Document:

<PAGE>   1

                         [DELOITTE & TOUCHE LETTERHEAD]

                                                                    EXHIBIT 10.7
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Prestolite Indiel Argentina S.A.
Buenos Aires, Argentina

We have audited the accompanying consolidated balance sheets of Prestolite
Indiel Argentina S.A. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.

Our audits also comprehended the translation of the Argentine peso amounts into
U.S. dollar amounts for the purpose of consolidation with the financial
statements of the parent company, Prestolite Electric Incorporated. In our
opinion, such translation has been made in conformity with accounting principles
generally accepted in the United States of America, as set forth in Statement of
Financial Accounting Standards No. 52, applicable to foreign currency financial
statements incorporated in financial statements of an enterprise by
consolidation.

Buenos Aires, Argentina.
January 31, 2001

Deloitte & Co. S.R.L.

<PAGE>   2

PRESTOLITE INDIEL ARGENTINA S.A.
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            December             December
                                                                            31, 2000             31, 1999
                                                                            --------             --------

<S>                                                                        <C>                   <C>
ASSETS

CURRENT ASSETS
 Cash                                                                       $    645              $    280
 Accounts receivable, net                                                      8,337                 8,883
 Inventories                                                                  10,760                14,227
 Other current assets                                                          2,140                 1,379
                                                                            --------              --------
    Total current assets                                                      21,882                24,769
PROPERTY, PLANT AND EQUIPMENT, NET                                            11,590                12,869
OTHER NON-CURRENT ASSETS                                                       8,570                 8,391
                                                                            --------              --------

    Total assets                                                            $ 42,042              $ 46,029
                                                                            ========              ========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Short-term debt and current portion of long-term debt                      $  1,540              $  3,366
 Accounts payable                                                              6,611                 5,702
 Accrued liabilities                                                           2,202                 3,003
                                                                            --------              --------
    Total current liabilities                                                 10,353                12,071

LONG-TERM LIABILITIES
 Loans due to parent company                                                   4,157                 6,336
 Long-term debt                                                                  339
 Other non-current liabilities                                                 1,970                 1,991
                                                                            --------              --------
    Total liabilities                                                         16,819                20,398
                                                                            --------              --------

COMMITMENTS AND CONTINGENCIES
                                                                            --------              --------
MINORITY INTEREST                                                                                        2
                                                                            --------              --------
STOCKHOLDERS' EQUITY
 Common stock, par value $1 per share; 14,786,176 shares
  authorized, issued and outstanding                                          14,786                14,786
 Additional paid-in capital                                                   41,665                38,165
 Legal reserve                                                                 1,012                 1,012
 Accumulated deficit                                                         (32,240)              (28,334)
                                                                            --------              --------
    Total stockholders' equity                                                25,223                25,629
                                                                            --------              --------

    Total liabilities and stockholders' equity                              $ 42,042              $ 46,029
                                                                            ========              ========
</TABLE>

See notes to consolidated financial statements.

<PAGE>   3

PRESTOLITE INDIEL ARGENTINA S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                           Year ended
                                                                        ---------------------------------------------
                                                                          December         December         December
                                                                          31, 2000         31, 1999         31, 1998
                                                                        -----------      -----------      -----------

<S>                                                                     <C>              <C>              <C>
NET SALES                                                                $ 40,785          $ 39,366         $ 56,711
                                                                         --------          --------         --------

COSTS AND EXPENSES:
 Cost of goods sold                                                        37,733            36,671           51,866
 Selling, general and administrative expenses                               7,041             7,672            9,496
 Severance                                                                    499                              5,474
                                                                         --------          --------         --------
                                                                           45,273            44,343           66,836
                                                                         --------          --------         --------

OPERATING LOSS                                                             (4,488)           (4,977)         (10,125)
                                                                         --------          --------         --------

INTEREST EXPENSE                                                            2,011             1,642            1,251
                                                                         --------          --------         --------

OTHER INCOME (EXPENSE)
 Revenues under tax regimes for promoted activities                         2,707             1,884            2,792
 Other income, net                                                            407             1,212              224
                                                                         --------          --------         --------
                                                                            3,114             3,096            3,016
                                                                         --------          --------         --------

LOSS BEFORE PROVISION FOR INCOME TAXES
 AND MINORITY INTEREST                                                     (3,385)           (3,523)          (8,360)

PROVISION FOR INCOME TAXES                                                    522               512              480
                                                                         --------          --------         --------

LOSS BEFORE MINORITY INTEREST                                              (3,907)           (4,035)          (8,840)

MINORITY INTEREST                                                               1                (1)               2
                                                                         --------          --------         --------

NET LOSS                                                                 $ (3,906)         $ (4,036)        $ (8,838)
                                                                         ========          ========         ========

</TABLE>

See notes to consolidated financial statements.

