** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

----

** **

**FORM 10-Q**

 

| x          |   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934  |
|------------|--------|-------------------------------------------------------------------------------------------|
|       |   |                                                                                      |
|       |   | For the  quarterly period ended**March 31, 2007**                                         |
| ** ** |   | ** **                                                                                |
|       |   | OR                                                                                        |
|       |   |                                                                                      |
| o          |   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 |

 

For the transition period from                to               

 

| **Commission**   | ** ** | **Registrant,  State of Incorporation,** | ** ** | **I.R.S.  Employer**    |
|------------------|------------|------------------------------------------|------------|-------------------------|
| **File  Number** | ** ** | **Address  and Telephone Number**        | ** ** | **Identification  No.** |
|             |       |                                     |       |                    |
| **1-9052**       |       | **DPL  INC.**                            |       | **31-1163136**          |
|             |       | (An Ohio  Corporation)                   |       |                    |
|             |       | 1065 Woodman  Drive                      |       |                    |
| ** **       |       | Dayton, Ohio  45432                      |       |                    |
|             |       | 937-224-6000                             |       |                    |
|             |       |                                     |       |                    |
| **1-2385**       |       | **THE  DAYTON POWER AND LIGHT COMPANY**  |       | **31-0258470**          |
| ** **       |       | (An Ohio  Corporation)                   |       |                    |
|             |       | 1065 Woodman  Drive                      |       |                    |
| ** **       |       | Dayton, Ohio  45432                      |       |                    |
| ** **       |       | 937-224-6000                             |       |                    |
| ** **       |       | ** **                               |       | ** **              |

 

Indicate by check markwhether each registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

| DPL Inc.                           |   | Yes x |   | No o |
|------------------------------------|--------|-------|--------|------|
| The Dayton Power and Light Company |   | Yes x |   | No o |

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.

 

|                                     |   | Large accelerated filer |   | Accelerated filer |   | Non-accelerated filer |
|-------------------------------------|--------|-------------------------|--------|-------------------|--------|-----------------------|
| DPL Inc.                            |   | x                       |   | o                 |   | o                     |
| The Dayton Power and Light  Company |   | o                       |   | o                 |   | x                     |

 

Indicate by check markwhether each registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

| DPL Inc.                           |   | Yes o | No x |
|------------------------------------|--------|-------|------|
| The Dayton Power and Light Company |   | Yes o | No x |

 

Asof April 27, 2007, each registrant had the following shares of common stockoutstanding:

 

| **Registrant**                         | ** ** | **Description**                   | ** ** | **Shares  Outstanding** |
|----------------------------------------|------------|-----------------------------------|------------|-------------------------|
|                                   |       |                              |       |                    |
| **DPL Inc.**                           |       | **Common Stock, $0.01 par value** |       | 113,342,744             |
| ** **                             |       | ** **                        |       | ** **              |
| **The Dayton Power and Light Company** |       | **Common Stock**                  |       | 41,172,173              |
| ** **                             |       | ** **                        |       | ** **              |

 

Thiscombined Form 10-Q is separately filed by DPL Inc. and The Dayton Power andLight Company.  Information containedherein relating to any individual registrant is filed by such registrant on itsown behalf.  Each registrant makes norepresentation as to information relating to a registrant other than itself.

 

 

----

** **

**DPL Inc. and The Dayton Power and Light Company**

**Index**

**Part I  Financial Information**
|                                      | ** ** |                                                                                             | ** ** | **Page No.** |
|--------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------|
|                                 | Item 1     | **Financial Statements —  DPL and DP&L**                                           | ** ** | 4            |
|                                 |       |                                                                                        |       |         |
|                                 |       | Condensed Consolidated Statement of Results of  Operations – DPL                       |       | 4            |
|                                 |       |                                                                                        |       |         |
|                                 |       | Condensed Consolidated Statement of Cash Flows – DPL                                   |       | 5            |
|                                 |       |                                                                                        |       |         |
|                                 |       | Condensed Consolidated Balance Sheet – DPL                                             |       | 6            |
|                                 |       |                                                                                        |       |         |
|                                 |       | Condensed Consolidated Statement of Results of  Operations – DP&L                  |       | 8            |
|                                 |       |                                                                                        |       |         |
|                                 |       | Condensed Consolidated Statement of Cash Flows – DP&L                              |       | 9            |
|                                 |       |                                                                                        |       |         |
|                                 |       | Condensed Consolidated Balance Sheet – DP&L                                        |       | 10           |
|                                 |       |                                                                                        |       |         |
|                                 |       | Notes to Condensed Consolidated Financial Statements                                        |       | 12           |
|                                 |       |                                                                                        |       |         |
|                                 | Item 2     | Management’s Discussion  and Analysis of Financial Condition and Results of Operations |       | 30           |
|                                 |       |                                                                                        |       |         |
|                                 |       | Operating Statistics                                                                        |       | 48           |
|                                 |       |                                                                                        |       |         |
|                                 | Item 3     | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 48           |
|                                 |       |                                                                                        |       |         |
|                                 | Item 4     | Controls and  Procedures                                                                    |       | 48           |
|                                 |       |                                                                                        |       |         |
|                                 |       |                                                                                        |       |         |
|                                 |       |                                                                                        |       |         |
| **Part II  Other  Information** |       | 49                                                                                          |
|                                 |       |                                                                                        |       |         |
|                                 |            |                                                                                        |       |         |
|                                 | Item  1    | Legal  Proceedings                                                                          |       | 49           |
|                                 |       |                                                                                        |       |         |
|                                 | Item  1A   | Risk  Factors                                                                               |       | 50           |
|                                 |       |                                                                                        |       |         |
|                                 | Item 2     | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 50           |
|                                 |       |                                                                                        |       |         |
|                                 | Item 3     | Defaults Upon  Senior Securities                                                            |       | 50           |
|                                 |       |                                                                                        |       |         |
|                                 | Item 4     | Submission of  Matters to a Vote of Security Holders                                        |       | 50           |
|                                 |       |                                                                                        |       |         |
|                                 | Item  5    | Other  Information                                                                          |       | 50           |
|                                 |       |                                                                                        |       |         |
|                                 | Item 6     | Exhibits                                                                                    |       | 50           |
|                                 |       |                                                                                        |       |         |
|                                 |       |                                                                                        |       |         |
|                                 |       |                                                                                        |       |         |
| **Other**                            |       |                                                                                        |       |
|                                 |       |                                                                                        |       |         |
|                                 |       |                                                                                        |       |         |
|                                      |       | Signatures                                                                                  |       | 51           |
|                                 |       |                                                                                        |       |         |
|                                 |       | Certifications                                                                              |       |         |

 

2

----

** **

**DPLInc.** and **The Dayton Powerand Light Company** file current, annual and quarterly reports, proxystatements (as to **DPL Inc.**) andother information required by the Securities Exchange Act of 1934, as amended,with the Securities and Exchange Commission (SEC).  You may read and copy any document we file atthe SEC’s public reference room located at 100 F Street N.E., Washington, D.C.20549, USA.  Please call the SEC at (800)SEC-0330 for further information on the public reference rooms.  Our SEC filings are also available to thepublic from the SEC’s web site at http://www.sec.gov.

Our public internet siteis http://www.dplinc.com.  We makeavailable, free of charge, through our internet site, our annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andForms 3, 4 and 5 filed on behalf of our directors and executive officers andamendments to those reports filed or furnished pursuant to the SecuritiesExchange Act of 1934, as amended, as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC.

Inaddition, our public internet site includes other items related to corporategovernance matters, including, among other things, our governance guidelines,charters of various committees of the Board of Directors and our code ofbusiness conduct and ethics applicable to all employees, officers anddirectors.  You may obtain copies ofthese documents, free of charge, by sending a request, in writing, to DPLInvestor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

----

** **

**Part 1 — Financial Information**

This report includes thecombined filing of **DPL Inc. (DPL)**and **The Dayton Power and Light Company****(DP&L).  DP&L**isthe principal subsidiary of **DPL**providingapproximately 99% of **DPL’s**totalconsolidated revenue and approximately 89% of **DPL’s**totalconsolidated asset base.  Throughout thisreport the terms we, us, our and ours are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section. Historically, **DPL** and **DP&L** have filed separate SEC filings.   Beginning with the Form 10-K for the yearended December 31, 2006 and in the future, **DPL**and **DP&L** will file combined SEC reports on an interim andannual basis.

