UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2003
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

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

For the quarterly period ended June 30, 2004

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

For the transition period from ______ to ______

Commission file number: 1-3004

Illinois Power Company

(Exact name of registrant as specified in its charter)

Illinois	37-0344645
(State or other jurisdiction of	(I.R.S. Employer
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
incorporation or organization)	Identification No.)

500 S. 2727th th Street

Decatur, Illinois 62521-2200

(Address of principal executive offices)

(Zip Code)

(217) 424-6600

(Registrant’s telephone number, including area code)

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 ü NO o ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES ___ o NO x ü

Illinova Corporation is the sole holder of all 62,892,213 outstanding shares of the common stock ~~and owns approximately 73%~~ of ~~the preferred stock of~~ Illinois Power Company. There is no voting or non-voting common equity held by non-affiliates of Illinois Power Company. Illinova also owns 662,924 shares, or approximately 73%, of IP’s preferred stock. Illinois Power Company is an indirect wholly -owned subsidiary of Dynegy Inc.


	1

ILLINOIS POWER COMPANY

TABLE OF CONTENTS

	Page		~~Page~~
PART I.	FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION
Definitions	~~Definitions~~3		3
	Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
	Condensed Consolidated Balance Sheets:
Condensed Consolidated Balance Sheets: June 30, 2004 and December 31, 2003	4
		September 30, 2003 and December 31, 2002	4
Condensed Consolidated Statements of Income and Comprehensive Income: For the three and six months ended June 30, 2004 and 2003	5
	Condensed Consolidated Statements of Income and Comprehensive Income:
Condensed Consolidated Statements of Cash Flows: For the six months ended June 30, 2004 and 2003	6
		For the three and nine months ended September 30, 2003 and 2002	5
Notes to Condensed Consolidated Financial Statements	7
	Condensed Consolidated Statements of Cash Flows:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
		For the nine months ended September 30, 2003 and 2002	6
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29
	Notes to Condensed Consolidated Financial Statements		7
Item 4. CONTROLS AND PROCEDURES	29
	Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
PART II. OTHER INFORMATION
	Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
Item 1. LEGAL PROCEEDINGS	31
	Item 4.	CONTROLS AND PROCEDURES	30
Item 6. EXHIBITS AND REPORTS ON FORM 8-K	31
PART II.	OTHER INFORMATION
	Item 1.	LEGAL PROCEEDINGS	31
	Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	31


	2

Table of Contents

PART I

Definitions

As used in this Form 10-Q, the terms listed below are defined as follows:

AmerGen	AmerGen Energy Company
Ameren	Ameren Corporation
ARB	Accounting Research Board
ARO	Asset Retirement Obligation
Bcf	Billion cubic feet
Clinton	Clinton Power Station
ComEd	Commonwealth Edison Company
CWIP	Construction work in progress
DHI	Dynegy Holdings Inc.
DMG	Dynegy Midwest Generation, Inc.
DPM	Dynegy Power Marketing Inc.
Dynegy	Dynegy Inc.
EITF	Emerging Issues Task Force of the Financial Accounting Standards Board
EPA	Environmental Protection Agency
Exchange Act	Securities Exchange Act of 1934, as amended
Exelon	Exelon Corporation
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
FIN	FASB Interpretation Number
Form 10-K	Our Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 12, 2004
GAAP	Generally Accepted Accounting Principles
FIN	FASB Interpretation
GAAP	Accounting principles generally accepted in the United States of America
ICC	Illinois Commerce Commission
Illinova	Illinova Corporation, our direct parent company and a wholly -owned subsidiary of Dynegy
kWh	Kilowatt-Hour
IP	Illinois Power Company
IPSPT	Illinois Power Special Purpose Trust
ISO	Independent System Operator
kWh	Kilowatt-hour
LLC	Illinois Power Securitization Limited Liability Company
MGP	Manufactured-Gas Plant
MISO	Midwest Independent Transmission System Operator, Inc.
MW	Megawatts
MWh	Megawatt-hour
NOV	Notice of Violation
NSPS	New Source Performance Standard
P.A. 90-561	Electric Service Customer Choice and Rate Relief Law of 1997
PGA	Purchase Gas Adjustment
PPA	Power Purchase Agreement
PUHCA	The Public Utility Holding Company Act of 1935, as amended
PSD	Prevention of Significant Deterioration
RTO	Regional Transmission Organization
SEC	~~United~~U.S. ~~States~~ Securities and Exchange Commission
SFAS	Statement of Financial Accounting Standards
Trans-Elect	Trans-Elect Inc.
SPE	Special Purpose Entity
Trans-Elect	Trans-Elect, Inc.
VIE	Variable Interest Entity


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Table of Contents

ILLINOIS POWER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except share data) (unaudited)

	September 30, 2003			December 31, 2002
	June 30, 2004			December 31, 2003
ASSETS
Utility Plant:
Electric (includes construction work in progress of $91 million and $98 million, respectively)	$	2,484		$	2,410
Electric (includes CWIP of $70 million and $86 million, respectively)	$	2,515		$	2,499
Gas (includes construction work in progress of $18 million and $18 million, respectively)		781			770
Gas (includes CWIP of $6 million and $14 million, respectively)		795			783
		3,265			3,180
		3,310			3,282
Less -- accumulated depreciation		1,~~261~~203			1,~~219~~199
		2,004			1,961
		2,107			2,083
Investments and Other Assets		105			97
Current Assets:
Cash and cash equivalents		2342			~~117~~17
Restricted cash		20			17
Accounts receivable, net		114			116
Accounts receivable, net		120			104
Accounts receivable, affiliates		84			75
Accounts receivable, affiliates		71			22
Accrued unbilled revenue		59			82
Accrued unbilled revenue		63			78
Inventories, at average cost		37			66
Inventories, at average cost		64			44
Prepayments and other		38			50
Prepayments and other		42			20
		374			406
		403			402
Note Receivable from Affiliate		2,271			2,271
Deferred Debits:
Transition period cost recovery		~~126~~97			~~155~~116
Other		134			143
Investment in IPSPT		4			4
		260			298
Receivable from IPSPT		2			2
	$	4,948		$	4,941
Other		160			170
		263			292
	$	5,020		$	5,059
CAPITAL AND LIABILITIES
Capitalization:
Common stock -- no par value, 100,000,000 shares authorized: 75,643,937 shares issued, stated at	$	1,274		$	1,274
Additional paid-in capital		9			9
Retained earnings - accumulated since 1/1/99		~~478~~565			~~390~~505
Accumulated other comprehensive income (loss), net of tax		(139	)		(1310	)
Less -- Capital stock expense		7			7
Less -- 12,751,724 shares of common stock in treasury, at cost		287			287
		1,454			1,366
		1,545			1,484
Preferred stock		46			46
Long-term debt		1,~~801~~366			1,~~719~~435
		3,301			3,131
Long-term debt, IPSPT		302			345
		3,259			3,310
Current Liabilities:
Accounts payable		4147			6638
Accounts payable, affiliates		116			1814
Notes payable and current portion of long-term debt		86			376
Notes payable and long-term debt maturing within one year		148			71
Accrued liabilities		240			145
Long-term debt maturing within one year to IPSPT		72			74
		378			605
Accrued liabilities		126			155
		399			352
Deferred Credits:
Accumulated deferred income taxes		1,003			1,~~038~~011
Accumulated deferred investment tax credits		2019			2120
Other		~~246~~340			~~146~~366
		1,269			1,205
		1,362			1,397
	$	45,~~948~~020		$	45,~~941~~059

See notes to condensed consolidated financial statements.


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Table of Contents

ILLINOIS POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in millions) (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
	2004			2003			2004			2003
Operating Revenues:
Electric	$	~~352~~258		$	~~365~~257		$	~~860~~505		$	~~896~~508
Gas		4966			4171			~~330~~276			~~247~~281
Total		~~401~~324			~~406~~328			~~1,190~~781			~~1,143~~789
Operating Expenses and Taxes:
Power purchased		~~212~~154			~~210~~160			~~530~~305			~~521~~318
Gas purchased for resale		2739			1941			~~220~~193			~~147~~193
Other operating expenses		4736			3833			~~110~~72			~~107~~63
Maintenance		1516			16			4327			4128
Depreciation and amortization		1920			20			5940			6140
Amortization of regulatory assets		1110			1210			3221			3821
General taxes		1316			917			5137			4538
Income taxes		10---			25(2	)		158			455
Total		~~354~~291			~~349~~295			~~1,060~~703			~~1,005~~706
Operating income		4733			5733			~~130~~78			~~138~~83
Other Income and Deductions – Net:
Other Income and Deductions:
Interest income from affiliates		4342			4342			~~128~~85			~~128~~85
Miscellaneous - net		(12	)		(16	)		(44	)		(45	)
Other income taxes		(17	)		(16	)		(34	)		(33	)
Total		31			27			84			83
Other income		7			2			12			3
Income before interest charges		78			84			214			221
Other expense		(1	)		(2	)		(1	)		(2	)
Total		31			26			62			53
Interest Charges:
Interest expense		3835			2741			~~122~~68			8384
Allowance for borrowed funds used during construction		---			---			---			---
Interest expense - IPSPT		6			---			12			---
Total		38			27			122			83
Allowance for borrowed funds used during construction		(1	)		---			(1	)		---
Earnings before cumulative effect of change in accounting principle		40			57			92			138
Total		40			41			79			84
Cumulative effect of change in accounting principle, net of tax (Note 1)		---			---			(2	)		---
Earnings before cumulative effect of change in accounting principle		24			18			61			52
Net income		40			57			90			138
Cumulative effect of change in accounting principle, net of tax		---			---			---			(2	)
Less - Preferred dividend requirements		1			1			2			2
Net income		24			18			61			50
Net income applicable to common shareholder	$	39		$	56		$	88		$	136
Less - Preferred dividend requirements		---			---			1			1
Net income	$	40		$	57		$	90		$	138
Net income applicable to common shareholder	$	24		$	18		$	60		$	49
Other comprehensive income (loss), net of tax		---			---			---			---
Net income	$	24		$	18		$	61		$	50
Comprehensive income	$	40		$	57		$	90		$	138
Other comprehensive income, net of tax		---			---			1			---
Comprehensive income	$	24		$	18		$	62		$	50

See notes to condensed consolidated financial statements.


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Table of Contents

ILLINOIS POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited)

	Nine Months Ended September 30,
	Six Months Ended
		2003			2002
	June 30,			June 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2004			2003
Net income	$	9061		$	~~138~~50
Items not affecting cash flows from operating activities:
Depreciation and amortization		9865			~~105~~65
Deferred income taxes		(1110	)		(29	)
Cumulative effect of change in accounting principle (Note 1)		2---			~~---~~2
Changes in assets and liabilities resulting from operating activities:
Accounts receivable		111			(533	)
Unbilled revenue		1523			1419
Inventories		~~(20~~19	)		47
Prepayments		(23	)		(4	)
Other assets		7			8
Accounts payable		(32	)		(11	)
Prepayments		17			(4	)
Other deferred credits		(25	)		(9	)
Accounts payable		1			(20	)
Interest accrued and other, net		45			(11	)
Other deferred credits		1			(17	)
Net cash provided by operating activities		140			219
Other liabilities		(18	)		6
Net cash provided by operating activities		177			74
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(~~100~~63	)		(~~102~~67	)
Other investing activities		(21	)		4(1	)
Net cash used in investing activities		(~~102~~62	)		(9868	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on common and preferred stock		(21	)		(21	)
Prepaid interest from affiliate		85			---
Prepaid interest on affiliate note receivable		(43	)		---
Redemptions:
Short-term debt		~~(100~~---	)		(38100	)
Long-term debt		(~~254~~43	)		(~~161~~43	)
Issuances:
Short-term debt		---			60
Long-term debt		---			150
Long-term debt		150			---
Increase in restricted cash		---			(1	)
Increase in restricted cash		(3	)		(6	)
Transitional funding trust notes overfunding		(3	)		---
Other financing activities		(8---	)		(38	)
Net cash used in financing activities		(~~132~~90	)		(~~150~~3	)
Net change in cash and cash equivalents		~~(94~~25	)		~~(29~~3	)
Cash and cash equivalents at beginning of period		~~117~~17			41117
Cash and cash equivalents at end of period	$	2342		$	12120

6See ~~ILLINOIS~~notes ~~POWER~~to ~~COMPANY~~condensed ~~NOTES~~consolidated TOfinancial ~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Interim Periods Ended September 30, 2003 and 2002~~statements.


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Table of Contents

ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Interim Periods Ended June 30, 2004 and 2003

Note 1 - Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the SEC. ~~These~~The ~~interim~~year ~~financial~~end ~~statements~~condensed ~~should~~balance besheet ~~read~~data ~~together~~was ~~with~~derived ~~the~~from audited ~~consolidated~~ financial statements ~~and~~but ~~notes~~does ~~thereto~~not ~~included~~include inall ~~Illinois~~disclosures ~~Power~~required ~~Company’s~~by ~~("IP,"~~GAAP. ~~"we,"~~These ~~"us"~~interim ~~and~~financial ~~"our"~~statements )should ~~Annual~~be ~~Report~~read ontogether ~~Form~~with ~~10-K for~~ the ~~year~~consolidated ~~ended~~financial ~~December~~statements ~~31,~~and ~~2002,~~notes ~~which~~thereto weincluded ~~refer to~~ in ~~this~~our ~~report as the~~ Form 10-K.

The unaudited condensed consolidated financial statements contained in this ~~quarterly~~ report include all material adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. ~~Interim~~The ~~period~~ results of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of the results to be expected for the full year or any other interim period due to seasonal fluctuations in demand for our energy products and services, timing of maintenance and other expenditures and other factors. The preparation of the unaudited condensed consolidated financial statements in conformity with ~~accounting~~GAAP ~~principles generally accepted in the United States of America~~ requires management to ~~develop~~make estimates and ~~make~~ assumptions that affect our reported financial position and results of operations. These estimates and ~~that~~assumptions also impact the nature and extent of disclosure, if any, of our contingent ~~assets and~~ liabilities. We review significant estimates affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such ~~judgments and~~ estimates are made. Adjustments made with respect to the use of these estimates often relate to information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. Estimates are primarily used in (1) recording revenue for services provided but not yet billed, (2) estimating the useful lives of our assets, (3) analyzing tangible and intangible assets for possible impairment, (4) projecting recovery of stranded costs, (5) estimating various factors ~~impacting~~used ~~the~~to ~~valuation~~value of our pension assets, (6) assessing future tax exposure and the realization of tax assets and (7) determining the amounts to accrue ~~related~~for to contingencies. Actual results could differ materially from any such estimates. ~~Certain reclassifications have been made to prior period amounts in order to conform to current year presentation.~~

~~All~~We ~~significant intercompany balances and transactions~~ have ~~been~~reclassified ~~eliminated~~certain ~~from~~amounts ~~the~~reported ~~unaudited condensed consolidated financial statements included~~ in this ~~quarterly~~Form ~~report.~~10-Q ~~All~~from ~~nonutility~~prior ~~operating~~periods ~~transactions~~to ~~are~~conform ~~included~~to in the ~~line~~2004 ~~titled~~financial ~~"Miscellaneous~~statement -presentation. ~~net"~~These inreclassifications ~~our~~had ~~Condensed~~no ~~Consolidated~~impact ~~Statements~~on ofreported ~~Income~~net ~~and Comprehensive Income~~income.

All significant intercompany balances and transactions have been eliminated from the unaudited condensed consolidated financial statements included in this report. All nonutility operating transactions are included in the section titled "Other Income and Deductions" in our condensed consolidated statements of income and comprehensive income.

Utility Plant The following tables present the details, by functional classification, of the items that comprise the balances related to Utility Plant on our condensed consolidated balance sheets:

Electric Utility Plant	June 30, 2004		December 31, 2003		Avg. Useful Life
	(in millions)				(in years)
Transmission	$	282	$	279		49.0
Distribution		1,656		1,625		36.0
General (1)		254		249		31.3
Other (1)		253		260		5.0 - 50.0
Construction Work-In-Progress		70		86
Total Electric Utility Plant		2,515		2,499
Less: Accumulated Depreciation-Electric		865		870
	$	1,650	$	1,629

(1) Joint function assets used in both electric and gas operations are included in the captions General and Other Electric Utility Plant.


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Table of Contents

ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Interim Periods Ended June 30, 2004 and 2003

Gas Utility Plant	June 30, 2004		December 31, 2003		Avg. Useful Life
	(in millions)				(in years)
Transmission	$	123	$	121		48.2
Distribution		538		530		36.3
General		23		21		20.7
Other		105		97		5.0 - 42.0
Construction Work-In-Progress		6		14
Total Gas Utility Plant		795		783
Less: Accumulated Depreciation-Gas		338		329
	$	457	$	454

Other Income and Other Expense The following table presents the details of the items that comprise the balances related to Other income and Other expense on our condensed consolidated statements of income and comprehensive income:

Three Months Ended

Six Months Ended

June 30,

June 30,

2004

2003

2004

2003

(in millions)

Other income:

Other interest income

$

5

$

1

$

9

$

2

Gain on disposition of property

1

---

1

---

Other non-operating income

1

1

2

1

Total other income

$

7

$

2

$

12

$

3

Other expense:

Other non-operating expense

$

(1

)

$

(2

)

$

(1

)

$

(2

)

Total other expense

$

(1

)

$

(2

)

$

(1

)

$

(2

)

Accounting Principles Adopted

SFAS No. 143 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." We adopted ~~this statement effective January 1, 2003.~~ SFAS No. 143, which provides accounting requirements for costs associated with legal obligations to retire tangible, long-lived assets, effective January 1, 2003. Under SFAS No. 143, ~~the~~an ARO is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset by an amount equal to the ARO. In each subsequent period, the liability is accreted totowards ~~its~~the ~~fair~~ultimate ~~value~~obligation amount and the capitalized ~~cost~~ARO iscosts are depreciated over the useful life of the related asset. The cumulative effect of applying SFAS No. 143 has been recognized as a change in accounting principle in the unaudited condensed consolidated statements of income and comprehensive income. Upon adoption, the cumulative effect, net of the associated income taxes, was approximately $2 million related to our lease agreement for four gas turbines and a separate land lease agreement in Tilton, Illinois and the ARO liability for the asset receivable and the land lease was approximately $6 million. Amortization and accretion expense for 2003 is expected to be approximately $1 million. There were no additional AROs recorded or settled during the three-and nine-month periods ending September 30, 2003.

InAt ~~addition~~January to1, ~~this~~2004, our ARO liability, werelated ~~also~~to ~~have~~the ~~potential~~Tilton ~~retirement~~site ~~obligations~~was ~~for~~approximately $1 million. This ARO related to the ~~dismantlement~~dismantling of ~~our~~the ~~electric~~generation plant and ~~gas~~remediation ~~transmission~~of the site. For the three- and ~~distribution~~six-month ~~facilities~~periods ended June 30, 2004, accretion expense was negligible as compared to accretion expense of approximately $0.2 million and ~~natural~~$0.4 ~~gas~~million, ~~storage~~respectively, ~~facilities~~for the three- and six-month periods ended June 30, 2003. ItFor isadditional ~~our~~information ~~intent~~related to ~~maintain~~our ~~these~~Tilton ~~facilities~~ARO inliability aand ~~manner~~remeasurement, ~~such~~please ~~that~~read ~~the~~Note ~~facilities~~1 ~~will~~- beSummary ~~operational~~of ~~indefinitely~~Significant Accounting Policies - SFAS No. As143 ~~such~~beginning on page F-14 of our Form 10-K. There were no additional AROs recorded or settled, wenor ~~cannot~~were ~~estimate~~there any ~~potential~~revisions ~~retirement~~to ~~obligations~~estimated cash flows associated with ~~these~~this ~~assets.~~ARO Atduring the ~~time~~three- weand ~~are~~six-month ~~able~~periods toended ~~estimate~~June ~~any~~30, ~~new~~2004. ~~asset~~Please ~~retirement~~read ~~obligations,~~Note ~~liabilities~~9 ~~will~~- beSubsequent ~~recorded~~Event infor ~~accordance~~additional ~~with~~information ~~SFAS~~regarding ~~No.~~the ~~143.~~Tilton facility.

~~Had~~In ~~SFAS~~addition ~~No.~~to ~~143~~this ~~been~~liability, ~~applied~~we ~~retroactively~~may inhave retirement obligations for the ~~three~~removal ~~months~~of asbestos and ~~nine~~the ~~months~~dismantlement ~~ended~~of ~~September~~our ~~30,~~electric ~~2002,~~and ~~our~~gas ~~net~~transmission ~~income~~and ~~would~~distribution ~~have~~facilities ~~been~~and ~~reduced~~natural bygas ~~approximately~~storage $0facilities.2 ~~million~~We ~~and~~intend $0to maintain these facilities in a manner such that the facilities will be operational indefinitely.6 ~~million,~~We ~~respectively~~do not have sufficient information available to estimate a range of potential settlement dates for any known or unknown retirement obligations associated with these assets. We will recognize any such liability in accordance with SFAS No. 143 in the period in which sufficient information is available for us to make a reasonable estimate of the liability’s fair value.

