UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)
[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarterly period       September 30, 1998
                         ----------------------------------------------
                                       or

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

For the transition period from                  to 
                               -----------------  --------------------

Commission       Registrant, State of Incorporation,      IRS Employer
File Number         Address and Telephone Number        Identification No.
-----------      -----------------------------------    ------------------

1-12459         MIDAMERICAN ENERGY HOLDINGS COMPANY       42-1451822
                     (An Iowa Corporation)
                   666 Grand Ave. PO Box 657
                    Des Moines, Iowa 50303
                        515-242-4300

1-11505           MIDAMERICAN ENERGY COMPANY              42-1425214
                     (An Iowa Corporation)
                  666 Grand Ave. PO Box 657
                    Des Moines, Iowa 50303
                        515-242-4300

     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 the number of shares  outstanding of each of the issuers'  classes
of common stock as of the latest practicable date.

   Registrant             Class        Shares Outstanding at October 30, 1998 
------------------  -----------------  --------------------------------------
MidAmerican Energy    Common Stock             94,104,682 *
 Holdings Company   without par value

MidAmerican Energy    Common Stock      70,980,203 (all of which were held by
 Company            without par value    MidAmerican Energy Holdings Company)

* MidAmerican Energy Holdings Company common shares outstanding at October 30,
1998, exclude 437,131 shares which are held by a subsidiary.
<PAGE>


                       MIDAMERICAN ENERGY HOLDINGS COMPANY
                                       AND
                           MIDAMERICAN ENERGY COMPANY


This combined  Form 10-Q is  separately  filed by  MidAmerican  Energy  Holdings
Company  (Company or Holdings) and  MidAmerican  Energy  Company  (MidAmerican).
Information  herein  relating  to each  individual  registrant  is filed by such
registrant  on  its  own  behalf.  Accordingly,  except  for  its  subsidiaries,
MidAmerican  makes no  representation  as to  information  relating to any other
subsidiary of Holdings.



                                TABLE OF CONTENTS

                          PART I. FINANCIAL INFORMATION

ITEM 1.   Financial Statements                                         Page No.

                       MidAmerican Energy Holdings Company

          Consolidated Statements of Income..............................  3
          Consolidated Statements of Comprehensive Income................  4
          Consolidated Balance Sheets....................................  5
          Consolidated Statements of Cash Flows..........................  6
          Notes to Consolidated Financial Statements.....................  7

                           MidAmerican Energy Company

          Consolidated Statements of Income.............................. 12
          Consolidated Balance Sheets.................................... 13
          Consolidated Statements of Cash Flows.......................... 14
          Notes to Consolidated Financial Statements..................... 15

ITEM 2.   Management's Discussion and Analysis of
            Financial Condition and Results of Operations................ 16

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk..... 42

                           PART II. OTHER INFORMATION

ITEM 1.   Legal Proceedings ............................................. 42

ITEM 4.   Submission of Matters to a Vote of Security Holders............ 43

ITEM 6.   Exhibits and Reports on Form 8-K............................... 44

Signatures .............................................................. 45

                                      -2-
<PAGE>
<TABLE>
<CAPTION>
                       MIDAMERICAN ENERGY HOLDINGS COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                      THREE MONTHS            NINE MONTHS            TWELVE MONTHS
                                                     ENDED SEPT. 30          ENDED SEPT. 30          ENDED SEPT. 30
                                                    1998        1997        1998        1997        1998         1997
                                                 ---------   ---------  ----------  ----------   ----------  ----------
<S>                                              <C>         <C>        <C>         <C>          <C>         <C>
OPERATING REVENUES
Electric utility...............................  $ 363,992   $ 334,336  $  907,440  $  850,453   $1,183,287  $1,109,438
Gas utility....................................     63,156      60,208     303,644     352,686      487,264     534,933
Nonregulated...................................     85,562      40,701     166,577     197,528      228,724     295,168
                                                 ---------   ---------  ----------  ----------   ----------  ----------
                                                   512,710     435,245   1,377,661   1,400,667    1,899,275   1,939,539
                                                 ---------   ---------  ----------  ----------   ----------  ----------

OPERATING EXPENSES
Utility:
  Cost of fuel, energy and capacity...........      71,906      67,258     174,190     178,682      231,268     235,337
  Cost of gas sold............................      33,127      34,320     171,096     221,252      295,860     346,541
  Other operating expenses....................     118,291      98,686     336,814     290,984      475,624     381,032
  Maintenance.................................      27,522      24,217      80,845      70,315      108,620      90,320
  Depreciation and amortization...............      44,178      42,815     132,560     126,883      176,217     168,349
  Property and other taxes....................      24,370      26,139      74,135      76,482       98,970      97,324
                                                 ---------   ---------  ----------  ----------   ----------  ----------
                                                   319,394     293,435     969,640     964,598    1,386,559   1,318,903
                                                 ---------   ---------  ----------  ----------   ----------  ----------
Nonregulated:
  Cost of sales...............................      49,851      37,112     113,084     183,325      169,941     277,084
  Other.......................................      28,723       6,750      49,212      22,168       57,120      32,402
                                                 ---------   ---------  ----------  ----------   ----------  ----------
                                                    78,574      43,862     162,296     205,493      227,061     309,486
                                                 ---------   ---------  ----------  ----------   ----------  ----------
  Total operating expenses....................     397,968     337,297   1,131,936   1,170,091    1,613,620   1,628,389
                                                 ---------   ---------  ----------  ----------   ----------  ----------

OPERATING INCOME..............................     114,742      97,948     245,725     230,576      285,655     311,150
                                                 ---------   ---------  ----------  ----------   ----------  ----------

NON-OPERATING INCOME
Interest income...............................       3,188       1,019       7,818       4,134        9,002       5,058
Dividend income...............................       2,340       3,252       7,792      10,507       11,077      14,411
Realized gains and losses on securities, net..      (2,249)       (276)       (230)        340        7,228        (969)
Other, net....................................        (887)      5,573       5,548      12,837       14,822       8,276
                                                 ---------   ---------  ----------  ----------   ----------  ----------
                                                     2,392       9,568      20,928      27,818       42,129      26,776
                                                 ---------   ---------  ----------  ----------   ----------  ----------
FIXED CHARGES
Interest on long-term debt....................      21,009      20,617      61,617      66,909       84,606      92,295
Other interest expense........................       3,482       2,383      10,110       7,831       12,313      10,493
Preferred dividends of subsidiaries...........       3,234       3,234       9,699      11,234       12,933      15,175
Allowance for borrowed funds..................      (1,074)       (620)     (2,749)     (1,932)      (3,414)     (2,858)
                                                 ---------   ---------  ----------  ----------   ----------  ----------
                                                    26,651      25,614      78,677      84,042      106,438     115,105
                                                 ---------   ---------  ----------  ----------   ----------  ----------
INCOME FROM CONTINUING OPERATIONS
   BEFORE INCOME TAXES........................      90,483      81,902     187,976     174,352      221,346     222,821
INCOME TAXES..................................      36,861      32,197      74,621      66,297       76,714      85,057
                                                 ---------   ---------  ----------  ----------   ----------  ----------
INCOME FROM CONTINUING OPERATIONS.............      53,622      49,705     113,355     108,055      144,632     137,764
                                                 ---------   ---------  ----------  ----------   ----------  ----------

DISCONTINUED OPERATIONS
Income (loss) from operations
  (net of income taxes).......................           -         407           -       1,105       (1,223)        312
Loss on disposal (net of income taxes)........           -      (3,200)          -      (3,724)        (386)     (4,192)
                                                 ---------   ---------  ----------  ----------   ----------  ----------
                                                         -      (2,793)          -      (2,619)      (1,609)     (3,880)
                                                 ---------   ---------  ----------  ----------   ----------  ----------
NET INCOME....................................   $  53,622   $  46,912  $  113,355  $  105,436   $  143,023  $  133,884
                                                 =========   =========  ==========  ==========   ==========  ==========

AVERAGE COMMON SHARES OUTSTANDING.............      94,105      97,097      94,504      98,752       94,873      99,213

EARNINGS PER COMMON SHARE
  -BASIC AND DILUTED:
Continuing operations.........................   $    0.57   $    0.51  $     1.20  $     1.09   $     1.52  $     1.39
Discontinued operations.......................           -       (0.03)          -       (0.02)       (0.01)      (0.04)
                                                 ---------   ---------- ----------  ----------   ----------  ----------
Earnings per average common share.............   $    0.57   $    0.48  $     1.20  $     1.07   $     1.51  $     1.35
                                                 =========   =========  ==========  ==========   ==========  ==========

DIVIDENDS DECLARED PER SHARE..................   $    0.30   $    0.30  $     0.90  $     0.90   $     1.20  $     1.20
                                                 =========   =========  ==========  ==========   ==========  ==========
</TABLE>
The accompanying notes are an integral part of these statements.
                                      -3-
<PAGE>
<TABLE>
<CAPTION>

                       MIDAMERICAN ENERGY HOLDINGS COMPANY
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                   (Unaudited)
                                 (In Thousands)


                                                           THREE MONTHS             NINE MONTHS           TWELVE MONTHS
                                                          ENDED SEPT. 30          ENDED SEPT. 30         ENDED SEPT. 30
                                                          1998       1997         1998       1997        1998       1997    
                                                       ---------   ---------    --------   --------    --------   --------    


<S>                                                    <C>         <C>          <C>        <C>         <C>        <C>     
NET INCOME............................................ $  53,622   $  46,912    $113,355   $105,436    $143,023   $133,884
                                                       ---------   ---------    --------   --------    --------   --------

OTHER COMPREHENSIVE INCOME, NET 
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period.......  (142,235)    285,706     (88,982)   288,728    (153,783)   291,965
  Less reclassification adjustment for realized gains
    (losses) reflected in net income during period....    (2,249)       (284)       (230)       329       7,228       (993)
                                                       ----------  ---------    --------   --------    --------   --------
                                                        (139,986)    285,990     (88,752)   288,399    (161,011)   292,958
Income tax (benefit) expense..........................   (48,995)    100,357     (30,981)   101,146     (56,560)   102,741
                                                       ---------   ---------    --------   --------    --------   --------
                                                         (90,991)    185,633     (57,771)   187,253    (104,451)   190,217
                                                       ---------   ---------    --------   --------    --------   --------

COMPREHENSIVE INCOME.................................. $ (37,369)  $ 232,545    $ 55,584   $292,689    $ 38,572   $324,101
                                                       =========   =========    ========   ========    ========   ========

</TABLE>
The accompanying notes are an integral part of these statements.


                                      -4-

<PAGE>
<TABLE>
<CAPTION>
                       MIDAMERICAN ENERGY HOLDINGS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)
                                                                                              AS OF  
                                                                          ---------------------------------------------       
                                                                                   SEPT. 30                 DECEMBER 31
                                                                          ----------------------------      -----------
                                                                            1998              1997              1997 
                                                                          ----------       ----------        ----------
                                                                                  (UNAUDITED)
<S>                                                                       <C>              <C>               <C>    
ASSETS
UTILITY PLANT
Electric..........................................................        $4,136,095       $4,062,408        $4,084,920
Gas...............................................................           774,482          746,173           756,874
                                                                          ----------       ----------        ----------
                                                                           4,910,577        4,808,581         4,841,794
Less accumulated depreciation and amortization....................         2,390,915        2,250,667         2,275,099
                                                                          ----------       ----------        ----------
                                                                           2,519,662        2,557,914         2,566,695
Construction work in progress.....................................            87,442           53,236            55,418
                                                                          ----------       ----------        ----------
                                                                           2,607,104        2,611,150         2,622,113
                                                                          ----------       ----------        ----------

POWER PURCHASE CONTRACT...........................................           166,345          188,860           173,107
                                                                          ----------       ----------        ----------

INVESTMENT IN DISCONTINUED OPERATIONS.............................                 -            6,655                 -
                                                                          ----------       ----------        ----------

CURRENT ASSETS
Cash and cash equivalents.........................................            14,151           12,290            10,468
Receivables.......................................................           157,504          214,462           207,471
Inventories.......................................................            90,851           94,969            86,091
Other.............................................................            39,538           12,169            18,452
                                                                          ----------       ----------        ----------
                                                                             302,044          333,890           322,482
                                                                          ----------       ----------        ----------

INVESTMENTS AND NONREGULATED PROPERTY, NET........................           738,836          883,186           799,524
                                                                          ----------       ----------        ----------

OTHER ASSETS......................................................           408,611          376,814           360,865
                                                                          ----------       ----------        ----------

TOTAL ASSETS......................................................        $4,222,940       $4,400,555        $4,278,091
                                                                          ==========       ==========        ==========

CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity.......................................        $1,245,883       $1,368,299        $1,301,286
MidAmerican preferred securities, not subject to
    mandatory redemption..........................................            31,759           31,765            31,763
Preferred securities, subject to mandatory redemption:
    MidAmerican preferred securities..............................            50,000           50,000            50,000
    MidAmerican-obligated preferred securities of subsidiary trust
       holding solely MidAmerican junior subordinated debentures..           100,000          100,000           100,000
Long-term debt (excluding current portion)........................         1,044,981        1,103,551         1,034,211
                                                                          ----------       ----------        ----------
                                                                           2,472,623        2,653,615         2,517,260
                                                                          ----------       ----------        ----------
CURRENT LIABILITIES
Notes payable.....................................................           212,499          141,354           138,054
Current portion of long-term debt ................................            69,631           77,727           144,558
Current portion of power purchase contract........................            14,361           13,718            14,361
Accounts payable..................................................           140,020          133,523           145,855
Taxes accrued.....................................................           115,227           72,739            92,629
Interest accrued..................................................            20,075           20,503            22,355
Other.............................................................            52,966           53,630            38,766
                                                                          ----------       ----------        ----------
                                                                             624,779          513,194           596,578
                                                                          ----------       ----------        ----------
OTHER LIABILITIES
Power purchase contract...........................................            83,143           97,504            83,143
Deferred income taxes.............................................           720,658          809,287           761,795
Investment tax credit.............................................            78,847           84,556            83,127
Other ............................................................           242,890          242,399           236,188
                                                                          ----------       ----------        ----------
                                                                           1,125,538        1,233,746         1,164,253
                                                                          ----------       ----------        ----------

TOTAL CAPITALIZATION AND LIABILITIES..............................        $4,222,940       $4,400,555        $4,278,091
                                                                          ==========       ==========        ==========
</TABLE>
The accompanying notes are an integral part of these statements.


                                      -5-
<PAGE>
<TABLE>
<CAPTION>

                       MIDAMERICAN ENERGY HOLDINGS COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

                                                                         THREE MONTHS              NINE MONTHS
                                                                      ENDED SEPTEMBER 30        ENDED SEPTEMBER 30          
                                                                       1998        1997          1998        1997    
                                                                     ---------    --------     --------    ---------
<S>                                                                  <C>          <C>          <C>         <C>    
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income.........................................................  $  53,622    $ 46,912     $113,355    $ 105,436
Adjustments to reconcile net income to net cash provided:
    Depreciation and amortization...................................    52,243      51,118      150,303      147,100
    Net decrease in deferred income taxes and
       investment tax credit, net...................................    (4,418)     (3,124)     (14,539)     (15,072)
    Amortization of other assets....................................    11,624       5,773       30,969       18,247
    Loss from discontinued operations...............................         -       2,792            -        2,619
    Loss (gain) on sale of securities, assets and other investments.     2,409         189       (6,186)      (1,638)
    Other-than-temporary decline in value of investments............         -           3          110          255
    Impact of changes in working capital, net of effects
      from discontinued operations..................................   (10,573)     (2,406)      52,804       69,303
    Other...........................................................    (3,968)      7,993       12,392        8,039
                                                                     ---------    --------     --------    ---------
      Net cash provided.............................................   100,939     109,250      339,208      334,289
                                                                     ---------    --------     --------    ---------

NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures...............................       (45,633)    (49,815)    (114,225)    (113,844)
Quad Cities Nuclear Power Station
    decommissioning trust fund..................................        (2,875)     (2,779)      (8,533)      (7,060)
Deferred energy efficiency expenditures.........................             -      (5,909)           -      (12,258)
Nonregulated capital expenditures...............................        (1,612)     (2,498)     (40,295)      (9,500)
Purchase of real estate brokerage companies.....................       (26,500)          -     (105,485)           -
Purchase of securities..........................................       (35,713)    (10,866)    (134,067)    (127,273)
Proceeds from sale of securities................................        44,934      36,168      149,751      168,217
Proceeds from sale of assets and other investments..............           501       1,472       28,845       15,142
Investment in discontinued operations...........................             -          96            -      145,289
Other investing activities, net.................................          (454)     (6,793)        (467)      (6,741)
                                                                     ---------    --------     --------    ---------
   Net cash (used) provided ....................................       (67,352)    (40,924)    (224,476)      51,972
                                                                     ---------    --------     --------    ---------

NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid...........................................       (28,343)    (29,122)     (85,029)     (88,845)
Issuance of long-term debt, net of issuance cost................             -           -      158,440            -
Retirement of long-term debt, including reacquisition cost......      (157,882)    (58,069)    (233,304)    (119,859)
Reacquisition of preferred shares...............................            (1)          -           (4)          (4)
Reacquisition of common shares..................................             -     (21,311)     (25,597)     (67,876)
Decrease in MidAmerican Capital Company
    unsecured revolving credit facility.........................             -           -            -     (174,500)
Net increase (decrease) in notes payable........................        45,070      (4,831)      74,445      (20,636)
                                                                     ---------    --------     --------    ---------
    Net cash used...............................................      (141,156)   (113,333)    (111,049)    (471,720)
                                                                     ---------    --------     --------    ---------

NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.......          (107,569)    (45,007)       3,683      (85,459)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................       121,720      57,297       10,468       97,749
                                                                     ---------    --------     --------    ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................     $  14,151    $ 12,290     $ 14,151    $  12,290
                                                                     =========    ========     ========    =========

ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized.......................     $  22,755    $ 27,085     $ 66,754    $  77,063
                                                                     =========    ========     ========    =========
Income taxes paid...............................................     $  23,760    $ 25,349     $ 58,411    $ 102,102
                                                                     =========    ========     ========    =========
</TABLE>
The accompanying notes are an integral part of these statements.


