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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

AMENDMENT NO. 1



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from              to



Commission file number: 000-29311



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DYNEGY HOLDINGS INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3248415                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1000 Louisiana,
Suite 5800

Houston, Texas 77002

(Address of principal executive offices)

(Zip Code)



(713) 507-6400

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



All of the registrants outstanding common stock is owned, directly or indirectly by Dynegy Inc.



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DYNEGY HOLDINGS INC.



TABLE OF
CONTENTS



|                                 |  |                                                                                                                            |  |                                              |  |     
|-------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  | ----
|                                 |  |                                                                                                                            |  |                                              |  | Page
|PART I.    FINANCIAL INFORMATION |  |                                                                                                                           
|                                 |  |                                                                                                                            | 
|                                 |  | Item 1.                                                                                                                    |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: |  |     
|                                 |  | Condensed Consolidated Balance Sheets (Restated):June 30, 2004 and December 31, 2003                                       |  | 4                                           
|                                 |  | Condensed Consolidated Statements of Operations:For the three and six months ended June 30, 2004 and 2003                  |  | 5                                           
|                                 |  | Condensed Consolidated Statements of Cash Flows:For the six months ended June 30, 2004 and 2003                            |  | 6                                           
|                                 |  | Condensed Consolidated Statements of Comprehensive Income (Loss):For the three and six months ended June 30, 2004 and 2003 |  | 7                                           
|                                 |  | Notes to Condensed Consolidated Financial Statements                                                                       |  | 8                                           
|                                 |  |                                                                                                                            | 
|                                 |  | Item 4.                                                                                                                    |  | CONTROLS AND PROCEDURES                      |  | 36  
|                                 | 
|PART II.    OTHER INFORMATION    |  |                                                                                                                           
|                                 |  |                                                                                                                            | 
|                                 |  | Item 6.                                                                                                                    |  | EXHIBITS AND REPORTS ON FORM 8-K             |  | 38  



INTRODUCTORY NOTE



Dynegy Holdings Inc. is filing this Amendment No. 1 on
Form 10-Q/A (Amendment No. 1) to reflect the effect of a $292 million increase to our deferred income tax liability at December 31, 2003 resulting from our tax basis balance sheet review on our historical unaudited condensed consolidated
financial statements and related information, as reported in our Quarterly Report on Form 10-Q for the period ended June 30, 2004, which was originally filed on August 13, 2004 (the Original Filing).



The aforementioned item is discussed in more detail in the Explanatory Note
to the accompanying unaudited condensed consolidated financial statements beginning on page 8. Revised financial information for the periods presented reflecting these restatements was previously disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2003, which was most recently amended by Amendment No. 1 thereto filed with the SEC on January 25, 2005 (the Form 10-K/A). The restated financial and other information included in this Amendment No. 1 should be
read together with the Form 10-K/A. The following Items of the Original Filing are amended by this Amendment No. 1:



| | Item 1. | Condensed Consolidated Financial Statements
| | ------- | -------------------------------------------



| | Item 4. | Controls and Procedures
| | ------- | -----------------------



| | Item 6. | Exhibits and Reports on Form 8-K
| | ------- | --------------------------------



Unaffected items have not been repeated in this Amendment No. 1.



PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS AMENDMENT NO. 1, INCLUDING THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO, DOES NOT REFLECT EVENTS OCCURRING AFTER THE DATE OF THE ORIGINAL FILING. SUCH EVENTS INCLUDE, AMONG OTHERS, THE EVENTS DESCRIBED IN OUR QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2004 AND THE EVENTS SUBSEQUENTLY
DESCRIBED IN OUR CURRENT REPORTS ON FORM 8-K. FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE AUGUST 13, 2004, INCLUDING OUR QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2004, OUR CURRENT
REPORTS ON FORM 8-K AND ANY AMENDMENTS THERETO.



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DEFINITIONS



As used in this Form 10-Q/A, the abbreviations listed below have the following meanings:



|                |  |                                                                                                                                                                    
|--------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ARO             |  | Asset retirement obligation                                                                                                                                        
|Bbtu/d          |  | Billions of British thermal units per day                                                                                                                          
|Cal ISO         |  | The California Independent System Operator                                                                                                                         
|Cal PX          |  | The California Power Exchange                                                                                                                                      
|CDWR            |  | California Department of Water Resources                                                                                                                           
|CFTC            |  | Commodity Futures Trading Commission                                                                                                                               
|CPUC            |  | California Public Utilities Commission                                                                                                                             
|CRM             |  | Our customer risk management business segment                                                                                                                      
|$/Bbl           |  | Dollars per barrel                                                                                                                                                 
|$/Gal           |  | Dollars per gallon                                                                                                                                                 
|DMG             |  | Dynegy Midwest Generation, Inc.                                                                                                                                    
|DMS             |  | Dynegy Midstream Services                                                                                                                                          
|DPM             |  | Dynegy Power Marketing Inc.                                                                                                                                        
|Dynegy          |  | Dynegy Inc., our parent company, together with its subsidiaries                                                                                                    
|EITF            |  | Emerging Issues Task Force                                                                                                                                         
|EPA             |  | Environmental Protection Agency                                                                                                                                    
|ERCOT           |  | Electric Reliability Council of Texas, Inc.                                                                                                                        
|ERISA           |  | The Employee Retirement Income Security Act of 1974, as amended                                                                                                    
|FASB            |  | Financial Accounting Standards Board                                                                                                                               
|FERC            |  | Federal Energy Regulatory Commission                                                                                                                               
|FIN             |  | FASB Interpretation                                                                                                                                                
|Form 10-K       |  | Our Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004, as amended by Amendment No. 1 on Form 10-K/A filed on January 25, 2005
|Form 10-K/A     |  | Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2003, filed on January 25, 2005                                                  
|Form 10-Q/A     |  | Amendment No. 1 to our Form 10-Q for the quarter ended June 30, 2004                                                                                               
|GAAP            |  | Accounting principles generally accepted in the United States of America                                                                                           
|Illinois Power  |  | Illinois Power Company                                                                                                                                             
|GEN             |  | Our power generation business segment                                                                                                                              
|ICC             |  | Illinois Commerce Commission                                                                                                                                       
|kW-yr           |  | Kilowatts per year                                                                                                                                                 
|LNG             |  | Liquefied natural gas                                                                                                                                              
|MBbls/d         |  | Thousands of barrels per day                                                                                                                                       
|MMBtu           |  | Millions of British thermal units                                                                                                                                  
|MMCFD           |  | Million cubic feet per day                                                                                                                                         
|MW              |  | Megawatt                                                                                                                                                           
|MWh             |  | Megawatt hour                                                                                                                                                      
|NGL             |  | Our natural gas liquids business segment                                                                                                                           
|NOV             |  | Notice of Violation                                                                                                                                                
|NSPS            |  | New Source Performance Standard                                                                                                                                    
|Original Filing |  | Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed on August 13, 2004                                                                    
|PSD             |  | Prevention of Significant Deterioration                                                                                                                            
|SEC             |  | U.S. Securities and Exchange Commission                                                                                                                            
|SFAS            |  | Statement of Financial Accounting Standards                                                                                                                        
|SPE             |  | Special Purpose Entity                                                                                                                                             
|VaR             |  | Value at Risk                                                                                                                                                      
|VIE             |  | Variable Interest Entity                                                                                                                                           



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions)

See Explanatory Note



|                                                                                           |  |               |        |   |                   |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                           |  | June 30, 2004 |        |   | December 31, 2003 |  
|                                                                                           |  | (Restated)    |       
|ASSETS                                                                                     |  |               |        |   |                   |   |        |  
|Current Assets                                                                             |  |               |        |   |                   |   |        |  
|Cash and cash equivalents                                                                  |  | $             | 695    |   |                   | $ | 328    |  
|Accounts receivable, net of allowance for doubtful accounts of $152 and $174, respectively |  |               | 753    |   |                   |   | 806    |  
|Accounts receivable, affiliates                                                            |  |               | 428    |   |                   |   | 338    |  
|Inventory                                                                                  |  |               | 218    |   |                   |   | 194    |  
|Assets from risk-management activities                                                     |  |               | 887    |   |                   |   | 818    |  
|Prepayments and other current assets                                                       |  |               | 420    |   |                   |   | 324    |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Total Current Assets                                                                       |  |               | 3,401  |   |                   |   | 2,808  |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Property, Plant and Equipment                                                              |  |               | 7,736  |   |                   |   | 7,691  |  
|Accumulated depreciation                                                                   |  |               | (1,549 | ) |                   |   | (1,389 | )
|                                                                                           |  |               |        |   |                   |   |        |  
|Property, Plant and Equipment, Net                                                         |  |               | 6,187  |   |                   |   | 6,302  |  
|Other Assets                                                                               |  |               |        |   |                   |   |        |  
|Unconsolidated investments                                                                 |  |               | 595    |   |                   |   | 577    |  
|Assets from risk-management activities                                                     |  |               | 671    |   |                   |   | 629    |  
|Goodwill                                                                                   |  |               | 15     |   |                   |   | 15     |  
|Other long-term assets                                                                     |  |               | 184    |   |                   |   | 146    |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Total Assets                                                                               |  | $             | 11,053 |   |                   | $ | 10,477 |  
|                                                                                           |  |               |        |   |                   |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                       |  |               |        |   |                   |   |        |  
|Current Liabilities                                                                        |  |               |        |   |                   |   |        |  
|Accounts payable                                                                           |  | $             | 585    |   |                   | $ | 631    |  
|Accounts payable, affiliates                                                               |  |               | 77     |   |                   |   | 74     |  
|Accrued liabilities and other current liabilities                                          |  |               | 498    |   |                   |   | 415    |  
|Liabilities from risk-management activities                                                |  |               | 944    |   |                   |   | 838    |  
|Notes payable and current portion of long-term debt                                        |  |               | 81     |   |                   |   | 79     |  
|Current portion of long-term debt to affiliates                                            |  |               | 78     |   |                   |   | 71     |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Total Current Liabilities                                                                  |  |               | 2,263  |   |                   |   | 2,108  |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Long-term debt                                                                             |  |               | 4,014  |   |                   |   | 3,464  |  
|Long-term debt to affiliates                                                               |  |               | 200    |   |                   |   | 200    |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Long-Term Debt                                                                             |  |               | 4,214  |   |                   |   | 3,664  |  
|Other Liabilities                                                                          |  |               |        |   |                   |   |        |  
|Liabilities from risk-management activities                                                |  |               | 762    |   |                   |   | 746    |  
|Deferred income taxes                                                                      |  |               | 232    |   |                   |   | 186    |  
|Other long-term liabilities                                                                |  |               | 312    |   |                   |   | 492    |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Total Liabilities                                                                          |  |               | 7,783  |   |                   |   | 7,196  |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Minority Interest                                                                          |  |               | 120    |   |                   |   | 121    |  
|Commitments and Contingencies (Note 8)                                                     |  |               |        |   |                   |   |        |  
|Stockholders Equity                                                                       |  |               |        |   |                   |   |        |  
|Additional paid-in capital                                                                 |  |               | 2,419  |   |                   |   | 2,419  |  
|Accumulated other comprehensive income (loss), net of tax                                  |  |               | (15    | ) |                   |   | 33     |  
|Accumulated deficit                                                                        |  |               | (286   | ) |                   |   | (324   | )
|Stockholders equity                                                                       |  |               | 1,032  |   |                   |   | 1,032  |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Total Stockholders Equity                                                                 |  |               | 3,150  |   |                   |   | 3,160  |  
|                                                                                           |  |               |        |   |                   |   |        |  
|Total Liabilities and Stockholders Equity                                                 |  | $             | 11,053 |   |                   | $ | 10,477 |  
|                                                                                           |  |               |        |   |                   |   |        |  



See the notes to
condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited) (in millions)



|                                                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                            |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                                            |  | 2004                       |       |   | 2003                     |   |        | 2004 |  |   | 2003   |  
|Revenues                                                                    |  | $                          | 1,231 |   |                          | $ | 859    |      |  | $ | 2,558  |   |  | $ | 2,400  |  
|Cost of sales, exclusive of depreciation shown separately below             |  |                            | (970  | ) |                          |   | (1,083 | )    |  |   | (2,120 | ) |  |   | (2,360 | )
|Depreciation and amortization expense                                       |  |                            | (82   | ) |                          |   | (84    | )    |  |   | (160   | ) |  |   | (168   | )
|Impairment and other charges                                                |  |                            | (17   | ) |                          |   |       |      |  |   | (27    | ) |  |   | 7      |  
|Gain on sale of assets, net                                                 |  |                            | 36    |   |                          |   | 14     |      |  |   | 53     |   |  |   | 15     |  
|General and administrative expenses                                         |  |                            | (85   | ) |                          |   | (111   | )    |  |   | (138   | ) |  |   | (170   | )
|                                                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating income (loss)                                                     |  |                            | 113   |   |                          |   | (405   | )    |  |   | 166    |   |  |   | (276   | )
|Earnings from unconsolidated investments                                    |  |                            | 52    |   |                          |   | 37     |      |  |   | 91     |   |  |   | 89     |  
|Interest expense                                                            |  |                            | (102  | ) |                          |   | (68    | )    |  |   | (190   | ) |  |   | (136   | )
|Other income and expense, net                                               |  |                            | (7    | ) |                          |   | 3      |      |  |   | 6      |   |  |   | 13     |  
|Minority interest income (expense)                                          |  |                            | (7    | ) |                          |   | (8     | )    |  |   | (9     | ) |  |   | 9      |  
|Accumulated distributions associated with trust preferred securities        |  |                            |      |   |                          |   | (4     | )    |  |   |       |   |  |   | (8     | )
|                                                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes                |  |                            | 49    |   |                          |   | (445   | )    |  |   | 64     |   |  |   | (309   | )
|Income tax benefit (expense) (Note 11)                                      |  |                            | (13   | ) |                          |   | 165    |      |  |   | (19    | ) |  |   | 115    |  
|                                                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                    |  |                            | 36    |   |                          |   | (280   | )    |  |   | 45     |   |  |   | (194   | )
|Loss from discontinued operations, net of taxes (Notes 2 and 11)            |  |                            | (19   | ) |                          |   |       |      |  |   | (7     | ) |  |   | (10    | )
|                                                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before cumulative effect of change in accounting principles   |  |                            | 17    |   |                          |   | (280   | )    |  |   | 38     |   |  |   | (204   | )
|Cumulative effect of change in accounting principles, net of taxes (Note 1) |  |                            |      |   |                          |   |       |      |  |   |       |   |  |   | 57     |  
|                                                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                           |  | $                          | 17    |   |                          | $ | (280   | )    |  | $ | 38     |   |  | $ | (147   | )
|                                                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  





