This Report on Form 10-K includes "forward-looking statements" including, in particular, the statements about our plans, strategies and prospects under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements express an expectation or belief and contain a projection, plan or assumption with regard to, among other things, future revenues, income, or capital structure. Such statements of future events or performance are not guarantees of future performance and involve estimates, assumptions and uncertainties. The words "could," "may," "predict," "anticipate," "would," "believe," "estimate," "expect," "forecast," "project," "objective," and similar expressions are intended to identify forward-looking statements.

Some important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to; our ownership by AES, our credit ratings, fluctuations in customer growth and demand, weather and weather-related damage, fuel costs, generating unit availability and capacity, purchased power costs and availability, regulatory action, environmental matters, federal and state legislation, interest rates, availability and cost of capital, labor strikes, maintenance and capital expenditures, local economic conditions, the ultimate disposition of litigation and the specific needs of plants to perform unanticipated facility maintenance or repairs or outages. The timing of deregulation and competition, product development and technology changes are also important potential factors that may cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Most of these factors affect us through our consolidated subsidiary, Indianapolis Power & Light Company.

IPALCO Enterprises, Inc. (IPALCO) is a holding company incorporated under the laws of the State of Indiana on September 14, 1983. Our principal subsidiary is Indianapolis Power & Light Company (IPL), an electric utility with its customer base concentrated in Indianapolis, Indiana. Mid-America Capital Resources, Inc. (Mid-America) is the holding company for our unregulated activities. During 2000 and 2001, Mid America sold its steam and district cooling assets and, as a result, it is currently not conducting any business. As of December 31, 2002, Mid America owned a 6.6% interest in a venture capital fund valued at approximately $4.2 million. IPALCO is owned by The AES Corporation ("AES"), which acquired IPALCO in an approximately $2.15 billion stock-for-stock pooling transaction in March 2001. Our total electric revenues for the fiscal year ended December 31, 2002 were $818.0 million and our total assets as of December 31, 2002, were $2.0 billion.

Our principal executive offices are located at One Monument Circle, Indianapolis, Indiana 46204, and our telephone number is (317) 261-8261. Our internet website address is www.IPALCO.com.

IPALCO owns all of the outstanding common stock of IPL. IPL was incorporated under the laws of the State of Indiana in 1926. IPL is engaged primarily in generating, transmitting, distributing and selling electric energy to approximately 450,000 customers in the city of Indianapolis and neighboring areas within the state of Indiana; the most distant point being about 40 miles from Indianapolis. IPL has an exclusive right to provide retail electric service to those customers. IPL owns and operates two primarily coal-fired generating plants, one combination coal and gas-fired plant and a separately-sited combustion turbine facility that are used for electric generation. IPL's net electric generation capability for winter is 3,342 megawatts and net summer capability is 3,224 megawatts. There have been no significant changes in the services rendered by IPL, or in their markets or methods of distribution, during 2002.

The electric utility business is affected by seasonal weather patterns throughout the year and, therefore, the operating revenues and associated operating expenses are not generated evenly by month during the year. IPL's business is not dependent on any single customer or group of customers. IPL's electricity sales for 1998 through 2002 are set forth in the table of statistical information included at the end of this section.

IPL's generation, transmission and distribution facilities are described under "Item 2. Properties." IPL's electric system is directly interconnected with the electric systems of Indiana Michigan Power Company, PSI Energy, Inc., Southern Indiana Gas and Electric Company, Wabash Valley Power Association, Hoosier Energy Rural Electric Cooperative, Inc., the Indiana Municipal Power Agency, West Fork Land Development Company, LLC, and DTE Georgetown, LLC.

IPL is also a member of the East Central Area Reliability Group, or ECAR, and is cooperating under an agreement that provides for coordinated planning of generation and transmission facilities and the operation of such facilities to promote reliability of bulk power supply in the nine-state region served by ECAR. Smaller electric utility systems, independent power producers and power marketers participate as associate members. See "Regulatory Matters- Wholesale Energy Market" in Item 7 of the report for a discussion of our participation in the Midwest Independent Transmission System Operator, Inc. (MISO), a registered transmission organization.

IPL is subject to regulation by the Indiana Utility Regulatory Commission, or IURC, as to its services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, rates and charges, the issuance of securities (other than evidences of indebtedness payable less than twelve months after the date of issue), the acquisition and sale of public utility properties or securities and certain other matters.

In addition, IPL is subject to the jurisdiction of the Federal Energy Regulatory Commission, or FERC, with respect to short-term borrowing not regulated by the IURC, the sale of electricity at wholesale and the transmission of electric energy in interstate commerce, the classification of its accounts, and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act.

IPL is also affected by the regulatory jurisdiction of the U.S. Environmental Protection Agency, at the federal level and the Indiana Department of Environmental Management, at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the U.S. Department of Labor and the Indiana Occupational Safety and Health Administration. As a regulated entity, IPL is required to use certain accounting methods prescribed by regulatory bodies which may differ from those accounting methods required to be used by nonregulated entities.

Please see "Regulatory Matters" under "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more comprehensive discussion of regulatory matters impacting IPL and IPALCO.

IPL's tariffs for electric service to retail customers (basic rates and charges) are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the staff of the IURC, the Office of the Indiana Utility Consumer Counselor, as well as other interested consumer groups and customers. In Indiana, basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all utilities at least once every four years. Other numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual maintenance and capital expenditures, fuel costs, generating unit availability and purchased power costs and availability can affect the return realized. During 1998, in an order resulting from an IPL initiated proceeding, the IURC declined to exercise its jurisdiction in part over IPL customers who voluntarily select service under IPL's Elect Plan options. Under two of these options, the customer's prices are not adjusted for changes in fuel costs or other factors. The Elect Plan was extended by an IURC order through December 31, 2006 (See "Regulatory Matters" under Item 7 of this report.) Substantially all other IPL customers are served pursuant to retail tariffs that provide for the monthly billing or crediting to customers of increases or decreases, respectively, in the actual costs of fuel consumed from estimated fuel costs embedded in base tariffs, subject to certain restrictions on the level of operating income. Additionally, most such retail tariffs provide for billing of current costs resulting from IPL's IURC-approved demand side management programs. IPL maintains its books and records consistent with accounting principles generally accepted reflecting the impact of regulation. See Note 3 to the Consolidated Financial Statements.

Future events, including the advent of retail competition within IPL's service territory, could result in the deregulation of part of IPL's existing regulated businesses. Upon deregulation, adjustments to IPL's accounting records may be required to eliminate the historical impact of regulatory accounting. Such adjustments, as required by Statement of Financial Accounting Standards (SFAS) No. 101, "Regulated Enterprises-Accounting for the Discontinuation of Application of SFAS No. 71," could eliminate the "effects of any actions of regulators that have been recognized as assets and liabilities. . .." Required adjustments could include the expensing of any unamortized net regulatory assets, the elimination of certain tax liabilities, and a write down of any impaired utility plant balances. We expect IPL to meet the criteria for the application of SFAS No. 71 for the foreseeable future.

In 2002, approximately 99% of the total kWh produced by IPL was generated from coal. Natural gas and No. 2 fuel oil combined to provide the remaining kWh generation. Natural gas is used in IPL's newer combustion turbines. Fuel oil is used for start up and flame stabilization in coal-fired generating units, as primary fuel in oil-fired steam turbine generating units and three older combustion turbines, and as an alternate fuel in two newer combustion turbines.

IPL's long-term coal contracts provide for approximately 70% of its requirements through the year 2005 and approximately 60% through 2009. The long- term coal agreements are with four suppliers. All of our coal is currently mined in the state of Indiana. Approximately 50% of our coal is from one supplier. IPL has entered into three contracts with this supplier for the provision of coal from three separate mines. It is presently believed that all coal used by IPL will be mined by others. IPL normally carries fuel oil and a 30-60 day system supply of coal to offset unforeseen occurrences such as equipment breakdowns and transportation or mine delays.

The following table of statistical information presents additional data on our electric operations:

                                                Year Ended December 31,
                                   -------------------------------------------------
                                     2002      2001      2000      1999      1998
                                   --------- --------- --------- --------- ---------
Operating Revenues (In Thousands):
Residential                        $292,855  $289,779  $285,000  $282,254  $269,351
Small industrial and commercial     130,642   127,863   130,482   127,027   122,082
Large industrial and commercial     335,436   334,387   337,725   328,903   321,103
Public lighting                      10,926    10,415    10,249    10,386     9,754
Miscellaneous                        10,389    10,091    11,153    10,600    12,469
                                   --------- --------- --------- --------- ---------
   Revenues - ultimate consumers    780,248   772,535   774,609   759,170   734,759
Wholesale - REMC                      1,402     1,367     1,222     1,035       936
Wholesale - other                    36,317    54,144    55,124    40,132    50,140
                                   --------- --------- --------- --------- ---------
   Total electric revenues         $817,967  $828,046  $830,955  $800,337  $785,835
                                   ========= ========= ========= ========= =========
Kilowatt hour Sales (In Millions):
Residential                           4,939     4,717     4,614     4,510     4,359
Small industrial and commercial       2,018     1,955     1,990     1,928     1,888
Large industrial and commercial       7,417     7,337     7,432     7,187     7,138
Public lighting                          72        72        71        73        71
                                   --------- --------- --------- --------- ---------
   Sales - ultimate consumers        14,446    14,081    14,107    13,698    13,456
Wholesale - REMC                         47        46        42        33        31
Wholesale - other                     1,691     2,129     2,272     1,968     2,252
                                   --------- --------- --------- --------- ---------
   Total kilowatt hours sold         16,184    16,256    16,421    15,699    15,739
                                   ========= ========= ========= ========= =========
Customers at End of Period:
Residential                         400,130   394,793   391,086   385,799   379,943
Small industrial and commercial      44,428    43,767    43,078    42,610    42,230
Large industrial and commercial       4,337     4,283     4,195     4,107     4,036
Public lighting                         655       622       574       509       445
                                   --------- --------- --------- --------- ---------
   Total ultimate consumers         449,550   443,465   438,933   433,025   426,654
Wholesale - REMC                          1         1         1         1         1
                                   --------- --------- --------- --------- ---------
   Total electric customers         449,551   443,466  $438,934   433,026   426,655
                                   ========= ========= ========= ========= =========

We are subject to various federal, state and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of hazardous materials; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. A violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We believe that we operate in material compliance with environmental laws, regulations and permits and health and safety laws. We cannot assure, however, that we have been or will be at all times in compliance with such laws, regulations and permits.

Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at our or our predecessors' past or present facilities and at third party waste disposal sites. We could also be held liable for any and all consequences arising out of human exposure to such contamination or other hazardous substances or for other environmental damage. We cannot assure you that our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances will not adversely affect our business, results of operations or financial condition.

In late 1990, Congress passed the Clean Air Act Amendments of 1990, which affect both new and existing facilities. The Clean Air Act and many state laws require significant reductions in sulfur dioxide, particulate matter, and nitrogen oxide (NO_x) emissions that result from burning fossil fuels. The following is a discussion of specific areas that affect our business, primarily under or related to the Clean Air Act.

On October 27, 1998, U.S. Environmental Protection Agency, or the EPA, issued a final rule, referred to as the NO_x SIP call, calling for Indiana, along with 21 other states in the eastern third of the United States and the District of Columbia, to impose more stringent limits on nitrogen oxides (NO_x) emissions from fossil fuel-fired steam electric generators, including those operated by IPL. IPL lodged a challenge to the NO_x SIP call, which was rejected by the Court of Appeals for the District of Columbia Circuit in 2002.

The EPA's NO_x SIP call requires operators of coal-fired electric utility boilers in the affected states and the District of Columbia to limit NO_x emissions to 0.15 pounds per million BTUs of heat input as a system-wide average during the annual ozone season, which extends from the beginning of May through the end of September of each year. That limit calls for a reduction of about 85% from 1990 average emissions from coal-fired electric utility boilers, and a reduction during the ozone season of about 57% from our current emissions. In 2001, the Indiana Air Pollution Control Board adopted rules requiring fossil fuel-fired electric generating units, including IPL's, to adhere to those restrictions defined in the EPA's NO_x SIP call by May 2004.

Our current estimates are that the NO_x SIP call will necessitate additional capital expenditures of approximately $227 million during 2003-2005 to achieve substantially all of the required NO_x emissions reductions, which could be reduced by purchasing some of the required NO_x emission allowances in the market, subject to IURC approval.

On July 16, 1997, the EPA promulgated final rules tightening the National Ambient Air Quality Standards for ozone and creating new fine particulate matter standards. In May 1999, the EPA issued its final guidelines for the revised ground-level ozone and particulate matter, which further delineated the so- called "non-attainment regions" and other non-attainment classifications. In February 2001, the United States Supreme Court upheld the ozone and particulate matter standards, but held that the EPA's policy of implementing the new ozone standard in non-attainment areas was unlawful. If the EPA develops an interpretation of this standard with respect to non-attainment regions that is consistent with the Supreme Court's decision, our plants may be faced with further emission reduction requirements that could necessitate the installation of additional control technology, increased capital expenditures and related operating costs.

In February 1998, eight northeastern states filed petitions seeking the EPA's assistance in reducing ozone in the eastern U.S. under Section 126 of the Clean Air Act. The EPA believes that Section 126 petitions allow a state to claim that sources in another state are contributing to its air quality problem and request the EPA to require the upwind sources to reduce their emissions. In December 1999, the EPA granted four Section 126 petitions relating to NO_x emissions. On May 15, 2001, the U.S. Appeals Court for the District of Columbia Circuit upheld the EPA rule requiring some power plants in the Midwest to reduce nitrogen oxide emissions. This ruling does not currently affect our Indiana fossil fuel-fired plants. However, we cannot assure you that our plants will not be affected by these Section 126 petitions in the future.

The EPA has commenced an investigation of the fossil fuel-fired electric power generation industry to determine compliance with environmental requirements under the Clean Air Act associated with repairs, maintenance, modifications and operational changes made to facilities over the years. The EPA's focus is on whether the changes were subject to new source review or new source performance standards, and whether best available control technology was or should have been installed. The EPA has required us to provide extensive information regarding our maintenance modification and operational activities over the last quarter century. In late 2000, we sent the EPA the last batch of information responding to its request under the Clean Air Act and since then, we have received no further communication from the EPA.

The EPA published the final regional haze rule on July 1, 1999. This rule established planning and emission reduction timelines for states to use to improve visibility in national parks throughout the U.S. On June 22, 2001, the EPA signed a proposed rule to guide states in implementing the 1999 rule and in controlling power plant emissions that cause regional haze problems. The proposed rule set guidelines for states in setting best available retrofit technology, or BART, at older power plants. The ultimate effect of the new regional haze rule could be requirements for (1) newer and cleaner technologies and additional controls on conventional particulates, and (2) reductions in SO₂, NO_x and particulate matter emissions from utility sources. If the proposed rules are finalized and utility emissions reductions are required, the compliance cost could be significant. At this time, we cannot, however, estimate the costs to comply with the final regional haze rule.

The U.S. and other countries have signed the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which, if ratified, would require the U.S. and other countries to make substantial reductions in "greenhouse gas" emissions. While it seems unlikely the Kyoto Protocol will be ratified by the U.S. under the Bush Administration, global warming remains a policy issue that is regularly considered for possible government regulation and if legislation requiring reductions in greenhouse gases is adopted, such legislation could substantially affect both the costs and the operating characteristics of our fossil fuel-fired plants.

In December 2000, the EPA announced it would adopt rules to regulate mercury emission from coal-fired power plants. These regulations are expected to be proposed by December 2003, with final regulations by December 2004 and reductions required by 2010. Once these final regulations are issued, the use of "maximum available control technology," or MACT, i.e. the process that produces the greatest emissions reductions, regardless of economic, chemical and physical constraints, may be required to control these emissions. We cannot predict the outcome or effects of the EPA's determination and any subsequent regulation.

In April 2002, the U.S. EPA issued proposed rules governing existing facilities that have cooling water intake structures. Final rules are anticipated in February 2004. The impact of the final rules cannot be determined at this time.

In summary, environmental laws and regulations presently require substantial capital expenditures and operating costs. Our capital expenditures relating to environmental matters were approximately $9.1 million in 2002, substantially all of which related to the NO_x SIP call. We currently estimate capital expenditures related to the NO_x SIP call of approximately $227 million during 2003-2005, which could be reduced by purchasing some of the required NO_x emission allowances in the market, subject to IURC approval. Other capital expenditures related to environmental matters in the near future are not expected to be material. In addition, environmental laws are complex, change frequently and have tended to become stringent over time. As a result, our operating expenses and continuing capital expenditures may increase. More stringent standards may also limit our operating flexibility. Because other electric power plants will have similar restrictions, we believe that compliance with more stringent environmental laws and regulations is not likely to affect our competitive position. However, depending upon the level of recovery allowed by the IURC, these costs could adversely affect our financial condition, liquidity and results of operations.

In recent years, various forms of proposed industry-restructuring legislation and/or rulemakings have been introduced at the federal level and in several states. Generally, the intent of these initiatives is to encourage an increase in competition within the regulated electric utility industry. While federal rulemaking to date has addressed only the electric wholesale market, various state legislatures are considering or have enacted new laws impacting the retail energy markets within their respective states.

At times, IPL will purchase power on the wholesale markets, and at other times IPL will have electric generation capacity available for sale on the wholesale market in competition with other utilities and power generators. IPL's ability to compete in the wholesale market for the sale of its excess generation is dependent on the price, terms and conditions of the sale.

In 2002, the utility industry, and as a consequence, the wholesale markets, experienced significant change and uncertainty. The industry was faced with the instability of the California electricity markets, the bankruptcy of Enron Corp., historically an influential energy trader, and a generally sluggish economy. Another factor contributing to the uncertainty was the downgrading of utility company credit by the rating agencies, which influences credit issues on the wholesale market, and also limits access to the capital markets. In the Midwest, another factor contributing to the changes in the wholesale market was the increase in the supply of electricity on the wholesale market. IPL saw an almost 15% decrease in the average price per kWh and a 20% decrease in wholesale kWh sales.

As of December 31, 2002, IPL had 1,298 employees of whom 1,267 were full time. Of these employees, 923 were represented by the International Brotherhood of Electrical Workers, AFL-CIO, or IBEW in two bargaining units: a physical unit and a clerical-technical unit. In November 2002, the membership of the IBEW physical unit ratified a labor agreement that remains in effect until December 19, 2005. The agreement provides for a 3.0% general pay increase effective in each of November 2002, December 2003, and December 2004; increased pension benefits and other changes. The membership of the clerical-technical unit has a labor agreement extending through February 23, 2004 which provides for a general pay increase of 2% in February 2003. As of December 31, 2002, neither IPALCO, nor any of its subsidiaries other than IPL had any employees.