<PAGE>   4

PRESTOLITE INDIEL ARGENTINA S.A.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands of U.S. dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                          Additional
                                           Common          paid-in          Legal         Accumulated
                                           stock           capital          reserve         deficit          Total

<S>                                    <C>             <C>               <C>              <C>             <C>
Balances, December 31, 1997            $  14,786       $  29,665         $   1,012         $ (15,460)     $  30,003

Net loss                                                                                      (8,838)        (8,838)
                                       ---------       ---------         ---------         ---------      ---------

Balances, December 31, 1998            $  14,786       $  29,665         $   1,012         $ (24,298)     $  21,165

Conversion of loans due to
  parent company into equity                               8,500                                              8,500

Net loss                                                                                      (4,036)        (4,036)
                                       ---------       ---------         ---------         ---------      ---------

Balances, December 31, 1999            $  14,786       $  38,165         $   1,012         $ (28,334)     $  25,629

Conversion of loans due to
  parent company into equity                               3,500                                              3,500

Net loss                                                                                      (3,906)        (3,906)
                                       ---------       ---------         ---------         ---------      ---------

Balances, December 31, 2000            $  14,786       $  41,665         $   1,012         $ (32,240)     $  25,223
                                       =========       =========         =========         =========      =========

</TABLE>

See notes to consolidated financial statements

<PAGE>   5

PRESTOLITE INDIEL ARGENTINA S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                             Year ended
                                                                      ------------------------------------------------------------
                                                                       December 31,          December 31,           December 31,
                                                                          2000                  1999                   1998
                                                                      --------------       ---------------        ----------------

<S>                                                                   <C>                  <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                $(3,906)              $(4,036)               $(8,838)
Adjustments to reconcile net loss to net cash (used in)
 provided by operating activities:
  Depreciation of property, plant and equipment                           2,905                 3,530                  3,398
  Gain on sale of property, plant and equipment                             (43)                   (7)
  Minority interest                                                          (2)                    1                     (2)
  Changes in assets and liabilities:
    Accounts receivable                                                     546                   137                    180
    Inventories                                                           3,467                  (291)                 4,160
    Other current and non-current assets                                   (940)                  383                  1,524
    Accounts payable                                                        909                  (827)                (3,010)
    Accrued liabilities                                                    (502)               (1,617)                 1,206
    Other non-current liabilities                                          (320)                 (535)                    23
                                                                        -------               -------                -------
Net cash provided by (used in) operating activities                       2,114                (3,262)                (1,359)
                                                                        -------               -------                -------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Acquisition of property, plant and equipment                            (1,146)               (1,449)                (1,547)
 Proceeds from sale of property, plant, and equipment                        58                    47
                                                                        -------               -------                -------
Net cash used in investing activities                                    (1,088)               (1,402)                (1,547)
                                                                        -------               -------                -------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Financing obtained from the parent company                               1,321                 3,542                  6,294
 (Decrease) increase in bank arrangements, net                           (1,804)                1,040                 (4,500)
 Repayment of capital leases                                               (178)                  (42)
                                                                        -------               -------                -------
Net cash (used in) provided by financing activities                        (661)                4,540                  1,794
                                                                        -------               -------                -------
INCREASE (DECREASE) IN CASH                                                 365                  (124)                (1,112)
CASH AT BEGINNING OF YEAR                                                   280                   404                  1,516
                                                                        -------               -------                -------

CASH AT END OF YEAR                                                     $   645               $   280                $   404
                                                                        =======               =======                =======
SUPPLEMENTAL DISCLOSURES
 Cash flow information:                                                 $ 1,848               $ 1,447                $   958
                                                                        =======               =======                =======
   Cash paid for interest                                               $    22               $     8                $     -
                                                                        =======               =======                =======
   Cash paid for income taxes
 Non-cash investing activities:
   Capital lease obligations incurred for the purchase
     of new equipment                                                   $   495               $   248                $     -
 Non-cash financing activities:                                         =======               =======                =======
   Conversion of loans due to parent company into
     equity                                                             $ 3,500               $ 8,500                $     -
                                                                        =======               =======                =======

</TABLE>

See notes to consolidated financial statements.

<PAGE>   6

PRESTOLITE INDIEL ARGENTINA S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. dollars)
--------------------------------------------------------------------------------

 1.      GENERAL INFORMATION - NATURE OF BUSINESS

PRESTOLITE INDIEL ARGENTINA S.A., A WHOLLY OWNED SUBSIDIARY OF PRESTOLITE
ELECTRIC INCORPORATED, A U.S. CORPORATION, INCLUDES THE WHOLLY OWNED
SUBSIDIARIES EQUIPOS ORIGINALES S.A. AND JOVSA S.A. OPERATIONS ARE GENERALLY
CONDUCTED AS PRESTOLITE INDIEL ARGENTINA S.A. (PRESTOLITE INDIEL ARGENTINA S.A.,
EQUIPOS ORIGINALES S.A. AND JOVSA S.A., HEREINAFTER COLLECTIVELY REFERRED TO AS
THE "COMPANY").

THE COMPANY MANUFACTURES AND DISTRIBUTES MOTOR STARTERS, ALTERNATORS,
DISTRIBUTORS AND STEERING COLUMNS FOR AFTERMARKET AND ORIGINAL EQUIPMENT
APPLICATIONS IN THE AUTOMOTIVE INDUSTRY. THE COMPANY'S THREE MANUFACTURING
FACILITIES ARE LOCATED IN ARGENTINA.

 2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
      statements include the accounts of Prestolite Indiel Argentina S.A. and
      its subsidiaries, Equipos Originales S.A. and Jovsa S.A. All significant
      intercompany balances and transactions have been eliminated.

