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

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**FORM 10-Q**

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**Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

**For the quarterly period ended September 30, 2006**

**IPALCO ENTERPRISES, INC.**
(Exact name of Registrant as specified in its Charter)

**Commission file number 1-8644**



|**Indiana**                                                    | **35-1575582**                         
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

**One Monument CircleIndianapolis, IN    46204**(Address of Principal Executive Offices including Zip Code)

**(317) 261-8261**(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer 	    
Accelerated filer	     
Non-accelerated filer X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).	Yes		      
No X

At November 3, 2006, 89,685,177 shares of IPALCO Enterprises, Inc. common stock were outstanding.
All of such shares were owned by The AES Corporation.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.







**IPALCO ENTERPRISES, INC.
                                    FORM 10-Q
                                     INDEX**



|**PART I - Financial Information**                                                                                                          | **Page No.**
|------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                                            |             
|Item 1:   Financial Statements:                                                                                                             |             
|                                                                                                                                            |             
|Unaudited Consolidated Statements of Income for the Three-month and
        
          Nine-month Periods Ended September 30, 2006 and 2005 | 3           
|                                                                                                                                            |             
|Unaudited Consolidated Balance Sheets as of September 30, 2006 
        
           and December 31, 2005                                   | 4           
|                                                                                                                                            |             
|Unaudited Consolidated Statements of Cash Flows for the
        
          Nine-month Periods Ended September 30, 2006 and 2005             | 5           
|                                                                                                                                            |             
|Notes to Unaudited Consolidated Financial Statements                                                                                        | 6           
|                                                                                                                                            |             
|Item 2:   Management's Discussion and Analysis of Financial Condition 
          
and Results of Operations                                 | 11          
|                                                                                                                                            |             
|Item 3:   Quantitative and Qualitative Disclosure About Market Risk                                                                         | 18          
|                                                                                                                                            |             
|Item 4:  Controls and Procedures                                                                                                            | 18          
|                                                                                                                                            |             
|**PART II - Other Information**                                                                                                             |             
|                                                                                                                                            |             
|Item 1:  Legal Proceedings                                                                                                                  | 20          
|                                                                                                                                            |             
|Item 1A:  Risk Factors                                                                                                                      | 20          
|                                                                                                                                            |             
|Item 6:  Exhibits                                                                                                                           | 20          
|                                                                                                                                            |             
|**Signature**                                                                                                                               | 21          

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**PART I -- FINANCIAL INFORMATION**

Item 1.  Financial Statements

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**IPALCO ENTERPRISES, INC. and SUBSIDIARIES

Unaudited Consolidated Statements of Income

(In Thousands)**

`Three Months Ended    Nine Months Ended
                                                         September 30,           September 30,
                                                       --------------------- -----------------------
                                                          2006       2005        2006        2005
                                                       ---------- ---------- ------------ ----------
UTILITY OPERATING REVENUES                             $ 273,058  $ 254,207  $   779,581  $ 709,895

UTILITY OPERATING EXPENSES:
 Operation:
   Fuel                                                   69,153     42,874      209,525    135,407
   Other operating expenses                               43,370     42,274      123,857    111,711
 Power purchased                                          13,429     23,213       33,052     33,866
 Maintenance                                              15,678     15,541       71,800     54,801
 Depreciation and amortization                            34,361     33,929      101,755    101,374
 Taxes other than income taxes                             9,242      8,847       29,024     27,061
 Income taxes-net                                         33,565     30,505       74,928     83,294
                                                       ---------- ---------- ------------ ----------
  Total utility operating expenses                       218,798    197,183      643,941    547,514
                                                       ---------- ---------- ------------ ----------
UTILITY OPERATING INCOME                                  54,260     57,024      135,640    162,381
                                                       ---------- ---------- ------------ ----------
OTHER INCOME AND (DEDUCTIONS):
 Allowance for equity funds used during construction         460        504        2,281      1,825
 Other - net                                                (532)      (780)      (1,788)      (379)
 Income tax benefit - net                                  6,109      6,894       25,116     19,747
                                                       ---------- ---------- ------------ ----------
  Total other income and (deductions)- net                 6,037      6,618       25,609     21,193
                                                       ---------- ---------- ------------ ----------
INTEREST AND OTHER CHARGES:
 Interest on long-term debt                               27,861     27,763       83,388     83,941
 Other interest                                              953        166        2,528        474
 Allowance for borrowed funds used during construction      (642)      (373)      (1,951)    (1,070)
 Amortization of redemption premiums and expense
   on debt - net                                             778        724        2,359      2,088
 Preferred dividends of subsidiary                           803        803        2,410      2,410
                                                       ---------- ---------- ------------ ----------
  Total interest and other charges - net                  29,753     29,083       88,734     87,843
                                                       ---------- ---------- ------------ ----------
NET INCOME                                             $  30,544  $  34,559  $    72,515  $  95,731
                                                       ---------- ---------- ------------ ----------
  Other comprehensive income (loss)                       (1,075)       849          381          7
                                                       ---------- ---------- ------------ ----------
TOTAL COMPREHENSIVE INCOME                             $  29,469  $  35,408  $    72,896  $  95,738
                                                       ========== ========== ============ ==========`

See notes to consolidated financial statements.

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**IPALCO ENTERPRISES, INC. and SUBSIDIARIES

Unaudited Consolidated Balance Sheets

(In Thousands)**

`September 30, December 31,
                                                                    2006          2005
                                                               -------------  ------------
                            ASSETS
UTILITY PLANT:
 Utility plant in service                                      $  3,578,974   $ 3,496,202
 Less accumulated depreciation                                    1,480,730     1,425,489
                                                               -------------  ------------
     Utility plant in service - net                               2,098,244     2,070,713
 Construction work in progress                                      133,876        94,087
 Property held for future use                                           591           591
                                                               -------------  ------------
     Utility plant - net                                          2,232,711     2,165,391
                                                               -------------  ------------
OTHER ASSETS:
 Nonutility property - at cost, less
  accumulated depreciation                                              711           714
 Other investments                                                   10,096         9,460
                                                               -------------  ------------
     Other assets - net                                              10,807        10,174
                                                               -------------  ------------
CURRENT ASSETS:
 Cash and cash equivalents                                            4,974         6,008
 Restricted cash                                                     83,737             -
 Short-term investments                                               1,935         1,581
 Accounts receivable and unbilled revenue (less allowance
  for doubtful accounts of $1,740 and $2,076, respectively)          63,985        64,025
 Fuel - at average cost                                              31,291        25,145
 Materials and supplies - at average cost                            53,417        52,331
 Net income tax refunds receivable                                        -         6,309
 Regulatory assets                                                    2,196        41,424
 Prepayments and other current assets                                13,567         8,131
                                                               -------------  ------------
     Total current assets                                           255,102       204,954
                                                               -------------  ------------
DEFERRED DEBITS:
 Regulatory assets                                                  160,013       156,952
 Miscellaneous                                                       59,725        35,685
                                                               -------------  ------------
     Total deferred debits                                          219,738       192,637
                                                               -------------  ------------
             TOTAL                                             $  2,718,358   $ 2,573,156
                                                               =============  ============
                CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
 Common shareholder's deficit:
   Premium on 4% cumulative preferred stock                    $        649   $       649
   Paid in capital                                                    3,075         2,063
   Accumulated deficit                                              (57,487)      (54,752)
   Accumulated other comprehensive loss                             (73,980)      (74,361)
                                                               -------------  ------------
     Total common shareholder's deficit                            (127,743)     (126,401)
 Cumulative preferred stock of subsidiary                            59,135        59,135
 Long-term debt                                                   1,482,180     1,443,316
                                                               -------------  ------------
     Total capitalization                                         1,413,572     1,376,050
                                                               -------------   -----------
CURRENT LIABILITIES:
  Notes payable and current portion of long-term debt               186,800       111,100
  Accounts payable and accrued expenses                              70,862        82,267
  Accrued real estate and personal property taxes                    12,167        15,843
  Accrued income taxes                                               16,041             -
  Accrued interest                                                   38,282        26,531
  Customer deposits                                                  14,023        12,875
  Other current liabilities                                          11,009        13,052
                                                               -------------  ------------
     Total current liabilities                                      349,184       261,668
                                                               -------------  ------------
 DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
 Accumulated deferred income taxes - net                            366,578       339,041
 Asset retirement obligations                                       430,044       412,597
 Unamortized investment tax credit                                   20,869        22,827
 Accrued pension and other postretirement benefits                  128,918       149,103
 Miscellaneous                                                        9,193        11,870
                                                               -------------  ------------
     Total deferred credits and other long-term liabilities         955,602       935,438
                                                               -------------  ------------
COMMITMENTS AND CONTINGENCIES (Note 11)

             TOTAL                                             $  2,718,358   $ 2,573,156
                                                               =============  ============`

See notes to consolidated financial statements.

