter.

REGULATION

CILCO is a public utility subject to regulation by the Illinois
Commerce Commission (ICC) and the Federal Energy Regulatory
Commission (FERC) with respect to accounting matters, and
maintains its accounts in accordance with the Uniform System of
Accounts prescribed by these agencies.

CILCO is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS 71) for its regulated public
utility operations.  Under SFAS 71, assets and liabilities are
recorded to represent probable future increases and decreases,
respectively, of revenues to CILCO resulting from the ratemaking
action of regulatory agencies.

The Electric Service Customer Choice and Rate Relief Law of 1997
(Customer Choice Law) became effective in Illinois in December
1997.  Among other provisions, this law begins a nine-year
transition process to a fully competitive market for electricity
in Illinois.  Electric transmission and distribution activities
are expected to continue to be regulated, but a customer may
choose to purchase electricity from another supplier (see
Management's Discussion - Competition).





                                30

Due to the transition cost recovery limitations and base rate
reductions of the Customer Choice Law, CILCO's electric generation
activities will no longer be subject to the provisions of SFAS 71.
Accordingly, regulatory assets of $1.5 million and liabilities of
$5.6 million associated with electric generating plant were
written-off or credited, respectively, to income in 1997 as a net
$4.1 million after-tax extraordinary item.  Regulatory assets
included on the Consolidated Balance Sheets at December 31, 1998
and 1997 are as follows:

<TABLE>
<CAPTION>
                                             1998     1997
                                              (In thousands)
<S>                                        <C>       <C>
Included in prepayments and other:                          
    Fuel and gas cost adjustments          $ 4,740   $ 2,954
    Coal tar remediation cost -                              
      estimated current                        609       844
    Gas transition costs                        --       159
                                           -------   -------
          Current costs included in                         
            prepayments and other            5,349     3,957
                                           -------   -------
Included in other assets:                                   
    Coal tar remediation cost, net of                       
      recoveries                             1,281     2,745
    Regulatory tax asset                     5,723     7,578
    Deferred gas costs                       4,039     4,145
    Unamortized loss on reacquired debt      3,261     3,581
                                           -------   -------
      Future costs included in other assets 14,304    18,049
                                           -------   -------
              Total regulatory assets      $19,653   $22,006
                                           =======   =======
</TABLE>

Regulatory assets at December 31, 1998 are related to CILCO's
regulated electric and gas distribution activities.  CILCO does
not currently believe the costs recorded for its generating plants
and related assets at December 31, 1998 to be impaired as a result
of the Customer Choice Law.  Regulatory liabilities, consisting of
deferred tax items primarily related to CILCO's electric and gas
transmission and distribution operations, are approximately
$46.3 million and $56.8 million at December 31, 1998 and 1997,
respectively.

CILCO's electric generation-related identifiable assets included
in the balance sheet at December 31, 1998 and 1997 were:

<TABLE>
<CAPTION>                                 1998         1997
                                            (In thousands)
<S>                                     <C>         <C>
Property, Plant and Equipment           $ 537,358   $ 535,065
Less:  Accumulated Depreciation          (266,461)   (259,988)
                                        ---------   ---------
                                          270,897     275,077
Construction Work in Progress               3,268       1,979
                                        ---------   ---------
  Net Property, Plant and Equipment       274,165     277,056
Fuel, at Average Cost                       8,704       8,520
Materials and Supplies, at Average Cost     8,452       8,202
                                        ---------   ---------
Total Identifiable Electric                         
  Generation Assets                     $ 291,321   $ 293,778
                                        =========   =========
</TABLE>

                                31

Accumulated deferred income taxes associated with electric
generation property at December 31, 1998 and 1997 were
approximately $72 million and $79 million, respectively.

OPERATING REVENUES, FUEL COSTS AND COST OF GAS

Electric, gas, and non-regulated energy and energy services
revenues include service provided but unbilled at year end.
Substantially all electric rates and gas system sales rates of
CILCO include a fuel adjustment clause and a purchased gas
adjustment clause, respectively.  These clauses provide for the
recovery of changes in electric fuel costs, excluding coal
transportation, and changes in the cost of gas on a current basis
in billings to customers.  CILCO adjusts the cost of fuel and cost
of gas to recognize over or under recoveries of allowable costs.
The cumulative effects are deferred on the Balance Sheets as a
current asset or current liability (see Regulation, above) and
adjusted by refunds or collections through future billings to
customers.

CONCENTRATION OF CREDIT RISK

CILCO, as a public utility, must provide service to customers
within its defined service territory and may not discontinue
service to residential customers when certain weather conditions
exist.  CILCO continually reviews customers' creditworthiness and
requests deposits or refunds deposits based on that review.  At
December 31, 1998, CILCO had net receivables of $35.8 million, of
which approximately $4.7 million was due from its major customers.

See Note 6 for a discussion of receivables related to CILCORP
Investment Management Inc.'s leveraged lease portfolio.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of Cash and Temporary Cash Investments, Other
Investments, and Notes Payable approximates fair value.  The
estimated fair value of the Company's Preferred Stock with
Mandatory Redemption was $23 million at December 31, 1998 and
1997, based on current market interest rates for other companies
with comparable credit ratings, capital structure, and size.  The
estimated fair value of the Company's Long-Term Debt, including
current maturities, was $339 million at December 31, 1998, and
$352 million at December 31, 1997.  The fair market value of these
instruments was based on current market interest rates for other
companies with comparable credit ratings, capital structures, and
size.