Our executive offices are located at One Monument Circle, Indianapolis, Indiana. This facility and the remainder of our material properties in our business and operations are owned directly by IPL. The following is a description of these material properties.

IPL owns two distribution service centers in Indianapolis at 1230 West Morris Street and 3600 North Arlington Avenue. IPL also owns the building in Indianapolis which houses its customer service center located at 2102 North Illinois Street.

IPL owns and operates two primarily coal-fired generating plants, one combination coal and gas-fired plant and a separate combustion turbine facility which are used for electric generation. For electric generation, the net winter capability is 3,342 MW and net summer capability is 3,224 MW. IPL set new summer peak and winter peak load records of 3,003 MW and 2,653 MW in July 2002 and January 2003, respectively.

IPL's sources of electric generation are as follows:

Net electrical generation during 2002, at the Petersburg, Harding Street and Eagle Valley plants and the Georgetown combustion turbine accounted for approximately 69.3%, 22.6%, 8.0% and 0.1%, respectively, of IPL's total net generation.

Included in the above totals are three gas turbine units at the Harding Street plant added in 1973, one gas turbine added in each of 1994, 1995 and 2002 with a combined nameplate rating of 374 MW. Also included is one diesel unit each at Eagle Valley and Harding Street plants and three diesel units at Petersburg station, all added in 1967. Each diesel unit has a nameplate rating of 3 MW.

IPL's transmission system includes 457 circuit miles of 345,000 volt lines, 360 circuit miles of 138,000 volt lines and 269 miles of 34,500 volt lines. Underground distribution and service facilities include 623 miles of conduit and 6,789 wire miles of conductor. Underground street lighting facilities include 94 miles of conduit and 2,053 wire miles of conductor. Also included in the system are 75 bulk power substations and 85 distribution substations.

In addition, IPL owns approximately 4,067 acres of land in Morgan County, Indiana for future plant sites, coal and other minerals underlying 798 acres in Sullivan County, Indiana, and coal underlying approximately 6,215 acres in Pike and Gibson Counties, Indiana. IPL also has an option to purchase 876 acres of land in Switzerland County, Indiana.

All critical facilities owned by IPL are well maintained, in good condition and meet the present needs of IPL.

The mortgage and deed of trust of IPL, together with the supplemental indentures thereto, secure first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage, substantially all property owned by IPL is subject to a $562.7 million direct first mortgage lien. In addition, IPALCO has $750 million principal amount of indebtedness outstanding, which is secured by its pledge of all of the outstanding common stock of IPL.

Please refer to Note 14 of the attached audited financial statements for a summary of significant legal proceedings involving IPALCO and/or IPL. We are also subject to routine litigation, claims and administrative proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations.

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

Not applicable pursuant to General Instruction I of the Form 10-K.

All of the outstanding common stock of IPALCO is owned by AES, and as a result is not listed for trading on any stock exchange.

Dividends. During 2002 and 2001, we paid quarterly dividends to AES totaling $180.5 million and $796.0 million, respectively. In addition to distributions of operating income, the 2002 dividends included income tax refunds of $53.7 million and the 2001 dividends included $663 million of the net proceeds from the issuance of the IPALCO Notes (See Item 7). Also during 2001, we paid $29.0 million of common stock dividends to our shareholders prior to our acquisition by AES. Future distributions will be determined in the discretion of the Board of Directors of IPALCO and will depend primarily on dividends received from IPL and such other factors as the Board of Directors of IPALCO deems relevant. Please refer to the Liquidity and Capital Resources section of Item 7 of this report for a discussion of limitations on dividends from IPL. IPALCO must be in compliance with leverage and interest coverage ratios contained in the Indenture for the IPALCO Notes prior to paying any dividends to AES. We do not believe this requirement will be a limiting factor in paying dividends in the ordinary course of prudent business operations.

The following table presents our selected consolidated financial data, which should be read in conjunction with our audited consolidated financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Other data management believes is important in understanding trends in IPALCO's business is also included in this table.

                                                 Year Ended December 31,
                                   -------------------------------------------------------
                                      2002 (3)   2001 (3)   2000 (3)   1999 (3)   1998 (3)
                                   -------------------------------------------------------
                                                     (IN THOUSANDS)
Operating Data:
Total utility operating revenues     $817,967   $828,046   $858,535   $834,652   $821,256
Termination benefit agreement costs        --    (74,765)        --         --         --
Voluntary early retirement program         --    (23,751)   (62,007)        --         --
Utility operating income              200,586    130,641    136,223    183,501    179,511
Allowance for funds used during con     5,738      1,974      3,034      2,201      2,300
Income before extraordinary loss      124,946     77,947    158,842    128,947    130,119
Extraordinary loss on early retirem        --         --     (4,259)        --         --
Net income                            124,946     77,947    154,583    128,947    130,119

Balance Sheet Data (end of period):
Utility plant - net                 1,688,890  1,665,717  1,647,834  1,750,412  1,748,460
Total assets                        2,020,915  2,012,716  1,983,276  2,315,837  2,118,945
Common shareholder's equity (defici   (92,449)     4,229    730,148    677,746    574,191
Cumulative preferred stock of subsi    59,135     59,135     59,135     59,135     59,135
Long term debt (less current
  maturities and sinking fund
  requirements)                     1,372,006  1,371,930    621,863    870,050    907,974
Other Data:
Utility construction expenditures      94,709    126,517     75,712    103,452     79,458
Nonutility construction expenditure       107         --        438        295        975

(1) Termination benefits represents costs related to the termination of certain employees as a result of our acquisition by AES. The pretax expenses included $59.4 million related to termination benefit agreements and severance, $9.2 million in supplemental retirement costs and $6.2 million in restricted stock expense.
(2) Voluntary Early Retirement Program (VERP) benefit costs for 2000 represented $56.8 million pre-tax non-cash pension and $5.2 million other post-retirement benefit costs. In 2001 we recognized $19.2 million in pre-tax non-cash pension and $4.6 million other post-retirement benefit costs associated with the VERP plans implemented in 2001.
(3) In November 2000, we sold our steam operations to Citizens Gas & Coke Utility using a portion of the net proceeds to retire debt specifically assignable to the assets sold. In connection with the retirement, we incurred make-whole payments and wrote off debt issuance costs of $4.3 million, which was recorded as an extraordinary loss on early retirement of debt.

The following discussion and analysis should be read in conjunction with our audited financial statements and the notes thereto included in Item 8 of this Annual Report on Form 10-K. The following discussion contains forward- looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. Please see "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this document.

IPALCO Enterprises, Inc. (IPALCO) is a holding company incorporated under the laws of the state of Indiana. Our principal subsidiary, Indianapolis Power & Light Company (IPL), is engaged primarily in generating, transmitting, distributing and selling electric energy to approximately 450,000 customers in the city of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, the most distant point being approximately forty miles from Indianapolis. IPL has an exclusive right to provide retail electric service to those customers. Until November 2000, IPL also produced, distributed and sold steam within a limited area in Indianapolis. IPL owns and operates two primarily coal-fired generating plants, one combination coal and gas-fired plant and a separately-sited combustion turbine facility that are used for electric generation. IPL's net electric generation capability for winter is 3,342 megawatts and net summer capability is 3,224 megawatts.

Our other direct subsidiary is Mid-America Capital Resources, Inc. (Mid- America). Mid-America is the holding company for our unregulated activities. As of December 31, 2002, Mid-America owned a 6.6% interest in EnerTech Capital Partners II L.P. (EnerTech), a venture capital fund that invests in service and technology companies providing products and services that take advantage of opportunities created by deregulation of the energy and telecommunications industries. Our regulated business is conducted through IPL. We have historically had two business segments: electric and "all other." Our steam distribution system and our chilled water cooling and distribution assets were in the "all other" segment prior to being sold effective November 20, 2000. The operations of our Cleveland Energy Resources subsidiary (CER) were in the "all other" segment prior to being sold effective May 21, 2001. Since these sales, substantially all of our business consists of the generation, transmission, distribution and sale of electric energy conducted through IPL.

The AES Corporation, a Delaware corporation (AES) acquired IPALCO in a stock-for-stock transaction on March 27, 2001 (the AES Acquisition). At the effective time of the share exchange, each of the outstanding 89,685,177 shares of IPALCO common stock was converted into the right to receive 0.463 shares of AES common stock, for an aggregated purchase price of $2.15 billion and $890 million in assumed debt and preferred stock. Following the share exchange, AES owns all of our outstanding common stock. IPALCO's common stock is pledged under AES' Amended and Restated Credit and Reimbursement Agreement dated as of Dec 12, 2002 as well as AES' Collateral Trust Agreement dated as of Dec 12, 2002. Treasury stock of $500.6 million was cancelled as a result of the acquisition. Accordingly, the common stock balance was reduced by $459.8 million and the remaining $40.8 million was applied against retained earnings.

During the years ended December 31, 2001 and 2000, we expensed $6.3 million and $5.8 million of merger related costs, respectively. Total merger related costs were $12.1 million. As a result of our acquisition by AES, we recorded $74.8 million, or $46.4 million after tax, of costs related to the termination of certain employees. The pretax expenses included $59.4 million in costs associated with termination benefit agreements and severance, $9.2 million in supplemental retirement costs, and $6.2 million in restricted stock expense.