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**IPALCO ENTERPRISES, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

(In Thousands)**

`Nine Months Ended
                                                             September 30,
                                                          ---------- ---------
                                                            2006       2005
                                                          ---------  ---------
Cash Flows from Operations:
 Net income                                              $  72,515  $  95,731
 Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                          100,986     99,862
    Amortization of regulatory assets                        3,150      3,644
    Deferred income taxes and investment tax credit
      adjustments - net                                     34,089     (7,113)
    Gains on sales of environmental allowances              (4,690)    (1,028)
    (Gain) loss on investments                                 138       (417)
    Noncash dividend income                                   (410)      -
    Preferred dividends of subsidiary                        2,410      2,410
    Allowance for equity funds used during construction     (2,281)    (1,825)
  Change in certain assets and liabilities:
    Accounts receivable                                         40        823
    Fuel, materials and supplies                            (8,410)     1,713
    Income taxes receivable or payable                      22,350      2,273
    Accounts payable and accrued expenses                   (3,274)      (208)
    Accrued real estate and personal property taxes         (3,676)    (3,485)
    Accrued interest                                        11,751      9,524
    Pension and other postretirement benefit expenses      (20,185)   (11,841)
    Short-term and long-term regulatory assets
       and liabilities                                      24,195    (37,363)
    Other - net                                             (9,772)     4,516
                                                          ---------  ---------
Net cash provided by operating activities                  218,926    157,216
                                                          ---------  ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures - utility                          (148,642)   (77,692)
  Increase in restricted cash                              (83,737)      -
  Purchase of environmental emissions allowances           (16,275)      -
  Purchase of short-term investments                       (25,550)  (749,112)
  Proceeds from sales and maturities of
    short-term investments                                  25,475    758,062
  Proceeds from sales of environmental allowances            1,190      1,028
  Other                                                     (6,285)    (2,714)
                                                          ---------  ---------
Net cash used in investing activities                     (253,824)   (70,428)
                                                          ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term borrowings-net                                 14,500       -
  Long-term borrowings                                     100,000     71,850
  Retirement of long-term debt                                -       (71,850)
  Dividends on common stock                                (75,250)   (83,922)
  Preferred dividends of subsidiary                         (2,410)    (1,608)
  Other                                                     (2,976)      (988)
                                                          ---------  ---------
Net cash used in financing activities                       33,864    (86,518)
                                                          ---------  ---------
Net change in cash and cash equivalents                     (1,034)       270
Cash and cash equivalents at beginning of period             6,008      3,779
                                                          ---------  ---------
Cash and cash equivalents at end of period               $   4,974  $   4,049
                                                          =========  =========
Supplemental disclosures of cash flow information:
  Cash paid (received) during the period for:
    Interest (net of amount capitalized)                 $  74,165  $  74,232
                                                          =========  =========
    Income taxes                                         $  (5,970) $  68,393
                                                          =========  =========`

See notes to consolidated financial statements.

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IPALCO ENTERPRISES, INC. and SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1.  ORGANIZATION

IPALCO Enterprises, Inc. ("IPALCO") is a wholly-owned subsidiary of The AES
Corporation ("AES"). IPALCO owns all of the outstanding common stock of its subsidiaries.
These include its regulated electric utility subsidiary, Indianapolis Power & Light Company
("IPL"), and its unregulated subsidiary, Mid-America Capital Resources, Inc. ("Mid-
America"). Substantially all of IPALCO's business consists of the generation, transmission,
distribution and sale of electric energy conducted through IPL. IPL has more than 465,000 retail
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 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 that are all used for generating electricity. IPL's
net electric generation capability for winter is 3,400 megawatts and net summer capability is 3,282
megawatts. Mid-America conducts IPALCO's unregulated activities.

2.  BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of IPALCO, IPL and
Mid-America. All significant intercompany amounts have been eliminated. The accompanying financial
statements are unaudited; however, they have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP") for interim financial
information and in conjunction with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the disclosures required by GAAP for annual
fiscal reporting periods. In the opinion of management, all adjustments of a normal recurring nature
necessary for fair presentation, have been included. 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. These unaudited financial
statements have been prepared in accordance with the accounting policies described in IPALCO's
audited financial statements for the year ended December 31, 2005, included in its annual report on
Form 10-K and should be read in conjunction therewith.

The preparation of financial statements in conformity with GAAP requires that management make
certain estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may also be affected by the
estimates and assumptions management is required to make. Actual results may differ from those
estimates.

3. SIGNIFICANT ACCOUNTING POLICIES

Emissions Allowances. IPL uses environmental air emissions allowances to meet
standards set forth by the Environmental Protection Agency related to emission of sulfur dioxide
("SO2") and nitrogen oxides ("NOx") gasses. IPL accounts
for environmental air emissions allowances as intangible assets, included in MISCELLANEOUS DEFERRED
DEBITS on the accompanying balance sheets, and records expenses for allowances using a first in
first out ("FIFO") method. The total book value of SO2and NOx
emissions allowances as of September 30, 2006 and December 31, 2005 was $16.4 million and $1.2
million, respectively. The increase in book value is primarily due to the purchase of $16.3 million
of SO2 allowances during the first nine months of 2006.

Income taxes.

Financial Transmission Rights.  Midwest Independent Transmission System Operators,
Inc. ("Midwest ISO") market participants are able to hedge their exposure to congestion
charges, which result from constraints on the transmission system, with certain Financial
Transmission Rights ("FTRs"). Participants are allocated FTRs each year and are permitted
to purchase additional FTRs. Both the congestion and FTR amounts are generally recoverable through
the fuel adjustment charge proceeding ("FAC"). In accordance with SFAS No. 71, IPALCO
recognizes a regulatory liability for the value of the FTR derivative, which is adjusted as the
value of the FTRs changes. All methods of assessing fair value result in a general approximation of
value and such value may never be realized. IPL's FTRs are included in PREPAYMENTS AND OTHER CURRENT
ASSETS on the accompanying balance sheets at their estimated fair market value, which was $4.0
million and $2.6 million as of September 30, 2006 and December 31, 2005, respectively. The
associated regulatory liability is included in OTHER CURRENT LIABILITIES. The net of expenses
related to congestion charges and/or FTRs have not been material to our financial statements.

4.  NEW ACCOUNTING PRONOUNCEMENTS

In March 2006, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No.
156, "Accounting for Servicing of Financial Assets," to simplify accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 156 permits an entity to choose either the amortization method or the
fair value measurement method for measuring each class of separately recognized servicing assets and
servicing liabilities after they have been initially measured at fair value. SFAS No. 156 applies to
all separately recognized servicing assets and liabilities acquired or issued after the beginning of
an entity's fiscal year that begins after September 15, 2006. IPALCO does not believe SFAS No. 156
will have a material impact on our results of operations or financial position.

In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes" ("FIN No. 48") which is effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return, and also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. IPALCO will adopt FIN No. 48 on January 1,
2007 and will record the cumulative effect of applying the provisions of this Interpretation as an
adjustment to beginning retained earnings. FIN No. 48 applies to all tax positions accounted for in
accordance with SFAS No. 109. IPALCO is assessing the impact the adoption of FIN 48 will have on our
results of operations or financial position.

In July 2006, the FASB also issued FASB Statement of Position FAS 13-2, "Accounting for a
Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a
Leveraged Lease Transaction." This FASB staff position ("FSP") amends FASB Statement
No. 13, "Accounting for Leases," to require a lessor in a leveraged-lease transaction to
recalculate the leveraged lease for the effects of a change or projected change in the timing of
cash flows relating to income taxes that are generated by the leveraged lease. The FSP is effective
for fiscal years beginning after December 15, 2006. The cumulative effect of applying the provisions
of this FSP will be recorded as an adjustment to the balance of retained earnings as of the
beginning of January 1, 2007. IPALCO is assessing the impact the adoption of FAS 13-2 will have on
our results of operations or financial position.

In September 2006, the Securities and Exchange Commission ("SEC") staff issued Staff
Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108").  SAB 108 was issued in order to eliminate the diversity of
practice surrounding how public companies quantify financial statement misstatements.  In SAB
108, the SEC staff established an approach that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the company's financial
statements and the related financial statement disclosures.  This model is commonly referred to
as a "dual approach" because it requires quantification of errors under both the iron curtain and
the rollover methods.  IPALCO will initially apply the provisions of SAB 108 using the
cumulative effect transition method in connection with the preparation of our annual financial
statements for the year ending December 31, 2006.  When we initially apply the provisions of
SAB 108, we do not expect the impact to be material to our financial statements.  The
accompanying financial statements do not reflect these adjustments.

In September 2006, the FASB released SFAS No. 157, "Fair Value Measurements," to define
fair value, establish a framework for measuring fair value in accordance with accounting principles
generally accepted in the United States of America, and expand disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. IPALCO
is assessing the impact the adoption of SFAS No. 157 will have on our results of operations or
financial position.