~~7 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Interim Periods Ended September 30, 2003 and 2002~~8

~~SFAS~~Table ~~No. 146 In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses issues regarding the recognition, measurement and reporting~~ of ~~costs~~Contents ~~that~~ILLINOIS ~~are~~POWER ~~associated~~COMPANY ~~with~~NOTES ~~exit~~TO ~~and~~CONDENSED ~~disposal~~CONSOLIDATED ~~activities,~~FINANCIAL ~~including~~STATEMENTS ~~restructuring~~(UNAUDITED) ~~activities~~For ~~that were previously accounted for pursuant to~~ the ~~guidance~~Interim inPeriods ~~EITF~~Ended ~~Issue~~June ~~94-3~~30, ~~"Liability~~2004 ~~Recognition for Certain Employee Termination Benefits~~ and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have any impact on our financial statements. 2003

SFAS No. 148 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation –- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," and provides alternative methods of transition (prospective, modified prospective or retroactive) for entities that voluntarily change to the fair -value based method of accounting for stock-based employee compensation in a fiscal year beginning before December 16, 2003. SFAS No. 148 requires prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Although we do not grant stock-based compensation awards to our employees, our employees do participate in the equity compensation plans of Dynegy, our ultimate parent company. We transitioned to a fair value based method of accounting for stock-based compensation in the first quarter 2003 and are using the prospective method of transition as described under SFAS No. 148. ~~As a result, a charge of approximately $0.2 million will be reflected in 2003 other operating expense in the unaudited condensed consolidated statements of income and comprehensive income.~~

Under the prospective method of transition, all stock options granted since January 1, 2003 ~~will~~are be accounted for on a fair value basis. AsWe ofwill ~~September~~incur ~~30,~~compensation ~~2003,~~expense over the ~~fair~~vesting ~~value~~period ~~based~~of ~~expense~~the ~~which~~options wein ~~have~~an ~~recorded~~amount ~~for~~equal ~~options~~to ~~granted~~the infair ~~2003~~value isof ~~$0.1~~the ~~million~~options. Options granted prior to January 1, 2003 continue to be accounted for using the intrinsic value method. ~~Had~~Accordingly, ~~compensation cost~~ for options granted ~~before~~prior to January 1, 2003, ~~been~~compensation ~~determined~~expense onis anot ~~fair~~reflected ~~value~~for ~~basis~~employee ~~consistent~~stock ~~with~~options ~~SFAS~~unless ~~No.~~they ~~123,~~were ~~our~~granted ~~net~~at ~~income~~an ~~would~~exercise ~~have~~price ~~approximated~~lower ~~the~~than ~~following~~market ~~pro~~value ~~forma~~on ~~amounts~~the ~~for~~grant ~~the~~date. ~~three-~~Since ~~and~~the ~~nine~~Dynegy-~~months~~Illinova ~~ended~~merger ~~September~~in 30February 2000, ~~2003~~none ~~and~~of ~~2002,~~our ~~respectively~~employees (have been granted in-the-money ~~millions).~~stock options.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2003		2002		2003		2002
Net income as reported	$	40	$	57	$	90	$	138
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		---		---		---		---
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		1		1		3		3
Pro forma net income	$	39	$	56	$	87	$	135

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

~~FIN~~ Three ~~45 In~~Months ~~November~~Ended June ~~2002~~30, Six ~~the~~Months ~~FASB~~Ended June ~~issued FIN 45~~30, 2004 2003 2004 2003 (in ~~"Guarantor’s~~millions) Net ~~Accounting~~income ~~and~~as ~~Disclosure~~reported $ 24 $ 18 $ 61 $ 50 Add: ~~Requirements~~Stock-based ~~for~~employee ~~Guarantees,~~compensation ~~Including~~expense ~~Indirect~~included ~~Guarantees~~in ofreported ~~Indebtedness~~net ~~of Others." As required by FIN 45~~income, wenet ~~adopted~~of ~~the~~related ~~disclosure~~tax ~~requirements~~effects on(1) --- --- --- --- Deduct: ~~December~~Total ~~31,~~stock-based ~~2002.~~employee Oncompensation ~~January~~expense 1,determined ~~2003,~~under wefair ~~adopted~~value ~~the~~based ~~initial~~method ~~recognition and measurement provisions~~ for ~~guarantees~~all ~~issued or modified after December 31~~awards, ~~2002.~~net ~~The adoption~~ of ~~the~~related ~~recognition~~tax ~~and~~effects 1 1 2 2 Pro ~~measurement~~forma ~~provisions~~net ~~did not have any impact on our financial statements.~~ income $ 23 $ 17 $ 59 $ 48

~~Accounting~~(1) Compensation ~~Principles~~expense ~~Not~~recorded ~~Yet~~for ~~Adopted~~stock options granted after January 1, 2003 was negligible for the three- and six-month periods ended June 30, 2004 and 2003.

FIN 46 No. 46R In ~~January~~the fourth quarter 2003, we adopted the ~~FASB~~initial ~~issued~~provisions of FIN 46No. 46R, "Consolidation of Variable Interest Entities— - an Interpretation of ARB No. 51." InFIN ~~summary,~~No. ~~this~~46R ~~interpretation~~was ~~increases~~effective ~~the~~on ~~level~~December of31, ~~risk~~2003 ~~that~~for ~~must~~entities beconsidered ~~assumed by equity investors in special purpose entities~~SPEs. ~~FIN~~We 46adopted ~~requires that~~ the ~~equity~~remaining ~~investor~~provisions ~~have significant equity at risk (a minimum~~ of 10FIN ~~percent~~No. ~~with~~46R ~~few~~on ~~exceptions~~March 31, ~~which~~2004. isThese anprovisions ~~increase~~require ~~from~~that 3we ~~percent~~review ~~under~~the ~~previous~~structure ~~guidance)~~of ~~and~~non-SPE ~~hold~~legal aentities ~~controlling~~in ~~interest,~~which ~~evidenced~~we byhave ~~voting~~an ~~rights,~~investment ~~risk of loss~~ and ~~the~~other ~~benefit~~legal ofentities ~~residual~~with ~~returns.~~whom Ifwe ~~the~~transact ~~equity~~business ~~investor~~to isdetermine ~~unable~~whether tosuch ~~evidence~~entities ~~these~~are ~~characteristics~~VIEs, ~~the~~as ~~entity~~defined ~~that~~by ~~retains~~FIN ~~these~~No. ~~ownership characteristics will be required to consolidate the variable interest entity~~46R. While we ~~have~~did not ~~entered~~enter into any arrangements in 2003 that ~~would~~were be subject to ~~FIN~~these 46initial provisions, wetwo ~~are analyzing the structures of~~ entities previously formed towere ~~determine~~impacted. ~~whether~~As wea ~~have~~result ~~any~~of ~~arrangements~~our ~~that~~adoption ~~are~~of ~~impacted.~~ FIN 46No. ~~was~~46R, ~~applicable~~we ~~immediately~~deconsolidated toIPSPT ~~variable~~and ~~interest~~LLC. ~~entities~~The ~~created~~deconsolidation oroccurred ~~obtained~~at ~~after~~December ~~January~~ 31, 2003. ~~For~~and ~~variable~~did ~~interest~~not ~~entities~~have ~~created~~any orimpact ~~obtained~~upon ~~before~~our ~~February~~results ~~1, 2003, FIN 46 was applicable as~~ of ~~July 1, 2003~~operations. InPlease ~~October~~read ~~2003,~~Note ~~the~~1 ~~FASB~~- ~~deferred~~Summary ~~the implementation date~~ of ~~FIN~~Significant 46Accounting ~~until~~Policies ~~the~~- ~~fourth~~FIN ~~quarter 2003~~No. ~~The impact of adopting FIN~~ 46 ~~will~~beginning beon ~~reflected~~page asF-16 ~~a cumulative effect~~ of aour ~~change~~Form in10-K ~~accounting~~for ~~principle~~additional ininformation ~~the~~regarding ~~fourth~~this ~~quarter 2003~~deconsolidation.

8We ~~ILLINOIS~~determined ~~POWER~~that ~~COMPANY~~we ~~NOTES~~have TOno ~~CONDENSED~~entities ~~CONSOLIDATED~~that ~~FINANCIAL~~were ~~STATEMENTS~~impacted ~~(UNAUDITED)~~by ~~For~~ the ~~Interim~~adoption ~~Periods~~of ~~Ended~~these ~~September~~remaining 30provisions and, ~~2003~~as ~~and~~such, ~~2002~~our financial statements were not impacted by the adoption of these remaining provisions.

~~Note 2 - Agreed Sale to Exelon~~ 9

OnTable ~~October 31, 2003, we and Dynegy Inc., our ultimate parent company, among others, entered into a purchase agreement under which a newly formed subsidiary~~ of ~~Exelon~~Contents ~~Corporation,~~ILLINOIS ~~which~~POWER weCOMPANY ~~refer~~NOTES toTO asCONDENSED ~~New~~CONSOLIDATED IPFINANCIAL ~~Company,~~STATEMENTS ~~will~~(UNAUDITED) ~~acquire~~For ~~substantially~~the ~~all~~Interim ofPeriods ~~our~~Ended ~~assets~~June ~~and liabilities~~30, ~~excluding,~~2004 ~~among other things, the $2.3 billion note receivable from Illinova~~ and ~~deferred taxes from the previous transfer of our fossil generating assets to DMG, for $2.225 billion. The purchase price includes:~~ 2003

		•	the assumption by Exelon of all of our debt, estimated to be approximately $1.8 billion at closing;
		•	a $150 million promissory note; and
		•	approximately $275 million of cash, subject to working capital adjustments

FSP No. 106-2 FSP No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, supersedes FSP 106-1 and became effective for interim periods beginning after June 15, 2004. FSP No. 106-2 requires additional disclosures relating to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was signed into law on December 8, 2003 and which we refer to as the Act. We have elected to defer accounting for the Act and the amounts included within the accumulated postretirement benefit obligation and net periodic postretirement benefit cost in the financial statements and accompanying notes do not reflect the effects of the Act on our plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information.

~~Proceeds~~Note ~~from~~2 ~~the~~- ~~transaction~~Agreed ~~would~~Sale ~~be used~~ to ~~reduce Dynegy Inc.’s consolidated indebtedness.~~ Ameren

~~The~~In ~~consummation~~February ~~of the sale is conditioned upon~~2004, ~~among~~Dynegy ~~other~~entered ~~things,~~into ~~the~~a ~~elimination of the obligation to us under the~~ $2.3 billion ~~intercompany~~sale ~~note~~agreement ~~receivable~~with ~~from~~Ameren ~~Illinova. The~~pursuant ~~sale~~to iswhich ~~also~~Ameren ~~conditioned~~will onacquire ~~the~~all ~~receipt~~ of ~~all~~our ~~regulatory~~outstanding ~~and~~common ~~other consents~~ and ~~approvals~~preferred asstock ~~specified~~owned inby ~~the~~Illinova ~~purchase~~and ~~agreement,~~Dynegy’s ~~including~~20% ~~approvals~~ownership ~~from~~in the ~~ICC,~~Joppa ~~FERC,~~power ~~the~~generation ~~SEC~~facility ~~and~~in ~~other~~Joppa, ~~governmental and regulatory agencies~~IL. ~~The~~ ~~passage~~Upon ofacquiring ~~legislation~~our ~~recently introduced in the Illinois General Assembly during its November veto session~~company, ~~which~~Ameren ~~ends~~will oneffectively ~~November~~assume ~~20,~~our ~~2003~~debt, isexpected ~~critical~~ to ~~the~~approximate ~~consummation of the transaction~~$1. ~~This~~8 ~~legislation~~billion ~~would~~at ~~authorize~~closing, ~~the ICC to consider the sale transaction~~ and aDynegy ~~proposed~~will ~~rate~~receive ~~plan~~approximately in$400 amillion ~~single proceeding and render a decision on both issues~~ in acash, ~~nine-month~~subject ~~review~~to ~~process.~~working ~~The~~capital ~~proposed~~adjustments, ~~rate~~with ~~plan~~another ~~contemplates~~$100 amillion ~~rate~~being ~~increase~~placed ~~beginning~~ in ~~2007~~escrow.

~~The~~In ~~proposed legislation provides for an immediate effective date, which requires passage by vote of at least three-fifths of each house of the General Assembly. If the legislation passes by~~ a ~~three-fifths~~related ~~super-majority~~agreement ~~vote~~that ~~in the November veto session and~~ is ~~promptly~~conditioned ~~signed~~upon ~~into~~the ~~law~~closing byof the ~~Governor~~transaction, ~~then~~DPM ithas ~~would~~contracted ~~become~~to ~~effective~~sell inup ~~late~~to ~~November. If the legislation becomes effective~~2,800 aMWs ~~petition~~of ~~would~~capacity beand ~~filed~~up ~~with~~to ~~the~~11.5 ~~ICC~~million inMWh ~~December,~~of ~~which~~energy ~~would~~to ~~start~~us ~~the~~at ~~nine-month~~fixed ~~review~~prices ~~with~~for atwo ~~decision~~years ~~expected~~beginning in ~~September~~January ~~2004~~2005. ~~Filings~~ DPM ~~with~~has ~~the~~also ~~FERC~~agreed ~~and the SEC are expected~~ to besell ~~made~~300 ~~around~~MWs ~~the same time as the filing~~ of ~~the~~capacity ~~petition~~in ~~with~~2005 ~~the~~and ~~ICC. Rulings~~150 byMWs ~~the~~of ~~FERC~~capacity ~~and~~in ~~the~~2006 ~~SEC~~to ~~are~~us ~~currently~~at ~~anticipated within~~ a ~~few~~fixed ~~months~~price ~~following~~with ~~the~~an ~~ICC’s~~option ~~decision. Pending these state and federal approvals, the sale is expected~~ to ~~close~~purchase inenergy ~~the~~at ~~fourth~~market-based ~~quarter of 2004~~prices. ~~Approval~~ ofPlease ~~the~~read ~~legislation~~Note by3 ~~less than a three~~-~~fifths~~ ~~super-majority~~Related ~~would~~Parties ~~delay~~for ~~its~~further ~~effective~~discussion ~~date,~~of asour ~~well~~power aspurchase ~~the~~agreements ~~filings~~ with ~~the~~other ~~ICC,~~Dynegy ~~the FERC and the SEC, until July 2004, and delay the decision by the ICC until early 2005~~affiliates.

~~Since~~In ~~the~~connection ~~submission~~with ofDynegy’s ~~the~~agreement ~~proposed~~to ~~legislation,~~sell ~~various~~our ~~consumer~~common ~~groups~~ and ~~others~~preferred instock ~~Illinois~~to ~~have voiced their opposition. As a result~~Ameren, the ~~language~~Note ~~contained~~Receivable infrom ~~the~~Affiliate ~~proposed~~is ~~legislation~~required ~~has changed and may continue~~ to ~~change~~be ~~throughout the approval process~~addressed. ~~Additionally,~~ onPlease ~~November~~read Note 3, ~~2003,~~- ~~the~~Related ~~People~~Parties offor ~~the~~additional ~~State~~information ofconcerning ~~Illinois,~~our byNote ~~and~~Receivable ~~through~~from ~~Lisa~~Affiliate. ~~Madigan~~Additionally, ~~Attorney General of~~ the ~~State~~sale ofis ~~Illinois~~conditioned upon, ~~the~~among ~~Cook~~other ~~County State’s Attorney Office~~things, the ~~Citizens~~receipt ~~Utility~~of ~~Board~~approvals ~~and~~from ~~others, filed a petition at~~ the ICC, ~~seeking an investigation by~~ the ~~ICC~~SEC ~~into~~and ~~Illinois~~other ~~Power’s~~governmental ~~financial~~and ~~condition~~regulatory agencies. ~~The~~ ~~stated~~In ~~purpose~~July of2004, the ~~request~~FERC isapproved ~~to assist~~ the ~~General~~sale ~~Assembly~~and intwo-year ~~determining~~power ~~whether~~purchase toagreement ~~pass~~described ~~the proposed legislation~~above. An ~~initial~~Pending ~~hearing~~receipt inof ~~this~~the ~~matter~~remaining ~~before an Administrative Law Judge has been set for November 14~~approvals, ~~2003. It~~the transaction is ~~not~~expected ~~possible~~ to ~~determine~~close before the ~~outcome~~end of ~~this proceeding or when it will be decided~~2004. ~~Moreover,~~ ~~we cannot assure you that the proposed legislation will be approved by the General Assembly.~~

The purchase agreement may be terminated upon the occurrence of certain events, including:

	•	if the closing shall not have occurred on or before December 31, 2004; or
	•	if the above-described Illinois legislation does not become effective within 60 days of the end of the legislative session of the Illinois General Assembly scheduled to begin in January 2004.

In a related agreement that is conditioned upon the closing of the transaction, Dynegy has contracted to sell 3,100 MW of generating capacity and 2,900 MW of generating capacity and energy to an Exelon subsidiary, which in turn would contract to sell power to New IP Company, for six years beginning in January 2005. It is anticipated that this agreement will be in place concurrently with the termination of our power purchase agreement with DMG, which expires in December 2004, and the closing of the sale to Exelon.

9 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Interim Periods Ended September 30, 2003 and 2002

Note 3 - Related Parties

At ~~September~~June 30, ~~2003~~2004, principal outstanding under ~~our note receivable from Illinova approximated $2.3 billion. We refer to this note as our Note Receivable from Affiliate. Due to~~ the ~~July and September 2003 prepayments described below, we had no accrued interest at September 30, 2003. At December 31, 2002, principal outstanding under our~~ Note Receivable from Affiliate approximated $2.3 billion with no accrued interest ~~of approximately $14 million~~. We recognized approximately $4385 million ofin interest income ~~under our~~from ~~Note~~Illinova ~~Receivable~~on ~~from~~the ~~Affiliate~~note for each of the ~~three~~six-month ~~months~~periods ended ~~September~~June 30, ~~2003~~2004 and ~~September~~2003 ~~30, 2002~~ and approximately $~~128~~42 million offor ~~interest~~each ~~income~~of ~~for~~ the ~~nine~~three-month ~~months~~periods ended ~~September~~June 30, ~~2003~~2004 and ~~September 30, 2002~~2003. In ~~July~~January ~~2003~~2004, Dynegy made an accelerated interest payment of approximately $~~100~~43 million on its $2.3 billion intercompany note payable to Illinova, which in turn made an interest payment of approximately $~~100~~43 million to us under our Note Receivable from Affiliate. At InJune ~~September and October 2003~~30, ~~Dynegy paid to Illinova~~2004, ~~which~~we incarried ~~turn paid us, additional interest payments of~~ approximately $7185 million ~~and~~in ~~approximately~~prepaid ~~$28 million, respectively. These notes contain substantially similar~~ interest ~~payment~~on ~~provisions pursuant to which semi-annual interest payments of approximately $86 million are due to us under~~ our Note Receivable from Affiliate ~~on April 1 and October 1 of each year. The amounts paid to us in July~~, ~~September~~which ~~and~~represents ~~October~~six ~~2003 represent accrued interest on the notes for the~~ months of ~~April – September 2003 and prepaid~~ interest ~~for~~paid ~~the~~before ~~months~~it ofhas ~~October~~been ~~2003 – May 2004~~earned. WeIn ~~have~~the ~~classified six~~same ~~months~~period of ~~prepaid interest, received as of September 30,~~ 2003, aswe ~~cash~~had ~~flows~~no ~~from~~prepaid ~~financing activities on our condensed consolidated statement of cash flows. As the~~ interest isand ~~earned,~~carried itapproximately ~~will~~$43 bemillion ~~reclassified as cash flows from operating activities~~ in ~~the~~interest ~~condensed consolidated cash flow statement~~receivable. In ~~For~~July ~~further discussion of our liquidity position and support commitment from Dynegy~~2004, ~~please~~we ~~read~~received ~~"Management's~~an ~~Discussion~~additional ~~and~~payment ~~Analysis~~ of ~~Financial~~interest ~~Condition~~under ~~and~~our ~~Results~~Note ofReceivable ~~Operations –~~from ~~Credit~~Affiliate ~~Capacity, Liquidity and Debt Maturities – Sources~~ of ~~Liquidity"~~approximately ~~beginning~~$14 ~~on page 18~~million.

We have reviewed the collectibility of our Note Receivable from Affiliate to assess whether it has become impaired under the criteria of SFAS No. 114, “"Accounting by Creditors for Impairment of a Loan.” " Under this standard, a loan is impaired when, based on current information and events, it is “"probable”" that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Please see Note 1, “- Summary of Significant Accounting Policies,” in- ~~the~~Note Receivable from Affiliate beginning on page F-9 of our Form 10-K for further discussion as to applicable GAAP requirements regarding impairment of this note. While we believe that our Note Receivable from Affiliate is not impaired and is fully collectible, we continue to review the collectibility of the note on a quarterly basis. Principal payments on our Note Receivable from Affiliate are not required until 2009 when it is due in full; as a result, future events may affect our view as to the collectibility of the remaining principal owed us under the note. In ~~our fourth quarter review, we will consider the impact, if any, of the proposed transaction with Exelon on the collectibility of our Note Receivable from Affiliate.~~ It is possible that if negative events affect Dynegy or if we do not receive timely interest payments on our Note Receivable from Affiliate, such matters could cause us to believe it necessary to impair our Note Receivable from Affiliate on our ~~condensed~~ consolidated balance sheet and such action could have a material adverse effect on our ~~liquidity,~~ financial condition and results of operations. ~~For~~ example, a significant impairment could impact our ability to comply with the financial covenants contained in our Tilton lease agreement and to stay within the utility earnings cap contained in the Illinois Customer Choice Law.

We routinely conduct business with other subsidiaries of Dynegy. These transactions include the purchase or sale of electricity, natural gas and transmission services as well as certain other services. Operating revenue derived from transactions with affiliates approximated $8 million and $23 million for the three- and nine-months ended September 30, 2003. For the three- and nine-months ended September 30, 2002, approximately $10 million and $26 million in operating revenue was derived from affiliate transactions. Aggregate operating expenses charged by affiliates during the quarter ended September 30, 2003 approximated $139 million, including $124 million for power purchased. Approximately $412 million in aggregate operating expenses, including $356 million for power purchased, was charged by affiliates during the nine-months ended September 30, 2003. Aggregate operating expenses charged by affiliates approximated $148 million and $403 million for the three- and nine-months ended September 30, 2002, including $132 million and $369 million, respectively, for power purchased. The change in operating expenses, excluding power purchased, resulted from additional purchases of gas from an affiliate. We believe that these related party transactions have been conducted at prices and terms similar to those available to and transacted with unrelated parties.

10Table of Contents ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Interim Periods Ended ~~September~~June 30, ~~2003~~2004 and ~~2002~~2003

In connection with Dynegy’s agreement to sell our common and preferred stock to Ameren, the Note Receivable from Affiliate is required to be addressed. Pursuant to this requirement, we anticipate that the Note Receivable from Affiliate will be significantly reduced or eliminated from our consolidated balance sheet in exchange for value, in the form of cash and/or other consideration, to be received by us.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
	(in millions)
Operating revenues	$	6	$	7	$	12	$	15

Power purchased	$	108	$	114	$	232	$	232
Other operating expenses		5		17		14		41
Operating expenses	$	113	$	131	$	246	$	273

The reduction in operating expenses, excluding power purchased, resulted from making fewer gas purchases from our affiliates during 2004. Management believes that the methods of allocating costs, where used, are reasonable and related party transactions have been conducted at prices and terms similar to those available to and transacted with unrelated parties.

We have a PPA with DMG that provides us the right to purchase power from DMG for a primary term extending through December 31, 2004. This right to purchase power qualifies under the normal purchase and sale exemption of SFAS No. 133 and, therefore, we have accounted for the PPA under the accrual method. The PPA defines the terms and conditions under which DMG provides power and energy to us using a tiered pricing structure. The agreement requires us to pay DMG approximately $311 million for capacity charges in 2004. According to the PPA with DMG, we are to provide a security guarantee of $50 million upon a credit downgrade event. This guarantee is being fulfilled by a $50 million guarantee from Dynegy on our behalf. With this arrangement, we believe we have provided adequate power supply for our expected load plus a reserve supply above that expected level. Should power acquired under this agreement, when combined with our other power purchase agreements, be insufficient to meet our load requirements, we will have to buy power at current market prices. The PPA obligates DMG to provide power up to the reservation amount even if DMG has individual units unavailable at various times.