On November 9, 2000, we implemented a Voluntary Early Retirement Program (VERP I). This program offered enhanced retirement benefits upon early retirement to eligible employees. The program was available to all employees, except officers, whose combined age and years of service totaled at least 75 on July 1, 2001. Participation was limited to, and subsequently accepted by, 400 qualified employees. Participants elected actual retirement dates in 2001. Additionally, we currently intend to provide post-retirement medical and life insurance benefits to VERP I retirees until age 55 at which time they will be eligible to receive similar benefits from the independent Voluntary Employee Beneficiary Association (VEBA) trustee. We reserve the right to modify or terminate post-retirement health care and life insurance benefits being provided by IPL. We recognized a $56.8 million pre-tax non-cash pension charge and a $5.2 million charge for other post-retirement benefit costs of the program in December 2000.

On June 1, 2001, we implemented a second Voluntary Early Retirement Program (VERP II) to 225 individuals, offering substantially the same retirement enhancements as described in the prior paragraph. Upon expiration of the revocation period on July 23, 2001, the offer under this program was accepted by 142 individuals, who will take retirement dates between August 1, 2001, and August 1, 2004. We recognized $17.2 million in pre-tax non-cash pension and $2.6 million in other post-retirement benefit costs associated with this program in 2001.

On September 14, 2001, we implemented a third Voluntary Early Retirement Program (VERP III) limited to personnel at our Petersburg Generating Station, offering substantially the same retirement enhancements as described in the prior paragraphs, except that the eligibility was based upon a combined age and years of service of 72 as of December 31, 2001. Upon expiration of the revocation period on October 31, 2001, the offer under this program was accepted by nine employees, who will take retirement dates as agreed upon between IPL and the employees. We recognized $2.0 million in pre-tax non-cash pension costs and $2.0 million in other post-retirement benefit costs associated with this program in 2001.

On December 23, 2002, we executed an agreement with the administrator of the independent Voluntary Employee Beneficiary Association Trust (VEBA Trust) to provide post-retirement medical and life insurance benefits to VERP II and VERP III participants from age 55 until age 62, subject to our right to modify or terminate such benefits in the future. The additional cost is estimated to be $7.5 million to be amortized over 8 years. When those retirees reach age 62, they will be eligible for benefits from the VEBA Trust.

Pension plan assets consist of investments in equity and fixed income securities. Funding for the qualified defined benefit pension plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. Due to the decline in market value of the investment portfolio over the last few years, assets held in trust to satisfy plan obligations have decreased. Additionally, recent decreases in long-term interest rates have the effect of increasing the measured liability for funding purposes. As a result of these events, together with the Voluntary Early Retirement Programs discussed above, future funding obligations could increase substantially.

Total pension program-related cash contributions were $15.2 million and $11.6 million for 2002 and 2001, respectively. In addition, we funded $20 million to the pension plan in January of 2003. We anticipate additional program-related cash contributions for pension benefits of approximately $149 million over the three year period of 2003 thru 2005. These estimates are based on actuarial assumptions using a 6.75% discount rate. This discount rate is based on the four-year weighted average of 30-year treasury rates.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period presented. The significant accounting policies which we believe are most critical to understanding and evaluating our reported financial results include the following: Regulation, Regulatory Assets, Revenues, Authorized Annual Operating Income, Income Taxes Pensions and Contingencies.

Regulation: The retail utility operations of IPL are subject to the jurisdiction of the Indiana Utility Regulatory Commission (IURC). IPL's wholesale power transactions are subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC). These agencies regulate IPL's utility business operations, tariffs, accounting, depreciation allowances, services, security issues and the sale and acquisition of utility properties. The financial statements of IPL are based on accounting principles generally accepted in the United States of America, including the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," which gives recognition to the ratemaking and accounting practices of these agencies.

Regulatory Assets: Regulatory assets represent deferred costs that have been included as allowable costs for ratemaking purposes. IPL has recorded regulatory assets relating to certain costs as authorized by the IURC. Specific regulatory assets are disclosed in Note 6. IPL is amortizing such nontax-related regulatory assets to expense over periods ranging from 1 to 30 years. Tax- related regulatory assets represent the net income tax costs to be considered in future regulatory proceedings generally as the tax-related amounts are paid.

In accordance with regulatory treatment, IPL deferred as a regulatory asset certain post in-service date carrying charges and certain other costs related to its investment in Unit 4 at the Petersburg Plant. As authorized in the 1995 Electric Rate Settlement, IPL, effective September 1, 1995, is amortizing this deferral to expense over a life that generally approximates the useful life of the related facility. Also in accordance with regulatory treatment, IPL defers as regulatory assets non-sinking fund debt and preferred stock redemption premiums and expenses, and amortizes such costs over the life of the original debt or, in the case of preferred stock redemption premiums, over 20 years.

Revenues: Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis through-out the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is estimated. This unbilled revenue is estimated each month based on daily generation volumes, estimated customer usage by class, weather factors, line losses and applicable customer rates based on regression analyses reflecting significant historical trends and experience. Customer accounts receivable include unbilled energy revenues of $32.6 million on a base of annual revenue of $818.0 million.

A fuel adjustment charge provision, which is established after public hearing, is applicable to most of the rate schedules of IPL and permits the billing or crediting of estimated fuel costs above or below the levels included in such rate schedules. Actual fuel costs in excess of or under estimated fuel costs billed are deferred or accrued, respectively. Through the date of IPL's next general electric rate order, IPL is required to file upward and downward adjustments in fuel cost credits and charges on a quarterly basis, based on changes in the cost of fuel.

Authorized Annual Operating Income: Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in fuel adjustment charges. Additionally, customer refunds may result if the utilities' rolling 12-month operating income, determined at quarterly measurement dates, exceeds the utilities' authorized annual operating income and cannot be offset by applicable cumulative net operating income deficiencies. In such a circumstance, the required customer refund for the quarterly measurement period is calculated to be one-fourth of the excess annual operating income grossed up for federal and state taxes as required under I. C. 8-1-2-42.5. See "Regulatory Matters" for additional information.

Income Taxes: IPALCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property. IPALCO and its subsidiaries file consolidated federal and state income tax returns with AES. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income. Income taxes are allocated to the IPALCO subsidiaries based on their respective taxable income or losses.

Pensions: Substantially all of our employees are covered by a defined benefit pension plan, defined contribution plans and a group benefits plan.

The Employees' Retirement Plan of Indianapolis Power & Light Company is a defined benefit plan. The defined benefit pension plan is noncontributory and is funded through a trust. Benefits are based on each individual employee's pension band and years of service. Pension bands are based primarily on job duties and responsibilities. Benefit accrual was frozen for all non-union participants effective July 8, 2001. The non-union participants who had their benefit accrual frozen also were prohibited from making additional contributions to the IPL defined contribution plan (Thrift Plan). These non-union people became eligible to participate in the AES defined contribution plan.

In the 4th quarter of 2002, the non-union people who had their defined benefit pension frozen on July 8, 2001 were given a one-time, irrevocable choice to either (1) continue as an active participant in the AES defined contribution plan; or (2) return to the IPL defined benefit plan as an active participant, and return to the Thrift Plan as an active participant.

Our funding policy for the defined benefit plan is to contribute annually not less than the minimum required by applicable law, nor more than the maximum amount that can be deducted for federal income tax purposes.

Additionally, a select group of former management employees of IPALCO and IPL who have terminated vested benefits are covered under a funded supplemental retirement plan. During 2000, we recognized a non-cash $6.7 million curtailment loss for the supplemental retirement plan reflecting the expected near-term retirement of certain plan participants. In conjunction with recording a minimum pension liability of $3.5 million for this plan, we recorded an intangible asset of $1.7 million. The net difference of $1.8 million was recorded as other comprehensive loss.

The Thrift Plan is a defined contribution plan sponsored by IPL. Participants elect to make contributions to the Thrift Plan based on a percentage of their base compensation. Each participant's contribution is matched in amounts up to, but not exceeding, 4% of the participant's base compensation. Employer contributions to the Thrift Plan were $1.2 million, $2.2 million and $3.5 million for 2002, 2001 and 2000, respectively.

The AES Profit Sharing and Stock Ownership Plan is a defined contribution plan sponsored by AES. Participants elect to make contributions to the AES defined contribution plan based on a percentage of their taxable compensation. Each participant's contribution is matched in amounts up to, but not exceeding, 5% of the participant's taxable compensation. In addition, the AES defined contribution plan has a profit sharing component where AES contributes a percentage of each employee's annual salary into the plan on a pre-tax basis. The profit sharing percentage is determined by the AES Board on an annual basis. Employer payroll-matching and profit sharing contributions (by IPL) relating to the AES defined contribution plan were $3.4 million and $1.7 million for 2002 and 2001, respectively.

The group benefits plan is sponsored by IPL and provides certain health care and life insurance benefits to active employees. Prior to October 20, 2000, the plan also provided certain health care and life insurance benefits to employees who retired from active service on or after attaining age 55 and had rendered at least 10 years of service. The post-retirement benefit costs of this plan were funded through the VEBA Trust. In the fourth quarter of 2000, IPL curtailed and settled for $7.5 million the post-retirement medical and life insurance benefit portion of its overall group benefits plan. On April 30, 2001, all assets of the VEBA Trust and its obligations were formally spun-off to an independent trustee into a newly formed plan, the Voluntary Employee Beneficiary Association Plan (the "VEBA Plan") that provides post retirement medical and life benefits to retirees who retired from IPL or IPALCO before October 20, 2000. In addition, people who were employed by IPL or IPALCO on October 20, 2000, who subsequently retire from IPL or IPALCO and who meet the retirement requirements of age 55 or older and 10 or more years service are eligible for post-retirement health care benefits under the VEBA Trust, except that, as described previously, such people included in VERP II and VERP III will receive their post-retirement medical benefits from IPL or IPALCO until age 62. The VEBA Plan is sponsored and administered by an independent VEBA Committee.