In September 2006, the FASB released FASB Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88,
106, and 132(R)." This Statement will require IPALCO to fully recognize, as a liability, the
underfunded status of its benefit plans in its 2006 year-end balance sheet. IPALCO's consolidated
unfunded benefit obligation is already recognized in the accompanying financial statements. However,
IPALCO will be required to present its unrecognized prior service cost from previous pension plan
amendments and the associated deferred income tax liabilities as part of Other comprehensive
income (loss) in its consolidated balance sheets beginning on December 31, 2006. IPALCO's
intangible pension asset from previous pension plan amendments is currently included in
MISCELLANEOUS DEFERRED DEBITSand totaled $27.3 million and $21.9 million as of September 30,
2006 and December 31, 2005, respectively. The new standard will also require IPALCO to measure its
plan assets and benefit obligations as of its year-end balance sheet date, beginning in 2008.
Statement 158 does not address the measurement and recognition issues related to the changes in the
fair value of plan assets and benefit obligations. Those, as well as other issues, will be the
primary focus of a multi-year Phase II project. Accordingly, Statement 158 does not have any impact
on IPALCO's computation of its benefit expense recognized in the income statement.

5.  NONCASH TRANSACTIONS

During the first quarter of 2006, IPL exchanged 2,510 SO2environmental emission
allowances with a 2007 vintage year for 2,500 SO2 environmental emission allowances with
a 2005 vintage year. IPL recorded a gain on the transaction of $3.5 million.

6.  SEGMENT INFORMATION

Operating segments are components of an enterprise for which separate financial information
is available and is evaluated regularly by the chief operating decision maker in assessing
performance and deciding how to allocate resources. Substantially all of our business consists of
the generation, transmission, distribution and sale of electric energy conducted through IPL.
IPALCO's reportable business segments are electric and "all other." The "all
other" category primarily includes the IPALCO$750 million Senior Secured Notes as of
September 30, 2006 and December 31, 2005; approximately $0.4 million and $0.6 million of nonutility
cash and cash equivalents, as of September 30, 2006 and December 31, 2005, respectively; short-term
and long-term nonutility investments, collectively, of $10.9 million and $9.9 million at September
30, 2006 and December 31, 2005, respectively; and income taxes and interest related to those items.
There was no utility operating income other than the activities of IPL during the periods covered by
this report. Nonutility assets represented less than 1% of IPALCO's total assets as of September 30,
2006 and December 31, 2005 and there were no nonutility capital expenditures during the nine month
periods ended September 30, 2006 and September 30, 2005.

7.  INCOME TAXES

IPALCO's effective combined state and federal income tax rates for the nine month periods
ended September 30, 2006 and 2005 were 40.7% and 39.9%, respectively. The rate increase was
primarily the result of an increase in income taxes due to depreciation flow through and
amortization of $4.8 million. This increase was offset by $4.9 million of interest income related to
income taxes recorded as a result of the completion of an IRS examination of our filings for the
period 1996 through March of 2001 during the first quarter of 2006. The examination resulted in a
refund due to IPALCO of $25.0 million, which was received in the second quarter of 2006.

8.  REGULATORY ASSETS

Deferred Fuel and RSG amounts. Deferred fuel costs are a component of current
regulatory assets and are expected to be recovered through future fuel adjustment charge
proceedings. IPL records deferred fuel in accordance with standards prescribed by the Federal Energy
Regulatory Commission ("FERC"). The deferred fuel adjustment is the result of variances
between estimated fuel and purchased power costs in IPL's fuel adjustment charge and actual fuel and
purchased power costs. IPL is permitted to recover underestimated fuel and purchased power costs in
future rates through the fuel adjustment charge proceedings and therefore the costs are deferred and
amortized into fuel expense in the same period that IPL's rates are adjusted. The deferred fuel
asset decreased $39.2 million during the nine months ended September 30, 2006 primarily because the
amount of fuel charged to customers increased to recover underbilled fuel costs from prior periods
and because in 2006 we reduced our deferred fuel by $5.8 million for Day Ahead Revenue Sufficiency
Guarantee Distribution Amounts and Real-Time Revenue Sufficiency Guarantee First Pass Distribution
Amounts ("RSG amounts") (see below) for which we had previously sought recovery through
the FAC.

During the second quarter of 2006, we received an Order from the Indiana Utility Regulatory
Commission ("IURC") requiring us to return all RSG amounts assessed by the Midwest ISO
prior to December 9, 2005 charged to customers, or scheduled to be charged to customers, through the
FAC. According to the Order, RSG amounts beginning December 9, 2005, may be recovered in IPL's FACs,
subject to a benchmark. Based on established regulatory practices and Orders received by the IURC
allowing deferral, we believe it is probable that all RSG amounts charged to us prior to December 9,
2005, will be recovered. Accordingly, we have deferred such costs as a regulatory asset. The
recovery period for these costs is not yet determined.

Additionally, in IPL's March 2006 FAC, a consumer advocacy group representing some of IPL's
industrial customers requested that a sub-docket be established to review IPL's fuel costs. The
hearing on this FAC was held on May 3, 2006 and IPL received an Order on May 24, 2006 approving the
establishment of a sub-docket to review its fuel costs. IPL's last two FAC Orders approved FAC
factors on an interim basis, subject to refund, due to the establishment of the sub-docket. To date,
no procedural schedule for this proceeding has been established.

9.  INDEBTEDNESS AND RESTRICTED CASH

In May 2006, IPL entered into a new credit agreement in the aggregate principal amount of
$120.6 million which includes an $80 million committed line of credit and a $40.6 million liquidity
facility (related to $40 million of IPL variable rate bonds, which are remarketed weekly). The
committed line of credit also provides a sub limit for the issuance of letters of credit. In
addition, the credit agreement allows the committed line of credit to be increased to $109.4 million
upon IPL's request and subject to certain other conditions. Such increase was affected in August
2006. The maturity date for the new agreement is May 16, 2011. This agreement replaced two existing
364-day agreements with an aggregate borrowing capacity of $115.6 million which included a $75
million committed line of credit and a $40.6 million liquidity facility.

On September 27, 2006, the Indiana Finance Authority ("IFA") issued
on behalf of IPL $40 million principal amount of 4.55%
insured first mortgage bonds due 2024, the proceeds of
which were loaned to IPL and are being held in escrow by the trustee to be used on December 1, 2006
to call at par $40 million principal amount of 6 5/8% first mortgage
 bonds due 2024. These proceeds are reflected on the accompanying balance
sheet as restricted cash at September 30, 2006. The direction to call the outstanding bonds was
delivered to the trustee on September 28, 2006. This financing activity will result in annual
interest savings to IPL of approximately $830,000.

On September 27, 2006, the IFA also issued On behalf of IPL
$60 million principal amount of insured first mortgage auction rate bonds
due 2041, the proceeds of which
were placed with the trustee to be made available to IPL as funds are invested on certain qualifying
environmental facilities. Through September 30, 2006, IPL has drawn down $17.6 million of such
proceeds. The remaining proceeds are reflected on the accompanying balance sheet as restricted cash
at September 30, 2006. The initial rate was set at 3.45%, and will be adjusted based upon a 7-day
auction period beginning October 6, 2006 and every Monday thereafter (commencing October 16, 2006).

On October 6, 2006, IPL issued $158.8 million of first mortgage bonds, 6.05% Series, due 2036.
The net proceeds from this offering, together with other available cash, were used to effect the
repayment upon maturity of IPL's 8% Series first mortgage bonds, due October 2006 in the principal
amount of $58.8 million and will be used to effect the redemption of IPL's 7.05% Series first
mortgage bonds, due 2024 in the principal amount of $100 million in November 2006, as well as $2.6
million of redemption premiums associated with the 7.05% Series redemption.  .

10.  PENSION AND OTHER POSTRETIREMENT BENEFITS (See also Note 4 for new
accounting guidance related to pension and other postretirement benefits)

Employees' Retirement Plan: Approximately 91% of IPL's active employees are covered by
the Employees' Retirement Plan of Indianapolis Power & Light Company ("Retirement
Plan"); as well as, the Employees' Thrift Plan of Indianapolis Power & Light Company
("Thrift Plan"). The Retirement Plan is a qualified defined benefit plan, while the Thrift
Plan is a qualified defined contribution plan. The remaining 9% of active employees are covered by
the AES Retirement Savings Plan ("RSP Plan"). The RSP Plan is a qualified defined
contribution plan containing a profit sharing component. All non-union new hires are covered under
the RSP Plan, while union new hires are covered under the Retirement and Thrift plans. The
Retirement Plan is noncontributory and is funded through a trust. Benefits are based on each
individual employee's pension band and years of service as opposed to their compensation. Pension
bands are based primarily on job duties and responsibilities.

Supplemental Retirement Plan: Additionally, a small group of former officers and their
surviving spouses are covered under a funded non-qualified supplemental pension plan. The total
number of participants in the plan is less than 35 and the plan is closed to new participants.