See the notes to condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)



|                                                                                        |  |                           |      |   |      |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------- | ---- | - | ---- | - | ------ | -
|                                                                                        |  | Six Months Ended June 30, |     
|                                                                                        |  | 2004                      |      |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                           |      |   |      |   |        |  
|Net income (loss)                                                                       |  | $                         | 38   |   |      | $ | (147   | )
|Adjustments to reconcile net income (loss) to net cash flows from operating activities: |  |                           |      |   |      |   |        |  
|Depreciation and amortization                                                           |  |                           | 184  |   |      |   | 189    |  
|Impairment and other charges                                                            |  |                           | 27   |   |      |   |       |  
|Earnings from unconsolidated investments, net of cash distributions                     |  |                           | (18  | ) |      |   | (21    | )
|Risk-management activities                                                              |  |                           | (44  | ) |      |   | 285    |  
|Gain on sale of assets, net                                                             |  |                           | (53  | ) |      |   | (15    | )
|Deferred income taxes                                                                   |  |                           | 44   |   |      |   | (118   | )
|Cumulative effect of change in accounting principles (Note 1)                           |  |                           |     |   |      |   | (57    | )
|Liability associated with gas transportation contracts (Note 2)                         |  |                           | (148 | ) |      |   |       |  
|Other                                                                                   |  |                           | (1   | ) |      |   | 4      |  
|Changes in working capital:                                                             |  |                           |      |   |      |   |        |  
|Accounts receivable                                                                     |  |                           | 53   |   |      |   | 1,494  |  
|Inventory                                                                               |  |                           | (19  | ) |      |   | 91     |  
|Prepayments and other assets                                                            |  |                           | (108 | ) |      |   | 552    |  
|Accounts payable and accrued liabilities                                                |  |                           | (53  | ) |      |   | (2,086 | )
|Changes in non-current assets and liabilities, net                                      |  |                           | (6   | ) |      |   | 20     |  
|                                                                                        |  |                           |      |   |      |   |        |  
|Net cash provided by (used in) operating activities                                     |  |                           | (104 | ) |      |   | 191    |  
|                                                                                        |  |                           |      |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                           |      |   |      |   |        |  
|Capital expenditures                                                                    |  |                           | (90  | ) |      |   | (121   | )
|Affiliate transactions                                                                  |  |                           | (36  | ) |      |   | 164    |  
|Proceeds from asset sales, net                                                          |  |                           | 65   |   |      |   | 43     |  
|                                                                                        |  |                           |      |   |      |   |        |  
|Net cash provided by (used in) investing activities                                     |  |                           | (61  | ) |      |   | 86     |  
|                                                                                        |  |                           |      |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                           |      |   |      |   |        |  
|Net proceeds from long-term borrowings                                                  |  |                           | 581  |   |      |   | 159    |  
|Repayments of long-term borrowings                                                      |  |                           | (39  | ) |      |   | (277   | )
|Net cash flow from commercial paper and revolving lines of credit                       |  |                           |     |   |      |   | (128   | )
|Other financing, net                                                                    |  |                           | (9   | ) |      |   |       |  
|                                                                                        |  |                           |      |   |      |   |        |  
|Net cash provided by (used in) financing activities                                     |  |                           | 533  |   |      |   | (246   | )
|                                                                                        |  |                           |      |   |      |   |        |  
|Effect of exchange rate changes on cash                                                 |  |                           | (1   | ) |      |   | 7      |  
|Net increase in cash and cash equivalents                                               |  |                           | 367  |   |      |   | 38     |  
|Cash and cash equivalents, beginning of period                                          |  |                           | 328  |   |      |   | 633    |  
|                                                                                        |  |                           |      |   |      |   |        |  
|Cash and cash equivalents, end of period                                                |  | $                         | 695  |   |      | $ | 671    |  
|                                                                                        |  |                           |      |   |      |   |        |  



See the notes to
condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited) (in millions)



|                                                                                                           |  |                             |     |   |      |   |      |  
|---------------------------------------------------------------------------------------------------------- |  | --------------------------- | --- | - | ---- | - | ---- | -
|                                                                                                           |  | Three Months Ended June 30, |    
|                                                                                                           |  | 2004                        |     |   | 2003 |  
|Net income (loss)                                                                                          |  | $                           | 17  |   |      | $ | (280 | )
|Cash flow hedging activities, net:                                                                         |  |                             |     |   |      |   |      |  
|Unrealized mark-to-market gains arising during period, net                                                 |  |                             | 5   |   |      |   | 33   |  
|Reclassification of mark-to-market losses (gains) to earnings, net                                         |  |                             | 9   |   |      |   | (2   | )
|                                                                                                           |  |                             |     |   |      |   |      |  
|Changes in cash flow hedging activities, net (net of tax expense of $8 and $18, respectively)              |  |                             | 14  |   |      |   | 31   |  
|Foreign currency translation adjustments                                                                   |  |                             | 1   |   |      |   | 2    |  
|                                                                                                           |  |                             |     |   |      |   |      |  
|Other comprehensive income, net of tax                                                                     |  |                             | 15  |   |      |   | 33   |  
|                                                                                                           |  |                             |     |   |      |   |      |  
|Comprehensive income (loss)                                                                                |  | $                           | 32  |   |      | $ | (247 | )
|                                                                                                           |  |                             |     |   |      |   |      |  
|                                                                                                           | 
|                                                                                                           |  | Six Months Ended June 30,   |    
|                                                                                                           |  | 2004                        |     |   | 2003 |  
|Net income (loss)                                                                                          |  | $                           | 38  |   |      | $ | (147 | )
|Cash flow hedging activities, net:                                                                         |  |                             |     |   |      |   |      |  
|Unrealized mark-to-market gains (losses) arising during period, net                                        |  |                             | (53 | ) |      |   | 45   |  
|Reclassification of mark-to-market losses (gains) to earnings, net                                         |  |                             | 20  |   |      |   | (21  | )
|                                                                                                           |  |                             |     |   |      |   |      |  
|Changes in cash flow hedging activities, net (net of tax benefit (expense) of $20 and ($14), respectively) |  |                             | (33 | ) |      |   | 24   |  
|Foreign currency translation adjustments                                                                   |  |                             | (15 | ) |      |   | 9    |  
|                                                                                                           |  |                             |     |   |      |   |      |  
|Other comprehensive income (loss), net of tax                                                              |  |                             | (48 | ) |      |   | 33   |  
|                                                                                                           |  |                             |     |   |      |   |      |  
|Comprehensive loss                                                                                         |  | $                           | (10 | ) |      | $ | (114 | )
|                                                                                                           |  |                             |     |   |      |   |      |  





See the notes to condensed consolidated financial statements.



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DYNEGY HOLDINGS INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and Restated)

For the Interim Periods Ended June 30, 2004 and 2003



PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT REFLECT EVENTS OCCURRING AFTER AUGUST 13, 2004 (THE DATE OF THE ORIGINAL
FILING).    FOR A DESCRIPTION OF THESE EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE AUGUST 13, 2004, INCLUDING OUR QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2004, OUR CURRENT REPORTS ON
FORM 8-K AND ANY AMENDMENTS THERETO.



EXPLANATORY NOTE



This Amendment No. 1 to our Quarterly Report on Form 10-Q
for the period ended June 30, 2004 includes restatements related to our audited consolidated financial statements as of December 31, 2003 and our unaudited condensed consolidated financial statements for the periods ended June 30, 2004 and 2003. On
January 25, 2005, we filed Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The Form 10-K/A also included restated financial information for the period ended June 30, 2003. The restatements relate our
deferred income tax accounts. Specifically, the restatements are as follows:



Deferred Income Tax Accounts. As discussed in the Form 10-K/A, and as previously disclosed in the Original Filing, we undertook an evaluation of our tax accounting and reconciliation controls and
processes, including a tax basis balance sheet review, which we have recently completed. Through this initiative, we have determined that adjustments related to our deferred income tax accounts in periods prior to 2004 are required. These
adjustments primarily related to errors associated with accounting for acquisitions, incorrect classification of goodwill impairments as permanent differences for purposes of calculating the tax provision and other items. As a result of these
errors, adjustments were also made to goodwill, accounts receivable (payable), affiliates and other long-term liabilities accounts.



This restatement has no effect on our previously reported net income (loss) or cash flows for the three and six months ended June 30, 2004 or 2003.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Balance Sheet Summary.The table below summarizes the effects of the restatement on our
December 31, 2003 and June 30, 2004 balance sheets:



|                                         |  |               |        |   |                  |   |        |  
|---------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                         |  | June 30,2004  |        |   | December 31,2003 |  
|                                         |  | (in millions) |       
|Accounts receivable, affiliates          |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 18     |   |                  | $ | 25     |  
|Restatement                              |  |               | 410    |   |                  |   | 313    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 428    |   |                  | $ | 338    |  
|                                         |  |               |        |   |                  |   |        |  
|Other long-term assets                   |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 194    |   |                  | $ | 156    |  
|Restatement                              |  |               | (10    | ) |                  |   | (10    | )
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 184    |   |                  | $ | 146    |  
|                                         |  |               |        |   |                  |   |        |  
|Total Assets                             |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 10,713 |   |                  | $ | 10,280 |  
|Restatement                              |  |               | 340    |   |                  |   | 197    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 11,053 |   |                  | $ | 10,477 |  
|                                         |  |               |        |   |                  |   |        |  
|Accounts payable, affiliates             |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 101    |   |                  | $ | 195    |  
|Restatement                              |  |               | (24    | ) |                  |   | (121   | )
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 77     |   |                  | $ | 74     |  
|                                         |  |               |        |   |                  |   |        |  
|Deferred income tax (assets) liabilities |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | (60    | ) |                  | $ | (106   | )
|Restatement                              |  |               | 292    |   |                  |   | 292    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 232    |   |                  | $ | 186    |  
|                                         |  |               |        |   |                  |   |        |  
|Other long-term liabilities              |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 319    |   |                  | $ | 499    |  
|Restatement                              |  |               | (7     | ) |                  |   | (7     | )
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 312    |   |                  | $ | 492    |  
|                                         |  |               |        |   |                  |   |        |  
|Total Liabilities                        |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 7,582  |   |                  | $ | 7,138  |  
|Restatement                              |  |               | 201    |   |                  |   | 58     |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 7,783  |   |                  | $ | 7,196  |  
|                                         |  |               |        |   |                  |   |        |  
|Stockholders Equity                     |  |               |        |   |                  |   |        |  
|As previously reported                   |  | $             | 3,011  |   |                  | $ | 3,021  |  
|Restatement                              |  |               | 139    |   |                  |   | 139    |  
|                                         |  |               |        |   |                  |   |        |  
|As restated                              |  | $             | 3,150  |   |                  | $ | 3,160  |  
|                                         |  |               |        |   |                  |   |        |  



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Note 1Accounting Policies



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the
instructions to interim financial reporting as prescribed by the SEC. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These interim financial statements
should be read together with the restated consolidated financial statements and notes thereto included in our Form 10-K/A, which includes restated financial statements reflecting the adjustment described in the Explanatory Note above.



The unaudited condensed consolidated financial statements contained in this
report include all material adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the interim periods presented in this Form 10-Q/A are not
necessarily indicative of the results to be expected for the full year or any other interim period, however, due to seasonal fluctuations in demand for our energy products and services, changes in commodity prices, timing of maintenance and other
expenditures and other factors. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect our reported financial position and results of
operations. These estimates and assumptions also impact the nature and extent of disclosure, if any, of our contingent liabilities. We review significant estimates affecting our consolidated financial statements on a recurring basis and record the
effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such estimates are made. Adjustments made with respect to the use of
these estimates often relate to information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. Estimates are primarily used in (1) developing fair value
assumptions, including estimates of future cash flows and discount rates, (2) analyzing tangible and intangible assets for possible impairment, (3) estimating the useful lives of our assets, (4) assessing future tax exposure and the realization of
tax assets, and (5) determining amounts to accrue for contingencies. Actual results could differ materially from any such estimates.



We have reclassified certain amounts reported in this Form 10-Q/A from prior periods to conform to the 2004 financial statement presentation. These
reclassifications had no impact on reported net income (loss).



Accounting Principles Adopted



EITF Issue 02-03. In October 2002, the EITF rescinded EITF Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities, which previously required use of mark-to-market accounting
for our energy trading contracts. While the rescission of EITF Issue 98-10 reduced the number of contracts accounted for on a mark-to-market basis, it did not eliminate mark-to-market accounting. All derivative contracts that either do not qualify,
or are not designated, as hedges or as normal purchases or sales, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, continue to be marked-to-market in accordance with SFAS No. 133. Any
earnings or losses previously recognized under EITF Issue 98-10 that would not have been recognized under SFAS No. 133 were reversed in 2003 in connection with our adoption of EITF Issue 02-03.



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



The cumulative effect of this change in accounting principle resulted in after-tax earnings of $21
million in the first quarter 2003 and comprised the following items no longer required to be recorded using mark-to-market accounting (in millions):



|                                                                                                |  |   |      |  
|----------------------------------------------------------------------------------------------- |  | - | ---- | -
|Removal of net risk-management assets representing the value of natural gas storage contracts   |  | $ | (176 | )
|Removal of other net risk-management assets                                                     |  |   | (24  | )
|Removal of net risk-management liabilities representing the value of power tolling arrangements |  |   | 103  |  
|                                                                                                |  |   |      |  
|Net change in risk-management assets and liabilities                                            |  |   | (97  | )
|Addition of inventory previously included in risk-management assets (1)                         |  |   | 130  |  
|                                                                                                |  |   |      |  
|Pre-tax gain recorded from change in accounting principle                                       |  |   | 33   |  
|Income tax provision                                                                            |  |   | (12  | )
|                                                                                                |  |   |      |  
|After-tax gain recorded in the unaudited condensed consolidated statements of operations        |  | $ | 21   |  
|                                                                                                |  |   |      |  

---

|(1) | A substantial portion of this natural gas inventory was sold during the three months ended March 31, 2003, with the remainder being sold in the second quarter 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



SFAS No. 143. In June 2001, the
FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. We adopted SFAS No. 143, which provides accounting requirements for costs associated with legal obligations to retire tangible, long-lived assets, effective January
1, 2003. Under SFAS No. 143, an ARO is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset by an amount equal to the ARO. In each subsequent period, the liability is accreted
towards the ultimate obligation amount and the capitalized ARO costs are depreciated over the useful life of the related asset.