 

3

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** **

**Item 1 — Financial Statements**
| **DPL INC.**                                                   |
|----------------------------------------------------------------|
| **CONDENSED  CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS** |

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| **$ in millions except per share amounts** | ** ** | ** **                       | ** ** | **March 31,** | ** ** |
| ** **                                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Revenues**                                                             | ** ** | **$**                            | **379.7**  |   | $ | 341.1 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Cost of revenues:**                                                    | ** ** | ** **                       |       |   |   |
| Fuel                                                                     | ** ** | **90.3**                         |       | 84.2 |   |
| Purchased power                                                          | ** ** | **52.2**                         |       | 25.3 |   |
| Total cost of  revenues                                                  | ** ** | **142.5**                        |       | 109.5 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Gross margin**                                                         | ** ** | **237.2**                        |       | 231.6 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Operating expenses:**                                                  | ** ** | ** **                       |       |   |   |
| Operation and  maintenance                                               | ** ** | **69.3**                         |       | 62.4 |   |
| Depreciation and  amortization                                           | ** ** | **33.5**                         |       | 36.9 |   |
| General taxes                                                            | ** ** | **28.0**                         |       | 28.0 |   |
| Amortization of  regulatory assets                                       | ** ** | **2.9**                          |       | 1.1 |   |
| Total operating  expenses                                                | ** ** | **133.7**                        |       | 128.4 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Operating income**                                                     | ** ** | **103.5**                        |       | 103.2 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| Investment income                                                        | ** ** | **3.0**                          |       | 6.4 |   |
| Interest expense                                                         | ** ** | **(23.1**                        | **)**      | (26.3 | ) |
| Other income (deductions)                                                | ** ** | **0.8**                          |       | (0.3 | ) |
| ** **                                                               | ** ** | ** **                       |       |   |   |
| **Earnings from continuing  operations before income tax**               | ** ** | **84.2**                         |       | 83.0 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| Income tax expense                                                       | ** ** | **33.0**                         |       | 31.7 |   |
| ** **                                                               | ** ** | ** **                       |       |   |   |
| **Earnings from continuing  operations**                                 | ** ** | **51.2**                         |       | 51.3 |   |
| ** **                                                               | ** ** | ** **                       |       |   |   |
| **Earnings from discontinued  operations, net of tax**                   | ** ** | **4.9**                          |       | 7.6 |   |
| ** **                                                               | ** ** | ** **                       |       |   |   |
| **Net Income**                                                           | ** ** | **$**                            | **56.1**   |   | $ | 58.9 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Average number of common shares  outstanding (millions)**              | ** ** | ** **                       |       |   |   |
| Basic                                                                    | ** ** | **107.5**                        |       | 120.2 |   |
| Diluted                                                                  | ** ** | **119.4**                        |       | 129.3 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Earnings per share of common  stock**                                  | ** ** | ** **                       |       |   |   |
| Basic:                                                                   | ** ** | ** **                       |       |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                            | **0.48**   |   | $ | 0.43 |   |
| Earnings from  discontinued operations                                   | ** ** | **0.04**                         |       | 0.06 |   |
| Total Basic                                                              | ** ** | **$**                            | **0.52**   |   | $ | 0.49 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| Diluted:                                                                 | ** ** | ** **                       |       |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                            | **0.43**   |   | $ | 0.40 |   |
| Earnings from  discontinued operations                                   | ** ** | **0.04**                         |       | 0.06 |   |
| Total Diluted                                                            | ** ** | **$**                            | **0.47**   |   | $ | 0.46 |   |
|                                                                     | ** ** | ** **                       |       |   |   |
| **Dividends paid per share of  common stock**                            | ** ** | **$**                            | **0.26**   |   | $ | 0.25 |   |
| ** **                                                               | ** ** | ** **                       |       |   |   |
|                                                                          |            |                                  |            |  |  |  |  |  |  |

 
| *See Notes to Condensed Consolidated Financial Statements.* | ** ** | ** ** |   |   |   |
|-------------------------------------------------------------|------------|------------|--------|--------|--------|
| *These interim statements are  unaudited.*                  | ** ** | ** ** |   |   |   |
|                                                        | ** ** | ** ** |   |   |   |

 

4

----

 
| **DPL INC.**                                        |
|-----------------------------------------------------|
| **CONDENSED  CONSOLIDATED STATEMENT OF CASH FLOWS** |

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| **$ in millions**                                  | ** ** | ** **                       | ** ** | **March 31,** | ** ** |
| ** **                                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Cash flows from operating  activities:**                   |       |                             |       |   |   |
| Net income                                                   | ** ** | **$**                            | **56.1**   |   | $ | 58.9 |   |
| Less: Income from  discontinued operations                   | ** ** | **(4.9**                         | **)**      | (7.6 | ) |
| Income from  continuing operations                           | ** ** | **51.2**                         |       | 51.3 |   |
|                                                         |       |                             |       |   |   |
| Adjustments to  reconcile net income to net cash provided by |       |                             |       |   |   |
| operating  activities:                                       |       |                             |       |   |   |
| Depreciation and  amortization                               | ** ** | **33.5**                         |       | 36.9 |   |
| Amortization of  regulatory assets                           | ** ** | **2.9**                          |       | 1.1 |   |
| Deferred income  taxes                                       | ** ** | **(1.7**                         | **)**      | (2.4 | ) |
| Captive  insurance provision                                 | ** ** | **1.3**                          |       | 1.2 |   |
| Gain on sale of  other investments                           | ** ** | **—**                       |       | (1.0 | ) |
| Changes in certain  assets and liabilities:                  |       |                             |       |   |   |
| Accounts  receivable                                         | ** ** | **(23.3**                        | **)**      | (15.9 | ) |
| Accounts payable                                             | ** ** | **16.3**                         |       | 35.0 |   |
| Accrued taxes  payable                                       | ** ** | **6.0**                          |       | (9.2 | ) |
| Accrued interest  payable                                    | ** ** | **(14.5**                        | **)**      | (7.5 | ) |
| Prepayments                                                  | ** ** | **(1.1**                         | **)**      | 3.2 |   |
| Inventories                                                  | ** ** | **(0.2**                         | **)**      | (7.4 | ) |
| Deferred  compensation assets                                | ** ** | **7.7**                          |       | 3.1 |   |
| Deferred  compensation obligations                           | ** ** | **1.6**                          |       | (1.3 | ) |
| Other                                                        | ** ** | **17.4**                         |       | 4.5 |   |
| **Net  cash provided by operating activities**               | ** ** | **97.1**                         |       | 91.6 |   |
|                                                         |       |                             |       |   |   |
| **Cash flows from investing  activities:**                   |       |                             |       |   |   |
| Capital expenditures                                         | ** ** | **(80.5**                        | **)**      | (110.9 | ) |
| Purchases of short-term  investments and securities          | ** ** | **—**                       |       | (494.8 | ) |
| Sales of short-term  investments and securities              | ** ** | **—**                       |       | 494.8 |   |
| **Net  cash used for investing activities**                  | ** ** | **(80.5**                        | **)**      | (110.9 | ) |
|                                                         |       |                             |       |   |   |
| **Cash flows from financing  activities:**                   |       |                             |       |   |   |
| Purchase of treasury  shares                                 | ** ** | **—**                       |       | (155.3 | ) |
| Exercise of stock  options                                   | ** ** | **3.9**                          |       | 0.2 |   |
| Tax impact related to  exercise of stock options             | ** ** | **1.4**                          |       | — |   |
| Registration of  warrants                                    | ** ** | **—**                       |       | (0.1 | ) |
| Retirement of long-term  debt                                | ** ** | **(225.0**                       | **)**      | — |   |
| Withdrawal of  restricted funds held in trust                | ** ** | **10.1**                         |       | — |   |
| Dividends paid on  common stock                              | ** ** | **(27.8**                        | **)**      | (30.2 | ) |
| Issuance of short-term  debt, net                            | ** ** | **65.0**                         |       | — |   |
| **Net  cash used for financing activities**                  | ** ** | **(172.4**                       | **)**      | (185.4 | ) |
|                                                         |       |                             |       |   |   |
| **Cash and cash equivalents:**                               |       |                             |       |   |   |
| Net change                                                   | ** ** | **(155.8**                       | **)**      | (204.7 | ) |
| Balance at beginning of  period                              | ** ** | **262.2**                        |       | 595.8 |   |
| **Cash  and cash equivalents at end of period**              | ** ** | **$**                            | **106.4**  |   | $ | 391.1 |   |
|                                                         |       |                             |       |   |   |
| **Supplemental cash flow  information:**                     |       |                             |       |   |   |
| Interest paid, net of  amounts capitalized                   | ** ** | **$**                            | **36.4**   |   | $ | 32.6 |   |
| Income taxes paid, net                                       | ** ** | **$**                            | **15.4**   |   | $ | 22.4 |   |
|                                                         |       |                             |       |   |   |
|                                                              |            |                                  |            |  |  |  |  |  |  |

 
| *See Notes to Condensed Consolidated Financial Statements.* |   |   |   |   |   |
|-------------------------------------------------------------|--------|--------|--------|--------|--------|
| *These interim statements are  unaudited.*                  |   |   |   |   |   |
|                                                        |   |   |   |   |   |

 

5

----

 
| **DPL INC.**                              |
|-------------------------------------------|
| **CONDENSED  CONSOLIDATED BALANCE SHEET** |

 
| ** **                                                                                     | ** ** | **At**             | ** **  | **At**                | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                    | ** ** | ** **         | ** **  | **2007**              | ** ** | **2006** | ** ** |
|                                                                                           | ** ** | ** **         | ** **  |                  |       |
| **ASSETS**                                                                                     | ** ** | ** **         | ** **  |                  |       |
|                                                                                           | ** ** | ** **         | ** **  |                  |       |
| **Current assets:**                                                                            | ** ** | ** **         |        |                  |       |
| Cash and cash  equivalents                                                                     | ** ** | **$**              | **106.4**   |                  | $          | 262.2 |   |
| Restricted funds  held in trust                                                                | ** ** | **—**         |        | 10.1                  |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.5 and $1.4, respectively | ** ** | **246.7**          |        | 225.0                 |       |
| Inventories, at  average cost                                                                  | ** ** | **85.6**           |        | 85.4                  |       |
| Taxes applicable  to subsequent years                                                          | ** ** | **36.9**           |        | 48.0                  |       |
| Other current  assets                                                                          | ** ** | **12.1**           |        | 37.7                  |       |
| Total current  assets                                                                          | ** ** | **487.7**          |        | 668.4                 |       |
|                                                                                           | ** ** | ** **         |        |                  |       |
| **Property:**                                                                                  | ** ** | ** **         |        |                  |       |
| **Held  and used:**                                                                            | ** ** | ** **         |        |                  |       |
| Property, plant  and equipment                                                                 | ** ** | **4,787.7**        |        | 4,718.5               |       |
| Less:  Accumulated depreciation and amortization                                               | ** ** | **(2,180.3**       | **)**       | (2,159.2              | )          |
| Total net  property held and used                                                              | ** ** | **2,607.4**        |        | 2,559.3               |       |
|                                                                                           | ** ** | ** **         |        |                  |       |
| **Assets held for sale:**                                                                      | ** ** | ** **         |        |                  |       |
| Property, plant  and equipment                                                                 | ** ** | **283.5**          |        | 283.5                 |       |
| Less:  Accumulated depreciation and amortization                                               | ** ** | **(132.3**         | **)**       | (132.3                | )          |
| Total net  property held for sale                                                              | ** ** | **151.2**          |        | 151.2                 |       |
|                                                                                           | ** ** | ** **         |        |                  |       |
| **Other noncurrent assets:**                                                                   | ** ** | ** **         |        |                  |       |
| Regulatory assets                                                                              | ** ** | **144.6**          |        | 148.6                 |       |
| Other assets                                                                                   | ** ** | **76.7**           |        | 84.7                  |       |
| Total other  noncurrent assets                                                                 | ** ** | **221.3**          |        | 233.3                 |       |
|                                                                                           | ** ** | ** **         |        |                  |       |
| **Total Assets**                                                                               | ** ** | **$**              | **3,467.6** |                  | $          | 3,612.2 |   |
|                                                                                                |            |                    |             |                       |            |  |  |  |  |