Please read Note 2 - Agreed Sale to Ameren for a discussion of a contingent power purchase agreement with DPM to provide us power following the closing of the sale to Ameren. In the event that the pending sale transaction does not close before the end of 2004, we will enter into an interim power purchase agreement with DPM. The interim PPA was approved by the FERC in July 2004 and will take effect only if the pending sale does not close before year end. It will remain in effect only until the earlier of the closing of the pending sale or December 31, 2006, which latter date coincides with the expiration of the retail electric rate freeze in the State of Illinois. The interim PPA will provide for capacity and energy to serve our customers through 2006 if the sale is not completed and contains terms and conditions, including pricing terms, substantially similar to those contained in the PPA to be entered into upon our sale to Ameren. If we are unable to sufficiently contract for all of our future power and energy needs, we would be required to satisfy our needs through existing agreements, through a competitive purchasing process or, in limited circumstances, through open market purchases; however, we are currently in the process of acquiring additional contracted capacity and energy for 2005 and 2006.


	11

Table of Contents

ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Interim Periods Ended June 30, 2004 and 2003

At June 30, 2004, the outstanding balance on our receivable from DMG related to the Tilton lease was approximately $78 million. We recognized approximately $4 million and $8 million, respectively, of interest income from accretion of the receivable for the three- and six-month periods ended June 30, 2004. The interest income from DMG was offset by the corresponding interest we paid to the original lessor. In July 2004, subsequent to the expiration of a statutory notice period after a filing at the ICC, we terminated our lease with the original lessor and the related turbines were purchased from the original lessor by DMG. Please see Note 4 - Commitments and Contingencies - Capital Leases for further discussion of the Tilton lease and Note 9 - Subsequent Event for further discussion of the July transactions related to Tilton.

Effective January 1, 2000, the Dynegy consolidated group, including us, began operating under a Services and Facilities Agreement which was approved by the ICC. Under this agreement, we share facility space and exchange services (such as financial, legal, information technology and human resources) with other Dynegy affiliates. Our services are exchanged at fully distributed costs and revenue is not recorded under this agreement. Management believes that the allocation method utilized under this agreement is reasonable and amounts charged under this agreement would result in costs to us similar to costs we would have incurred for these services on a stand-alone basis.

On October 23, 2002, the ICC issued an order approving a petition submitted by us to enter into an agreement with Dynegy and its affiliates that would allow for certain payments due to Dynegy under the Services and Facilities Agreement to be netted against certain payments due to us from Dynegy, should Dynegy or its affiliates fail to make payments due to us on or before their due dates. However, the PPA with DMG is specifically exempted from this agreement. The agreement also allows Dynegy to net payments in the event we fail to make our required payments to Dynegy. To date, there have been no triggering events to necessitate such netting of transactions. Additionally, under the terms of this petition and the ICC’s approval, we will not pay any common dividend to Dynegy or its affiliates until our first mortgage bonds are rated investment grade by Moody’s Investors Service and Standard & Poor’s Ratings Group and specific approval is obtained from the ICC.

Our financial statements include related-party transactions with IPSPT, our wholly-owned unconsolidated subsidiary, which was deconsolidated in accordance with the adoption of FIN No. 46R effective on December 31, 2003. Please read Note 1 - Summary of Significant Accounting Policies - FIN No. 46R in our Form 10-K for additional information regarding the deconsolidation of IPSPT. The table below reflects our transactions with IPSPT (in millions).


	6/30/04		12/31/03

Investment in IPSPT	$	4	$	4
Receivable from IPSPT (noncurrent)	$	2	$	2
Long-term debt to IPSPT (including maturing within one year)	$	374	$	420

In addition to the transactions above, we recorded $6 million and $12 million, respectively, in interest expense related to IPSPT for the three- and six-month periods ended June 30, 2004.

Note 4 - Commitments and Contingencies

Commitments

Please ~~see~~read Note 6,5 "- Commitments and Contingencies," tobeginning ~~the~~on page F-20 of our Form 10-K for a ~~description~~discussion of the material commitments and contingencies affecting us. No material developments affecting us have occurred with respect to such matters since ~~our~~the filing of ~~the~~our Form 10-K, except as described herein.

Legal and Environmental Matters

Set forth below is a description of our material legal proceedings. In addition to the matters ~~described~~set forth below, we are ~~party~~involved toin legal or administrative proceedings ~~arising~~before various courts and agencies with respect to matters occurring in the ordinary course of business. InManagement ~~the~~has ~~opinion~~recorded reserves against some of ~~management,~~these matters in amounts believed to be appropriate and expects that the final disposition of ~~these~~all such ordinary course ~~matters~~proceedings will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

We record reserves for estimated losses from contingencies when information available indicates that a loss is probable and the amount of the loss is reasonably estimable in accordance with SFAS No. 5, "Accounting for Contingencies." For environmental matters, we record liabilities when environmental assessment indicates that remedial efforts are probable and the costs can be reasonably estimated. Please see Note 1, "Summary of Significant Accounting Policies," beginning on page F-8 of the Form 10-K for further discussion. 12

~~With~~Table ~~respect to some~~ of ~~the~~Contents ~~items~~ILLINOIS ~~listed~~POWER ~~below,~~COMPANY weNOTES ~~have~~TO ~~determined~~CONDENSED ~~that~~CONSOLIDATED aFINANCIAL ~~loss~~STATEMENTS is(UNAUDITED) ~~not~~For ~~probable or that any such loss, to~~ the ~~extent~~Interim ~~probable,~~Periods isEnded ~~not~~June ~~reasonably estimable. Notwithstanding the foregoing~~30, ~~management~~2004 ~~has assessed these matters based on currently available information~~ and made an informed judgment concerning the potential outcome of such matters, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may, as a result of facts arising prior to resolution of these matters or other factors, prove inaccurate and investors should be aware that such judgment is made subject to the known uncertainty of litigation. 2003

~~Trans-Elect~~We ~~Litigation As~~record ~~previously~~reserves ~~announced,~~for inestimated ~~October~~losses ~~2002~~from wecontingencies ~~entered~~when ~~into~~information anavailable ~~asset~~indicates ~~purchase~~that ~~and~~a ~~sale~~loss ~~agreement~~is toprobable ~~sell~~and ~~our~~the ~~1,672~~amount ~~circuit~~of ~~mile~~the ~~electric~~loss ~~transmission~~is ~~system~~reasonably toestimable ~~Trans-Elect,~~under anSFAS ~~independent~~No. ~~transmission company~~5, ~~conditioned~~"Accounting onfor ~~several~~Contingencies." For environmental matters, ~~including~~we ~~the~~record ~~receipt~~liabilities ofwhen ~~the~~remedial ~~required~~efforts ~~approvals~~are ~~from~~probable ~~the~~and ~~SEC under~~ the ~~PUHCA,~~costs ~~the~~can ~~Federal~~be ~~Trade~~reasonably ~~Commission, the ICC and the FERC~~estimated. OnEnvironmental ~~February~~reserves ~~20,~~do ~~2003,~~not ~~the~~reflect ~~FERC~~management’s ~~voted~~assessment ~~to defer approval~~ of the ~~transaction~~insurance ~~and~~coverage ~~ordered~~that amay ~~hearing~~be applicable to ~~establish~~ the ~~allowable~~matters ~~transmission~~at ~~rates for Trans-Elect. Under the agreement~~issue, ifwhereas ~~the~~litigation ~~transaction~~reserves ~~did~~do ~~not~~reflect ~~close~~such onpotential orcoverage. ~~before~~We ~~July~~cannot 7,make ~~2003,~~any ~~either~~assurances ~~party~~that ~~could terminate~~ the ~~agreement. As~~amount of ~~July~~any 7,reserves ~~2003,~~or ~~the~~potential ~~agreement~~insurance ~~had~~coverage ~~not~~will ~~been~~be ~~approved~~sufficient ~~by,~~to ~~among~~cover ~~other~~the ~~Entities,~~cash ~~the~~obligations ~~FERC~~we ~~and,~~might incur as a result, weof ~~terminated~~litigation ~~the~~or ~~agreement~~regulatory inproceedings, ~~accordance~~payment ~~with~~of ~~its~~which ~~terms~~could onbe ~~July 8, 2003~~material.

InWith ~~October~~respect ~~2003,~~to ~~Trans-Elect~~some of the items listed below, ~~Inc.~~management ~~and~~has ~~Illinois~~determined ~~Electric~~that ~~Transmission~~a ~~Company,~~loss ~~LLC~~is ~~filed~~not ~~suit~~probable ~~against~~or usthat inany such loss, to the ~~Northern~~extent ~~District~~probable, ofis ~~Illinois~~not ~~requesting~~reasonably ~~specific~~estimable. ~~performance~~In ~~and~~some ~~estoppel~~cases, ~~and~~management ~~claiming~~is ~~damages~~not asable ato ~~result~~predict with any degree of ~~breach~~certainty the range of ~~contract~~possible ~~and~~loss ~~lost~~that ~~profits~~could be incurred. ~~These~~Notwithstanding ~~causes~~these offacts, ~~action~~management ~~allegedly~~has ~~arise~~assessed ~~from~~these ~~our~~matters ~~termination~~based on current information and made a judgment concerning their potential outcome, giving due consideration to the nature of the ~~agreement~~claim, ~~described~~the ~~above.~~amount ~~Trans-Elect~~and ~~claims~~nature ~~that~~of ~~that~~damages wesought ~~breached~~and the ~~agreement~~probability byof ~~not~~success. ~~using~~Management’s ~~our~~judgment ~~"best~~may, ~~efforts"~~as a result of facts arising prior to ~~obtain~~resolution ~~the~~of ~~required~~these ~~approvals~~matters ~~and/~~or toother ~~negotiate~~factors, anprove ~~alternate~~inaccurate ~~agreement~~and ~~that~~investors ~~could~~should be ~~approved. We~~aware ~~have~~that ~~until~~such ~~November~~judgment ~~17,~~is ~~2003~~made tosubject ~~respond~~ to the ~~plaintiffs'~~known ~~complaints~~uncertainty of litigation.

WeAsbestos ~~deny~~Litigation As ~~these~~of ~~claims~~June 30, in2004, ~~that~~forty-one welawsuits ~~believe~~were wepending ~~complied~~against ~~with~~us ~~the~~for ~~terms~~illnesses ofbased ~~the~~on ~~agreement,~~alleged ~~and~~exposure ~~intend~~ to ~~defend~~asbestos ~~against~~at ~~them~~generation ~~vigorously.~~facilities Itpreviously isowned ~~not~~by ~~possible~~us. toEight ~~predict~~of ~~with~~these ~~any~~pending ~~certainty~~asbestos ~~whether~~lawsuits wewere ~~will~~served ~~incur~~on ~~any~~us ~~liability~~during orthe tosecond ~~estimate~~quarter ~~the~~of ~~damages,~~2004. ifWe ~~any,~~intend ~~that~~to defend ~~might~~vigorously beagainst ~~incurred~~the inremaining ~~connection~~pending ~~with~~lawsuits. ~~this~~Reserves ~~lawsuit.~~have ~~However,~~been weestablished dowith ~~not~~respect ~~believe~~to ~~that~~the ~~any~~pending ~~liability~~lawsuits; however, we ~~might~~do ~~incur~~not asexpect athe ~~result~~outcome of ~~this~~any ~~litigation~~such ~~would~~pending lawsuits to have a material adverse effect onupon our financial condition or results of operations.

~~U.S.~~Trans-Elect ~~Environmental~~Litigation In ~~Protection~~October ~~Agency~~2003, ~~Complaint IP~~Trans-Elect, Inc. and ~~DMG~~Illinois Electric Transmission Company, ~~collectively~~LLC ~~referred~~filed tosuit against us in ~~this~~the ~~section~~Northern asDistrict ~~the~~of ~~Defendants~~Illinois requesting specific performance and estoppel, ~~are~~and ~~currently~~claiming ~~the~~damages ~~subject~~as a result of abreach ~~NOV~~of contract and lost profits. These causes of action allegedly arise from ~~the~~our ~~EPA~~termination of an asset purchase and asale ~~complaint~~agreement ~~filed~~entered into by the ~~EPA~~parties ~~and~~in October 2002. Under the ~~Department~~terms of ~~Justice~~the ~~alleging~~agreement, ~~violations~~we ofagreed ~~the~~to ~~Clean~~sell ~~Air~~our ~~Act~~transmission assets to Trans-Elect if, on or before July 7, 2003, the ~~regulations~~agreement ~~promulgated~~received ~~thereunder~~the required FERC, ICC, SEC and ~~certain~~Hart-Scott ~~Illinois~~Rodino ~~regulations~~approvals. ~~adopted~~As ~~pursuant~~of toJuly 7, 2003, the ~~Clean~~agreement ~~Air~~had ~~Act.~~not ~~Eight~~been ~~similar~~approved ~~notices~~by, ~~and~~among ~~complaints~~other ~~were~~entities, ~~filed~~the ~~against~~FERC ~~other~~and, ~~owners~~as ofa ~~coal-fired~~result, ~~power~~we ~~plants~~terminated the agreement in ~~what~~accordance with its terms on July 8, 2003. Trans-Elect claims that we ~~refer~~breached the agreement by failing to asuse ~~the~~our ~~Utility~~"best ~~Enforcement~~efforts" ~~Initiative.~~to ~~Both~~obtain the ~~NOV~~required approvals and/or to negotiate an alternate agreement that could be approved. In April 2004, the plaintiffs amended their complaint ~~allege~~to ~~that~~add ~~certain~~Dynegy ~~equipment~~Inc. ~~repairs~~as a defendant, ~~replacements~~claiming that Dynegy tortiously interfered with the asset purchase and ~~maintenance~~sale ~~activities~~agreement. atIn May 2004, the ~~Defendants’~~parties ~~three~~entered ~~Baldwin~~into ~~Station~~a ~~generating~~settlement agreement ~~units~~and ~~constituted~~these ~~"major~~lawsuits were settled for less than $ 3 million, which was paid by Dynegy. The lawsuits have been dismissed.

11Kemerer ~~ILLINOIS~~v. ~~POWER~~Illinois ~~COMPANY~~Power ~~NOTES~~Company This TOcase ~~CONDENSED~~was ~~CONSOLIDATED~~brought ~~FINANCIAL~~by ~~STATEMENTS~~the wife of a man who died in 2000 when he backed his aluminum ladder into overhead power lines and was electrocuted. In the lawsuit, the plaintiff sought to recover on allegations of wrongful death (~~UNAUDITED~~including lost wages and pain and suffering), ~~For~~negligent infliction of emotional distress (to the ~~Interim~~decedent’s ~~Periods~~wife) ~~Ended~~and ~~September~~punitive 30damages. The case was tried to a jury in January 2004, ~~2003~~and the jury awarded the plaintiff approximately $1.6 million in actual damages and ~~2002~~$3 million in punitive damages. In April 2004, we filed several post-trial motions, including a motion to set aside the verdict based on our belief that insufficient supporting evidence was presented at trial. However, in August 2004, the judge awarded approximately $1.5 million in attorney’s fees to plaintiff’s counsel and denied our post-trial motions. We will vigorously pursue all of these issues on appeal. Reserves have been established in connection with this lawsuit.

~~modifications"~~Sarah ~~under~~Lucash ~~the~~and ~~Prevention~~Kyle ofJohnson ~~Significant~~v. ~~Deterioration~~Illinois ~~("PSD"),~~Power ~~the~~Company Plaintiffs ~~New~~Lucash ~~Source~~and ~~Performance~~Johnson ~~Standard~~were ~~("NSPS")~~killed ~~regulations~~in ~~and~~an ~~the~~automobile ~~applicable~~accident in February 2001 when their car struck an Illinois ~~regulations,~~Power guy wire and ~~that~~utility ~~the~~pole ~~Defendants~~and ~~failed~~caught tofire. ~~obtain~~Plaintiffs’ ~~required~~families ~~operating~~assert ~~permits~~wrongful ~~under~~death ~~the~~and ~~applicable~~survivorship ~~Illinois~~causes ~~regulations.~~of ~~When~~action ~~activities~~alleging that ~~meet~~we failed to properly maintain our electrical equipment and did not have authority for the ~~definition~~location of ~~"major~~the ~~modifications"~~pole. ~~occur~~The ~~and~~parties are currently engaged in discovery. Although a date has not ~~otherwise~~been ~~exempt~~set, we expect the ~~Clean~~trial ~~Air~~to ~~Act~~occur ~~and~~in ~~related~~the ~~regulations~~first ~~generally~~quarter ~~require~~2005. ~~that~~We ~~the~~cannot ~~generating~~predict ~~facilities~~with atany ~~which~~certainty ~~such~~the ~~activities~~extent ~~occur~~to ~~meet~~which ~~more~~we ~~stringent~~will ~~emissions~~incur ~~standards,~~any ~~which~~liability ~~may~~or ~~entail~~to estimate the ~~installation~~damages, ofif ~~potentially~~any, ~~costly~~that ~~pollution~~might ~~control~~be ~~equipment.~~incurred

DMG has undertaken activities to reduce significantly emissions at the Baldwin Station since the complaint was filed in 1999. In 2000, the Baldwin Station was converted from high to low sulfur coal, resulting in sulfur dioxide emission reductions of over 90% from 1999 levels. Furthermore, selective catalytic reduction equipment has been installed at two of the three units at Baldwin Station, resulting in significant emission reductions of nitrogen oxides. However, the EPA may seek to require the installation of the "best available control technology," or the equivalent, at the Baldwin Station. Current estimates indicate that capital expenditures of up to $410 million could be incurred if the installation of best available control technology were required. The EPA also has the authority to seek penalties for the alleged violations at the rate of up to $27,500 per day for each violation. 13

InTable ~~February 2003, the Court granted our motion for partial summary judgment based on the five-year statute~~ of ~~limitations.~~Contents AsILLINOIS aPOWER ~~result,~~COMPANY ~~the~~NOTES ~~EPA~~TO isCONDENSED ~~not~~CONSOLIDATED ~~permitted~~FINANCIAL toSTATEMENTS ~~seek~~(UNAUDITED) ~~any~~For ~~monetary civil penalties for claims related to construction without a permit under~~ the ~~PSD~~Interim ~~regulations.~~Periods ~~The~~Ended Court’s ruling also precludes monetary civil penalties for a portion of the claims under the NSPS regulations and the applicable Illinois regulations. We believe that we have meritorious defenses against the remaining claims and vigorously defended against them at trial. The trial to address these remaining issues began in June ~~2003 and closing arguments occurred in September 2003. The parties also participated in a mandatory settlement conference with the judge but did not reach a settlement. Shortly before closing argument~~30, ~~motions~~2004 ~~to intervene were filed on behalf of the State of Illinois~~ and ~~on behalf of Bottom Conservancy, Health and Environmental Justice – St. Louis, Inc., Illinois Stewardship Alliance and Prairie Rivers Alliance. The motions were granted by order on October 23,~~ 2003 as to all intervenors. The order specifically limits the participation of the intervenors to filing briefs in support of arguments they believe the United States has ceased to pursue. The judge has indicated he intends to enter judgment in this matter before the end of 2003. Dynegy has recorded a reserve for potential penalties that could be imposed if the EPA were to prosecute successfully these remaining claims for penalties.

~~In August 2003 two significant decisions were handed down~~ in ~~other~~connection ~~cases~~with ~~that are part of the Utility Enforcement Initiative. In one case, United States v. Ohio Edison, the Court found the defendant liable for violations of the Clean Air Act. In reaching~~ this ~~decision,~~lawsuit; ~~the Court adopted the EPA’s interpretation of the "routine maintenance~~however, ~~repair~~we ~~and~~do ~~replacement" exclusion, applying it narrowly at each unit where the projects occurred. The Court held that the projects at issue were~~ not ~~routine~~expect ~~and thus~~ the ~~exclusion~~outcome ~~did not apply. In the second case, United States v. Duke Energy Company, the Court rejected the EPA’s interpretation~~ of ~~the~~this ~~routine~~litigation ~~maintenance, repair and replacement exclusion holding that the exclusion should be defined relative~~ to ~~what~~have isa ~~routine~~material ~~for~~adverse ~~the~~effect ~~particular~~upon ~~industry,~~our ~~not~~financial ~~what~~condition isor ~~routine~~results ~~for~~of ~~the particular unit at issue~~operations. ~~The~~We ~~Duke~~have ~~case~~established ~~also held that the government bears the burden of proof on the issue of whether~~ a ~~project~~reserve atin ~~issue~~connection iswith ~~routine.~~this litigation.

~~Also~~U.S. inEnvironmental ~~August~~Protection ~~2003,~~Agency Complaint IP and DMG are the subject of an NOV from the EPA ~~issued~~and a ~~new~~complaint ~~rule,~~filed by the ~~"Equipment~~EPA ~~Replacement~~and ~~Provision~~the Department of Justice in federal district court alleging violations of the ~~Routine~~Clean ~~Maintenance,~~Air ~~Repair~~Act and ~~Replacement~~certain ~~Exclusion,"~~related ~~which~~federal ~~became~~and ~~final~~Illinois ~~in October~~regulations. ~~This~~Similar ~~rule~~notices ~~specifies~~and ~~that~~complaints ~~the~~were ~~replacement~~filed ofagainst ~~components~~other owners of acoal-fired ~~process~~power ~~unit~~plants ~~with~~in ~~identical~~what ~~components~~we ~~(or~~refer ~~their~~to ~~functional~~as ~~equivalents)~~the ~~will~~Utility ~~fall~~Enforcement ~~within~~Initiative. Both the ~~scope~~NOV ofand the ~~routine~~complaint ~~maintenance~~allege that certain equipment repairs, ~~repair~~replacements and ~~replacement~~maintenance ~~exclusion~~activities ifat ~~(i)~~ the ~~replacement~~three ~~costs~~Baldwin isStation ~~less~~generating ~~than~~units ~~20%~~constituted of"major modifications" under the ~~total~~PSD, ~~cost~~the ofNSPS ~~replacing~~regulations and the ~~unit~~applicable Illinois regulations, ~~(ii)~~and that the ~~replacement~~Defendants ~~does~~failed to obtain required operating permits under the applicable Illinois regulations. When activities which are not ~~alter~~otherwise exempt result in an increase in annual emissions that exceeds the ~~unit’s~~amount ~~basic~~deemed ~~design~~significant ~~and~~under ~~(iii)~~the PSD regulations, those activities are considered "major modifications". When activities meeting this definition occur, the ~~unit~~Clean ~~will~~Air ~~continue~~Act and related regulations generally subject those activities to ~~comply~~PSD ~~within~~review ~~applicable~~and ~~emission~~permit requirements and ~~operational~~require that the generating facilities where the activities occur meet more stringent emissions standards., which may entail the installation of potentially costly pollution control equipment.