      PRESENTATION OF FINANCIAL STATEMENTS IN U.S. DOLLARS - The accompanying
      consolidated financial statements have been translated into U.S. dollars
      in accordance with the provisions of Statement of Financial Accounting
      Standards ("SFAS") No. 52, Foreign Currency Translation. Management has
      determined that the Argentine peso is the functional currency. Certain
      assets and liabilities are denominated in currencies other than the
      functional currency; transaction gains and losses on those assets and
      liabilities are included in the determination of income for the relevant
      periods. The translation of all items of these financial statements has
      been made using the exchange rate of one Argentine peso to one U.S.
      dollar. This exchange rate reflects the free market exchange rate
      prevailing at December 31, 2000 and in the preceding years since the
      Convertibility Law was enacted in April, 1991. Consequently, no
      adjustments resulted from the translation of the financial statements from
      their functional currency to U.S. dollars.

      USE OF ESTIMATES - The preparation of financial statements in conformity
      with accounting principles generally accepted in the United States of
      America requires management to make 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
      and the reported amount of revenues and expenses during the reporting
      period. Actual results may differ from the estimates and assumptions used
      in preparing the financial statements.

      REVENUE RECOGNITION - Revenues are recognized upon shipment of products,
      with appropriate provision for doubtful accounts. The Company believes
      that its revenue recognition policies conform to Staff Accounting
      Bulleting No. 101, Revenue Recognition in Financial Statements.

<PAGE>   7

Revenues exceeding 10% attributable to any one customer amounted to $7,383
or 18%, and $7,700 or 14% (in both cases representing 1 customer), for the
years ended December 31, 2000 and 1998, respectively. There were no
revenues exceeding 10% attributable to any one customer in 1999.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of cash,
accounts receivable and payable, accrued expenses, debt and other
liabilities approximates their fair value at December 31, 2000 and 1999.
Fair values have been determined based on management estimates and
information from market sources. The fair value of financial instruments
is based on a number of factors and assumptions and may not necessarily be
representative of the actual gains or losses that may be realized upon
settlement.

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE - The Company carries accounts
receivable at the amount it deems to be collectible. Accordingly, it
provides allowances for accounts receivable deemed to be uncollectible
based on management's best estimates. Recoveries are recognized in the
period they are received. The ultimate amount of accounts receivable that
become uncollectible could differ from the estimated amount. The activity
for the allowance for doubtful accounts receivable is as follows:

<TABLE>
<CAPTION>
                                                                     Year ended
                                                  --------------------------------------------------
                                                     December           December          December
                                                     31, 2000           31, 1999          31, 1998
                                                  --------------------------------------------------

<S>                                               <C>                <C>               <C>
Beginning balance                                    $   762            $   857           $   540
Provision                                                496                268               317
Write-offs, net                                         (410)              (363)
                                                     -------            -------           -------
Ending balance                                       $   848            $   762           $   857
                                                     =======            =======           =======
</TABLE>

INVENTORIES - Inventories are stated at the lower of cost or market, with cost
being established by the first-in first-out method.

PROPERTY, PLANT AND EQUIPMENT - Property plant and equipment is stated at cost
and depreciated using the straight-line method over the expected life of the
related asset. Buildings are depreciated over 50 years; machinery,
installations, tooling, furniture and fittings over 10 years; vehicles, over 5
years; and software over 3 years.

INCOME TAX AND ALTERNATIVE MINIMUM INCOME TAX - The Company accounts for income
taxes in accordance with the provisions of SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires an asset and liability approach for differences in
financial accounting and income tax purposes. Under this method, a deferred tax
asset or liability is recognized with respect to all temporary differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities, and the benefit from utilizing tax loss carryforwards and
asset tax credits is recognized in the year in which the loss or credit arises
(subject to a valuation allowance with respect to any tax benefits not expected
to be realized).

Alternative minimum income tax ("AMIT") is determined as 1% of total assets as
of year-end. The amount determined in respect of AMIT is considered as a
payment on account of the current income tax obligation. Tax payers must pay in
aggregate an amount that cannot be lesser than the

<PAGE>   8

     AMIT. The AMIT can be used to reduce the income tax obligation within 10
     years after the year of payment. Management has estimated that the Company
     will not be able to utilize the AMIT in future years. Therefore, AMIT has
     been charged to results of operations and is presented together with the
     provision for income taxes in the consolidated statement of operations.

     RECLASSIFICATIONS - Certain reclassifications have been made to conform
     prior years' data to the current presentation. These reclassifications had
     no impact on previously reported results of operations or shareholders'
     equity.

3.       INVENTORIES

         Inventories consisted of the following:

<TABLE>
<CAPTION>

                                                                             December          December
                                                                             31, 2000          31, 1999
                                                                         ---------------    --------------
<S>                                                                      <C>                <C>
     Finished goods                                                       $    4,842        $    3,732
     Work in process                                                           1,692             3,985
     Raw materials and other supplies                                          2,303             2,890
     Goods in transit                                                            301             1,068
     Resale merchandises                                                       1,622             2,552
                                                                          ----------        ----------
                                                                          $   10,760        $   14,227
                                                                          ==========        ==========
</TABLE>

4.       OTHER CURRENT ASSETS

     Other current assets consisted of the following:

<TABLE>
<CAPTION>
                                                                             December          December
                                                                             31, 2000          31, 1999
                                                                         ---------------    --------------
<S>                                                                      <C>                <C>
     Tax credits                                                          $      941        $      674
     Restricted deposits                                                         430
     Others                                                                      769               705
                                                                          ----------        ----------
                                                                          $    2,140        $    1,379
                                                                          ==========        ==========
</TABLE>

5.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                             December          December
                                                                             31, 2000          31, 1999
                                                                         ---------------    --------------
<S>                                                                      <C>                <C>
     Land                                                                 $      803        $      803
     Buildings                                                                 9,875             9,530
     Machinery                                                                23,375            22,875
     Tooling                                                                   8,406             7,741
     Installations                                                             3,317             3,297
     Furniture and fittings                                                    2,341             2,341
     Vehicles                                                                  1,094             1,044
     Software                                                                    979               932
     Others                                                                      103               132
                                                                          ----------        ----------
     Total                                                                    50,293            48,695
     Less: Accumulated depreciation                                          (38,703)          (35,826)
                                                                          ----------        ----------
     Property, plant and equipment, net                                   $   11,590        $   12,869
                                                                          ==========        ==========

</TABLE>

<PAGE>   9

6.        OTHER NON-CURRENT ASSETS

          Other non-current assets consisted of the following:

<TABLE>
<CAPTION>

                                                                                 December           December
                                                                                 31, 2000           31, 1999
                                                                             ---------------    --------------
<S>                                                                          <C>                <C>
         Tax credits arising from the suspension of tax benefits              $    4,922         $    4,922
         Other tax credits                                                         3,648              3,469
                                                                              ----------         ----------
                                                                              $    8,570         $    8,391
                                                                              ==========         ==========
</TABLE>

7.       DEBT

         Debt consisted of following:

<TABLE>
<CAPTION>
                                                                                 December           December
                                                                                 31, 2000           31, 1999
                                                                             ---------------    ---------------
<S>                                                                          <C>                <C>
         Bank arrangements                                                    $    1,356         $    3,160
         Capital lease obligations                                                   523                206
                                                                              ----------         ----------
         Total debt                                                           $    1,879         $    3,366
         Less: short-term debt and current portion of long-term debt.              1,540              3,366
                                                                              ----------         ----------
         Long-term debt, less current portion                                 $      339         $        -
                                                                              ==========         ==========

</TABLE>

          The Company has arrangements with several banks to discount or borrow
     against accounts receivable. The approximate average annual interest rate
     was 19% and 17%, for 2000 and 1999, respectively.

          8.   OTHER NON-CURRENT LIABILITIES

               Other non-current liabilities consisted of the following:

<TABLE>
<CAPTION>

                                                                               December           December
                                                                               31, 2000           31, 1999
                                                                            -------------       -------------
<S>                                                                         <C>                <C>
         Retirement benefit liabilities                                       $    1,529         $    1,631
         Accrued claims and other litigation expenses                                372                360
         Others                                                                       69
                                                                              ----------         ----------
                                                                              $    1,970         $    1,991
                                                                              ==========         ==========

</TABLE>

<PAGE>   10

 9.      LEASES

     The Company leases certain machinery and vehicles under long-term capital
lease arrangements. Scheduled payments on capital leases as of December 31, 2000
are as follows:

<TABLE>

<S>                                                                                  <C>
     2001                                                                                $      236
     2002                                                                                       179
     2003                                                                                       130
     2004                                                                                       124
     2005                                                                                        17
                                                                                        -----------
     Total minimum lease payments                                                               686
     Less: Imputed interest                                                                     163
                                                                                        -----------
     Present value of net minimum lease payments                                        $       523
                                                                                        ===========

</TABLE>

10. RELATED PARTY TRANSACTIONS

    Prestolite Indiel Argentina S.A. is a wholly-owned subsidiary of Prestolite
    Electric Incorporated (the "Parent Company"). For the years ended December
    31, 2000, 1999, and 1998, sales to the Parent Company and its affiliates
    totaled $3,312, $1,740 and $955, respectively, and purchases from the Parent
    company and its affiliates totaled $203, $168 and $88, respectively.
    Included in accounts receivable as of December 31, 2000 and 1999 is $191 and
    $801 due from the Parent Company and its affiliates, respectively. Included
    in accounts payable as of December 31, 2000 and 1999 is $98 and $24, due to
    the parent company and its affiliates. The Company has obtained financing
    from the Parent Company of $1,321, $3,542 and $6,524, in 2000, 1999 and
    1998, respectively. Loans due to the Parent Company at December 31, 2000 and
    1999 amounted to $4,157 and $6,336, respectively.

11. BENEFITS UNDER TAX REGIME FOR PROMOTED ACTIVITIES

    The Company was granted the tax exemptions established by Law No. 22,021
    (amended by Law No. 22,702), which include, among others, the following
    benefits: (a) Exemption from payment of Income Tax and Capital/Assets Tax
    for a period of fifteen years from the start-up date of the industrial
    plant, ranging from 100% for the first five years up to 12.6% for the last
    year; and (b) Exemption from payment of value added tax ("VAT") on domestic
    market sales for a period of fifteen years from the start-up date of the
    industrial plant, applying the same sliding scale.