Other benefit estimates were prepared using an expected rate of return on plan assets of 9.0% for 2000. For measurement purposes, we assumed an annual rate of increase in the per capita cost of covered medical care benefits of 10.0% for 2003, gradually declining to 5.5% in 2007 and remaining level thereafter. In addition, we assumed an annual rate of increase in the per capita cost of covered prescription drugs of 15.0% for 2003, gradually declining to 5.5% in 2012 and remaining level thereafter. The effect of a one percentage point increase and decrease in the assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic post retirement health care benefit costs is $8,467 and $(8,287), respectively. The effect of a one percentage point increase and decrease in the assumed health care cost trend rates on the accumulated post retirement benefit obligation for health care benefit costs is $597,057 and $(547,234), respectively. We assumed a 5.9% blended rate of increase in the per capita cost of covered health care benefits (medical and prescription drugs) for 2000. The plan assets were spun- off on October 20, 2000 to an independent trustee.

In November 2002, IPL and the International Brotherhood of Electrical Workers (IBEW) union reached an agreement whereby IPL will provide post-retirement health care benefits to all IBEW members who were employed by IPL after October 20, 2000. The plan was amended accordingly.

Contingencies: We accrue for loss contingencies when the amount of the loss is probable and estimable. We are subject to various environmental regulations, and are involved in certain legal proceedings. If our actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our operating results and financial condition.

Utility operating revenues decreased in 2002 from the prior year by $10.1 million, which resulted from the following changes in electric operating revenues (dollars in thousands):

                                2001       2000               Percentage
Electric Operating Revenues   Revenues   Revenues    Change     Change
                             ---------- ---------- ---------- ----------
Retail Revenues               $769,859   $762,444     $7,415        1.0%
Wholesale Revenues              37,719     55,511    (17,792)     -32.1%
Miscellaneous Revenues          10,389     10,091        298        3.0%
                             ---------- ---------- ---------- ----------
Total Electric
 Operating Revenues           $817,967   $828,046   ($10,079)      -1.2%
                             ========== ========== ========== ==========

The increase in retail revenues in 2002 was primarily due to a 2.6% increase in retail kWh sales, partially offset by a $1.3 million decrease in 2002 from a service quality credit IPL was required to refund to its customers (See "Regulatory Matters-Stipulation and Settlement Agreement".) The increase in kWh sales was primarily due to overall warmer summer temperatures and colder winter temperatures in our service area, as evidenced by an additional 356 cooling degree days and an additional 302 heating degree days in 2002. In addition, IPL increased its retail customer base by 6,085 customers or 1.4%. The decrease in wholesale revenues was primarily due to a 20.1% decrease in wholesale kWh sales and a 14.9% decrease in the average price per kWh sold. The decrease in the average wholesale price per kWh sold is due primarily to a sluggish economy, and an increase in the supply of electricity, as many of the producers of electricity have increased their production capacity. IPL reduced its electricity generation due to the reduction in wholesale electricity prices.

Utility operating expenses decreased $80.0 million, or 11.5% during 2002 as compared to 2001. This decrease was primarily the result of $54.5 million of termination benefit agreement costs in 2001 in connection with the AES Acquisition; a charge of $23.8 million taken in the third quarter of 2001 relating to two additional VERP's offered in connection with the AES Acquisition; a $27.2 million decrease in other operating expenses; a $15.7 million decrease in maintenance expenses; and a $9.4 million decrease in fuel costs, partially offset by a $47.4 million increase in income taxes-net resulting from an increase in pretax operating income. The decrease in other operating expenses includes $11.2 million of supplemental retirement expense incurred in 2001, $6.2 million of restricted stock paid in 2001 and an $8.0 million decrease in power generation operating expenses. The $8.0 million decrease in power generation operating expenses includes $4.0 million in 2001 for rents related to electricity generators, which were no longer needed after IPL placed a new gas turbine in service in 2002 and a $4.6 million decrease in expenses, primarily labor, related to the production of steam for electricity generation. The decrease in fuel cost is primarily due to a steadier demand for electricity in 2002, which allowed us to produce a greater proportion of electricity from our low-cost, base-load, coal-fired units than from less efficient peaking unit resources. This decrease is partially offset by a $1.1 million increase in power purchased. The maintenance expense decrease is primarily the result of the timing of major generating unit overhauls. Maintenance expenses are expected to increase in 2003 because of major generating unit overhauls which are scheduled to coincide with the NO_x compliance construction program.

As a result of the foregoing, utility operating income increased $69.9 million or 53.5% during 2002 as compared to 2001.

Other income and deductions increased from income of $12 thousand in 2001 to income of $26.5 million in 2002. This was primarily a result of the following: net income tax benefits increased by $8.8 million, primarily due to an increase in interest expense from IPALCO's November 2001 issuance of $750 million of Senior Secured Notes (the IPALCO Notes); we expensed $6.3 million of merger costs in 2001 related to the AES Acquisition; termination benefit agreement costs of $4.7 million were recognized in 2001 associated with non- utility officer termination costs as a result of the AES Acquisition; we recognized gains of $4.4 million in 2002 related to the sales of noncore real estate assets; and the allowance for equity funds used during construction increased by $2.6 million, primarily due to a gas combustion turbine placed in service in 2002 with a total installed cost of approximately $63 million. At December 31, 2001 the turbine was included in Other investments and is now included in Utility plant in service on IPALCO's consolidated balance sheets. Included in Other-net in 2002 is our $2.2 million share of losses in EnerTech. In 2001, Other-net includes a $1.8 million impairment provision on the carrying amounts of the CER assets.

Interest and other charges increased $49.4 million in 2002 as compared to 2001. This increase was primarily the result of a $49.8 million increase in interest and a $0.5 million increase in debt cost amortization from the November 2001 issuance of the IPALCO Notes. These increases were partially offset by a $1.2 million increase in the allowance for borrowed funds used during construction, which was primarily due to the gas combustion turbine placed in service in 2002, as described above, and a $1.0 million decrease in other interest resulting from the December 2001 termination of our commercial paper program.

Utility operating revenues decreased in 2001 from the prior year by $30.5 million, which resulted from a $27.6 million decrease in steam operating revenues and a $2.9 million decrease in electric operating revenues. The decrease in steam revenues was a result of IPL's sale of thermal assets and associated cessation of steam operations in 2000 (See Note 2 to the Consolidated Financial Statements). The decrease in electric operating revenues was due to the following (dollars in thousands):

                                2001       2000               Percentage
Electric Operating Revenues   Revenues   Revenues    Change     Change
                             ---------- ---------- ---------- ----------
Retail Revenues               $762,444   $763,456    ($1,012)      -0.1%
Wholesale Revenues              55,511     56,347       (836)      -1.5%
Miscellaneous Revenues          10,091     11,153     (1,062)      -9.5%
                             ---------- ---------- ---------- ----------
Total Electric
 Operating Revenues           $828,046   $830,956    ($2,910)      -0.4%
                             ========== ========== ========== ==========

The decrease in retail electric revenues in 2001 as compared to 2000 is primarily the result of a decrease in total fuel costs billed to customers, resulting primarily from decreases in both heating and cooling degree days and the overall decreased market prices of oil and natural gas in the fall of 2001 as compared to the same time period in 2000 (See below). Wholesale sales decreased as a result of softer wholesale markets and increased capacity reserve margins in the Midwest. The decrease in miscellaneous revenues during 2001 primarily reflects decreased service revenues.

Utility operating expenses decreased $24.9 million in 2001 as compared to 2000, primarily as a result of the following: Fuel expense decreased by $8.2 million due to decreases in both heating degree days (-9.6%) and cooling degree days (-12.6%) and the overall decreased market prices of oil and natural gas in the fall of 2001 as compared to the same time period in 2000. Other operating expenses decreased $17.9 million during 2001 over 2000 due to a $21.1 million reduction in administration and general office expenses, as a result of decreases in personnel (net of the Voluntary Early Retirement Program and the Termination Benefit Agreements) and a $5.3 million reduction in purchased steam due to the sale of IPL's thermal assets, partially offset by a $6.5 million increase in contract services as a result of decreases in personnel. Power purchased increased by $3.7 million during 2001, primarily due to obligations associated with our summer peak power contracts in place to limit market-risk exposure and the corresponding mild summer. Maintenance expenses decreased $1.7 million during 2001, primarily due to the timing of generating unit overhauls and outages. A charge of $23.8 million was taken in 2001 relating to two additional Voluntary Early Retirement Programs taken in 2001. A charge of $54.5 million was taken in 2001 relating to the termination of certain employees. A charge of $62.0 million was recorded in 2000 as a result of the Voluntary Early Retirement Program offered to eligible employees. Taxes other than income taxes decreased by $1.7 million in 2001 over 2000 primarily due to decreased employment taxes associated with workforce reductions. Income taxes - net decreased $9.8 million in 2001 over 2000, which coincides with the decrease in pretax operating income.

As a result of the foregoing, utility operating income decreased $5.6 million or 4.1% during 2001 as compared to 2000.