As part of the transition adjustment in adopting SFAS No. 143, existing environmental liabilities in the amount of $73 million were reversed in the first
quarter 2003. The fair value of the remediation costs estimated to be incurred upon retirement of the respective assets is included in the ARO and was recorded upon adoption of SFAS No. 143. Since the previously accrued liabilities exceeded the fair
value of the future retirement obligations, the impact of adopting SFAS No. 143 was an increase in earnings, net of tax, of $34 million in the first quarter 2003, which is included in cumulative effect of change in accounting principles in the
unaudited condensed consolidated statements of operations. In addition to these liabilities, we also have potential retirement obligations for dismantlement of power generation facilities, a fractionation facility and natural gas storage facilities.
Our current intent is to maintain these facilities in a manner such that they will be operated indefinitely. As such, we cannot estimate any potential retirement obligations associated with these assets. Liabilities will be recorded in accordance
with SFAS No. 143 at the time we are able to estimate any new AROs.



At January 1, 2004, our ARO liabilities were $30 million for our GEN segment and $10 million for our NGL segment. These retirement obligations related to activities such as ash pond and landfill capping, closure and post-closure costs,
environmental testing, remediation, monitoring and land lease obligations. During the three- and six-month periods ended June 30, 2004, accretion expense recognized as our ARO liabilities accreted toward their ultimate redemption values totaled
approximately $1 million and $2 million, respectively. There were no additional AROs recorded or settled, nor were there any revisions to estimated cash flows associated with existing AROs, during the three - and six-month periods ended June 30,
2004. At June 30, 2004, our aggregate ARO liability was $42 million.



SFAS No. 148. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based



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##### Table of Contents

DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Compensation, and provides alternative methods of transition (prospective, modified prospective or retroactive) for entities that voluntarily change to
the fair value-based method of accounting for stock-based employee compensation in a fiscal year beginning before December 16, 2003. SFAS No. 148 requires prominent disclosure about the effects on reported net income of an entitys accounting
policy decisions with respect to stock-based employee compensation. Although we do not grant stock options to our employees, these employees do participate in Dynegys stock-based employee compensation programs. We transitioned to a fair
value-based method of accounting for stock-based compensation in the first quarter 2003 and are using the prospective method of transition as described under SFAS No. 148.



Under the prospective method of transition, all stock options granted by Dynegy after January 1, 2003 are accounted for on a
fair value basis. We will incur compensation expense over the vesting period of the options in an amount equal to the fair value of the options. Options granted prior to January 1, 2003 continue to be accounted for using the intrinsic value method.
Accordingly, for options granted prior to January 1, 2003, compensation expense is not reflected for employee stock options unless they were granted at an exercise price lower than market value on the grant date. We have recognized compensation
expense over the applicable vesting periods for in-the-money stock options Dynegy previously granted. No in-the-money stock options have been granted by Dynegy since 1999.



Had compensation cost for all stock options granted prior to 2003 been determined on a fair value basis consistent with SFAS
No. 123, our net income (loss) would have approximated the following pro forma amounts for the three- and six-month periods ended June 30, 2004 and 2003, respectively.



|                                                                                                                                            |  |                                      |    |   |                           |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | -- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                                                                                                            |  | Three MonthsEnded June 30,           |    |   | Six Months Ended June 30, |  
|                                                                                                                                            |  | 2004                                 |    |   | 2003                      |   |      | 2004 |  |   | 2003 |  
|                                                                                                                                            |  | (in millions, except per share data) |   
|Net income (loss) as reported                                                                                                               |  | $                                    | 17 |   |                           | $ | (280 | )    |  | $ | 38   |   |  | $ | (147 | )
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects                           |  |                                      | 1  |   |                           |   |     |      |  |   | 2    |   |  |   | 1    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                      | (4 | ) |                           |   | (8   | )    |  |   | (9   | ) |  |   | (17  | )
|                                                                                                                                            |  |                                      |    |   |                           |   |      |      |  |   |      |   |  |   |      |  
|Pro forma net income (loss)                                                                                                                 |  | $                                    | 14 |   |                           | $ | (288 | )    |  | $ | 31   |   |  | $ | (163 | )
|                                                                                                                                            |  |                                      |    |   |                           |   |      |      |  |   |      |   |  |   |      |  



FIN No.
46R. In the fourth quarter 2003, we adopted the initial provisions of FIN No. 46R, Consolidation of Variable Interest EntitiesAn Interpretation of ARB No. 51. FIN No. 46R was effective on December 31, 2003 for entities
considered SPEs. We adopted the remaining provisions of FIN No. 46R on March 31, 2004. These provisions require that we review the structure of non-SPE legal entities in which we have an investment and other legal entities with whom we transact to
determine whether such entities are VIEs, as defined by FIN No. 46R. With respect to each of the VIEs we identified, we assessed whether we are the primary beneficiary, as defined by FIN No. 46R. We concluded that we were not the primary
beneficiary of any of these entities and, therefore, the adoption did not have an impact on our unaudited condensed consolidated financial statements.



FIN No. 46R requires additional disclosures for entities which meet the definition of a VIE in which we hold a significant variable interest but are not
the primary beneficiary. We own or have owned 50% equity interests in various generation facilities in Illinois, California, Georgia, Texas and Michigan, which are accounted for using equity method accounting and are included in Unconsolidated
investments in our unaudited condensed



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



consolidated balance sheets. We acquired or began involvement with these equity interests in 1997 and 1999. Total net generating capacity for these
generating facilities ranges from 62 MW to 1,156 MW. As a result of various contractual arrangements into which these entities have entered, we have concluded that they are VIEs. As we do not absorb a majority of the expected losses or receive a
majority of the expected residual returns, we are not considered the primary beneficiary of these entities. Our equity investment balance in the facilities totaled $490 million at June 30, 2004, and one of our affiliates has a loan outstanding to
one of these entities, which totaled $10 million at June 30, 2004.



FIN No. 46R also requires additional disclosure for entities where we are unable to obtain, after exhaustive efforts, financial information to determine (1) if the entity is a VIE and (2) if we are deemed to be the primary beneficiary of
the entity. We identified one potential VIE for which we were unable to obtain adequate financial information. As required to be disclosed by FIN No. 46R, following is a description of the agreements with this potential VIE. In July 2001, we entered
into several agreements, including a power tolling agreement, a financial derivative instrument, an energy management agreement and a natural gas supply agreement, with Sithe Independence Power Partners, L.P., which owns and operates a 955 MW
combined cycle natural gas generation facility in Oswego, New York. These agreements are in effect through 2014. Our future obligations under these agreements are approximately $789 million, which includes the fixed capacity payments for our
physical tolling contract and fixed payments related to the financial derivative instrument. We recorded expense of $9 million and $141 million under the tolling agreement and financial derivative instrument during the three months ended June 30,
2004 and 2003, respectively, and $10 million and $143 million during the six months ended June 30, 2004 and 2003, respectively.



Cumulative Effect of Change in Accounting Principles



We adopted SFAS No. 143 and provisions of EITF Issue 02-03 in the first quarter 2003. Please see above for a discussion of
the impact of adopting these standards.



Note 2Dispositions, Contract
Terminations and Discontinued Operations



Dispositions and Contract Terminations



Hackberry LNG Project. During the first quarter 2003, we entered into an agreement to sell our ownership interest in Hackberry LNG Terminal LLC, the entity we formed in connection with our proposed LNG terminal/gasification
project in Hackberry, Louisiana, to Sempra LNG Corp., a subsidiary of San Diego-based Sempra Energy. The transaction closed in April 2003, after which we received contingent payments in 2003 based upon project development milestones. In March 2004,
we sold our remaining financial interest in this project, which interest included rights to receive future contingent payments under the 2003 agreement, for $17 million and recognized a pre-tax gain of $17 million on the sale. This gain is included
in Gain on sale of assets, net on our unaudited condensed consolidated statements of operations.



Indian Basin. In April 2004, we sold our 16% interest in the Indian Basin Gas Processing Plant for approximately $48 million. In the second
quarter 2004, we recognized a pre-tax gain on the sale of approximately $36 million. This gain is included in Gain on sales of assets, net on our unaudited condensed consolidated statements of operations.



Gas Transportation Contracts. In June 2004, we agreed to exit
four long-term natural gas transportation contracts whose purpose was to secure firm pipeline capacity through 2014 in support of our former third-party marketing and trading business. In exchange for exiting these obligations, we paid $20 million
in June 2004 and



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##### Table of Contents

DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



will pay an additional $42 million in the first quarter 2005. This future payment obligation was recorded at its fair value of $40 million and will be
accreted to $42 million over the period July 1, 2004 through March 31, 2005. Additionally, we reversed an aggregate liability of $148 million associated with the transportation contracts that was originally established in 2001 and recognized a
pre-tax gain of $88 million related to these transactions. This gain is included in Revenues on our unaudited condensed consolidated statements of operations and is included in the results of our CRM segment. This agreement will eliminate our
obligation to make approximately $295 million in aggregate fixed capacity payments from April 2005 through 2014.



Discontinued Operations



As part of our restructuring plan, we sold or liquidated some of our operations during 2003, including our U.K. CRM business, which have been accounted
for as discontinued operations under SFAS No. 144. The following table summarizes information related to our discontinued operations:



|                                           |  |               |     |   |               |   |    |       |  |   |     |  
|------------------------------------------ |  | ------------- | --- | - | ------------- | - | -- | ----- |  | - | --- | -
|                                           |  | U.K. CRM      |     |   | GlobalLiquids |   |    | Total | 
|                                           |  | (in millions) |    
|Three Months Ended June 30, 2004           |  |               |     |   |               |   |    |       |  |   |     |  
|Income from operations before taxes        |  | $             | 1   |   |               | $ |   |       |  | $ | 1   |  
|Loss from operations after taxes           |  |               | (19 | ) |               |   |   |       |  |   | (19 | )
|Three Months Ended June 30, 2003           |  |               |     |   |               |   |    |       |  |   |     |  
|Income (loss) from operations before taxes |  | $             | 4   |   |               | $ | (1 | )     |  | $ | 3   |  
|Income (loss) from operations after taxes  |  |               | 1   |   |               |   | (1 | )     |  |   |    |  
|                                           |  |               |    
|                                           |  | U.K. CRM      |     |   | GlobalLiquids |   |    | Total | 
|                                           |  | (in millions) |    
|Six Months Ended June 30, 2004             |  |               |     |   |               |   |    |       |  |   |     |  
|Income from operations before taxes        |  | $             | 18  |   |               | $ |   |       |  | $ | 18  |  
|Loss from operations after taxes           |  |               | (7  | ) |               |   |   |       |  |   | (7  | )
|Six Months Ended June 30, 2003             |  |               |     |   |               |   |    |       |  |   |     |  
|Revenue                                    |  | $             | 21  |   |               | $ |   |       |  | $ | 21  |  
|Loss from operations before taxes          |  |               | (11 | ) |               |   | (1 | )     |  |   | (12 | )
|Loss from operations after taxes           |  |               | (9  | ) |               |   | (1 | )     |  |   | (10 | )



In the first quarter
2004, we recognized $17 million of pre-tax income related to translation gains on foreign currency in the U.K. Please see Note 4Risk Management Activities and Accumulated Other Comprehensive LossNet investment hedges in foreign
operations for further discussion. In the second quarter 2004, we recognized a tax expense of $20 million related to charges resulting from the conclusion of prior year tax audits. Please read Note 11Income Taxes for further discussion.



Note 3Restructuring Charges



In the three months ended June 30, 2004, we recorded a $5 million pre-tax
charge related to the impairment of one of our midstream assets.



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##### Table of Contents

DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



In October 2002, we announced a restructuring plan designed to improve operational efficiencies and
performance across our lines of business. The following is a schedule of 2004 activity for the liabilities recorded in connection with this restructuring:



|                              |  |               |     |   |                                        |   |    |       |  |   |     |  
|----------------------------- |  | ------------- | --- | - | -------------------------------------- | - | -- | ----- |  | - | --- | -
|                              |  | Severance     |     |   | Cancellation Fees and Operating Leases |   |    | Total | 
|                              |  | (in millions) |    
|Balance at December 31, 2003  |  | $             | 20  |   |                                        | $ | 28 |       |  | $ | 48  |  
|2004 adjustments to liability |  |               | 20  |   |                                        |   | 5  |       |  |   | 25  |  
|Cash payments                 |  |               | (36 | ) |                                        |   | (6 | )     |  |   | (42 | )
|                              |  |               |     |   |                                        |   |    |       |  |   |     |  
|Balance at June 30, 2004      |  | $             | 4   |   |                                        | $ | 27 |       |  | $ | 31  |  
|                              |  |               |     |   |                                        |   |    |       |  |   |     |  



The adjustment to the
accrued liability during 2004 primarily reflects increases in the severance accrual due to changes in our estimate of the probable loss associated with the severance claims of Dynegys former chief executive officer and Dynegys former
president. Cash payments during 2004 reflect payments made to Dynegys former chief executive officer and Dynegys former president. Please see Note 8Commitments and ContingenciesSeverance Arbitrations for further discussion
regarding the status of these claims and settlement payments.



Note
4Risk Management Activities and Accumulated Other Comprehensive Income (Loss)



The nature of our business necessarily involves market and financial risks. We enter into financial instrument contracts in an attempt to mitigate or eliminate these various risks. These risks and our strategy for
mitigating them are more fully described in Note 5Risk Management Activities and Financial Instruments beginning on page F-26 of our Form 10-K/A.



Cash flow hedges. We enter into financial derivative instruments that qualify as cash flow hedges. Instruments related to our power
generation and natural gas liquids businesses are entered into for purposes of hedging future fuel requirements and sales commitments and locking in future margin. Interest rate swaps are used to convert the floating interest-rate component of some
obligations to fixed rates.