DEPRECIATION AND MAINTENANCE

Provisions for depreciation of utility property for financial
reporting purposes are based on straight-line composite rates.
The annual provisions for utility plant depreciation, expressed as
a percentage of average depreciable utility property, were 3.8%
and 4.6% for electric and gas, respectively, for each of the last
three years.  Utility maintenance and repair costs are charged
directly to expense.  Renewals of units of property are charged to
the utility plant account, and the original cost of depreciable
property replaced or retired, together with the removal cost less
salvage, is charged to the accumulated provision for depreciation.

Non-utility property is depreciated over estimated lives ranging
from 3 to 40 years.

GOODWILL

As a result of significant downsizing of QST Environmental Inc.
(QST Environmental) during 1996 and 1997 and continuing
overcapacity and competition in the environmental segment in the
fourth quarter of 1997, the Company


                                32

determined that an impairment to goodwill associated with QST
Environmental existed.  As a result, the Company wrote off the
$22.6 million unamortized goodwill balance.  In late 1998, the
Company decided to sell its 100% ownership interest in QST
Environmental and has classified its results as discontinued (see
Note 10).

INCOME TAXES

The Company follows a policy of comprehensive interperiod income
tax allocation.  Investment tax credits related to utility
property have been deferred and are being amortized over the
estimated useful lives of the related property.  CILCORP 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.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The Company considers all highly liquid debt instruments purchased
with a remaining maturity of three months or less to be cash
equivalents for purposes of the Consolidated Statements of Cash
Flows.

Cash paid for interest and income taxes was as follows:

<TABLE>
<CAPTION>
                           1998        1997       1996
                                  (In thousands)
<S>                      <C>         <C>        <C>
Interest                 $26,067     $28,710    $28,988
Income taxes             $19,611     $28,537    $13,572
                         -------     -------    -------
</TABLE>

COMPANY-OWNED LIFE INSURANCE POLICIES

The following amounts related to Company-owned life insurance
contracts, issued by one major insurance company, are included in
Other Investments:

<TABLE>
<CAPTION>
                                    1998         1997
                                       (In thousands)
<S>                                 <C>       <C>
Cash surrender value of contracts   $ 50,786  $ 45,297
Borrowings against contracts         (48,132)  (42,898)
                                    --------  --------
     Net investment                 $  2,654  $  2,399
                                    ========  ========
</TABLE>

Interest expense related to borrowings against Company-owned life
insurance, included in "Other" on the Consolidated Statements of
Income, was $3.6 million, $3.5 million and $2.7 million for 1998,
1997 and 1996, respectively.

NOTE 2 - INCOME TAXES

The Company uses the liability method to account for income taxes.
Under the liability method, deferred income taxes are recognized
at currently enacted income tax rates to reflect the tax effect of
temporary differences between the financial reporting basis and
the tax basis of assets and liabilities.  Temporary differences
occur because the income tax law either requires or permits
certain items to be reported on the Company's income tax return in
a different year than they are reported in the financial
statements.  CILCO has recorded a regulatory asset and liability
to account for the effect of expected

                                 
                                33

future regulatory actions related to unamortized investment tax
credits, income tax liabilities initially recorded at tax rates in
excess of current rates, the equity component of Allowance for
Funds Used during Construction and other items for which deferred
taxes had not previously been provided.  The temporary differences
related to the consolidated deferred income tax asset and
liability at December 31, 1998, 1997, and 1996 were as follows:

<TABLE>
<CAPTION>
December 31                     1998      1997      1996
                                    (In thousands)
<S>                           <C>       <C>       <C>
Deferred tax assets:
   Deferred tax asset         $20,742   $18,347   $16,452
   Adjustment to reflect                          
      regulatory asset         (5,723)   (7,578)   (4,777)
                              -------   -------   -------
   Net deferred tax asset     $15,019   $10,769   $11,675
                              =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>
December 31                     1998      1997      1996
                                     (In thousands)
<S>                           <C>       <C>       <C>
Deferred tax liabilities:
  Deferred tax liability-
   property                   $196,301  $207,460  $214,356
   Adjustment to reflect                          
     regulatory liability      (46,346)  (56,807)  (68,565)
                              --------  --------  --------
   Net deferred tax                               
     liability-property        149,955   150,653   145,791
   Deferred tax liability-
    leases                     103,566   101,005    97,964
   Deferred tax liability-
    other                          804       124     3,159
                              --------  --------  --------
  Accumulated deferred                            
   income tax liability       $254,325  $251,782  $246,914
                              ========  ========  ========
  Accumulated deferred                            
    income tax liability, net                                        
    of deferred tax assets    $239,306  $241,013  $235,239
                              ========  ========  ========
</TABLE>





















                                34

The following table reconciles the change in the accumulated
deferred income tax liability to the deferred income tax expense
included in the income statement:

<TABLE>
<CAPTION>
December 31                           1998       1997
                                      (In thousands)
<S>                                 <C>         <C>
Net change in deferred income tax               
  liability per above table         $ (1,707)   $  5,774
Change in tax effects of income tax                
  related regulatory assets and
  liabilities                         (8,606)    (14,559)
Deferred taxes related to                       
  extraordinary item                      --       5,634
Other                                   (106)        125
                                    --------    --------
Deferred income tax benefit for                 
  the period                         (10,419)     (3,026)
Less:  Deferred income tax benefit              
  for the period from                    
  discontinued operations             (6,115)     (1,245)
                                    --------    --------
Deferred income tax benefit for the                
  period from continuing operations $ (4,304)   $ (1,781)
                                    ========    ========
</TABLE>





