    The Economic Emergency Law No. 23,697 suspended 50% of the tax benefits for
    promoted activities for a period of six months from September 25, 1989.
    Decree No. 435/90 of the National Executive Power extended for another six
    months the suspension of the tax benefits and, also, repealed the VAT
    exemption on purchases to suppliers of raw materials and semi-processed
    goods. This benefit was afterwards reinstated by delivering tax credit
    certificates. Effective December 1, 1992, Decree No. 2,054/92 established
    that the tax benefits would be credited to a current account with the Tax
    Authority, based on the theoretical tax costs for the National Government.

<PAGE>   11

     The Company recorded a tax credit of $4,922 at December 31, 2000 and 1999,
     corresponding to the estimate of the Company's rights resulting from the
     suspension of the tax benefits, under Law No. 23,697, and the exemption
     from customs duties repealed by article 45 of Decree No. 435/90 credited to
     income when recorded. On June 28 and November 18, 1994, the Tax Authority
     issued General Resolutions No. 3,838/94 and 3,905/94, which regulated the
     granting of Tax Credit Certificates resulting from the suspension of the
     tax benefits under Law No. 23,697 and the exemption from customs duties
     repealed by article 45 of Decree No. 435/90. In June 1995, the Company
     submitted all the elements established by these General Resolutions to the
     corresponding control authority, who may request additional information in
     order to establish whether the granting of the aforementioned Tax Credit
     Certificates is applicable. Upon satisfactory completion of this review
     process, the Company will receive Debt Consolidation Bonds created by Law
     No. 23,982 in connection with the claims predating April 1, 1991, and the
     rest will be credited to a computerized current account provided by the Tax
     Authority.

12.  INCOME TAXES

THE PROVISION FOR INCOME TAXES SHOWN IN THE CONSOLIDATED STATEMENT OF OPERATIONS
SOLELY CONSISTS OF ALTERNATIVE MINIMUM INCOME TAX CHARGES OF $522, $512 AND $480
AT DECEMBER 31, 2000, 1999 AND 1998, RESPECTIVELY.

     The provision for income taxes differs from the amount computed by applying
     the statutory tax rate to net loss before provision for income taxes. The
     sources and tax effects of the differences are as follows:

<TABLE>
<CAPTION>

                                                                                    Year ended
                                                             --------------------------------------------------------
                                                                   December           December            December
                                                                   31, 2000           31, 1999            31, 1998
                                                             -----------------    ---------------    ----------------

<S>                                                          <C>                  <C>                <C>
     Income tax benefit at the statutory rate
       (35%)                                                   $   (1,185)         $   (1,233)         $   (2,926)
     Revenues under tax regimes for promoted
       activities                                                  (1,122)               (659)               (977)
     Other                                                            647                   8                (340)
     Increase in valuation allowance                                1,660               1,884               4,243
                                                               ----------          ----------          ----------
     Subtotal - Income tax                                              -                   -                   -
     Alternative minimum income tax                                   522                 512                 480
                                                               ----------          ----------          ----------
     Total provision for income taxes                          $      522          $      512          $      480
                                                               ==========          ==========          ==========

</TABLE>

THE SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES ARE THE
FOLLOWING:

<TABLE>
<CAPTION>

                                                                                     December            December
                                                                                     31, 2000            31, 1999
                                                                                  ---------------    ----------------
<S>                                                                               <C>                <C>
     Tax loss carryforwards                                                        $   12,318          $   11,167
     Other                                                                              1,419               1,511
                                                                                   ----------          ----------
                                                                                       13,737              12,678
     Valuation allowance                                                              (13,737)            (12,678)
                                                                                   ----------          ----------
                                                                                   $        0          $        0
                                                                                   ==========          ==========
</TABLE>

<PAGE>   12

The Company has established a valuation allowance against the net deferred tax
asset position at December 31, 2000 and 1999, as management believes that
realization of these benefits is not probable. Realization of the future tax
benefits related to the net deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income within the net
operating loss carryforward period. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial reporting
purposes.

The tax loss carryforwards expire as follows:

<TABLE>
<CAPTION>

                                                                                      Tax effect
                                                                                (statutory rate of 35%)
                                                                            --------------------------------
                                                            Tax-loss          December             December
            Expiration date                               carryforwards       31, 2000             31, 1999
------------------------------------------------          -------------     --------------      ------------
<S>                                                      <C>                <C>                 <C>
December 2000                                              $   1,718                             $     601
December 2001                                                  3,485          $    1,220             1,220
December 2002                                                 10,950               3,832             3,832
December 2003                                                  7,460               2,611             2,611
December 2004                                                  8,293               2,903             2,903
December 2005                                                  5,006               1,752
                                                           ---------          ----------         ---------
                                                           $  36,912          $   12,318         $  11,167
                                                           =========          ==========         =========

</TABLE>

13. TAX LOSS CARRYFORWARDS UNDER LAW NO. 24,073

         In accordance with the provisions of Law No. 24,073, tax loss
    carryforwards originated before March 31, 1991 will be converted, upon
    approval by the Tax Authority, into tax credits to be repaid by the Federal
    Government with Debt Consolidation Bonds under Law No. 23,982. On April 27,
    1993, the Company made the corresponding filing with the Tax Authority for
    $728. The Tax Authority rejected the Company's request. The Company
    accounted for a valuation allowance to cover the rejected tax credit. The
    Company has appealed the decision before the Tax Authority.