~~None~~DMG ofhas ~~the~~significantly ~~Defendants’~~reduced ~~other~~emissions ~~facilities~~of ~~are~~sulphur ~~covered~~dioxide ~~in the complaint~~ and ~~NOV,~~nitrogen ~~but~~oxides at the ~~EPA~~Baldwin ~~has~~Station ~~officially~~since ~~requested~~the ~~information,~~1999 ~~which~~complaint ~~has~~by ~~been~~converting ~~provided,~~from ~~concerning~~high ~~activities~~to atlow ~~the~~sulfur ~~Defendants’ Vermilion~~coal, ~~Wood River~~ and ~~Hennepin~~installing ~~plants.~~selective ~~The~~catalytic ~~EPA~~reduction ~~could eventually commence enforcement actions based on activities at these plants~~equipment. However, the ~~likelihood~~EPA ofmay ~~additional~~seek ~~enforcement~~to ~~actions~~require isthe ~~uncertain~~installation ~~in light~~ of the ~~August~~"best ~~2003~~available ~~public~~control ~~statement~~technology," byor the ~~Acting~~equivalent, ~~Administrator~~at of the ~~EPA~~Baldwin ~~indicating~~Station, ~~that~~which ~~additional~~we ~~enforcement~~estimate ~~actions~~could ~~under~~require ~~the~~capital ~~Utility~~expenditures ~~Enforcement~~of ~~Initiative~~up ~~are~~to ~~unlikely~~$410 ~~and~~million. ~~the~~The ~~November~~EPA ~~2003~~also ~~public~~has ~~statement by lawyers for~~ the ~~EPA~~authority ~~that~~to ~~investigations~~seek ~~into~~penalties ~~several power plants~~ for ~~past~~the ~~Clean~~alleged ~~Air Act~~ violations ~~would~~at ~~likely~~the berate ~~dropped~~of ~~and~~up ~~that~~to ~~future~~$27,500 ~~cases~~per ~~would~~day befor ~~judged~~each ~~under the new rule~~violation.

12In ~~ILLINOIS~~February ~~POWER~~2003, ~~COMPANY~~the ~~NOTES~~Court TOgranted ~~CONDENSED~~our ~~CONSOLIDATED~~motion ~~FINANCIAL~~for ~~STATEMENTS~~partial ~~(UNAUDITED)~~summary ~~For~~judgment based on the ~~Interim~~five-year ~~Periods~~statute ~~Ended~~of ~~September~~limitations. 30As a result, the EPA is not permitted to seek any monetary civil penalties for claims related to construction without a permit under the PSD regulations. The Court’s ruling also precludes monetary civil penalties for a portion of the claims under the NSPS regulations and the applicable Illinois regulations. We believe that we have meritorious defenses against the remaining claims and vigorously defended against them at trial. The trial to resolve claims of liability began in June 2003 and ~~2002~~closing arguments occurred in September 2003. Shortly after closing arguments, several interveners were granted the right to file briefs in support of arguments they believe the United States ceased to pursue. These interventions and delays in post-trial briefing have postponed the issuance of the liability order, and we cannot predict with any certainty when a decision will be rendered. Dynegy has recorded reserves in an aggregate amount considered reasonable for potential penalties that could be imposed if the Court finds us and/or DMG liable and the EPA prosecutes successfully the remaining claims for penalties.

~~Manufactured-Gas Plants~~ In ~~the~~August ~~early~~2003 ~~1900’s, we operated~~ two ~~dozen~~significant ~~sites~~decisions atwere ~~which~~handed ~~natural~~down ~~gas~~in ~~was~~other ~~manufactured~~cases ~~from~~that ~~coal.~~are ~~Operation~~part of ~~these~~the ~~MGP~~Utility ~~sites~~Enforcement ~~was~~Initiative. ~~generally~~The ~~discontinued~~court in ~~the~~United ~~1950s~~States ~~when~~v. ~~natural~~Ohio ~~gas~~Edison, ~~became~~applied ~~available~~the ~~from~~EPA’s ~~interstate~~narrow ~~gas~~interpretation ~~transmission~~of ~~pipelines.~~the ~~Many~~"routine ofmaintenance, ~~these~~repair ~~MGP~~and ~~sites~~replacement" ~~were~~exclusion, ~~contaminated~~which ~~with~~defines ~~residues~~it ~~from~~with ~~the~~respect ~~gas~~to ~~manufacturing~~what ~~process.~~is ~~The~~routine ~~Illinois~~for ~~EPA~~the ~~has~~specific ~~issued~~unit Nowhere ~~Further~~the ~~Remediation~~projects ~~Letters~~occurred, ~~for~~while ~~two~~the ofcourt ~~our~~in ~~MGP~~United ~~sites~~States v. ~~Although~~Duke weEnergy ~~estimate~~Company ~~our~~rejected ~~liability~~the ~~for~~EPA’s ~~MGP~~narrow ~~site~~interpretation, ~~remediation~~holding tothat bethe ~~approximately~~exclusion ~~$48~~should ~~million~~be ~~for~~defined ~~our~~relative ~~remaining~~to 22what ~~MGP~~is ~~sites,~~routine ~~because~~for of the ~~unknown~~particular ~~and~~industry. ~~unique~~The ~~characteristics~~Duke atcourt ~~each~~also ~~site,~~held wethat ~~cannot~~the behours ~~certain~~and ofconditions ~~our ultimate liability for remediation~~ of ~~the~~a ~~sites.~~unit’s Inoperations ~~October~~must ~~1995,~~be weheld ~~initiated~~constant ~~litigation~~when ~~against~~measuring aemissions ~~number~~increases. ofUnder ~~our~~this ~~insurance~~rationale, ~~carriers.~~an ~~Settlement~~increase ~~proceeds~~in ~~recovered~~maximum ~~from~~hourly ~~these~~emissions ~~carriers~~is ~~offset~~required abefore ~~portion~~activities ofwould ~~the~~be ~~estimated~~considered ~~MGP~~"major ~~remediation~~modifications." ~~costs~~We ~~and~~ are ~~credited~~unable to ~~customers~~predict ~~through~~ the ~~tariff~~significance ~~rider~~of ~~mechanism~~these ~~that~~cases to the ~~ICC~~Baldwin ~~previously~~Station ~~approved.~~litigation ~~Cleanup~~as ~~costs~~they ~~in excess of insurance proceeds~~ are ~~considered~~pending ~~probable~~in ofother ~~recovery~~jurisdictions ~~from~~and ~~our~~are ~~electric~~not ~~and~~binding ~~gas customers~~authority.

~~Asbestos~~None ~~Litigation We~~of ~~have~~our ~~lawsuits~~or ~~pending~~DMG’s ~~against~~other usfacilities ~~for~~are ~~illnesses~~covered ~~based~~in onthe ~~alleged~~complaint ~~exposure~~and toNOV, ~~asbestos~~but atthe ~~generation~~EPA ~~facilities~~ previously ~~owned~~requested byinformation, ~~us.~~which Ashas ofbeen ~~September 30~~provided, ~~2003,~~concerning ~~thirty–five~~activities ~~lawsuits~~at ~~were~~DMG’s ~~pending~~Vermilion, ~~thirteen~~Wood ofRiver ~~which~~and ~~were~~Hennepin ~~served during the third quarter of 2003~~plants. WeAlthough ~~intend to defend against~~ the ~~pending~~EPA ~~lawsuits~~could ~~vigorously.~~eventually Wecommence ~~have~~enforcement ~~recorded~~actions abased ~~reserve~~on ~~for~~activities at these ~~matters~~plants, ~~and do not believe that any liability~~ we ~~might~~are ~~incur~~unable asto aassess ~~result~~the likelihood of ~~these~~any ~~matters~~such ~~would~~additional ~~have~~EPA aenforcement ~~material adverse effect on our financial condition or result of operations~~actions.

~~Regulatory~~Manufactured-Gas ~~Matters~~Plants In the early 1900s, we operated two dozen sites at which synthetic natural gas was manufactured from coal. Operation of these MGP sites was generally discontinued in the 1950s when natural gas became available from interstate gas transmission pipelines. Many of these MGP sites were contaminated with residues from the gas manufacturing process. The Illinois EPA has issued No Further Remediation Letters for three of our MGP sites. Although we estimate our liability for MGP site remediation to be approximately $47 million for our remaining 21 MGP sites, because of the unknown

~~P.A. 90-561 – ISO Participation Participation in an ISO or RTO by utilities serving retail customers in Illinois was one of the requirements included in P.A. 90-561 and P.A. 92-12.~~ 14

InTable ~~January~~of ~~1998,~~Contents ~~we,~~ILLINOIS inPOWER ~~conjunction~~COMPANY ~~with~~NOTES ~~eight~~TO ~~other~~CONDENSED ~~transmission-owning~~CONSOLIDATED ~~entities,~~FINANCIAL ~~filed~~STATEMENTS ~~with~~(UNAUDITED) ~~the~~For ~~FERC for all approvals necessary to create and to implement~~ the ~~MISO.~~Interim OnPeriods ~~May~~Ended 8,June ~~2001~~30, ~~the~~2004 ~~FERC~~and ~~issued an order approving a settlement that allowed Illinois Power to withdraw from the MISO.~~ 2003

Onand ~~November~~unique 1,characteristics ~~2001~~at each site, we ~~and~~cannot ~~seven~~be certain of ~~the~~our ~~transmission~~ultimate ~~owners~~liability ~~proposing~~for toremediation ~~form~~of the ~~Alliance~~sites. ~~RTO~~In ~~filed~~October ~~definitive~~1995, ~~agreements~~we ~~with~~initiated ~~the~~litigation ~~FERC~~against ~~for~~a ~~approval~~number ~~whereby~~of ~~National~~our ~~Grid~~insurance ~~would~~carriers. ~~serve~~Settlement asproceeds ~~the~~recovered ~~Alliance~~from ~~RTO’s~~these ~~managing~~carriers ~~member.~~offset Ina anportion ~~order~~of ~~issued~~the onestimated ~~December~~MGP ~~20,~~remediation ~~2001,~~costs ~~the~~and ~~FERC~~are ~~stated~~credited ~~that~~to itcustomers ~~could~~through ~~not approve~~ the ~~Alliance~~tariff ~~RTO,~~rider ~~and~~mechanism that the ~~FERC~~ICC ~~directed~~previously ~~the~~approved. ~~Alliance~~Cleanup ~~companies~~costs toin ~~file~~excess aof ~~statement~~insurance ofproceeds ~~their~~are ~~plans~~considered toprobable ~~join~~of anrecovery ~~RTO,~~from ~~including~~our ~~the~~electric ~~timeframe,~~and ~~within~~gas 60customers, ~~days~~based ofupon ~~December~~ICC ~~20,~~Docket ~~2001~~91-0085.

On May 28, 2002, we submitted a letter to the FERC indicating that we would join PJM either as an individual transmission owner or as part of an independent transmission company. On July 31, 2002, the FERC issued an order approving our proposal to join PJM, subject to certain conditions. These conditions include requirements, among others, that (i) the parties negotiate and implement a rate design that will eliminate rate pancaking between PJM and the MISO, (ii) the North American Electric Reliability Council oversee the reliability plans for the MISO and PJM, and (iii) PJM and MISO develop a joint operation agreement to deal with seams issues. In addition, the FERC initiated an investigation under Federal Power Act section 206 of the MISO, PJM West and PJM’s transmission rates for through and out service and revenue distribution. Subsequent to the July 31 order, the parties were unable to negotiate a rate design that would eliminate rate pancaking between PJM and the MISO and the FERC ordered a hearing on this matter. The hearing has concluded and an order from the FERC is expected before the end of the year. Although we are not currently charging rates or collecting revenues through these entities, once we begin operating under PJM, our transmission rates and revenues could be impacted by the outcome of this proceeding. Other

OnOperating ~~July~~Leases There ~~23,~~were ~~2003,~~no ~~the~~material ~~FERC~~changes ~~initiated~~in anminimum ~~investigation~~commitments ~~under~~in ~~Federal~~connection ~~Power~~with ~~Act~~operating ~~section~~leases ~~206~~from ofthose ~~the~~reported ~~transmission~~in ~~rates~~our ~~for~~form ~~through and out service of several former Alliance RTO participants including us~~10-K. These Onoperating ~~November~~lease ~~13,~~payments ~~2003,~~primarily ~~the~~relate ~~FERC~~to ~~announced~~our ~~the~~material ~~issuance~~distribution ~~of an order relating to this investigation~~facility, ~~although~~which ~~it has neither described nor disclosed the content of this order. Until the content of this order~~ is ~~made~~a ~~publicly~~commercial ~~available,~~property welease ~~will~~for beour ~~unable~~storage ~~to determine its impact~~warehouse, ~~if any, on~~ the ~~investigation.~~Tilton ~~Further~~land ~~action~~lease inand ~~this proceeding is expected before~~ the ~~end~~lease ofon ~~2003. We~~15 ~~recently~~line ~~suspended our efforts to join an RTO in light of the potential sales transaction with Exelon~~trucks. ~~Our~~Please ~~agreement~~read ~~with~~Note ~~Exelon~~9 ~~requires~~- ~~that~~Subsequent weEvent ~~take~~for ~~certain~~additional ~~steps~~information ~~designed~~related to ~~ensure our membership in PJM upon closing of~~ the ~~transaction, which we currently expect will occur, subject to the regulatory and other approvals described above, in the fourth quarter of 2004~~Tilton lease.

13Capital ~~ILLINOIS~~Leases An ~~POWER~~off-balance ~~COMPANY~~sheet ~~NOTES~~operating TOlease ~~CONDENSED~~for ~~CONSOLIDATED~~four ~~FINANCIAL~~gas ~~STATEMENTS~~turbines ~~(UNAUDITED)~~located ~~For~~in Tilton, Illinois was reclassified as a capital lease in September 2003, pursuant to the ~~Interim~~delivery ~~Periods~~of ~~Ended~~notice of an intent to exercise an option to purchase the assets when the lease expired in September 302004. The turbine assets were sublet to DMG and we became the capital sublessor. In July 2004, ~~2003~~subsequent to the expiration of a statutory notice period after a filing at the ICC, we terminated our lease with the original lessor and ~~2002~~the related turbines were purchased from the original lessor by DMG. As a result, we no longer have any off-balance sheet financing arrangements or capital lease agreements. Please read Note 9 - Subsequent Event for additional information related to Tilton.

Please ~~see~~read Note 6,5 "- Commitments and Contingencies," tobeginning ~~the~~on page F-20 of our Form 10-K and Note 7 - Regulatory Issues for a ~~description~~discussion of the other material regulatory matters affecting us. No additional material developments affecting us have occurred with respect to such matters since ~~our~~the filing of ~~the~~our Form 10-K.

Note 5 –- Debt

OnDuring ~~December~~each ~~20, 2002, we closed a private offering~~ of ~~$550 million of our 11 1/2% Mortgage bonds due 2010. Of~~ the ~~$550~~three- ~~million~~and insix-month ~~aggregate~~periods ~~principal~~ended ~~amount~~June of30, ~~our~~2004 ~~Mortgage~~and ~~bonds~~2003, we ~~issued~~paid IPSPT approximately $~~400~~22 million inand ~~December 2002, with~~ $~~150~~43 million, ~~issued on a delayed delivery basis subject to ICC approval~~respectively, which weIPSPT ~~received~~used ~~in January 2003. The mortgage bonds were sold at a discounted price of $97.48~~ to ~~yield~~pay andown ~~effective~~the ~~interest~~transitional ~~rate~~funding oftrust ~~12%~~notes. We ~~realized~~estimate ~~net~~that ~~cash~~IPSPT ~~proceeds~~will ~~from~~continue ~~this~~to ~~offering~~pay ofdown ~~approximately~~such ~~$380~~notes, ~~million in December 2002 and~~ approximately $~~142~~22 million inper ~~January~~quarter, ~~2003.~~through ~~We used a portion of the proceeds from the offering to replenish the liquidity used to repay our $96 million 6~~2008.~~25%~~ ~~Mortgage~~LLC ~~bonds~~and IPSPT, which ~~matured~~are onVIEs ~~July~~under ~~15,~~FIN ~~2002~~No. ~~Also~~46R, weare ~~used~~separate ~~$200~~legal ~~million~~entities infrom ~~December~~IP. ~~2002~~The ~~and~~assets ~~$100~~of ~~million~~the onVIEs ~~May~~are 2,not ~~2003~~available to ~~pay off~~ our ~~one-year~~creditors ~~term~~and ~~loan due May 2003. We have used~~ the ~~remaining~~transitional ~~proceeds,~~properties ~~together~~held ~~with~~by the ~~interest~~VIEs ~~income~~are ~~described~~not inassets ~~Note~~of ~~3 above and other available cash, to repay our $190 million in aggregate August and September 2003 mortgage bond maturities~~IP.

~~Exchange~~We ~~Offer On~~make ~~July~~periodic ~~11,~~interest ~~2003,~~payments werelated ~~commenced an exchange offer, pursuant~~ to ~~which~~our wefixed-rate ~~offered~~and tovariable ~~exchange~~rate updebt toobligations. ~~$550~~Interest ~~million~~rates ofon ~~our~~these ~~outstanding~~obligations 11ranged from 1/2.25% ~~Mortgage~~to ~~Bonds due 2010, or Outstanding Bonds, for a new series of our~~ 11 ~~1/2~~.5% ~~Mortgage~~per ~~Bonds~~annum ~~due~~during ~~2010,~~the orsix ~~New~~months ~~Bonds,~~ended ~~with~~June ~~substantially~~30, ~~the~~2004. ~~same~~Interest ~~terms~~expense asfor the ~~Outstanding~~three- ~~Bonds,~~and ~~including~~six-month ~~the~~periods ~~same~~ended ~~principal~~June ~~amount~~30, ~~interest~~2004 ~~rate,~~was ~~redemption~~approximately ~~terms~~$40 ~~and~~million ~~payment~~ and ~~maturity~~$79 ~~dates~~million, ~~and~~ ~~which~~respectively. ~~were registered~~During ~~under~~ the ~~Securities~~three- ~~Act.~~and ~~The~~six-month ~~exchange~~periods ~~offer,~~ended ~~which~~June ~~was initially scheduled to expire on August 11~~30, 2003, ~~was~~interest ~~extended~~expense ~~until~~was ~~August~~approximately ~~25,~~$41 ~~2003~~million and ~~was~~$84 ~~completed on August 28~~million, ~~2003~~respectively. ~~For~~The areduction ~~complete~~in ~~discussion~~expense ofis ~~the~~due ~~terms~~to ~~and conditions of our exchange offer, please read~~ the ~~prospectus~~repayments ~~relating~~ to ~~the~~IPSPT ~~exchange~~discussed ~~offer, which we filed with the SEC on July 11, 2003~~above.

~~Please~~Tilton ~~see~~Capital ~~Note~~Lease In 9July 2004, ~~"Long-Term~~subsequent ~~Debt~~to the expiration of a statutory notice period after a filing at the ICC," towe terminated our lease with the ~~Form~~original ~~10-K~~lessor and the related turbines were purchased from the original lessor by DMG for ~~further~~$81 ~~discussion~~million. ofThis ~~our~~resulted 11in ~~1/2%~~a ~~Mortgage~~reduction ~~bonds~~of ~~due~~debt ~~2010~~of $78 million. Please read Note 4 - Commitments and Contingencies - Capital Leases and Note 9 - Subsequent Event for additional information concerning our Tilton capital lease.

~~The~~Note ~~following~~6 ~~table~~- ~~provides a summary of our debt payments for the fourth quarter of 2003, the next four years and thereafter (millions of dollars).~~ Liquidity

Payments Due by Period
Cash Obligations		Total		2003		2004		2005		2006		2007		Thereafter
Long-Term Debt (1)	$	1,445	$	---	$	---	$	70	$	---	$	---	$	1,375
Transitional Funding Trust Notes (1)		452		22		86		86		86		86		86
Tilton Capital Lease (2)		81		---		81		---		---		---		---
Total Cash Obligations	$	1,978	$	22	$	167	$	156	$	86	$	86	$	1,461

Due to our non-investment grade credit ratings and other factors, we do not have access to the commercial paper markets, and our access to the capital markets is limited. These factors, along with the level of our indebtedness and the fact that we do not currently have a revolving credit facility, will have several important effects on our future operations. First, a significant portion of our cash flows will be dedicated to the payment of principal and interest on our outstanding indebtedness, including the increased interest expense associated with our December 2002 $550 million Mortgage bond financing, and will not be

~~(1) Does not include the associated debt discount or fair market value adjustment.~~ 15

Table of Contents ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (2UNAUDITED) ~~Please~~ ~~read~~For the ~~section~~Interim ~~"Tilton~~Periods ~~Capital~~Ended ~~Lease"~~June ~~below~~30, ~~for~~2004 ~~additional~~and ~~information.~~ 2003

~~Term~~ available ~~Loan In~~for ~~May~~other ~~2003~~purposes. Second, ~~we used a portion of the proceeds from~~ our ~~above~~ability ~~described~~to ~~sale~~obtain ofadditional ~~$550~~financing ~~million~~for inworking 11capital, ~~1/2%~~capital ~~Mortgage~~expenditures, ~~bonds~~general ~~due~~corporate ~~2010~~and toother ~~pay~~purposes ~~down~~is ~~the $100 million then outstanding under our one-year term loan~~limited.

~~Mortgage~~For ~~Bond~~the ~~Maturities We~~near ~~used~~term, our debt maturities primarily consist of (i) quarterly payments of approximately $22 million on the ~~remaining~~IPSPT ~~proceeds~~transitional funding trust notes, for which we receive a separate revenue stream from our ~~December~~customers, ~~2002~~and ~~Mortgage~~(ii) ~~bond~~redemption ~~offering~~of ~~together~~$70 ~~with~~million ~~prepaid~~in ~~interest~~mortgage ~~payments~~bonds ~~from~~due ~~Illinova~~March on2005. We believe that we have sufficient internal liquidity sources, including Dynegy’s commitment of support, to satisfy these near term debt maturities and our commercial obligations. The ability of Dynegy and it's other subsidiaries to support our liquidity needs is restricted, however, by their financing agreements. DHI’s May 2004 credit facility permits DHI to fund prepayments of up to $450 million in principal under our Note Receivable from Affiliate, but only to ~~pay~~the anextent ~~aggregate~~that such prepayment does not cause Dynegy’s liquidity to fall below $200 million for any ten business day period. DHI’s credit facility also prohibits prepayment by DHI of more than 12 months of interest under our Note Receivable from Affiliate. In addition, the indenture governing DHI’s second priority senior secured notes permits payments of principal on the intercompany note receivable up to $~~190~~450 million inor ~~mortgage~~to ~~bond~~the ~~maturities~~extent inthat ~~August~~a ~~and~~fixed ~~September~~charge ~~2003~~coverage ratio of 2:1 is satisfied. The indenture also permits the prepayment of interest on the intercompany note receivable up to twelve months at any one time.