                                      -6-
<PAGE>


                       MIDAMERICAN ENERGY HOLDINGS COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A)   GENERAL:

     The consolidated financial statements included herein have been prepared by
Holdings, without audit, pursuant to the rules and regulations of the Securities
and Exchange  Commission.  Certain information and disclosures normally included
in  financial   statements   prepared  in  accordance  with  generally  accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations.  In the opinion of the Company,  all adjustments  have been made to
present fairly the financial position, the results of operations,  comprehensive
income and the changes in cash flows for the  periods  presented.  Although  the
Company  believes  that the  disclosures  are  adequate to make the  information
presented not  misleading,  it is suggested that these  financial  statements be
read in conjunction  with the  consolidated  financial  statements and the notes
thereto included in the Company's latest Annual Report on Form 10-K.

B)   ENVIRONMENTAL MATTERS:

     1) Manufactured Gas Plant Facilities:

     The United States Environmental Protection Agency (EPA) and the state
environmental  agencies have determined that  contaminated  wastes  remaining at
certain decommissioned manufactured gas plant (MGP) facilities may pose a threat
to the public health or the environment if such  contaminants  are in sufficient
quantities and at such concentrations as to warrant remedial action.

     MidAmerican is evaluating 27 properties  which were, at one time,  sites of
gas  manufacturing  plants in which it may be a  potentially  responsible  party
(PRP). The purpose of these  evaluations is to determine whether waste materials
are present,  whether such materials constitute an environmental or health risk,
and whether MidAmerican has any responsibility for remedial action.  MidAmerican
is currently  conducting field  investigations at seventeen of the sites and has
completed  investigations  at one of the sites.  In  addition,  MidAmerican  has
completed removals at three of the sites.  MidAmerican is continuing to evaluate
several of the sites to determine  its  responsibility,  if any, for  conducting
site investigations or other site activity.

     MidAmerican's  present estimate of probable remediation costs for the sites
discussed above as of September 30, 1998, is $24 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The Illinois
Commerce  Commission  (ICC) has approved the use of a tariff rider which permits
recovery  of the  actual  costs of  litigation,  investigation  and  remediation
relating to former MGP sites.  MidAmerican's present rates in Iowa provide for a
fixed annual  recovery of MGP costs.  MidAmerican  intends to pursue recovery of
the remediation costs from other PRPs and its insurance carriers.

     The  estimate  of  probable  remediation  costs  is  established  on a site
specific  basis.  The costs are  accumulated in a three-step  process.  First, a
determination  is made as to whether  MidAmerican  has potential legal liability
for the site and whether information exists to indicate that contaminated wastes
remain at the site.  Second, if potential legal liability  exists,  the costs of
performing  a  preliminary   investigation  and  the  costs  of  removing  known
contaminated soil are accrued. Finally, as the investigation is performed and if
it is determined  remedial action is required,  the best estimate of remediation
costs is accrued. If necessary,  the estimate is revised when a consent order is
issued.  The  estimated  recorded   liabilities  for  these  properties  include
incremental direct costs of the remediation effort,  costs for future monitoring
at sites and costs of  compensation  to employees  for time expected to be spent
directly on the remediation effort. The estimated recorded liabilities for these
properties  are based upon  preliminary  data.  Thus,  actual  costs  could vary
significantly from the estimates.  The estimate could change materially based on
facts and circumstances  derived from site  investigations,  changes in required
remedial action and changes in technology relating to remedial alternatives.  In
addition, insurance recoveries for some or all of the costs may be possible, but
the  liabilities  recorded  have  not  been  reduced  by any  estimate  of  such
recoveries.

                                      -7-
<PAGE>

     Although the timing of potential  incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods,  management
believes  that the  outcome of these  issues  will not have a  material  adverse
effect on MidAmerican's financial position or results of operations.

     2) Clean Air Act:

     Following recommendations provided by the Ozone Transport Assessment Group,
the EPA,  in  November  1997,  issued  a Notice  of  Proposed  Rulemaking  which
identified  22  states  and the  District  of  Columbia  as  making  significant
contribution  to  nonattainment  of the ozone standard in downwind states in the
eastern half of the United States.  In September  1998, the EPA issued its final
rules  in  this  proceeding.  Iowa is not  subject  to the  emissions  reduction
requirements in the final rules, and, as such,  MidAmerican's facilities are not
subject to additional emissions reductions as a result of this initiative.

     On July 18, 1997,  the EPA adopted  revisions  to the National  Ambient Air
Quality  Standards  (NAAQS) for ozone and a new  standard  for fine  particulate
matter.  Based on data to be obtained  from  monitors  located  throughout  each
state,  the EPA will determine  which states have areas that do not meet the air
quality standards (i.e., areas that are classified as nonattainment). If a state
has area(s) classified as nonattainment area(s), the state is required to submit
a State  Implementation  Plan  specifying  how it will reach  attainment  of the
standards  through emission  reductions or other means. In August 1998, the Iowa
Environmental Protection Commission adopted by reference the NAAQS for ozone and
fine particulate matter.

     The  impact  of  the  new  standards  on  MidAmerican  will  depend  on the
attainment  status  of  the  areas  surrounding   MidAmerican's  operations  and
MidAmerican's  relative contribution to the nonattainment status. The attainment
status of areas in the  state of Iowa will not be known for two to three  years.
However,   if   MidAmerican's   operations   are  determined  to  contribute  to
nonattainment,  the  installation  of  additional  control  equipment,  such  as
scrubbers and/or selective catalytic reduction,  on MidAmerican's units could be
required.  The cost to install such equipment could be significant.  MidAmerican
will continue to follow the attainment  status of the areas in which it operates
and evaluate the  potential  impact of the status of these areas on  MidAmerican
under the new regulations.

C)   RATE MATTERS:

     As a result of a negotiated settlement in Illinois, MidAmerican reduced its
Illinois  electric  service  rates by annual  amounts of $13.1  million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively. MidAmerican
implemented  an additional  $0.9 million  annual rate reduction for its Illinois
residential  customers,  effective  August 1, 1998, in connection with Illinois'
electric utility restructuring law.

     On June 27,  1997,  the Iowa  Utilities  Board (IUB)  approved a March 1997
settlement agreement between  MidAmerican,  the Iowa Office of Consumer Advocate
(OCA) and other parties. Six major components of the settlement and their status
are as follows:

     1) On an annualized  basis,  prices for residential  customers were reduced
$8.5 million,  $10.0 million and $5.0 million  effective  November 1, 1996, July
11, 1997, and June 1, 1998,  respectively,  for a total annual decrease of $23.5
million.

     2) Rates for industrial  customers  will be reduced by $6 million  annually
and rates for  commercial  customers  will be reduced  by $4  million  annually.
MidAmerican has been given  permission to implement these  reductions  through a
retail access pilot project and through negotiated individual contracts.  In the
event that these  contracts  in the  aggregate do not reduce rates by $6 million
and $4 million,  respectively,  MidAmerican  is required to apply any  remaining
amount to  across-the-board  rate  reductions to customers who do not enter into
contracts.

     The effective  date for these rate  reductions was set for June 1, 1998, in
the IUB Order approving the settlement.  However, the IUB approved a MidAmerican
request  to extend  the  deadlines  until  September  1,  1998,  for  industrial
customers  and  December  31,  1998,  for  commercial  customers.  The  delay in
deadlines  includes an  obligation  

                                      -8-
<PAGE>
to increase the amount of the reduction on a one-time basis to reflect the time 
value of money between June 1, 1998, and the new deadlines.  MidAmerican  
estimates it will not have any interest  obligation with  respect to the  
industrial  contracts,  and will not incur  any  material interest obligation
with respect to its commercial contracts.

     The negotiated  contracts  have  differing  terms and conditions as well as
prices.  The  contracts  range in length  from five to ten years,  and some have
price  renegotiation  and early  termination  provisions  exercisable  by either
party.  The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 10-year contracts.  Prices are set
as fixed prices;  however,  many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes,  and transition costs.  While the contract prices are fixed (except
for the potential adjustment elements),  the costs MidAmerican incurs to fulfill
these  contracts  will vary.  On an aggregate  basis the annual  revenues  under
contract are approximately $155 million.

     The IUB has recently considered the contracting process in two proceedings.
Its decisions in those proceedings  allowed the contracting efforts to continue.
Contracts remain subject to IUB regulation.

     3)  A tracking mechanism (Cooper Tracker) is being used to currently 
recover costs for capital  improvements  required by the Cooper Nuclear  Station
Power   Purchase   Contract.   Revenues  from  the  Cooper  Tracker  will  total
approximately  $6 million  in 1998.  Other  operating  expenses  will  include a
comparable amount for currently expensing the related costs.

     4)  Elimination of the Iowa energy  adjustment  clause (EAC).  Prior to 
July 11, 1997, MidAmerican collected fuel costs from Iowa customers on a current
basis  through the EAC,  and thus,  fuel costs had little  impact on net income.
Since then,  base rates for Iowa  customers  include a factor for  recovery of a
representative  level of fuel costs.  To the extent  actual fuel costs vary from
that  factor,  pre-tax  earnings  are  impacted.  The fuel cost  factor  will be
reviewed in February 1999 and adjusted  prospectively  if actual 1998 fuel costs
vary by more than 15% above or below the factor included in base rates.

     5)  If MidAmerican's  annual Iowa electric jurisdictional return on common
equity exceeds 12%, then an equal sharing between  customers and shareholders of
earnings  above the 12% level  begins;  if it exceeds 14%,  then  two-thirds  of
MidAmerican's  share of those earnings will be used for accelerated  recovery of
certain  regulatory  assets.  The  agreement  permits  MidAmerican  to file  for
increased  rates if the  return  falls  below  9%.  Other  parties  signing  the
agreement are prohibited  from filing for reduced rates prior to 2001 unless the
return, after reflecting credits to customers, exceeds 14%.

     The IUB is  reviewing  MidAmerican's  calculation  of its 1997  return as a
result of an  objection  by the OCA.  MidAmerican  does not expect the  ultimate
outcome of this issue to have a material  impact on its  financial  condition or
results of operations.

     6)  MidAmerican  has developed a pilot program for a market access  service
which allows  customers  with at least 4 MW of load to choose energy  suppliers.
The pilot program is limited to 60 MW of participation the first year and can be
expanded by 15 MW annually  until the  conclusion  of the  program.  Any loss of
revenues  associated  with the pilot program will be considered  part of the $10
million annual  reduction for  commercial and industrial  customers as described
above,  but may not be recovered  from other customer  classes.  The program was
filed with the IUB,  which has  approved it, and the Federal  Energy  Regulatory
Commission (FERC). The Company anticipates FERC acceptance by year end.

D)   ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:

     Statement  of  Financial  Accounting  Standards  (SFAS)  No. 71 sets  forth
accounting  principles  for  operations  that are  regulated  and  meet  certain
criteria.  For operations  that meet the criteria,  SFAS 71 allows,  among other
things, the deferral of costs that would otherwise be expensed when incurred.  A
possible  consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71. The majority of MidAmerican's electric and gas utility
operations  currently  meet the  criteria of SFAS 71, but its  applicability  is
periodically reexamined. On December 16,

                                       -9-
<PAGE>

1997,  MidAmerican's  generation  operations  serving  Illinois  were no  longer
subject to the provisions of SFAS 71 due to passage of restructuring legislation
in Illinois.  Thus,  MidAmerican was required to write off regulatory assets and
liabilities   from  its  balance  sheet  related  to  its  Illinois   generation
operations.  The net amount of such write-offs were immaterial. If other utility
operations no longer meet the criteria of SFAS 71, MidAmerican could be required
to write off the  related  regulatory  assets and  liabilities  from its balance
sheet and thus, a material  adjustment  to earnings in that period could result.
As of  September  30,  1998,  MidAmerican  had  approximately  $308  million  of
regulatory  assets in its  Consolidated  Balance  Sheet  because these costs are
expected to be recovered in future charges to utility customers.

E)   MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES:

     The MidAmerican  Obligated  Mandatorily  Redeemable Preferred Securities of
Subsidiary  Trust Holding  Solely  MidAmerican  Junior  Subordinated  Debentures
included in the  Consolidated  Balance Sheets were issued by MidAmerican  Energy
Financing I (the Trust), a wholly-owned statutory business trust of MidAmerican.
The sole assets of the Trust are $103.1  million of  MidAmerican  7.98% Series A
Debentures due 2045.

F)   COMMON SHAREHOLDERS' EQUITY:

     In March 1997, Holdings announced its plan to repurchase up to $200 million
of the  Company's  common  stock.  As of  September  30,  1998,  the Company had
repurchased  approximately 6.2 million shares for $114.8 million under the plan.
In addition,  a subsidiary  holds 437,131 shares of Holdings  common stock which
are also excluded from shares outstanding.

G)   DETAIL OF OTHER COMPREHENSIVE INCOME - INCOME TAXES:

     For fiscal years beginning after December 15, 1997, full sets of
general-purpose  financial  statements  are  required  to display  comprehensive
income and its  components in a financial  statement  that is displayed with the
same prominence as the other financial statements.  Comprehensive income refers,
in general,  to changes in the Company's  equity,  except those  resulting  from
transactions with shareholders. "Unrealized holding gains (losses)" reflects the
overall increase (decrease) in the market value of marketable securities held by
the Company as available-for-sale. The "reclassification adjustment" removes any
gains  (losses)  that have been  realized  from  sales of those  securities  and
reflected in the Company's Net Income.

                                      -10-
<PAGE>


     The following  table shows the income tax expense or benefit related to
each component (in thousands):
<TABLE>
<CAPTION>

                                                Three Months            Nine Months            Twelve Months
                                               Ended Sept. 30          Ended Sept. 30          Ended Sept. 30  
                                           --------------------    --------------------    ---------------------
                                             1998       1997         1998        1997          1998        1997   
                                           ---------   --------    --------    --------    ----------   --------
<S>                                        <C>         <C>         <C>         <C>         <C>          <C>
Unrealized holding gains/(losses)
    during period
      Before income taxes                  $(142,235)  $285,706    $(88,982)   $288,728    $(153,783)   $291,965
      Income tax benefit/(expense)            49,782   (100,257)     31,061     101,261       54,021    (102,393)
                                           ---------   --------    --------    --------    ---------    --------
                                             (92,453)   185,449     (57,921)    187,467      (99,762)    189,572
                                           ---------   --------    --------    --------    ---------    --------
Less reclassification adjustment for
    realized gains/(losses) reflected in
    net income during period
      Before income taxes                     (2,249)      (284)       (230)        329        7,228        (993)
      Income tax benefit/(expense)               787        100          80        (115)      (2,539)        348
                                           ---------   --------    --------    --------    ---------    --------
                                              (1,462)      (184)       (150)        214        4,689        (645)
                                           ---------   --------    --------    --------    ---------    --------
      Other Comprehensive Income, Net      $ (90,991)  $185,633    $(57,771)   $187,253    $(104,451)   $190,217
                                           =========   ========    ========    ========    =========    ========
</TABLE>


H)   MCLEODUSA INCORPORATED INVESTMENT:

     Included in investments on the Consolidated Balance Sheets is the Company's
investment  in common stock of  McLeodUSA  Incorporated  (McLeodUSA).  McLeodUSA
common stock has been publicly traded since June 14, 1996.  Investor  agreements
related to  McLeodUSA's  initial  public  offering  and  subsequent  merger with
Consolidated   Communications  Inc.  prohibited  the  Company  from  selling  or
otherwise  disposing of any of the common stock of McLeodUSA  prior to September
24, 1998, without approval of McLeodUSA's board of directors. As a result of the
agreements,  the Company's  investment was considered  restricted  stock and, as
such, was recorded at cost in all periods prior to September 1997.  Beginning in
September 1997, the investment is no longer considered restricted for accounting
purposes and is recorded at fair value. At September 30, 1998, the cost and fair
value of the  McLeodUSA  investment  were  $45.2  million  and  $176.3  million,
respectively.  The  unrealized  gain  is  recorded,  net  of  income  taxes,  as
accumulated  comprehensive income in common  shareholders'  equity. At September
30, 1998, the unrealized gain and deferred income taxes for this investment were
$131.1 million and $45.9 million, respectively.