Pension Funding: The Pension Protection Act of 2006 ("Act"), which contains
comprehensive pension funding reform legislation, was enacted into law during the third quarter of
2006. The pension funding provisions are effective January 1, 2008. The Act requires plans that are
less than 100% funded to fully fund any funding shortfall in amortized level installments over seven
years, beginning in the year of the shortfall. Then, each year thereafter, if the plan's
underfunding increases to more than the present value of the remaining annual installments, the
excess is separately amortized over a new seven year period. The Act provides transition relief for
years 2008, 2009, and 2010. Rather than requiring 100% funding immediately, the Act requires a
funded ratio of 92% for 2008, 94% for 2009, 96% for 2010, and 100% for years 2011 and beyond. IPL's
total underfunded pension liability was approximately $119.5 million as of September 30, 2006. The
Act contains special accelerated provisions for plans that are determined to be "at risk".
IPL plans to fund to levels to avoid the "at risk" status. IPL is in process of
determining the impact on pension funding when the Act becomes effective in 2008.

IPL's funding policy for the Defined Benefit Pension Plan and the Supplemental Retirement Plan
("the Pension Plans") is to contribute annually no less than the minimum required by
applicable law, nor more than the maximum amount that can be deducted for federal income tax
purposes. In September, 2006, IPL made a $37 million cash contribution to the Defined Benefit
Pension Plan. In addition, IPL funded $0.2 million into the Supplemental Retirement Plan earlier
this year to satisfy a participant lump sum election.

The following table presents information relating to the Pension Plans combined:

`For the Three Months           For the Nine Months
                                            Ended September 30,            Ended September 30,
                                         -------------------------      ------------------------
                                             2006         2005              2006        2005
                                         -------------------------      ------------------------
Pension Benefits                                                  (IN THOUSANDS)

Components of net periodic benefit cost
Service cost                                   $1,404      $1,033            $4,141      $3,100
Interest cost                                   7,033       6,473            20,969      19,419
Expected return on plan assets                 (6,866)     (6,547)          (20,420)    (19,526)
Amortization of transition assets                   -        (318)                -        (954)
Amortization of prior service costs               668         434             1,798       1,303
Amortization of actuarial loss                  1,300         781             3,899       2,342
                                         -------------------------      ------------------------
Net periodic benefit cost                      $3,539      $1,856           $10,387      $5,684
                                         =========================      ========================`

Other Postretirement Benefits: IPL is providing, and has agreed to provide, postretirement
health care benefits to certain retired or active employees and the spouses of certain retired or
active employees. Approximately 500 people were receiving such benefits or entitled to future
benefits. Other postretirement benefit costs for the nine month periods ended September 30, 2006 and
2005,, were $2.1 million and $2.4 million, respectively. As of September 30, 2006 and December 31,
2005 IPL had net benefit obligations recognized as part of accrued pension and other postretirement
benefits of $9.5 million and $8.3 million, respectively.

11.  COMMITMENTS AND CONTINGENCIES

Legal

IPALCO and certain former officers and directors of IPALCO are defendants in a class
action lawsuit under the Employment Retirement Income Security Act, filed in the U.S. District Court
for the Southern District of Indiana, regarding matters arising from the acquisition of IPALCO by
AES. The lawsuit was filed in March 2002 and alleges breach of fiduciary duties with respect to
shares held in IPL's 401(k) thrift plan. A bench trial was held in February 2006 to determine
whether there were any breaches of fiduciary duties. The court took the matter under advisement and
has not yet ruled. While we cannot predict the outcome, we do not believe that the suit will have a
material adverse effect on IPALCO's consolidated financial statements.

Many years ago, IPL obtained, through purchases from several owners, a substantial tract of land
as a potential site for a future power plant. IPL later determined it no longer intended to build a
power plant on that land and sold it in 2004. In September 2004, a former owner of a parcel included
within IPL's land sued IPL in Morgan County Superior Court in a purported class action to force IPL
to pay any profit on the sale to the various former owners, as well as profits received from ground
leases and timber sales. The plaintiffs contend, in essence, that IPL obtained the various parcels
through eminent domain or threat of eminent domain and now allege, in an amended complaint, theories
of fraudulent inducement to contract, unjust enrichment, breach of fiduciary duty, and fraudulent
concealment. IPL believes the suit is without merit. At this time discovery has just recently begun
and the court has not certified a class. While we cannot predict the outcome, we do not expect the
matter will have a material adverse effect on IPALCO's consolidated financial statements.

As of September 30, 2006 and December 31, 2005, IPL was a defendant in approximately 115 and 109
pending lawsuits, respectively, alleging personal injury or wrongful death stemming from exposure to
asbestos and asbestos containing products formerly located in IPL power plants. IPL has been named
as a "premises defendant" in that IPL did not mine, manufacture, distribute or install
asbestos or asbestos containing products. These suits have been brought on behalf of persons who
worked for contractors or subcontractors hired by IPL. IPL has insurance which may cover some
portions of these claims; currently, these cases are being defended by counsel retained by various
insurers who wrote policies applicable to the period of time during which much of the exposure has
been alleged.

It is possible that material additional loss with regard to the asbestos lawsuits could be
incurred. At this time, an estimate of additional loss cannot be made. IPL has settled a number of
asbestos related lawsuits for amounts which, individually and in the aggregate, are not material to
IPL or IPALCO's financial position, results of operations, or cash flows. Historically, settlements
paid on IPL's behalf have been comprised of proceeds from one or more insurers along with
comparatively smaller contributions by IPL. We are unable to estimate the number of, the effect of,
or losses or range of loss which are reasonably possible from the pending lawsuits or any additional
asbestos suits. Furthermore, we are unable to estimate the portion of a settlement amount, if any,
that may be paid from any insurance coverage for any known or unknown claims. Accordingly, there is
no assurance that the pending or any additional suits will not have a material adverse effect on
IPALCO's consolidated financial statements.

In addition, IPALCO and IPL are involved in litigation arising in the normal course of business.
While the results of such litigation cannot be predicted with certainty, management, based upon
advice of counsel, believes that the outcomes will not have material adverse effects on IPALCO's
consolidated financial statements.

Environmental

IPALCO and IPL 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. 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 full compliance with such laws, regulations and
permits. Please see Note 11 "Commitments and Contingencies - Environmental" of IPALCO's
audited financial statements for the year ended December 31, 2005, included in its annual report on
Form 10-K, for a more comprehensive discussion of environmental matters impacting IPALCO and
IPL.

1. RELATED PARTY TRANSACTIONS

In the third quarter, IPL purchased, in arm's length transactions, 3,200 SO2
vintage 2006 air emissions allowances at the then current market price, for a total of $2.0 million
from a wholly-owned subsidiary of AES.



---

Item 2.	Management's Discussion And Analysis Of Financial Condition And Results Of
Operations

Cautionary Note Regarding Forward-Looking Statements

This Report on Form 10-Q includes ``forward-looking statements''
including, in particular, the statements about our plans, strategies and prospects under the heading
``Item 2. 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, our future revenues, income, expenses 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:

- changes in our credit ratings or the credit ratings of AES
- performance of pension plan assets
- fluctuations in customer growth and demand
- weather and weather-related damage
- fuel costs
- generating unit availability and capacity
- transmission and distribution system reliability and capacity
- purchased power costs and availability
- regulatory action, including, but not limited to, the review of our basic rates and charges by
the IURC
- our ownership by AES
- federal and state legislation
- changes in financial or regulatory accounting policies
- environmental matters, including costs of compliance with current and future environmental
requirements
- interest rates and other costs of capital
- the availability of capital
- labor strikes or other workforce factors
- unanticipated generation outages, facility or equipment maintenance, repairs and capital
expenditures
- local economic conditions
- acts of terrorism, natural disasters or other catastrophic events
- costs and effects of legal and administrative proceedings, settlements, investigations and
claims and the ultimate disposition of litigation
- issues related to our participation in the Midwest ISO, including recovery of costs
incurred
- product development and technology changes

Most of these factors affect us through our consolidated subsidiary IPL. All such factors are
difficult to predict, contain uncertainties that may materially affect actual results and many are
beyond our control. We undertake no obligation to publicly update or review any forward-looking
information, future events or otherwise.

Overview

IPALCO is a holding company incorporated under the laws of the state of
Indiana. Our principal subsidiary is IPL, a regulated electric utility operating in the state of
Indiana. Substantially all of our business consists of the generation, transmission, distribution
and sale of electric energy conducted through IPL. Our other direct subsidiary, Mid-America, is the
holding company for our unregulated activities. Mid-America's only significant investment is a small
minority ownership interest in EnerTech Capital Partners II L.P., a venture capital fund valued at
$6.4 million, as of September 30, 2006. Our business segments are electric and "all
other."

IPL is engaged primarily in generating, transmitting, distributing and selling electric energy to
more than 465,000 retail customers in the city of Indianapolis and neighboring areas within the
state of Indiana. IPL has an exclusive right to provide electric service to those customers. IPL
owns and operates four generating stations, all within the state of Indiana. Historically,
approximately 99% of the total electricity produced by IPL was generated from coal. Natural gas and
fuel oil combined to provide the remaining kWh generation (primarily for peaking capacity). IPL's
net electric generation capability for winter and summer is 3,400 and 3,282 megawatts, respectively.
Our corporate mission is to serve our customer's needs for electric power in ways that provide
exceptional value to our customers, shareholders, people and communities.