~~Tilton~~Over ~~Capital~~the ~~Lease In~~longer ~~September 1999~~term, weour ~~entered~~liquidity ~~into~~and ancapital ~~$81~~resources ~~million~~will ~~operating~~be ~~lease~~materially onaffected ~~four~~by ~~gas~~the ~~turbines~~outcome ~~located~~of inthe ~~Tilton,~~pending ~~Illinois~~sale ~~and~~of aour ~~separate~~company ~~land~~to ~~lease~~Ameren. atIf the ~~Tilton~~sale ~~site.~~is ~~These~~consummated, ~~facilities~~Ameren ~~consist~~has ofcommitted ~~peaking~~to ~~units~~contribute ~~totaling~~cash ~~176~~to MWus ofin ~~capacity.~~order Weto ~~sublet~~support ~~the~~our ~~turbines~~ongoing tooperating ~~DMG~~commitments inand ~~October~~to ~~1999~~reduce our leverage. InIf ~~September~~the ~~2003~~sale is not consummated, we ~~delivered~~would ~~notice~~explore other liquidity initiatives. These initiatives would include an integration of ~~our~~many ~~intent~~processes tointo ~~exercise~~those of Dynegy’s, which we expect would yield significant cost savings. Another liquidity initiative could include an issuance of mortgage bonds.

14Our ~~ILLINOIS~~ability ~~POWER~~to ~~COMPANY~~consummate ~~NOTES~~other TOliquidity ~~CONDENSED~~initiatives, ~~CONSOLIDATED~~as ~~FINANCIAL~~described ~~STATEMENTS~~above, ~~(UNAUDITED)~~is ~~For~~subject to a number of risks, some of which are beyond our control. The outcome of the ~~Interim~~agreed ~~Periods~~sale ~~Ended~~to ~~September~~Ameren is also subject to a number of risks, some of which are beyond our control. These risks include, among others, the receipt of required regulatory approvals, particularly from the ICC, and satisfaction of other closing conditions. We encourage you to read Dynegy’s Quarterly Report on Form 10-Q for the period ended June 30, ~~2003~~2004 for additional information regarding Dynegy and ~~2002~~its current liquidity position.

~~our~~Note ~~option~~7 to purchase the turbines upon the expiration of the operating lease in September 2004. As a result of this action, the operating lease was reclassified as a capital lease and we are now the capital sublessor. Based upon an independent appraisal, we recorded a receivable from DMG at the fair market value of $66 million, which is offset by a corresponding liability to the original lessor. The receivable from DMG and payable to the original lessor will be accreted to the $81 million lease payment over the next 12 months using the straight line method. The accretion to be recorded for 2003 will be approximately $4 million and will be recorded as interest income offset by the same amount of interest expense. The accretion to be recorded in 2004 will be approximately $11 million. The net effect on our income statement will be zero. This lease obligation was previously disclosed as a lease obligation in the footnotes to our financial statements and the Commercial Financial Obligations and Contingent Financial Commitments tables in our Form 10-K. Regulatory Issues

Note 6 – Liquidity

We have a significant amount of leverage, including quarterly payments of approximately $22 million due on our transitional funding trust notes. We are required to make these same quarterly payments of approximately $22 million on our transitional funding trust notes through 2008.

Due to our non-investment grade credit ratings and other factors, we do not have access to the commercial paper markets, and our access to the capital markets is limited. These factors, along with the level of our indebtedness and the fact that we do not currently have a revolving credit facility, will have several important effects on our future operations. First, a significant portion of our cash flows will be dedicated to the payment of principal and interest on our outstanding indebtedness, including the transitional funding trust notes, and will not be available for other purposes. Second, our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes is limited.

Because we have no revolving credit facility and no access to the commercial paper markets, we rely on cash on hand, cash flows from operations, including interest payments under our $2.3 billion Note Receivable from Affiliate, and liquidity support which has been committed by Dynegy, to satisfy our debt obligations and to otherwise operate our business. Please see Note 5, "Related Parties," to the Form 10-K and Note 3, "Related Parties," in this Form 10-Q for further discussion related to the potential impairment of our Note Receivable from Affiliate.

For the near term, we will continue to rely on a support commitment by Dynegy in order to satisfy our obligations. As part of our long-term plan, we will consider one or more liquidity initiatives including, among other things, a revolving credit facility or additional debt issuances. We believe our liquidity and capital resources, including our support commitment from Dynegy, are sufficient to satisfy our obligations over the next twelve months. Please read Note 2, "Agreed Sale to Exelon," for additional information affecting our long-term plan.

Our ability to execute one or more liquidity initiatives successfully is subject to a number of risks. These risks include, among others, the ability to obtain new bank or other borrowings and the financial effects of our relationship with Dynegy. We encourage you to read Dynegy’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 for additional information regarding Dynegy and its current liquidity position.

Note 7 – Regulatory Issues

We are subject to regulation by various federal, state and local agencies, including extensive rules and regulations governing transportation, transmission and sale of electricity and natural gas, as well as those relating to environmental protection. Compliance with these regulations requires general and administrative, capital and operating expenditures including those related to monitoring, pollution control equipment, permitting, and remediation obligations. In addition, the United States Congress has before it a number of bills that could impact regulations or impose new regulation applicable to us. We cannot predict the outcome of these bills or other regulatory developments or the effects that they might have on our business.

15P.A. ~~ILLINOIS~~90-561 ~~POWER~~- ~~COMPANY~~ISO ~~NOTES~~Participation Please TOread ~~CONDENSED~~Note ~~CONSOLIDATED~~5 ~~FINANCIAL~~- ~~STATEMENTS~~Commitments ~~(UNAUDITED)~~and ~~For~~Contingencies ~~the~~- ~~Interim~~Legal ~~Periods~~and ~~Ended~~Environmental ~~September~~Matters 30- P.A. 90-561 - ISO Participation, ~~2003~~beginning on page F-22 of our Form 10-K, for more information regarding ISO participation. Participation in an ISO or RTO by utilities serving retail customers in Illinois was one of the requirements included in P.A. 90-561 and ~~2002~~P.A. 92-12.

~~Note 8 – Pension Plan Assets~~ 16

AsTable ~~a result~~ of ~~general~~Contents ~~declines~~ILLINOIS inPOWER ~~interest~~COMPANY ~~rates,~~NOTES ~~projected~~TO ~~plan~~CONDENSED ~~obligations~~CONSOLIDATED atFINANCIAL ~~year-end~~STATEMENTS ~~are~~(UNAUDITED) ~~expected~~For ~~to be greater than~~ the ~~market~~Interim ~~value~~Periods ofEnded ~~pension~~June ~~plan assets. If IP’s pension plan~~30, ~~which~~2004 is included in the Dynegy pension plans, is underfunded at year-end 2003 by a greater amount than at year-end 2002, we have two alternatives. The first alternative is to contribute cash to the plan in an amount equal to the underfunded amount. The second alternative is to establish a liability equal to the underfunded amount with the offset being an after-tax reduction in stockholder’s equity. Determination of any underfunded amount will be made at year-end 2003 and ~~will be dependent on the actual return on pension assets for~~ 2003~~, the discount rate assumptions, which depend on year-end interest rates, and actual participant numbers.~~

16In ~~ILLINOIS~~May ~~POWER~~2004, ~~COMPANY~~we ~~MANAGEMENT’S~~submitted ~~DISCUSSION~~a ~~AND~~conditional ~~ANALYSIS~~application OFto ~~FINANCIAL~~the ~~CONDITION~~MISO. ~~AND~~The ~~RESULTS~~application OFwas ~~OPERATIONS~~conditioned ~~For~~in part on FERC approval of the ~~Interim~~sale ~~Periods~~of ~~Ended~~IP ~~September~~to 30Ameren, ~~2003~~which FERC approval was received in July 2004. The FERC approval of the Ameren transaction included an approval for us to join the MISO. We are proceeding quickly to integrate into the MISO and ~~2002~~are in the process of making preparations necessary for that integration, including submission of a filing with the FERC to gain approval for our recovery of (i) the exit fee we paid to the MISO in May 2001 to exit the MISO and to join the Alliance RTO and (ii) the Alliance RTO development costs.

~~Item~~Underground 2Storage We continuously monitor the operating efficiencies of our underground gas storage fields. ~~Management’s~~In ~~Discussion~~1999, we reduced the capacity of our working gas in the Hillsboro gas storage field from 7.6 Bcf to 4.0 Bcf, based on results from an engineering study and ~~Analysis~~the annual operating results of ~~Financial~~the ~~Condition~~field, thereby increasing the base gas inventory. During 2003, we initiated further engineering studies to analyze the base/working gas ratio and ~~Results~~confirm the gas in inventory. In March 2004, as a result of ~~Operations~~the studies, we decreased both the base gas and working gas inventories, returning the base gas volume to its pre-1999 level. Because of the increase in gas prices over time, the average price per Bcf of base gas increased as a result of this adjustment. We expect the approximately $10 million in working gas adjustment to be recovered from our customers through the purchase gas adjustment clause, subject to ICC prudency review.

~~The~~Gas ~~following~~Rate ~~discussion~~Case In ~~should~~June be2004, ~~read~~we ~~together~~filed with the ~~unaudited~~ICC ~~condensed~~seeking ~~consolidated~~authority ~~financial~~to ~~statements and~~raise our natural gas delivery rates by approximately $40 million annually, or about $5.85 per month for the ~~notes~~average ~~thereto~~residential ~~included~~gas customer. We have operated under the same rate structure for 10 years. The requested increase will allow us to recover investments in ~~this~~our ~~report~~natural ~~and~~gas ~~with~~delivery system. In addition, the increase reflects the increase in our ~~Annual~~operating ~~Report~~costs, onincluding ~~Form~~materials ~~10-K~~and labor, since 1994. The requested increase applies only to base rates and does not affect the cost of gas itself, which typically accounts for approximately two-thirds of customers’ total gas bills and is recovered via the ~~year~~PGA ~~ended~~process. ~~December~~As 31part of the regulatory process, ~~2002~~which can be expected to take up to eleven months, asthe ~~filed~~ICC ~~with~~will decide the ~~SEC~~amount of increase, if any, to provide recovery of costs from our customers. Upon approval, the new rates will go into effect in spring 2005, after the expected close of the sale of IP to Ameren.

~~General~~Note –8 ~~Company~~- ~~Profile~~Pension Plan Assets

WeOur employees are ~~engaged~~participants in ~~the~~defined ~~transmission,~~benefit ~~distribution~~plans ~~and~~sponsored ~~sale~~by ofDynegy, ~~electric~~which ~~energy~~prior ~~and~~to the ~~distribution,~~Dynegy-Illinova ~~transportation~~merger ~~and sale of natural gas~~ in ~~the~~February ~~State~~2000, ofwere ~~Illinois.~~sponsored ~~We provide electric~~ and ~~natural~~administered ~~gas~~by ~~service~~us. toPlease ~~residential,~~read ~~commercial~~Note ~~and~~12 ~~industrial~~- ~~customers~~Employee ~~in substantial portions of northern~~Compensation, ~~central~~Savings and ~~southern~~Pension ~~Illinois.~~Plans Webeginning ~~also~~on ~~currently~~page ~~supply~~F-35 ~~electric~~of ~~transmission~~our ~~service~~Form to10-K ~~numerous~~for ~~utilities,~~more ~~electric~~information ~~cooperatives,~~on ~~municipalities~~our ~~and~~pension ~~power marketing entities in the State of Illinois~~plans.

WeComponents ~~are an indirect, wholly owned subsidiary~~ of ~~Dynegy~~Net ~~Inc.~~Periodic ~~Dynegy~~Benefit ~~acquired~~Cost The ~~our~~components ~~direct parent company, Illinova, and its subsidiaries, including us, in February 2000. Our operations comprise one~~ of ~~Dynegy’s~~net ~~three~~periodic ~~operating~~benefit ~~divisions.~~cost ~~Our results of operations and financial condition are affected by the consolidated financial and liquidity position of Dynegy.~~ were:

We recently entered into an agreement to sell substantially all of our assets and liabilities, excluding, among other things, the Note Receivable from Affiliate and deferred taxes from the previous transfer of our fossil generating assets to DMG, to Exelon for $2.225 billion. Please read Note 2,"Agreed Sale to Exelon," for further discussion.

	Pension Benefits						Other Benefits
	Three Months Ended June 30,
	2004			2003			2004			2003
	(in millions)
Service cost benefits earned during period	$	3.9		$	3.4		$	1.2		$	1.0
Interest cost on projected benefit obligation		9.3			9.0			2.8			2.6
Expected return on plan assets		(11.6	)		(12.6	)		(1.6	)		(1.5	)
Amortization of net transition		(0.4	)		(0.4	)		0.5			0.5
Amortization of prior service cost		0.4			0.4			0.0			0.0
Amortization of net loss		0.8			0.0			1.2			1.2
Net periodic benefit cost (income)	$	2.4		$	(0.2	)	$	4.1		$	3.8

	Pension Benefits						Other Benefits
	Six Months Ended June 30,
	2004			2003			2004			2003
	(in millions)
Service cost benefits earned during period	$	7.8		$	6.8		$	2.4		$	2.0
Interest cost on projected benefit obligation		18.6			18.0			5.6			5.2
Expected return on plan assets		(23.2	)		(25.2	)		(3.2	)		(3.0	)
Amortization of net transition		(0.8	)		(0.8	)		1.0			1.0
Amortization of prior service cost		0.8			0.8			0.0			0.0
Amortization of net loss		1.6			0.0			2.4			2.4
Net periodic benefit cost (income)	$	4.8		$	(0.4	)	$	8.2		$	7.6


	17

Table of Contents

ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the Interim Periods Ended June 30, 2004 and 2003

Contributions In Note 12 - Employee Compensation, Savings and Pension Plans beginning on page F-35 of our Form 10-K, we reported that we expected to contribute approximately $2 million related to our pension plan liability in 2004. Pursuant to the Pension Funding Equity Act of 2004, we are no longer required to make estimated quarterly contributions in 2004.

Note 9 - Subsequent Event

In September 1999, we entered into an operating lease on four gas turbines located in Tilton, IL and a separate land lease at the Tilton site. We sublet the turbines to DMG in October 1999. For additional information relating to the Tilton capital lease and related ARO liability and remeasurement, please read Note 1 - Summary of Significant Accounting Policies - SFAS No. 143, beginning on page F-14 and Note 7 - Commitments and Contingencies - Other - Capital Leases, beginning on page F-24 of our Form 10-K.

In July 2004, subsequent to the expiration of a statutory notice period after a filing at the ICC, we terminated our lease with the original lessor. DMG then executed a transfer agreement under which the original lessor sold the turbine assets to DMG for the full contract price of approximately $81 million. Additionally, we assigned our associated land lease on the Tilton site to DMG.


	18

Table of Contents

ILLINOIS POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Interim Periods Ended June 30, 2004 and 2003

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with the unaudited condensed consolidated financial statements and the notes thereto included in this report and with the audited consolidated financial statements and the notes thereto included in our Form 10-K.

General - Company Profile

We are a regulated utility that serves more than 590,000 electricity customers and nearly 415,000 natural gas customers in northern, central and southern Illinois. We also currently supply electric transmission service to numerous utilities, electric cooperatives, municipalities and power marketing entities in the State of Illinois.

We are an indirect, wholly-owned subsidiary of Dynegy Inc. Dynegy and Illinova recently entered into an agreement with Ameren to sell the shares of our common and preferred stock owned by Illinova, together with Dynegy’s 20% interest in a Joppa, IL power generating facility, for $2.3 billion. The transaction is expected to close before the end of 2004, subject to the receipt of required regulatory approvals and other closing conditions. Please read Note 2 - Agreed Sale to Ameren for further discussion.

Our results of operations and financial condition are affected by the consolidated financial and liquidity position of Dynegy, particularly because we rely on interest payments under an unsecured $2.3 billion intercompany note receivable from Illinova, our direct parent company and a wholly-owned Dynegy subsidiary, which we refer to as our Note Receivable from Affiliate, for a significant portion of our net cash provided by operating activities. Please read "- Liquidity and Capital Resources - Our Relationship with Dynegy" for further discussion.

Operationally, our performance for the first six months of 2004 was substantially in line with our performance during the same period in 2003. Electric and gas revenues were slightly down in 2004 as compared to 2003, primarily as a result of industrial customers choosing alternative suppliers.

Liquidity and Capital Resources

Overview

~~Our~~In ~~cash~~this ~~balance~~section, aswe ofprovide ~~November~~updates 5related to our liquidity, ~~2003~~capital ~~was~~requirements ~~approximately~~and ~~$49~~capital ~~million,~~resources. ~~including~~Our ~~restricted~~liquidity ~~cash~~and ofcapital ~~approximately~~requirements ~~$31million.~~are ~~Because~~primarily a function of our ~~significant~~debt maturities and debt ~~obligations~~service requirements, ~~including~~contractual ~~higher~~obligations, ~~interest~~capital ~~expense~~expenditures ~~resulting~~and ~~from~~working ~~our~~capital ~~December~~needs. ~~2002~~Examples ~~Mortgage~~of ~~bond~~working ~~offering,~~capital weneeds ~~remain~~include ~~reliant~~purchases onof ~~cash~~electricity onand ~~hand~~natural gas, ~~cash~~facility ~~flows~~maintenance ~~from~~costs ~~operations~~(including required environmental expenditures) and other costs such as payroll. Our liquidity ~~support~~and ~~committed~~capital byresources ~~Dynegy~~are toprimarily ~~satisfy~~derived ~~our~~from ~~obligations.~~cash ~~Please~~flows ~~see~~from ~~"Conclusion"~~operations, ~~below~~cash ~~for~~on ~~further~~hand ~~discussion.~~and interest payments under our Note Receivable from Affiliate.

Our Relationship with Dynegy

WeAs stated above, we are an indirect, wholly owned subsidiary of Dynegy Inc. ~~Due to our relationship with Dynegy, adverse developments or announcements concerning Dynegy have affected our ability to access the capital markets and to otherwise conduct our business.~~ We are ~~particularly~~ susceptible to developments at Dynegy because we rely ~~upon~~on anour ~~unsecured~~ Note Receivable from Affiliate for a substantial portion of our net cash ~~flows~~provided by operating activities. ~~Our~~ ~~Note~~The ~~Receivable~~note, ~~from~~which ~~Affiliate~~had ~~relates~~$2.3 tobillion ~~the~~in ~~transfer~~principal ofoutstanding ~~our~~at ~~former~~June ~~fossil-fueled~~30, ~~generating~~2004 ~~assets.~~and ~~The~~December ~~note~~31, 2003, matures on September 30, 2009 and bears interest at an annual rate of 7.5%, due semiannually in April and October. AtBecause ~~September~~our ~~30,~~operating ~~2003~~cash ~~and December 31~~flows, ~~2002,~~cash ~~principal~~on ~~outstanding~~hand ~~under~~and ~~the~~other ~~note~~capital ~~approximated~~resources ~~$2.3~~were ~~billion.~~insufficient Weto ~~had~~satisfy noour ~~accrued~~2003 ~~interest~~debt atmaturities ~~September~~and ~~30,~~other ~~2003~~capital ~~due~~resource torequirements, ~~prepayments~~Dynegy ofprepaid approximately $~~100~~128 million ~~and~~of ~~$71~~interest ~~million~~ on our Note Receivable from Affiliate in ~~July~~ 2003. In January and ~~September~~July ~~2003~~2004, ~~respectively,~~we asreceived ~~further~~an ~~discussed~~additional in$43 ~~Note~~million 3,and ~~"Related~~$14 ~~Parties"~~million, ~~above~~respectively, ~~while~~of atprepaid ~~December~~interest ~~31,~~under ~~2002~~our ~~accrued~~Note ~~interest~~Receivable ~~approximated~~from ~~$14 million~~Affiliate. AnAt ~~additional~~June ~~interest~~30, ~~prepayment~~2004, ofwe carried approximately $2885 million ~~was received~~ in ~~October~~prepaid ~~2003. As of October 31, 2003, seven months of~~ interest on our Note Receivable from Affiliate, ~~had been prepaid.~~ which

We have reviewed the collectibility of this note to assess whether it has become impaired under the criteria of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Under this standard, a loan is impaired when, based on current information and events, it is "probable" that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Please see "Critical Accounting Policies" in the Form 10-K for further discussion as to applicable GAAP requirements regarding impairment of the loan. While we believe that the note is not impaired, we continue to review the collectibility of the note on a quarterly basis. Principal payments on the note are not required until 2009 when it is due in full; as a result, future events may affect our view as to the collectibility of the remaining principal owed to us under the note. On our fourth quarter review, we will consider the impact, if any, of the proposed transaction with Exelon on the collectibility of our Note Receivable from Affiliate. It is possible that if negative events affect Dynegy or if we do not receive timely interest payments on our Note Receivable from Affiliate, such matters could cause us to believe it necessary to impair our Note Receivable from Affiliate on our condensed consolidated balance sheet and such action could have a material adverse effect on our liquidity, financial condition and results of operations. For example, a significant impairment could impact our ability to comply with the financial covenants contained in our Tilton lease agreement and to stay within the utility earnings cap contained in the Illinois Customer Choice Law. 19

17Table of Contents ILLINOIS POWER COMPANY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Interim Periods Ended ~~September~~June 30, ~~2003~~2004 and ~~2002~~2003

On represents ~~October~~six ~~31,~~months ~~2003, we entered into an agreement to sell substantially all~~ of ~~our~~interest ~~assets~~paid ~~and~~before ~~liabilities,~~it ~~excluding,~~has ~~among~~been ~~other things, the Note Receivable from Affiliate and deferred taxes from the previous transfer of our fossil generating assets to DMG, to Exelon~~earned. ~~The~~ ~~sale~~At isJune ~~conditioned on~~30, ~~among other things~~2003, ~~the~~we ~~receipt~~had ofno ~~approvals~~prepaid ~~from~~interest ~~the ICC, the FERC, the SEC~~ and ~~other~~carried ~~governmental~~approximately ~~and~~$43 ~~regulatory~~million ~~agencies. In addition, the passage of legislation recently introduced~~ in ~~the~~interest ~~Illinois General Assembly is critical to the consummation of the transaction~~receivable. ~~Pending these approvals, the transaction is expected to close in the fourth quarter 2004. Please read Note 2, “Agreed Sale to Exelon,” for further discussion.~~

~~Credit~~We ~~Capacity~~have reviewed the collectibility of this note to assess whether it has become impaired, ~~Liquidity~~as required by GAAP. Based upon our assessment, we do not believe that our Note Receivable from Affiliate is impaired. Please read "Management’s Discussion and ~~Debt~~Analysis ~~Maturities~~of Financial Condition and Results of Operations - Critical Accounting Policies - Note Receivable from Affiliate" beginning on page 23 of our Form 10-K for further discussion as to applicable GAAP requirements regarding impairment of our Note Receivable from Affiliate. Principal payments on our Note Receivable from Affiliate are not required until 2009 when it is due in full; as a result, future events may affect our view as to the collectiblity of the remaining principal owed to us thereunder. It is possible that if negative events affect Dynegy, or if we do not receive timely interest payments on our Note Receivable from Affiliate, such matters could cause us to believe it necessary to impair our Note Receivable from Affiliate on our consolidated balance sheet and such action could have a material adverse effect on our financial condition and results of operations.