During the three and six months
ended June 30, 2004 and 2003, there was no material ineffectiveness from changes in fair value of hedge positions and no amounts were excluded from the assessment of hedge effectiveness related to the hedge of future cash flows. During the three and
six months ended June 30, 2004 and 2003, no amounts were reclassified to earnings in connection with forecasted transactions that were no longer considered probable of occurring.



The balance in cash flow hedging activities, net at June 30, 2004 is expected to be reclassified to future earnings,
contemporaneously with the related purchases of fuel, sales of electricity or natural gas liquids and payments of interest, as applicable to each type of hedge. Of this amount, after-tax losses of approximately $25 million are currently estimated to
be reclassified into earnings over the 12-month period ending June 30, 2005. The actual amounts that will be reclassified to earnings over this period and beyond could vary materially from this estimated amount as a result of changes in market
conditions and other factors.



Fair value hedges.
We also enter into derivative instruments that qualify as fair value hedges. We use interest rate swaps to convert a portion of our non-prepayable fixed-rate debt into variable-rate debt. During the



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



three and six months ended June 30, 2004 and 2003, there was no ineffectiveness from changes in the fair value of hedge positions and no amounts were
excluded from the assessment of hedge effectiveness. During the three and six months ended June 30, 2004 and 2003, no amounts were recognized in relation to firm commitments that no longer qualified as fair value hedges.



In July 2004, we entered into interest rate swaps with a notional value of
$500 million. These swaps were designated as fair value hedges, and effectively convert a portion of our non-prepayable fixed-rate debt into variable-rate debt.



Net investment hedges in foreign operations. We have investments in foreign subsidiaries, the net assets of which are exposed to currency
exchange-rate volatility. In the past, we used derivative financial instruments, including foreign exchange forward contracts and cross-currency interest rate swaps, to hedge this exposure. As of June 30, 2004, we had no net investment hedges in
place.



During the first quarter 2003, our efforts to exit the
U.K. CRM business were substantially completed. As required by SFAS No. 52, Foreign Currency Translation, a significant portion of unrealized gains and losses resulting from translation and financial instruments utilized to hedge
currency exposures previously recorded in stockholders equity were recognized in income, resulting in an after-tax loss of approximately $5 million in the six months ended June 30, 2003. During the first quarter 2004, we repatriated a majority
of our cash from the U.K., resulting in the substantial liquidation of our investment in the U.K. As such, we recognized approximately $17 million of pre-tax translation gains in income that arose since April 1, 2003 and had accumulated in
stockholders equity.



Accumulated other
comprehensive income (loss). Accumulated other comprehensive income (loss), net of tax, is included in stockholders equity on the unaudited condensed consolidated balance sheets as follows:



|                                                          |  |               |     |   |                  |   |    |  
|--------------------------------------------------------- |  | ------------- | --- | - | ---------------- | - | -- | -
|                                                          |  | June 30,2004  |     |   | December 31,2003 |  
|                                                          |  | (in millions) |    
|Cash flow hedging activities, net                         |  | $             | (23 | ) |                  | $ | 10 |  
|Foreign currency translation adjustment                   |  |               | 11  |   |                  |   | 26 |  
|Minimum pension liability                                 |  |               | (3  | ) |                  |   | (3 | )
|                                                          |  |               |     |   |                  |   |    |  
|Accumulated other comprehensive income (loss), net of tax |  | $             | (15 | ) |                  | $ | 33 |  
|                                                          |  |               |     |   |                  |   |    |  



Note 5Unconsolidated
Investments



A summary of our unconsolidated investments
is as follows:



|                                 |  |               |     |                  |   |    
|-------------------------------- |  | ------------- | --- | ---------------- | - | ---
|                                 |  | June 30,2004  |     | December 31,2003
|                                 |  | (in millions)
|Equity affiliates:               |  |               |     |                  |   |    
|GEN investments                  |  | $             | 515 |                  | $ | 495
|NGL investments                  |  |               | 80  |                  |   | 82 
|                                 |  |               |     |                  |   |    
|Total unconsolidated investments |  | $             | 595 |                  | $ | 577
|                                 |  |               |     |                  |   |    



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Summarized aggregate financial information for West Coast Power and our equity share thereof was:



|                 |  |                           |     |              |   |       |  |              |     |  |   |    
|---------------- |  | ------------------------- | --- | ------------ | - | ----- |  | ------------ | --- |  | - | ---
|                 |  | Six Months Ended June 30,
|                 |  | 2004                      |     | 2003        
|                 |  | Total                     |     | Equity Share |   | Total |  | Equity Share
|                 |  | (in millions)            
|Revenues         |  | $                         | 598 |              | $ | 299   |  | $            | 526 |  | $ | 263
|Operating income |  |                           | 163 |              |   | 82    |  |              | 137 |  |   | 68 
|Net income       |  |                           | 163 |              |   | 82    |  |              | 131 |  |   | 65 



Summarized aggregate
financial information for our unconsolidated equity investments, exclusive of the West Coast Power information above, and our equity share thereof was:



|                 |  |                           |     |              |   |       |  |              |     |  |   |    
|---------------- |  | ------------------------- | --- | ------------ | - | ----- |  | ------------ | --- |  | - | ---
|                 |  | Six Months Ended June 30,
|                 |  | 2004                      |     | 2003        
|                 |  | Total                     |     | Equity Share |   | Total |  | Equity Share
|                 |  | (in millions)            
|Revenues         |  | $                         | 309 |              | $ | 130   |  | $            | 885 |  | $ | 334
|Operating income |  |                           | 61  |              |   | 27    |  |              | 100 |  |   | 41 
|Net income       |  |                           | 43  |              |   | 20    |  |              | 63  |  |   | 24 



Earnings from
unconsolidated investments of $91 million for the six months ended June 30, 2004, include $82 million from West Coast Power, and the $20 million above, offset by a $8 million impairment of our Michigan Power equity investment discussed below and $3
million of amortization of the difference between the cost of our unconsolidated investments and our underlying equity in their net assets. Earnings from unconsolidated investments of $89 million for the six months ended June 30, 2003 consist
entirely of the net income related to such investments.



In
July 2004, we sold our unconsolidated investments in the Oyster Creek and Michigan Power generating facilities for aggregate net cash proceeds of approximately $104 million. We expect to recognize a gain of approximately $15 million in the third
quarter 2004 related to our sale of Oyster Creek. In the three- and six-month periods ended June 30, 2004, we recorded impairments on our investment in Michigan Power totaling $1 million and $8 million, respectively, to adjust our book value to the
selling price. Thus, we do not expect to recognize a gain or loss on its sale in the third quarter 2004.



In July 2004, we entered into agreements to sell our unconsolidated investments in the Commonwealth and Hartwell generating facilities. Closing of each of
these transactions, targeted for the fourth quarter 2004, is subject to regulatory and other approvals. Under the terms of these agreements, we do not expect to recognize a material gain or loss on these sales.



Note 6Debt



Revolvers. During the three- and six-month periods ended June 30, 2004, we reduced
an aggregate of approximately $37 million and $17 million, respectively, of letters of credit under our revolving credit facilities, resulting in a total of $171 million utilized at June 30, 2004. As of June 30, 2004, there were no borrowings
outstanding under our $700 million revolving credit facility. During the period from June 30, 2004 through July 30, 2004, we increased our outstanding letters of credit under this facility by $6 million.



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Effective May 28, 2004, we entered into a $1.3 billion credit facility consisting of:



| |  |  | a $700 million secured revolving credit facility that matures on May 28, 2007; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a $600 million secured term loan that matures on May 28, 2010, subject to an earlier maturity in specified circumstances.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



The credit facility replaced our $1.1 billion revolving credit facility,
which was scheduled to mature in February 2005.



The revolving
credit facility provides funding for general corporate purposes. The revolving credit facility is also available for the issuance of letters of credit. Borrowings under the revolving credit facility will bear interest, at our option, at (i) a base
rate plus 3.00% per annum or (ii) LIBOR plus 4.00% per annum. A letter of credit fee is payable on the undrawn amount of each letter of credit outstanding at a percentage per annum equal to 4.00% of such undrawn amount. We also incur additional fees
for issuing letters of credit. An unused commitment fee of 0.50% will be payable on the unused portion of the revolving credit facility.



Of the $600 million in proceeds from the term loan drawn at closing, a portion has been used to post cash collateral in lieu of letters of credit, while
approximately $19 million was used to pay upfront fees incurred in connection with the new facility. These fees have been capitalized and are being amortized over the term of the credit facility. Additionally, in August 2004, $154 million was used
to pre-pay indebtedness and other amounts owed in connection with the ABG Gas Supply financing.The remaining proceeds, subject to specified restrictions in the credit facility, are available for general corporate purposes. Borrowings
under the term loan will bear interest, at our option, at (i) a base rate plus 3.00% per annum or (ii) LIBOR plus 4.00% per annum.



The credit facility contains mandatory prepayment events associated with specified asset sales and recovery events (i.e., certain payments in respect of
insurance claims or condemnation proceedings). We must offer to repay the term loan or permanently reduce the revolving credit facility with 100% of the net cash proceeds of all asset sales or any proceeds from recovery events, excluding (i)
proceeds from sales of designated assets and the minority generation investments currently targeted for sale; (ii) up to $100 million of net cash proceeds from other asset sales as designated by us; and (iii) up to $900 million of proceeds from
asset sales and recovery events that are reinvested in the business, subject to specified restrictions. Sales of assets over a specified threshold require written confirmation from both Standard & Poors Ratings Service and Moodys
Investors Service that the credit ratings of the new credit facility will not be lowered as a result. Further, any sale of our Baldwin facility or all or substantially all of our DMS assets would require the written consent of a majority of the
lenders under the new credit facility.



The credit facility
provides for no amortization of principal amounts outstanding prior to the maturity dates except (i) upon the occurrence of a mandatory prepayment event and (ii) term loan amortization of 1% per annum.



The new credit facility is secured by substantially the same collateral as
the $1.1 billion facility it replaces, including a first priority interest in substantially all our assets and the assets of our subsidiaries, and on substantially all of the equity of our subsidiaries, in each case to the extent permitted by other
applicable agreements. Dynegy Inc. and substantially all of its subsidiaries, excluding Illinois Power and its subsidiaries, also guarantee the new facility.



The credit facility contains affirmative and negative covenants, including negative covenants relating to the following which restrict us and our
subsidiaries but do not restrict Dynegy Inc.: liens; investments; indebtedness;



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



dispositions; restricted payments; burdensome agreements; amendments to organizational documents; prepayments of indebtedness; and swap contracts. The credit
facility also contains the financial and capital expenditure-related covenants described below.



The credit facility generally prohibits us and our subsidiaries, subject to specified exceptions, from incurring additional debt. Notwithstanding this
restriction, we may issue, to the extent permitted by the more restrictive covenants with respect to secured debt in the indenture governing our second priority senior secured notes. i) up to $700 million of additional second lien or junior secured
debt or unsecured debt, provided such additional debt matures at least six months after the term loan, and (ii) permitted refinancing indebtedness.



The credit facility generally prohibits us and our subsidiaries from pre-paying, redeeming or repurchasing our outstanding debt or preferred stock.
Notwithstanding this restriction, we may repurchase or redeem our remaining 2005 and 2006 senior notes, the ABG Gas Supply facility and the Riverside facility. We also may repurchase or redeem our senior unsecured notes maturing in 2007 and
thereafter and our second priority senior secured notes, subject to specified conditions.



Dynegy Inc. and its subsidiaries, excluding Illinois Power and its subsidiaries, are also prohibited from (i) permitting our Secured Debt/EBITDA Ratio (as defined in the credit facility) on and after September
30, 2004 to exceed specified ratios; (ii) permitting our liquidity to be less than $200 million for a period of more than ten consecutive business days; or (iii) making capital expenditures during each four fiscal quarter period in excess of a
designated amount, subject to specified exceptions.



The terms
and conditions of the new credit facility are described in more detail in the definitive agreements governing the credit facility, which are incorporated by reference as exhibits to this Form 10-Q/A.



Repayments. In the first half of 2004, we made principal
repayments of $39 million related to the ABG Gas Supply financing.



Tilton Capital Lease. In September 1999, Illinois Power entered into an operating lease on four gas turbines located in Tilton, Illinois and a separate land lease at the Tilton site. This facility consists of peaking units
totaling 176 MWs of capacity. Illinois Power sublet the turbines to DMG in October 1999.



In September 2003, Illinois Power delivered notice of its intent to exercise its option in order for DMG to purchase the turbines upon the expiration of the operating lease in September 2004. Based on Dynegys
and our intent to purchase, GAAP required that we reflect the asset and the associated debt on our balance sheets.



In July 2004, Illinois Power terminated its lease arrangement, and DMG purchased the turbines for $81 million. This action resulted in a reduction of our
debt of $78 million.



ABG Gas Supply Credit
Agreement. In August 2004, we used $154 million in proceeds from our $600 million term loan to pre-pay all indebtedness and other obligations under our ABG Gas Supply financing. This pre-payment was required by the terms of our new credit
facility.



Note 7Related Party Transactions



We routinely engage in business transactions with subsidiaries of Dynegy
that are not part of our consolidated group. These transactions include, among others, sales of energy and capacity to Illinois Power



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



under a power purchase agreement, as well as purchases of natural gas from Illinois Power. Please read Note 13Related Party
TransactionsOther beginning on page F-43 of our Form 10-K/A for further discussion. Additionally, we engage in transactions with ChevronTexaco Corporation and its affiliates, including purchases and sales of natural gas and natural gas
liquids, which we believe are executed on terms that are fair and reasonable. Please read Note 13Related Party Transactionsbeginning on page F-41 of our Form 10-K/A for further discussion.



Note 8Commitments and Contingencies



PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS NOTE 8, WHICH WAS
PRESENTED IN OUR SECOND QUARTER 2004 FORM 10-Q ORIGINALLY FILED WITH THE SEC ON AUGUST 13, 2004 IN ORDER TO REFLECT THE MATERIAL CHANGES IN OR UPDATES TO OUR MATERIAL LEGAL PROCEEDINGS SINCE THE ORIGINAL FILING OF OUR 2003 FORM 10-K, DOES NOT
REFLECT EVENTS OCCURRING AFTER AUGUST 13, 2004.    FOR A DESCRIPTION OF THESE EVENTS, INCLUDING MATERIAL CHANGES IN, OR UPDATES TO, OUR MATERIAL LEGAL PROCEEDINGS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE AUGUST 13,
2004, INCLUDING OUR QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004, OUR CURRENT REPORTS ON FORM 8-K AND ANY AMENDMENTS THERETO.