We are subject to federal and state of Indiana income taxes. Our income tax provision requires
significant judgment and is based on calculations and assumptions that are subject to examination by
the Internal Revenue Service and other tax authorities. In January 2006, the Internal Revenue
Service completed an examination of our filings for the period 1996 through March of 2001. The
examination resulted in a refund due to us of $25.0 million, which we received in the second quarter
of 2006.

Material changes in our consolidated financial condition and results of operations, except where
noted, are attributed to the operations of IPL. Consequently, the following discussion is centered
on IPL.

Results of Operations

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.

Comparison of Quarters Ended September 30, 2006 and September 30, 2005

Our third quarter 2006 net income of $30.5 million decreased $4.1 million from net
income of $34.6 million in the third quarter of 2005. The following discussion highlights the
significant factors contributing to this change.

Utility Operating Revenues

Utility operating revenues increased by $18.9 million during the three months ended September
30, 2006 compared to the same period in 2005 as a result of the following (dollars in thousands):

`September 30,  September 30,   Increase   Percentage
                                2006           2005       (Decrease)    Change
                           ------------------------------------------------------
Retail Revenues                  $253,844       $237,106     $16,738         7.1%
Wholesale Revenues                 14,673         13,142       1,531        11.6%
Miscellaneous Revenues              4,541          3,959         582        14.7%
                           ------------------------------------------

Total Utility Operating
  Revenues                       $273,058       $254,207     $18,851         7.4%
                           ==========================================

Heating Degree Days                    84             18          66       366.7%
Cooling Degree Days                   751            917        (166)      -18.1%`

The 7.1% increase in retail revenues was primarily due to a 10.1% increase in the weighted
average price of kWhs sold ($24.0 million) offset by a 2.8% decrease in the quantity of kWhs sold
($7.2 million). The $24.0 million increase in the weighted average price of retail kWhs sold was
primarily due to an $18.5 million increase in fuel charges and a $5.3 million increase due to an
increase in the weighted average per kWh rate, excluding fuel recovery, charged to our residential
customers.  Our declining block rate structure generally provides for residential customers to be
charged a lower per kWh rate at higher consumption levels. Therefore, as volumes decline, the
weighted average price per kWh increases. The amount of fuel charged to customers has increased
primarily to recover underbilled fuel and/or purchased power costs from prior periods (see
discussion of operating expenses). The decrease in the quantity of retail kWhs sold is primarily due
to an 18.1% decrease in cooling degree days during the comparative periods. Changes in the FAC fuel
charge revenues are generally offset by fuel and purchased power expenses and generally do not have
an affect on net income. Excluding the increase in the fuel charges, retail revenues were down $1.8
million over the comparable period.

The 11.6% increase in wholesale revenues is primarily due to a 64.5% increase in the quantity of
kWhs sold ($5.8 million) partially offset by a 32.1% decrease in the weighted average price of
retail kWhs sold. The increase in the quantity of kWhs sold in the wholesale market in the third
quarter of 2006 over the third quarter of 2005 was primarily due to a decrease in the quantity of
kWhs sold for retail and a reduction in unit outages, which allowed for more kWhs to be sold on the
wholesale market.

Utility Operating Expenses

The following table illustrates the primary operating expense changes from
September 30, 2005 to September 30, 2006 for IPL (dollars in millions).



`Operating Expenses for the Quarter Ended September 30, 2005            $197.2
Increase in fuel                                                         26.3
Decrease in income taxes - net                                            3.1
Increase in other operating expenses                                      1.1
Decrease in purchased power expense                                      (9.8)
Other miscellaneous variances                                             0.9
                                                                     ---------
Operating Expenses for the Quarter Ended September 30, 2006            $218.8
                                                                     =========`

The $26.3 million increase in fuel is the result of a $21.5 million increase in the deferred fuel
adjustment and a $5.0 million increase in current fuel costs. The deferred fuel adjustment is the
result of variances between estimated fuel and purchased power costs in our fuel adjustment charge
and actual fuel and purchased power costs. We are permitted to recover underestimated fuel and
purchased power costs in future rates through the fuel adjustment charge proceedings and therefore
the costs are deferred and amortized into expense in the same period that our rates are adjusted.
The increase in deferred fuel costs is primarily because the amount of fuel charged to customers has
increased to allow us to recover underestimated fuel costs from prior periods. Current fuel costs
increased primarily due to a $6.3 million increase in the average price of coal consumed.

The $3.1 million increase in income tax expense was primarily due to an increase of $2.4 million
in operating income tax contingencies and an increase in income taxes due to depreciation flow
through and amortization of $0.7 million.

The increase in other operating expenses is primarily due to a $1.5 million increase in pension
and other postretirement benefits and a $0.8 million increase in Midwest ISO transmission expenses,
partially offset by a $1.6 million decrease in environmental air emission allowances expense. The
increase in pension and other postretirement benefits is primarily due to increased interest and
service costs ($0.9 million) and increased net loss amortization ($0.5 million).

We are allocated NOx and SO2 environmental air emission allowances each year by the
Environmental Protection Agency ("EPA") at no cost. Additionally, during 2006, we
purchased 20,100 SO2 allowances at a total cost of $16.3 million. We account for emission
allowances as intangible assets and record expenses for allowances using a FIFO
method. Therefore, we do not recognize emission allowance expense until we use up
all of the allowances allocated to us from the EPA. We project our total expense in 2006 to be
significantly higher than in 2005, because we purchased a greater portion of our projected allowance
needs in the market. On June 24, 2006, we enhanced existing clean coal technology, which is helping
to reduce our SO2emissions and therefore help to reduce future emissions costs. In
addition, we expect to place another clean coal technology project in service in late 2007 to
further reduce emissions.

Purchased power expense decreased due to a decrease in the market price of purchased power ($8.3
million) and a decrease in the volume of power purchased during the period ($1.5 million).  The
decreased price of purchased power is influenced by changes in the market price of delivered fuel
(primarily natural gas), the price of environmental emission allowances, the supply of and demand
for electricity, and the time of day in which power is purchased.

Other Income and Deductions

Other income and deductions decreased from income of $6.6 million in the third quarter of
2005 to income of $6.0 million in the third quarter of 2006. Included in this decrease is a $0.8
million decrease in the income tax benefit, primarily due to the changes in previously recorded tax
contingencies including related interest.

Interest and Other Charges

While interest and other charges increased only slightly for the quarter ended September 30,
2006 as compared to 2005, it includes an increase of $0.8 million of interest expense on line of
credit borrowings primarily used to fund construction activities. This increase was partially offset
by a $0.3 million increase in the allowance for borrowed funds used during construction also due to
increased capital expenditures related to the multi-pollutant plan.  See Liquidity and Capital
Resources for recent financing activity.

Comparison of Nine Month Periods Ended September 30, 2006 and September 30, 2005

Net income during the nine month period ended September 30, 2006 of $72.5 million
decreased $23.2 million from net income of $95.7 million in the same period in 2005. The following
discussion highlights the significant factors contributing to this change.

Utility Operating Revenues

Utility operating revenues increased by $69.7 million during the nine months ended September
30, 2006 compared to the same period in 2005 as a result of the following (dollars in thousands):

`September 30,  September 30,   Increase   Percentage
                                2006           2005       (Decrease)    Change
                           ------------------------------------------------------
Retail Revenues                  $724,589       $656,866     $67,723        10.3%
Wholesale Revenues                 36,578         40,386      (3,808)       -9.4%
Miscellaneous Revenues             18,414         12,643       5,771        45.6%
                           ------------------------------------------
Total Utility Operating
   Revenues                      $779,581       $709,895     $69,686         9.8%
                           ==========================================

Heating Degree Days                 2,929          3,181        (252)       -7.9%
Cooling Degree Days                 1,027          1,270        (243)      -19.1%`

The 10.3% increase in retail revenues is primarily due to a 13.3% increase in the weighted
average price of kWhs sold ($87.5 million) offset by a 2.7% decrease in the quantity of kWhs sold
($19.8 million). The $87.5 million increase in the weighted average price of retail kWhs sold was
primarily due to a $75.6 million increase in fuel charges and an $8.2 million increase due to an
increase in the weighted average per kWh rate, excluding fuel and NOx recovery, charged
to our residential customers in accordance with our declining block rate structure described above.
There was also a $3.6 million increase in costs IPL recovered from its retail customers associated
with its NOx compliance construction program. The amount of fuel charged to customers has
increased primarily to recover underbilled fuel and/or purchased power costs from prior periods. The
decrease in the quantity of retail kWhs sold is primarily due to a 19.1% decrease in cooling degree
days and a 7.9% decrease in heating degree days during the comparative periods. Changes in the FAC
fuel charge revenues are generally offset by fuel and purchased power expenses and generally do not
have an affect on net income. Excluding the increase in the fuel charges, retail revenues were down
$7.9 million over the comparable period.