~~Sources of~~ Liquidity We are currently satisfying our capital requirements primarily with cash from operations, cash on hand, interest payments under our $2.3 billion Note Receivable from Affiliate and liquidity support which has been committed by Dynegy.

~~Without~~Sources ~~the additional support from Dynegy through its prepayments~~ of ~~interest~~Liquidity Due ~~on the Note Receivable from Affiliate, our cash flows are insufficient~~ to ~~satisfy~~ our ~~debt~~non-investment ~~service~~grade ~~obligations~~credit ratings and other ~~capital~~factors, ~~resource~~we ~~requirements.~~do Wenot ~~used~~have ~~the~~access ~~remaining~~to ~~proceeds~~the ~~from~~commercial ~~our~~paper ~~December 2002 Mortgage bond offering~~markets, ~~together with a portion of the prepaid interest payments received in July 2003~~ and ~~September 2003, respectively, under~~ our ~~Note~~access ~~Receivable from Affiliate,~~ to ~~pay~~the ~~our~~capital ~~August~~markets ~~and September 2003 mortgage bond maturities of $190 million in aggregate. An additional interest prepayment of approximately $28 million was received in October 2003 and~~ is ~~being used for payment of general operating expenses~~limited. InWe ~~the~~are ~~near~~currently ~~term,~~satisfying weour ~~will~~capital ~~continue~~requirements toprimarily ~~rely~~with oncash ~~a support commitment~~ from ~~Dynegy in order to satisfy our obligations. Although Dynegy’s restructured credit facility~~operations, ~~which~~cash ~~expires~~on ~~in February 2005~~hand, ~~prohibits~~interest itpayments ~~from~~under ~~prepaying~~our ~~more than~~ $~~200~~2.3 ~~million~~billion ~~in principal under our~~ Note Receivable from Affiliate ~~during~~and ~~the~~liquidity ~~term~~support ofcommitted ~~the~~by ~~credit agreement, it does not limit~~ Dynegy’s. ~~ability~~We tobelieve ~~prepay~~that ~~interest~~we ~~under~~have ~~our~~sufficient ~~Note~~internal ~~Receivable~~liquidity ~~from Affiliate. In addition~~sources, ~~the~~including ~~indenture governing~~ Dynegy ~~Holdings Inc.~~’s ~~recently~~commitment ~~issued second priority senior secured notes permits payments~~ of ~~principal~~support, ~~on the intercompany note receivable up~~ to ~~$450~~satisfy ~~million~~our ordebt tomaturities ~~the~~and ~~extent~~other ~~that~~capital aresource ~~fixed~~requirements ~~charge~~for ~~coverage ratio of 2:1 is satisfied. The indenture also permits~~ the ~~prepayment~~near ~~of interest on the intercompany note receivable up to twelve months at any one time~~term.

AsIn ~~part~~connection ofwith Dynegy’s agreement to sell our ~~long-term~~common ~~plan~~and preferred stock to Ameren, the Note Receivable from Affiliate is required to be addressed. Pursuant to this requirement, we anticipate that the Note Receivable from Affiliate will ~~consider~~be ~~one~~significantly reduced or ~~more~~eliminated ~~liquidity~~from ~~initiatives~~our ~~including,~~consolidated ~~among~~balance ~~other~~sheet ~~things~~in exchange for value, ain ~~revolving~~the ~~credit~~form ~~facility~~of cash and/or ~~additional~~other ~~debt~~consideration, ~~issuances~~to be received by us. ~~Please~~While ~~read~~Ameren ~~Note~~representatives 2,have ~~"Agreed~~publicly ~~Sale~~submitted testimony to ~~Exelon~~applicable regulatory authorities that Ameren plans to infuse substantial equity into IP in connection with the pending sale," ~~for~~the ~~further~~exact ~~discussion.~~amount ~~Please~~or ~~also~~structure ~~read~~of ~~"Conclusion"~~this ~~below~~infusion will not be known until the required regulatory approvals are obtained. In any case, we believe that Ameren will provide us with sufficient capital resources in connection with the reduction or elimination of our Note Receivable from Affiliate and thereafter such that the loss of interest income from our Note Receivable from Affiliate will not materially adversely affect our financial condition or results of operations.

~~Uses~~Debt ~~of Liquidity~~Maturities OnIn ~~May~~each ~~17,~~of ~~2002, we exercised~~ the ~~"term~~three-~~out"~~ ~~provision~~and ~~contained~~six-month inperiods ~~our~~ended ~~$300~~June ~~million~~30, ~~364-day~~2004 ~~revolving~~and ~~credit facility~~2003, ~~which~~we ~~was~~paid ~~scheduled~~approximately to$22 ~~mature~~million onand ~~May~~$43 20million, ~~2002. In connection with this conversion~~respectively, weon ~~borrowed~~ the ~~remaining~~IPSPT ~~$60~~transitional ~~million~~funding ~~available~~trust ~~under this facility~~notes. ~~The~~For ~~exercise of~~ the "near term~~-out"~~, ~~provision~~our ~~converted~~debt ~~the~~maturities ~~facility~~primarily tocomprise a(i) ~~one-year~~similar ~~term~~quarterly ~~loan~~payments ~~that~~on ~~matured~~the inIPSPT ~~May~~transitional ~~2003.~~funding Intrust ~~December 2002~~notes, for which we ~~used~~receive a ~~portion~~separate ofrevenue ~~the~~stream ~~proceeds~~ from our ~~$550~~customers; ~~million~~and ~~Mortgage~~(ii) ~~bond~~redemption ~~offering~~of ~~to repay~~ $~~200~~70 million onin ~~this~~mortgage ~~loan.~~bonds Ondue ~~May~~March ~~2, 2003 we made the final $100 million payment on this loan~~2005.

~~Our~~In ~~$100~~September ~~million~~1999, ~~and~~we ~~$90~~entered ~~million~~into ~~Mortgage~~an ~~bonds,~~operating ~~which~~lease ~~matured~~ on ~~August~~four 1gas turbines located in Tilton, ~~2003~~IL and ~~September~~a ~~15,~~separate land lease at the Tilton site. We sublet the turbines to DMG in October 1999. In September 2003, ~~respectively,~~we ~~were~~delivered ~~redeemed~~notice ~~using~~of ~~prepaid~~our ~~interest~~intent ~~under~~to exercise our ~~Note~~option ~~Receivable~~to ~~from~~purchase ~~Affiliate~~the asturbines ~~further~~upon ~~discussed~~expiration ~~above~~of the lease in September 2004. Upon delivery of this notice of intent, ~~and~~our ~~the~~operating ~~remaining~~lease ~~proceeds~~converted to a capital lease. Pursuant to these events, we recorded a receivable from DMG in accordance with our ~~December~~sublease ~~2002~~agreement ~~Mortgage~~and ~~bond~~a ~~offering~~corresponding payable to the original lessor of approximately $66 million. ~~Our~~We ~~December~~were ~~2002~~ratably ~~Mortgage bond~~recording ~~offering~~the ~~has~~interest ~~also~~income ~~resulted,~~related to the receivable and isthe ~~expected~~accretion expense related to ~~continue~~the payable to ~~result,~~the full contractual purchase obligation of approximately $81 million which was due at the expiration of the lease in ~~additional~~September 2004. The effect on net income of the interest ~~expense~~on the receivable was offset by the accretion of the payable. ~~Please~~For additional information relating to the Tilton capital lease, please read ~~"Management’s~~Note ~~Discussion~~7 - Commitments and ~~Analysis~~Contingencies of- ~~Financial~~Other ~~Condition~~- ~~and~~Capital ~~Results~~Leases ofbeginning ~~Operations~~on –page ~~Results~~F-24 of ~~Operations~~our –Form ~~Three~~10-~~Month~~K. ~~Periods~~In ~~Ended~~July ~~September~~2004, 30subsequent to the expiration of a statutory notice period after a filing at the ICC, ~~2003~~we terminated our lease with the original lessor and ~~2002"~~the related turbines were purchased from the original lessor by DMG for the full contract price of approximately $81 million. This resulted in a ~~discussion~~reduction of ~~this~~debt ~~additional~~of ~~interest~~$78 ~~expense~~million. Additionally, we assigned our associated land lease on the Tilton site to DMG

InContractual ~~addition,~~Obligations weand ~~have~~Contingent ~~made~~Financial ~~quarterly~~Commitments We ~~payments~~have ofentered ~~approximately~~into ~~$22~~various ~~million~~financial onobligations ~~our~~and ~~transitional~~commitments ~~funding trust notes. These payments are made from our restricted cash, which is reserved for use~~ in ~~paying off~~ the ~~transitional~~course ~~funding trust notes issued under the provisions~~ of ~~the~~our ~~Electric~~ongoing ~~Service~~operations ~~Customer Choice~~ and ~~Rate~~financing ~~Relief~~strategies. ~~Law~~Please ofread ~~1997 (~~"~~P.A.~~Management’s ~~90-561").~~Discussion ~~We will continue to make these quarterly payments through 2008.~~ and

~~18 ILLINOIS POWER COMPANY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Interim Periods Ended September 30, 2003 and 2002~~20

~~Collateral As~~Table ~~discussed~~of ~~in our~~Contents ~~Form~~ILLINOIS ~~10-K,~~POWER weCOMPANY ~~have~~MANAGEMENT’S ~~been~~DISCUSSION ~~requested~~AND toANALYSIS ~~provide~~OF ~~letters~~FINANCIAL ofCONDITION ~~credit~~AND toRESULTS ~~support~~OF ~~certain~~OPERATIONS ~~business~~For ~~transactions,~~the ~~including~~Interim ~~our~~Periods ~~purchase~~Ended ofJune ~~natural gas and natural gas transportation. As of September~~ 30, ~~2003,~~2004 ~~Dynegy~~and ~~had posted approximately $20 million in collateral in support of these transactions, down from $28 million at December 31, 2002.~~ 2003

~~Debt~~Analysis ~~Payments The~~of ~~following~~Financial ~~table~~Condition ~~provides~~and aResults ~~summary~~ of ~~our~~Operations ~~debt~~- ~~payments~~Liquidity ~~for~~and ~~the~~Capital ~~fourth~~Resources ~~quarter~~- ofFinancial ~~2003,~~Obligations ~~the~~and ~~next~~Commercial ~~four~~Commitments" ~~years~~beginning ~~and~~on ~~thereafter~~page ~~(millions~~20 of ~~dollars).~~our Form 10-K for a complete listing of our obligations and commitments.

Payments Due by Period
Cash Obligations	Total		2003		2004		2005		2006		2007		Thereafter
Long-Term Debt (1)	$	1,445	$	---	$	---	$	70	$	---	$	---	$	1,375
Transitional Funding Trust Notes (1)		452		22		86		86		86		86		86
Tilton Capital Lease (2)		81		---		81		---		---		---		---
Total Cash Obligations	$	1,978	$	22	$	167	$	156	$	86	$	86	$	1,461

Subsequent to year-end, obligations associated with contracts for firm transportation and storage services for natural gas that have varying expiration dates ranging from 2004 to 2012, increased from $66 million, as reported in our Form 10-K, to approximately $78 million. The increase is the result of the renewal of three contracts under different terms and the signing of an additional contract. Gas purchase commitments have increased from approximately $38.7 million, as reported in our Form 10-K, to approximately $49 million at June 30, 2004. We began entering into fixed-price forward contracts during April 2004 and will continue through October 2004. Typically these obligations range in duration from one to twelve months and require us to compensate the provider for capacity charges. In addition, we are in the process of acquiring additional capacity and associated energy to replace that which is supplied under the AmerGen PPA, which will expire at year end, for 2005 and 2006. The specific terms and conditions under which these resources will be acquired are not currently known.

(We make periodic interest payments related to our fixed-rate and variable rate debt obligations. Interest rates on these obligations ranged from 1).25% ~~Does~~to ~~not~~11.5% ~~include~~per annum during the ~~associated~~six ~~debt~~months ~~discount~~ended orJune ~~fair~~30, ~~market~~2004. ~~value~~Interest ~~adjustment~~expense for the three- and six-month periods ended June 30, 2004 was approximately $40 million and $79 million, respectively. During the three- and six-month periods ended June 30, 2003, interest expense was approximately $41 million and $84 million, respectively.

~~(2)~~Dividends There ~~Please~~are ~~read~~restrictions on our ability to pay cash dividends, including any dividends that we might pay indirectly to Dynegy. Under our Restated Articles of Incorporation, we may pay dividends on our common stock, all of which is owned by Illinova, subject to the ~~section~~preferential ~~"Tilton~~rights ~~Capital~~of ~~Lease"~~the ~~below~~holders of our preferred stock, of which Illinova owns approximately 73%. However, we are limited in our ability to pay dividends by the Illinois Public Utilities Act and the Federal Power Act, which require retained earnings equal to or greater than the amount of any proposed dividend. Additionally, the ICC’s October 23, 2002 order relating to a netting agreement between Dynegy and us prohibits us from declaring and paying any dividends on our common stock until our mortgage bonds are rated investment grade by both Moody’s and Standard & Poor’s, and further requires that we first obtain approval for ~~additional~~any ~~information~~such payment from the ICC. Please read Note 3 - Related Parties for further discussion of this ICC order.

~~Financial~~During ~~Obligations~~each ~~and~~of ~~Commercial Commitments We have entered into various financial obligations and commitments in~~ the ~~course~~six-month ofperiods ~~our~~ended ~~ongoing~~June ~~operations and financing strategies. Financial obligations are considered to represent known future cash payments that we are required to make under existing contractual arrangements~~30, ~~such~~2004 ~~as debt~~ and ~~lease agreements. These obligations may result from general financing activities~~2003, aswe ~~well~~paid aspreferred ~~from~~stock ~~commercial~~dividends arrangements that are directly supported by related revenue-producing activities. Financial commitments represent contingent obligations that become payable only if certain pre-defined events were to occur, such as funding financial guarantees. Please see "Liquidity and Capital Resources—Financial Obligations and Commercial Commitments" in our Form 10-K for a complete listing of ~~our~~approximately ~~obligations~~$1 ~~and commitments~~million. We ~~enter~~paid ~~into~~no ~~obligations~~common onstock andividends ~~ongoing~~in ~~basis for~~ the ~~reservation~~first ofsix ~~natural gas supply. These obligations generally range in duration from one to twelve~~ months ~~and require us to compensate the provider for capacity charges. The cost~~ of ~~the~~2004 ~~agreements~~or ~~through~~ 2003 ~~is $76 million compared to $28 million reported in the Form 10-Q for June 30, 2003~~. ~~The increase is due to increased natural gas prices.~~

~~Tilton~~Capital Expenditures Capital ~~Lease In~~expenditures ~~September~~for ~~1999,~~the wesix ~~entered~~months ~~into~~ended anJune ~~$81 million operating lease on four gas turbines located in Tilton~~30, ~~Illinois~~2004 ~~and~~were aapproximately ~~separate~~$63 ~~land lease at the Tilton site~~million. ~~These~~Capital ~~facilities~~expenditures consist of ~~peaking~~numerous ~~units~~projects ~~totaling 176 MW of capacity. We sublet the turbines~~ to ~~DMG~~upgrade inand ~~October~~maintain ~~1999 pursuant to a sublease that requires DMG to pay all amounts owed by us under~~ the ~~operating~~reliability ~~lease. In September 2003, we delivered notice~~ of our ~~intent~~electric toand ~~exercise~~gas ~~our~~transmission ~~option to purchase the turbines upon the expiration of the operating lease in September 2004. As a result of this action, the operating lease was reclassified as a capital lease~~ and wedistribution ~~are now the capital sublessor. Based upon an independent appraisal~~systems, weadd ~~recorded~~new acustomers ~~receivable from DMG at the fair market value of $66 million, which is offset by a corresponding liability~~ to the ~~original~~system ~~lessor. The receivable from DMG~~ and ~~payable~~prepare ~~to the original lessor will be accreted up to the $81 million lease payment over the next 12 months using the straight line method. The accretion to be recorded~~ for 2003 will be approximately $4 million and will be recorded as interest income offset by the same amount of interest expense. The accretion to be recorded in 2004 will be approximately $11 million. The net effect on our income statement will be zero. This lease obligation was previously disclosed as a ~~lease~~competitive ~~obligation in the footnotes to our financial statements and the Commercial Financial Obligations and Contingent Financial Commitments tables in our Form 10-K~~environment.

~~Dividends~~Conclusion ~~There~~Due ~~are~~to ~~restrictions~~our onnon-investment ~~our~~grade ~~ability~~credit toratings ~~pay~~and ~~cash~~other ~~dividends~~factors, ~~including any dividends that~~ we ~~might~~do ~~pay~~not ~~indirectly~~have access to ~~Dynegy.~~the ~~Under~~commercial ~~our~~paper ~~Restated Articles of Incorporation~~markets, weand ~~may pay dividends on~~ our ~~common~~access ~~stock,~~to ~~all~~the ofcapital ~~which~~markets is ~~owned~~limited. byThese ~~Illinova~~factors, ~~subject~~along towith the ~~preferential~~level ~~rights~~ of ~~the holders of~~ our ~~preferred~~indebtedness ~~stock,~~and ofthe ~~which~~fact ~~Illinova~~that ~~owns~~we ~~approximately~~do ~~73%.~~not Wecurrently ~~also~~have ~~are~~a ~~limited~~revolving incredit ~~our~~facility, ~~ability~~will tohave ~~pay~~several ~~dividends~~important byeffects ~~the~~on ~~Illinois~~our ~~Public~~future ~~Utilities~~operations. ~~Act~~First, ~~and~~a ~~the~~significant ~~Federal~~portion ~~Power~~of ~~Act,~~our ~~which~~cash ~~require~~flows ~~retained~~will ~~earnings~~be ~~equal~~dedicated to ~~or greater than~~ the ~~amount~~payment of ~~any~~principal ~~proposed~~and ~~dividend.~~interest ~~Additionally,~~on ~~the~~our ~~ICC’s~~outstanding ~~October 23~~indebtedness, ~~2002~~including ~~order~~the ~~relating~~increased tointerest aexpense ~~netting~~associated ~~agreement~~with ~~between~~our usDecember ~~and~~2002 ~~Dynegy~~$550 ~~prohibits~~million usMortgage ~~from~~bond ~~declaring~~financing, and ~~paying~~will ~~any~~not ~~dividends~~be onavailable ~~our~~for ~~common~~other ~~stock~~purposes. ~~until~~Second, ~~such time as~~ our ~~mortgage~~ability ~~bonds~~to ~~are~~obtain ~~rated~~additional ~~investment~~financing ~~grade~~for byworking ~~both~~capital, ~~Moody’s~~capital ~~and~~expenditures, ~~Standard~~general &corporate ~~Poor’s,~~ and ~~further~~other ~~requires~~purposes ~~that~~is ~~we first obtain approval for any such payment from the ICC~~limited.

19For ~~ILLINOIS~~the ~~POWER~~near ~~COMPANY~~term, ~~MANAGEMENT’S~~our ~~DISCUSSION~~debt ~~AND~~maturities ~~ANALYSIS~~primarily OFcomprise ~~FINANCIAL~~(i) ~~CONDITION~~quarterly ~~AND~~payments ~~RESULTS~~of OFapproximately ~~OPERATIONS~~$22 ~~For~~million on the ~~Interim~~IPSPT ~~Periods~~transitional ~~Ended~~funding ~~September~~trust 30notes, ~~2003~~for which we receive a separate revenue stream from our customers; and ~~2002~~(ii) redemption of $70 million in mortgage bonds due March 2005. We believe that we have sufficient internal liquidity sources, including Dynegy’s commitment of support, to satisfy these near term debt maturities and our commercial obligations. The ability of Dynegy and it's other subsidiaries to support our liquidity needs is restricted, however, by their financing agreements. DHI's May 2004 credit facility permits DHI to fund prepayments of up to $450 million in principal under our Note Receivable from Affiliate, but only to the extent that such prepayment does not cause Dynegy’s liquidity to fall below $200 million for any ten business day period. Dynegy’s credit

During the nine months ended September 30, 2003, we paid preferred stock dividends of approximately $2 million. During the nine months ended September 30, 2002, we paid common stock dividends of $0.5 million to Illinova and preferred stock dividends of approximately $2 million. 21

~~Capital~~Table ~~Expenditures Capital~~of ~~expenditures~~Contents ~~for~~ILLINOIS ~~the~~POWER ~~nine~~COMPANY ~~months~~MANAGEMENT’S ~~ended~~DISCUSSION ~~September~~AND ~~30,~~ANALYSIS ~~2003~~OF ~~were~~FINANCIAL ~~approximately~~CONDITION ~~$100~~AND ~~million.~~RESULTS WeOF ~~estimate~~OPERATIONS ~~that~~For ~~we will spend approximately $25 million on construction for~~ the ~~remainder~~Interim ofPeriods ~~2003.~~Ended ~~Capital~~June ~~expenditures for the nine months ended September~~ 30, ~~2002~~2004 ~~were approximately $102 million,~~ and for the year ended December 31, 2002 were $144 million. Capital expenditures consist of numerous projects to upgrade and maintain the reliability of our electric and gas transmission and distribution systems, add new customers to the system and prepare for a competitive environment. 2003

~~Conclusion We~~facility ~~have~~also aprohibits ~~significant~~prepayment ~~amount~~by DHI of ~~leverage,~~more ~~including~~than ~~quarterly~~12 ~~payments~~months of ~~approximately~~interest ~~$22~~under ~~million~~our ~~due~~Note onReceivable ~~our~~from ~~transitional~~Affiliate. ~~funding~~In ~~trust~~addition, ~~notes.~~the Weindenture ~~are~~governing ~~required~~DHI's tosecond ~~make~~priority ~~these~~senior ~~same~~secured ~~quarterly~~notes permits payments of ~~approximately~~principal on the intercompany note receivable up to $22450 million or to the extent that a fixed charge coverage ratio of 2:1 is satisfied. The indenture also permits the prepayment of interest on ~~our~~the ~~transitional~~intercompany ~~funding~~note ~~trust~~receivable ~~notes~~up ~~through~~to ~~2008~~twelve months at any one time.