Set forth below is a description of our material legal proceedings. In addition to the matters described below, we are party to legal proceedings arising
in the ordinary course of business. In managements opinion, the disposition of these ordinary course matters will not materially adversely affect our financial condition, results of operations or cash flows.



We record reserves for estimated losses from contingencies when information
available indicates that a loss is probable and the amount of the loss is reasonably estimable under SFAS No. 5, Accounting for Contingencies. During the first six months of 2004, we recorded pre-tax legal and settlement charges of $50
million, including cash payments made in the period in excess of our then-existing accruals. The charges recorded relate to contingencies for which, during the period, either the amount of loss became probable and reasonably estimable or our
previous loss estimates were adjusted.



For environmental
matters, we record liabilities when remedial efforts are probable and the costs can be reasonably estimated. Please read Note 2Accounting PoliciesOther Contingencies beginning on page F-11 of our Form 10-K/A for further discussion of our
reserve policies. Environmental reserves do not reflect managements assessment of the insurance coverage that may be applicable to the matters at issue, whereas litigation reserves do reflect such potential coverage. We cannot make any
assurances that the amount of any reserves or potential insurance coverage will be sufficient to cover the cash obligations we might incur as a result of litigation or regulatory proceedings, payment of which could be material.



With respect to some of the items listed below, management has determined
that a loss is not probable or that any such loss, to the extent probable, is not reasonably estimable. In some cases, management is not able to predict with any degree of certainty the range of possible loss that could be incurred. Notwithstanding
these facts, management has assessed each of these matters based on current information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought and the probability of
success. Managements judgment may, as a result of facts arising prior to resolution of these matters or other factors, prove inaccurate and investors should be aware that such judgment is made subject to the known uncertainty of litigation.



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Summary of Recent Developments. As described in greater detail below, the following
significant developments involving our material legal proceedings occurred since the original filing of our first quarter 2004 Form 10-Q:



| |  |  | Dynegy completed final documentation regarding the previously announced agreement on a comprehensive settlement of numerous contested FERC claims relating to western electric energy
market transactions that occurred between January 2000 and June 2001. As part of the settlement, West Coast Power will forego its right to collect past due receivables and interest from the Cal ISO and the Cal PX related to the settlement period and
pay $22.5 million in exchange for the dismissal of claims against Dynegy and West Coast Power related to the settlement period. The settlement has received CPUC approval but remains subject to approval by the FERC.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dynegy was ordered by an arbitral panels binding decision to pay its former president approximately $10.4 million, plus attorneys fees, costs and interest, with respect
to his severance claims, and Dynegy paid its former chief executive officer $22 million to settle severance claims against it arising under his employment agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dynegy paid the plaintiffs in the Trans-Elect litigation less than $3 million to settle their claims with respect to the termination of the October 2002 asset purchase and sale
agreement.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above summary of recent
developments is qualified in its entirety by, and should be read in conjunction with, the following description of our significant legal proceedings.



Shareholder Litigation. We and Dynegy are defending a class action lawsuit filed on behalf of purchasers of Dynegys publicly traded
securities from January 2000 to July 2002 seeking unspecified compensatory damages and other relief. The lawsuit principally asserts that we and Dynegy and certain of our current and former officers and directors violated the federal securities laws
in connection with our disclosures, including accounting disclosures, regarding Project Alpha (a structured natural gas transaction entered into by us in April 2001), round-trip trading, the submission of false trade reports to publications that
calculate natural gas index prices, the alleged manipulation of the California power market and the restatement of our financial statements for 1999-2001. The Regents of the University of California are lead plaintiff and Lerach Coughlin Stoia &
Robbins, LLP is class counsel. The plaintiff filed an amended complaint in January 2004 and, in March 2004, we filed motions to dismiss. Briefing on our motions was completed in June 2004 and we are awaiting a ruling from the court. An adverse
result in this litigation could have a material adverse effect on our financial condition, results of operations and cash flows. Reserves have been provided in connection with this litigation.



In addition, Dynegy is a nominal defendant in several derivative lawsuits
brought by shareholders on Dynegys behalf against certain of its former officers and current and former directors whose claims are similar to those described above. These lawsuits have been consolidated into two groupsone pending in
federal court and the other pending in state court. A motion to dismiss the federal derivative claim is currently pending and is set for hearing in August 2004. We do not expect to incur any material liability with respect to these claims.



ERISA/401(k) Litigation. Dynegy is defending a
purported class action complaint filed in federal district court on behalf of participants holding Dynegy common stock in the Dynegy 401(k) Savings Plan during the period from April 1999 to January 2003. This complaint alleges violations of ERISA in
connection with Dynegys 401(k) Savings Plan, including claims that Dynegys Board and certain of Dynegys former and current officers, past and present members of Dynegys Benefit Plans Committee, former employees who served on
a predecessor committee to its Benefit Plans Committee, and Vanguard Fiduciary Trust Company and CG Trust Company (trustees of the trust that held Plan assets for portions of the class period) breached their fiduciary



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



duties to the Plans participants and beneficiaries in connection with the Plans investment in Dynegy common stockin particular with respect
to Dynegys financial statements, Project Alpha, round-trip trades and gas price index reporting. The lawsuit seeks unspecified damages for the losses to the Plan, as well as attorneys fees and other costs. In July 2003, Dynegy filed a
motion to dismiss this action. The judge entered an order on this motion in March 2004, dismissing several of the plaintiffs claims and all of the defendants except Dynegy and the members of its Benefit Plans Committee from January 2002 to
January 2003, the substantially reduced class period established by the order. Discovery is proceeding. In May 2004, in response to the plaintiffs request, the judge ordered the parties to engage in mediation. The parties first entered
mediation in June 2004, although no settlement has been reached.



Dynegy is analyzing these claims and intends to defend against them vigorously. We cannot predict with certainty whether we will incur any liability or to estimate the damages, if any, that might be incurred in connection with this lawsuit.
However, given the nature of the claims, an adverse outcome could have a material adverse effect on our financial condition, results of operations and cash flows.



Baldwin Station Litigation. Illinois Power and DMG are the subject of an NOV from the EPA and a complaint
filed by the EPA and the Department of Justice in federal district court alleging violations of the Clean Air Act and related federal and Illinois regulations. Similar notices and complaints were filed against other owners of coal-fired power plants
in what we refer to as the Utility Enforcement Initiative. Both the NOV and the complaint allege that certain equipment repairs, replacements and maintenance activities at our three Baldwin Station generating units constituted major
modifications under the PSD regulations, the NSPS regulations and applicable Illinois regulations, and that we failed to obtain required operating permits under applicable Illinois regulations. When activities which are not otherwise exempt
result in an increase in annual emissions that exceeds the amount deemed significant under the PSD regulations, those activities are considered major modifications. When activities meeting this definition occur, the Clean Air Act and
related regulations generally subject those activities to PSD review and permit requirements and require that the generating facilities where the activities occur meet more stringent emissions standards, which may entail the installation of
potentially costly pollution control equipment.



We have
significantly reduced emissions of sulphur dioxide and nitrogen oxides at the Baldwin Station since the 1999 complaint by converting it from high to low sulfur coal and installing selective catalytic reduction equipment. However, the EPA may seek to
require the installation of the best available control technology, or the equivalent, at the Baldwin Station, which we estimate could require us to incur capital expenditures of up to $410 million. The EPA also has the authority to seek
penalties for the alleged violations at the rate of up to $27,500 per day for each violation.



In February 2003, the Court granted our motion for partial summary judgment based on the five-year statute of limitations. As a result, the EPA is not permitted to seek any monetary civil penalties for claims related
to construction without a permit under the PSD regulations. The Courts ruling also precludes monetary civil penalties for a portion of the claims under the NSPS regulations and the applicable Illinois regulations. We believe that we have
meritorious defenses against the remaining claims and vigorously defended against them at trial. The trial to resolve claims of liability began in June 2003 and closing arguments occurred in September 2003. Shortly after closing arguments, several
interveners were granted the right to file briefs in support of arguments they believe the United States ceased to pursue. These interventions and delays in post-trial briefing have postponed the issuance of the liability order, and we cannot
predict with certainty when a decision will be rendered. Reserves have been provided in an aggregate amount we consider reasonable for potential penalties that could be imposed if the Court finds us liable and the EPA prosecutes successfully the
remaining claims for penalties.



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



In August 2003, two significant decisions were handed down in other cases that are part of the
Utility Enforcement Initiative. The court in United States v. Ohio Edison applied the EPAs narrow interpretation of the routine maintenance, repair and replacement exclusion, which defines it with respect to what is routine
for the specific unit where the projects occurred, while the court in United States v. Duke Energy Company rejected the EPAs narrow interpretation, holding that the exclusion should be defined relative to what is routine for the
particular industry. The Duke court also held that the hours and conditions of a units operations must be held constant when measuring emissions increases. Under this rationale, an increase in maximum hourly emissions is required before
activities would be considered major modifications. We are unable to predict the significance of these cases to our Baldwin Station litigation as they are pending in other jurisdictions and are not binding authority.



None of our other facilities are covered in the complaint and NOV, but the
EPA previously requested information, which we provided, concerning activities at our Vermilion, Wood River, Hennepin, Danskammer and Roseton plants. Although the EPA could eventually commence enforcement actions based on activities at these plants,
we are unable to assess the likelihood of any such additional EPA enforcement actions.



California Market Litigation. We and/or Dynegy and numerous other power generators and marketers are the subject of numerous lawsuits arising from our participation in the western power markets during
the California energy crisis. Eight of these lawsuits, which primarily allege manipulation of the California wholesale power markets and seek unspecified treble damages, were consolidated before a single federal judge. That judge dismissed two of
the cases in the first quarter 2003 on the grounds of FERC preemption and the filed rate doctrine. In June 2004, the Ninth Circuit Court of Appeals affirmed the dismissal of one of these cases, and we are awaiting a ruling on the other case.
Regarding the remaining six consolidated cases, we are awaiting a ruling from the Ninth Circuit, which we expect to occur prior to the end of 2004, on our appeal of a prior decision to remand those cases to state court.



In addition to the eight consolidated lawsuits discussed above, nine other
putative class actions and/or representative actions were filed in state and federal court on behalf of business and residential electricity consumers against us and/or Dynegy and numerous other power generators and marketers between April and
October 2002. The complaints allege unfair, unlawful and deceptive practices in violation of the California Unfair Business Practices Act and seek an injunction, restitution and unspecified damages. While some of the allegations in these lawsuits
are similar to the allegations in the eight lawsuits described above, these lawsuits include additional allegations relating to, among other things, the validity of the contracts between these power generators and the CDWR. The court dismissed eight
of these nine actions, although the plaintiffs have appealed and we are awaiting a hearing on their appeal. The ninth case was remanded to state court, where a newly added defendant filed a motion in February 2004 to remove the case back to federal
court. Once a decision is made on this motion, we intend to file a motion to dismiss this case.



In December 2002, two additional actions were filed with similar allegations on behalf of residents of Washington and Oregon. In May 2003, the plaintiffs
voluntarily dismissed these actions and refiled them in California Superior Court as a class action complaint. The complaint, which was brought on behalf of consumers and businesses in Oregon, Washington, Utah, Nevada, Idaho, New Mexico, Arizona and
Montana that purchased energy from the California market, alleges violations of the Cartwright Act and unfair business practices. This action has been removed from state court and consolidated with existing actions pending before the United States
District Court for the Northern District of California. The hearing on plaintiffs appeal to remand to state court occurred in February 2004. The judge stayed his ruling on the appeal pending the Ninth Circuits ruling on the six
consolidated cases referenced above. Most recently, the Montana Attorney General has filed a case alleging similar antitrust and market manipulation claims, although we have not been served with this lawsuit.



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(Unaudited and Restated)

For the
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In May 2004, Wah Chang, a division of TDY Industries, Inc., filed suit in Oregon federal court
against several energy companies, including Dynegy Power Marketing, Inc., seeking more than $30 million in compensatory damages resulting from alleged manipulation of the California wholesale power markets.



In June 2004, the City of Tacoma public utility filed a lawsuit in Washington
federal court against a number of energy companies, including us, alleging it paid inflated prices for electricity due to the defendants manipulation of the California wholesale power markets. The plaintiff has agreed to put the matter on hold
pending the Ninth Circuits ruling on the second of two cases dismissed in the first quarter 2003 on the grounds of FERC preemption and the filed rate doctrine, as discussed above.



In July 2004, the County of Santa Clara and the County and City of San Francisco filed two separate actions in California
state court against us and several other defendants alleging that the defendants violated Californias anti-trust and deceptive business practices statutes by manipulating the California wholesale power markets through, among other things,
providing false information to gas index publications and engaging in multiple transactions in a short period of time to artificially inflate gas prices. We intend to file our answer in August 2004.



In August 2004, we were served with a lawsuit filed by the County of San
Diego in California state court against us and several other energy companies and utilities seeking unspecified damages resulting from similar allegations of manipulation of the California wholesale power markets.



We believe that we have meritorious defenses to these claims and intend to
defend against them vigorously. We cannot predict with certainty whether we will incur any liability or estimate the range of possible loss, if any, that we might incur in connection with these lawsuits. However, given the nature of the claims, an
adverse result in any of these proceedings could have a material adverse effect on our financial condition, results of operations and cash flows.



FERC and Related Regulatory InvestigationsRequests for Refunds. In July 2001, the FERC initiated a hearing to establish refunds to
electricity customers, or offsets against amounts owed to electricity suppliers, during the period of October 2000 through June 2001. In particular, the FERC established a methodology to calculate mitigated market clearing prices in the Cal ISO and
the Cal PX markets. In December 2002, an administrative law judge issued his recommendations regarding the appropriate level of refunds or offsets. Those recommendations, however, do not fully reflect proposed refund or offset amounts for individual
companies. In October 2003, the FERC issued two orders addressing various applications for rehearing, including ours, relating to its previous refund orders. The orders addressed numerous requests by the parties, the most significant of which was
the refusal to change the gas pricing methodology and a requirement that the Cal ISO and Cal PX recalculate the refund liability of market participants. The gas price methodology approved by the FERC in March 2003 replaces the gas prices used in the
computation, thus reducing the mitigated market clearing price for power and increasing calculated refunds, subject to a provision that provides full recoverability of actual gas costs paid by the generators to unaffiliated third parties. No final
refund calculation is expected prior to August 2004. West Coast Power recorded a reserve in the fourth quarter 2003 relating to its estimated refund exposure.