I)   PENDING MERGER:

     On August 11, 1998, a definitive  merger agreement was entered into between
the Company and CalEnergy Company, Inc. (CalEnergy), a global provider of energy
services. Under the terms of the agreement, the shareholders of the Company will
receive $27.15 cash for each share of their common stock reflecting a 36 percent
premium over the August 11, 1998 closing  price.  The Company and CalEnergy each
held  a  special   shareholder  meeting  on  October  30,  1998,  at  which  the
shareholders  of each  respective  company  approved the  agreement  and plan of
merger.   Additionally,   the   pre-merger   notification   period   under   the
Hart-Scott-Rodino  Antitrust  Improvements  Act has expired.  The companies have
made filings with, and are awaiting favorable orders from, the FERC, the Nuclear
Energy  Regulatory  Commission,  and the IUB,  which has the right to review the
merger  and to  disapprove  it only if found not in the public  interest.  State
regulators  in Illinois,  Nebraska  and South  Dakota have been  notified of the
merger.  Management  believes  completion  of the merger  could occur during the
first quarter of 1999.


                                      -11-
<PAGE>
<TABLE>
<CAPTION>
                           MIDAMERICAN ENERGY COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                                 (IN THOUSANDS)


                                                 THREE MONTHS             NINE MONTHS                TWELVE MONTHS
                                                ENDED SEPT. 30          ENDED SEPT. 30               ENDED SEPT. 30
                                               1998       1997         1998         1997           1998         1997    
                                             --------   ---------   ----------   ----------     ----------   ----------
<S>                                          <C>        <C>         <C>          <C>            <C>          <C>
OPERATING REVENUES
Electric utility..........................   $363,992   $ 334,336   $  907,440   $  850,453     $1,183,287   $1,109,438
Gas utility...............................     63,156      60,208      303,644      352,686        487,264      534,933
                                             --------   ---------   ----------   ----------     ----------   ----------
                                              427,148     394,544    1,211,084    1,203,139      1,670,551    1,644,371
                                             --------   ---------   ----------   ----------     -----------  ----------

OPERATING EXPENSES
Cost of fuel, energy and capacity.........     72,460      67,258      175,860      178,682        232,938      235,337
Cost of gas sold..........................     33,127      34,320      171,096      221,252        295,860      346,541
Other operating expenses..................    118,291      98,686      336,814      290,984        475,624      381,032
Maintenance...............................     27,522      24,217       80,845       70,315        108,620       90,320
Depreciation and amortization.............     44,178      42,815      132,560      126,883        176,217      168,349
Property and other taxes..................     24,370      26,139       74,135       76,482         98,970       97,324
Income taxes..............................     35,697      31,332       74,323       67,753         81,132       91,992
                                             --------   ---------   ----------   ----------     ----------   ----------
                                              355,645     324,767    1,045,633    1,032,351      1,469,361    1,410,895
                                             --------   ---------   ----------   ----------     ----------   ----------

OPERATING INCOME..........................     71,503      69,777      165,451      170,788        201,190      233,476
                                             --------   ---------   ----------   ----------     ----------   ----------

NON-OPERATING INCOME
Interest and dividend income..............      1,695         358        5,089        1,685          5,736        2,273
Non-operating income taxes................        649      (2,200)       2,139       (4,493)         4,877       (8,434)
Other, net................................     (1,936)      4,727       (5,052)       9,066         (1,751)      18,751
                                             --------   ---------   ----------   ----------     ----------   ----------
                                                  408       2,885        2,176        6,258          8,862       12,590
                                             --------   ---------   ----------   ----------     ----------   ----------
FIXED CHARGES
Interest on long-term debt................     18,280      18,650       53,425       57,868         73,677       77,655
Other interest expense....................      3,166       2,382        9,863        7,824         12,066       10,486
Preferred dividends of subsidiary trust...      1,995       1,995        5,985        5,985          7,980        6,273
Allowance for borrowed funds..............     (1,074)       (620)      (2,749)      (1,932)        (3,414)      (2,858)
                                             --------   ---------   ----------   ----------     ----------   ----------
                                               22,367      22,407       66,524       69,745         90,309       91,556
                                             --------   ---------   ----------   ----------     ----------   ----------

INCOME FROM CONTINUING OPERATIONS.........     49,544      50,255      101,103      107,301        119,743      154,510

LOSS FROM DISCONTINUED OPERATIONS.........          -           -            -            -              -       (1,584)
                                             --------   ---------   ----------   ----------     ----------   ----------  
NET INCOME................................     49,544      50,255      101,103      107,301        119,743      152,926
PREFERRED DIVIDENDS.......................      1,239       1,239        3,714        5,249          4,953        8,902
                                             --------   ---------   ----------   ----------     ----------   ----------

EARNINGS ON COMMON STOCK..................   $ 48,305   $  49,016   $   97,389   $  102,052     $  114,790   $  144,024
                                             ========   =========   ==========   ==========     ==========   ==========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      -12-
<PAGE>
<TABLE>
<CAPTION>
                           MIDAMERICAN ENERGY COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

                                                                                               AS OF
                                                                          ---------------------------------------------      
                                                                                    SEPT. 30                DECEMBER 31
                                                                          -----------------------------     ----------- 
                                                                              1998            1997               1997     
                                                                          ----------       ----------        ----------
                                                                                  (UNAUDITED)
<S>                                                                       <C>              <C>               <C>    
ASSETS
UTILITY PLANT
Electric...............................................................   $4,139,099       $4,065,411        $4,087,924
Gas....................................................................      774,482          746,173           756,874
                                                                          ----------       ----------        ----------
                                                                           4,913,581        4,811,584         4,844,798
Less accumulated depreciation and amortization.........................    2,393,211        2,252,537         2,277,110
                                                                          ----------       ----------        ----------
                                                                           2,520,370        2,559,047         2,567,688
Construction work in progress..........................................       87,442           53,236            55,418
                                                                          ----------       ----------        ----------
                                                                           2,607,812        2,612,283         2,623,106
                                                                          ----------       ----------        ----------

POWER PURCHASE CONTRACT................................................      166,345          188,860           173,107
                                                                          ----------       ----------        ----------

CURRENT ASSETS
Cash and cash equivalents..............................................       12,502            7,065             9,318
Receivables............................................................      128,700          192,574           184,153
Inventories............................................................       88,726           93,142            84,298
Other..................................................................       29,834            6,024             6,174
                                                                          ----------       ----------        ----------
                                                                             259,762          298,805           283,943
                                                                          ----------       ----------        ----------

INVESTMENTS AND NONREGULATED PROPERTY, NET.............................      164,360          106,318           115,029
                                                                          ----------       ----------        ----------

OTHER ASSETS...........................................................      312,874          361,807           347,122
                                                                          ----------       ----------        ----------

TOTAL ASSETS...........................................................   $3,511,153       $3,568,073        $3,542,307
                                                                          ==========       ==========        ==========

CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity............................................   $  992,465       $  997,342        $  985,744
MidAmerican preferred securities, not subject to
  mandatory redemption.................................................       31,759           31,765            31,763
Preferred securities, subject to mandatory redemption:
  MidAmerican preferred securities.....................................       50,000           50,000            50,000
  MidAmerican-obligated preferred securities of subsidiary trust
    holding solely MidAmerican junior subordinated debentures..........      100,000          100,000           100,000
Long-term debt (excluding current portion).............................      930,497          969,175           920,203
                                                                          ----------       ----------        ----------
                                                                           2,104,721        2,148,282         2,087,710
                                                                          ----------       ----------        ----------
CURRENT LIABILITIES
Notes payable..........................................................       73,600          131,100           122,500
Current portion of long-term debt .....................................       49,628           77,730           124,460
Current portion of power purchase contract.............................       14,361           13,718            14,361
Accounts payable.......................................................      129,119          118,436           128,390
Taxes accrued..........................................................      110,002           56,175            91,449
Interest accrued.......................................................       15,247           16,062            20,616
Other..................................................................       30,069           26,438            22,598
                                                                          ----------       ----------        ----------
                                                                             422,026          439,659           524,374
                                                                          ----------       ----------        ----------
OTHER LIABILITIES
Power purchase contract................................................       83,143           97,504            83,143
Deferred income taxes..................................................      588,284          615,589           592,840
Investment tax credit..................................................       78,847           84,556            83,127
Other .................................................................      234,132          182,483           171,113
                                                                          ----------       ----------        ----------
                                                                             984,406          980,132           930,223
                                                                          ----------       ----------        ----------

TOTAL CAPITALIZATION AND LIABILITIES...................................   $3,511,153       $3,568,073        $3,542,307
                                                                          ==========       ==========        ==========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      -13-
<PAGE>
<TABLE>
<CAPTION>
                                            MIDAMERICAN ENERGY COMPANY
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (UNAUDITED)
                                                  (IN THOUSANDS)


                                                                     THREE MONTHS                  NINE MONTHS
                                                                  ENDED SEPTEMBER 30            ENDED SEPTEMBER 30             
                                                                  1998           1997            1998           1997    
                                                                ---------      --------        ---------      --------

<S>                                                             <C>            <C>             <C>            <C>    
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................    $  49,544      $ 50,255        $ 101,103      $ 107,301
Adjustments to reconcile net income to net cash provided:
  Depreciation and amortization.............................       50,926        50,290          147,341        144,719
  Net decrease in deferred income taxes and
    investment tax credit, net..............................       (2,951)       (1,686)          (8,836)        (5,264)
  Amortization of other assets..............................       11,162         5,635           30,195         17,727
  Impact of changes in working capital......................      (24,268)       (4,530)          48,750         23,947
  Other.....................................................       23,188        14,877           24,747        (10,284)
                                                                ---------      --------        ---------      ---------
    Net cash provided.......................................      107,601       114,841          343,300        278,146
                                                                ---------      --------        ---------      ---------

NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures...........................      (45,633)      (49,815)        (114,225)      (113,844)
Quad Cities Nuclear Power Station
  decommissioning trust fund................................       (2,875)       (2,779)          (8,533)        (7,060)
Deferred energy efficiency expenditures.....................            -        (5,909)               -        (12,258)
Nonregulated capital expenditures...........................         (153)       (2,071)         (20,307)        (5,377)
Proceeds from sale of assets and other investments..........            -             -           19,854              -
Other investing activities, net.............................          425          (176)           1,463            751
                                                                ---------      --------        ---------      ---------
  Net cash used ............................................      (48,236)      (60,750)        (121,748)      (137,788)
                                                                ---------      --------        ---------      ---------

NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid..............................................      (34,738)      (21,238)         (94,414)       (96,749)
Issuance of long-term debt, net of issuance cost............            -             -          158,440              -
Retirement of long-term debt, including reacquisition cost..     (157,879)      (28,102)        (233,490)       (90,155)
Reacquisition of preferred shares...........................           (1)            -               (4)            (4)
Net increase (decrease) in notes payable....................       32,100       (13,200)         (48,900)       (30,600)
                                                                ---------      --------        ---------      ---------
  Net cash used.............................................     (160,518)      (62,540)        (218,368)      (217,508)
                                                                ---------      --------        ---------      ---------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........     (101,153)       (8,449)           3,184        (77,150)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............      113,655        15,514            9,318         84,215
                                                                ---------      --------        ---------      ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................    $  12,502      $  7,065        $  12,502      $   7,065
                                                                =========      ========        =========      =========

ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized...................    $  28,046      $ 25,525        $  67,572      $  68,188
                                                                =========      ========        =========      =========
Income taxes paid...........................................    $  19,194      $ 23,714        $  52,630      $  91,179
                                                                =========      ========        =========      =========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      -14-
<PAGE>

                          MIDAMERICAN ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A)   GENERAL:

     The consolidated financial statements included herein have been prepared by
MidAmerican,  without  audit,  pursuant  to the  rules  and  regulations  of the
Securities and Exchange Commission. Certain information and disclosures normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations.  In the opinion of MidAmerican,  all adjustments  have been made to
present fairly the financial position, the results of operations and the changes
in cash flows for the periods presented.  Although MidAmerican believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested  that  these  financial  statements  be read in  conjunction  with the
consolidated   financial   statements   and  the  notes   thereto   included  in
MidAmerican's latest Annual Report on Form 10-K.

B)   ENVIRONMENTAL MATTERS:

     Refer to Note B of Holdings' Notes to Consolidated Financial Statements for
information regarding MidAmerican's environmental matters.

C)   RATE MATTERS:

     Refer to Note C of Holdings' Notes to Consolidated Financial Statements for
information regarding MidAmerican's rate matters.

D)   ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:

     Refer to Note D of Holdings' Notes to Consolidated Financial Statements for
information regarding MidAmerican's  accounting for the effects of certain types
of regulation.

E)   MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES:

     Refer to Note E of Holdings' Notes to Consolidated Financial Statements for
information regarding the MidAmerican-Obligated Mandatorily Redeemable Preferred
Securities.

F)   STATEMENT OF COMPREHENSIVE INCOME:

      MidAmerican  did not  have  other  comprehensive  income  for the  periods
presented,  and  accordingly,  a  statement  of  comprehensive  income  has been
omitted.  MidAmerican's total  comprehensive  income is equal to its earnings on
common stock for each period presented.

G)   PENDING MERGER:

     Refer to Note I of Holdings' Notes to Consolidated Financial Statements for
information regarding the pending merger.

                                      -15-
<PAGE>


                  Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                  INTRODUCTION
                                  ------------


COMPANY STRUCTURE

     MidAmerican  Energy Holdings Company (Holdings or the Company) is an exempt
public utility  holding company  headquartered  in Des Moines,  Iowa.  Effective
December  1, 1996,  Holdings  became the parent  company of  MidAmerican  Energy
Company  (MidAmerican),  MidAmerican Capital Company  (MidAmerican  Capital) and
Midwest  Capital  Group,  Inc.  (Midwest  Capital).  Prior to  December 1, 1996,
MidAmerican Capital and Midwest Capital were subsidiaries of MidAmerican.

     MidAmerican  is a public  utility with electric and natural gas  operations
and is the  principal  subsidiary  of  Holdings.  MidAmerican  Capital,  Midwest
Capital  and  MidAmerican  Realty  Services  Company  (MidAmerican  Realty)  are
Holdings'  nonregulated  subsidiaries.  MidAmerican  Capital manages  marketable
securities and passive investment  activities,  nonregulated  retail natural gas
businesses, security services and other energy-related, nonregulated activities.
Midwest  Capital  functions  as  a  regional  business  development  company  in
MidAmerican's  utility  service  territory.   MidAmerican  Realty  includes  the
Company's recently acquired real estate operations.

     In May 1998,  MidAmerican  Realty  completed  its  purchase  of AmerUs Home
Services Inc. During the third quarter of 1998, the Company  purchased HOME Real
Estate (HOME) and CBS Real Estate Company (CBS), the No. 1 and No. 2 residential
brokerage  organizations  in Omaha,  Nebraska,  and J. C. Nichols Real Estate, a
market leader in  residential  brokerage in the Kansas City  metropolitan  area.
HOME and CBS have combined and now operate as CBS HOME Real Estate. The acquired
companies are now  subsidiaries  of  MidAmerican  Realty and include real estate
operations in Iowa,  Kansas,  Minnesota,  Missouri,  Nebraska,  North Dakota and
Wisconsin.  On a  consolidated  basis,  MidAmerican  Realty  has more than 1,150
employees  and 4,500 sales  agents and  comprises  the nation's  second  largest
independent  residential  real  estate  brokerage  organization.  In addition to
residential brokerage, MidAmerican Realty offers relocation, title, abstract and
mortgage services.

DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS

     Management's   Discussion  and  Analysis  (MD&A)  addresses  the  financial
statements  of Holdings  and  MidAmerican  as  presented  in this joint  filing.
Discussions related to MidAmerican also relate to Holdings.  Information related
to MidAmerican Capital,  Midwest Capital and MidAmerican Realty pertains only to
the discussion of the financial condition and results of operations of Holdings.
To the extent necessary,  certain  discussions have been segregated to allow the
reader to identify information applicable only to Holdings.

     The  consolidated  financial  statements  of  MidAmerican  present  amounts
related to MidAmerican  Capital and Midwest Capital as  discontinued  operations
for the twelve  months  ended  September  30,  1997,  in order to reflect  their
transfer to Holdings in December 1996.