                                35

Income tax expenses were as follows:

<TABLE>
<CAPTION>
December 31                1998       1997        1996
                                (In thousands)
<S>                      <C>         <C>         <C>
Current income taxes
Federal                  $ 13,731    $17,814     $15,129
State                       3,791      3,836       2,169
                         --------    -------     -------
  Total current taxes      17,522     21,650      17,298
                         --------    -------     -------
Deferred income taxes,                           
  net
Property-related                                 
  deferred income taxes   (11,262)      (841)     (2,346)
Leveraged leases            2,602      3,040       4,398
Unbilled revenue             (287)      (885)        425
Gas take-or-pay
  settlements                 522       (339)       (706)
Environmental                                    
  remediation costs           (58)        46        (642)
Pension expenses              869     (1,798)     (1,726)
Other post-employment                            
  benefits expenses          (847)      (617)        187
Customer advances             478       (438)        (40)
Gas in underground
  storage                  (1,681)      (191)        405
Amortization of debt                             
  discounts, premiums                            
  and expenses               (790)      (179)       (179)
CILCO Executive Deferred                                  
  Compensation Plan          (671)      (191)       (525)
CILCORP Shareholder                              
  Return   Incentive       
  Comp. Plan                 (717)        --          --
QST Gas Derivatives                              
  Mark to Market              948         --          --
Other                         475       (633)       (360)
                         --------    -------     -------
   Total deferred                                
     income taxes, net    (10,419)    (3,026)     (1,109)
                         --------    -------     -------
Investment tax credit                            
  amortization             (1,668)    (1,684)     (1,684)
                         --------    -------     -------
   Total income tax                              
     provisions before                           
     extraordinary item     5,435     16,940      14,505
Deferred taxes related                           
  to extraordinary item        --     (5,634)         --
                         --------    -------     -------
Total income tax
  provisions             $  5,435    $11,306     $14,505
                         ========    =======     =======
</TABLE>













                                36

Total Income tax provisions are presented within the Income
Statement as follows:

<TABLE>
<CAPTION>
December 31                 1998       1997       1996
                                  (In thousands)
<S>                      <C>         <C>         <C>
Income taxes from                                
  continuing operations  $ 19,699    $22,349     $20,702
Tax on income (loss)                             
  from operations of                             
  discontinued businesses (16,278)    (7,298)     (6,197)
Tax on gain (loss) on                            
  sale/disposal of                               
  discontinued
  businesses                2,014      1,889          --
Deferred taxes related                           
  to extraordinary item        --     (5,634)         --
                         --------    -------     -------
Total income tax
  provisions             $  5,435    $11,306     $14,505
                         ========    =======     =======
</TABLE>

The 1997 income tax provision has been reduced to reflect the
crediting to income as an extraordinary item the regulatory
liability related to electric generation property deferred taxes
which were recorded at tax rates in excess of the current rate.

Total deferred income taxes, net, includes deferred state income
taxes of $(1,635,000) $(229,000) and $(538,000) for 1998, 1997 and
1996, respectively.

The following table represents a reconciliation of the effective
tax rate with the statutory federal income tax rate.

<TABLE>
<CAPTION>  Years Ended December 31    1998       1997       1996
<S>                                  <C>        <C>        <C>
Statutory federal income tax         35.0%      35.0%      35.0%
                                    -----      -----      -----
Amortization of property related                         
  deferred taxes provided at tax                                                
  rates in excess of current rate    (8.3)      (3.9)      (3.4)
Amortization of investment tax                     
  credit                             (7.6)      (6.1)      (4.0)
State income taxes                    5.5        9.0        4.8
Goodwill write-off and amortization    --       29.2         .6
Preferred dividends of subsidiary                        
  and other permanent differences     6.6        5.2        3.6
Tax provision adjustment               --       (1.6)       (.4)
Affordable housing tax credits       (6.1)      (3.4)       (.1)
Corporate-owned life insurance       (4.2)      (2.9)      (1.7)
AES transaction costs                 3.3         --         --
Other differences                     1.1         .7        (.2)
                                    -----      -----      -----
   Total                             (9.7)      26.2        (.8)
                                    -----      -----      -----
Effective income tax rate before                         
  effect of extraordinary item       25.3       61.2       34.2
Tax effect of extraordinary item       --      (20.4)        --
                                    -----      -----      -----
Effective income tax rate            25.3%      40.8%      34.2%
                                    =====      =====      =====
</TABLE>



                                 
                                37

NOTE 3 - POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS

POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS AND HEALTH CARE

CILCO has recorded a liability of approximately $1.5 million at
December 31, 1998 and 1997, for benefits other than pensions or
health care provided to former or inactive employees.  The
liability for these benefits (primarily long-term and short-term
disability payments under plans self-insured by CILCO) is
actuarially determined.

PENSION BENEFITS

Substantially all of CILCO's full-time employees, including those
assigned to the Holding Company, are covered by trusteed, non-
contributory defined benefit pension plans.  Benefits under these
qualified plans reflect the employee's years of service, age at
retirement and maximum total compensation for any consecutive
sixty-month period prior to retirement.  CILCO also has an
unfunded nonqualified plan for certain employees.