 
| *See Notes to Condensed Consolidated Financial Statements.* | ** ** | ** ** |   |   |   |
|-------------------------------------------------------------|------------|------------|--------|--------|--------|
| *These interim statements are  unaudited.*                  | ** ** | ** ** |   |   |   |
|                                                        | ** ** | ** ** |   |   |   |
|                                                        | ** ** | ** ** |   |   |   |

 

6

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**DPL INC.CONDENSED CONSOLIDATED BALANCE SHEET**
| **$ in millions**                                     | ** ** | ** **     | ** ** | ** **        | ** ** | ** **  | ** **  | **At  March 31,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|-----------------------------------------------------------------|------------|----------------|------------|-------------------|------------|-------------|-------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                      |       |           | ** ** | ** **        |       |        |        |                         |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                  |       |           | ** ** | ** **        |       |        |        |                         |       |
|                                                            |       |           | ** ** | ** **        |       |        |        |                         |       |
| **Current liabilities:**                                        | ** ** | ** **     | ** ** | ** **        |       |        |        |                         |       |
| Current portion  - long-term debt                               |       |           | ** ** | ** **        | ** ** | **$**       | **0.9**     |                         | $          | 225.9                           |       |
| Accounts payable                                                |       |           | ** ** | ** **        | ** ** | **179.0**   |        | 169.4                        |       |
| Accrued taxes                                                   |       |           | ** ** | ** **        | ** ** | **151.4**   |        | 155.2                        |       |
| Accrued interest                                                |       |           | ** ** | ** **        | ** ** | **20.8**    |        | 35.2                         |       |
| Short-term debt                                                 |       |           | ** ** | ** **        | ** ** | **65.0**    |        | —                       |       |
| Other current  liabilities                                      |       |           | ** ** | ** **        | ** ** | **32.4**    |        | 38.3                         |       |
| Total current  liabilities                                      |       |           | ** ** | ** **        | ** ** | **449.5**   |        | 624.0                        |       |
|                                                            |       |           | ** ** | ** **        |       |        |        |                         |       |
| **Noncurrent liabilities:**                                     | ** ** | ** **     | ** ** | ** **        |       |        |        |                         |       |
| Long-term debt                                                  |       |           | ** ** | ** **        | ** ** | **1,551.8** |        | 1,551.8                      |       |
| Deferred taxes                                                  |       |           | ** ** | ** **        | ** ** | **355.9**   |        | 355.2                        |       |
| Unamortized  investment tax credit                              |       |           | ** ** | ** **        | ** ** | **42.8**    |        | 43.6                         |       |
| Insurance and  claims costs                                     |       |           | ** ** | ** **        | ** ** | **23.2**    |        | 21.9                         |       |
| Other deferred  credits                                         |       |           | ** ** | ** **        | ** ** | **277.2**   |        | 280.7                        |       |
| Total noncurrent  liabilites                                    |       |           | ** ** | ** **        | ** ** | **2,250.9** |        | 2,253.2                      |       |
|                                                            |       |           | ** ** | ** **        |       |        |        |                         |       |
| Cumulative  preferred stock not subject to mandatory redemption |       |           | ** ** | **22.9**          |       | 22.9        |        |
|                                                            |       |           | ** ** | ** **        |       |        |        |                         |       |
| Commitments and  contingencies (Note 10)                        |       |           | ** ** | ** **        |       |        |        |                         |       |
|                                                            |       |           | ** ** | ** **        |       |        |        |                         |       |
| **Common shareholders’ equity:**                           | ** ** | ** **     | ** ** | ** **        | ** ** | ** **  | ** **  | ** **                   | ** ** |
| Common stock, at  par value of $0.01 per share:                 |       |           |       |              |       |        |        |                         |       |
| ** **                                                      | ** ** | **March 2007** | ** ** | **December 2006** | ** ** | ** **  | ** **  | ** **                   | ** ** |
| Shares  authorized                                              |       | 250,000,000    |       | 250,000,000       | ** ** | ** **  |        |                         |       |
| Shares issued                                                   |       | 163,724,211    |       | 163,724,211       | ** ** | ** **  |        |                         |       |
| Treasury shares                                                 |       | 50,540,767     |       | 50,705,239        | ** ** | ** **  |        |                         |       |
| Shares  outstanding                                             |       | 113,183,444    |       | 113,018,972       | ** ** | **1.1**     |        | 1.1                          |       |
| Warrants                                                        |       |           | ** ** | ** **        | ** ** | **50.0**    |        | 50.0                         |       |
| Common stock  held by employee plans                            |       |           | ** ** | ** **        | ** ** | **(68.5**   | **)**       | (69.0                        | )          |
| Accumulated  other comprehensive loss                           |       |           | ** ** | ** **        | ** ** | **(8.1**    | **)**       | (6.5                         | )          |
| Retained  earnings                                              |       |           | ** ** | ** **        | ** ** | **769.8**   |        | 736.5                        |       |
| Total common  shareholders’ equity                         |       |           | ** ** | ** **        | ** ** | **744.3**   |        | 712.1                        |       |
|                                                            |       |           | ** ** | ** **        |       |        |        |                         |       |
| **Total Liabilities and Shareholders’ Equity**             | ** ** | ** **     | ** ** | ** **        | ** ** | **$**       | **3,467.6** |                         | $          | 3,612.2                         |       |

 

*See Notes to Condensed Consolidated FinancialStatements.**These interim statements are unaudited.*

7

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**THEDAYTON POWER AND LIGHT COMPANYCONDENSED CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS**
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **$ in millions**        | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               | ** ** | ** **                                       |       |   |   |
| **Revenues**                       | ** ** | **$**                                            | **377.5**  |   | $ | 339.1 |   |
|                               | ** ** | ** **                                       |       |   |   |
| **Cost of revenues:**              | ** ** | ** **                                       |       |   |   |
| Fuel                               | ** ** | **89.5**                                         |       | 83.9 |   |
| Purchased power                    | ** ** | **52.7**                                         |       | 25.6 |   |
| Total cost of  revenues            | ** ** | **142.2**                                        |       | 109.5 |   |
|                               | ** ** | ** **                                       |       |   |   |
| **Gross margin**                   | ** ** | **235.3**                                        |       | 229.6 |   |
|                               | ** ** | ** **                                       |       |   |   |
| **Operating expenses:**            | ** ** | ** **                                       |       |   |   |
| Operation and  maintenance         | ** ** | **59.4**                                         |       | 54.2 |   |
| Depreciation and  amortization     | ** ** | **30.7**                                         |       | 31.3 |   |
| General taxes                      | ** ** | **27.6**                                         |       | 27.5 |   |
| Amortization of  regulatory assets | ** ** | **2.9**                                          |       | 1.1 |   |
| Total operating  expenses          | ** ** | **120.6**                                        |       | 114.1 |   |
|                               | ** ** | ** **                                       |       |   |   |
| **Operating income**               | ** ** | **114.7**                                        |       | 115.5 |   |
|                               | ** ** | ** **                                       |       |   |   |
| Investment income                  | ** ** | **1.5**                                          |       | 1.9 |   |
| Interest expense                   | ** ** | **(5.4**                                         | **)**      | (6.7 | ) |
| Other income  (deductions)         | ** ** | **0.8**                                          |       | (0.5 | ) |
| ** **                         | ** ** | ** **                                       |       |   |   |
| **Earnings Before Income Tax**     | ** ** | **111.6**                                        |       | 110.2 |   |
|                               | ** ** | ** **                                       |       |   |   |
| Income tax expense                 | ** ** | **41.8**                                         |       | 43.3 |   |
| ** **                         | ** ** | ** **                                       |       |   |   |
| **Net Income**                     | ** ** | **$**                                            | **69.8**   |   | $ | 66.9 |   |
|                               | ** ** | ** **                                       |       |   |   |
| Preferred dividends                | ** ** | **0.2**                                          |       | 0.2 |   |
|                               | ** ** | ** **                                       |       |   |   |
| **Earnings on common stock**       | ** ** | **$**                                            | **69.6**   |   | $ | 66.7 |   |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

*See Notes to Condensed Consolidated Financial Statements.**These interimstatements are unaudited.*