                                      -16-
<PAGE>
FORWARD-LOOKING STATEMENTS

     From time to time, the Company or one of its subsidiaries  individually may
make  forward-looking  statements  within the meaning of the federal  securities
laws that involve  judgments,  assumptions  and other  uncertainties  beyond the
control  of  the  Company  or  any  of  its  subsidiaries  individually.   These
forward-looking  statements  may include,  among others,  statements  concerning
revenue  and  cost  trends,  cost  recovery,   cost  reduction   strategies  and
anticipated  outcomes,  pricing  strategies,  changes in the  utility  industry,
planned capital  expenditures,  financing needs and availability,  statements of
the Company's expectations,  beliefs,  future plans and strategies,  anticipated
events or trends and similar comments concerning matters that are not historical
facts. Investors and other users of the forward-looking statements are cautioned
that such  statements  are not a guarantee of future  performance of the Company
and that such forward-looking  statements are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed in, or
implied by, such statements.  Some, but not all, of the risks and  uncertainties
include weather effects on sales and revenues, fuel prices, fuel transportation,
competitive  factors,  general  economic  conditions  in the  Company's  service
territory, interest rates, inflation and federal and state regulatory actions.

MERGER ANNOUNCEMENT

     On August 11, 1998, a definitive  merger agreement was entered into between
the Company and CalEnergy Company, Inc. (CalEnergy), a global provider of energy
services. Under the terms of the agreement, the shareholders of the Company will
receive $27.15 cash for each share of their common stock reflecting a 36 percent
premium over the August 11, 1998,  closing price. The Company and CalEnergy each
held  a  special  shareholders  meeting  on  October  30,  1998,  at  which  the
shareholders  of each  respective  company  approved the  agreement  and plan of
merger.   Additionally,   the   pre-merger   notification   period   under   the
Hart-Scott-Rodino  Antitrust  Improvements  Act has expired.  The companies have
made filings with,  and are awaiting  favorable  orders from, the Federal Energy
Regulatory  Commission (FERC),  the Nuclear Energy Regulatory  Commission (NRC),
and the Iowa Utilities Board (IUB), which has the right to review the merger and
to disapprove it only if found not in the public  interest.  State regulators in
Illinois, Nebraska and South Dakota have been notified of the merger. Management
believes completion of the merger could occur during the first quarter of 1999.

                                      -17-
<PAGE>
                              RESULTS OF OPERATION

Holdings:
---------

     The following tables provide a summary of the earnings contributions of the
Company's operations for each of the periods presented:
<TABLE>
<CAPTION>

                                                     Periods Ended September 30
                                                     --------------------------                   
                                         Three Months       Nine Months         Twelve Months
                                       ---------------    ---------------     ----------------
                                        1998     1997      1998     1997       1998      1997  
                                       ------   ------    ------   ------     ------    ------
     <S>                               <C>      <C>       <C>      <C>        <C>       <C>
     Net Income (in millions)
       Continuing operations
         Utility                       $ 48.3   $ 49.0    $ 97.4   $102.0     $114.8    $145.6
         Nonregulated operations          5.3      0.7      16.0      6.0       29.8      (7.8)
       Discontinued operations              -     (2.8)        -     (2.6)      (1.6)     (3.9)
                                       ------   ------    ------   ------     ------    ------
         Consolidated earnings         $ 53.6   $ 46.9    $113.4   $105.4     $143.0    $133.9
                                       ======   ======    ======   ======     ======    ======

     Earnings Per Common Share -
     Basic and Diluted
       Continuing operations
         Utility                       $ 0.51   $ 0.50    $ 1.03   $ 1.03     $ 1.21    $ 1.47
         Nonregulated operations         0.06     0.01      0.17     0.06       0.31     (0.08)
       Discontinued operations              -    (0.03)        -    (0.02)     (0.01)    (0.04)
                                       ------   ------    ------   ------     ------    ------
         Consolidated earnings         $ 0.57   $ 0.48    $ 1.20   $ 1.07     $ 1.51    $ 1.35
                                       ======   ======    ======   ======     ======    ======
</TABLE>
MidAmerican:
------------

     The following  table  provides a summary of the earnings  contributions  of
MidAmerican's operations for each of the periods presented:
<TABLE>
<CAPTION>

                                                   Periods Ended September 30
                                                   --------------------------                   
                                         Three Months        Nine Months        Twelve Months
                                        --------------     --------------     ----------------
                                         1998     1997      1998     1997      1998      1997  
                                        -----    -----     -----    -----     ------    ------
                                                           (in millions)
     <S>                                <C>      <C>       <C>     <C>        <C>       <C>
     Earnings on Common Stock
       Continuing operations            $48.3    $49.0     $97.4   $102.0     $114.8    $145.6
       Discontinued operations*             -        -         -        -          -      (1.6)
                                        -----    -----     -----   ------     ------    ------
       Consolidated earnings            $48.3    $49.0     $97.4   $102.0     $114.8    $144.0
                                        =====    =====     =====   ======     ======    ======
</TABLE>
     *  Discontinued  operations  for twelve  months ended  September  30, 1997,
includes  the loss of  MidAmerican  Capital and Midwest  Capital  prior to their
transfer to Holdings on December 1, 1996.

EARNINGS DISCUSSION

     Below  is a list  of  some  of the  significant  factors  resulting  in the
variances in earnings.  The amounts  represent the variance between the 1998 and
1997 periods. Therefore, a factor that had a negative impact on earnings in both
periods,  but which had less of a negative impact in the 1998 period than in the
1997 period,  would be displayed as a positive  factor for comparison  purposes.
The  discussion  that  follows  addresses  these  factors as well as other items
affecting the Company's results of operations.

                                      -18-
<PAGE>
     In  the  second  half  of  1997,  MidAmerican  began  charging  to  expense
additional  amortization of deferred  energy  efficiency  costs,  ongoing energy
efficiency  costs and certain  Cooper  Nuclear  Station  costs  consistent  with
ratemaking  treatment.  These  items  have  had a  significant  impact  on other
operating expenses. In conjunction with expensing these items, MidAmerican began
recovery of these costs from its  customers,  which is  reflected  in  revenues.
However,  for purposes of the following table, these expenses are netted against
the  related  revenues.  As a result,  the  "Other O&M  expenses"  line does not
reflect  the  impact of these  items,  and the net  effect of the  revenues  and
expenses is included on the "Other factors" line under gross margin.

                                 Approximate Net Income Variances:  1998 vs 1997
                                 ---------------------------------  ------------
                                             For Periods Ended September 30
                                             ------------------------------
                                        Three Months  Nine Months  Twelve Months
                                        ------------  -----------  -------------
                                                    ($ In Millions)
MidAmerican:
  Variation in electric and gas
    gross margin due to -
      Variation in the effect of weather       $11.5     $  2.0      $  1.9
      Customer growth                            1.4        4.4         6.7
      Electric retail rates and accruals        (1.9)      (4.4)       (4.3)
      Off-system sales                           5.2        7.4         8.0
      Other factors                             (4.9)       8.9         9.4
  Nuclear O&M expenses                           1.3        2.5         2.2
  1996 inventory adjustment                        -          -        (3.7)
  Storm repair expense                          (1.8)      (2.1)       (3.2)
  Other O&M expenses                            (7.3)     (16.1)      (37.0)
  Recognition of deferred energy
    efficiency income                           (0.9)      (2.7)       (3.0)
  1996 gain on sale of storage gas                 -          -        (2.4)
  Utility nonregulated activities               (0.6)      (1.5)       (2.5)
  1997 settlement of NPPD lawsuit               (1.3)      (1.3)       (1.3)
Nonregulated subsidiaries:
  Write-downs of certain assets                    -          -         7.4
  Realized gain on sale of McLeodUSA
    Incorporated common stock                      -          -         5.2
  Donation of appreciated stock                    -       (2.4)       (2.4)
  Gains on sales of certain assets                 -        3.2         9.2
  Income from a venture capital investment         -        1.2         1.2
  Realty operations                              4.6        6.3         6.3
  Reduction of interest on long-term debt          -          -         2.2

Discontinued operations                          2.8        2.6         2.3

Average shares outstanding for 1997 period    97,097     98,752      99,213

     Improved  margins resulted in an increase in utility earnings for the third
quarter of 1998.  The  increase was offset by expenses for repair of damage from
storms in late June  1998 and by  expenses  for  customer  service,  information
technology and marketing in preparation for a competitive utility environment.

                                      -19-
<PAGE>


     In the past two years,  the Company's  strategic  realignment of operations
has significantly  affected earnings of nonregulated  subsidiaries.  During 1997
and the first quarter of 1998, the Company divested a number of its interests in
nonregulated  assets which did not align with the  corporate  vision of becoming
the leading regional provider of energy and complementary services. Earnings for
the twelve months ended  September 30, 1998,  include 6 cents per share from the
sale of assets of railcar leasing and repair businesses in the fourth quarter of
1997.  During the first nine months of 1998, the Company recorded  earnings of 3
cents per share for the sale of its interest in a financial  management  company
and the liquidation of a partnership  that owned  commercial  office  buildings.
Losses from discontinued operations reduced earnings in each twelve-month period
shown above, though to a lesser degree in 1998 than in the 1997 period.

     Although  utility earnings for the current  twelve-month  period were lower
than in the prior year,  a reduction  was  anticipated  because of the  electric
pricing   settlements   achieved  in  1996  and  1997  in  Iowa  and   Illinois.
Additionally,  utility operating expenses increased as the Company continued its
strategic  realignment  which included  strengthening its marketing and customer
service capabilities and adding to its information technology resources.

     The Company's  evaluation of its  nonregulated  investments has resulted in
write-downs of certain  assets,  primarily  investments  in  alternative  energy
projects, during the past two years. The write-downs,  which reflect declines in
the value of those nonregulated  investments,  reduced earnings by approximately
$2.0 million,  or 2 cents per share, and $9.4 million,  or 9 cents per share, in
the twelve months ended September 30, 1998 and 1997, respectively.

Discontinued Operations -

Holdings:
---------

     During 1996, the Company discontinued some of its nonregulated  operations.
The  Consolidated  Statements  of Income  reflect  the income or loss from those
operations and the losses on disposal. Net assets of the discontinued operations
are presented  separately in the  Consolidated  Balance  Sheets as Investment in
Discontinued Operations.

     In  January  1997,  the  Company  completed  the sale of a  portion  of its
nonregulated  operations,  including its oil and gas exploration and development
operations.  The twelve months ended September 30, 1997, reflects a $1.0 million
after-tax loss for the transaction.  The original estimated loss was recorded in
September 1996.

     In October 1997, the Company also divested a subsidiary that developed
and  operated a  computerized  information  system which  facilitated  real-time
exchange of power in the electric industry.  The Company recorded an anticipated
after-tax loss on disposal of those  operations in September 1996. An additional
$3.2 million  after-tax  loss on disposal was recorded in September  1997 and is
reflected in the twelve months ended September 30, 1997.

                                      -20-
<PAGE>


UTILITY GROSS MARGIN

Electric Gross Margin:
----------------------
<TABLE>
<CAPTION>
                                                    Periods Ended September 30
                                                    -------------------------- 
                                           Three Months    Nine Months     Twelve Months
                                           ------------    -----------    ----------------
                                            1998   1997    1998   1997     1998      1997  
                                            ----   ----    ----   ----    ------    ------
                                                          (In millions)

<S>                                         <C>    <C>     <C>    <C>     <C>       <C>   
     Operating revenues                     $364   $334    $907   $850    $1,183    $1,109
     Cost of fuel, energy and capacity*       72     67     176    179       233       235
                                            ----   ----    ----   ----    ------    ------
     Electric gross margin                  $292   $267    $731   $671    $  950    $  874
                                            ====   ====    ====   ====    ======    ======
</TABLE>

     *Amounts  shown  are from the  MidAmerican  Consolidated  Statements  of
     Income.  The amounts on Holdings' Consolidated Statements of Income reflect
     an intercompany elimination.

     A variety of factors contributed to the increase in MidAmerican's  electric
gross margin for the 1998 periods  compared to the 1997 periods.  An increase in
revenues from energy efficiency cost recovery accounted for $9.0 million,  $26.9
million and $35.9  million of the  increase in margin for the three-,  nine- and
twelve-month  comparisons,   respectively.  Revenues  from  the  Cooper  Tracker
(discussed below) contributed $0.1 million, $3.3 million and $5.3 million to the
increases  for the three,  nine and twelve  months  ended  September  30,  1998,
respectively.  The increases in revenues  from these  factors are  substantially
offset by increases in other operating expenses.

     Regarding the increase in energy efficiency revenues, on September 29,
1997,  MidAmerican began collection of its remaining  deferred energy efficiency
costs and current,  ongoing energy efficiency costs. Including an allowed return
on the deferred costs, the annual increase in electric revenues is approximately
$36.1  million.  The effect on earnings of this  increase in revenues  and gross
margin  is  partially  offset by a  corresponding  increase  in other  operating
expenses of approximately $31.1 million annually for currently incurred electric
energy efficiency costs and amortization of previously incurred costs.

     The Cooper  Tracker  allows  MidAmerican  to collect on a current basis the
Iowa portion of expenses for Cooper capital improvement  advances.  Prior to the
Cooper Tracker,  capital improvement advances were capitalized when incurred and
amortized over future periods in accordance with ratemaking treatment.

     The effect of  temperatures  contributed  $21  million to the  increase  in
margin for the third quarter of 1998 compared to 1997.  Compared to normal, 1998
third  quarter  temperatures  resulted  in an  increase  in gross  margin of $14
million,  while the 1997 third  quarter was cooler than  normal,  resulting in a
decrease in margin of $7 million.  Moderate  customer  growth resulted in a $2.2
million  increase in electric  gross margin  compared to the 1997 third quarter.
Total retail  sales of  electricity  increased  7.2%. A reduction in other usage
factors and sales mix reduced gross margin compared to the 1997 quarter.

     The average cost of fuel, energy and capacity per unit in the third quarter
of 1998 was above the 1997  level and  resulted  in a decrease  to gross  margin
compared to the third quarter of 1997.  Prior to July 11, 1997,  MidAmerican was
allowed to recover its energy costs from most of its electric utility  customers
through Energy  Adjustment  Clauses (EACs) included in revenues.  Effective July
11,  1997,  the EAC was  eliminated  for  Iowa  customers  as part of a new Iowa
pricing plan. Previously, variations in energy costs did not affect gross margin
or net income due to  corresponding  changes in revenues  collected  through the
EACs.  With the  elimination of the Iowa EAC,  fluctuations  in energy costs now
have an impact on gross margin and net income.

                                      -21-
<PAGE>
     Reductions of electric retail rates resulted in a $3.2 million  decrease in
revenues and gross margin compared to the third quarter of 1997.

     Sales for resale decreased 7.7% for the quarter comparison.  However,
margins on off-system sales,  which account for most of MidAmerican's  sales for
resale,  contributed  $8.8 million more to gross margin in the 1998 quarter than
the sales in the third  quarter of 1997.  Refer to the  discussion of the energy
market under "Competition" in the Operating Activities and Other Matters section
of MD&A.

     For the  comparison  of the  nine-month  periods  ended  September  30, the
variance in  temperatures  resulted in a $16 million  increase in electric gross
margin.  Compared to normal,  the 1998  temperatures  resulted in an increase in
gross  margin  of $6  million,  while the 1997  period  reflects  a $10  million
decrease  in  margin.  An  increase  in sales  not  dependent  on  weather  also
contributed  to the  increase in margin.  Moderate  but steady  customer  growth
improved gross margin by $6.2 million  compared to the 1997  nine-month  period.
Total retail sales of  electricity  increased 4.1% compared to nine months ended
September 30, 1997.

     Reductions of electric retail rates, including the effect of a 1997 accrual
for a then potential refund, resulted in a $7.4 million decrease in revenues and
gross margin compared to the first nine months of 1997.

     Year-to-date  sales for resale  decreased  9.0% compared to the nine months
ended September 30, 1997. However, margins on off-system sales contributed $12.5
million  more to gross  margin  in the 1998  period  than the  sales in the same
period of 1997.

     For the  twelve  months  ended  September  30  comparison,  the  effect  of
temperatures  increased  gross margin by $19 million in the 1998 period compared
to the 1997 period. When compared to normal, the impact of temperatures resulted
in a $11 million  increase in electric  gross  margin for the 1998  twelve-month
period compared to an $8 million reduction in gross margin for the twelve months
ended September 30, 1997.  Moderate but steady growth in the number of customers
increased gross margin $8.7 million compared to the 1997 period.  An increase in
sales that are not  dependent  on weather  also  contributed  to the increase in
gross margin.  Electric  retail sales  increased 3.5% for the 1998  twelve-month
period compared to the twelve months ended September 30, 1997.

     Retail rate reductions,  including the effect of an accrual for a potential
refund,  reduced electric gross margin by approximately $7.3 million compared to
the twelve months ended September 30, 1997. Refer to "Rate Matters" in Liquidity
and Capital Resources later in this discussion for further information regarding
the Iowa proceeding.

     Sales for resale decreased 9.1% for the twelve months ended September
30 comparison,  while margins on the off-system  sales  increased  approximately
$13.6 million.