In June 2003, the FERC issued an order to show cause why the activities of certain participants in the California power markets from January 2000 to
June 2001, including Dynegy, did not constitute gaming and/or anomalous market behavior as defined in the Cal ISO and Cal PX tariffs. In January 2004, Dynegy and the FERC staff submitted a stipulation and settlement agreement to the presiding
administrative law judge to settle the issues raised in the June 2003 show cause order, which settlement was approved by the judge in June 2004 but remains subject to final FERC approval. This settlement, which provides that West Coast Power will
pay



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



approximately $3 million, following final FERC approval, into a fund established at the U.S. Treasury for the benefit of California and Western electricity
consumers, will be incorporated into the broader settlement described below.



In April 2004, Dynegy and West Coast Power announced an agreement to settle FERC claims relating to western energy market transactions that occurred from January 2000 through June 2004, including those described
above. The parties to this settlement other than Dynegy and West Coast Power include the FERC, Pacific Gas and Electric Company, Southern California Edison, San Diego Gas & Electric Company, the CDWR, the California Electricity Oversight Board
and the California Attorney General. Other market participants may opt into this settlement and share in the distribution of the settlement proceeds. As part of the settlement agreement, West Coast Power will (i) forego its right to collect past-due
receivables and interest from the Cal ISO and the Cal PX related to the settlement period, (ii) forego natural gas cost recovery claims against the California settling parties related to the settlement period, and (iii) place into escrow accounts a
total of $22.5 million, which includes the above-referenced $3 million settlement with the FERC staff, for subsequent distribution to various California energy purchasers. In exchange, the other settling parties will forego (i) all claims relating
to refunds or other monetary damages for sales of electricity during the settlement period, and (ii) claims alleging receipt of unjust or unreasonable rates for the sale of electricity during the settlement period.



Although the parties completed definitive documentation for the settlement in
June 2004 and the CPUC granted its approval, the settlement remains subject to approval by the FERC, which is expected in the third quarter 2004. Reserves have been provided for the settlement.



The settlement will not apply to the ongoing civil litigation related to the
California energy markets described above in which we and/or Dynegy and West Coast Power are defendants. The settlement also will not apply to the pending appeal by the CPUC and the California Electricity Oversight Board of the FERCs prior
decision to affirm the validity of the West Coast Power-CDWR contract. We are currently awaiting a ruling on this appeal and related filings and cannot predict their outcome.



West Coast Power. Through our interest in West Coast Power, we have credit exposure for transactions to the
Cal ISO and Cal PX, which rely on cash payments from California utilities to in turn pay their bills. West Coast Power currently sells directly to the CDWR pursuant to a long-term sales agreement.



At June 30, 2004, our portion of the receivables owed to West Coast Power by
the Cal ISO and Cal PX approximated $205 million. Management periodically assesses our exposure through West Coast Power, relative to our California receivables and establishes and maintains reserves under SFAS 5. Our share of the total reserve
taken by West Coast Power at June 30, 2004 was approximately $194 million.



The above-described settlement, if approved, will resolve the claims and disputes which initially gave rise to these reserves at West Coast Power.



Enron Trade Credit Litigation. Shortly before their bankruptcy filing in the fourth quarter 2001, we
determined that Enron Corp. and its affiliates had net exposure to us, including certain liquidated damages and other amounts relating to the termination of commercial transactions among the parties, of approximately $84 million. This exposure was
calculated by setting off approximately $230 million owed from Dynegy entities to Enron entities against approximately $314 million owed from Enron entities to Dynegy entities. The master netting agreement between Enron and us and the valuation of
the commercial transactions covered by the agreement, which valuation is based principally on the parties assessment of market prices for such period, remain subject to dispute by Enron. We are engaged in an ongoing process with Enron to
reconcile the differences between our respective valuations of the transactions and accounts receivable. As a result of ongoing



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



refinement of the values of past transactions, we reduced the $84 million amount that we originally believed we are owed by Enron to approximately $41
million, including the liabilities under the gas transportation agreement related to the Sithe Independence power tolling arrangement. This change in value had no impact on our results, as the net receivable was fully reserved in the fourth quarter
2001. As required by the master netting agreement, we instituted arbitration proceedings against those Enron parties not in bankruptcy in 2002 and filed a motion with the Bankruptcy Court requesting that we be allowed to proceed to arbitration
against those Enron parties that are in bankruptcy. The Enron parties opposed our request and filed an adversary proceeding against us, alleging that the master netting agreement should not be enforced and that the Enron companies should recover
approximately $230 million from us. We have disputed such allegations and are vigorously defending our position regarding the setoff rights contained in the master netting agreement, although the Bankruptcy Court has yet to rule on the
enforceability of the master netting agreement.



In November
2003, we gave notice of our intent to pursue arbitration against Enron Canada Corp. as a non-bankrupt party to the master netting agreement. In response, Enron Canada Corp. filed a lawsuit in Canadian District Court to recover the amounts that it
claims to be owed by our Canadian subsidiary under the master netting agreement, contingent upon a Bankruptcy Court ruling on the enforceability of the master netting agreement. In December 2003, Enron filed an application with the Bankruptcy Court
for an injunction to prohibit this arbitration; the Bankruptcy Court ruled that the automatic stay of the bankruptcy applied to our request to pursue arbitration against Enron Canada Corp. under the master netting agreement. Consequently, we are
currently prohibited from enforcing the master netting agreement by arbitration. In March 2004, we appealed the enforcement of the automatic stay and requested permission from the appellate court to proceed with arbitration against Enron Canada
Corp. We also filed a motion with the Bankruptcy Court requesting a trial to determine the enforceability of the master netting agreement under the U.S. Bankruptcy Code. We are currently awaiting rulings on the appeal and the motion.



If the setoff rights are modified or disallowed, either by agreement or
otherwise, the amount available for our entities to set off against sums that might be due Enron entities could be reduced materially. In fact, we could be required to pay to Enron the full amount that it claims to be owed, while we would be an
unsecured creditor of Enron to the extent of our claim. We cannot predict with certainty whether we will incur any liability in connection with these disputes. However, given the size of the claims at issue, an adverse result could have a material
adverse effect on our financial condition, results of operations and cash flows.



Trans-Elect Litigation.In October 2003, Trans-Elect, Inc. and Illinois Electric Transmission Company, LLC filed suit against Illinois Power Company in the Northern District of Illinois requesting
specific performance and estoppel, and claiming damages as a result of breach of contract and lost profits. These causes of action allegedly arise from Illinois Powers termination of an asset purchase and sale agreement entered into by the
parties in October 2002. Under the terms of the agreement, Illinois Power agreed to sell its transmission assets to Trans-Elect if, on or before July 7, 2003, the agreement received the required FERC, ICC, SEC and Hart-Scott Rodino approvals. As of
July 7, 2003, the agreement had not been approved by, among other entities, the FERC and, as a result, Illinois Power terminated the agreement in accordance with its terms on July 8, 2003. Trans-Elect claims that Illinois Power breached the
agreement by failing to use its best efforts to obtain the required approvals and/or to negotiate an alternate agreement that could be approved.



In May 2004, Dynegy and Illinois Power Company entered into an agreement with the plaintiffs to settle all of their claims relating to this lawsuit. Under
this settlement, Dynegy paid the plaintiffs less than $3 million and recorded an expense for an equivalent amount in the second quarter 2004.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Severance Arbitrations. Dynegys former CEO, Chuck Watson, former President, Steve
Bergstrom, and former CFO, Rob Doty, each filed for arbitration pursuant to the terms of their employment/severance agreements. These former officers made arbitration claims seeking payments of up to approximately $28.7 million, $10.4 million and
$3.4 million, respectively.



The arbitration relating to Mr.
Bergstroms severance agreement was tried before a panel of three arbitrators in March 2004. Following the panels decisions with respect to Mr. Bergstroms severance claim awarding him approximately $10.4 million in damages in April
2004 and attorneys fees, costs and interest in May 2004, Dynegy paid the judgment in full. Shortly after the panels decisions in the Bergstrom matter, Dynegy entered into mediation and reached an agreement with Mr. Watson to settle his
severance claims. Pursuant to the terms of the settlement agreement, Dynegy paid Mr. Watson $22 million in exchange for a full release of his claims. Dynegy recorded an expense in the second quarter 2004 in the amount of the difference between this
settlement amount and Dynegys severance accrual for this matter. Please read Note 3Restructuring Charges for further discussion regarding the accrual relating to Mr. Watson.



The arbitration with respect to Mr. Doty is currently scheduled to commence in November 2004. Mr. Dotys agreement is
subject to interpretation and we maintain that the amount owed is substantially lower than the amount sought. We recorded a severance accrual we consider reasonable relating to this proceeding.



Farnsworth Litigation. In August 2002, Bradley Farnsworth filed
a lawsuit against Dynegy in state court claiming breach of contract and that he was demoted and ultimately fired from the position of Controller for refusing to participate in illegal activities. Specifically, Mr. Farnsworth alleges, in the words of
his amended complaint, that certain of Dynegys former executive officers requested that he shave or reduce for accounting purposes the forward price curves associated with the natural gas business in the United Kingdom for the
period of October 1, 2000 through March 31, 2001, in order to indicate a reduction in our mark-to-market losses. Mr. Farnsworth, who seeks unspecified actual and exemplary damages and other compensation, also alleges that he is entitled to a
termination payment under his employment agreement equal to 2.99 times the greater of his average base salary and incentive compensation for the highest three calendar years preceding termination or his base salary and target bonus amount for the
year of termination (currently estimated at a range of approximately $700,000 to $1,200,000). In March 2004, the judge dismissed Mr. Farnsworths claim that he was asked to shave forward price curves. Trial on the claim concerning
his employment agreement has been rescheduled for October 2004. We are vigorously defending this claim. Although reserves have been provided with respect to this litigation, we do not believe that any liability we might incur as a result of this
litigation would have a material adverse effect on our financial condition, results of operations or cash flows.



Apache Litigation. In May 2002, Apache Corporation filed suit in state court against Versado, as purchaser and processor of Apaches
gas, and DMS, as operator of the Versado assets in New Mexico, seeking more than $9 million in damages. The plaintiffs petition, as amended, alleges (i) excessive field losses of natural gas from wells owned by the plaintiff, (ii) that Versado
engaged in sham transactions with affiliates, resulting in Versado not receiving fair market value when it sells gas and liquids, and (iii) that the formula for calculating the amount Versado receives from its buyers of gas and liquids
is flawed since it is based on gas price indexes that these same affiliates are alleged to have manipulated by providing false price information to the index publisher. At trial, the plaintiffs claim with respect to the alleged
sham transactions and index manipulation, among others, were severed by the court and abated for a future trial, and the jury found in favor of the plaintiff on the remaining lost gas claim, awarding approximately $1.6 million in
damages. In May 2004, our motion to set aside this judgment was granted by the court and the jurys award to the plaintiff was vacated. The plaintiff has indicated an intent to appeal the courts decision. We do not believe that any
liability we might incur as a result



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



of this litigation would have a material adverse effect on our financial condition, results of operations or cash flows.



Gas Index Pricing Litigation. We are defending the following
suits claiming damages resulting from the alleged manipulation of gas index publications and prices by us and others: Sierra Pacific Resources and Nevada Power Company v. El Paso Corp. et al.; Bustamante v. The McGraw Hill Companies et
al.; In re Natural Gas Commodity Litigation; Texas-Ohio Energy Inc. et al. v. Centerpoint Energy et al; People of the State of Montana et al. v. Williams Energy Marketing et al; Benscheidt v. AEP Energy Services et
al. In each of these suits, the plaintiffs allege that we and other energy companies engaged in an illegal scheme to inflate natural gas prices by providing false information to gas index publications, thereby manipulating the price. All of the
complaints rely heavily on the FERC and CFTC investigations into and report concerning index-reporting manipulation in the energy industry. The plaintiffs generally seek unspecified actual and punitive damages relating to costs they claim to have
incurred as a result of the alleged conduct. These cases are in varying procedural stages, although we have not been served in the Montana case.



We are analyzing all of these claims and intend to defend against them vigorously. We cannot predict with certainty whether we will incur any liability or
to estimate the damages, if any, that might be incurred in connection with these lawsuits. We do not believe that any liability that we might incur as a result of this litigation would have a material adverse effect on our financial condition,
results of operations or cash flows.



Atlantigas Corp.
Litigation. In November 2003, Atlantigas Corporation filed suit in Maryland against us and several other defendants alleging certain conspiracies between natural gas shippers and storage facilities. The complaint alleges that the
interstate pipelines provided preferential storage and transportation services to their own unregulated marketing affiliate in return for percentages of the profits reaped by the marketing affiliate and that such conduct violated applicable FERC
regulations and the federal antitrust laws and constituted common law tortious interference with contractual and business relations. In addition, we are alleged to have conspired with the other defendants to receive preferential natural gas storage
and transportation services at off-tariff prices. The complaint seeks unspecified compensatory and punitive damages. Defendants are currently challenging plaintiff on the threshold issues of standing, statute of limitations and jurisdiction. These
issues were fully briefed in February 2004 and a hearing date has been requested but not scheduled. We are analyzing these claims and intend to defend against them vigorously. We cannot predict with certainty whether we will incur any liability or
to estimate the damages, if any, that we might incur in connection with this lawsuit.



Alleged Marketing Contract Defaults. We have posted collateral to support a portion of our obligations in our CRM business, including our obligations under one of our power tolling arrangements. While we
worked with various counterparties to provide mutually acceptable collateral or other adequate assurance under these contracts, we have not reached agreement with Sithe Independence and Sterlington/Quachita Power LLC regarding a mutually acceptable
amount of collateral in support of our obligations under our power tolling arrangements with either of these two parties. Although we are current on all contract payments to these counterparties, we previously received a notice of default from each
such party with regard to collateral. Despite receiving these notices, all parties are continuing to perform and we have fulfilled our economic commitments under these contracts. Our average annual capacity payments under these two arrangements
approximate $75 million and $63 million, respectively, and the contracts extend through 2014 and 2012, respectively, with a five- year extension option for Sterlington. If these two parties were successfully to pursue claims that we defaulted on
these contracts, they could declare a termination of their respective contracts, which generally provide for termination payments based on the agreed mark-to-market value of the contracts. Because of the effects of changes in commodity prices on the
mark-to-market value of these contracts, as well as the likelihood that we



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



would differ with our counterparties as to the estimated value of these contracts, we cannot predict with any degree of certainty the amounts of termination
payments that could be required under these two contracts. Disputes relating to these two contracts, if resolved against us, could materially adversely affect our financial condition, results of operations and cash flows.