8

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**THE DAYTON POWERAND LIGHT COMPANYCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS**
| **$ in millions**                     | ** ** | ** ** | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**   | ** ** | **2006**                                         | ** ** |
| **Cash flows from operating  activities:**      | ** ** | ** ** |       |                                             |       |
| Net income                                      | ** ** | **$**      | **69.8**   |                                             | $          | 66.9 |   |
| Adjustments:                                    | ** ** | ** ** |       |                                             |       |
| Depreciation and  amortization                  | ** ** | **30.7**   |       | 31.3                                             |       |
| Amortization of  regulatory assets              | ** ** | **2.9**    |       | 1.1                                              |       |
| Deferred income  taxes                          | ** ** | **(4.7**   | **)**      | (1.9                                             | )          |
| Changes in certain  assets and liabilities:     | ** ** | ** ** |       |                                             |       |
| Accounts  receivable                            | ** ** | **(23.8**  | **)**      | (10.7                                            | )          |
| Accounts payable                                | ** ** | **15.2**   |       | 38.1                                             |       |
| Accrued taxes  payable                          | ** ** | **20.5**   |       | 14.2                                             |       |
| Accrued interest  payable                       | ** ** | **2.8**    |       | 4.8                                              |       |
| Prepayments                                     | ** ** | **0.1**    |       | 4.4                                              |       |
| Inventories                                     | ** ** | **(0.2**   | **)**      | (7.4                                             | )          |
| Deferred  compensation assets                   | ** ** | **7.9**    |       | 4.6                                              |       |
| Deferred  compensation obligations              | ** ** | **1.6**    |       | (3.5                                             | )          |
| Other                                           | ** ** | **14.2**   |       | 1.6                                              |       |
| **Net  cash provided by operating activities**  | ** ** | **137.0**  |       | 143.5                                            |       |
|                                            |       |       |       |                                             |       |
| **Cash flows from investing  activities:**      | ** ** | ** ** |       |                                             |       |
| Capital expenditures                            | ** ** | **(79.6**  | **)**      | (110.5                                           | )          |
| **Net  cash used for investing activities**     | ** ** | **(79.6**  | **)**      | (110.5                                           | )          |
|                                            | ** ** | ** ** |       |                                             |       |
| **Cash flows from financing  activities:**      | ** ** | ** ** |       |                                             |       |
| Issuance of short-term  debt, net               | ** ** | **65.0**   |       | —                                           |       |
| Withdrawal of  restricted funds held in trust   | ** ** | **10.1**   |       | —                                           |       |
| Dividends paid on  preferred stock              | ** ** | **(0.2**   | **)**      | (0.2                                             | )          |
| Dividends paid on  common stock to parent       | ** ** | **(125.0** | **)**      | —                                           |       |
| **Net  cash used for financing activities**     | ** ** | **(50.1**  | **)**      | (0.2                                             | )          |
|                                            | ** ** | ** ** |       |                                             |       |
| **Cash and cash equivalents:**                  | ** ** | ** ** |       |                                             |       |
| Net change                                      | ** ** | **7.3**    |       | 32.8                                             |       |
| Balance at beginning of  period                 | ** ** | **46.1**   |       | 46.2                                             |       |
| **Cash  and cash equivalents at end of period** | ** ** | **$**      | **53.4**   |                                             | $          | 79.0 |   |
|                                            | ** ** | ** ** |       |                                             |       |
| **Supplemental cash flow  information:**        | ** ** | ** ** |       |                                             |       |
| Interest paid, net of  amounts capitalized      | ** ** | **$**      | **1.8**    |                                             | $          | 1.2 |   |
| Income taxes paid, net                          | ** ** | **$**      | **14.1**   |                                             | $          | 9.3 |   |

 

*See Notes to Condensed Consolidated Financial Statements.**These interimstatements are unaudited.*

9

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**THE DAYTON POWERAND LIGHT COMPANYCONDENSED CONSOLIDATED BALANCE SHEET**
| **$ in millions**                                                                     | ** ** | ** **   | ** **  | **At  March 31,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------|-------------|------------------------------|------------|---------------------------------|------------|
|                                                                                            | ** ** | ** **   |        |                         |       |
| **ASSETS**                                                                                      | ** ** | ** **   |        |                         |       |
|                                                                                            | ** ** | ** **   |        |                         |       |
| **Current assets:**                                                                             | ** ** | ** **   |        |                         |       |
| Cash and cash  equivalents                                                                      | ** ** | **$**        | **53.4**    |                         | $          | 46.1                            |       |
| Restricted funds  held in trust                                                                 | ** ** | **—**   |        | 10.1                         |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.5 and $1.4,  respectively | ** ** | **227.8**    |        | 205.6                        |       |
| Inventories, at  average cost                                                                   | ** ** | **83.1**     |        | 83.0                         |       |
| Taxes applicable  to subsequent years                                                           | ** ** | **36.9**     |        | 48.0                         |       |
| Other current  assets                                                                           | ** ** | **12.3**     |        | 38.2                         |       |
|                                                                                            | ** ** | ** **   |        |                         |       |
| Total current  assets                                                                           | ** ** | **413.5**    |        | 431.0                        |       |
|                                                                                            | ** ** | ** **   |        |                         |       |
| **Property:**                                                                                   | ** ** | ** **   |        |                         |       |
| Property, plant  and equipment                                                                  | ** ** | **4,519.1**  |        | 4,450.6                      |       |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(2,097.3** | **)**       | (2,079.0                     | )          |
|                                                                                            | ** ** | ** **   | ** **  |                         |       |
| Net property                                                                                    | ** ** | **2,421.8**  |        | 2,371.6                      |       |
|                                                                                            | ** ** | ** **   |        |                         |       |
| **Other noncurrent assets:**                                                                    | ** ** | ** **   |        |                         |       |
| Regulatory  assets                                                                              | ** ** | **144.6**    |        | 148.6                        |       |
| Other assets                                                                                    | ** ** | **139.0**    |        | 139.1                        |       |
|                                                                                            | ** ** | ** **   |        |                         |       |
| Total other  noncurrent assets                                                                  | ** ** | **283.6**    |        | 287.7                        |       |
|                                                                                            | ** ** | ** **   |        |                         |       |
| **Total Assets**                                                                                | ** ** | **$**        | **3,118.9** |                         | $          | 3,090.3                         |       |

 

*See Notes to Condensed Consolidated Financial Statements.**These interimstatements are unaudited.*

10

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**THE DAYTON POWERAND LIGHT COMPANYCONDENSED CONSOLIDATED BALANCE SHEET**
| **$ in millions**                                     | ** ** | ** **  | ** **  | **At  March 31,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|-----------------------------------------------------------------|------------|-------------|-------------|------------------------------|------------|---------------------------------|------------|
|                                                            | ** ** | ** **  |        |                         |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                  | ** ** | ** **  |        |                         |       |
|                                                            | ** ** | ** **  |        |                         |       |
| **Current liabilities:**                                        | ** ** | ** **  |        |                         |       |
| Current portion  - long-term debt                               | ** ** | **$**       | **0.9**     |                         | $          | 0.9                             |       |
| Accounts payable                                                | ** ** | **174.5**   |        | 166.2                        |       |
| Accrued taxes                                                   | ** ** | **169.1**   |        | 159.6                        |       |
| Accrued interest                                                | ** ** | **15.5**    |        | 12.6                         |       |
| Short-term debt                                                 | ** ** | **65.0**    |        | —                       |       |
| Other current  liabilities                                      | ** ** | **29.1**    |        | 35.4                         |       |
| Total current  liabilities                                      | ** ** | **454.1**   |        | 374.7                        |       |
|                                                            | ** ** | ** **  |        |                         |       |
| **Noncurrent liabilities:**                                     | ** ** | ** **  |        |                         |       |
| Long-term debt                                                  | ** ** | **785.1**   |        | 785.2                        |       |
| Deferred taxes                                                  | ** ** | **357.0**   |        | 360.2                        |       |
| Unamortized  investment tax credit                              | ** ** | **42.9**    |        | 43.6                         |       |
| Other deferred  credits                                         | ** ** | **277.2**   |        | 272.5                        |       |
| Total noncurrent  liabilities                                   | ** ** | **1,462.2** |        | 1,461.5                      |       |
|                                                            | ** ** | ** **  |        |                         |       |
| Cumulative preferred  stock not subject to mandatory redemption | ** ** | **22.9**    |        | 22.9                         |       |
|                                                            | ** ** | ** **  |        |                         |       |
| Commitments and  contingencies (Note 10)                        | ** ** | ** **  |        |                         |       |
|                                                            | ** ** | ** **  |        |                         |       |
| **Common shareholders’ equity:**                           | ** ** | ** **  |        |                         |       |
| Common stock, at  par value of $0.01 per share:                 | ** ** | **0.4**     |        | 0.4                          |       |
| Other paid-in  capital                                          | ** ** | **783.6**   |        | 783.7                        |       |
| Accumulated  other comprehensive income                         | ** ** | **19.1**    |        | 15.1                         |       |
| Retained  earnings                                              | ** ** | **376.6**   |        | 432.0                        |       |
| Total common  shareholders’ equity                         | ** ** | **1,179.7** |        | 1,231.2                      |       |
|                                                            | ** ** | ** **  |        |                         |       |
| **Total Liabilities and Shareholders’ Equity**             | ** ** | **$**       | **3,118.9** |                         | $          | 3,090.3                         |       |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements areunaudited.*

11

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**Notes to CondensedConsolidated Financial Statements**

**1.**    Basis of Presentation

**Description ofBusiness**

**DPL**is adiversified regional energy company organized in 1985 under the laws ofOhio.  **DPL’s**principal subsidiary is **The Dayton Power andLight Company (DP&L)**.  **DP&L** is a public utility incorporatedin 1911 under the laws of Ohio.  **DP&L** sells electricity to residential,commercial, industrial and governmental customers in a 6,000 square mile areaof West Central Ohio.  Electricity for **DP&L’s** 24 county service area isprimarily generated at eight coal-fired power plants and is distributed to morethan 500,000 retail customers.  **DP&L** also purchases retail peak loadrequirements from DPL Energy LLC (DPLE, one of our wholly-ownedsubsidiaries).  Principal industriesserved include automotive, food processing, paper, plastic manufacturing, anddefense.  **DP&L’s** sales reflect the general economic conditions andseasonal weather patterns of the area.  **DP&L** sells any excess energy andcapacity into the wholesale market.