The decrease in wholesale revenues was primarily due to a 12.2% decrease in the weighted average
price of wholesale kWhs sold ($4.9 million) partially offset by a 3.2% increase in the quantity of
wholesale kWhs sold ($1.1 million). The increase in the quantity of kWhs sold in the wholesale
market in the nine months ending 2006 over the same period in 2005 was primarily due to a decrease
in the quantity of kWhs sold for retail, which allowed for more kWhs to be sold on the wholesale
market.

The $5.8 million increase in miscellaneous revenues is primarily due to a $3.7 million gain from
exchanging 2,510 vintage 2007 SO2 air emission allowances for 2,500 vintage 2005
SO2 air emission allowances during the first quarter of 2006 and a $1.6 million increase
in Midwest ISO transmission revenues, which is offset by an increase in Midwest ISO transmission
expense as described below. The gain results from exchanging allowances that were granted to us by
the EPA at no charge and recorded at cost, which is zero, for allowances that are recorded at fair
market value, partially offset by a decrease in available generating capacity as a result of the
timing of outages.

Utility Operating Expenses

The following table illustrates the primary operating expense changes from
September 30, 2005 to September 30, 2006 for IPL (dollars in millions).



`Operating Expenses for the Nine Months Ended September 30, 2005        $547.5
Increase in fuel                                                         74.1
Increase in maintenance expenses                                         17.0
Increase in other operating expenses                                     12.1
Decrease in income taxes - net                                           (8.4)
Decrease in purchased power expense                                      (0.8)
Other miscellaneous variances                                             2.4
                                                                     ---------
Operating Expenses for the Nine Months Ended September 30, 2006        $643.9
                                                                     =========`

The increase in fuel is the result of a $59.1 million increase in the deferred fuel adjustment
and a $15.1 million increase in current fuel costs. The increase in deferred fuel costs is primarily
because the amount of fuel charged to customers has increased to allow us to recover underestimated
fuel costs in prior periods. Current fuel costs increased primarily due to a $21.4 million increase
in the average price of coal consumed, partially offset by a $4.7 million decrease in the volume of
coal consumed.

The increase in maintenance expenses is primarily due to a scheduled outage on one of our large
base load coal fired units that coincided with a project to enhance environmental emission
technology to significantly reduce emissions as part of IPL's multi-pollutant plan.

The increase in other operating expenses is primarily due to increases in wages and employee
benefits ($6.4 million), consulting fees and other contract labor ($1.8 million), Midwest ISO
transmission expenses ($2.7 million) and various other items, partially offset by a $2.1 million
decrease in environmental air emissions allowance expense. The increase in wages and employee
benefits includes a $4.4 million increase in pension and other postretirement benefits and a $2.4
million increase in payroll costs. The increase in pension and other postretirement benefits is
primarily due to increased interest and service costs ($2.6 million) and increased net loss
amortization ($1.6 million). The increase in payroll costs reflects annual wage increases and
additional employees. The increase in consulting fees and other contract labor consists primarily of
increased legal costs to defend outstanding litigation and consulting fees related to remediation
efforts with respect to deferred income taxes and the related regulatory asset balances (see Item
4 Controls and Procedures.)

The $8.4 million decrease in income tax expense was primarily the result of a $35.1 million
decrease in pre-tax net operating income, which contributed $14.2 million to the decrease. This
decrease was partially offset by a $4.8 million increase in income taxes due to depreciation flow
through and amortization. The $5.2 million recorded for depreciation flow through in the first three
quarters of 2006 is based on the estimated annual amount for 2006 of $6.9 million.

While purchased power expense decreased only 2.4%, it was the result of a 17% decrease in the
market price of purchased power offset by an 18% increase in the volume of power purchased during
the period. The decreased price of purchased power ($6.9 million) is influenced by changes in the
market price of delivered fuel (primarily natural gas), the price of environmental emissions
allowances, the supply of and demand for electricity, and the time of day in which power is
purchased. The increase in the volume of power purchased ($6.1 million) is primarily due to a
scheduled outage on one of our large base load coal fired units to enhance environmental emission
technology that will significantly reduce emissions as part of IPL's multi-pollutant plan.

Other Income and Deductions

Other income and deductions increased from income of $21.2 million in the nine month period
ended September 30, 2005 to income of $25.6 million in the nine month period ended September 30,
2006. Included in this increase is a $5.4 million increase in income tax benefit, primarily due to a
change of $4.8 million in previously recorded tax contingencies including related interest. This
increase was partially offset by a decrease in interest income from short-term investments ($0.7
million), primarily due to a decrease in the weighted average invested amounts.

Interest and Other Charges

While interest and other charges in total changed only slightly for the nine months ended
September 30, 2006 as compared to 2005, it includes an increase of $2.1 million of interest expense
on short-term debt related to increased line of credit borrowings, partially offset by a $0.6
million decrease in interest expense on long-term debt and a $0.9 million increase in allowance for
borrowed funds used during construction. The decrease in interest on long-term debt is primarily due
to less interest on $71.9 million of first mortgage bonds that were refinanced in April 2005 at a
lower interest rate. The increase in allowance for borrowed funds used during construction is
primarily related to increased capital expenditures in 2006 related to the multi-pollutant plan.  In
addition, as described below, we had $43 million of restricted cash to be made available to IPL as
funds are invested on certain qualifying environmental facilities and $40 million of restricted cash
to be used on December 1, 2006 to call at par $40 million principal amount of 6 5/8% first mortgage
bonds due 2024.  See Liquidity and Capital Resources for recent financing activity.

Liquidity and Capital Resources

As of September 30, 2006, IPALCO had cash and cash equivalents of $5.0
million and highly liquid short-term investments of $1.9 million. As of September 30, 2006, IPL also
had available borrowing capacity of $41.8 million under its $109.4 million committed credit facility
after outstanding borrowings of $66.8 million and existing letters of credit. All long-term
borrowings by IPL must first be approved by the IURC and the aggregate amount of IPL's short-term
indebtedness must be approved by FERC. IPL has approval from FERC to borrow up to $500 million of
short-term indebtedness outstanding at any time through July 27, 2008. IPL and IPALCO also have
restrictions on the amount of new debt that may be issued due to contractual obligations of AES and
by financial covenant restrictions under their existing debt obligations. We do not believe such
restrictions will be a limiting factor in our ability to issue debt in the ordinary course of
prudent business operations. We believe that existing restricted and unrestricted cash balances,
short-term investments, cash generated from operating activities and borrowing capacity on IPL's
committed credit facility will be adequate on a short-term and long-term basis to meet anticipated
operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures and
pay dividends to AES. Sources for principal payments on outstanding indebtedness and nonrecurring
capital expenditures are expected to be obtained from: (i) existing restricted and unrestricted cash
balances; (ii) cash generated from operating activities; (iii) borrowing capacity on IPL's committed
credit facility; and (iv) additional debt financing.

In March 2006, the IURC issued an order approving a financing petition filed by IPL in 2005. This
order (including $30 million approved in a previous financing order) allowed IPL to issue $60
million first mortgage bonds on September 27, 2006 (see below) and to refinance certain other
indebtedness. This financing authority expires on December 31, 2008.

In May 2006, IPL entered into a new credit agreement in the aggregate principal amount of $120.6
million which includes an $80 million committed line of credit and a $40.6 million liquidity
facility (related to $40 million of IPL variable rate bonds, which are remarketed weekly). The
committed line of credit also provides a sub limit for the issuance of letters of credit. In
addition, the credit agreement allows the committed line of credit to be increased to $109.4 million
upon IPL's request and subject to certain other conditions. Such increase was affected in August
2006. The maturity date for the new agreement is May 16, 2011. This agreement replaced two existing
364-day agreements with an aggregate borrowing capacity of $115.6 million which included a $75
million committed line of credit and a $40.6 million liquidity facility.

On September 27, 2006, the IFA issued on
behalf of IPL $40 million principal amount of 4.55% insured first mortgage bonds due 2024, the
proceeds of which were loaned to IPL and are being held in escrow by the trustee to be used on
December 1, 2006 to call at par $40 million principal amount of 6 5/8% first mortgage bonds due
2024. These proceeds are reflected on the accompanying balance sheet as restricted cash at September
30, 2006. The direction to call the outstanding bonds was delivered to the trustee on September 28,
2006. This financing activity will result in annual interest savings to IPL of approximately
$830,000.

On September 27, 2006, the IFA also issued on behalf of IPL $60 million principal
amount of insured first mortgage auction rate bonds due 2041, the proceeds of which were placed with
the trustee to be made available to IPL as funds are invested on certain qualifying environmental
facilities. Through September 30, 2006, IPL has drawn down $17.6 million of such proceeds. The
remaining proceeds are reflected on the accompanying balance sheet as restricted cash at September
30, 2006. The initial rate was set at 3.45%, and will be adjusted based upon a 7-day auction period.