Pension costs for the past three years were charged as follows:

<TABLE>
<CAPTION>                      1998      1997      1996
                                   (In thousands)
 <S>                         <C>        <C>       <C>
Operating expenses           $  (893)   $   493   $ 9,700
Utility plant and other            6        125       922
                             -------    -------   -------
  Net pension costs          $  (887)   $   618   $10,622
                             =======    =======   =======
</TABLE>

Provisions for pension expense reflect the use of the projected
unit credit actuarial cost method.  At December 31, 1998 and 1997,
CILCO recognized an additional minimum liability on the Balance
Sheets for the plan in which the accumulated benefit obligation
exceeds the fair value of plan assets.

POSTRETIREMENT HEALTH CARE BENEFITS

Provisions for postretirement benefits expenses are determined
under the accrual method of accounting.

Substantially all of CILCO's full-time employees, including those
assigned to the Holding Company, are currently covered by a
trusteed, non-contributory defined benefit postretirement health
care plan.  The plan pays stated percentages of most necessary
medical expenses incurred by retirees, after subtracting payments
by Medicare or other providers and after a stated deductible has
been met.  Participants become eligible for the benefits if they
retire from CILCO after reaching age 55 with 10 or more years of
service.  Neither QST Enterprises nor its subsidiaries provide
health care benefits to retired employees.















                                38

Postretirement health care benefit costs were charged as follows:

<TABLE>
<CAPTION>
                                    1998     1997      1996
                                         (In thousands)
<S>                                <C>      <C>       <C>
Operating expenses                 $3,904   $3,989    $5,096
Utility plant and other             1,260    1,825     1,883
                                   ------   ------    ------
  Net postretirement health                                 
    care benefit costs             $5,164   $5,814    $6,979
                                   ======   ======    ======
</TABLE>

The components of net periodic benefit costs follow:

<TABLE>
<CAPTION>
                              1998     1997     1998      1997
                                     (In thousands)
                                                     Other
                            Pension Benefits     Postretirement
                                                    Benefits
<S>                        <C>       <C>       <C>       <C>
Service cost               $  5,410  $  4,384  $  1,417  $  1,298
Interest cost                19,024    17,561     5,371     5,047
Expected return on plan
  assets                    (25,304)  (21,005)   (4,388)   (3,249)
Amortization of transition                                         
  liability (asset)            (888)     (888)    2,858     2,858
Amortization of past                                     
  service cost                1,068     1,068        --        --
Recognized actuarial loss      (197)     (502)      (94)     (140)
                           --------  --------  --------  --------
Net benefit cost           $   (887) $    618  $  5,164  $  5,814
                           ========  ========  ========  ========
Pension Plans with                                       
  Accumulated Benefit                
  Obligations in Excess              
  of Assets
Total projected benefit                                  
  obligation               $ (4,191) $ (3,692)
Total accumulated benefit                                
  obligation               $ (3,582) $ (2,902)
Total fair value of assets $     --  $     --            
                                                         
</TABLE>




















                                 
                                39

Information on the plans' funded status follows:
<TABLE>
<CAPTION>
                              1998        1997      1998     1997     
                                         (In thousands)
                                                       Other
                             Pension Benefits      Postretirement
                                                      Benefits
<S>                        <C>        <C>        <C>       <C>
Change in Benefit                                          
Obligations
Benefit obligation at                                      
  January 1,               $(254,929) $(235,441) $(72,542) $(67,367)
Service cost                  (5,410)    (4,384)   (1,417)   (1,298)
Interest cost                (19,024)   (17,561)   (5,371)   (5,047)
Actuarial (gain) loss        (22,521)   (13,928)   (7,500)   (2,891)
Benefits paid                 16,238     16,385     4,514     4,061
                           ---------  ---------  --------  --------
Benefit obligation at                                      
  December 31,             $(285,646) $(254,929) $(82,316) $(72,542)
                           =========  =========  ========  ========
Change in Plan Assets                                      
Fair value of assets at                                    
  January 1,               $ 289,091  $ 254,824  $ 52,263  $ 39,601
Actual return on assets       36,467     50,489     5,781     9,907
Company contributions            163        163       863     6,816
Participant contributions         --         --        --        --
Benefits paid                (16,238)   (16,385)   (4,514)   (4,061)
                           ---------  ---------  --------  --------
Fair value of assets at                                    
  December 31,             $ 309,483  $ 289,091  $ 54,393  $ 52,263
                           =========  =========  ========  ========
Funded Status at                                           
December 31,
Benefit obligation less                                    
  (greater) than plan
  assets                   $  23,837  $  34,162  $(27,923) $(20,279)
Unrecognized net transition                                           
  liability (asset)           (4,011)    (4,899)   30,297    33,155
Unrecognized actuarial                                     
  (gain) loss                (35,875)   (47,431)   (6,777)  (12,977)
Unrecognized prior                                         
  service cost                 6,365      7,433        --        --
Intangible asset                (415)      (455)       --        --
Accumulated other                                          
  comprehensive income        (1,401)    (1,120)       --        --
                           ---------  ---------  --------  --------
Prepaid (accrued) benefit  
  cost                     $ (11,500) $ (12,310) $ (4,403) $   (101)
                           =========  =========  ========  ========
Assumptions as of                                          
  December 31,
Discount rate                  6.75%      7.25%     6.75%     7.25%
Long-term return on assets     9.00%      8.50%     8.50%     8.50%
Long-term compensation                                     
  increase                     3.50%      4.50%       N/A       N/A
</TABLE>

For measurement purposes, a 7.2 percent annual rate of increase in
the per capita cost of covered health care benefits was assumed
for 1998.  The rate was assumed to decrease gradually to 5.7
percent for 2025 and remain level thereafter.