**DPL’s** significantsubsidiaries (all of which are wholly-owned) include DPLE, which engages in theoperation of peaking generating facilities; DPL Energy Resources, Inc. (DPLER),which sells retail electric energy under contract to major industrial andcommercial customers in West Central Ohio; MVE, Inc., which was primarilyresponsible for the management of our financial asset portfolio; and MiamiValley Insurance Company (MVIC), our captive insurance company that providesinsurance sources to us and our subsidiaries. ** DP&L**has one significantsubsidiary, DPL Finance Company, Inc., which is wholly-owned and providesfinancing to **DPL**, **DP&L** and other affiliated companies.

**DPL** and **DP&L** conduct their principal businessin one business segment - Electric.

**FinancialStatement Presentation**

We prepare consolidatedfinancial statements in accordance with Generally Accepted Accounting Principles(GAAP) in the United States of America. The Condensed Consolidated Financial Statements include the accounts of **DPL** and **DP&L** andtheir majority-owned subsidiaries. Investments that are not majority owned are accounted for using theequity method when our investment allows us the ability to exert significantinfluence, as defined by GAAP.  Undividedinterests in jointly-owned generation facilities are consolidated on a pro ratabasis.  All material intercompanyaccounts and transactions are eliminated in consolidation.  Interim results for the three months endedMarch 31, 2007 may not be indicative of our results that will be realized forthe full year ending December 31, 2007.

Pursuant to the Securities and Exchange Commission(SEC) rules, certain information and footnote disclosures normally included inthe annual financial statements prepared in accordance with GAAP have beenomitted from interim reports. Therefore, these financial statements should beread along with the annual financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2006.  In the opinion of our management, thecondensed consolidated financial statements contain all adjustments (which areall of a normal recurring nature) necessary to fairly state our financialcondition as of March 31, 2007, our results of operations for the three monthsended March 31, 2007, and our cash flows for the three months ended March 31,2007 in accordance with GAAP.

**Estimates,Judgments and Reclassifications**

The preparation of financial statements in conformitywith GAAP requires us to make estimates and judgments that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the revenue andexpenses of the period reported. Different estimates could have a material effect on our financial results.  Judgments and uncertainties affecting theapplication of these estimates may result in materially different amounts beingreported under different conditions or circumstances.  Significant items subject to such estimatesand judgments include the carrying value of property, plant and equipment;unbilled revenues; the valuation of derivative instruments; the valuation ofinsurance and claims costs; valuation allowances for receivables and deferredincome taxes; regulatory assets and liabilities; reserves recorded for incometax exposures; litigation; and assets and liabilities related to employeebenefits.  Actual results may differ fromthose estimates.  Certain amounts fromprior periods have been reclassified to conform to the current reportingpresentation.

12

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**Recently Adopted Accounting Standards**

***Accountingfor Uncertainty in Income Taxes***

On January 1, 2007, we adopted Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (FIN 48). There was no significantimpact to our overall results of operations, cash flows or financial position.The total amount of unrecognized tax benefits as of the date of adoption was$36.8 million and we have recorded $3.5 million (net of tax) of accruedinterest. Our total reserve for uncertain tax positions is $40.3 million as ofJanuary 1, 2007. None of the amount of unrecognized tax benefits is due touncertainty in the timing of deductibility.

We recognize interest and penalties related tounrecognized tax benefits in income taxes.

Taxes for calendar years 2004 - 2006 remain open toexamination by the jurisdictions in which we are subject to taxation.

***Accountingfor Taxes Collected from Customers and Remitted to Governmental Authorities***

We adopted EITF No. 06-03“How Taxes Collected from Customers and Remitted to Governmental AuthoritiesShould Be Presented in the Income Statement” in January 2007.  EITF No. 06-03 requires a registrant todisclose how taxes collected from customers are presented in the financialstatements, i.e. gross or net.  **DP&L** collects certain excise taxes levied by state orlocal governments from its customers. **DP&L’s**excise taxes are accounted for on a gross basis and recorded as revenues in theaccompanying Condensed Consolidated Statements of Operations for the three monthsended March 31, 2007 and March 31, 2006 as follows:
| Three Months  Ended  March 31, 2007 | ** ** | **Three Months  Ended  March 31, 2006** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|
| $                                                  | 14,206,437 |                                                   | $          | 13,461,949 |   |
|                                                    |            |                                                        |            |  |  |

 

**Recently Issued Accounting Standards**

***Accountingfor Fair Value Measurements***

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS 157)effective for fiscal years beginning after November 15, 2007. SFAS 157 applieswhenever other standards require (or permit) assets or liabilities to bemeasured at fair value. SFAS 157 clarifies the principal that fair value shouldbe based on the assumptions market participants would use when pricing theassest or liability. In support of this principle, SFAS 157 establishes a fairvalue hierarchy that prioritizes the information used to develop thosestandards. The fair value hierarchy gives the highest priority to quoted pricesin active markets and the lowest priority to unobservable data, for example,the reporting entity’s own data. Under SFAS 157, fair value measurements wouldbe separately disclosed by level within the fair value hierarchy. SFAS 157 doesnot expand the use of fair value in any new circumstances. In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities - Including anamendment of FASB Statement No. 115” (SFAS 159) effective for fiscal yearsbeginning after November 15, 2007. SFAS 159 permits entities to choose tomeasure many financial instruments and certain warranty and insurance contractsat fair value on a contract-by-contract basis. We are currently evaluating theimpact of adopting SFAS 157 and SFAS 159, and have not yet determined the significanceof these new rules to our overall results of operations, financial position orcash flows.

**2.**   Earnings per Share

Basic earnings per share(EPS) is based on the weighted-average number of **DPL** common shares outstanding during the year.  Diluted earnings per share is based on theweighted-average number of **DPL**common and common equivalent shares outstanding during the year, except inperiods where the inclusion of such common equivalent shares isanti-dilutive.  Excluded from outstandingshares for this weighted-average computation are the unallocated shares held by**DP&L’s** Master Trust Plan fordeferred compensation and unallocated shares held by **DP&L’s**Employee Stock Ownership Plan (ESOP).

For the first quarter of2007, there were no warrants and stock options excluded from the computation ofdiluted earnings per share. For the first quarter of 2006, there were 0.4million warrants and stock options excluded from the computation of dilutedearnings per share because they were anti-dilutive.

The following illustratesthe reconciliation of the numerators and denominators of the basic and dilutedearnings per share computations for income after discontinued operations:
| **$ in millions except per**  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| **share amounts**                            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **Net**                                              | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| ** **                                        | ** ** | **Income**                                           | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic  EPS**                                    | ** ** | **$**                                                | **56.1**   | ** ** | **107.5** | ** ** | **$** | **0.52** |   | $ | 58.9 |   | 120.2 |   | $ | 0.49 |   |
|                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive**                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   | ** ** |
| **Securities:**                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   | ** ** |
| Stock Incentive  Units                            | ** ** | ** **                                           |       | **1.3** |   |   |   |   |   | 1.3 |   |   |   |
| Warrants                                          | ** ** | ** **                                           |       | **9.1** |   |   |   |   |   | 6.5 |   |   |   |
| Stock options,  performance and restricted shares | ** ** | ** **                                           |       | **1.5** |   |   |   |   |   | 1.3 |   |   |   |
|                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                   | ** ** | **$**                                                | **56.1**   | ** ** | **119.4** | ** ** | **$** | **0.47** | ** ** | $ | 58.9 |   | 129.3 |   | $ | 0.46 |   |

 

13

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**3.**    Discontinued Operations

 

|                                            | ** ** | **For Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------|------------|
| **$ in millions**                | ** ** | ** **                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       | ** ** | ** **                                                |       |   |   |
| Investment  income                         | ** ** | **$**                                                     | **—** |   | $ | — |   |
| Investment  expenses                       | ** ** | **(0.3**                                                  | **)**      | (0.5 | ) |
| Income from discontinued operations        | ** ** | **(0.3**                                                  | **)**      | (0.5 | ) |
|                                       | ** ** | ** **                                                |       |   |   |
| Gain realized  from sale                   | ** ** | **8.2**                                                   |       | 13.2 |   |
| Broker fees and  other expenses            | ** ** | **—**                                                |       | — |   |
| Loss recorded                              | ** ** | **—**                                                |       | — |   |
| Net gain on sale                           | ** ** | **8.2**                                                   |       | 13.2 |   |
|                                       | ** ** | ** **                                                |       |   |   |
| Earnings before  income taxes              | ** ** | **7.9**                                                   |       | 12.7 |   |
| Income tax  expense                        | ** ** | **(3.0**                                                  | **)**      | (5.1 | ) |
| Earnings from discontinued operations, net | ** ** | **$**                                                     | **4.9**    |   | $ | 7.6 |   |
|                                            |            |                                                           |            |  |  |  |  |  |  |

 

On February 13, 2005, **DPL’s** subsidiaries, MVE and MVIC, enteredinto an agreement to sell their respective interests in forty-six privateequity funds to AlpInvest/Lexington 2005, LLC, a joint venture of AlpInvestPartners and Lexington Partners, Inc. Sales proceeds and any related gains or losses were recognized as thesale of each fund closed.  Among otherclosing conditions, each fund required the transaction to be approved by therespective general partner of each fund. During 2005, MVE and MVIC completed the sale of their interests inforty-three and a portion of  another ofthose private equity funds resulting in a $46.6 million pre-tax gain ($53.1million less $6.5 million professional fees) from discontinued operationsand provided approximately $796 million in net proceeds.