Gas Gross Margin:
-----------------
                                   Periods Ended September 30
                                   --------------------------
                            Three Months   Nine Months  Twelve Months
                            ------------   -----------  -------------
                             1998   1997   1998   1997   1998   1997  
                             ----   ----   ----   ----   ----   ----
                                          (In millions)

     Operating revenues      $63    $60    $304   $353   $487   $535
     Cost of gas sold         33     34     171    221    296    347
                             ---    ---    ----   ----   ----   ----
       Gas gross margin      $30    $26    $133   $132   $191   $188
                             ===    ===    ====   ====   ====   ====


                                      -22-
<PAGE>

     Revenues  include  purchase gas  adjustment  clauses  (PGAs)  through which
MidAmerican  has been  allowed to recover  the cost of gas sold from most of its
gas utility customers. Consequently, fluctuations in the cost of gas sold do not
affect  gross  margin  or  net  income  because  revenues   reflect   comparable
fluctuations  in  revenues  from PGAs.  A decrease in the  per-unit  cost of gas
compared  to 1997  reduced  revenues  and  cost of gas  sold in each of the 1998
periods shown above. MidAmerican recently made a filing with the IUB which would
modify  the use of the PGA  beginning  May 1,  2000.  Refer to Small  Volume Gas
Transportation  under the Operating Activities and Other Matters section of MD&A
for further discussion.

     Recovery of gas energy efficiency costs resulted in a $3.1 million increase
in revenues and gross margin for the quarter. As discussed in the electric gross
margin section, on September 29, 1997,  MidAmerican began recovery of its energy
efficiency costs which had not previously been approved for recovery.  Including
an allowed  return on deferred  costs,  the annual  increase in gas  revenues is
approximately  $12.8  million.  The  effect  on  earnings  of this  increase  is
partially  offset by a  corresponding  increase in other  operating  expenses of
approximately  $11.1  million  annually  for  deferred  and  ongoing  gas energy
efficiency costs.

     Temperatures in the third quarter of 1998 were warmer than normal resulting
in a $2 million decrease in gas gross margin for the period,  while temperatures
in the third quarter of 1997 were close to normal.

     Energy efficiency revenues increased $9.3 million for the nine months ended
September 30, 1998,  compared to the same period in 1997,  while customer growth
accounted for $1.1 million of the increase in gas margin.  The mix of sales also
contributed  to the  increase  compared  to the 1997  period.  The  variance  in
temperatures  between  the 1998 and 1997  nine-month  periods  resulted in a $12
million decrease in gas margin.  Temperatures in the nine months ended September
30, 1998, were 15.7% warmer than normal  yielding in an $11 million  decrease in
gas gross  margin for the period.  Colder-than-normal  temperatures  in the nine
months  ended   September  30,  1997,   increased   margin  in  that  period  by
approximately  $1 million.  Retail sales in 1998 decreased 12.3% compared to the
1997 nine-month period.

     Mild  temperatures  resulted in a $16 million  decrease in gas gross margin
for the twelve months ended  September  30, 1998,  compared to the twelve months
ended  September 30, 1997.  When compared to normal,  the impact of temperatures
resulted  in  an  $12  million  reduction  in  gas  gross  margin  in  the  1998
twelve-month  period  compared to a $4 million  increase in gas gross margin for
the twelve months ended September 30, 1997.

     The  increase  in  recovery  of  gas  energy   efficiency   costs  for  the
twelve-month  period  recovered  approximately  $12.5  million  of the  loss  in
revenues  and margin  resulting  from  milder  temperatures.  Moderate  customer
growth,  contributing  $2.7 million to gross margin,  and an increase from other
usage  factors  also  helped  offset  the  decrease  in gross  margin due to the
weather.

UTILITY OPERATING EXPENSES

     Other Operating Expenses -

     Utility other operating expenses increased $19.6 million, $45.8 million and
$94.6 million for the three,  nine and twelve  months ended  September 30, 1998,
respectively, compared to the same periods in 1997.

     As  mentioned  in the gross  margin  discussions,  on  September  29, 1997,
MidAmerican  began additional  recovery of deferred energy  efficiency costs and
current  recovery of ongoing  costs.  As the  deferred  costs are  recovered  in
revenues, they are amortized to expense. In addition,  ongoing energy efficiency
costs, which historically were deferred until future periods, are now charged to
expense  currently.  The increase in energy efficiency costs accounted for $10.7
million,  $32.2  million and $43.1  million of the  increase in other  operating

                                      -23-

<PAGE>
expenses  for the three,  nine and  twelve  months  ended  September  30,  1998,
respectively, compared to the same periods in 1997.

     In addition to the energy efficiency  expense increase,  operating expenses
related to Cooper  increased due in part to the ratemaking  treatment for Cooper
capital  improvements.  As a result  of 1996 and 1997 rate  settlements,  Cooper
capital   improvements  are  now  expensed  when  incurred,   instead  of  being
capitalized.  As mentioned in the Electric Gross Margin section,  MidAmerican is
recovering  on a current  basis the Iowa  portion  of these  costs from its Iowa
electric customers through the Cooper Tracker.  Recovery in Illinois is included
in base rates.  This change  accounted  for  increases  of $1.3 million and $3.1
million for the nine-month and twelve-month comparisons, respectively. Excluding
these currently  recovered Cooper costs,  nuclear operations  expenses decreased
$4.7 million, $10.6 million and $6.9 million, respectively, for the three-month,
nine-month  and  twelve-month  comparisons  due to reductions in expenses at the
Quad Cities Station.

     Continued  restructuring  of the Company in  preparation  for a competitive
industry  has  required  additional  expenses.  MidAmerican  has  increased  its
emphasis on  marketing-related  efforts, as well as customer service operations,
resulting in increases in  consulting  costs,  advertising,  employee  incentive
compensation and other related  expenses.  Increases in such expenses  accounted
for a majority of the remaining  increases for the quarter and nine-month period
comparisons.  In addition,  the 1998 twelve-month  period reflects  increases in
certain employee benefits  expenses,  customer  assistance and energy efficiency
administrative  costs,  manufactured  gas  plant  site  clean-up  costs and rent
expense.

     Maintenance -

     Maintenance  expenses increased $3.3 million and $10.5 million for the 1998
three-month  and  nine-month  periods  ended  September  30 compared to the same
periods ended September 30, 1997. Increased maintenance costs at the Quad Cities
Station  accounted  for $2.5  million and $6.2  million of the  three-month  and
nine-month increases,  respectively.  Additionally,  the Company incurred repair
costs for storms in June 1998,  totalling  $3.1 million and $3.5 million for the
three months and nine months ended September 30, 1998, respectively.  A decrease
in other generation  maintenance expenses partially offset the increases for the
quarter.

         Maintenance  expenses for the twelve  months ended  September 30, 1998,
were $18.3 million  greater than in the  comparable  1997 period.  In the fourth
quarter of 1996,  MidAmerican  made an adjustment to align power plant inventory
accounting of predecessor  companies.  That adjustment  reduced expenses by $6.2
million for the twelve-month  period ended September 30, 1997. In addition,  the
Company incurred $2.0 million in maintenance expenses for restoration  following
a snow storm in October 1997 and $3.5 million for costs related to the June 1998
storms.  Maintenance  expenses at the Quad Cities Station increased $3.1 million
in the  twelve-month  period ended  September  30, 1998,  compared to the twelve
months ended September 30, 1997.  Refer to the discussion of Quad Cities Nuclear
Station in the Liquidity and Capital  Resources  section of MD&A for information
regarding the status of Quad Cities Station.


                                      -24-
<PAGE>
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES

Holdings:
---------

     Revenues  of  nonregulated  subsidiaries  increased  $44.9  million for the
three-month  period ended  September 30, 1998,  and decreased  $31.0 million and
$66.4  million for the nine months and twelve  months ended  September 30, 1998,
compared to their respective 1997 periods.

     Revenues  from the  natural  gas  marketing  subsidiaries  decreased  $22.6
million, $111.7 million and $148.6 million for the 1998 three-month,  nine-month
and  twelve-month  periods,  respectively.  Related  sales  volumes  decreased 8
million  MMBtu's (61%),  35 million  MMBtu's (55%) and 55 million  MMBtu's (54%)
compared to the sales volumes in the 1997 periods. The decrease in sales volumes
is due primarily to the  expiration of wholesale  contracts  which have not been
replaced.  Additionally,  nonregulated retail sales volumes have decreased,  but
the remaining  sales are at improved  margin  levels.  A decrease in the average
price per unit,  reflective of a decrease in the cost of gas sold,  also reduced
revenues in each of the periods ended September 30, 1998.

     Cost of sales  related  to  natural  gas  marketing  for the  1998  periods
reflects  decreases in the average cost of gas per unit as well as the effect of
reduced  sales  volumes.  Total gross  margin  (total price less cost of gas) on
nonregulated  natural gas sales  increased  $1.7 million,  $0.3 million and $1.0
million  for the 1998  three,  nine,  and  twelve  months  ended  September  30,
respectively, compared to the 1997 periods.

     The Company has acquired several real estate brokerage  operations in 1998.
Nonregulated  revenues for the 1998 quarter  reflect $69.5 million from the real
estate brokerage  operations.  For the nine-month and twelve-month periods, real
estate brokerage revenues totaled $87.8 million.  Nonregulated cost of sales for
the third  quarter of 1998  includes  $37.4  million  related to the real estate
brokerage  companies.  For the nine months and twelve months ended September 30,
1998, real estate brokerage cost of sales totaled $43.9 million. Other operating
expenses for those operations were $23.7 million for the three-month  period and
$32.1 million for the nine- and twelve-month periods in 1998.

     Nonregulated other operating expenses for the 1998 twelve-month period
reflect a decrease of approximately $4.0 million due primarily to administrative
costs in the 1997 period which are no longer incurred  because of the absence of
operations the Company sold in early 1997.

NON-OPERATING INCOME AND INTEREST EXPENSE

MidAmerican:
------------

     Interest and Dividend Income -

     Interest  income  increased  in  each  1998  comparative  period  due to an
increase in temporary cash investments.

     Other, Net -

     In the fourth quarter of 1997,  MidAmerican  sold a portion of its accounts
receivable.  Other,  Net for the  quarter,  nine months and twelve  months ended
September 30, 1998,  includes  deductions for discounts on receivables sold, net
of related  subservicer  fees,  totaling  $1.4  million,  $4.4  million and $4.7
million,  respectively.  Refer to the Financing  Activities section of Liquidity
and Capital Resources later in MD&A for a discussion of the receivables sale.

                                      -25-
<PAGE>
     Recognition  of deferred  income from energy  efficiency  programs  totaled
zero,  $0.2 million and $0.4 million for the 1998  three-month,  nine-month  and
twelve-month  periods ended  September 30,  respectively.  The  comparable  1997
periods  reflect  income  of  $1.5  million,  $4.8  million  and  $5.4  million,
respectively.  The  decrease  is  due  to  the  additional  recovery  of  energy
efficiency  costs begun  September  29, 1997,  as discussed in the Utility Gross
Margin section of MD&A.

     Other, Net for the nine-month and twelve-month  periods ended September 30,
1997,  includes a reduction for net losses on reacquired  long-term debt of $0.9
million and $0.2 million, respectively.

     In  September  1997,  MidAmerican  received a $15 million cash payment from
Nebraska  Public Power  District  (NPPD) as  settlement  for a lawsuit  filed by
MidAmerican   against   NPPD.   Approximately   $12  million  was   refunded  to
MidAmerican's  customers.  The remaining  amount was retained by MidAmerican for
recovery of  litigation  costs in the lawsuit.  Other,  Net for each 1997 period
reflects  $2.2  million  of pre-tax  income for  recovery  of  litigation  costs
incurred in pre-1997 years.

     MidAmerican was awarded pre-tax income in each nine-month and  twelve-month
period presented for performance under its incentive gas procurement program. In
the second quarter of 1998 and 1997,  MidAmerican received $2.0 million and $1.7
million, respectively.  Twelve months ended September 30, 1998 and 1997, reflect
amounts of $5.3 million and $4.4 million, respectively.

     As part of its preparation for a competitive  electric utility environment,
the Company is investigating and developing new products to offer customers. The
impact of these activities and other nonregulated  activities reduced Other, Net
by $1.1  million,  $2.6  million and $4.3  million for the 1998 three,  nine and
twelve  months  ended  September  30, 1998,  respectively,  compared to the 1997
periods.

     In the fourth quarter of 1996, MidAmerican recorded an initial pre-tax gain
of $3.2 million on its sale of certain  storage gas supplies  which is reflected
in  the  twelve  months  ended  September  30,  1997.  MidAmerican  recorded  an
additional  $0.8  million  gain in the  second  quarter  of 1997,  which is also
reflected  in the twelve  months  ended  September  30,  1997,  after  receiving
favorable treatment on the transaction from the IUB.

     The twelve months ended  September 30, 1997,  also includes $2.2 million of
income from the reversal of a reserve after  successful  resolution of a dispute
with a vendor.

     Fixed Charges -

     Interest on long-term  debt decreased for the nine months and twelve months
ended  September  30, 1998,  due to long-term  debt  reduction  and  refinancing
activities. Other interest expense increased due to short-term debt at Holdings,
which resulted in interest being allocated to MidAmerican.  Preferred securities
of a  subsidiary  trust were issued in  December  1996  resulting  in the twelve
months ended  September  30, 1997,  including  only a partial year of dividends.
MidAmerican  preferred  shares were reacquired at the same time,  resulting in a
decrease in other preferred dividends.  Preferred dividends include net gains or
losses on the  reacquisition  of  MidAmerican  preferred  shares.  Net losses on
reacquisitions  totaled  $1.4  million and 2.7 million  for the  nine-month  and
twelve-month periods ended September 30, 1997, respectively.

                                      -26-
<PAGE>
Holdings:
---------

     Dividend Income -

     Dividend income decreased for each of the periods ended September 30, 1998,
compared to the  respective  1997 periods due to MidAmerican  Capital's  reduced
holdings of preferred stock portfolios.

     Realized Gains and Losses on Securities, Net -

     Net realized  gains on  securities  for twelve  months ended  September 30,
1998,  includes an $8.0 million  pre-tax gain on the sale of shares of McLeodUSA
common stock.

     Other, Net -

     The first nine months of 1998 includes $4.7 million from the  divestment of
nonregulated  assets in the first  quarter,  including the sale of the Company's
interest in a financial  management  company,  the sale of a  commercial  office
building and liquidation of a partnership  interest  concurrent with the sale of
its  commercial  property.  In addition,  the Company  recorded  $2.1 million of
income from an equity investment in a venture capital fund.

     In  addition to the above  items,  the twelve  months  ended  September  30
periods were affected by several  additional  factors.  During the twelve months
ended  September  30,  1998,  the Company  sold all of the assets of its railcar
repair  services  subsidiary  and  most of the  assets  of its  railcar  leasing
subsidiary and recorded  pre-tax gains  totaling  $10.0 million.  Write-downs of
nonregulated investments, as discussed in the Earnings Discussion section at the
beginning of Results of  Operations,  decreased  Other,  Net by $3.4 million and
$15.6 million for the  twelve-month  periods ended  September 30, 1998 and 1997,
respectively.

     Interest Charges -

     Interest on long-term  debt of  nonregulated  subsidiaries  decreased  $3.7
million for the  twelve-month  comparison  due  primarily  to the  reduction  in
MidAmerican Capital's long-term debt in early 1997.

INCOME TAXES

Holdings:
---------

     During  the second  quarter of 1997,  the  Company  contributed  part of an
appreciated  common stock  investment to its tax exempt  foundation and realized
$2.9 million of tax benefit.

                                      -27-
<PAGE>


                         LIQUIDITY AND CAPITAL RESOURCES
                         -------------------------------

     The Company has  available  a variety of sources of  liquidity  and capital
resources,  both internal and external.  These resources  provide funds required
for current operations,  construction  expenditures,  dividends, debt retirement
and other capital requirements.

     As of September 30, 1998, common equity  represented 50.4% of the Company's
total  capitalization  compared to 51.7% and 51.6% as of December 31, 1997,  and
September  30,  1997,  respectively.  A reduction in  accumulated  comprehensive
income,  reflective  of a  decrease  in the  market  value of an  investment  in
McLeodUSA  common  stock,  and the  Company's  common stock  repurchase  program
reduced common equity since September 30, 1997.

     As reflected on the Consolidated Statements of Cash Flows, Holdings had net
cash  provided  from  operating  activities  of $339  million for the first nine
months  of  1998  compared  to  $334  million  for  the  same  period  in  1997.
MidAmerican's  net cash provided from operating  activities was $343 million for
the first nine  months of 1998 and $278  million  for the first  nine  months of
1997.

INVESTING ACTIVITIES AND PLANS

MidAmerican:
------------

     Utility Construction Expenditures -

     MidAmerican's   primary   need  for   capital   is   utility   construction
expenditures.   For  the  first  nine  months  of  1998,  utility   construction
expenditures  totaled $114  million,  including  allowance for funds used during
construction  (AFUDC) and Quad Cities Station nuclear fuel  purchases.  All such
expenditures  were met with  cash  generated  from  utility  operations,  net of
dividends.