Increasing the assumed health care cost trend rate by 1% in each
year would increase the accumulated postretirement benefit
obligation at December 31,  1998, by $2.9 million and the
aggregate of the service and interest cost components of net
postretirement health care cost for 1998 by $252,000.  Decreasing
the assumed health care cost trend rate by 1% in each year would
decrease the accumulated postretirement benefit obligation at
December 31,

                                 
                                40

1998, by $3.3 million and the aggregate of the service and
interest cost components of net postretirement health care cost
for 1998 by $295,000.

NOTE 4 - CILCORP SHAREHOLDER RETURN INCENTIVE COMPENSATION PLAN

Under the Company's Shareholder Return Incentive Compensation Plan
(the Plan), eligible key employees of the Company and its
subsidiaries are entitled to receive shares of the Company's
common stock based on a performance methodology established and
periodically amended by the Compensation Committee of the
Company's Board of Directors.  During 1997, 350,000 fully-vested
performance shares were distributed.  Such shares are convertible
into common stock with the number of shares received based upon
the number of performance shares exercised multiplied by the
difference between the average market price of the Company's
common stock for the fifteen days prior to exercise and $36,
divided by the market price of common stock at the exercise date.

The compensation expense recognized under this Plan, based on the
provisions of Statement of Financial Accounting Standards No. 123,
(SFAS 123) was $1.8 million in 1997 when the performance shares
were distributed.  These shares were convertible into common stock
at any time until December 31, 1998 (the Performance Period).  The
fair value of each performance share granted under the Plan was
$5.98 - estimated using the Black-Scholes option-pricing model
assuming a risk-free interest rate of 5.7%, dividend yield of
5.9%, expected life of one year and volatility of 16.1%.

In 1998, the Performance Period for the originally granted
performance shares was extended to December 31, 1999.  No
additional expense was recorded following this extension, as a
revaluation of the fair value of the performance shares per the
provisions of SFAS 123 yielded no material valuation difference
due to the one-year extension.

To the extent that the market price exceeds $56, the Plan
participants are entitled to receive cash in lieu of common stock.
Consequently, the Company recognized expense of $1.75 million in
the fourth quarter 1998 to reflect a share price approximating
$61.

NOTE 5 - SHORT-TERM DEBT

Short-term debt at December 31, 1998, consisted of $55.6 million
of Holding Company bank borrowings and $40.6 million of CILCO
commercial paper.  Short-term debt at December 31, 1997, included
$40.9 million of Holding Company bank borrowings and $21.3 million
of CILCO commercial paper.

The Holding Company had arrangements for bank lines of credit
totaling $60 million at December 31, 1998, of which $55.6 million
was used.  These lines were maintained by commitment fees of 1/8
of 1% per annum in lieu of balances.

CILCO had arrangements for bank lines of credit totaling $45
million at December 31, 1998, all of which were unused.  These
lines of credit were maintained by commitment fees of 1/20 of 1%
per annum in lieu of balances.  These bank lines of credit support
CILCO's issuance of commercial paper.

NOTE 6 - LEVERAGED LEASE INVESTMENTS

The Company, through subsidiaries of CILCORP Investment Management
Inc. (CIM), is a lessor in eight leveraged lease arrangements
under which mining equipment, electric production facilities,
warehouses, office buildings, passenger railway equipment and an
aircraft are leased to third parties.  The economic lives and
lease terms vary with the leases.  CIM's share of total equipment
and facilities cost was approximately $350 million at December 31,
1998, and 1997.

The cost of the equipment and facilities owned by CIM is partially
financed by non-recourse debt provided by lenders, who have been
granted, as their sole remedy in the event of a lessee default, an
assignment of rents due under the

                                 
                                41

leases and a security interest in the leased property.  Such debt
amounted to $232 million at December 31, 1998, and $237 million at
December 31, 1997.  Leveraged lease residual value assumptions,
which are conservative in relation to independently appraised
residual values of the lease portfolio, are tested on a periodic
basis.  In 1998, CIM decreased the estimated residual value of one
of its leases by approximately $6.8 million to reflect current
conditions in the secondary market for the asset.

CIM's net investment in leveraged leases at December 31, 1998 and
1997 is shown below:

<TABLE>
<CAPTION>
                                      1998         1997
                                        (In thousands)
<S>                                  <C>         <C>
Minimum lease payments receivable    $142,095    $136,916
Estimated residual value               87,569      94,368
Less:  Unearned income                 82,674      84,826
                                     --------    --------
Investment in lease financing                            
  receivables                         146,990     146,458
Less:  Deferred taxes arising                            
  from leveraged leases               103,566     101,005
                                     --------    --------
  Net investment in leveraged leases $ 43,424    $ 45,453
                                     ========    ========
</TABLE>

NOTE 7 - PREFERRED STOCK

PREFERRED STOCK OF SUBSIDIARY
<TABLE>
<CAPTION>
At December 31                       1998          1997
                                       (In thousands)
<S>                                 <C>            <C>
Preferred stock, cumulative
$100 par value, authorized
1,500,000 shares
   Without mandatory redemption
   4.50% series - 111,264 shares    $11,126        $11,126
   4.64% series - 79,940 shares       7,994          7,994
Class A, no par value,                                    
  authorized 3,500,000 shares                                        
   Flexible auction rate -           
     250,000 shares (*)              25,000         25,000
   With mandatory redemption                              
   5.85% series - 220,000 shares     22,000         22,000
                                    -------        -------
        Total preferred stock       $66,120        $66,120
                                    =======        =======
<FN>
(*) Dividend rates at December 31, 1998 and 1997, were 4.04 % and
    4.18%, respectively.
</TABLE>

All classes of preferred stock are entitled to receive cumulative
dividends and rank equally as to dividends and assets, according
to their respective terms.