During 2005, MVE enteredinto alternative closing arrangements with AlpInvest/Lexington 2005, LLC forfunds where legal title to said funds could not be transferred until a latertime.  Pursuant to these arrangements,MVE transferred the economic aspects of the remaining private equity funds,consisting of two funds and a portion of one fund, to AlpInvest/Lexington 2005,LLC without a change in ownership of the interests.  The alternative arrangements resulted in a2005 deferred gain of $27.1 million and provided approximately $72 million innet proceeds on these funds.  We recordedan impairment loss of $5.6 million in the second quarter of 2005 to write downassets transferred pursuant to the alternative arrangements to estimated fairvalue.  A portion of the deferred gainwas recognized in 2006 in the amount of $18.9 million with the remaining $8.2million being recognized in the first quarter of 2007.

In 2007 and 2006, **DPL** has separately disclosed the earningsfrom discontinued operations, net of income taxes, which in prior periods werereported with elements of continued operations.

14

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**4.**                 SupplementalFinancial Information DPL Inc.
| **$ in millions**                         | ** ** | ** **  | ** **  | **At  March 31,  2007** | ** ** | **At  December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|-------------|-------------|------------------------------|------------|---------------------------------|------------|
|                                                | ** ** | ** **  |        |                         |       |
| **Accounts receivable, net:**                       | ** ** | ** **  |        |                         |       |
| Unbilled revenue                                    | ** ** | **$**       | **63.5**    |                         | $          | 68.7                            |       |
| Retail customers                                    | ** ** | **70.4**    |        | 65.0                         |       |
| Partners in  commonly-owned plants                  | ** ** | **57.3**    |        | 51.5                         |       |
| Wholesale and  subsidiary customers                 | ** ** | **18.1**    |        | 15.8                         |       |
| PJM including  financial transmission rights        | ** ** | **24.2**    |        | 13.1                         |       |
| Other                                               | ** ** | **9.5**     |        | 7.1                          |       |
| Refundable  franchise tax                           | ** ** | **5.2**     |        | 5.2                          |       |
| Provision for  uncollectible accounts               | ** ** | **(1.5**    | **)**       | (1.4                         | )          |
| **Total  accounts receivable, net**                 | ** ** | **$**       | **246.7**   |                         | $          | 225.0                           |       |
|                                                | ** ** | ** **  |        |                         |       |
| **Inventories, at average cost:**                   | ** ** | ** **  |        |                         |       |
| Fuel and  emission allowances                       | ** ** | **$**       | **51.8**    |                         | $          | 52.4                            |       |
| Plant materials  and supplies                       | ** ** | **33.5**    |        | 32.6                         |       |
| Other                                               | ** ** | **0.3**     |        | 0.4                          |       |
| **Total  inventories, at average cost**             | ** ** | **$**       | **85.6**    |                         | $          | 85.4                            |       |
|                                                | ** ** | ** **  |        |                         |       |
| **Other current assets:**                           | ** ** | ** **  |        |                         |       |
| Deposits and  other advances                        | ** ** | **$**       | **0.9**     |                         | $          | 17.8                            |       |
| Prepayments                                         | ** ** | **7.2**     |        | 13.3                         |       |
| Derivatives                                         | ** ** | **0.2**     |        | 3.2                          |       |
| Current deferred  income taxes                      | ** ** | **1.7**     |        | 2.0                          |       |
| Other                                               | ** ** | **2.1**     |        | 1.4                          |       |
| **Total  other current assets**                     | ** ** | **$**       | **12.1**    |                         | $          | 37.7                            |       |
| ** **                                          | ** ** | ** **  |        |                         |       |
| **Property, plant and equipment:**                  | ** ** | ** **  |        |                         |       |
| Construction  work in process                       | ** ** | **$**       | **444.9**   |                         | $          | 376.0                           |       |
| Property, plant  and equipment                      | ** ** | **4,626.3** |        | 4,626.0                      |       |
| **Total  property, plant and equipment (a)**        | ** ** | **$**       | **5,071.2** |                         | $          | 5,002.0                         |       |
| ** **                                          | ** ** | ** **  |        |                         |       |
| **Other deferred assets:**                          |       |        |        |                         |       |
| Master Trust  assets                                | ** ** | **$**       | **32.2**    |                         | $          | 39.4                            |       |
| Unamortized loss  on reacquired debt                | ** ** | **20.0**    |        | 20.4                         |       |
| Unamortized debt  expense                           | ** ** | **10.3**    |        | 10.6                         |       |
| Commercial  activities tax benefit                  | ** ** | **6.8**     |        | 6.8                          |       |
| Investments                                         | ** ** | **6.9**     |        | 7.0                          |       |
| Other                                               | ** ** | **0.5**     |        | 0.5                          |       |
| **Total  other deferred assets**                    | ** ** | **$**       | **76.7**    |                         | $          | 84.7                            |       |
|                                                | ** ** | ** **  |        |                         |       |
| **Accounts payable:**                               | ** ** | ** **  |        |                         |       |
| Trade payables                                      | ** ** | **$**       | **63.7**    |                         | $          | 75.7                            |       |
| Fuel accruals                                       | ** ** | **44.9**    |        | 37.3                         |       |
| Other                                               | ** ** | **70.4**    |        | 56.4                         |       |
| **Total  accounts payable**                         | ** ** | **$**       | **179.0**   |                         | $          | 169.4                           |       |
|                                                | ** ** | ** **  |        |                         |       |
| **Other current liabilities:**                      | ** ** | ** **  |        |                         |       |
| Customer  security deposits                         | ** ** | **$**       | **18.7**    |                         | $          | 19.4                            |       |
| Pension and  retiree benefits payable               | ** ** | **0.8**     |        | 5.8                          |       |
| Financial  transmission rights - future proceeds    | ** ** | **1.1**     |        | 2.7                          |       |
| Payroll taxes  payable                              | ** ** | **0.1**     |        | 0.1                          |       |
| Other                                               | ** ** | **11.7**    |        | 10.3                         |       |
| **Total  other current liabilities**                | ** ** | **$**       | **32.4**    |                         | $          | 38.3                            |       |
|                                                | ** ** | ** **  |        |                         |       |
| **Other deferred credits:**                         | ** ** | ** **  |        |                         |       |
| Asset retirement  obligations - regulated property  | ** ** | **$**       | **87.0**    |                         | $          | 86.3                            |       |
| Trust obligations                                   | ** ** | **77.9**    |        | 76.2                         |       |
| Pension  liabilities                                | ** ** | **37.0**    |        | 37.7                         |       |
| Retiree health  and life benefits                   | ** ** | **28.1**    |        | 28.5                         |       |
| SECA net revenue  subject to refund                 | ** ** | **21.0**    |        | 18.7                         |       |
| Asset retirement  obligations - generation property | ** ** | **12.2**    |        | 11.7                         |       |
| Deferred gain on  sale of portfolio                 | ** ** | **—**  |        | 8.2                          |       |
| Legal reserves                                      | ** ** | **3.3**     |        | 3.4                          |       |
| Environmental  reserves                             | ** ** | **0.1**     |        | 0.1                          |       |
| Other                                               | ** ** | **10.6**    |        | 9.9                          |       |
| **Total other deferred credits**                    | ** ** | **$**       | **277.2**   |                         | $          | 280.7                           |       |

 