On October 6, 2006, IPL issued $158.8 million of first mortgage bonds, 6.05% Series, due 2036.
The net proceeds from this offering, together with other available cash, were used to effect the
repayment upon maturity of IPL's 8% Series first mortgage bonds, due October 2006 in the principal
amount of $58.8 million and will be used to effect the redemption of IPL's 7.05% Series first
mortgage bonds, due 2024 in the principal amount of $100 million in November 2006, as well as $2.7
million of redemption premiums associated with the 7.05% Series redemption.

In July 2006, Moody's Investors Service, Inc. upgraded the credit ratings of IPL as
follows:

`New Rating      Previous Rating
                                              ------------     ----------------
IPL Issuer Rating/Corporate Credit
Rating/Long-Term Issuer Default Rating            Baa2               Baa3

IPL Senior Secured                                Baa1               Baa2`

A security rating is not a recommendation to buy, sell or hold securities. The rating may be
subject to revision or withdrawal at any time by the assigning rating organization, and each rating
should be evaluated independently of any other rating.

Capital Requirements.  Our capital requirements are primarily related to IPL's
construction expenditures needed to meet customers' needs for electricity and for environmental
compliance. IPL's capital expenditures totaled $148.6 million during the nine months ended September
30, 2006. This represented an increase of $70.9 million from the comparable period in 2005,
primarily related to increased expenditures on technology designed to reduce environmental emissions
related to IPL's multi-pollutant plan. Construction expenditures during the first nine months of
2006 were financed with internally generated cash provided by operations, borrowings on our credit
facilities, and $17.6 million in draws from the $60 million first mortgage bonds issued in September
2006. IPL's construction program is composed of capital expenditures necessary for prudent utility
operations and compliance with environmental laws and regulations, along with discretionary
investments designed to improve overall performance. Our capital expenditure program for the three-
year period 2006-2008 is currently estimated to cost approximately $522 million. It includes
approximately $152 million for additions, improvements and extensions to transmission and
distribution lines, substations, power factor and voltage regulating equipment, distribution
transformers and street lighting facilities. The capital expenditure program also includes
approximately $220 million for construction projects designed to reduce SO2 and mercury
emissions; $104 million for power plant related projects; $40 million for investments associated
with additional generation and $6 million for other miscellaneous equipment and furniture. The
majority of the expenditures for construction projects designed to reduce SO2 and mercury
emissions are recoverable through jurisdictional retail rate revenue as part of IPL's multipollutant
plan, subject to regulatory approval. Capital expenditures are financed with a combination of
internally generated funds and short-term and long-term borrowings.

Pension Funding.  The Pension Protection Act of 2006 ("Act"), which
contains comprehensive pension funding reform legislation, was enacted into law during the third
quarter of 2006. The pension funding provisions are effective January 1, 2008. The Act requires
plans that are less than 100% funded to fully fund any funding shortfall in amortized level
installments over seven years, beginning in the year of the shortfall. Then, each year thereafter,
if the plan's underfunding increases to more than the present value of the remaining annual
installments, the excess is separately amortized over a new seven year period. The Act provides
transition relief for years 2008, 2009, and 2010. Rather than requiring 100% funding immediately,
the Act requires a funded ratio of 92% for 2008, 94% for 2009, 96% for 2010, and 100% for years 2011
and beyond. IPL's total underfunded pension liability was approximately $119.5 million as of
September 30, 2006. The Act contains special accelerated provisions for plans that are determined to
be "at risk". IPL plans to fund to levels to avoid the "at risk" status. IPL is
in process of determining the impact on pension funding when the Act becomes effective in 2008.

IPL's funding policy for the Defined Benefit Pension Plan and the supplemental retirement plan
("the Pension Plans") is to contribute annually no less than the minimum required by
applicable law, nor more than the maximum amount that can be deducted for federal income tax
purposes. In September, 2006, IPL made a $37 million cash contribution to the Defined Benefit
Pension Plan. In addition, IPL funded $0.2 million into the Supplemental Retirement Plan earlier
this year to satisfy a participant lump sum election.

Dividends.  All of our outstanding common stock is owned by AES. During the first
nine months of 2006, we paid $75.3 million in dividends to AES. Other future distributions will be
determined at the discretion of our board of directors and will depend primarily on dividends
received from IPL. Dividends from IPL are affected by IPL's results of operations, cash flows,
financial condition, capital requirements, financings, regulatory considerations, and such other
factors as IPL's board of directors deems relevant.

Related Party Transactions.  In the third quarter, IPL purchased, in arm's length
transactions, 3,200 SO2 vintage 2006 air emissions allowances at the then current market
price, for a total of $2.0 million from a wholly-owned subsidiary of AES.

Other Regulatory Matters

Fuel Adjustment Charge Proceedings.

During the second quarter of 2006, we received an Order from the IURC requiring us to return all
RSG amounts assessed by the Midwest ISO prior to December 9, 2005 charged to customers, or scheduled
to be charged to customers, through the FAC (approximately $5.8 million). According to the Order,
RSG amounts beginning December 9, 2005, may be recovered in IPL's FACs, subject to a benchmark.
Based on established regulatory practices and Orders received by the IURC allowing deferral, we
believe it is probable that all RSG amounts charged to us prior to December 9, 2005, will be
recovered. Accordingly, we have deferred such cost as a regulatory asset. The recovery period for
these costs can not yet be determined.

Additionally, in IPL's March 2006 FAC proceeding, a consumer advocacy group representing some of
IPL's industrial customers requested that a sub-docket be established to review IPL's fuel costs.
The hearing on this FAC was held on May 3, 2006 and IPL received an Order on May 24, 2006 approving
the establishment of a sub-docket to review its fuel costs. IPL's last two FAC Orders approved FAC
factors on an interim basis, subject to refund, due to the establishment of the sub-docket. To date,
no procedural schedule for this proceeding has been established.

Alternative Regulatory Plan. On August 23, 2006, we made a filing with the IURC in
which we sought approval for a new alternative regulatory plan ("ARP") called Empower.  Our Elect
Plan, which was filed as an ARP and offered customer pricing and service options, expires on
December 31, 2006.   The three elements of Empower are: (1) renewable energy options, (2) energy
efficiency options and (3) customer service and pricing options.  The renewable energy options
include a Green Power initiative, renewable energy education and a commitment to invest in a
renewable energy project.  Energy efficiency options are demand-side management options with a focus
on energy efficiency.  The customer pricing options provide a voluntary alternative to our regulated
rates and services and include choices for a Sure Bill, Fixed Rate or Time of Use program.  Similar
to our Elect Plan, the proposed plan would treat revenues and certain expenses of its optional
pricing and service programs as non-jurisdictional for purposes of computing our rolling 12-month
jurisdictional net operating income in our fuel adjustment clause proceedings.

On October 13, 2006, the Indiana Office of Utility Consumer Counselor ("OUCC") filed
testimony responsive to our proposal.  The OUCC was generally supportive of continuation of our
Elect Plan programs, but opposed our continuation of treating ARP revenues and certain expenses as
nonjurisdictional for purposes of computing our rolling 12-month jurisdictional net operating income
in our fuel adjustment clause proceedings.  Citizens Action Coalition of Indiana, Inc.
("CAC"), a not-for-profit membership corporation that works on a wide variety of consumer
and energy issues, also filed testimony on October 13, 2006.  CAC also opposed certain aspects of
our filing.  We filed rebuttal testimony on October 23, 2006.  On October 27, 2006, IPL, the OUCC,
CAC and the IPL Industrial Group filed a Stipulation and Agreement with the Commission, requesting
that our Green Power program be continued for six months past its December 31, 2006 expiration under
the Elect Plan, and that the parties be given an additional six months to attempt to reach a global
settlement of the issues arising from the ARP filing.  We are unable to predict if, or when, the
parties will be able to reach a settlement of this matter and, if, or when, the IURC would approve
any proposed settlement.

New Accounting Pronouncements

In March 2006, the FASB released SFAS No. 156, "Accounting for
Servicing of Financial Assets," to simplify accounting for separately recognized servicing
assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 156 permits an
entity to choose either the amortization method or the fair value measurement method for measuring
each class of separately recognized servicing assets and servicing liabilities after they have been
initially measured at fair value. SFAS No. 156 applies to all separately recognized servicing assets
and liabilities acquired or issued after the beginning of an entity's fiscal year that begins after
September 15, 2006. IPALCO does not believe SFAS No. 156 will have a material impact on our results
of operations or financial position.

In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes" ("FIN No. 48") which is effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return, and also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. IPALCO will adopt FIN No. 48 on January 1,
2007 and will record the cumulative effect of applying the provisions of this Interpretation as an
adjustment to beginning retained earnings. FIN No. 48 applies to all tax positions accounted for in
accordance with SFAS No. 109. IPALCO is assessing the impact the adoption of FIN 48 will have on our
results of operations or financial position.