     Beginning  with  July  1997  expenditures,   advances  for  Cooper  capital
improvements are no longer included in utility construction expenditures but are
expensed  when incurred in other  operating  expenses.  Previously,  MidAmerican
capitalized  these expenses in accordance with then applicable rate  regulation.
As part of the 1997  settlement  of  MidAmerican's  electric  pricing  proposal,
MidAmerican  is  recovering  on a current basis the Iowa portion of expenses for
Cooper capital improvements  advances from its Iowa electric customers through a
tracking mechanism.

     Forecasted utility construction expenditures, including AFUDC, for 1998 are
$201 million and $609 million for 1999 through 2002.  Capital  expenditure needs
are reviewed regularly by MidAmerican's  management and may change significantly
as a result of such  reviews.  MidAmerican  presently  expects  that all utility
construction  expenditures  for  the  next  five  years  will be met  with  cash
generated from utility  operations,  net of dividends.  The actual level of cash
generated from utility  operations is affected by, among other things,  economic
conditions  in the  utility  service  territory,  weather  and federal and state
regulatory actions.

     Deferred Energy Efficiency Expenditures -

     The Company stopped  reflecting costs of its energy efficiency  programs as
an investing activity on its Consolidated  Statement of Cash Flows following the
IUB's  approval  in  September  1997 of the current  recovery of ongoing  energy
efficiency  program costs.  Under prior energy efficiency  regulations,  program
costs were deferred for several years prior to beginning  their  recovery over a
four-year  period,  and accordingly,  the Company reflected them as an investing
activity.

                                      -28-
<PAGE>
     Nuclear Decommissioning -

     Operators of a nuclear  facility are required to set aside funds to provide
for costs of future  decommissioning  of their  nuclear  facility.  In  general,
decommissioning  of a nuclear  facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator.  Based on  information  presently  available,  MidAmerican  expects to
contribute  approximately  $50 million during the period 1999 through 2003 to an
external trust established for the investment of funds for  decommissioning  the
Quad Cities Station.  Approximately 55% of the trust's funds are now invested in
domestic corporate debt and common equity securities.  The remainder is invested
in investment grade municipal and U.S. Treasury bonds.

     In addition,  MidAmerican makes payments to NPPD related to decommissioning
Cooper.  These  payments  are  reflected  in  other  operating  expenses  in the
Consolidated  Statements of Income.  NPPD estimates call for  MidAmerican to pay
approximately $57 million to NPPD for Cooper  decommissioning  during the period
1999 through 2003. NPPD invests the funds  predominately in U.S. Treasury Bonds.
MidAmerican's  obligation  for Cooper  decommissioning  may be  affected  by the
actual plant shutdown date and the status of the power purchase contract at that
time. In July 1997, NPPD filed a lawsuit in United States District Court for the
District  of  Nebraska  naming  MidAmerican  as  the  defendant  and  seeking  a
declaration of  MidAmerican's  rights and  obligations in connection with Cooper
nuclear decommissioning funding.

     MidAmerican  currently recovers Quad Cities Station  decommissioning  costs
charged to Illinois customers through a rate rider on customer billings.  Cooper
and Quad Cities  Station  decommissioning  costs  charged to Iowa  customers are
included in base rates,  and  recovery of  increases  in those  amounts  must be
sought through the normal ratemaking process.

Holdings:
---------

     Nonregulated Capital Expenditures -

     Capital   expenditures   of  MidAmerican   Capital,   Midwest  Capital  and
MidAmerican  Realty  totaled  $20  million  for the first  nine  months of 1998.
Capital   expenditures  of  these   subsidiaries   depend   primarily  upon  the
availability  of  suitable  investment  opportunities  which meet the  Company's
objectives.  The Company continues to evaluate nonregulated  investments and may
redeploy  certain assets in the future.  External  financing may also be used to
provide for nonregulated capital expenditures.

     As discussed in the Introduction section of MD&A, the Company has purchased
several residential real estate brokerage  organizations in the second and third
quarters  of 1998  for a total  of  approximately  $105  million.  The  acquired
companies  are now the  subsidiaries  of  MidAmerican  Realty.  Total  assets of
MidAmerican  Realty as of September 30, 1998, were $123 million.  The line items
significantly  affected  on  the  Company's  Consolidated  Balance  Sheet  as of
September  30,  1998,  are as  follows  ($ in  millions):  Receivables  ($18.2);
Nonutility  Property and Investments  ($19.0);  Other Assets ($80.5);  and Other
Current Liabilities  ($13.7).  For the nine months ended September 30, 1998, the
combined  total  closed  buyer/seller  transactions  of all  MidAmerican  Realty
companies,  including transactions prior to their acquisition, was approximately
52,800 transactions. Many factors affect the residential real estate market, and
there is no assurance that the same transaction volume, or the revenues thereon,
will be achieved in the future.

     During the second  quarter of 1998, the Company also acquired the assets of
two security services companies in the Midwest.

                                      -29-
<PAGE>
     Investments -

     MidAmerican Capital invests in a variety of marketable  securities which it
holds for  indefinite  periods of time. In the  Consolidated  Statements of Cash
Flows,  the lines  Purchase of  Securities  and Proceeds from Sale of Securities
consist primarily of the gross amounts of these activities,  including  realized
gains and losses on investments in marketable securities.

     Included in investments on the Consolidated Balance Sheets is the Company's
investment  in  common  stock of  McLeodUSA.  McLeodUSA  common  stock  has been
publicly traded since June 14, 1996.  Investor agreements related to McLeodUSA's
initial public offering and subsequent merger with  Consolidated  Communications
Inc.  prohibited  the Company from selling or otherwise  disposing of any of the
common stock of McLeodUSA  prior to September 24, 1998,  without the approval of
McLeodUSA's  board of directors.  As a result of the  agreements,  the Company's
investment was considered restricted stock and, as such, was recorded at cost in
all periods prior to September 1997. Beginning in September 1997, the investment
is no longer  considered  restricted for accounting  purposes and is recorded at
fair value.  As of September 30, 1998,  the cost and fair value of the McLeodUSA
investment were $45.2 million and $176.3 million,  respectively.  The unrealized
gain is recorded,  net of income taxes, as accumulated  comprehensive  income in
common  shareholders'  equity. As of September 30, 1998, the unrealized gain and
deferred income taxes for this investment were $131.1 million and $45.9 million,
respectively.

FINANCING ACTIVITIES, PLANS AND AVAILABILITY

MidAmerican:
------------

     MidAmerican  currently has authority from the FERC to issue short-term debt
in the form of commercial paper and bank notes  aggregating $400 million.  As of
September 30, 1998,  MidAmerican  had a $250 million  revolving  credit facility
agreement  and a $5 million line of credit to provide  short-term  financing for
utility  operations.  MidAmerican's  commercial paper borrowings,  which totaled
$73.6  million at September  30, 1998,  are  supported by the  revolving  credit
facility  and the  line of  credit.  MidAmerican  also  has a  revolving  credit
facility  which is  dedicated to provide  liquidity  for its  obligations  under
outstanding pollution control revenue bonds that are periodically remarketed.

     In 1997,  MidAmerican entered into a revolving agreement,  which expires in
2002, to sell all of its right, title and interest in the majority of its billed
accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a
special  purpose  entity  established  to  purchase  accounts   receivable  from
MidAmerican.  Funding  Corp.  in  turn  sold  receivable  interests  to  outside
investors.  In consideration for the sale,  MidAmerican  received $70 million in
cash and the remaining  balance in the form of a subordinated  note from Funding
Corp.  The agreement is structured as a true sale, as determined by Statement of
Financial  Accounting  Standards  (SFAS) No. 125,  under which the  creditors of
Funding  Corp.  will be  entitled to be  satisfied  out of the assets of Funding
Corp.  prior to any  value  being  returned  to  MidAmerican  or its  creditors.
Therefore,  the  accounts  receivable  sold are not  reflected  on  Holdings' or
MidAmerican's  Consolidated  Balance  Sheets.  As of September 30, 1998,  $106.8
million, net of reserves, was sold under the agreement.

                                      -30-
<PAGE>

     The  following  table  displays the 1998  long-term  debt  retirements  and
issuances  of  MidAmerican  Energy.   Repayment  of  the  February  and  October
maturities was funded with short-term debt and cash from operations.

<TABLE>
<CAPTION>

     <S>        <C>                                       <C>            <C>
       Date              Issue                             Principal     Transaction  
     --------   ----------------------------------------  ------------   -----------  
       2-1-98   6.25% First Mortgage Bonds, due 2-1-98    $ 75,000,000   Matured
      6-19-98   6.375% Medium Term Notes due 6-15-06       160,000,000   Issued
      7-15-98   8.125% General Mortgage Bonds due 2-1-03   100,000,000   Called at 105.23
      7-15-98   8% General Mortgage Bonds due 2-15-22       50,000,000   Called at 105.13
     10-15-98   5.05% First Mortgage Bonds due 10-15-98     49,100,000   Matured
</TABLE>
       
     As of October 31, 1998,  MidAmerican  had $379  million of  long-term  debt
maturities and sinking fund requirements for 1999 through 2003.

     MidAmerican  recently received  authorization  from the FERC to issue up to
$500 million in various forms of debt.  MidAmerican will also need authorization
from the Illinois Commerce Commission (ICC) prior to issuing any securities.  If
90% or more of the proceeds from a securities  issuance are used for refinancing
purposes,   MidAmerican  need  only  provide  the  ICC  with  an  "informational
statement"  prior to the issuance  which sets forth the type,  amount and use of
the proceeds of the  securities  to be issued.  If less than 90% of the proceeds
are used for  refinancing,  MidAmerican  must file a  comprehensive  application
seeking  authorization prior to issuance.  The ICC is required to hold a hearing
before issuing its authorization.

     Credit Ratings

     MidAmerican's  access  to  external  capital  and its cost of  capital  are
influenced by the credit ratings of its securities. MidAmerican's credit ratings
as of October 31, 1998, are shown in the table below.  The ratings  reflect only
the  views  of such  rating  agencies,  and  each  rating  should  be  evaluated
independently of any other rating. Generally, rating agencies base their ratings
on information  furnished to them by the issuing  company and on  investigation,
studies and assumptions by the rating  agencies.  There is no assurance that any
particular rating will continue for any given period of time or that it will not
be  changed or  withdrawn  entirely  if in the  judgment  of the  rating  agency
circumstances so warrant.  Such ratings are not a recommendation to buy, sell or
hold securities.
                                         Moody's
                                        Investors         Standard
                                         Service*         & Poor's *
                                        ---------         ----------

     Mortgage Bonds                         A2                AA-
     Unsecured Medium-Term Notes            A3                A
     Preferred Stocks                       a3                A
     Commercial Paper                       P-1               A-1

     *Following the  announcement  of the Company's  merger with  CalEnergy,
      Moody's Investors Service placed its ratings of MidAmerican securities
      under review for possible downgrade.  Standard & Poor's placed its ratings
      of MidAmerican on CreditWatch with negative implications pending further
      analysis.

Holdings:
---------

     As of  September  30,  1998,  Holdings  had lines of credit  totaling  $140
million to provide for short-term  financing needs,  $136.6 million of which was
outstanding.

                                      -31-
<PAGE>
     In March 1997, Holdings announced its plan to repurchase up to $200 million
of the  Company's  common  stock.  As of  September  30,  1998,  the Company had
repurchased  approximately 6.2 million shares for $114.8 million under the plan.
Repurchasing  the common stock reduced total common  dividend  requirements  and
aided  in  improving  the  Company's  dividend  payout  ratio.  In  addition,  a
subsidiary of the Company holds approximately  437,000 shares of Holdings common
stock which are also excluded from shares outstanding.

     On October 28,  1998,  Holdings'  board of  directors  declared a quarterly
dividend  on common  shares of $0.30 per share  payable  December  1, 1998.  The
dividend represents an annual rate of $1.20 per share.

     Nonregulated Subsidiaries -

     As of  September  30, 1998,  MidAmerican  Capital had  unsecured  revolving
credit  facilities  in the  amount  of $114  million,  under  which  no debt was
outstanding.  MidAmerican  Capital has $115 million of long-term debt maturities
and sinking fund  requirements for 1999 through 2003 related to debt outstanding
at September 30, 1998. In October 1998, MidAmerican Capital paid off $20 million
of its  long-term  debt which was  reflected in current  maturities of long-term
debt at September 30, 1998.

     Midwest   Capital   currently  has  a  $25  million  line  of  credit  with
MidAmerican, of which $5 million was outstanding at September 30, 1998.

     In November  1998,  MidAmerican  Realty  obtained a $25  million  revolving
credit facility and issued $35 million of 7.12% notes due 2010 through a private
placement.

OPERATING ACTIVITIES AND OTHER MATTERS

     Throughout the country,  the utility  industry  continues to move towards a
competitive  environment.  Although the extent of  deregulation  varies  between
states, increased competition is becoming a reality in virtually every region of
the country.  Numerous  states have passed  restructuring  legislation,  some of
which  initiated  a  phase-in  of  customer  choice  in  1998.  Legislators  and
regulators in many other states are addressing the issue.

     As part of many restructuring legislation packages,  electric utilities are
required to unbundle  traditional  services  previously  provided as a "packaged
product" under their rate tariffs.  Unbundling  allows customers to choose their
energy  supplier  and the level of energy  delivery  and  retail  services  they
desire.  Gas  utilities  are also  experiencing  separation  of the merchant and
delivery functions for all classes of customers.

     The  generation  and  retail  segments  of the  electric  industry  will be
significantly  impacted by competition.  The  introduction of competition in the
wholesale  market has  resulted  in a  proliferation  of power  marketers  and a
substantial increase in market activity. As retail competition evolves,  margins
will be pressured by competition  from other  utilities,  power  marketers,  and
self-generation.  Additionally,  increased  volatility in the energy marketplace
can be expected.

     As  evidence  of this,  in late June 1998,  utility  energy  markets in the
Midwest experienced substantial price volatility due to a number of factors. The
market volatility did not have a material impact on MidAmerican's  energy costs.
As the  industry  moves into a  competitive  utility  environment,  the  Company
expects such  volatility to continue.  MidAmerican  cannot predict the effect of
that volatility on its future revenues, energy costs or net income.

                                      -32-
<PAGE>
     MidAmerican  has been active in promoting and  monitoring  legislative  and
regulatory changes that affect the jurisdictions in which it operates.  In order
to successfully  compete in the new  environment,  the Company  believes it must
become the leading regional provider of energy and complementary  services.  The
Company is evaluating all aspects of its business to determine what  adjustments
are necessary to align them with this strategy. Aligning nonregulated businesses
with the Company's strategy has resulted, and may continue to result in the next
year, in negative  impacts on Holdings'  earnings in the form of write-downs for
the  sale,   revaluation  or  discontinuance  of  nonregulated   operations  and
investments. (Refer to the Results of Operations section of MD&A for comments on
the earnings impact of such actions.) The following discussion further addresses
changes  affecting  the  industry and actions the Company is taking to implement
its strategy.

     Competition -

     MidAmerican is subject to regulation by several utility regulatory agencies
which significantly  influences the operating environment and the recoverability
of costs from utility  customers.  That regulatory  environment has, in general,
given  MidAmerican  an  exclusive  right to serve  customers  within its service
territory  and, in turn,  the  obligation to provide  electric  service to those
customers.

     Although  the  anticipated  changes in the  electric  utility  industry may
create opportunities,  they will also create additional challenges and risks for
utilities.  Competition  is expected to put pressure on margins for  traditional
electric services. In order to lessen the impact of reduced margins, MidAmerican
will  focus on  controlling  the  cost of  traditional  services.  As part of an
electric pricing settlement approved by the IUB in 1997, MidAmerican reduced its
prices  for  most of its  Iowa  electric  retail  customers.  In the  IUB  order
approving  the  settlement,  MidAmerican  was  also  authorized  to  enter  into
long-term contracts with industrial and commercial electric customers.  Refer to
"Rate Matters" later in this  discussion for further  information.  In addition,
MidAmerican is positioning itself to offer  complementary  products and services
as expected  opportunities  become  available in a  competitive  utility  retail
market.  Additional products and services may provide avenues to replace margins
lost on traditional  electric  services.  The Company  anticipates  its recently
purchased real estate brokerage  organizations to benefit its utility operations
through the additional  contact with customers and potential  customers at times
when the Company can meet a variety of their needs.

     In December 1997, an Iowa industrial customer located within  MidAmerican's
IUB-approved  exclusive  electric  service  territory,  filed a lawsuit  against
Holdings and  MidAmerican  in the United States  District Court for the Southern
District of Iowa (the Court) alleging  various  violations of federal  antitrust
laws. The lawsuit  stemmed from a claim that because the customer is not free to
choose  its  retail  energy   supplier,   MidAmerican  is  engaging  in  illegal
monopolistic  behavior. In addition to damages, the customer sought the right to
choose its electric retail supplier. MidAmerican maintains that its provision of
retail  electric  service  is in  accordance  with  Iowa  laws  and  regulations
governing  electric  service   territories,   and  all  other  applicable  legal
requirements.  The Court  issued a judgment in favor of  MidAmerican.  An Appeal
filed by the customer is currently  pending.  A ruling in favor of the plaintiff
could have the effect of accelerating  retail  competition in MidAmerican's Iowa
service territory.