U.S. Attorney Investigations. The U.S. Attorneys office
in Houston is continuing its investigation of our actions relating to Project Alpha and our gas trade reporting practices. We have produced documents and witnesses for interviews in connection with this investigation. Seven of our natural gas
traders were terminated in the fourth quarter 2002 for violating our Code of Business Conduct after an ongoing internal investigation conducted by Dynegys Audit and Compliance Committee in collaboration with independent counsel discovered that
inaccurate information regarding natural gas trades had been reported to various energy industry publications. In January 2003, one of our former natural gas traders was indicted in Houston on three counts of knowingly causing the transmission of
false trade reports used to calculate the index price of natural gas and four counts of wire fraud. In August 2003, however, several of these counts were dismissed as unconstitutional. Upon request by the U.S. Attorneys office for
reconsideration of this ruling, the judge reinstated the dismissed counts. The case was originally set for trial in January 2004; however, both the U.S. Attorneys office and the defense have appealed the courts rulings regarding the
dismissed and reinstated charges. The appeals are pending and a new trial date has not been set.



In June 2003, three former Dynegy employees were indicted on charges of conspiracy, securities fraud and mail and wire fraud related to the Project Alpha
transaction. Subsequently, two of these former employees plead guilty to conspiracy to commit securities fraud and are scheduled to be sentenced in August 2004. Trial on the indictment against the third employee was held in November 2003. The
defendant was convicted on all charges and, in March 2004, sentenced to a term of approximately 24 years in federal prison.



We are cooperating fully with the U.S. Attorneys office in its continuing investigation of these matters and cannot predict the ultimate outcome of
these investigations.



Additionally, the United States
Attorneys office in the Northern District of California has issued a Grand Jury subpoena requesting information related to our activities in the California energy markets in November 2002. We have been, and intend to continue, cooperating
fully with the U.S. Attorneys office in its investigation of these matters, including production of substantial documents responsive to the subpoena and other requests for information. We cannot predict the ultimate outcome of this
investigation.



Department of Labor
Investigation. In August 2002, the U.S. Department of Labor commenced an official investigation pursuant to Section 504 of ERISA with respect to the benefit plans maintained by Dynegy and its ERISA affiliates. Dynegy has cooperated with the
Department of Labor throughout this investigation, which remains ongoing. As of this date, the investigation has focused on a review of plan documentation, plan reporting and disclosure, plan recordkeeping, plan investments and investment options,
plan fiduciaries and third-party service providers, plan contributions and other operational aspects of the plans. The Department of Labor has not yet provided definitive findings resulting from its investigation.



Note 9Regulatory Issues



We are subject to regulation by various federal, state, local and foreign
agencies, including extensive rules and regulations governing transportation, transmission and sale of energy commodities as well as the discharge of materials into the environment or otherwise relating to environmental protection. Compliance with
these regulations requires general and administrative, capital and operating expenditures including those related to monitoring, pollution control equipment, emission fees and permitting at various operating facilities and



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



remediation obligations. In addition, the United States Congress has before it a number of bills that could impact regulations or impose new regulations
applicable to us and our subsidiaries. We cannot predict the outcome of these bills or other regulatory developments or the effects that they might have on our business.



Danskammer Water Permit. As previously disclosed, the state-issued water discharge permit associated with our
Danskammer facility expired in 1992. However, under New York State law, each permit remains in effect and allows for continued operation under the terms of the original permit, provided that a timely and sufficient application requesting renewal has
been filed as required. In November 2002, several environmental groups filed suit in the Supreme Court of the State of New York seeking, among other things, a declaratory judgment that the Danskammer water discharge permit expired because of alleged
deficiencies in the renewal application process. The Court has recently indicated that it intends to rule on whether the permit expired because of these deficiencies. In the event the Court determines that our renewal application expired due to
deficiencies or otherwise, we intend to appeal the Courts decision and seek a stay pending resolution of the appeal. If, under these circumstances, a stay were not granted, or if our appeal were ultimately unsuccessful, we may be required to
curtail operations at our Danskammer facility pending resolution of the appeal and/or receipt of final approval of the renewal of our water discharge permit. We cannot predict with any certainty the outcome of these proceedings; however, an adverse
outcome, particularly a requirement that we curtail operations at our Danskammer facility for any period of time, could have a material adverse effect on our financial condition, results of operations and cash flows.



FERC Market-Based Rate Authority. Market-based rate authority
allows the sale of power at negotiated rates through the bilateral market or within an organized energy market. In April 2004, the FERC issued an order concerning the ability of companies to sell electricity at market-based rates. In this order, the
FERC adopted two new tests for assessing generation market power. If an applicant for market-based rate authority is found to possess generation market power under these tests and is unsuccessful in challenging that finding, the applicant may either
propose mitigation measures or adopt cost-based rates. If the FERC finds that the proposed mitigation measures fail to eliminate the ability to exercise market power, the applicants market-based rate authority will be revoked and the applicant
will be subject to cost-based default rates, or other cost-based rates proposed by the applicant and approved by the FERC. The FERC issued a follow up order in May 2004, which (i) addressed the implementation process for pending and new market-based
rate applications and (ii) established a timeline for entities with FERC market-based rate authority to provide the FERC with their market power assessment. Despite challenges from numerous industry participants, in July 2004 the FERC upheld the
April 2004 order. These orders require entities that were previously granted market-based rate authority by the FERC, including several of our entities with applications pending since February 2002, to resubmit their market power applications in
accordance with the new directive by February 5, 2005. Although we cannot predict with any certainty whether these applications will be approved or the loss of revenues which would result from the imposition of cost-based rates, an adverse outcome
with respect to these applications, and the resulting requirement that we charge cost-based rates, could have a material adverse effect on our financial condition, results of operations and cash flows.



Note 10Employee Compensation, Savings and Pension Plans



We have various defined benefit pension plans and post-retirement benefit
plans, which are more fully described in Note 19Employee Compensation, Savings and Pension Plans beginning on page F-61 of our Form 10-K/A.



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Components of Net Periodic Benefit Cost. The components of net periodic benefit cost
were:



|                                              |  |                             |      |   |                |   |      |      |  |      |     |  |   |    
|--------------------------------------------- |  | --------------------------- | ---- | - | -------------- | - | ---- | ---- |  | ---- | --- |  | - | ---
|                                              |  | Pension Benefits            |      |   | Other Benefits
|                                              |  | Three Months Ended June 30,
|                                              |  | 2004                        |      |   | 2003           |   |      | 2004 |  | 2003
|                                              |  | (in millions)              
|Service cost benefits earned during period    |  | $                           | 2.1  |   |                | $ | 1.9  |      |  | $    | 0.2 |  | $ | 0.1
|Interest cost on projected benefit obligation |  |                             | 0.9  |   |                |   | 0.7  |      |  |      | 0.2 |  |   | 0.2
|Expected return on plan assets                |  |                             | (0.6 | ) |                |   | (0.6 | )    |  |      |    |  |   |   
|Recognized net actuarial loss                 |  |                             | 0.3  |   |                |   | 0.2  |      |  |      |    |  |   | 0.1
|                                              |  |                             |      |   |                |   |      |      |  |      |     |  |   |    
|Total net periodic benefit cost               |  | $                           | 2.7  |   |                | $ | 2.2  |      |  | $    | 0.4 |  | $ | 0.4
|                                              |  |                             |      |   |                |   |      |      |  |      |     |  |   |    
|                                              |  |                            
|                                              |  | Pension Benefits            |      |   | Other Benefits
|                                              |  | Six Months Ended June 30,  
|                                              |  | 2004                        |      |   | 2003           |   |      | 2004 |  | 2003
|                                              |  | (in millions)              
|Service cost benefits earned during period    |  | $                           | 4.2  |   |                | $ | 3.8  |      |  | $    | 0.4 |  | $ | 0.2
|Interest cost on projected benefit obligation |  |                             | 1.8  |   |                |   | 1.4  |      |  |      | 0.4 |  |   | 0.4
|Expected return on plan assets                |  |                             | (1.2 | ) |                |   | (1.2 | )    |  |      |    |  |   |   
|Recognized net actuarial loss                 |  |                             | 0.6  |   |                |   | 0.4  |      |  |      |    |  |   | 0.2
|                                              |  |                             |      |   |                |   |      |      |  |      |     |  |   |    
|Total net periodic benefit cost               |  | $                           | 5.4  |   |                | $ | 4.4  |      |  | $    | 0.8 |  | $ | 0.8
|                                              |  |                             |      |   |                |   |      |      |  |      |     |  |   |    



Contributions. In Note 19Employee Compensation, Savings and Pension PlansContributions beginning on page F-65 of our Form 10-K/A, we reported that we expected to contribute approximately $1 million to our pension
plans in 2004. This expectation has not changed.



Note 11Income Taxes



Prior Year Tax Audits. In the second
quarter 2004, we recognized an expense of $17 million associated with the conclusion of prior year federal tax audits. A charge of $20 million related to our discontinued U.K. CRM business is included in Loss from discontinued operations on our
unaudited condensed consolidated statements of operations. An offsetting benefit of $3 million is reflected in Income tax benefit (expense) on our unaudited condensed consolidated statements of operations.



Note 12Segment Information



Amounts in this footnote have been restated. For further information, please
see the Explanatory Note beginning on page 8.



We report our
operations in the following segments: GEN, NGL and CRM. All direct general and administrative expenses and other income (expense) items incurred by us on behalf of our subsidiaries are charged to the applicable subsidiary as incurred.



Pursuant to EITF Issue 02-03, all gains and losses on third-party
energy-trading contracts in the CRM segment, whether realized or unrealized, are presented net in the unaudited condensed consolidated statements of operations. For the purpose of the segment data presented below, intersegment transactions between
CRM and



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(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



our other segments are presented net in CRM intersegment revenues but are presented gross in the intersegment revenues of our other segments, as the
activities of our other segments are not subject to the net presentation requirements contained in EITF Issue 02-03. If transactions between CRM and our other segments result in a net intersegment purchase by CRM, the net intersegment purchases and
sales are presented as negative revenues in CRM intersegment revenues. In addition, intersegment hedging activities are presented net pursuant to SFAS No. 133.



Reportable segment information for the three- and six-month periods ended June 30, 2004 and 2003 is presented below:



Dynegys Segment Data for the Quarter Ended June 30,
2004

(in millions)



|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|----------------------------------------------- |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | ----- | - |  | - | ------ | -
|                                                |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |      
|Unaffiliated revenues:                          |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Domestic                                        |  | $   | 54    |   |     | $ | 689   |     |  | $ | 404                   |   |  | $     |      |   |  | $ | 1,147  |  
|Other                                           |  |     |      |   |     |   | 1     |     |  |   | (25                   | ) |  |       |      |   |  |   | (24    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|                                                |  |     | 54    |   |     |   | 690   |     |  |   | 379                   |   |  |       |      |   |  |   | 1,123  |  
|Affiliate revenues                              |  |     | 108   |   |     |   |      |     |  |   |                      |   |  |       |      |   |  |   | 108    |  
|Intersegment revenues                           |  |     | 253   |   |     |   | 76    |     |  |   | (195                  | ) |  |       | (134  | ) |  |   |       |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Total revenues                                  |  | $   | 415   |   |     | $ | 766   |     |  | $ | 184                   |   |  | $     | (134  | ) |  | $ | 1,231  |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Depreciation and amortization                   |  | $   | (47   | ) |     | $ | (25   | )   |  | $ |                      |   |  | $     | (10   | ) |  | $ | (82    | )
|Operating income (loss)                         |  | $   | 36    |   |     | $ | 75    |     |  | $ | 90                    |   |  | $     | (88   | ) |  | $ | 113    |  
|Earnings from unconsolidated investments        |  |     | 50    |   |     |   | 2     |     |  |   |                      |   |  |       |      |   |  |   | 52     |  
|Other items, net                                |  |     |      |   |     |   | (5    | )   |  |   | (1                    | ) |  |       | (8    | ) |  |   | (14    | )
|Interest expense                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | (102   | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Income from continuing operations before taxes  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | 49     |  
|Income tax expense                              |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | (13    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Income from continuing operations               |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | 36     |  
|Loss from discontinued operations, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | (19    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Net income                                      |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  | $ | 17     |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Identifiable assets:                            |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Domestic                                        |  | $   | 5,261 |   |     | $ | 2,024 |     |  | $ | 1,901                 |   |  | $     | 1,058 |   |  | $ | 10,244 |  
|Other                                           |  |     |      |   |     |   | (26   | )   |  |   | 833                   |   |  |       | 2     |   |  |   | 809    |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Total                                           |  | $   | 5,261 |   |     | $ | 1,998 |     |  | $ | 2,734                 |   |  | $     | 1,060 |   |  | $ | 11,053 |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Unconsolidated investments                      |  | $   | 515   |   |     | $ | 80    |     |  | $ |                      |   |  | $     |      |   |  | $ | 595    |  
|Capital expenditures                            |  | $   | (44   | ) |     | $ | (18   | )   |  | $ |                      |   |  | $     | (3    | ) |  | $ | (65    | )



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Dynegys Segment Data for the Quarter Ended June 30, 2003