~~Due~~Over tothe ~~our~~longer ~~non-investment~~term, ~~grade~~our ~~credit~~liquidity ~~ratings~~ and ~~other~~capital ~~factors,~~resources wewill dobe ~~not~~materially ~~have~~affected ~~access~~by to the ~~commercial~~outcome ~~paper~~of ~~markets, and our access to~~ the ~~capital~~pending ~~markets~~sale ~~is limited. These factors, along with the level~~ of our ~~indebtedness~~company ~~and~~to ~~the~~Ameren. ~~fact~~If ~~that~~the wesale dois ~~not~~consummated, ~~currently~~Ameren ~~have~~has acommitted ~~revolving~~to ~~credit~~contribute ~~facility,~~cash ~~will~~to ~~have~~us ~~several~~in ~~important~~order ~~effects~~to onsupport our ~~future~~ongoing ~~operations.~~operating ~~First,~~commitments aand ~~significant~~to ~~portion~~reduce of our ~~cash~~leverage. ~~flows~~If ~~will be dedicated to~~ the ~~payment~~sale ofis ~~principal~~not ~~and~~consummated, ~~interest~~we onwould ~~our~~explore ~~outstanding~~other ~~indebtedness,~~liquidity ~~including~~initiatives. ~~the~~These ~~transitional~~initiatives ~~funding~~would ~~trust~~include ~~notes,~~an ~~and~~integration ~~will~~of ~~not~~many beprocesses ~~available~~into ~~for~~those ~~other~~of ~~purposes. Second~~Dynegy’s, ~~our~~which ~~ability~~we toexpect ~~obtain~~would ~~additional~~yield ~~financing~~significant ~~for~~cost ~~working~~savings. ~~capital,~~Another ~~capital~~liquidity ~~expenditures,~~initiative ~~general~~could ~~corporate~~include ~~and~~an ~~other~~issuance ~~purposes~~of ismortgage ~~limited~~bonds.

~~Because~~Our weability ~~have~~to noconsummate ~~revolving~~other ~~credit~~liquidity ~~facility~~initiatives, ~~and~~as nodescribed ~~access~~above, is subject to ~~the~~a ~~commercial~~number ~~paper~~of ~~markets~~risks, wesome ~~rely~~of onwhich ~~cash~~are onbeyond ~~hand,~~our ~~cash~~control. ~~flows~~The ~~from~~outcome ~~operations,~~of ~~including~~the ~~interest~~agreed ~~payments~~sale ~~under~~to ~~our~~Ameren ~~$2.3~~is ~~billion~~also ~~Note~~subject ~~Receivable~~to ~~from~~a ~~Affiliate,~~number ~~and~~of ~~liquidity~~risks, ~~support~~some of which ~~has~~are ~~been~~beyond ~~committed~~our bycontrol. ~~Dynegy,~~These torisks ~~satisfy~~include, ~~our~~among ~~debt~~others, ~~obligations~~the ~~and~~receipt toof ~~otherwise~~required ~~operate~~regulatory ~~our~~approvals, ~~business.~~particularly ~~Please~~from ~~see~~the ~~Note 5~~ICC, ~~"Related~~and ~~Parties,"~~satisfaction toof ~~the~~other ~~Form~~closing ~~10-K~~conditions. ~~and~~We ~~Note~~encourage 3,you ~~"Related~~to ~~Parties,"~~read inDynegy’s ~~this~~Quarterly Report on Form 10-Q for ~~further~~the ~~discussion~~period ~~related~~ended toJune ~~the~~30, ~~potential~~2004 ~~impairment~~for ofadditional ~~our~~information ~~Note~~regarding ~~Receivable~~Dynegy ~~from~~and ~~Affiliate~~its current liquidity position.

~~For~~Please ~~the~~read ~~near~~"Uncertainty ~~term, we will continue to rely on a support commitment by Dynegy in order to satisfy our obligations. As part~~ of ~~our long~~Forward-~~term~~Looking ~~plan,~~Statements weand ~~will~~Information" ~~consider~~below ~~one~~for ~~or more liquidity initiatives including, among other things, a revolving credit facility or~~ additional ~~debt~~factors ~~issuances.~~that Wecould ~~believe~~impact our ~~liquidity~~future ~~and~~operating ~~capital resources~~results, including ~~our~~the ~~support~~pending ~~commitment~~sale ~~from~~of ~~Dynegy, are sufficient to satisfy~~ our ~~obligations~~company ~~over the next twelve months. Please read Note 2, "Agreed Sale~~ to ~~Exelon," for additional information affecting our long-term plan~~Ameren.

Our ability to execute one or more liquidity initiatives successfully is subject to a number of risks. These risks include, among others, our ability to obtain new bank or other borrowings and the financial effects of our relationship with Dynegy. We encourage you to read Dynegy’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 for additional information regarding Dynegy and its current liquidity position.

Factors Affecting Future Operating Results

~~Our~~In ~~financial~~"Management’s ~~condition~~Discussion and ~~results~~Analysis of ~~operations~~Financial inCondition and Results of Operations - General - Company Profile" beginning on page 16 of our Form 10-K, we detailed the ~~fourth~~primary ~~quarter~~factors that have impacted, and are expected to continue to impact, our earnings and cash flows. Our earnings and cash flows for the remainder of ~~2003~~2004 and beyond may be ~~affected~~ significantly affected by aany ~~number~~or all of these factors, including: the following in particular:

Ø ~~the~~weather ~~effects of the agreed sale of substantially all of our assets~~ and ~~liabilities,~~its ~~excluding,~~effect ~~among~~on ~~other~~demand ~~things,~~for ~~the Note Receivable from Affiliate and deferred taxes from the previous transfer of~~ our ~~fossil generating assests to DMG~~services, toparticularly ~~Exelon;~~with Ørespect ~~our ability~~ to ~~address~~residential ~~our~~electric ~~significant leverage and increased interest expense in light of, among other things, our non-investment grade status and lack of borrowing capacity~~customers; Ø our ability to receive proceeds from one or more potential liquidity initiatives, including new bank borrowings or additional debt issuances; Ø our ability to execute our business strategy of delivering reliable transmission and distribution services in a cost-effective manner;

20Ø ~~ILLINOIS~~the ~~POWER~~number ~~COMPANY~~of ~~MANAGEMENT’S~~customers ~~DISCUSSION~~that ~~AND~~choose ~~ANALYSIS~~another OFretail ~~FINANCIAL~~electric ~~CONDITION~~provider ~~AND~~under ~~RESULTS OF OPERATIONS For~~ the ~~Interim~~Illinois ~~Periods~~Customer ~~Ended~~Choice ~~September~~Law; ~~30, 2003~~ and ~~2002~~

Ø ~~our~~general ~~ability~~economic toconditions ~~receive interest payments under our Note Receivable from Affiliate~~ and ~~to otherwise receive liquidity support from, and continued performance under our arrangements with, Dynegy; Ø~~ the ~~effects~~resulting ofeffect ~~past or future regulatory actions, including Illinois power market deregulation and, specifically, "direct access,"~~ on ~~our~~demand ~~electric~~for ~~business; Ø~~ our ~~ability~~services, toparticularly ~~maintain~~with orrespect ~~improve our credit ratings; Ø the effects of weather on our electric and gas business; Ø our ability~~ to ~~secure~~commercial ~~power~~ and ~~natural~~industrial ~~gas for our electric and gas~~ customers~~; Ø the effects of general economic conditions; and Ø the effects of customer choice in Illinois~~.

Additionally, as further discussed in Note 1 to the unaudited condensed consolidated financial statements, new accounting pronouncements have impacted our results of operations and will continue to do so in the future. Please read the section "Uncertainty of Forward-Looking Statements and Information" below for additional factors that could impact our future operating results., including the pending sale of our company to Ameren.

Critical Accounting Policies

Please see our Form 10-K for a complete explanation of our critical accounting policies, with respect to which there have been no material changes since the filing of ~~the~~our Form 10-K.

~~21 ILLINOIS POWER COMPANY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Interim Periods Ended September 30, 2003 and 2002~~22

Table of Contents

ILLINOIS POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Interim Periods Ended June 30, 2004 and 2003

Results of Operations

~~Provided below is an unaudited tabular presentation of certain operating and financial statistics for the three-month periods ended September 30, 2003 and 2002, respectively.~~ Overview

	Three Months Ended September 30,
	2003		2002
	($ in millions)
Electric Sales Revenues -
Residential	$	149	$	154
Commercial		103		105
Commercial-distribution (1)		---		---
Industrial		77		83
Industrial-distribution (1)		1		1
Other		12		11
Revenues from ultimate consumers		342		354
Interchange		---		---
Transmission/Wheeling		10		11
Total Electric Revenues	$	352	$	365
Electric Sales in kWh (Millions) -
Residential		1,766		1,832
Commercial		1,208		1,231
Commercial-distribution (1)		1		1
Industrial		1,561		1,667
Industrial-distribution (1)		641		621
Other		99		98
Sales to ultimate consumers		5,276		5,450
Interchange		6		---
Total Electric Sales		5,282		5,450
Cooling Degree Days (2) – Actual		773		1,006
Cooling Degree Days (2) – 10 Year Rolling Average		850		860

In this section, we discuss our results of operations for the three- and six-month periods ended June 30, 2004 and 2003. We have also included our business outlook.

~~(1) Distribution~~Three-Month ofPeriods ~~customer-owned~~Ended ~~energy~~June 30, 2004 and 2003

The following table presents key operating and financial statistics for the three-month periods ended June 30, 2004 and 2003, respectively.

	Three Months Ended June 30,
	2004		2003
	(in millions)
Electric Sales Revenues -
Residential	$	93	$	83
Commercial		85		82
Commercial-distribution⁽¹⁾		---		---
Industrial		61		72
Industrial-distribution⁽¹⁾		1		2
Other		9		8
Revenues from ultimate consumers		249		247
Interchange		---		---
Transmission/Wheeling		9		10
Total Electric Revenues	$	258	$	257

Electric Sales in kWh (Millions) -
Residential		1,135		998
Commercial		1,118		1,052
Commercial-distribution⁽¹⁾		2		1
Industrial		1,371		1,648
Industrial-distribution⁽¹⁾		801		600
Other		90		88
Sales to ultimate consumers		4,517		4,387
Interchange		---		---
Total Electric Sales		4,517		4,387

Cooling Degree Days ⁽²⁾ - Actual		373		198
Cooling Degree Days ⁽²⁾ - 10 year Rolling Average		373		364

⁽¹⁾

Distribution of customer-owned energy.

⁽²⁾

A Cooling Degree Day ("CDD") represents the number of degrees that the mean temperature for a particular day is above 65 degrees Fahrenheit. The CDDs for a period of time are computed by adding the CDDs for each day during the period.

~~22 ILLINOIS POWER COMPANY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Interim Periods Ended September 30, 2003 and 2002~~23

	Three Months Ended September 30,
	2003		2002
	($ in millions)
Gas Sales Revenues -
Residential	$	26	$	22
Commercial		11		9
Industrial		8		5
Other		1		---
Revenues from ultimate consumers		46		36
Transportation of customer-owned gas		---		---
Sales to affiliates		3		5
Total Gas Revenues	$	49	$	41
Gas Sales in Therms (Millions) -
Residential		18		18
Commercial		10		11
Industrial		11		11
Sales to ultimate consumers		39		40
Transportation of customer-owned gas		48		47
Total gas sold and transported		87		87
Sales to affiliates		5		13
Total Gas Delivered		92		100
Heating Degree Days (1) – Actual		88		29
Heating Degree Days (1) – 10 Year Rolling Average		---		---

Table of Contents

ILLINOIS POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Interim Periods Ended June 30, 2004 and 2003

	Three Months Ended June 30,
	2004			2003
	(in millions)
Gas Sales Revenues -
Residential	$	41		$	43
Commercial		16			16
Industrial		8			11
Other		1			1
Revenues from ultimate consumers		66			71
Transportation of customer-owned gas		(1	)		(2	)
Sales to affiliates		1			2
Total Gas Revenues	$	66		$	71

Gas Sales in Therms (Millions) -
Residential		34			35
Commercial		16			16
Industrial		8			16
Sales to ultimate consumers		58			67
Transportation of customer-owned gas		56			57
Total gas sold and transported		114			124
Sales to affiliates		2			2
Total Gas Delivered		116			126

Heating Degree Days ⁽¹⁾ - Actual		388			469
Heating Degree Days ⁽¹⁾ - 10 year Rolling Average		453			431

⁽¹⁾

A Heating Degree Day ("HDD") represents the number of degrees that the mean temperature for a particular day is below 65 degrees Fahrenheit. The HDDs for a period of time are computed by adding the HDDs for each day during the period.

23For ~~ILLINOIS~~the ~~POWER~~quarter ~~COMPANY~~ended ~~MANAGEMENT’S~~June ~~DISCUSSION~~30, ~~AND~~2004, ~~ANALYSIS~~we OFreported ~~FINANCIAL~~net ~~CONDITION~~income ~~AND~~of ~~RESULTS~~$24 OFmillion, ~~OPERATIONS~~compared ~~For~~with ~~the~~second ~~Interim~~quarter ~~Periods~~2003 ~~Ended~~net ~~September~~income ~~30,~~of ~~2003~~$18 ~~and~~million. ~~2002~~

~~Three-Month~~Operating ~~Periods~~revenues ~~Ended~~in ~~September~~2004 30decreased $4 million period over period. Electric revenues increased slightly, primarily due to warmer summer weather as compared to 2003, ~~and~~offset ~~2002~~by lower industrial usage as a result of customers switching to alternative suppliers. Gas revenues were negatively impacted by lower industrial sales.

~~For~~Operating expenses, exclusive of income taxes discussed below, decreased $6 million in the second quarter ~~ended~~2004 ~~September~~compared ~~30,~~to the same period in 2003. Electric power purchases decreased due to lower average cost of power. Gas costs decreased due to a reduction in industrial usage, wepartially ~~reported~~offset ~~net~~by ~~income~~a higher average price of ~~$40~~gas. ~~million~~Other operating expenses, which increased in 2004 as compared ~~with~~to ~~third~~2003, ~~quarter~~were ~~2002~~impacted ~~net~~by ~~income~~higher ofemployee ~~$57~~benefits ~~million~~costs.

~~Operating~~Other ~~revenues~~income in ~~2003~~the ~~decreased~~second $5quarter ~~million~~2004 ~~period~~and ~~over~~2003 ~~period~~included ~~primarily~~interest ~~due~~income toassociated ~~unfavorable~~with ~~weather~~our ~~impacting~~Note ~~residential~~Receivable ~~and~~from ~~commercial~~Affiliate ~~electric~~and ~~usage~~allocated ~~partially~~income ~~offset~~taxes, bywhile ~~increased~~2004 ~~gas~~also ~~prices.~~includes ~~Residential~~interest ~~and~~income ~~commercial~~on ~~electric~~our ~~sales~~Tilton ~~revenues~~capital ~~decreased~~lease ~~because~~ of ~~lower~~$8 ~~usage due to cooler than normal summer weather~~million. Industrial electric sales revenues decreased due to customers choosing alternative electric suppliers coupled with a downturn in general economic conditions. Gas revenues increased in 2003 due to slightly higher gas prices.

~~Operating~~Interest ~~expenses,~~expense ~~exclusive~~decreased ~~of income taxes discussed below, increased~~ $201 million inperiod ~~2003~~over ~~compared~~period ~~to 2002~~ due ~~primarily~~ to ~~higher~~lower ~~market~~aggregate ~~prices~~outstanding ~~for~~debt natural gas purchases coupled with an increase in general and administrative expenses due to higher insurance related claims expense and an increase in legal reserves as a result of additional activity during the quarter partially offset by operating efficiency gainsbalances. ~~Lower regulatory asset amortization in 2003 resulted from the additional regulatory asset amortization that was recorded late in 2002.~~

~~Other~~We reported total income intax ~~2003~~provisions of $17 million and ~~2002~~$14 ~~includes~~million ~~interest~~for ~~income~~the ~~associated~~three-month ~~with~~periods ~~our~~ended ~~Note~~June ~~Receivable~~30, ~~from~~2004 ~~Affiliate~~and of2003, $respectively. The effective income tax rates approximated 41% and 43%, ~~million.~~respectively, for these periods.

Interest expense period-to-period increased $11 million reflecting higher outstanding debt balances and higher interest rates. Interest expense for the remainder of 2003 will continue to reflect higher costs from our December 2002 and January 2003 issuances of mortgage bonds totaling $550 million, which were issued at a 12% effective interest rate compared to our average 2002 mortgage bond interest rate of 5.81%. 24

WeTable ~~reported~~of ~~total~~Contents ~~income~~ILLINOIS ~~tax~~POWER ~~provision,~~COMPANY ~~included~~MANAGEMENT’S inDISCUSSION ~~income~~AND ~~taxes~~ANALYSIS ~~and~~OF ~~miscellaneous~~FINANCIAL -CONDITION ~~net,~~AND ofRESULTS ~~$22~~OF ~~million~~OPERATIONS ~~and~~For ~~$41 million for~~ the ~~three-month~~Interim ~~periods~~Periods ~~ended~~Ended ~~September~~June 30, ~~2003~~2004 and ~~2002, respectively. The effective tax rates approximated 36% and 42% in~~ 2003 ~~and 2002, respectively. The 2003 effective tax rate was positively affected by the reversal of a contingent liability previously recorded in relation to the open audit periods of 1998 and 1999.~~

24Six-Month ~~ILLINOIS POWER COMPANY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Interim~~ Periods Ended ~~September~~June 30, ~~2003~~2004 and ~~2002~~2003

~~Provided~~The ~~below~~following istable anpresents ~~unaudited~~key ~~tabular presentation of certain~~ operating and financial statistics for the ~~nine~~six-month periods ended ~~September~~June 30, ~~2003~~2004 and ~~2002~~2003, respectively.

	Nine Months Ended September 30,
	Six Months Ended June 30,
	2003		2002
	2004		2003
	($ in millions)
	(in millions)
Electric Sales Revenues -
Residential	$	~~328~~190	$	~~348~~179
Commercial		~~259~~159		~~261~~156
Commercial-distribution (1)		---		---
Commercial-distribution(1)		---		---
Industrial		~~211~~117		~~217~~134
Industrial-distribution (1)		4		4
Industrial-distribution(1)		2		3
Other		2918		2917
Revenues from ultimate consumers		~~831~~486		~~859~~489
Interchange		---		7---
Transmission/Wheeling		2919		3019
Total Electric Revenues	$	~~860~~505	$	~~896~~508
Electric Sales in kWh (Millions) -
Residential		42,~~197~~590		42,~~342~~431
Commercial		32,~~318~~172		32,~~334~~110
Commercial-distribution (1)		3		2
Commercial-distribution(1)		3		2
Industrial		42,~~614~~691		43,~~719~~053
Industrial-distribution (1)		1,789		1,921
Industrial-distribution(1)		1,429		1,148
Other		~~285~~187		~~282~~186
Sales to ultimate consumers		149,~~206~~072		148,~~600~~930
Interchange		71		1
Total Electric Sales		149,~~213~~073		148,~~601~~931
Cooling Degree Days (2) – Actual		971		1,432
Cooling Degree Days (2) - Actual		373		198
Cooling Degree Days (2) – 10 Year Rolling Average		1,214		1,246
Cooling Degree Days (2) - 10 year Rolling Average		374		364

(1) Distribution of customer-owned energy.

⁽²⁾ A Cooling Degree Day ("CDD") represents the number of degrees that the mean temperature for a particular day is above 65 degrees Fahrenheit. The CDDs for a period of time are computed by adding the CDDs for each day during the period.

25 ~~ILLINOIS POWER COMPANY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Interim Periods Ended September 30, 2003 and 2002~~

	Nine Months Ended September 30,
		2003			2002
	($ in millions)
Gas Sales Revenues -
Residential	$	212		$	161
Commercial		78			58
Industrial		31			18
Other		3			2
Revenues from ultimate consumers		324			239
Transportation of customer-owned gas		(2	)		---
Sales to affiliates		8			8
Total Gas Revenues	$	330		$	247
Gas Sales in Therms (Millions) -
Residential		238			214
Commercial		98			90
Industrial		46			41
Sales to ultimate consumers		382			345
Transportation of customer-owned gas		170			180
Total gas sold and transported		552			525
Sales to affiliates		11			20
Total Gas Delivered		563			545
Heating Degree Days (1) – Actual		3,492			3,024
Heating Degree Days (1) – 10 Year Rolling Average		3,018			3,054

Table of Contents

ILLINOIS POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Interim Periods Ended June 30, 2004 and 2003

	Six Months Ended June 30,
	2004			2003
	(in millions)
Gas Sales Revenues -
Residential	$	187		$	186
Commercial		65			67
Industrial		20			23
Other		2			2
Revenues from ultimate consumers		274			278
Transportation of customer-owned gas		(1	)		(2	)
Sales to affiliates		3			5
Total Gas Revenues	$	276		$	281

Gas Sales in Therms (Millions) -
Residential		194			220
Commercial		74			88
Industrial		23			35
Sales to ultimate consumers		291			343
Transportation of customer-owned gas		125			122
Total gas sold and transported		416			465
Sales to affiliates		6			6
Total Gas Delivered		422			471

Heating Degree Days ⁽¹⁾ - Actual		3,096			3,404
Heating Degree Days ⁽¹⁾ - 10 year Rolling Average		3,131			3,018

⁽¹⁾ A Heating Degree Day ("HDD") represents the number of degrees that the mean temperature for a particular day is below 65 degrees Fahrenheit. The HDDs for a period of time are computed by adding the HDDs for each day during the period.

26For ~~ILLINOIS~~the ~~POWER~~six-month ~~COMPANY~~period ~~MANAGEMENT’S~~ended ~~DISCUSSION~~June ~~AND~~30, ~~ANALYSIS~~2004, OFwe ~~FINANCIAL~~reported ~~CONDITION~~net ~~AND~~income ~~RESULTS~~of OF$61 ~~OPERATIONS~~million, ~~For~~compared ~~the~~with ~~Interim~~net ~~Periods~~income ~~Ended~~of ~~September~~$50 ~~30,~~million ~~2003~~for ~~and~~the ~~2002~~same period in 2003.