     Legislative and Regulatory Evolution -

     On December  16, 1997,  the Governor of Illinois  signed into law a bill to
restructure   Illinois'  electric  utility  industry  and  transition  it  to  a
competitive   market  beginning  October  1,  1999.   MidAmerican  is  presently
participating  in proceedings  which detail the new competitive  environment and
continues to evaluate the impact of the law on its operations.

     The law required a 15% electric rate reduction for all Illinois residential
customers in 1998. To satisfy its  obligation,  the law  specifically  permitted
MidAmerican to receive credit for the $15.5 million,  or 

                                      -33-
<PAGE>
approximately  13%, rate  reductions  implemented  in Illinois in 1996 and 1997.
MidAmerican  implemented  an additional  $0.9 million  annual rate reduction for
Illinois  residential  customers  effective August 1, 1998.  MidAmerican is also
exempted from the requirement to join an independent system operator (ISO) or to
form an in-state ISO.

     In addition,  the law provides for Illinois  earnings above a certain level
of return on equity (ROE) to be shared equally between customers and MidAmerican
beginning in April 2000. The ROE level at which  MidAmerican will be required to
share  earnings is a multi-step  calculation  of average  30-year  Treasury Bond
rates  plus  5.50%  for 1998 and 1999 and 6.50% for 2000  through  2004.  If the
resulting average Treasury Bond rate  approximated  rates which existed in 1997,
the ROE level above which sharing must occur would be approximately 12%. The law
allows for methods to mitigate the sharing of earnings  above the  threshold ROE
which would reduce MidAmerican's earnings. MidAmerican continues to evaluate its
strategy regarding the sharing mechanism.

     Beginning October 1, 1999, larger non-residential  customers and 33% of the
remaining  non-residential customers will be allowed to select their provider of
electric supply services. All other non-residential customers will have supplier
choice  starting  December  31,  2000.  Residential  customers  all  receive the
opportunity to select their electric  supplier on May 1, 2002.  Customer  choice
will create  opportunities  for  MidAmerican  to add customers who are currently
served by other  utilities.  At the same  time,  it will  introduce  the risk of
losing current MidAmerican customers to other energy providers.

     The law also addresses charges to customers for transition costs based on a
lost-revenue approach. These transition fees, designed to help utilities address
stranded costs, will end December 31, 2006, subject to possible extension.

     MidAmerican's  Iowa legislative  priority for 1998 was utility property tax
reform, a condition it considers precedent to utility industry restructuring.  A
bill to replace the current utility property tax system,  which was supported by
MidAmerican,  was  approved by the Iowa  legislature  and signed into law by the
Governor. The legislation becomes effective on January 1, 1999.

     Because energy costs are relatively low in Iowa, industry restructuring has
not been an issue  aggressively  pursued  in the state to date.  During the 1998
Iowa legislative session, a group of industrial customers introduced legislation
to allow  retail  service  competition,  but it did not  develop  further.  With
resolution of the utility property tax issue,  MidAmerican intends to pursue the
adoption of restructuring legislation in the 1999 Iowa legislative session.

     Small Volume Gas Transportation -

     In October  1997,  the IUB adopted  rules to encourage  gas  transportation
service for small volume customers starting in 1999.  MidAmerican filed its plan
to unbundle  service for its small volume  customers on October 30, 1998.  Under
the plan,  all of  MidAmerican's  small  volume  natural gas  customers in Iowa,
including  residential  customers,  would be allowed to choose their own natural
gas  supplier/marketer,   which  may  be  MidAmerican's  retail  business  unit,
beginning   May  1,  2000.   If  a  customer   does  not   expressly   choose  a
supplier/marketer, then MidAmerican will provide the customer with market-priced
service.  With  implementation  of  customer  choice,  the PGA (refer to the Gas
Margin  discussion of Results of  Operations)  would be modified to recover only
the costs incurred by  MidAmerican,  as the  distribution  system  operator,  to
balance the system and maintain system integrity.

                                      -34-
<PAGE>
     Residential and Commercial Pilot Project -

     On August  21,  1998,  the IUB  issued an Order  approving,  subject to the
filing of appropriate  compliance  tariffs,  MidAmerican's  proposal to allow at
least 15,000 Iowa families and 2,000 small businesses 


to have the opportunity to select among  competing  electricity  providers.  The
two-year program will allow participating  retail customers in the selected test
area to choose among several electricity providers,  including MidAmerican,  and
to have that energy delivered by MidAmerican. MidAmerican expects customers will
begin choosing among electricity providers in the first half of 1999. Businesses
in the test area will be eligible for the program if their annual peak demand is
less than four megawatts.  New suppliers  participating in the program will have
to be certified by the IUB and meet specified requirements.

     Accounting Effects of Industry Restructuring -

     A possible  consequence of competition in the utility industry is that SFAS
71 may no longer apply. SFAS 71 sets forth accounting  principles for operations
that are  regulated  and meet certain  criteria.  For  operations  that meet the
criteria,  SFAS 71 allows,  among other things, the deferral of costs that would
otherwise be expensed when incurred.  A majority of  MidAmerican's  electric and
gas utility operations  currently meet the criteria required by SFAS 71, but its
applicability is periodically  reexamined.  On December 16, 1997,  MidAmerican's
generation  operations serving Illinois were no longer subject to the provisions
of SFAS 71 due to  passage  of  restructuring  legislation  in  Illinois.  Thus,
MidAmerican  was required to write off those  amounts of  regulatory  assets and
liabilities   from  its  balance  sheet  related  to  its  Illinois   generation
operations. These write-offs were not material. If other portions of its utility
operations no longer meet the criteria of SFAS 71, MidAmerican could be required
to write off the  related  regulatory  assets and  liabilities  from its balance
sheet, and thus, a material  adjustment to earnings in that period could result.
As of September 30, 1998,  MidAmerican had $308 million of regulatory  assets in
its Consolidated Balance Sheet.

     Energy Efficiency -

     MidAmerican's  regulatory  assets as of September 30, 1998,  included $79.3
million of deferred  energy  efficiency  costs.  Based on the  current  level of
recovery,  MidAmerican  expects  to  recover  these  costs  by the end of  2001.
MidAmerican is also allowed to recover its ongoing energy  efficiency costs on a
current basis.  Recovery of these costs is being  collected from customers based
on projected  annual  costs of $16.8  million,  which may be adjusted  annually.
Amortization of the deferred energy  efficiency  costs and current  expenditures
for energy  efficiency costs will be reflected in other operating  expenses over
the  related  periods of  recovery.  The total of such costs for the years 1999,
2000 and 2001,  is  estimated  to be $43  million,  $40 million and $35 million,
respectively.

     Rate Matters: Electric -

     As a result of a negotiated settlement in Illinois, MidAmerican reduced its
Illinois  electric  service  rates by annual  amounts of $13.1  million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively.

     On June 27,  1997,  the IUB  approved  a March  1997  settlement  agreement
between  MidAmerican,  the Iowa  Office  of  Consumer  Advocate  (OCA) and other
parties. Six major components of the settlement and their status are as follows:

     1) On an annualized  basis,  prices for residential  customers were reduced
$8.5 million,  $10.0 million and $5.0 million  effective  November 1, 1996, July
11, 1997, and June 1, 1998  respectively,  for a total annual  decrease of $23.5
million.

                                      -35-
<PAGE>
     2) Rates for industrial  customers  will be reduced by $6 million  annually
and rates for  commercial  customers  will be reduced  by $4  million  annually.
MidAmerican has been given  permission to implement these  reductions  through a
retail access pilot project and through negotiated individual contracts.  In the
event that these  contracts  in the  aggregate do not reduce rates by $6 million
and $4 million,  respectively,  MidAmerican  is required to apply any  remaining
amount to  across-the-board  rate  reductions to customers who do not enter into
contracts.

     The effective  date for these rate  reductions was set for June 1, 1998, in
the IUB Order approving the settlement.  However, the IUB approved a MidAmerican
request  to extend  the  deadlines  until  September  1,  1998,  for  industrial
customers  and  December  31,  1998,  for  commercial  customers.  The  delay in
deadlines  includes an  obligation  to increase the amount of the reduction on a
one-time  basis to reflect the time value of money between June 1, 1998, and the
new deadlines.  MidAmerican  estimates it will not have any interest  obligation
with  respect  to the  industrial  contracts,  and will not incur  any  material
interest obligation with respect to its commercial contracts.

     The negotiated  contracts  have  differing  terms and conditions as well as
prices.  The  contracts  range in length  from five to ten years,  and some have
price  renegotiation  and early  termination  provisions  exercisable  by either
party.  The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 10-year contracts.  Prices are set
as fixed prices;  however,  many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes,  and transition costs.  While the contract prices are fixed (except
for the potential adjustment elements),  the costs MidAmerican incurs to fulfill
these  contracts  will vary.  On an aggregate  basis the annual  revenues  under
contract are approximately $155 million.

     The IUB has recently considered the contracting process in two proceedings.
Its decisions in those proceedings  allowed the contracting efforts to continue.
Contracts remain subject to IUB regulation.

     3) A tracking mechanism (Cooper Tracker) is being used to currently recover
costs for capital  improvements  required by the Cooper  Nuclear  Station  Power
Purchase Contract.  Revenues from the Cooper Tracker will total approximately $6
million in 1998. Other operating  expenses will include a comparable  amount for
currently expensing the related costs.

     4) Elimination of the Iowa energy  adjustment  clause (EAC).  Prior to July
11,  1997,  MidAmerican  collected  fuel costs from Iowa  customers on a current
basis  through the EAC,  and thus,  fuel costs had little  impact on net income.
Since then,  base rates for Iowa  customers  include a factor for  recovery of a
representative  level of fuel costs.  To the extent  actual fuel costs vary from
that  factor,  pre-tax  earnings  are  impacted.  The fuel cost  factor  will be
reviewed in February 1999 and adjusted  prospectively  if actual 1998 fuel costs
vary by more than 15% above or below the factor included in base rates.

     5) If MidAmerican's  annual Iowa electric  jurisdictional  return on common
equity exceeds 12%, then an equal sharing between  customers and shareholders of
earnings  above the 12% level  begins;  if it exceeds 14%,  then  two-thirds  of
MidAmerican's  share of those earnings will be used for accelerated  recovery of
certain  regulatory  assets.  The  agreement  permits  MidAmerican  to file  for
increased  rates if the  return  falls  below  9%.  Other  parties  signing  the
agreement are prohibited  from filing for reduced rates prior to 2001 unless the
return, after reflecting credits to customers, exceeds 14%.

     The IUB is  reviewing  MidAmerican's  calculation  of its 1997  return as a
result of an  objection  by the OCA.  MidAmerican  does not expect the  ultimate
outcome of this issue to have a material  impact on its  financial  condition or
results of operations.

                                      -36-
<PAGE>
     6)  MidAmerican  has developed a pilot program for a market access  service
which allows  customers  with at least 4 MW of load to choose energy  suppliers.
The pilot program is limited to 60 MW of participation the first year and can be
expanded by 15 MW annually  until the  conclusion  of the  program.  Any loss of
revenues  associated  with the pilot program will be considered  part of the $10
million annual  reduction for  commercial and industrial  customers as described
above,  but may not be recovered  from other customer  classes.  The program was
filed with the IUB, which has approved it, and the FERC. The Company anticipates
FERC acceptance by year end.

     Rate Matters: Gas -

     On October 27, 1998,  MidAmerican  made a filing with the IUB  requesting a
rate  increase  for its Iowa  retail gas  customers.  The 4.5  percent  increase
represents  approximately an $18.5 million  increase in annual gas revenues.  As
part  of  the  filing,   MidAmerican  requested  an  interim  rate  increase  of
approximately $16.3 million,  annually. The IUB may adjust the requested interim
amount and delay its implementation for up to ninety days.  MidAmerican  expects
the final rates,  which may differ from the requested  amount, to be implemented
in the summer of 1999.

     Environmental Matters -

     The  United  States   Environmental   Protection  Agency  (EPA)  and  state
environmental  agencies have determined that  contaminated  wastes  remaining at
certain  decommissioned  manufactured  gas plant facilities may pose a threat to
the public  health or the  environment  if such  contaminants  are in sufficient
quantities and at such concentrations as to warrant remedial action.

     The Company is evaluating 27 properties  which were, at one time,  sites of
gas  manufacturing  plants in which it may be a  potentially  responsible  party
(PRP). The purpose of these  evaluations is to determine whether waste materials
are present,  whether such materials constitute an environmental or health risk,
and  whether  the  Company  has any  responsibility  for  remedial  action.  The
Company's present estimate of probable  remediation costs for these sites is $24
million.  This estimate has been recorded as a liability and a regulatory  asset
for future recovery through the regulatory process. Refer to Note B of Notes for
further  discussion  of  the  Company's  environmental   activities  related  to
manufactured gas plant sites and cost recovery.

     Although the timing of potential  incurred  costs and recovery of such cost
in rates may affect the results of operations in individual periods,  management
believes  that the  outcome of these  issues  will not have a  material  adverse
effect on the Company's financial position or results of operations.

     Following recommendations provided by the Ozone Transport Assessment Group,
the EPA,  in  November  1997,  issued  a Notice  of  Proposed  Rulemaking  which
identified  22  states  and the  District  of  Columbia  as  making  significant
contribution  to  nonattainment  of the ozone standard in downwind states in the
eastern half of the United States.  In September  1998, the EPA issued its final
rules  in  this  proceeding.  Iowa is not  subject  to the  emissions  reduction
requirements in the final rules, and, as such,  MidAmerican's facilities are not
subject to additional emissions reductions as a result of this initiative.

     On July 18,  1997,  the EPA adopted  revisions to the NAAQS for ozone and a
new  standard for fine  particulate  matter.  Based on data to be obtained  from
monitors  located  throughout the states,  the EPA will make a determination  of
whether  the states  have any areas that do not meet the air  quality  standards
(i.e.,  areas that are  classified  as  nonattainment).  If a state has  area(s)
classified  as  nonattainment  area(s),  the state is required to submit a State
Implementation  Plan  specifying  how it will reach  attainment of the standards

                                      -37-
<PAGE>
through   emission   reductions  or  other  means.  In  August  1998,  the  Iowa
Environmental Protection Commission adopted by reference the NAAQS for ozone and
fine particulate matter.

     The  impact  of  the  new  standards  on  MidAmerican  will  depend  on the
attainment  status  of  the  areas  surrounding   MidAmerican's  operations  and
MidAmerican's  relative contribution to the nonattainment status. The attainment
status of areas in the  state of Iowa will not be known for two to three  years.
However,   if   MidAmerican's   operations   are  determined  to  contribute  to
nonattainment,  the  installation  of  additional  control  equipment,  such  as
scrubbers and/or selective catalytic reduction,  on MidAmerican's units could be
required.  The cost to install such equipment could be significant.  MidAmerican
will continue to follow the attainment  status of the areas in which it operates
and evaluate the  potential  impact of the status of these areas on  MidAmerican
under the new regulations.

     In  December  1997,  negotiators  from more than 150  nations met in Kyoto,
Japan to negotiate an international agreement designed to address global climate
change impacts by attempting to reduce so-called greenhouse gas emissions.  Some
scientists contend that these gases build up in the Earth's atmosphere and cause
global  temperatures  to rise. The primary  target of these  emissions is carbon
dioxide (CO2) which is formed by, among other things,  the  combustion of fossil
fuels.  The  agreement  currently  calls for the  United  States  to reduce  its
emissions of CO2 and other  greenhouse  gases to 7 percent  below 1990 levels in
the 2008-2012 time frame.  In order for the agreement to become binding upon the
United States,  ratification  by the U.S.  Senate is necessary.  The cost to the
utility industry in general,  and to MidAmerican,  of reducing its CO2 emissions
levels by 7 percent  below 1990 levels would depend on available  technology  at
the time, but could be material.

     Quad Cities Nuclear Power Station-

     Quad Cities  Station,  which is  operated by and 75% owned by  Commonwealth
Edison Company (ComEd), began 1998 with Unit 1 and Unit 2 out of service under a
Confirmatory  Action Letter (CAL) addressing safety system concerns in the event
of certain postulated fires. Also, in January, ComEd was informed by the Nuclear
Regulatory  Commission  (NRC) that the  performance  of Quad  Cities  Station is
trending  adversely.  The NRC  lifted  the CAL in May,  and Unit 2  returned  to
service on May 26,  1998.  On June 1, 1998,  Unit 1 returned to service.  During
discussions  with the  NRC,  ComEd  made  numerous  commitments  to the NRC with
respect to  additional  long-term  analysis  and  improvements  related to those
safety  systems.  ComEd  has  made  significant  changes  in  senior  management
positions in its nuclear  program and at the Quad Cities  Station since November
1997 in an effort to improve its nuclear operations.