The total annual dividend requirement for preferred stock
outstanding at December 31, 1998, is $3.2 million, assuming a
continuation of the auction dividend rate at December 31, 1998,
for the flexible auction rate series.



                                42

PREFERRED STOCK WITHOUT MANDATORY REDEMPTION

The call provisions of preferred stock redeemable at CILCO's
option outstanding at December 31, 1998, are as follows:

<TABLE>
<CAPTION>
Series    Callable Price Per Share (plus accrued dividends)
<S>                          <C>
4.50%                        $110
4.64%                        $102
Flexible Auction Rate        $100
</TABLE>

PREFERRED STOCK WITH MANDATORY REDEMPTION

CILCO's 5.85% Class A preferred stock may be redeemed in 2003 at
$100 per share.  A mandatory redemption fund must be established
on July 1, 2003.  The fund will provide for the redemption of
11,000 shares for $1.1 million on July 1 of each year through July
1, 2007.  On July 1, 2008, the remaining 165,000 shares will be
retired for $16.5 million.

PREFERENCE STOCK OF SUBSIDIARY, CUMULATIVE

No Par Value, Authorized 2,000,000 shares, of which none have been
issued.

PREFERRED STOCK OF HOLDING COMPANY

No Par Value, Authorized 4,000,000 shares, of which none were
outstanding at December 31, 1998 and 1997.

COMMON STOCK RIGHTS

On October 29, 1996, the Board of Directors of CILCORP authorized
and declared a dividend distribution of one right for each share
of common stock of the Company to stockholders of record at
November 12, 1996, and for each share of common stock issued
thereafter.  Each right gives the stockholder the right to
purchase one one-hundredth of a share of preferred stock of the
Company for $100, subject to the conditions set forth in the
agreement governing the rights plan.

























                                43

NOTE 8 - LONG-TERM DEBT

<TABLE>
<CAPTION>
At December 31                        1998           1997
                                         (In thousands)
<S>                                <C>            <C>
CILCO first mortgage bonds
   7 1/2% series due 2007          $ 50,000       $ 50,000
   8 1/5% series due 2022            65,000         65,000
Medium-term notes
   6.4% series due 2000              30,000         30,000
   6.82% series due 2003             25,350         25,350
  6.13% series due 2005              16,000         16,000
  7.8% series due 2023               10,000         10,000
  7.73% series due 2025              20,000         20,000
Pollution control refunding bonds          
   6.5% series F due 2010             5,000          5,000
   6.2% series G due 2012             1,000          1,000
   6.5% series E due 2018            14,200         14,200
   5.9% series H due 2023            32,000         32,000
                                   --------       --------
                                    268,550        268,550
Unamortized premium and discount                
  on long-term debt, net               (666)          (714)
                                   --------       --------
     Total CILCO                   $267,884       $267,836
                                   --------       --------
CILCORP Inc. Unsecured medium-term               
notes; various maturities in 2001;              
interest rates ranging from 8.52%               
to 9.10%                             17,500         30,500
Other                                   168            192
                                   --------       --------
    Total long-term debt           $285,552       $298,528
                                   ========       ========
</TABLE>

CILCO's first mortgage bonds are secured by a lien on
substantially all of its property and franchises.  Unamortized
borrowing expense, premium and discount on outstanding long-term
debt are being amortized over the lives of the respective issues.

Total consolidated maturities of long-term debt for 2000-2003 are
as follows:  $30 million in 2000, $18 million in 2001, no debt due
in 2002, and $25 million in 2003.  The remaining maturities of
long-term debt of $214 million, occur in 2004 and beyond.

The 1999 and 1998 maturities of long-term borrowings have been
classified as current liabilities.

NOTE 9 - COMMITMENTS & CONTINGENCIES

CILCO's 1999 capital expenditures are estimated to be
$56.6 million in connection with which CILCO has normal and
customary purchase commitments at December 31, 1998.

CILCO acts as a self-insurer for certain insurable risks resulting
from employee health and life insurance programs.

The International Brotherhood of Electrical Workers Local 51
(IBEW) ratified its current agreement on October 10, 1997.  The
contract expires on July 1, 2000.  The IBEW represents
approximately 389 CILCO gas and electric department employees.
The National Conference of Firemen and Oilers Local 8 (NCF&O)


                                44

ratified its current contract with the Company on October 23,
1998.  CILCO's previous contract with the NCF&O expired on July 1,
1998, and the NCF&O membership had been working without a contract
since that time.  The new contract expires on July 1, 2001.  The
NCF&O represents approximately 200 CILCO power plant employees.

In August 1990, CILCO entered into a firm, wholesale power
purchase agreement with Central Illinois Public Service Company,
now AmerenCIPS (CIPS).  This agreement provided for a minimum
contract delivery rate from CIPS of 90 MW until the contract
expired in May 1998.