14.    RETIREMENT BENEFIT LIABILITIES

    The Company has a noncontributory unfunded pension plan which provides
    retirement benefits for 9 former employees. The plan was established in
    June, 1987 and terminated in June, 1995. Consequently, no pension
    increases, other than interest, have arisen since then or will arise in
    the future. The following table sets forth the components of the changes
    in pension liabilities during the years ended December 31, 2000 and 1999:

<TABLE>
                                                                                  December          December
                                                                                  31, 2000          31, 1999
                                                                                -------------     -------------
<S>                                                                             <C>               <C>
Benefit obligation at beginning of year                                          $   1,631          $  1,780
Interest cost                                                                          164               150
Benefits paid                                                                         (266)             (299)
                                                                                 ---------          --------
Benefit obligation at end of year                                                $   1,529          $  1,631
                                                                                 =========          ========
</TABLE>

<PAGE>   13

15.      SEVERANCE

      During 2000 and 1998 the Company announced and implemented restructuring
      plans involving employee cutbacks. All costs related to the plans are for
      employee severance. The following is a summary of the redundancy charges
      and outlays:

<TABLE>
<CAPTION>

                                                                              December           December
                                                                              31, 2000           31, 1999
                                                                           -------------      ------------
<S>                                                                        <C>                <C>
      Balance at beginning of year                                           $   1,085          $   2,157
      Severance cost                                                               499
      Write-offs - Payments                                                     (1,129)            (1,072)
                                                                             ---------          ---------
      Balance at end of year                                                 $     455          $   1,085
                                                                             =========          =========

</TABLE>

16.      CONTINGENCIES - ACCRUED CLAIMS AND OTHER LITIGATION EXPENSES

      The Company is involved in various claims and legal proceedings of a
nature considered normal to its business. At December 31, 2000 and 1999 the
Company recorded a liability related to these claims of $372 and $360,
respectively. The precise final outcome of such claims and proceedings is
uncertain. Management believes that no significant negative impact will result
from known outstanding issues.

17. RESTRICTIONS ON THE DISTRIBUTION OF PROFITS

      Under Argentine Corporation Law N(degree) 19,550, Companies must
      appropriate 5% of each year's income to a legal reserve, until the reserve
      is equivalent to 20% of the carrying value of common stock, determined by
      applying accounting principles generally accepted in Argentina. Dividend
      distributions must be approved by a vote of the stockholders. Dividends
      are allowed only to the extent of retained earnings, based upon financial
      statements prepared in accordance with accounting principles generally
      accepted in Argentina.<PAGE>   1
                                                                     EXHIBIT 4.1

================================================================================

                          SECOND SUPPLEMENTAL INDENTURE

                            Dated as of April 5, 2001

                                       to

                                    INDENTURE

                           Dated as of March 13, 2001

                                     between

                                NRG ENERGY, INC.

                                       and

                              THE BANK OF NEW YORK,

                                   as Trustee

================================================================================

<PAGE>   2

         SECOND SUPPLEMENTAL INDENTURE, dated as of April 5, 2001 (this "Second
Supplemental Indenture"), to the Indenture, dated as of March 13, 2001 (the
"Base Indenture"), between NRG ENERGY, INC., a Delaware corporation (the
"Company"), and THE BANK OF NEW YORK, a New York banking corporation (the
"Trustee"), as supplemented by the First Supplemental Indenture, dated as of
March 13, 2001 (the "First Supplemental Indenture"), between the Company and the
Trustee.

         WHEREAS, the Company and the Trustee have heretofore executed and
delivered the Base Indenture to provide for the issuance from time to time of
Securities (as defined in the Base Indenture) of the Company, to be issued in
one or more Series (as defined in the Base Indenture);

         WHEREAS, Sections 2.1, 2.2 and 7.1 of the Base Indenture provide, among
other things, that the Company and the Trustee may enter into indentures
supplemental to the Base Indenture for, among other things, the purpose of
establishing the designation, form, terms and provisions of Securities of any
Series as permitted by Sections 2.1, 2.2 and 7.1 of the Base Indenture;

         WHEREAS, the Company (i) desires the issuance of two new separate
Series of Securities to be designated as hereinafter provided and (ii) has
requested the Trustee to enter into this Second Supplemental Indenture for the
purpose of establishing the designation, form, terms and provisions of the
Securities of such Series;

         WHEREAS, all action on the part of the Company necessary to authorize
the issuance of said Securities under the Base Indenture and this Second
Supplemental Indenture has been duly taken.

         NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH:

         That, in order to establish the designation, form, terms and provisions
of, and to authorize the authentication and delivery of, said Securities, and in
consideration of the acceptance of said Securities by the Holders thereof and of
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:

<PAGE>   3

                                    ARTICLE I

                                   DEFINITIONS

         (a) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings ascribed thereto in the Base Indenture.

         (b) The rules of interpretation set forth in the Base Indenture shall
be applied hereto as if set forth in full herein.