*(a)   $283.5 of theassets presented in this table are held for sale.*

15

----

**DP&L**

 
| ** **                                          | ** ** | **At**             | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                         | ** ** | ** **         | ** **  | **2007**              | ** ** | **2006** | ** ** |
|                                                |       |               |        |                  |       |
| **Accounts receivable, net:**                       |       |               |        |                  |       |
| Retail customers                                    | ** ** | **$**              | **70.4**    |                  | $          | 65.0 |   |
| Partners in  commonly-owned plants                  | ** ** | **57.3**           |        | 51.5                  |       |
| Unbilled revenue                                    | ** ** | **56.2**           |        | 61.0                  |       |
| PJM including  financial transmission rights        | ** ** | **24.2**           |        | 13.9                  |       |
| Wholesale and  subsidiary customers                 | ** ** | **12.8**           |        | 8.3                   |       |
| Refundable  franchise tax                           | ** ** | **3.1**            |        | 3.1                   |       |
| Other                                               | ** ** | **5.3**            |        | 4.2                   |       |
| Provision for  uncollectible accounts               | ** ** | **(1.5**           | **)**       | (1.4                  | )          |
| **Total  accounts receivable, net**                 | ** ** | **$**              | **227.8**   |                  | $          | 205.6 |   |
|                                                |       |               |        |                  |       |
| **Inventories, at average cost:**                   |       |               |        |                  |       |
| Fuel and  emission allowances                       | ** ** | **$**              | **51.8**    |                  | $          | 52.4 |   |
| Plant materials  and supplies                       | ** ** | **31.1**           |        | 30.2                  |       |
| Other                                               | ** ** | **0.2**            |        | 0.4                   |       |
| **Total  inventories, at average cost**             | ** ** | **$**              | **83.1**    |                  | $          | 83.0 |   |
|                                                |       |               |        |                  |       |
| **Other current assets:**                           |       |               |        |                  |       |
| Deposits and  other advances                        | ** ** | **$**              | **0.7**     |                  | $          | 17.0 |   |
| Prepayments                                         | ** ** | **8.6**            |        | 15.8                  |       |
| Derivatives                                         | ** ** | **0.2**            |        | 3.2                   |       |
| Current deferred  income taxes                      | ** ** | **0.3**            |        | 0.7                   |       |
| Other                                               | ** ** | **2.5**            |        | 1.5                   |       |
| **Total  other current assets**                     | ** ** | **$**              | **12.3**    |                  | $          | 38.2 |   |
| ** **                                          |       |               |        |                  |       |
| **Property, plant and equipment:**                  |       |               |        |                  |       |
| Construction  work in process                       | ** ** | **$**              | **444.1**   |                  | $          | 375.2 |   |
| Property, plant  and equipment                      | ** ** | **4,075.0**        |        | 4,075.4               |       |
| **Total  property, plant and equipment**            | ** ** | **$**              | **4,519.1** |                  | $          | 4,450.6 |   |
| ** **                                          |       |               |        |                  |       |
| **Other deferred assets:**                          |       |               |        |                  |       |
| Master Trust  assets                                | ** ** | **$**              | **109.5**   |                  | $          | 109.0 |   |
| Unamortized loss  on reacquired debt                | ** ** | **20.0**           |        | 20.4                  |       |
| Unamortized debt  expense                           | ** ** | **8.4**            |        | 8.6                   |       |
| Investments                                         | ** ** | **0.6**            |        | 0.6                   |       |
| Other                                               | ** ** | **0.5**            |        | 0.5                   |       |
| **Total  other deferred assets**                    | ** ** | **$**              | **139.0**   |                  | $          | 139.1 |   |
|                                                |       |               |        |                  |       |
| **Accounts payable:**                               |       |               |        |                  |       |
| Trade payables                                      | ** ** | **$**              | **63.3**    |                  | $          | 74.7 |   |
| Fuel accruals                                       | ** ** | **44.8**           |        | 36.7                  |       |
| Other                                               | ** ** | **66.4**           |        | 54.8                  |       |
| **Total  accounts payable**                         | ** ** | **$**              | **174.5**   |                  | $          | 166.2 |   |
|                                                |       |               |        |                  |       |
| **Other current liabilities:**                      |       |               |        |                  |       |
| Customer  security deposits                         | ** ** | **$**              | **18.7**    |                  | $          | 19.4 |   |
| Financial  transmission rights - future proceeds    | ** ** | **1.1**            |        | 2.7                   |       |
| Payroll taxes  payable                              | ** ** | **0.2**            |        | 0.2                   |       |
| Pension and  retiree benefits payable               | ** ** | **0.8**            |        | 5.8                   |       |
| Other                                               | ** ** | **8.3**            |        | 7.3                   |       |
| **Total  other current liabilities**                | ** ** | **$**              | **29.1**    |                  | $          | 35.4 |   |
|                                                |       |               |        |                  |       |
| **Other deferred credits:**                         |       |               |        |                  |       |
| Asset retirement  obligations - regulated property  | ** ** | **$**              | **87.0**    |                  | $          | 86.3 |   |
| Trust  obligations                                  | ** ** | **77.9**           |        | 76.2                  |       |
| Retiree health  and life benefits                   | ** ** | **28.1**           |        | 28.5                  |       |
| Pension  liabilities                                | ** ** | **37.0**           |        | 37.7                  |       |
| SECA net revenue  subject to refund                 | ** ** | **21.0**           |        | 18.7                  |       |
| Asset retirement  obligations - generation property | ** ** | **12.2**           |        | 11.7                  |       |
| Legal reserves                                      | ** ** | **3.3**            |        | 3.4                   |       |
| Environmental  reserves                             | ** ** | **0.1**            |        | 0.1                   |       |
| Other                                               | ** ** | **10.6**           |        | 9.9                   |       |
| **Total other deferred credits**                    | ** ** | **$**              | **277.2**   |                  | $          | 272.5 |   |
|                                                     |            |                    |             |                       |            |  |  |  |  |

 

16

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**DPL Inc.**
| ** **                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **$ in millions**                                       | ** ** | ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash flows - other:**                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Payroll taxes  payable                                            | ** ** | **$**                                                | **—** |   | $ | (1.1 | ) |
| Employee/director  stock plan                                     | ** ** | **1.5**                                              |       | 1.9 |   |
| Lump sum  retirement payment                                      | ** ** | **(4.9**                                             | **)**      | — |   |
| Deposits and  other advances                                      | ** ** | **16.1**                                             |       | (2.5 | ) |
| Other                                                             | ** ** | **4.7**                                              |       | 6.2 |   |
| **Total  cash flows - other**                                     | ** ** | **$**                                                | **17.4**   |   | $ | 4.5 |   |
|                                                              |       |                                                 |       |   |   |
| **Comprehensive income:**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                        | ** ** | **$**                                                | **56.1**   |   | $ | 58.9 |   |
| Net change in  unrealized gains (losses) on financial instruments | ** ** | **0.4**                                              |       | 0.4 |   |
| Net change in  deferred gains (losses) on cash flow hedges        | ** ** | **(3.6**                                             | **)**      | 0.6 |   |
| Minimum pension  liability                                        | ** ** | **0.6**                                              |       | — |   |
| Deferred income  taxes related to unrealized gains and (losses)   | ** ** | **1.1**                                              |       | (1.8 | ) |
| **Comprehensive  income**                                         |       | **$**                                                | **54.6**   |   | $ | 58.1 |   |
|                                                                   |            |                                                      |            |  |  |  |  |  |  |

 

**DP&L**

 
| ** **                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **$ in millions**                                       | ** ** | ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash flows - other:**                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Payroll taxes  payable                                            | ** ** | **$**                                                | **—** |   | $ | (1.1 | ) |
| Deposits and  other advances                                      | ** ** | **15.5**                                             |       | (1.5 | ) |
| Lump sum  retirement payment                                      | ** ** | **(4.9**                                             | **)**      | — |   |
| Other                                                             | ** ** | **3.6**                                              |       | 4.2 |   |
| **Total  cash flows - other**                                     | ** ** | **$**                                                | **14.2**   |   | $ | 1.6 |   |
|                                                              |       |                                                 |       |   |   |
| **Comprehensive income:**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                        | ** ** | **$**                                                | **69.8**   |   | $ | 66.9 |   |
| Net change in  unrealized gains (losses) on financial instruments | ** ** | **8.4**                                              |       | 0.8 |   |
| Net change in  deferred gains (losses) on cash flow hedges        | ** ** | **(3.6**                                             | **)**      | 0.6 |   |
| Minimum pension  liability                                        | ** ** | **0.6**                                              |       | — |   |
| Deferred income  taxes related to unrealized gains and (losses)   | ** ** | **(1.4**                                             | **)**      | (1.4 | ) |
| **Comprehensive  income**                                         | ** ** | **$**                                                | **73.8**   |   | $ | 66.9 |   |
|                                                                   |            |                                                      |            |  |  |  |  |  |  |

 

17

----

** **

**5.     RegulatoryMatters**

We apply the provisions of SFAS 71 to our regulated operations.  This accounting standard defines regulatoryassets as the deferral of costs expected to be recovered in future customerrates and regulatory liabilities as current cost recovery of expected futureexpenditures.

Regulatory liabilities are reflected on the Condensed ConsolidatedBalance Sheet under the caption entitled “Other Deferred Credits”.  Regulatory assets and liabilities on theCondensed Consolidated Balance Sheet include:

 
| ** **                                         | ** ** | ** **       | ** ** | ** **            | ** ** | **At**             | ** ** | **At**                | ** ** |
|----------------------------------------------------|------------|------------------|------------|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **Type of** | ** ** | **Amortization**      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                        | ** ** | ** **       | ** ** | **Recovery (a)** | ** ** | **Through**        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Regulatory Assets:**                             | ** ** | ** **       | ** ** |                  |       |               |       |                  |       |
| Deferred  recoverable income taxes                 |       | C/B              |       | Ongoing               |       | **$**              | **52.9**   |                  | $          | 53.1 |   |
| Pension and  postretirement benefits               |       | C                |       | Ongoing               |       | **46.2**           |       | 47.1                  |       |
| Electric Choice  systems costs                     |       | F                |       | 2010                  |       | **12.6**           |       | 13.5                  |       |
| Regional  transmission organization costs          |       | C                |       | 2014                  |       | **11.1**           |       | 11.4                  |       |
| Deferred storm  costs                              |       | C                |       | 2008                  |       | **4.4**            |       | 5.4                   |       |
| PJM  administrative costs                          |       | F                |       | 2009                  |       | **4.2**            |       | 4.6                   |       |
| Power plant  emission fees                         |       | C                |       | Ongoing               |       | **4.3**            |       | 4.5                   |       |
| Rate case  expenses                                |       | F                |       | 2010                  |       | **0.9**            |       | 3.5                   |       |
| Retail  settlement system costs                    |       |             |       | ** **            |       | **3.1**            |       | 3.1                   |       |
| PJM integration  costs                             |       | F                |       | 2015                  |       | **1.3**            |       | 1.4                   |       |
| Other costs                                        |       |             |       | ** **            |       | **3.6**            |       | 1.0                   |       |
| **Total  regulatory assets**                       | ** ** | ** **       | ** ** | ** **            |       | **$**              | **144.6**  |                  | $          | 148.6 |   |
|                                               |       |             |       |                  |       |               |       |                  |       |
| **Regulatory Liabilities:**                        | ** ** | ** **       | ** ** |                  |       |               |       |                  |       |
| Asset retirement  obligations - regulated property |       |             |       | ** **            |       | **$**              | **87.0**   |                  | $          | 86.3 |   |
| Postretirement  benefits                           |       |             |       | ** **            |       | **7.5**            |       | 7.6                   |       |
| SECA net revenue  subject to refund                |       |             |       | ** **            |       | **21.0**           |       | 18.7                  |       |
| **Total regulatory liabilities**                   | ** ** | ** **       | ** ** | ** **            |       | **$**              | **115.5**  |                  | $          | 112.6 |   |
|                                                    |            |                  |            |                       |            |                    |            |                       |            |  |  |  |  |

 
| *(a)*    | * * | *F — Recovery of incurred costs plus rate of  return.*                          |
|----------|----------|--------------------------------------------------------------------------------------|
| * * |     | *C —  Recovery of incurred costs only.*                                         |
| * * | * * | *B —  Balance has an offsetting liability resulting in no impact on rate base.* |

 

**RegulatoryAssets**

 

We evaluate our regulatory assets each period andbelieve recovery of these assets is probable. We have received or requested a return on certain regulatory assets forwhich we are currently recovering or seeking recovery through rates.