In March 1995, CILCO and CIPS amended a limited-term power
agreement reached in November 1992.  This agreement, which now
expires in May 2009, provides for CILCO to purchase up to 150 MW
of CIPS' capacity from June 1998 through May 2002, and 50 MW from
June 2002 through May 2009.

In January 1997, CILCO intervened in a proceeding before the
Federal Energy Regulatory Commission (FERC) to raise contract
issues relating to CIPS' proposal to engage with a second utility
in joint dispatch of their respective generating units.  CILCO
also challenged the validity of the power agreements with CIPS
because of CIPS' failure to obtain FERC approval of the
agreements.  In the alternative, CILCO requested that FERC provide
an "open season" during which CILCO may cancel the power
agreements in whole or in part.  In an October 1997 order, FERC
rejected CILCO's challenges to joint dispatch and denied CILCO's
request for an open season.  However, CIPS was ordered to file the
agreements with FERC and, on its own motion, FERC initiated a
separate proceeding to investigate the terms of the agreements.
Hearings in that proceeding have concluded, and the Administrative
Law Judge has entered an order finding the agreements are, with
minor exceptions, just and reasonable.  CILCO is appealing that
order to FERC and is requesting FERC to assess penalties against
CIPS for CIPS' failure to file the 1990 agreement before providing
service to CILCO under that agreement.  FERC's October 1997 order
failed to address certain contract issues raised by CILCO.  FERC
denied rehearing of that order in February 1998, and CILCO has
appealed to the United States Court of Appeals for the District of
Columbia Circuit for a review of FERC's orders concerning the CIPS
agreements.  CILCO also filed a separate complaint at FERC in
December 1998, challenging the manner in which CIPS is performing,
or failing to perform, under the agreements and has notified CIPS
that CILCO considers CIPS to be in default under the agreements.
On the ground that CIPS is in default regarding performance under
the 1992 agreement, CILCO suspended capacity reservation payments
to CIPS under the agreements as of January 21, 1999.  CILCO cannot
predict how FERC or the Court will ultimately rule on the issues
pending before them.  If CILCO's position is not upheld on certain
issues, CILCO could be required to pay the suspended capacity
reservation charges which are currently $865,000 per month, plus
interest, to CIPS.  While the capacity payments are suspended,
CILCO is purchasing power and energy from other sources.

Reference is made to Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental
Matters (regarding former gas manufacturing sites) for a
discussion of that item.

NOTE 10 - QST ENTERPRISES DISCONTINUED OPERATIONS

Due to uncertainties related to energy deregulation across the
country, the illiquidity of certain energy markets and its pending
acquisition by AES, the Company will focus in the future on the
opportunities in the Illinois energy market resulting from the
deregulation of electricity under the Electric Service Customer
Choice and Rate Relief Law of 1997 (see Management's Discussion
and  Analysis - Competition).  As a result, the Company decided in
the fourth quarter of 1998 to sell its 100% ownership interest in
QST Environmental Inc., a first-tier subsidiary of QST providing
environmental consulting and engineering services.  In August
1998, QST sold its wholly-owned fiber optic-based
telecommunications subsidiary, QST Communications, for $20 million
cash and

                                 
                                45

stock options valued at $5.5 million.  Since incurring material
losses in the wholesale electricity market in June 1998 and
subsequent losses in its energy operations outside of Illinois,
QST Energy has transferred its Pennsylvania retail customers to
other marketers, ceased its Houston-based energy trading
operations, and has begun an effort to negotiate an end to its
obligation to provide electricity to its non-Illinois customers.
Accordingly, the operations of QST Enterprises and its
subsidiaries are shown as discontinued operations in the
statements of income.  The Company's investment in QST
Enterprises, as of December 31, 1998, on the accompanying
consolidated balance sheet, consists primarily of $17.4 million in
working capital, $6.9 million in fixed assets and $6.3 million of
investments and other assets.  Prior year financial statements,
which also include the discontinued operations of ESE Land
Corporation (sold by QST Environmental in November 1997, for $9.5
million and residual interests in three limited liability
corporations), have been reclassified to conform to the current
year presentation.

NOTE 11 - LEASES

The Company and its subsidiaries lease certain equipment,
buildings and other facilities under capital and operating leases.
Several of the operating leases provide that the Company pay
taxes, maintenance and other occupancy costs applicable to these
premises.

Minimum future rental payments under non-cancellable capital and
operating leases having remaining terms in excess of one year as
of December 31, 1998, are $19.9 million in total.  Payments due
during the years ending December 31, 1999, through December 31,
2003, are $8.1 million, $5.6 million, $3.4 million, $1.9 million
and $.5 million, respectively.

NOTE 12 - FINANCIAL INSTRUMENTS AND PRICE RISK MANAGEMENT

CILCORP utilizes commodity futures contracts, options and swaps in
the normal course of its natural gas business activities.
However, it does not currently utilize these instruments to hedge
its electric purchase and sale transactions or to participate in
energy trading activities.  Gains and losses arising from
derivative financial instrument transactions which hedge the
impact of fluctuations in energy prices are recognized in income
concurrent with the related purchases and sales of the commodity.
If a derivative financial instrument contract is terminated
because it is probable that a transaction or forecasted
transaction will not occur, any gain or loss as of such date is
immediately recognized.  If a derivative financial instrument
contract is terminated early for other economic reasons, any gain
or loss as of the termination date is deferred and recorded
concurrently with the related purchase and sale of natural gas.
CILCORP is subject to commodity price risk for deregulated sales
to the extent that energy is sold under firm price commitments.
Due to market conditions, at times CILCORP may have unmatched
commitments to purchase and sell energy on a price and quantity
basis.  Physical and derivative financial instruments give rise to
market risk, which represents the potential loss that can be
caused by a change in the market value of a particular commitment.
Market risks are actively monitored to ensure compliance with the
Company's risk management policies, including limits to the
Company's total net exposure at any time.