         (c) For all purposes of this Second Supplemental Indenture, except as
otherwise expressly provided or unless the context otherwise requires, the
following terms shall have the following respective meanings (such meanings
shall apply equally to both the singular and plural forms of the respective
terms): "Change of Control" means the occurrence of one or more of the following
events: (i) Xcel or its successors ceases to own a majority of the outstanding
Voting Stock of the Issuer, (ii) at any time following the occurrence of the
event described in the preceding clause (i), a Person or group (as that term is
used in Section 13(d)(3) of the Exchange Act) of Persons (other than Xcel) shall
have become the beneficial owner directly or indirectly, or shall have acquired
the absolute power to direct the vote, of more than 35% of the outstanding
Voting Stock of the Issuer or (iii) during any twelve-month period, individuals
who at the beginning of such period constitute the Board of Directors (together
with any new directors whose election or nomination was approved by a majority
of the directors then in office who were either directors at the beginning of
such period or who were previously so approved) shall cease for any reason to
constitute a majority of the Board of Directors. Notwithstanding the foregoing,
a Change of Control shall be deemed not to have occurred with respect to a
Series of Securities if one or more of the above events occurs or circumstances
exist and, after giving effect thereto, the Securities of such Series are rated
Investment Grade.

         "Comparable Treasury Issue" means the United States Treasury security
selected by Banc of America Securities LLC, Salomon Smith Barney Inc., or any of
their respective affiliates as having a maturity comparable to the remaining
term of the Notes that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of the Notes.

         "Comparable Treasury Price" means the average of three Reference
Treasury Dealer Quotations obtained by the Trustee in respect of the Notes to be
redeemed on the applicable redemption date.

                                       2
<PAGE>   4

         "Make Whole Amount" means, with respect to the Notes at any time, the
sum of the present values of the Remaining Scheduled Payments discounted, on a
semiannual basis (assuming a 360 day year consisting of twelve 30-day months),
at a rate equal to the Treasury Rate plus 35 basis points in the case of the
Senior Notes due 2011 and 40 basis points in the case of the Senior Notes due
2031. The Make Whole Amount shall be computed as of the third Business Day prior
to the applicable redemption date, and certified, by an Investment Banker.

         "Notes" means the Senior Notes due 2011 and the Senior Notes due 2031.

         "Reference Treasury Dealer Quotation" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by a Reference Treasury Dealer at 3:30 p.m., New York
City time, on the third Business Day preceding the redemption date.

         "Reference Treasury Dealers" means Banc of America Securities LLC and
Salomon Smith Barney Inc. (so long as they continue to be primary U.S.
Government securities dealers) and any two other primary U.S. Government
securities dealers chosen by the Company. If Banc of America Securities LLC or
Salomon Smith Barney Inc. ceases to be a primary U.S. Government securities
dealer, the Company will appoint in its place another nationally recognized
investment banking firm that is a primary U.S. Government securities dealer.

         "Remaining Scheduled Payments" means, with respect to each Note that
the Company is redeeming, the remaining scheduled payments of the principal and
interest that would be due after the related redemption date if such Note were
not redeemed. However, if the redemption date is not a scheduled interest
payment date with respect to that Note, the amount of the next succeeding
scheduled interest payment on that Note will be reduced by the amount of
interest accrued on such Note to the redemption date.

         "Senior Notes due 2011" shall have the meaning ascribed thereto in
Section 2.1(a) hereof.

         "Senior Notes due 2031" shall have the meaning ascribed thereto in
Section 2.1(a) hereof.

                                       3
<PAGE>   5

         "Treasury Rate" means, with respect to any redemption date, an annual
rate equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
the redemption date. The semiannual equivalent yield to maturity will be
computed as of the third Business Day immediately preceding the redemption date.

                                   ARTICLE II

                    GENERAL TERMS AND CONDITIONS OF THE NOTES

         2.1 SECTION Designation and Principal Amount.

         (a) There is hereby authorized two new separate Series of Securities
designated the 7.75% Senior Notes due 2011 (the "Senior Notes due 2011") and the
8.625% Senior Notes due 2031 (the "Senior Notes due 2031").

         (b) The aggregate principal amount of the two new separate Series of
Securities authorized by this Second Supplemental Indenture shall be limited
(except as otherwise provided in Article II of the Base Indenture) to
$690,000,000, with the aggregate principal amount of the respective Securities
limited to $350,000,000 for the Senior Notes due 2011 and $340,000,000 for the
Senior Notes due 2031.

         (c) The Notes may be issued from time to time upon written order of the
Company to the Trustee for the authentication and delivery of the Notes pursuant
to Section 2.2 of the Base Indenture

         (d) The Notes shall have and be subject to such other terms as provided
in the Base Indenture and shall be evidenced by one or more Securities of that
Series in the form of Exhibit A to the Base Indenture.

         (e) The Notes shall be issuable in minimum denominations of $100,000
and integral multiples of $1,000 in excess thereof.

         2.2 SECTION Maturity.

         (a) The date upon which the Senior Notes due 2011 shall become due and
payable at final maturity, together with any accrued and unpaid interest, is
April 1, 2011 (the "2011 Notes Maturity Date").

                                       4
<PAGE>   6

         (b) The date upon which the Senior Notes due 2031 shall become due and
payable at final maturity, together with any accrued and unpaid interest, is
April 1, 2031 (the "2031 Notes Maturity Date" and, together with the 2011 Notes
Maturity Date, the "Maturity Dates").