Other income and deductions decreased from income of $78.9 million in 2000 to $12 thousand in 2001. This was primarily due to a gain of $102.3 million on the sale of available-for-sale securities in 2000 (See Note 15 to the Consolidated Financial Statements), a gain of $30.6 million on the sale of certain thermal assets during 2000 (See Note 2 to the Consolidated Financial Statements), termination benefit agreement costs of $4.7 million recognized in 2001 associated with non-utility officer termination costs as a result of the AES Acquisition and a $0.7 million decrease in the allowance for equity funds used during construction, which was primarily due to a decreased construction base. This decrease was partially offset by a $59.2 million decrease in the income tax provision due to charges in 2001 associated with one-time items (merger costs, termination benefits, and VERP). Merger costs of $6.3 million and $5.8 million were recognized in 2001 and 2000, respectively, related to the AES Acquisition.

Interest and other charges decreased $3.6 million in 2001 as compared to 2000. This decrease was primarily the result of a $3.8 million decrease in interest on long-term debt, partially offset by a $0.3 million decrease in the allowance for borrowed funds used during construction, which was primarily due to a decreased construction base. The reduction in interest on long-term debt was primarily due to lower interest rates on our variable-rate debt, which was reset to fixed-rate debt in August 2001.

During 2000, we recorded an extraordinary loss on the early extinguishment of debt when Mid-America incurred make-whole payments and wrote off debt issuance costs of $4.3 million, net of taxes, in connection with the sale of certain thermal assets.

As of December 31, 2002, IPALCO had cash and cash equivalents of $31.4 million. In addition, IPL has available borrowing capacity of $75 million under its existing committed credit facilities. All long-term borrowings by IPL must first be approved by the IURC. Also, IPL and IPALCO have restrictions on the amount of new debt they may issue by contractual obligations of the parent company, AES. Under such restrictions, IPL is allowed to fully draw the $75 million available on its credit facilities, refinance existing debt, issue the $160 million of long term debt approved by the IURC (see below) and issue certain other indebtedness. We believe that cash balances, cash flows from operations and short-term borrowings will be adequate to meet anticipated cash requirements in the near term.

On February 12, 2003, the IURC issued an Order approving IPL's 2003-2006 financing program, including, among other things, the issuance of up to $160 million of additional long-term debt to pay, in part, for IPL's construction program during 2003-2005, and the refinancing of $80 million of long-term debt, which matures in February 2004. In addition, the Order set forth a process whereby IPL must file a report with the IURC, prior to declaring or paying a dividend, that sets forth (1) the amount of any proposed dividend, (2) the amount of dividends distributed during the prior twelve months, (3) an income statement for the same twelve-month period, (4) the most recent balance sheet, and (5) IPL's capitalization as of the close of the preceding month, as well as a pro forma capitalization giving effect to the proposed dividend, with sufficient detail to indicate the amount of unappropriated retained earnings. If within twenty (20) calendar days the IURC does not initiate a proceeding to further explore the implications of the proposed dividend, the proposed dividend will be deemed approved. The Order stated that such process should continue in effect during the term of the financing authority, which expires December 31, 2006.

On February 28, 2003, IPL filed a petition for reconsideration, or in the alternative, for rehearing with the IURC. This petition seeks clarification of certain provisions of the Order. In addition, the petition requests that the IURC establish objective criteria in connection with the reporting process related to IPL's long term debt capitalization ratio. Whether or not such petition is successful, we have no reason to believe the IURC will prevent IPL from paying future dividends in the ordinary course of prudent business operations. On March 14, 2003, IPL filed a Notice of Appeal in the Indiana Court of Appeals in order to preserve its rights to appeal the IURC Order, if such an appeal is deemed appropriate.

We are a holding company, and accordingly substantially all of our cash is generated by the operating activities of our subsidiaries, principally IPL. None of our subsidiaries, including IPL, are obligated under or have guaranteed the IPALCO Notes. Accordingly, our ability to make payments on the IPALCO Notes depends on the ability of our subsidiaries to generate cash and distribute it to us.

IPL's mortgage and deed of trust and its amended articles of incorporation contain restrictions on IPL's ability to issue certain securities or pay cash dividends to us. So long as any of the several series of bonds of IPL issued under its mortgage remains outstanding, and subject to certain exceptions, IPL is restricted in the declaration and payment of dividends, or other distribution on shares of its capital stock of any class, or in the purchase or redemption of such shares, to the aggregate of its net income, as defined in Section 47 of such mortgage, after December 31, 1939. The amount which these mortgage provisions would have permitted IPL to declare and pay as dividends at December 31, 2002, exceeded retained earnings at that date. In addition, pursuant to IPL's articles, no dividends may be paid or accrued and no other distribution may be made on IPL's common stock unless dividends on all outstanding shares of IPL preferred stock have been paid or declared and set apart for payment.

IPL is also restricted in its ability to pay dividends under the terms of its credit facilities if it is not in compliance with certain financial covenants. These covenants require IPL to maintain a ratio of EBIT to interest expense not in excess of 2.5 to 1, and a ratio of total debt to total capitalization not in excess of .60 to 1, in order to pay dividends. As of December 31, 2002 and as of the filing of this report, IPL and IPALCO were in compliance with all financial covenants and no event of default existed.

IPL's amended articles of incorporation also require that, so long as any shares of preferred stock are outstanding, the net income of IPL, as specified therein, be at least one and one-half times the total interest on the funded debt and the pro forma dividend requirements on the outstanding, and any proposed, preferred stock before any additional preferred stock is issued. The mortgage requires that net earnings as calculated thereunder be two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. As of December 31, 2002, the requirements would not materially restrict IPL's ability to issue additional preferred stock or first mortgage bonds.

Net cash provided by operating activities was $271.0 million, $191.9 million and $186.9 million for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. Net cash provided by (used in) investing activities was $(87.2) million, $(156.2) million and $205.2 million for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. Net cash used in financing activities was $181.3 million, $75.4 million and $347.4 million for the fiscal years ended December 31, 2002, 2001 and 2000, respectively.

Our principal sources of funds in 2002 were net cash provided by operating activities of $271.0 million and proceeds of approximately $9.9 million from the sale of noncore assets. Net cash provided by operating activities is net of cash paid for interest of $95.3 million. The principal uses of funds in 2002 included $180.5 million in dividends to AES and construction expenditures of $94.7 million. We believe our future principal uses of net cash provided by operating activities, net of required pension contributions, will be debt service, capital expenditures and distributions to our parent, AES.

While we believe that our sources of liquidity will be adequate to meet our needs, this belief is based on a number of material assumptions, including, without limitation, assumptions about weather, economic conditions, credit ratings, regulatory constraints and environmental pronouncements. If and to the extent these assumptions prove to be inaccurate, our sources of liquidity may be affected.

Our non-contingent contractual obligations as of December 31, 2002 are set forth below:

                                                  Payment due by period
                                                      (in millions)
                                  Less than    1 to 3     4 to 5     Over 5
                                   one year    years      years      years      Total
                                  ---------- ---------- ---------- ---------- ----------
Indebtedness (excluding interest)      $0.3      $80.0     $138.8   $1,153.9   $1,373.0
Purchase Obligations(1)                 5.8          -          -          -        5.8
Construction commitments               14.4          -          -          -       14.4
Operating /Capital Lease Payments       1.5        2.5        1.4        0.4        5.8
                                  ---------- ---------- ---------- ---------- ----------
Total                                 $22.0      $82.5     $140.2   $1,154.3   $1,399.0
                                  ========== ========== ========== ========== ==========

In addition, as of December 31, 2002, we had a contractual obligation to invest additional capital of $9.6 million in EnerTech. In March 2003, we sold 1/3 of our existing ownership position in EnerTech, which reduced our commitment to $6.4 million. We then funded $1.0 million of such commitment. Our remaining funding commitment in EnerTech is $5.4 million.

We spent approximately $94.7 million and $126.5 million on capital expenditures in 2002 and 2001, respectively. Our construction program is comprised of capital expenditures necessary for prudent utility operations and compliance with environmental laws and regulations, along with, discretionary investments designed to improve overall performance. IPL's construction program for the three-year period 2003-2005 is currently estimated to cost approximately $455 million. The estimated cost of the overall program by year is $160 million in 2003, $175 million in 2004 and $120 million in 2005. It includes approximately $130 million for additions, improvements and extensions to transmission and distribution lines, substations, power factor and voltage regulating equipment, generating plants, distribution transformers and street lighting facilities. The construction program also includes approximately $94 million for power plant related projects, $4 million for energy and outage management systems and $227 million for construction associated with new environmental standards imposed by the U.S. Environmental Protection Agency (EPA) relating to NO_x emission reductions. The scope of the construction program associated with NO_x emission reductions could be reduced by purchasing some of the required NO_x emission allowances in the market, subject to IURC approval.

All of our outstanding common stock is held by AES. During 2002 and 2001, we paid $180.5 million and $796.0 million, respectively, in dividends to AES. In addition to distributions of operating income, the 2002 dividends included income tax refunds of $53.7 million and the 2001 dividends included $663 million of the net proceeds from the issuance of the IPALCO Notes. Also during 2001, we paid $29.0 million of common stock dividends to our shareholders prior to our acquisition by AES. Future distributions will be determined in the discretion of the Board of Directors of IPALCO and will depend primarily on dividends received from IPL, which are affected by IPL's actual results of operations, cash flows, financial condition, capital requirements, regulatory considerations; and such other factors as the Board of Directors of IPALCO deems relevant.