The net loss reflected in operating results from derivative
financial instruments was $2.2 million for the year 1998.  As of
December 31, 1998, CILCORP had fixed-price derivative financial
instruments representing hedges of natural gas purchases of 5.6
Bcf and natural gas sales of 7.2 Bcf for commitments through
September 1999.  The net deferred loss and carrying amount on
these fixed-price derivatives at December 31, 1998 was $.9
million.  At December 31, 1998, CILCORP had open positions in
derivative financial instruments used to hedge basis of 1.0 Bcf
for commitments through October 1999.  The net deferred loss on
these basis derivatives at December 31, 1998, was $.1 million.



                                46

NOTE 13 - EARNINGS PER SHARE

The following data show the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock.  The shares calculated
for dilutive potential result from the CILCORP Shareholder Return
Incentive Compensation Plan.

<TABLE>
<CAPTION>
                                              1998        1997
                                               (In thousands)
<S>                                          <C>         <C>
Income available to common shareholders      $16,310     $16,395
                                                        
Weighted average number of common shares                
  used in Basic Earnings Per Share            13,611      13,611
Weighted number of dilutive potential common                  
  stock used in Diluted Earnings Per Share        96          16
</TABLE>

The Company adopted Statement of Financial Accounting Standards
No. 128, Earnings Per Share, beginning with the year ended
December 31, 1997.  Restatement of 1996 is not applicable as no
potential common stock dilution occurred until 1997.









































                                 
                                47

NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following quarterly operating results are unaudited, but, in
the opinion of management, include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of
the Company's operating results for the periods indicated.  The
results of operations for each of the fiscal quarters
are not necessarily comparable to, or indicative of, the results
of an entire year due to the seasonal nature of the Company's
business and other factors.

<TABLE>
<CAPTION>
For the Three Months Ended
                       March 31   June 30  September 30 December 31
                         (In thousands except per share amounts)
<S>                    <C>        <C>        <C>        <C>
1998                                                    
Revenue                $154,274   $121,435   $141,143   $142,172
Income from continuing                                            
  operations before
  income taxes           17,566     10,254     29,020      1,077
Income taxes              6,250      2,519     10,983        (53)
Net income from                                         
  continuing operations  11,316      7,735     18,037      1,130
Loss from operations of                                   
  discontinued                                       
  business, net of tax                                     
  of $(2,355), $(5,512),                                        
  $(2,354), $(6,057)     (3,622)    (8,423)    (3,620)    (9,360)
Gain (loss) on                                          
  sale/disposal of                                      
  assets of                                             
  discontinued                                            
  business, net of
  tax of $5,425,
  $(3,411)                   --         --      8,252     (5,135)
                                                        
Net income (loss)      $  7,694   $   (688)  $ 22,669   $(13,365)
                                                        
Earnings per average                                    
  common share -       
  basic
   Continuing
    operations           $ 0.83     $ 0.57     $ 1.33     $ 0.08
   Discontinued
    operations            (0.27)     (0.62)      0.34      (1.06)
Net income (loss)        $ 0.56     $(0.05)    $ 1.67     $(0.98)
Earnings per average                                    
  common share -
  diluted
   Continuing
    operations           $ 0.83     $ 0.56      $1.32     $ 0.08
   Discontinued
    operations            (0.27)     (0.61)      0.34      (1.06)
Net income (loss)        $ 0.56     $(0.05)     $1.66     $(0.98)

1997                                                    
Revenue                $168,595   $113,610   $125,050   $150,705
Income from                                             
  continuing                                              
  operations before
  income taxes           16,793     10,889     23,966     14,410
Income taxes              5,254      3,559      8,858      4,678
Net income from                                         
  continuing                                            
  operations before                                     
  extraordinary item     11,539      7,330     15,108      9,732
Loss from operations                                    
  of discontinued                                       
  business, net of                                      
  tax of $(1,060),                                        
  $(842), $(1,195),
  $(4,201)               (1,820)    (1,513)    (2,034)    (28,759)
Gain on sale of                                         
  assets of                                               
  discontinued 
  business, net of
  tax of $1,889              --         --         --       2,712


                                48

Extraordinary item           --         --         --       4,100
                                                        
Net income (loss)      $  9,719   $  5,817   $ 13,074    $(12,215)
                                                        
Earnings per average                                    
  common share -
  basic
   Continuing  
    operations           $ 0.85     $ 0.54     $ 1.11      $ 0.71
   Discontinued
    operations            (0.14)     (0.11)     (0.15)      (1.91)
   Extraordinary item        --         --         --        0.30
Net income (loss)        $ 0.71     $ 0.43     $ 0.96      $(0.90)
Earnings per average                                    
  common share -       
  diluted
   Continuing
    operations           $ 0.85     $ 0.54     $ 1.11      $ 0.71
   Discontinued
    operations            (0.14)     (0.11)     (0.15)      (1.91)
   Extraordinary item        --         --         --         .30
Net income (loss)        $ 0.71     $ 0.43     $ 0.96      $(0.90)
</TABLE>















































                                 

                                49