     A refueling outage is scheduled for Quad Cities Unit 1 in November 1998. No
refueling outage is scheduled for either unit in 1999.

     Coal Inventories -

     MidAmerican  continues  to  manage  its coal  inventory  levels,  which are
significantly  higher  than those in early  1998.  MidAmerican  expects the coal
inventory at each generating plant to be at or near  management's  desired level
by year end.

     Generating Capability -

     In July, 1998,  customer usage of electricity  caused an hourly peak demand
of 3,643 megawatts (MW) on MidAmerican's energy system.  MidAmerican's  previous
record peak demand was 3,553 MW set in 1995.  MidAmerican is interconnected with
certain  Iowa and  neighboring  utilities  and is involved in an electric  power
pooling  agreement  known as  Mid-Continent  Area Power Pool  (MAPP).  Each MAPP
participant is 

                                      -38-
<PAGE>
required to maintain for emergency purposes a net generating  capability reserve
of at least 15% above its system peak demand.  MidAmerican's  reserve margin for
1998 was approximately 20%.


     MidAmerican   believes  it  has  adequate  electric  capacity  reserve  and
continues to manage its  generating  resources to ensure an adequate  reserve in
the future. However,  significantly  higher-than-normal  temperatures during the
cooling season could cause MidAmerican's  reserve to fall below the 15% minimum.
If MidAmerican fails to maintain the appropriate reserve,  significant penalties
could be contractually imposed by MAPP.

ACTIVITIES REGARDING YEAR 2000 DATE ISSUES

     The Company's  discussion of year 2000 issues addresses the Company's plans
to address technical problems relating to calculations,  manipulations,  storage
and other uses of date data which could cause some computer-controlled  systems,
applications and processes (hereinafter referred to as "Systems") to incorrectly
process  critical  financial and  operational  information,  or stop  processing
altogether.   The  discussion   contains  by  necessity   many   forward-looking
statements.  The Company wishes to avail itself of the safe harbor provisions of
the  Private  Securities  Litigation  Reform Act of 1995,  and in order to do so
includes  the  following  meaningful  cautionary  statements  with regard to the
forward  looking  statements of its year 2000 plans.  The Company's  intentions,
expectations,  and predictions  relating to its year 2000 efforts are subject to
risks and  uncertainties  that could cause actual  results to differ  materially
from  those  expressed  in,  or  implied  by such  statements.  Such  risks  and
uncertainties  include,  among  others,  the  effects  of  weather,  competitive
factors,  federal and state regulatory actions, and other matters, many of which
are beyond the Company's control.

     Project Description -

     The Company has  undertaken  an  extensive  ongoing  project to address its
information  technology (IT) and non-IT (including embedded  technology) Systems
potentially  affected by the year 2000 date change.  The  Company's  approach is
based on a five-phase  project  methodology - inventory,  assessment,  planning,
resolution  and  implementation  -  designed  to result  in the  identification,
evaluation of potential problems,  and remediation of the Company's Systems. The
Company generally defines the five phases as follows:

     1. Inventory  Phase - The purpose of the inventory phase is to identify and
document Systems used by the Company that may have a date function.

     2.  Assessment  Phase - The purpose of the  assessment  phase is to collect
information  about  inventoried  Systems,  including  the business and technical
context  in which  individual  Systems  operate,  to make an  informed  judgment
concerning an appropriate plan to mitigate year 2000 related risks.

     3.  Planning  Phase - The  purpose  of the  planning  phase  is to  develop
strategic  and tactical  plans for Systems that  require  replacement,  repairs,
upgrades or other appropriate resolutions (collectively referred to as "remedial
actions").

     4. Resolution Phase - The purpose of the resolution phase is to execute the
plan developed during the preceding phases. Testing of Systems and/or components
of Systems is commenced during this phase.

     5.  Implementation  Phase - The purpose of the  implementation  phase is to
perform integration testing and to verify that Systems will function properly in
a production environment.

     The  Company's  preparedness  goal is to ensure  high- and  medium-priority
Systems  are  suitable  for  continued  use into the year 2000 and will  perform
correctly all  functions  that require  accurate  processing of 

                                      -39-
<PAGE>
date data ("year 2000 ready" or "year 2000  readiness")  by June 30,  1999.  The
Company classifies all Systems ranging from low- to high-priority based on their
importance to carrying out the Company's  business  mission.  System priority is
based on  potential  impacts  resulting  from year 2000  problems  on public and
employee safety, prolonged and widespread service outages, long-term shareholder
value,  and  ability  to comply  with  regulatory  requirements.  In the case of
low-priority Systems, year 2000 readiness may be delayed beyond January 1, 2000,
or perhaps indefinitely. The Company plans to use the last six months of 1999 to
perform post-implementation testing, address selected lower priority Systems and
conduct preparedness exercises.

     Vendors, customers and other third parties may affect the Company's ability
to achieve  year 2000  readiness.  Because  service  reliability  and  financial
stability  are dependent on the Company's  supply chain,  a concerted  effort is
being made to  investigate  important  third  parties to assess their ability to
continue to supply  products or  services  to, or purchase  products or services
from, the Company.  The  investigation  of third parties consists of documenting
the nature of  business  relationships  in  correspondence  and surveys to third
parties and making  determinations  regarding  their year 2000 readiness  status
based on the responses received.  Ongoing communications with some third parties
will be required for the Company to make such a determination.

     State of Readiness -

     Although it is difficult due to factors such as the  overlapping  nature of
the project  phases and the varying  degree of  complexity  of the Systems being
addressed to accurately determine the status of completion of a particular phase
at any given point in time,  the Company  estimates  that it has  completed  the
process  of  inventorying  over 90 percent of all  Systems.  The  project is now
generally  in the  assessment  and  planning  phases  with a focus on high-  and
medium-priority  Systems.  Detailed  plans for remedial  actions and testing for
high- and  medium-priority  Systems will  generally be completed by December 31,
1998. In the case of certain high-priority  Systems,  vendors have been retained
to assist  in the  resolution  phase,  and  certain  high-priority  Systems  are
currently in the implementation phase. An estimate of the actions required to be
undertaken, a projected schedule regarding when those actions must be completed,
and an  updated  estimate  of the  cost of  resolving  the year  2000  problems,
including  possible  remedial  actions  with  respect to such  Systems,  will be
determined by December 31, 1998.

     By December 31, 1998, the Company intends to renovate several high priority
Systems  (management   information,   materials  management  information,   work
management  information,  and others).  Certain other Systems (customer service,
electric  outage  management,  meter control and inventory,  and others) will be
replaced to gain enhanced  functionalities prior to the end of the first quarter
of 1999. The  requirement  to develop and install a new customer  service system
("CSS")  and related  applications  was an outcome of the merger  which  created
MidAmerican in July of 1995.  Although  potential year 2000 problems existing in
the  predecessor  companies'  CSS  products  were  recognized,  the  decision to
implement  the new CSS was  primarily  in  response  to  technical  difficulties
associated with application  integration and the need for additional application
functionalities.  The  costs  of the new CSS and  related  applications  are not
reported  herein  as  their  development  and  installation  was not  driven  by
potential year 2000 concerns.

     To date, the Company's investigation of third parties has focused primarily
on vendors of Systems and System components.  A large amount of valuable product
information has been received in direct responses to the Company's inquiries, as
well  as  indirectly  through  reference  to Web  sites  hosted  by  vendors  or
representative  associations  such as the  Electric  Power  Research  Institute.
However, information made available to the Company has not been uniform in terms
of quality and quantity;  i.e.,  information about products in which the Company
has a specific interest has been definitive in some cases,  while in other cases
such  information  has been  inconclusive.  The Company will  continue to pursue
information about Systems and System components with the expectation of reaching
decisions  regarding  the year 2000  status  of all  high-  and  medium-priority
Systems by December 31, 1998,  and to take  appropriate  corresponding  actions.
During  the
                                      -40-

<PAGE>
fourth  quarter of 1998, the Company will also focus  substantial  effort on the
investigation  of other third  parties such as fuel  suppliers,  joint owners of
generation and transmission  facilities,  rail transportation service providers,
telecommunications  service providers,  wholesale (bulk power) customers,  major
retail customers,  and companies that exchange electronic data with the Company,
among others.

     Costs -

     To date,  approximately  $5.1  million  in  operating  expenses  have  been
incurred to carry out year 2000 activities. It is anticipated that an additional
$8.6 million in operating  expenses and $1.4 million in capital  costs will need
to be incurred to complete the project. Although additional unforeseen costs may
be incurred, at this time the Company has not become aware of any material costs
which may arise in order to achieve year 2000 readiness.  Future progress toward
achievement of year 2000 readiness could change this outlook.

     Contingency Plans -

     A comprehensive  contingency plan identifying credible worst-case scenarios
is being  developed.  The  schedule for  developing  the plan is to complete the
first draft by December  31,  1998,  complete the second draft on or before June
30, 1999,  and to have an  operational  plan in place no later than September 1,
1999.

     The  contingency  plan  comprises  both  mitigation  and recovery  aspects.
Mitigation  entails  planning  to  reduce  the  impact of  unresolved  year 2000
problems and recovery  entails planning to recover from problems that may occur.
The Company's  approach to contingency  planning  includes the following  steps:
identify year 2000 operating risks; perform scenario risk analysis; develop risk
management  strategies;  begin  general  preparations;  implement  power  system
operation planning; and implementation of year 2000 system operating plan.

     Risks -

     Despite the comprehensive nature of the Company's year 2000 project and the
results the project is designed to produce,  the Company may experience  random,
widespread and simultaneous failures in its generation, distribution and Systems
during January 2000.  Contingency plans for any known or reasonably  anticipated
risk of  interruption  to the  generation  or  distribution  of energy are being
developed  to plan  for  resources  needed  to be put in  place  to  reduce  the
potential outage period to a minimum.  Although the impact on future  operations
and revenues is unknown,  failure of the Company's Systems to perform because of
year 2000 implications  could result in operating problems and costs material to
the Company.

     Although management believes the project will be completed  sufficiently in
advance of January 1, 2000,  unforeseen  and other factors could cause delays in
the  project,  the results of which could  likely have a material  effect on the
Company's  results of  operations.  In addition,  there is no assurance that the
Company will not be affected by year 2000 problems experienced by third parties.

ACCOUNTING ISSUES

     In June 1998,  the Financial  Accounting  Standards  Board issued SFAS 133,
"Accounting  for Derivative  Instruments and Hedging  Activities"  effective for
fiscal  years  beginning  after June 15,  1999.  SFAS 133  requires an entity to
recognize  all of  its  derivatives  as  either  assets  or  liabilities  in its
statement of financial  position and measure those instruments at fair value. If
certain  conditions  are met,  such  instruments  may be  designated  as hedges.
Changes in the value of hedge instruments  would not impact earnings,  except to
the extent that the instrument is not perfectly  effective as a hedge. An entity
that elects to apply hedge  accounting is required to establish at the inception
of the hedge the method it will use in assessing the effectiveness of the  

                                      -41-

<PAGE>
derivative.  If the  pronouncement  was  currently  in effect,  the Company
believes  it would not have a material  impact on its results of  operations  or
financial condition. The Company continues to analyze the pronouncement.

PART I. (CONTINUED)

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------   ----------------------------------------------------------

     As of  September  30,  1998,  the  Company's  and  MidAmerican's  financial
positions  related to  financial  instruments  and assets that are  sensitive to
changes in interest rates or commodity price changes have not changed materially
since December 31, 1997.  Refer to the Company's 1997 Annual Report on Form 10-K
under Item 7A for the applicable information as of December 31, 1997.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
-------  -----------------

     The Company and its subsidiaries have no material legal proceedings  except
for the following:

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

     For information relating to the Company's Environmental Matters,  reference
is made to Part  I,  Note  (B) of  Holdings'  Notes  to  Consolidated  Financial
Statements.

Cooper Litigation
-----------------

     On July 23, 1997,  NPPD filed a Complaint,  in the United  States  District
Court for the District of Nebraska,  naming  MidAmerican  as the  defendant  and
seeking  declaratory  judgment as to three issues  under the parties'  long-term
power purchase agreement for Cooper capacity and energy. More specifically, NPPD
seeks a declaratory judgment in the following respects:  (1) that MidAmerican is
obligated to pay 50% of all costs and expenses  associated with  decommissioning
Cooper,  and that in the event NPPD continues to operate Cooper after expiration
of the power purchase agreement (September 2004), MidAmerican is not entitled to
reimbursement  of any  decommissioning  funds it has paid to date or will pay in
the future; (2) that the current method of allocating transition costs as a part
of the decommissioning  cost is proper under the power purchase  agreement;  and
(3) that the current method of investing  decommissioning  funds is proper under
the power purchase agreement.

     MidAmerican filed its answer and contingent  counterclaims.  The contingent
counterclaims   filed  by  MidAmerican  are  generally  as  follows:   (1)  that
MidAmerican  has no duty under the power purchase  agreement to reimburse or pay
50% of the decommissioning  costs unless certain conditions occur; (2) that NPPD
has the equitable duty to repay all amounts that  MidAmerican  has prefunded for
decommissioning in the event NPPD operates the plant after the term of the power
purchase  agreement;  (3) that NPPD is equitably  estopped  from  continuing  to
operate the plant after the term of the power purchase agreement;  (4) that NPPD
has granted  MidAmerican an option to continue  taking 50% of the power from the
plant;  (5) that the term "monthly power costs" as defined in the power purchase
agreement does not include costs and expenses  associated  with  decommissioning
the  plant;  (6)  that  MidAmerican  has no duty to pay for  nuclear  fuel,  O&M
projects or capital  improvements  that have useful  lives after the term of the
power  purchase  agreement;  (7) that  transition  costs are not included in any
decommissioning  costs  and  expenses;  (8) that NPPD has  breached  its duty to
MidAmerican in making investments of certain funds; (9) that reserves in certain
accounts are 

                                      -42-
<PAGE>

excessive and should be refunded to MidAmerican;  and (10) that NPPD must credit
MidAmerican for certain payments by MidAmerican for low-level  radioactive waste
disposal.

     MidAmerican and NPPD are currently involved in discovery. The trial in this
case is  presently  scheduled  for  November  1999.  MidAmerican  is  vigorously
defending and pursuing its interest in this proceeding.

North Star Steel Company
------------------------

     On December 8, 1997,  North Star Steel Company (NSS), a retail  MidAmerican
electric customer, filed a Complaint in the United States District Court for the
Southern  District of Iowa naming  Holdings and  MidAmerican as defendants.  The
Complaint  alleges  that  MidAmerican's  refusal  to allow NSS to obtain  retail
electric  service from an unspecified  alternative  energy company  amounts to a
violation of federal  antitrust laws. NSS sought to recover an unspecified level
of damages,  and to require  MidAmerican to provide retail  wheeling  service so
that NSS could obtain  electricity from an unnamed  supplier.  On June 23, 1998,
the  District  Court  issued  an Order  Granting  Summary  Judgment  in favor of
MidAmerican.  On July 20, 1998,  NSS appealed that decision to the United States
Court of Appeals for the Eighth Circuit. That appeal is currently pending.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------  ---------------------------------------------------

     At a special  meeting held  October 30, 1998,  the holders of a majority of
the  outstanding  shares of Company common stock approved the merger between the
Company and CalEnergy. The results of the voting are as follows:

         For -               69,069,250
         Against -            6,045,636
         Abstain -            1,097,608

                                      -43-
<PAGE>
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
-------  --------------------------------

(A)      EXHIBITS

Exhibits Filed Herewith
-----------------------

     The exhibits  filed  herewith are  attached to this  combined  Form 10-Q in
numerical  order.  They are listed below under the heading of the  registrant or
registrants to whom they apply.

Holdings

     Exhibit  12.1 -  Computation  of ratios of  earnings  to fixed  charges and
computation  of ratios of  earnings to fixed  charges  plus  preferred  dividend
requirements.

MidAmerican

     Exhibit 3.3 - Restated  Articles of  Incorporation  of  MidAmerican  Energy
Company, as amended October 27, 1998.

     Exhibit  12.2 -  Computation  of ratios of  earnings  to fixed  charges and
computation  of ratios of  earnings to fixed  charges  plus  preferred  dividend
requirements.

Holdings and MidAmerican

     Exhibit 27 - Financial Data Schedules (for electronic filing only).

(B)  REPORTS ON FORM 8-K

     On August 12, 1998,  Holdings  filed a report on Form 8-K, dated August 11,
1998. The report included an announcement stating that Holdings' entered into an
Agreement and Plan of Merger with  CalEnergy  Company,  Inc. on August 11, 1998,
and a copy of the related press release.

                                      -44-
<PAGE>

                                   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.




                              MIDAMERICAN ENERGY HOLDINGS COMPANY
                                   MIDAMERICAN ENERGY COMPANY
                              -----------------------------------            
                                         (Registrants)








Date  November 12, 1998                       /s/  A. L. Wells
-----------------------       -------------------------------------------------
                                                   A. L. Wells
                              Senior Vice President and Chief Financial Officer

                                      -45-