Our ability to borrow money and the interest rates at which we can borrow money are both affected by our credit ratings. During 2002, certain of IPALCO and IPL's credit ratings were downgraded as a result of downgrades in the ratings of AES, which has weaker credit characteristics. As a result of such downgrades, the interest rates on the IPALCO Notes were increased by 100 basis points, effective November 15, 2002. In addition, certain other fees related to IPL's credit lines have increased due to such downgrades. These downgrades did not impact the interest rates on IPL's existing long-term debt. Any further reductions in the credit ratings of AES, IPALCO or IPL would not impact the interest rates on IPALCO or IPL's outstanding debt, but improvements in IPALCO's credit ratings could reduce the interest rates on the IPALCO Notes.

The credit ratings of IPALCO and IPL at March 1, 2003 are as follows:

                            Standard & Poors
                                 (S&P)          Moody's          Fitch
                            --------------- --------------- ---------------
IPALCO Senior Secured Notes       BB-            Baa1             BB
IPALCO Commercial Paper            -              P2               -
IPL Corporate Credit Rating       BB+            Baa1              -
IPL Senior Secured                BB+             A3             BBB-
IPL Senior Unsecured              BB-            Baa1             BB+
IPL Commercial Paper               -           P2/VMIG-2           -

IPL formed IPL Funding Corporation (IPL Funding) in 1996 to purchase, on a revolving basis, up to $50 million of the retail accounts receivable and related collections of IPL in exchange for a note payable. IPL Funding is not consolidated by IPL or IPALCO since it meets requirements set forth in Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to be considered a qualified special-purpose entity. IPL Funding has entered into a purchase facility with unrelated parties (the Purchasers) pursuant to which the Purchasers agree to purchase from IPL Funding, on a revolving basis, up to $50 million of the receivables purchased from IPL. As of December 31, 2002, the aggregate amount of receivables purchased pursuant to this facility was $50.0 million. The net cash flows between IPL and IPL Funding are limited to cash payments made by IPL to IPL Funding for interest charges and processing fees. These payments totaled approximately $1.1 million, $2.3 million and $3.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. IPL retains servicing responsibilities through its role as a collection agent for the amounts due on the purchased receivables. IPL and IPL Funding provide certain indemnities to the Purchasers, including indemnification in the event that there is a breach of representations and warranties made with respect to the purchased receivables. IPL Funding and IPL each have agreed to indemnify the Purchasers on an after-tax basis for any and all damages, losses, claims, liabilities, penalties, taxes, costs and expenses at any time imposed on or incurred by the indemnified parties arising out of or otherwise relating to the sale agreement, subject to certain limitations as defined in the agreements. The transfers of receivables to IPL Funding are recorded as sales however no gain or loss is recorded on the sale.

Under the receivables sale agreement, if IPL fails to maintain certain financial covenants regarding interest coverage and debt-to-capital ratios, it would constitute a "termination event." IPL is in compliance with such covenants.

As a result of IPL's current credit rating, the facility agent has the ability to (i) replace IPL as the collection agent; and (ii) declare a "lock-box" event. Under a lock-box event or a termination event, the facility agent has the ability to require all proceeds of purchased receivables of IPL to be directed to lock-box accounts within 45 days of notifying IPL. A termination event would also (i) give the facility agent the option to take control of the lock-box account, and (ii) give the Purchasers the option to discontinue the purchase of new receivables and cause all proceeds of the purchased receivables to be used to reduce the Purchaser's investment and to pay other amounts owed to the Purchasers and the facility agent. This would have the effect of reducing the operating capital available to IPL by the aggregate amount of such purchased receivables (currently $50 million.)

IPL is a regulated public utility and is principally engaged in providing electric service to the Indianapolis metropolitan area. As a regulated entity, IPL is required to use certain accounting methods prescribed by regulatory bodies which may differ from accounting methods required to be used by nonregulated entities.

IPL is subject to extensive regulation at both the federal and state level. IPL is substantially affected by the regulatory jurisdiction of the EPA and the FERC at the federal level; and the Indiana Department of Environmental Management and the IURC at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the U.S. Department of Labor and the Indiana Occupational Safety and Health Administration. The regulatory power of the IURC over IPL is both comprehensive and typical of the economic regulation generally imposed by state public utility commissions.

An inherent business risk facing any regulated public utility is that of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Indiana, as elsewhere. Therefore, IPL attempts to work cooperatively with regulators and those who participate in the regulatory process, while remaining vigilant and steadfast in protecting IPL's legal rights in the regulatory process. IPL takes an active role in addressing regulatory policy issues in the current regulatory environment. Current federal initiatives include FERC's proposed Standard Market Design for the wholesale energy markets. Additionally, there is increased activity by environmental regulators.

IPL's tariffs for electric service to retail customers (basic rates and charges) are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the staff of the IURC, the Office of the Indiana Utility Consumer Counselor, as well as other interested consumer groups and customers. In Indiana, basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all utilities at least once every four years. Other numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual maintenance and capital expenditures, fuel costs, generating unit availability and purchased power costs and availability can affect the return realized. During 1998, in an order resulting from an IPL initiated proceeding, the IURC declined to exercise its jurisdiction in part over IPL customers who voluntarily select service under IPL's Elect Plan (See Below). Substantially all other IPL customers are served pursuant to retail tariffs that provide for the monthly billing or crediting to customers of increases or decreases, respectively, in the actual costs of fuel consumed from estimated fuel costs embedded in base tariffs, subject to certain restrictions on the level of operating income. Additionally, most such retail tariffs provide for billing of current costs resulting from IPL's IURC-approved demand side management programs.

IPL is allowed to recover purchased power costs based on a benchmark for most retail service. If the cost per kWh of power purchases is not greater than the benchmark, then the purchased power costs should be considered net energy costs that are presumed fuel costs included in purchased power. If the average cost per kWh of power purchases is greater than the benchmark, then the costs are recoverable only through demonstration of the reasonableness of those purchases to the IURC.

In 1998, the IURC approved a plan that allows IPL to offer customers with less than 2,000 kilowatts of demand an opportunity to choose from optional payment or service plans. IPL's authority to offer these options will expire on December 31, 2006 unless a subsequent plan is approved by the IURC.

Under the plan, eligible IPL customers may enter into written contracts for:

Additionally, residential customers may choose a "Sure Bill" option, paying the same bill each month for 12 months, regardless of how much electricity is used. Customers not choosing one of these options continue to receive electric service under existing tariffs.

Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in fuel adjustment charges. Additionally, customer refunds may result if the utilities' rolling 12-month operating income, determined at quarterly measurement dates, exceeds the utilities' authorized annual operating income and cannot be offset by applicable cumulative net operating income deficiencies. In such a circumstance, the required customer refund for the quarterly measurement period is calculated to be one-fourth of the excess annual operating income grossed up for federal and state taxes as required under I. C. 8-1-2-42.5. IPL's authorized annual jurisdictional electric net operating income, for purposes of quarterly operating income tests, is $163 million. This level will be maintained until changed by an IURC order. During the four quarterly measurement dates in 2002, the Commission found that IPL's rolling annual jurisdictional retail electric operating income was less than the authorized annual operating income at January and April and was greater than the authorized annual operating income by $5.6 million and $25.2 million at July and October, respectively. However, because IPL has a cumulative net operating deficiency, we were not required to make customer refunds. As of IPL's quarterly measurement date on October 31, 2002, IPL had a cumulative net operating deficiency of $655.3 million. The operating deficiency is calculated by summing the quarterly measurement period annual results from the date of the last rate order. Because of the deficiency, IPL can, for a period of time, earn above $163 million of electric jurisdictional retail net operating income without being required to make customer refunds.

The IURC approved the use of qualified pollution control property (QPCP) as defined in I.C. 8-1-2-6.6 and ratemaking treatment through an Environmental Compliance Cost Recovery Adjustment that allows IPL to meet the NO_x emission limits imposed pursuant to EPA's NO_x SIP Call. A return on the investment in IPL's CCT investments is included in the ratemaking. IPL may add the approved return on its CCT projects to its net operating income authorized by the IURC in subsequent fuel adjustment charge proceedings. The additional amount of return will be dependent on the cumulative amount of QPCP investment that has been made at the time IPL files with the IURC for ratemaking treatment on such QPCP investment. Such filings are made at an interval of no more often than every 6 months.

In recent years, various forms of proposed industry-restructuring legislation and/or rulemakings have been introduced at the federal level and in several states. Generally, the intent of these initiatives is to encourage an increase in competition within the regulated electric utility industry. While federal rulemaking to date has addressed only the electric wholesale market, various state legislatures are considering or have enacted new laws impacting the retail energy markets within their respective states. A discussion of the legislative and regulatory initiatives most likely to affect IPL follows:

In April 1996, the Federal Energy Regulatory Commission, or FERC, issued Order Nos. 888 and 889 concerning open access transmission service aimed at promoting competition in the wholesale energy market. In January 2000, IPL filed its open access transmission service tariff with FERC together with a request to sell power at wholesale at market-based rates, which FERC accepted.