~~Nine-Month~~Operating ~~Periods~~revenues ~~Ended~~in ~~September~~2004 30decreased $8 million period over period. Electric revenues decreased, primarily due to lower industrial usage due to customers switching to alternative suppliers, partially offset by higher residential usage due to warmer summer weather as compared to 2003. Gas revenues were negatively impacted by slightly warmer winter weather and ~~2002~~lower industrial sales.

~~For~~Operating ~~the~~expenses, ~~nine~~exclusive ~~months~~of ~~ended~~income ~~September~~taxes 30discussed below, decreased $6 million in 2004 compared to 2003,. weElectric ~~reported~~power ~~net~~purchases ~~income~~decreased due to lower average cost of ~~$90~~power. Gas ~~million,~~costs ~~compared~~remained ~~with~~flat, ~~net~~resulting ~~income~~from ofless ~~$138~~gas ~~million~~purchased ~~for~~in the ~~same~~2004 period inoffset ~~2002~~by a higher average price of gas. Other operating expenses, which increased in 2004, were primarily impacted by higher employee benefits and costs associated with claims and litigation reserves.

~~Operating~~Other ~~revenues~~income in ~~2003~~2004 ~~increased~~and ~~$47~~2003 ~~million~~included ~~primarily~~interest ~~due~~income toassociated ~~higher gas prices coupled~~ with ~~colder~~our ~~than~~Note ~~normal winter~~Receivable ~~weather~~from ~~which~~Affiliate ~~caused increased residential~~ and ~~commercial~~allocated ~~demand~~income ~~for gas~~taxes, ~~partially~~while ~~offset~~2004 byalso ~~cooler~~includes ~~than~~interest ~~normal~~income ~~spring~~on ~~and~~our ~~summer~~Tilton ~~weather~~capital ~~which~~lease ~~decreased residential and commercial electric demand. In addition, 2003 revenues attributable to the sale~~ of ~~electricity~~$8 ~~to residential customers were negatively impacted by a five percent rate reduction effective May 1, 2002~~million. In 2002, revenues from the sale of electricity were positively affected by the reversal of a contingent liability related to the resolution of a billing dispute with a large wholesale electric customer.

~~Operating~~Interest ~~expenses,~~expense ~~excluding~~decreased ~~income taxes, increased~~ $855 million inperiod ~~2003~~over ~~compared~~period ~~to 2002 primarily~~ due to higher market prices for natural gas purchases, an increase in the average price of power purchased, higher insurance related claims expense and an increase in legal reserves as a result of additional activity. These are partially offset by lower ~~regulatory~~aggregate ~~asset~~outstanding ~~amortization~~debt ~~resulting from the additional regulatory asset amortization recorded in December 2002 and operating efficiency gains~~balances.

~~Other~~We reported total income intax ~~2003~~provisions of $42 million and ~~2002~~$38 ~~included~~million ~~interest~~for the six-month periods ended June 30, 2004 and 2003, respectively. The effective income ~~associated~~tax ~~with~~rates ~~our~~approximated ~~Note~~41% ~~Receivable~~and ~~from~~42%, ~~Affiliate~~respectively, offor ~~$128~~these ~~million~~periods.

Interest expense period-to-period increased $39 million reflecting higher outstanding debt balances and higher interest rates. Interest expense for the remainder of 2003 will continue to reflect higher costs from our December 2002 and January 2003 issuances of mortgage bonds totaling $550 million, which were issued at a 12% effective interest rate compared to our average 2002 mortgage bond interest rate of 5.81%. 26

InTable ~~the~~of ~~first~~Contents ~~quarter~~ILLINOIS ~~2003,~~POWER weCOMPANY ~~adopted~~MANAGEMENT’S ~~SFAS~~DISCUSSION ~~No.~~AND ~~143,~~ANALYSIS ~~resulting~~OF inFINANCIAL aCONDITION ~~charge~~AND ofRESULTS ~~approximately~~OF $2OPERATIONS ~~million,~~For ~~net~~the ofInterim ~~tax.~~Periods Ended June 30, 2004 and 2003

We reported an income tax provision, included in income taxes and miscellaneous – net, of $58 million, which includes the tax benefits from the adoption of SFAS No. 143, and $97 million for the nine-month periods ended September 30, 2003 and 2002, respectively. The effective tax rates approximated 39% and 41% in 2003 and 2002, respectively.

Operating Cash Flow

Cash flow from operating activities totaled $~~140~~177 million for the ~~nine~~six-month period ended ~~September~~June 30, ~~2003~~2004, compared to $~~219~~74 million reported in the ~~2002~~2003 period. Changes in operating cash flow reflect the operating results previously discussed herein~~. Additional~~ ~~factors decreasing cash flow were higher priced gas inventories~~ and ~~higher prepayments due to increased collateral requirements on natural gas purchases. Accounts payable negatively impacted cash flow due to~~ the ~~decrease~~following insignificant ~~natural gas payables caused by increased prepayments of natural gas purchases~~factors. For the ~~nine~~six-month period ended ~~September~~June ~~2003~~30, 2004, we ~~have~~recognized ~~classified~~ $8528 million, ormore ~~six months,~~ of ~~prepaid~~operating ~~interest under our Note Receivable from Affiliate as~~ cash ~~flows~~flow from ~~financing activities on our condensed consolidated statement of cash flows due to our lack of access to~~ the ~~capital~~prepaid ~~markets. As the~~ interest ~~is earned, it will be reclassified as cash flows from operating activities in the condensed consolidated cash flow statement. For additional discussion~~ on ~~this~~our ~~prepaid interest, please read~~ Note 3,Receivable ~~“Related~~from ~~Parties”~~Affiliate ~~beginning~~compared on page 10 and “Managements Discussion and Analysis of Financial Condition and Results of Operations–Credit Capacity, Liquidity and Debt Maturities– Sources of Liquidity,” beginning on page 18.OutlookOur future results of operations may be affected, either positively or negatively, by regulatory actions (with respect to ~~rates or otherwise), general economic conditions, weather, overall economic growth,~~ the ~~demand~~prior ~~for~~year ~~power and natural gas in our service area, utilization of competitive alternate service providers by our customers and financing costs~~period. ~~Our~~Cash ~~results~~flow offrom operations ~~will~~ also bebenefited ~~impacted~~ by the ~~agreed~~reduction ~~sale~~in ofgas ~~substantially~~inventories ~~all~~as ofa ~~our~~result ~~assets~~of ~~and~~gas ~~liabilities,~~withdrawals ~~excluding,~~during ~~among other things,~~ the ~~Note~~winter ~~Receivable~~heating ~~from~~season ~~Affiliate~~ and ~~deferred taxes from~~ the ~~previous~~recovery ~~transfer~~ of ~~our~~prepayments ~~fossil~~related ~~generating assets~~ to ~~DMG,~~our tonatural ~~Exelon,~~gas ~~with~~purchase ~~respect to which we entered into an agreement on October 31, 2003~~contracts. ~~Please read Note 2, "Agreed Sale to Exelon" above for additional information.~~

~~27 ILLINOIS POWER COMPANY MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Interim Periods Ended September 30, 2003 and 2002~~Outlook

Future results of operations for us may be affected, either positively or negatively, by regulatory actions (with respect to rates or otherwise), general economic conditions, weather and customers choosing to utilize competitive alternate electric service providers. We expect 2004 operating income to be similar to actual results for 2003. Cash flow from operations is expected to be higher in 2004 than in 2003 as a result of the delayed recovery from our customers of costs we incurred in 2003 relating to gas inventories and higher prepaid deposits associated with gas purchases. Future results of operations will be significantly impacted by the outcome of the pending sale transaction with Ameren and by the decision of the ICC regarding the gas rate case which was filed in June 2004. Please read Note 2 - Agreed Sale to Ameren for further discussion of the pending sale transaction and Note 7- Regulatory Issues for more information concerning the gas rate case. Our ability to meet our capacity and energy needs beyond 2004 is partially addressed in connection with the pending sale to Ameren. We have also commenced a bidding process to replace the capacity and energy currently supplied under the AmerGen PPA. Please read Item 1 - Business - Power Supply beginning on page 3 of our Form 10-K and Note 3 - Related Parties for further discussion.

Uncertainty of Forward-Looking Statements and Information This quarterly report includes statements reflecting assumptions, expectations, projections, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this quarterly report, other than statements of historical fact, that address activities, events or developments that we or our management expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. Important factors that could cause a material difference in the actual results from the forward-looking statements are set forth elsewhere in this quarterly report. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "may," "should," "expect," "will" and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:

Ø projected operating or financial results; Ø our ability to consummate the agreed sale transaction with Exelon; Ø expectations regarding capital expenditures, preferred dividends and other matters; Ø beliefs about the financial impact of deregulation; Ø assumptions regarding the outcomes of legal and administrative proceedings; Ø projections as to the carrying value of our Note Receivable from Affiliate; Ø estimations relating to the potential impact of new accounting standards; Ø intentions with respect to future energy supplies; Ø our ability to obtain required funding from Dynegy in the short-term and to consummate one or more liquidity initiatives in the long-term; and Ø anticipated costs associated with legal and regulatory compliance.

Ø	the consummation of the agreed sale transaction with Ameren;

Ø	expectations regarding capital expenditures, preferred dividends and other matters;

Ø	beliefs about the financial impact of deregulation;

Ø	assumptions regarding the outcomes of legal and administrative proceedings;

Ø	projections as to the carrying value of our Note Receivable from Affiliate;

Ø	estimations relating to the potential impact of new accounting standards;

Ø	our ability to obtain required funding from Dynegy in the short-term and to consummate one or more liquidity initiatives in the long-term;

Ø	intentions with respect to future energy supplies; and

Ø	anticipated costs associated with legal and regulatory compliance.


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ILLINOIS POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Interim Periods Ended June 30, 2004 and 2003

Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties, including the following:

Ø the ~~effects~~outcome of the agreed sale transaction with ~~Exelon~~Ameren; Ø our substantial indebtedness and our ability to generate sufficient cash flows either from our operations or other liquidity initiatives, or to obtain required funding from Dynegy, to service principal and interest on such indebtedness; Ø the timing and extent of changes in commodity prices for natural gas and electricity; Ø the effects of deregulation in Illinois and nationally and the rules and regulations adopted in connection therewith; Ø competition from alternate retail electric providers; Ø general economic and capital market conditions, including overall economic growth, demand for power and natural gas, and interest rates; Ø our ability to execute one or more long-term liquidity initiatives, including a new revolving credit facility or additional debt issuances; Ø the effects of our relationship with Dynegy Inc., our indirect parent company, including the ultimate impact of the legal and administrative proceedings to which it is currently subject; Ø Dynegy’s financial condition, including its ability to continue to support payment to us of principal and interest on our $2.3 billion intercompany note receivable from Illinova; Ø the cost of borrowing, access to capital and other factors affecting our financing activities; Ø operational factors affecting the ongoing commercial operations of our transmission, transportation and distribution facilities, including catastrophic weather-related damage, unscheduled repairs or workforce issues; Ø the cost and other effects of legal and administrative proceedings, settlements, investigations, or claims, including environmental liabilities that may not be covered by indemnity or insurance; and Ø other regulatory or legislative developments that affect the energy industry in general and our operations in particular.

28Ø ~~ILLINOIS~~our ~~POWER~~substantial ~~COMPANY~~indebtedness ~~MANAGEMENT’S~~and ~~DISCUSSION~~our ~~AND~~ability ~~ANALYSIS~~to OFgenerate ~~FINANCIAL~~sufficient ~~CONDITION~~cash ~~AND~~flows ~~RESULTS~~either OFfrom ~~OPERATIONS~~our ~~For~~operations ~~the~~or ~~Interim~~other ~~Periods~~liquidity ~~Ended~~initiatives ~~September~~to ~~30,~~service ~~2003~~principal and ~~2002~~interest on such indebtedness;

Ø	the timing and extent of changes in commodity prices for natural gas and electricity;

Ø	the effects of deregulation in Illinois and nationally and the rules and regulations adopted in connection therewith;

Ø	competition from alternate retail electric providers;

Ø	general economic and capital market conditions, including overall economic growth, demand for power and natural gas, and interest rates;

Ø	the effects of our relationship with Dynegy, our indirect parent company, including the ultimate impact of the legal and administrative proceedings to which it is currently subject;

Ø	Dynegy’s financial condition, including its ability to continue to support payment to us of principal and interest on our $2.3 billion intercompany note receivable from Illinova;

Ø	the cost of borrowing, access to capital markets and other factors affecting our financing activities;

Ø	operational factors affecting the ongoing commercial operations of our transmission, transportation and distribution facilities, including catastrophic weather-related damage, unscheduled repairs or workforce issues;

Ø	the cost and other effects of legal and administrative proceedings, settlements, investigations or claims, including environmental liabilities that may not be covered by indemnity or insurance; and

Ø	other regulatory or legislative developments that affect the energy industry in general and our operations in particular, including ICC approval of our gas rate case filed in June 2004.

In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements. Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements.

All of the forward-looking statements contained in this quarterly report are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date of this quarterly report except as otherwise required by applicable law.

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ILLINOIS POWER COMPANY

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Commodity Supply Risk Our operating results may be impacted by commodity price fluctuations for electricity used in supplying service to our customers. We have contracted with AmerGen and DMG to supply power via PPAs that expire at the end of 2004. Should power acquired under these agreements be insufficient to meet our load requirements, we will have to buy power at current market prices. The PPA with DMG obligates DMG to provide power up to the reservation amount, and at the same prices, even if DMG has individual units unavailable at various times. The PPA with AmerGen does not obligate AmerGen to acquire replacement power for us in the event of a curtailment or shutdown at the Clinton Power Station. Under a Clinton shutdown scenario, to the extent we exceed our capacity reservation with DMG, we will have to buy power at current market prices. Such purchases would expose us to commodity price risk. As discussed in ~~“Regulation”~~our ~~included in the~~ Form 10-K, P.A. 90-561 was amended to extend the retail electric rate freeze for two additional years, through 2006. We are attempting to establish PPAs to cover this period, including discussions to modify or extend our existing PPAs, which modifications or extensions would likely require regulatory approval. Under an agreement conditioned upon the closing of the proposed transaction with Exelon, DMG has contracted to sell 3,100 MW of generating capacity and 2,900 MW of generating capacity and energy to an Exelon subsidiary, which in turn would contract to sell power to New IP Company, for six years beginning in January 2005. It is anticipated that this agreement will be in place concurrently with the termination of our power purchase agreement with DMG, which expires in December 2004, and the closing of the sale to Exelon. Our failure to consummate the sale to Exelon and satisfy the condition to the effectiveness of this agreement or to otherwise extend or renegotiate our current PPAs with DMG and AmerGen could negatively impact our results of operations. We cannot make any assurances that we will be able to successfully consummate our proposed sale to Exelon or to extend or renegotiate our PPAs with DMG and AmerGen on substantially similar terms or at all.

~~Please~~Our ~~read~~ability ~~Note~~to 2,meet ~~“Agreed~~our ~~Sale~~power toand ~~Exelon”~~energy needs beyond 2004 is provided for ain ~~discussion~~the ofproposed ~~our~~sale ~~recent~~transaction ~~agreement~~with toAmeren. ~~sell~~In ~~substantially~~the ~~all~~event ofthat ~~our~~the ~~assets~~pending ~~and~~sale ~~liabilities~~transaction does not close before the end of 2004, ~~excluding~~we will enter into an interim power purchase agreement with DPM. The interim PPA, ~~among~~which ~~other~~was ~~things~~approved by the FERC in July 2004, will take effect only if the ~~Note~~pending ~~Receivable~~sale ~~from~~does ~~Affiliate~~not close before year end and ~~deferred~~will ~~taxes~~remain ~~from~~in effect only until the ~~previous~~earlier ~~transfer~~of the closing of ~~our~~the ~~fossil~~pending ~~generating~~sale ~~assets~~or toDecember ~~DMG~~31, to2006, ~~Exelon~~which ~~for~~latter $2date coincides with the expiration of the retail electric freeze in the State of Illinois.~~225~~ ~~billion~~The interim PPA will provide for capacity and ~~DMG’s~~energy to serve our customers through 2006 if the sale is not completed and contains terms and conditions, including pricing terms, substantially similar to those contained in the agreement with Ameren described in Note 2 - Agreed Sale to ~~sell~~Ameren 3above. Additionally,~~100~~ MWwe are in the process of ~~generating~~acquiring additional contracted capacity and ~~2,900~~associated MWenergy for 2005 and 2006. The specific terms and conditions under which these resources will be acquired are not currently known. If we are unable to sufficiently contract for all of ~~generating~~our ~~capacity~~power and energy needs, we would be required to ansatisfy ~~Exelon~~our ~~subsidiary~~needs through open market purchases.

Price Risk The ICC determines ~~our~~rates ~~delivery~~that ~~rates~~we may charge for retail gas service. ~~These~~As with the rates ~~have~~that ~~been~~we are allowed to charge for retail electric service, these rates are designed to recover ~~the~~our cost of service and to allow our shareholders the opportunity to earn a reasonable rate of return. ~~The~~Our ~~gas~~rate ~~commodity~~schedules iscontain aprovisions ~~pass~~for passing through ~~cost~~ to our customers any increases or decreases in the ~~end-use~~cost ~~customer~~of ~~and~~natural isgas, subject to an annual prudency review by the ICC. ~~prudence~~Rates ~~review~~for gas distribution services are set by the ICC in rate proceedings and are based on the underlying costs. Future natural gas sales will continue to be affected by an increasingly competitive marketplace, changes in the regulatory environment, transmission access, weather conditions, gas cost recoveries, customer conservation efforts and the overall economy. Price risk associated with our gas operations is mitigated through contractual terms applicable to the business, as allowed by the ICC. We apply prudent risk-management practices in order to minimize these market risks. ~~Such~~However, such risk- management practices may not fully mitigate these exposures.

~~Our~~In ~~market~~June ~~risk~~2004, iswe ~~considered~~filed aswith athe ~~component~~ICC ofseeking ~~the~~authority ~~entity-wide~~to ~~risk-management~~raise ~~policies~~our ofnatural ~~our~~gas ~~parent~~delivery ~~company~~rates by approximately $40 million annually, ~~Dynegy~~or about $5.85 ~~Dynegy~~per ~~measures~~month ~~entity-wide~~for ~~market~~the ~~risk~~average inresidential ~~its~~gas ~~risk-management~~customer. ~~portfolios~~The ~~using~~requested ~~Value~~increase atwill ~~Risk~~allow us to recover investments in our natural gas delivery system. ~~Additional~~The ~~measures~~requested ~~are~~increase ~~used~~applies only to ~~determine~~base rates and does not affect the ~~treatment~~cost of ~~risks~~gas ~~outside~~itself, which typically accounts for approximately two-thirds of customers’ total gas bills and is recovered via the ~~Value~~PGA atprocess. ~~Risk~~As ~~methodologies~~part of the regulatory process, ~~such~~which ascan ~~market~~be ~~volatility~~expected to take up to eleven months, ~~liquidity~~the ICC will decide the amount of increase, ~~event~~if ~~and~~any, ~~correlation~~to ~~risk~~provide recovery of costs from our customers. Upon approval, the new rates will go into effect in spring 2005, after the expected close of the sale of IP to Ameren.

Interest Rate Risk We are exposed to fluctuating interest rates related to variable rate financial obligations. As of June 30, 2004, approximately 19% of our total debt instruments were variable rate instruments. Based upon sensitivity analysis of the variable rate financial obligations in our debt portfolio as of June 30, 2004, it is estimated that a one percentage point interest rate increase or decrease in the average market interest rates during the twelve month period ending June 30, 2005 would result in a change of approximately $3 million in interest expense.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures Effective as of the end of the ~~period~~second ~~covered~~quarter ~~by this report~~2004, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in ~~Rule~~Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, ~~the~~our ~~Chief~~CEO ~~Executive Officer~~ and ~~Chief~~CFO ~~Financial Officer~~ concluded that ~~the~~our ~~design and operation of these~~ disclosure controls and procedures ~~were~~are effective. Noat ~~significant~~the ~~changes~~reasonable ~~were~~assurance ~~made~~level toand ~~our~~designed ~~internal~~to ~~controls~~ensure orthat inthe ~~other~~information ~~factors~~required ~~that~~to ~~could~~be ~~significantly~~disclosed ~~affect~~in ~~these~~our ~~controls~~SEC ~~subsequent~~reports tois ~~the~~recorded, ~~date~~processed, ofsummarized ~~this~~and ~~evaluation.~~reported within the

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ILLINOIS POWER COMPANY

requisite time periods. While our disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well it may be designed or administered.

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


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ILLINOIS POWER COMPANY

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Please read Note 4, "- Commitments and Contingencies –- Legal and Environmental Matters," for a description of our material legal proceedings.

Item 6 - Exhibits and Reports on Form 8-K

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

10†31.1 ~~Purchase~~ ~~Agreement~~Certification ~~dated~~Pursuant ~~October~~to ~~31,~~13a-14(a) ~~2003 among Exelon Energy Delivery Company, LLC, New IP Company, Illinois Power Company, IP Gas Supply Company~~ and ~~Dynegy Inc.~~ 15d-14(~~incorporated~~a), byAs ~~reference~~Adopted Pursuant to ~~Exhibit~~Section ~~2.1~~302 toof the ~~Current Report on Form 8~~Sarbanes-KOxley Act of ~~Dynegy Inc~~2002. ~~filed on November 4, 2003, File No. 1-15659).~~

†31.1 2 Certification Pursuant to 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification Pursuant to 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*32.1

Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*32.2

Certification Pursuant to 18 United States Code Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

~~(b) Reports~~* onPursuant ~~Form~~to 8Securities and Exchange Commission Release No. 33-K8238, this certification will be treated as "accompanying" this report and not "filed" ~~during~~as part of such report for purposes of Section 18 of the ~~third~~Securities ~~quarter~~Exchange Act of ~~2003:~~1934, as amended, or the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

~~Current~~(b) ~~report~~Reports on Form 8-K ~~dated~~filed ~~July~~during 9,the ~~2003.~~second ~~Item~~quarter 5of ~~was reported and no financial statements were filed.~~2004:

We filed a Current ~~report~~Report on Form 8-K ~~dated~~on ~~August~~April 122, ~~2003~~2004. Items 5 and 7 were reported and no financial statements were filed.

Current report on Form 8-K dated August 29, 2003. Item 5 was reported and no financial statements were filed.


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ILLINOIS POWER COMPANY

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.

	Illinois Power Company
Date: November 14, 2003	By:	/s/ Peggy E. Carter
Date: August 11, 2004	By:	/s/ Peggy E. Carter
		Peggy E. Carter, Managing Director, Controller
		Peggy E. Carter, Managing Director, Controller (Duly Authorized Officer and Principal Accounting Officer)
		(Duly Authorized Officer and Principal Accounting Officer)


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