In July 2006, the FASB also issued FASB Statement of Position FAS 13-2, "Accounting for a
Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a
Leveraged Lease Transaction." This FSP amends FASB Statement
No. 13, "Accounting for Leases," to require a lessor in a leveraged-lease transaction to
recalculate the leveraged lease for the effects of a change or projected change in the timing of
cash flows relating to income taxes that are generated by the leveraged lease. The FSP is effective
for fiscal years beginning after December 15, 2006. The cumulative effect of applying the provisions
of this FSP will be recorded as an adjustment to the balance of retained earnings as of the
beginning of January 1, 2007. IPALCO is assessing the impact the adoption of FAS 13-2 will have on
our results of operations or financial position.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements".  SAB 108 was issued in order to eliminate the diversity of
practice surrounding how public companies quantify financial statement misstatements.  In SAB
108, the SEC staff established an approach that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the company's financial
statements and the related financial statement disclosures.  This model is commonly referred to
as a "dual approach" because it requires quantification of errors under both the iron curtain and
the rollover methods.  IPALCO will initially apply the provisions of SAB 108 using the
cumulative effect transition method in connection with the preparation of our annual financial
statements for the year ending December 31, 2006.  When we initially apply the provisions of
SAB 108, we do not expect the impact to be material to our financial statements.  The
accompanying financial statements do not reflect these adjustments.

In September 2006, the FASB released SFAS No. 157, "Fair Value Measurements," to define
fair value, establish a framework for measuring fair value in accordance with accounting principles
generally accepted in the United States of America, and expand disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. IPALCO
is assessing the impact the adoption of SFAS No. 157 will have on our results of operations or
financial position.

In September 2006, the FASB released FASB Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB Statements No. 87, 88,
106, and 132(R)." This Statement will require IPALCO to fully recognize, as a liability, the
underfunded status of its benefit plans in its 2006 year-end balance sheet. IPALCO's consolidated
unfunded benefit obligation is already recognized in the accompanying financial statements. However,
IPALCO will be required to present its unrecognized prior service cost from previous pension plan
amendments and the associated deferred income tax liabilities as part of Other comprehensive
income (loss) in its consolidated balance sheets beginning on December 31, 2006. IPALCO's
intangible pension asset from previous pension plan amendments is currently included in
MISCELLANEOUS DEFERRED DEBITSand totaled $27.3 million and $21.9 million as of September 30,
2006 and December 31, 2005, respectively. The new standard will also require IPALCO to measure its
plan assets and benefit obligations as of its year-end balance sheet date, beginning in 2008.
Statement 158 does not address the measurement and recognition issues related to the changes in the
fair value of plan assets and benefit obligations. Those, as well as other issues, will be the
primary focus of a multi-year Phase II project. Accordingly, Statement 158 does not have any impact
on IPALCO's computation of its benefit expense recognized in the income statement.

---

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Not applicable pursuant to General Instruction H of the Form 10-Q.

---

Item 4.	Controls and Procedures

We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the reports that we file
or submit under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the chief executive officer
("CEO") and chief financial officer ("CFO"), as appropriate,
to allow timely decisions regarding required disclosures.

Evaluation of Disclosure Controls and Procedures. We carried out an
evaluation, under the supervision and with the participation of our management, including the CEO
CFO, of the
effectiveness of our "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15-d-15 (e) as required by paragraph (b) of the Exchange
Act Rules 13a-15 or 15d-15) as of September 30, 2006. IPL's management, including the CEO and CFO,
is engaged in a comprehensive effort to review, evaluate and improve our controls; however,
management does not expect that our disclosure controls or our internal controls over financial
reporting will prevent all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system's objectives
will be met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. In addition,
any evaluation of the effectiveness of controls is subject to risks that those internal controls may
become inadequate in future periods because of changes in business conditions, or that the degree of
compliance with the policies or procedures deteriorates. We have interests in certain unconsolidated
entities. As we do not control or manage these entities, our disclosure controls and procedures with
respect to such entities is generally more limited than those we maintain with respect to our
consolidated subsidiaries.

Due to the material weakness described below, our CEO and CFO concluded that our disclosure
controls and procedures as of September 30, 2006 were not effective.
 To address this material weakness, we performed additional
analysis and other procedures to prepare our consolidated financial statements in accordance with
GAAP. Accordingly, we believe that the consolidated financial
statements included in this quarterly report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented.

A material weakness is a significant deficiency (within the meaning of PCAOB Auditing Standard
No. 2), or combination of significant deficiencies, that results in there being more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected.

As reported in Item 4 of our September 30, 2005 Form 10-Q, the Company determined that a material
weakness in internal control over financial reporting existed as of September 30, 2005. This
material weakness remains as of September 30, 2006. Specifically, the Company lacked effective
controls to monitor and assess individual components of the deferred income tax and the related
regulatory asset balances. These control deficiencies could result in a future misstatement of
certain account balances that could result in a material misstatement to the annual or interim
financial statements.

The Company's remediation efforts with respect to its deferred income tax and the related
regulatory asset balances include identification of all significant components of such balances and
enhanced controls over the analyses and reconciliation of the activity related to these components.
Moreover, the components not previously tracked in our tax accounting system are being incorporated
into and tracked in our tax accounting system in order to facilitate future reviews. When the remediation
is complete, the total deferred income taxes per the Company's financial accounting system will be reconciled
and adjusted, if necessary, to the deferred taxes reported in the tax accounting system on a quarterly
basis, and any required adjustment to the related regulatory asset balances will be recorded.

Changes in Internal Controls.
In the
course of our evaluation of disclosure controls and procedures, management considered certain
internal control areas in which we have made and are continuing to make changes to improve and
enhance controls. Based upon that evaluation, the CEO and CFO concluded that the following changes
in our internal controls over financial reporting identified in connection with the evaluation
required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter
ended September 30, 2006 have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. These changes are related to our remediation
efforts of a certain material weakness.

Material Weakness Remediation Plans as of the date of filing this Form 10-
Q.

We have corrected errors identified related to prior periods by recording adjustments during the
quarter ended September 30, 2006. These errors were not material to the periods in which they
related.  As of the end of the third quarter, we have designed and implemented new controls and
procedures related to the tracking and reconciliation of components of our deferred incomes taxes
and related regulatory assets related to property, plant and equipment. We will begin testing
the operating effectiveness of these new controls and procedures during the fourth quarter of 2006.
The remediation steps performed during the quarter included the following:

Designed and implemented a methodology to
track all individual components of our deferred incomes taxes and related regulatory
assets related to property, plant and equipment;

Increased staffing and resources to operate and
monitor the new controls;

Provided additional training on regulated
utility income tax accounting to our tax department;

Designed and implemented additional detective
control related to the identification and evaluation of non-recurring tax transactions and
adjustments and tracking movements in deferred tax accounts.

There were no other changes identified during the quarter ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.

Compliance with Section 404 of the Sarbanes Oxley Act of 2002.  Beginning with the year
ending December 31, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include
an internal control report of management with our annual report on Form 10-K. The internal control
report must contain (1) a statement of management's responsibility for establishing and maintaining
adequate internal controls over financial reporting for our Company, (2) a statement identifying the
framework used by management to conduct the required evaluation of the effectiveness of our internal
controls over financial reporting, (3) management's assessment of the effectiveness of our internal
controls over financial reporting as of the end of our most recent fiscal year, including a
statement as to whether or not our internal controls over financial reporting are effective, and (4)
a statement that our independent auditors have issued an attestation report on management's
assessment of our internal controls over financial reporting.

Management has developed a comprehensive plan in order to achieve compliance with Section 404
within the prescribed period and to review, evaluate and improve the design and effectiveness of our
controls and procedures on an on-going basis. The comprehensive compliance plan includes (1)
documentation and assessment of the adequacy of our internal controls over financial reporting, (2)
remediation of control weaknesses, (3) validation through testing that controls are functioning as
documented and (4) implementation of a continuous reporting and improvement process for internal
controls over financial reporting. As a result of this initiative, we have made and will continue to
make changes from time to time in our internal controls over financial reporting.

---

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to our Form 10-Q for the period ended March 31, 2006 for
information related to a legal proceeding that was settled during the period covered by that
report.

Item 1A. Risk Factors

There have been no material changes to the risk factors as previously
disclosed in IPALCO's 2005 annual report on Form 10-K.

Item 6.  Exhibits





|**Exhibit No.** | **Document**
|--------------- | ------------

`4.1   Fifty-first Supplemental Indenture dated as of September 1, 2006.

4.2   Fifty-secon Supplemental Indenture dated as of September 1, 2006.

4.3   Fifty-third Supplemental Indenture dated as of October 1, 2006.

31.1  Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a).

31.2  Certification by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a).

  32  Certification required by Rule 13a-14(b) or 15d-14(b) and by 18 U.S.C. Section 135`

---

**SIGNATURE**



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



| |                         
| | ------------------------
| | IPALCO ENTERPRISES, INC.

| |             
| | ------------
| |             
| | (Registrant)

Date: November 3, 2006



| |     |                    
| | --- | -------------------
| | By: | /s/ Frank P. Marino

| |                                                                          
| | -------------------------------------------------------------------------
| |                                                                          
| | Frank P. Marino                                                          
| | Vice President and Chief Financial Officer                               
| | (Principal Financial and Accounting Officer 
and Duly Authorized Officer)