In December 1999, FERC issued Order No. 2000, which, among other things, encourages the voluntary formation of regional transmission organizations, commonly referred to as RTOs, entities created to operate, plan and control and/or own transmission assets. Order No. 2000 also prescribes certain minimum characteristics and functions of acceptable RTO proposals; provides a collaborative process by which public utilities and non-public utilities that own, operate or control interstate transmission facilities will consider and develop RTOs; includes a proposal to consider transmission ratemaking reforms on a case-specific basis; and provides an opportunity for certain non-monetary regulatory benefits. Order No. 2000 required public utilities that own, operate or control interstate transmission to file in October 2000, either a proposal to join an RTO by December 15, 2001 or the reasons for not participating in an RTO (as well as its plans, if any, for further work towards participating in an RTO). IPL made its Order 2000 compliance filing in October 2000, stating that at that time it did not plan to join an RTO. Subsequently, in February 2001, IPL submitted an application to join the Midwest Independent Transmission System Operator, Inc. (MISO), which FERC recognized as an RTO in December 2001. Also in December 2001, FERC granted IPL's request to transfer control over its transmission facilities to the MISO. The MISO commenced full operations on February 1, 2002.

On July 31, 2002, FERC issued a Notice of Proposed Rulemaking for Standard Market Design (SMD) to modify the pro forma open access transmission tariff established under FERC's Order No. 888 to remedy the remaining undue discrimination in transmission services and other industry practices. FERC is in the process of responding to comments to its proposed rulemaking. For IPL many of the FERC SMD initiatives will be incorporated as part of the Midwest Market Initiative currently being implemented by the MISO and scheduled to be launched in December, 2003. This initiative could significantly change IPL's interface with the wholesale energy markets by incorporating Locational Marginal Pricing and Financial Transmission Rights. At this time we cannot determine the impact of the proposed SMD rule to IPL.

The legislatures of several states have enacted, and many other states are considering, new laws that would allow various forms of competition for retail sales of electric energy. While each state proposal is different, most provide for some recovery of a utility's stranded costs and require an extended transition period before competition is fully effective. Additionally, a few states have implemented programs that experiment with allowing some form of customer choice of electricity suppliers.

In Indiana, competition among electric energy providers for sales has focused primarily on the sale of bulk power to other public and municipal utilities. Indiana law provides for electricity suppliers to have exclusive retail service areas.

In 1995, the Indiana General Assembly, anticipating increasing competitive forces in the regulated public utility industry, enacted I.C. 8-1-2.5. This law enables the IURC to consider and approve, on an individual utility basis, utility-initiated proposals wherein the IURC declines to exercise jurisdiction over the whole or any part of the utility, or its retail energy service or both. The IPL Elect Plan was approved by the IURC under this law.

During 1997, the Indiana General Assembly authorized a legislative study committee to assess the issue of electric utility competition and restructuring. Comprehensive restructuring bills were introduced in the Indiana Senate in 1998, 1999 and 2000, but failed to pass. There was no restructuring legislation submitted in Indiana in 2001 or 2002.

Over the last several years there have been several mergers or acquisitions of Indiana utilities by entities located outside Indiana. Such transactions included the acquisition of IPALCO by AES. Pursuant to a decision by the Supreme Court of Indiana construing current Indiana statutes, the IURC was without jurisdiction to approve or reject such mergers effected via stock transactions. In addition, the IURC believes it has insufficient authority to adequately fine utilities which they determine are not meeting their statutory obligations to provide reasonably adequate service and facilities. Representatives of the IURC have advocated statutory changes to correct perceived deficiencies. In 2002, legislation which would have given the IURC authority to approve most utility mergers and to levy substantial fines on utilities was submitted but failed to pass. Such legislation has again been submitted in 2003. Such proposed legislation also contains provisions beneficial to utilities, such as sections allowing prompt recovery of governmentally mandated costs without being subject to a rate case. It is impossible to predict the content, scope and impact of legislation which may ultimately be passed into law.

During 2002, the IURC issued an order approving a Stipulation and Settlement Agreement (the "Settlement Agreement") entered into by IPL, the Indiana Office of Utility Consumer Counselor, and two intervening parties. The Settlement Agreement requires IPL to meet certain ongoing performance measures for system reliability and customer call center performance or pay penalties of up to $1.75 million per quarter for failure to meet such performance measures; quarterly reporting by IPL regarding service reliability and call center performance; reporting following major storm events; upgrading or replacing IPL's Outage Management System and Energy Management System at a cost of approximately $6 million; and a provision for a $100 credit to certain residential customers whose service was interrupted in July 2001 for 36 to 48 hours following severe storms in our service area (the July 2001 Storms). IPL had previously voluntarily provided a similar credit to residential customers whose service had been interrupted for more than 48 hours following the storm. In addition IPL was required to hire an independent auditor to review its quarterly reports to the IURC. During 2002, IPL issued credits of approximately $1.16 million to customers whose service was interrupted for 36 to 48 hours following the July 2001 Storms, which satisfied IPL's remaining liability for the July 2001 Storms.

IPL was subject to the measures for system reliability and customer call center performance for the second, third and fourth fiscal quarters of 2002. IPL met all of the customer call center performance measures in those periods. IPL did not meet three, four and two of the six service reliability standards in the second, third and fourth quarter of 2002, respectively. As a result, IPL issued credits to customers of $500,000 and $750,000 for the second and third quarters of 2002, respectively. No credits were issued for the fourth quarter, because fewer than three reliability and performance measures were missed. Management believes IPL is making significant progress towards compliance with these measures and expects to reduce or eliminate such penalties going forward. Meeting the reliability and performance measures is most difficult during periods of high storm activity and, therefore, such periods could result in reduced income and cash flows for IPL and IPALCO.

On May 24, 2001, the IURC on its own motion initiated an industry-wide investigation into the continuing propriety of provisions in utility tariffs that limit a utility's liability to its customers for interruptions in service. IPL has such provisions in its tariff for retail service as do most Indiana public utilities. On March 6, 2002, the IURC issued an order purporting to find any and all language in tariffs on file with the IURC which limit a utility's liability for service interruptions to be void and purporting to strike such provisions from the tariffs of all Indiana public utilities. After several utilities, including IPL, initiated an appeal, the IURC vacated its order and thus reinstated liability limitation language in the tariffs. Subsequently, however, the IURC initiated a rulemaking proceeding on the subject of tariff liability limitations, which is still pending. Thusfar, the IURC has not issued a proposed rule. If an IURC rule were to eliminate IPL's current tariff protection from liability for service interruptions, it could have a material adverse effect on IPL.

On February 12, 2003, the IURC issued an Order which approved IPL's 2003- 2006 financing program and set forth a process whereby IPL must file a report with the IURC, prior to declaring or paying a dividend. Please see "Liquidity and Capital Resources" for more information relating to that Order.

The electric utility business is affected by seasonal weather patterns throughout the year and, therefore, our operating revenues and associated operating expenses are not generated evenly by month during the year. Traditionally, retail kWh sales, after adjustments for weather variations, have grown in reasonable correlation with growth in service territory economic activity. During the past 10 years, IPL's retail kWh sales have grown at a compound annual rate of 1.7%, while personal income in our service territory grew at a compound annual rate of 2.4%.

IPL's wholesale kWh sales decreased $17.8 million or 32.1% in 2002 from the level achieved in 2001, largely as a result of softer wholesale markets and increased capacity reserve margins in the Midwest. As IPL's retail sales grow, the level of generating capacity available for wholesale sales is more limited. The ability to sell power in the highly competitive wholesale market is also highly dependent on market conditions and the level and frequency of unplanned outages.

Operating and maintenance expenses were $617.4 million in 2002. We expect these expenses to increase in 2003 due to the timing of major generating unit overhauls. Such expenses are influenced by the level of kWh generation, generating unit availability and overhaul costs, purchased power costs, cost control programs and inflation. IPL depends on purchased power, in part, to meet its retail obligations. Purchased power costs are highly volatile and, therefore, we are unable to predict the level of those costs for 2003, but such costs are recoverable under normal business operations as described under Item 7A.

In June 2001, the Financial Accounting Standards Board (FASB) issued new pronouncements: Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangibles" and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 142 requires the use of a non amortization approach to account for purchased goodwill and certain intangibles. Under a non amortization approach, goodwill and certain intangibles would not be amortized into results of operations, but instead would be reviewed for impairment at least annually and written down and charged to results of operations in the periods in which the recorded value of goodwill and certain intangibles are determined to be greater than their fair value. SFAS No. 142 was effective for us beginning January 1, 2002. The adoption of SFAS No. 142 did not have any impact on our financial position or results of operations.

SFAS No. 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long- lived asset. This statement was effective for us beginning January 1, 2003. Management does not expect the adoption of SFAS No. 143 to have a material impact on Enterprises financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses accounting for and reporting of the impairment or disposal of long-lived assets and was effective for us beginning January 1, 2002. The adoption of SFAS No. 144 did not have any impact on our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting for and reporting of costs associated with an exit or disposal activities. SFAS No. 146 required that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather then when the entity simply commits to a plan of exit or disposal. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Although we are currently not contemplating exit or disposal activities, SFAS No. 146 could have a material impact on our financial statements if and when such activities are initiated.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock- Based Compensation - Transition and Disclosure" an amendment of FASB Statement No. 123. SFAS No. 148 provides three alternative methods of accounting for stock-based compensation at fair value: (i) the prospective method; (ii) the modified prospective method; and (iii) the retroactive restatement method. Certain of our employees participate in the AES Stock Option Plan. No options were awarded to our employees during 2002. Effective January 1, 2003, we have elected to adopt fair value accounting for stock-based compensation using the prospective method for recognizing stock-based compensation expense. The prospective method requires recognition of stock-based compensation expense at fair value for all awards granted in the year of adoption but not for previous awards. We will continue to use the Black-Scholes option-pricing model to determine the fair value of options issued. The expense for each award grant, including awards with grad