         2.3 SECTION Interest.

         (a) The Notes will bear interest at the Interest Rates (as defined
below) from April 5, 2001, until the principal thereof becomes due and payable.
Interest on the Notes will be payable semi-annually in arrears on April 1 and
October 1 of each year, commencing October 1, 2001, to the Person in whose name
any such Note or any predecessor Note is registered, at the close of business on
the regular record date for such interest installment, which, in the case of a
Global Security, shall be the close of business on the March 15 and September 15
next preceding such Interest Payment Date. Notwithstanding the foregoing
sentence, if the Notes are no longer in book-entry only form, the regular record
dates for the Notes, shall be the March 15 and September 15 prior to the
applicable Interest Payment Date.

         (b) The interest rate in respect of the Senior Notes due 2011 will be
7.75% per annum (the "2011 Notes Interest Rate") and the interest rate in
respect of the Senior Notes due 2031 will be 8.625% per annum (the "2031 Notes
Interest Rate" and, together with the 2011 Notes Interest Rate, the "Interest
Rates").

         (c) In the event that any date on which interest is payable on the
Notes is not a Business Day, then payment of interest payable on such date will
be made on the next succeeding day which is a Business Day, with the same force
and effect as if made on such date, and no interest shall accrue on the amount
so payable from the period from and after such Interest Payment Date or Maturity
Date, as the case may be (each date on which interest is actually payable, an
"Interest Payment Date").

         2.4 SECTION Global Securities.

         Each Series of Notes shall be issued in the form of one or more Global
Securities in an aggregate principal amount equal to the aggregate principal
amount of all outstanding Notes of that Series, to be registered in the name of
the U.S. Depositary, or its nominee, and delivered by the Trustee to or upon the
order of the U.S. Depositary for crediting to the accounts of its participants
pursuant to the written instructions of the Company. The Company upon any such
presentation shall execute one or more Global Securities in such aggregate
principal amount and deliver the same to the Trustee for authentication and
delivery in accordance with the Base Indenture

                                       5
<PAGE>   7

and this Second Supplemental Indenture. Payments on Notes issued as one or more
Global Securities will be made to the U.S. Depositary.

                                   ARTICLE III

                             REDEMPTION OF THE NOTES

         3.1 SECTION Optional Redemption of the Notes.

         The Company at its option may, at any time, redeem the Notes, in whole
or in part, upon payment of a redemption price equal to (A) the greater of (i)
100% of the principal amount of the Notes to be redeemed and (ii) the Make Whole
Amount, plus (B) accrued and unpaid interest, if any, on the principal amount of
Notes being redeemed to the redemption date.

         3.2 SECTION No Sinking Fund.

         The Notes are not entitled to the benefit of any sinking fund.

                                   ARTICLE IV

                             ORIGINAL ISSUE OF NOTES

         4.1 SECTION Original Issue of Senior Notes due 2011.

         The Senior Notes due 2011 in the aggregate principal amount of
$350,000,000 may, upon execution of this Second Supplemental Indenture, be
executed by the Company and delivered to the Trustee for authentication, and the
Trustee shall thereupon authenticate and deliver said Notes to or upon the
written order of the Company pursuant to Section 2.2 of the Base Indenture
without any further action of the Company.

         4.2 SECTION Original Issue of Senior Notes due 2031.

         The Senior Notes due 2031 in the aggregate principal amount of
$340,000,000 may, upon execution of this Second Supplemental Indenture, be
executed by the Company and delivered to the Trustee for authentication, and the
Trustee shall thereupon authenticate and deliver said Notes to or upon the
written

                                       6
<PAGE>   8

order of the Company pursuant to Section 2.2 of the Base Indenture without any
further action of the Company.

                                    ARTICLE V

                                  MISCELLANEOUS

         5.1 SECTION Ratification of Base Indenture and First Supplemental
Indenture.

         The Base Indenture and the First Supplemental Indenture, as
supplemented by this Second Supplemental Indenture, are in all respects ratified
and confirmed, and this Second Supplemental Indenture shall be deemed part of
the Base Indenture in the manner and to the extent herein and therein provided.

         5.2 SECTION Trustee Not Responsible for Recitals.

         The recitals contained herein and in the Notes, except with respect to
the Trustee's certificates of authentication, shall be taken as the statements
of the Company, and the Trustee assumes no responsibility for the correctness of
the same. The Trustee makes no representations as to the validity or sufficiency
of this Second Supplemental Indenture or of the Notes.

         5.3 SECTION Governing Law.

         THIS SECOND SUPPLEMENTAL INDENTURE AND EACH NOTE OF EACH SERIES CREATED
HEREUNDER SHALL, PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS
LAW, BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO THE
CHOICE OF LAW PROVISIONS THEREOF (OTHER THAN SUCH SECTION 5-1401).

         5.4 SECTION Separability .

         In case any one or more of the provisions contained in this Second
Supplemental Indenture or in the Notes shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Second
Supplemental Indenture or of the Notes, but this Second Supplemental Indenture
and the Notes shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.

                                       7
<PAGE>   9

         5.5 SECTION Counterparts.

         This Second Supplemental Indenture may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.

                                       8
<PAGE>   10

         IN WITNESS WHEREOF, the parties have caused this Second Supplemental
Indenture to be duly executed by their respective officers thereunto duly
authorized as of the date first above written.

                                       NRG ENERGY, INC.

                                       By:
                                          --------------------------------------
                                          Name:
                                          Title:

                                       THE BANK OF NEW YORK, as Trustee

                                       By:
                                          --------------------------------------
                                          Name:
                                          Title:

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