(in millions)



|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|------------------------------------------------- |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                                  |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |     
|Unaffiliated revenues:                            |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                          |  | $   | 103   |   |     | $ | 620   |     |  | $ | 1                     |   |  | $     |     |   |  | $ | 724    |  
|Other                                             |  |     |      |   |     |   |      |     |  |   | (4                    | ) |  |       |     |   |  |   | (4     | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|                                                  |  |     | 103   |   |     |   | 620   |     |  |   | (3                    | ) |  |       |     |   |  |   | 720    |  
|Affiliate revenues                                |  |     | 114   |   |     |   |      |     |  |   | 25                    |   |  |       |     |   |  |   | 139    |  
|Intersegment revenues                             |  |     | 130   |   |     |   | 61    |     |  |   | (279                  | ) |  |       | 88   |   |  |   |       |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total revenues                                    |  | $   | 347   |   |     | $ | 681   |     |  | $ | (257                  | ) |  | $     | 88   |   |  | $ | 859    |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Depreciation and amortization                     |  | $   | (48   | ) |     | $ | (20   | )   |  | $ |                      |   |  | $     | (16  | ) |  | $ | (84    | )
|Operating income (loss)                           |  | $   | 17    |   |     | $ | 39    |     |  | $ | (360                  | ) |  | $     | (101 | ) |  | $ | (405   | )
|Earnings (losses) from unconsolidated investments |  |     | 44    |   |     |   | 2     |     |  |   | (9                    | ) |  |       |     |   |  |   | 37     |  
|Other items, net                                  |  |     |      |   |     |   | (5    | )   |  |   | (3                    | ) |  |       | (1   | ) |  |   | (9     | )
|Interest expense                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (68    | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Loss from continuing operations before taxes      |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (445   | )
|Income tax benefit                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | 165    |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Net loss                                          |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  | $ | (280   | )
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Identifiable assets:                              |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                          |  | $   | 6,574 |   |     | $ | 2,092 |     |  | $ | 3,111                 |   |  | $     | (182 | ) |  | $ | 11,595 |  
|Other                                             |  |     |      |   |     |   | 2     |     |  |   | 480                   |   |  |       |     |   |  |   | 482    |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total                                             |  | $   | 6,574 |   |     | $ | 2,094 |     |  | $ | 3,591                 |   |  | $     | (182 | ) |  | $ | 12,077 |  
|                                                  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Unconsolidated investments                        |  | $   | 521   |   |     | $ | 95    |     |  | $ | 2                     |   |  | $     |     |   |  | $ | 618    |  
|Capital expenditures                              |  | $   | (56   | ) |     | $ | (13   | )   |  | $ |                      |   |  | $     |     |   |  | $ | (69    | )



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Dynegys Segment Data for the Six Months Ended June 30, 2004

(in millions)



|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|----------------------------------------------- |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | ----- | - |  | - | ------ | -
|                                                |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |      
|Unaffiliated revenues:                          |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Domestic                                        |  | $   | 100   |   |     | $ | 1,520 |     |  | $ | 768                   |   |  | $     |      |   |  | $ | 2,388  |  
|Other                                           |  |     |      |   |     |   | 1     |     |  |   | (69                   | ) |  |       |      |   |  |   | (68    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|                                                |  |     | 100   |   |     |   | 1,521 |     |  |   | 699                   |   |  |       |      |   |  |   | 2,320  |  
|Affiliate revenues                              |  |     | 232   |   |     |   |      |     |  |   | 6                     |   |  |       |      |   |  |   | 238    |  
|Intersegment revenues                           |  |     | 522   |   |     |   | 146   |     |  |   | (549                  | ) |  |       | (119  | ) |  |   |       |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Total revenues                                  |  | $   | 854   |   |     | $ | 1,667 |     |  | $ | 156                   |   |  | $     | (119  | ) |  | $ | 2,558  |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Depreciation and amortization                   |  | $   | (95   | ) |     | $ | (45   | )   |  | $ |                      |   |  | $     | (20   | ) |  | $ | (160   | )
|Operating income (loss)                         |  | $   | 87    |   |     | $ | 142   |     |  | $ | 77                    |   |  | $     | (140  | ) |  | $ | 166    |  
|Earnings from unconsolidated investments        |  |     | 87    |   |     |   | 4     |     |  |   |                      |   |  |       |      |   |  |   | 91     |  
|Other items, net                                |  |     |      |   |     |   | (9    | )   |  |   | 2                     |   |  |       | 4     |   |  |   | (3     | )
|Interest expense                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | (190   | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Income from continuing operations before taxes  |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | 64     |  
|Income tax expense                              |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | (19    | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Income from continuing operations               |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | 45     |  
|Loss from discontinued operations, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   | (7     | )
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Net income                                      |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  | $ | 38     |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Identifiable assets:                            |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Domestic                                        |  | $   | 5,261 |   |     | $ | 2,024 |     |  | $ | 1,901                 |   |  | $     | 1,058 |   |  | $ | 10,244 |  
|Other                                           |  |     |      |   |     |   | (26   | )   |  |   | 833                   |   |  |       | 2     |   |  |   | 809    |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Total                                           |  | $   | 5,261 |   |     | $ | 1,998 |     |  | $ | 2,734                 |   |  | $     | 1,060 |   |  | $ | 11,053 |  
|                                                |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |       |   |  |   |        |  
|Unconsolidated investments                      |  | $   | 515   |   |     | $ | 80    |     |  | $ |                      |   |  | $     |      |   |  | $ | 595    |  
|Capital expenditures                            |  | $   | (58   | ) |     | $ | (27   | )   |  | $ |                      |   |  | $     | (5    | ) |  | $ | (90    | )



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DYNEGY HOLDINGS INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited and Restated)

For the
Interim Periods Ended June 30, 2004 and 2003



Dynegys Segment Data for the Six Months Ended June 30, 2003

(in millions)



|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|------------------------------------------------------------------ |  | --- | ----- | - | --- | - | ----- | --- |  | - | --------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                                                   |  | GEN |       |   | NGL |   |       | CRM |  |   | Other andEliminations |   |  | Total |     
|Unaffiliated revenues:                                             |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                                           |  | $   | 219   |   |     | $ | 1,598 |     |  | $ | 287                   |   |  | $     |     |   |  | $ | 2,104  |  
|Other                                                              |  |     |      |   |     |   |      |     |  |   | 5                     |   |  |       |     |   |  |   | 5      |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|                                                                   |  |     | 219   |   |     |   | 1,598 |     |  |   | 292                   |   |  |       |     |   |  |   | 2,109  |  
|Affiliate revenues                                                 |  |     | 232   |   |     |   |      |     |  |   | 59                    |   |  |       |     |   |  |   | 291    |  
|Intersegment revenues                                              |  |     | 299   |   |     |   | 134   |     |  |   | (551                  | ) |  |       | 118  |   |  |   |       |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total revenues                                                     |  | $   | 750   |   |     | $ | 1,732 |     |  | $ | (200                  | ) |  | $     | 118  |   |  | $ | 2,400  |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Depreciation and amortization                                      |  | $   | (89   | ) |     | $ | (40   | )   |  | $ | (1                    | ) |  | $     | (38  | ) |  | $ | (168   | )
|Operating income (loss)                                            |  | $   | 100   |   |     | $ | 90    |     |  | $ | (322                  | ) |  | $     | (144 | ) |  | $ | (276   | )
|Earnings from unconsolidated investments                           |  |     | 82    |   |     |   | 5     |     |  |   | 2                     |   |  |       |     |   |  |   | 89     |  
|Other items, net                                                   |  |     | 3     |   |     |   | (10   | )   |  |   | 23                    |   |  |       | (2   | ) |  |   | 14     |  
|Interest expense                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (136   | )
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Loss from continuing operations before taxes                       |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (309   | )
|Income tax benefit                                                 |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | 115    |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Loss from continuing operations                                    |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (194   | )
|Loss from discontinued operations, net of taxes                    |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | (10    | )
|Cumulative effect of change in accounting principles, net of taxes |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   | 57     |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Net loss                                                           |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  | $ | (147   | )
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Identifiable assets:                                               |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Domestic                                                           |  | $   | 6,574 |   |     | $ | 2,092 |     |  | $ | 3,111                 |   |  | $     | (182 | ) |  | $ | 11,595 |  
|Other                                                              |  |     |      |   |     |   | 2     |     |  |   | 480                   |   |  |       |     |   |  |   | 482    |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Total                                                              |  | $   | 6,574 |   |     | $ | 2,094 |     |  | $ | 3,591                 |   |  | $     | (182 | ) |  | $ | 12,077 |  
|                                                                   |  |     |       |   |     |   |       |     |  |   |                       |   |  |       |      |   |  |   |        |  
|Unconsolidated investments                                         |  | $   | 521   |   |     | $ | 95    |     |  | $ | 2                     |   |  | $     |     |   |  | $ | 618    |  
|Capital expenditures                                               |  | $   | (93   | ) |     | $ | (25   | )   |  | $ |                      |   |  | $     | (3   | ) |  | $ | (121   | )



Note 13Subsequent Events



In July 2004, we announced agreements to sell our 50%
interests in the Commonwealth and Hartwell power generating facilities. These sales are targeted to close in the fourth quarter 2004, subject to receipt of required regulatory, lender and other approvals. Also in July 2004, we sold our
unconsolidated investments in the Oyster Creek and Michigan Power generating facilities. Please read Note 5Unconsolidated Investments for further discussion.



In July 2004, Illinois Power terminated its lease arrangement and DMG purchased four gas turbines located in Tilton,
Illinois for $81 million. Please read Note 6Debt for further discussion.



In July 2004, we entered into interest rate swaps with a notional value of $500 million. Please read Note4 Risk Management Activities and Accumulated Other Comprehensive Income (Loss)Fair Value Hedges for
further discussion.



In August 2004, we used $154 million in
proceeds from our $600 million term loan to pre-pay all indebtedness and other obligations under our ABG Gas Supply financing. This pre-payment was required by the terms of our new credit facility.



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Item 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures. Effective as of the end of the second quarter 2004, an evaluation was carried out under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). This evaluation included
consideration of the various processes carried out under the direction of Dynegys disclosure committee in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within
the time periods specified by the SEC. This evaluation also considered the work completed as of the end of the second quarter 2004 relating to our participation in Dynegys efforts to achieve compliance with Section 404 of the Sarbanes-Oxley
Act of 2002, which is further described below. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level and designed to ensure that the information required to
be disclosed in our SEC reports is recorded, processed, summarized and reported within the requisite time periods. While our disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a
timely basis, this assurance is subject to limitations inherent in any control system, no matter how well it may be designed or administered.



Changes in Internal Controls. There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls performed during the second quarter 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting.



During the second and third quarter 2004,
deficiencies were identified that resulted in changes to the consolidated enterprisess internal controls over financial reporting, including matters relating to system access and system implementation controls, segregation of duties and
documentation of controls and procedures and their effective operation and monitoring. Deficiencies were also identified in the consolidated enterprises tax accounting and tax reconciliation controls and processes that make this an area of
particular focus. During the third quarter 2004, we determined that adjustments related to our deferred income tax accounts in periods prior to 2004 were required. We identified these deficiencies and promptly brought them to the attention of
Dynegys audit and compliance committee and independent auditors. Accordingly, in this Form 10-Q/A, we have restated our consolidated financial statements. For further information, please see the Explanatory Note beginning on page 8. We believe
we have addressed these tax deficiencies, by taking the following steps to improve our internal controls around our tax accounting and tax reconciliation controls and processes:



| |  |  | Increased the levels of review in the preparation of the quarterly and annual tax provision;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Formalized processes, procedures and documentation standards; and
| | - |  | -----------------------------------------------------------------



| |  |  | Restructured the consolidated enterprises Tax Department to ensure segregation of duties regarding preparation and review of the quarterly and annual tax provision.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are a wholly-owned subsidiary of Dynegy Inc.
and the primary holding company for Dynegy Inc.s GEN and NGL businesses. We are not subject to the disclosure requirements promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 until we file our Annual Report on Form 10-K for the
year ended December 31, 2005. However, in seeking to achieve compliance with Section 404 within the prescribed period, Dynegy Inc.s management has formed a steering committee to oversee its efforts to comply with Section 404, engaged outside
consultants and adopted and implemented a detailed project work plan to assess the adequacy of its internal controls over financial reporting, remediate any control weaknesses that may be identified, validate through testing that controls are
functioning as documented and implement a continuous reporting and improvement process for internal controls over financial reporting. Because we comprise a key part of Dynegy as a consolidated enterprise, our internal controls over financial
reporting are being reviewed in connection with this effort.



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Additionally, the Public Company Accounting Oversight Board recently adopted very stringent standards
governing managements required evaluation of its internal controls over financial reporting and the independent auditors review of those controls and managements evaluation thereof. These standards will likely result in a
significant number of companies, which may include Dynegy, identifying significant deficiencies and/or material weaknesses in their internal controls. Indeed, the items referenced in the preceding paragraph could preclude the independent auditors
from delivering an unqualified opinion on internal controls under Section 404 of Sarbanes-Oxley.



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DYNEGY HOLDINGS INC.



PART II.
OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



See Note 8 to the accompanying unaudited condensed consolidated financial
statements for discussion of the material legal proceedings to which we are a party.



Item 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) The following documents are included as exhibits to this Form 10-Q/A:



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.1  |  | Amended and Restated Credit Agreement dated as of May 28, 2004 among Dynegy Holdings Inc., as Borrower, Dynegy Inc., as Parent Guarantor, the Other Guarantors Party Thereto, the Lenders Party
Thereto and Various Other Parties Thereto (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of Dynegy Inc. filed on June 1, 2004, File No. 1-15659).                                                                       
|      | 
|10.2  |  | Amendment No. 1 to Collateral Trust and Intercreditor Agreement, dated as of May 28, 2004, among Dynegy Holdings Inc., various grantors named therein, JPMorgan Chase Bank, as collateral
agent, Wilmington Trust Company, as corporate trustee, and John M. Beeson, Jr., as individual trustee (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 of Dynegy Inc., File No.
1-15659).
|      | 
|+31.1 |  | Chief Executive Officer Certification Pursuant to Rule 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|      | 
|+31.2 |  | Chief Financial Officer Certification Pursuant to Rule 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|      | 
|*32.1 |  | Chief Executive Officer Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                           
|      | 
|*32.2 |  | Chief Financial Officer Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                           

---

|+ | Filed herewith.
|- | ---------------

|* | Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification will be treated as accompanying this report and not filed as part of
such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K of Dynegy Holdings Inc. filed during the second quarter 2004:



1. We filed a Current Report on Form 8-K on June 2, 2004. Items 5 and 7 were reported and no financial
statements were filed.



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DYNEGY HOLDINGS INC.



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                       |  |                      |  |                                                                                                                              
|---------------------- |  | -------------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|                       |  | DYNEGY HOLDINGS INC.
|                       |  |                     
|Date: January 26, 2005 |  | By:                  |  | /s/    NICK J.
CARUSO                                                                                                        
|                       |  |                      |  | Nick J. Caruso Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)



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