 

Deferredrecoverable income taxes represent deferred income tax assetsrecognized from the normalization of flow-through items as the result ofamounts previously provided to customers. Since currently existing temporary differences between the financialstatements and the related tax basis of assets will reverse in subsequentperiods, deferred recoverable income taxes are amortized.

Pension andpostretirement benefits represent the unfunded benefitobligation related to the transmission and distribution areas of our electricbusiness.  We have historically recordedthese costs on the accrual basis and this is how these costs have beenhistorically recovered through rates. This factor, combined with the historical precedents from the PUCO andthe FERC, makes future rate recovery of these costs probable.

Electric Choice systemscosts represent costs incurred to modify the customer billingsystem for unbundled rates and electric choice bills relative to othergeneration suppliers and information reports provided to the stateadministrator of the low-income electric program.  In February 2005, the PUCO approved astipulation allowing us to recover certain costs incurred for modifications toits billing system from all customers in its service territory.  We filed a subsequent case to implement thePUCO’s order to begin charging customers for billing costs.  On March 1, 2006, the PUCO issued an orderthat approved our tariff as filed.  Webegan collecting this rider immediately, and expect to recover all costs overfive years.

18

----

 

Regional transmissionorganization costs represent costs incurred to join aRegional Transmission Organization (RTO) that controls the receipts anddelivery of bulk power within the service area. These costs are being amortized over a 10-year period that commenced inOctober 2004.

Deferred storm costsinclude costs incurred by us to repair damage from December 2004 and January2005 ice storms.  On July 12, 2006, thePUCO approved our tariff as proposed and we began recovering these deferredcosts over a two-year period beginning August 1, 2006.

PJM administrative costscontain the administrative fees billed to us by PJM Interconnection, L.L.C.(PJM) as a member of  PJM .  Pursuant to a PUCO order issued on January25, 2006, these deferred costs will be recovered over a 3-year period fromretail ratepayers beginning February 2006.

Power plantemission fees represent costs paid to the State of Ohio forenvironmental monitoring that are or will be recovered over various periodsunder a PUCO rate rider from customers.

Retail settlement systemcosts represent costs to implement a retail settlement systemthat reconciles the amount ofenergy a competitive retail electric service (CRES) supplier delivers to itscustomers and what its customers actually use. Based on case precedent in other utilities’ cases, the cost of thissystem is recoverable through **DP&L’s** nexttransmission rate case that will be filed at the FERC.  The timing of this case is uncertain at thistime.

PJM integration costsinclude infrastructure costs and other related expenses incurred by PJM andreimbursed by **DP&L** to integrate us into theRTO.  Pursuant to a FERC order, the costsare being recovered over a 10-year period beginning May 2005 from wholesalecustomers within PJM.

Rate case expensesrepresent costs incurred in connection with the RateStabilization Surcharge that was approved by the PUCO and implemented inJanuary 2006.  These costs are beingamortized over a five-year period.

Other costsinclude consumer education advertising regarding electric deregulation andcosts pertaining to a recent rate case and are or will be recovered overvarious periods.

**RegulatoryLiabilities**

 

Asset retirementobligations - regulated property reflect an estimate ofamounts recovered in rates that are expected to be expended to remove existingtransmission and distribution property from service upon retirement.

Postretirementbenefits reflect a regulatory liability that was recorded forthe portion of the unrealized gain on our postretirement trust assets relatedto the transmission and distribution areas of our electric business.  The company has historically recorded thesetransactions on the accrual basis and this is how these costs have historicallybeen recovered through rates.  Thisfactor, combined with the historical precedents from the PUCO and the FERC,make it probable that these amounts will be reflected in future rates.

SECA(Seams Elimination Charge Adjustment) net revenue subject to refundrepresents the deferral of net SECA revenue accrued in 2005 and 2006.  SECA revenue and expenses representFERC-ordered transitional payments to replace the through-and-out transmissionrates that were eliminated within the PJM/MISO region.  A hearing was held in early 2006 to determinethe amount of these transitional payments. As of March 31, 2007,  no rulinghas been issued.  We received and paidthese transitional payments from May 2005 through March 2006.

**6.     AssetsHeld for Sale**

In connection with DPLE’s (significant subsidiaryof **DPL**)****decisionto sell the Greenville Station and Darby Station electric peaking generationfacilities, **DPL** recorded a $71.0 millionimpairment charge for the Greenville Station and Darby Station assets duringthe fourth quarter of 2006. Prior to the impairment charge GreenvilleStation had a net book value of approximately $66 million and Darby Station hada net book of approximately $156 million. Greenville Station consists of four natural gas peaking units and DarbyStation consists of six natural gas peaking units.

19

----

These assets are nolonger being depreciated.  The assets andliabilities held for sale March 31, 2007 and December 31, 2006 in the CondensedConsolidated Balance Sheets are as follows:

 
|  ($ in millions)                  | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|
|                                             |       |       |       |
| **Current  assets:**                             |       |       |       |
| Inventories                                      |       | $          | 0.2        |   |
|                                             |       |       |       |
| **Property:**                                    |       |       |       |
| Property, plant  and equipment                   |       | $          | 283.5      |   |
| Less:  Accumulated depreciation and amortization |       | (132.3     | )          |
| Net property, plant and equipment                |       | $          | 151.2      |   |
|                                             |       |       |       |
| **Current  liabilities:**                        |       |       |       |
| Accounts payable  and accrued expenses           |       | $          | 0.2        |   |
|                                             |       |       |       |
|                                             |       |       |       |
|                                                  |            |            |            |  |  |  |

** **

DPLE completed the sale of these peaking units onApril 25, 2007 and received approximately $151.2 million in cash. SeeFootnote 11 Subsequent Events.

**7.     Pension andPostretirement Benefits**

We sponsor a definedbenefit plan for substantially all employees. For collective bargaining employees, the defined benefits are based on aspecific dollar amount per year of service. For all other employees, the defined benefit plan is based primarily oncompensation and years of service. We fund pension plan benefits as accrued inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974 (ERISA).  Inaddition, we have a Supplemental Executive Retirement Plan (SERP) for certainactive and retired key executives. Benefits under this SERP have been frozen and no additional benefits canbe earned.  We****alsohave unfunded liabilities related to retirement benefits for certain active,terminated and retired key executives (not related to our ongoing litigationwith three former executives) that include The DPL Inc. Supplemental ExecutiveDefined Contribution Retirement Plan (SEDCRP). These liabilities totaled approximately $0.8 million at March 31, 2007.

Qualified employees whoretired prior to 1987 and their dependents are eligible for health care andlife insurance benefits.  We have fundedthe union-eligible health benefit using a Voluntary Employee BeneficiaryAssociation Trust.

Thenet periodic benefit cost of the pension and postretirement benefit plans forthe three months ended March 31, 2007 and 2006 was:

20

----

 

**Net periodicbenefit cost**
| **$ in millions**                   | ** ** | ** ** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------|------------|--------------------|------------|
| ** **                                    | ** ** | **2007**   | ** ** | **2006**    | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Service cost                                  | ** ** | **$**      | **1.1**    |        | $          | 1.1                |       | **$** | **—** |   | $ | — |   |
| Interest cost                                 | ** ** | **4.1**    |       | 4.1         |       | **0.4**            |       | 0.4 |   |
| Expected return  on assets (a)                | ** ** | **(5.5**   | **)**      | (5.4        | )          | **(0.1**           | **)**      | (0.1 | ) |
|                                          | ** ** | ** ** |       |        |       | ** **         |       |   |   |
| Amortization of  unrecognized:                | ** ** | ** ** |       |        |       | ** **         |       |   |   |
| Actuarial (gain) loss                         | ** ** | **0.9**    |       | 1.0         |       | **(0.2**           | **)**      | (0.2 | ) |
| Prior service cost                            | ** ** | **0.6**    |       | 0.6         |       | **—**         |       | — |   |
| Transition obligation                         | ** ** | **—** |       | —      |       | **—**         |       | 0.1 |   |
| Net periodic  benefit cost before adjustments | ** ** | **1.2**    |       | 1.4         |       | **0.1**            |       | 0.2 |   |
| Special  termination benefit cost (b)         | ** ** | **—** |       | 0.3         |       | **—**         |       | — |   |
| Net periodic benefit  cost after adjustments  | ** ** | **$**      | **1.2**    |        | $          | 1.7                |       | **$** | **0.1** |   | $ | 0.2 |   |

----

*(a) The market-related value of assets is equal tothe fair value of assets at implementation with subsequent*

*asset gains and losses recognized in themarket-value systematically over a three-year period.*

 

*(b) In 2006, a special termination benefit cost wasrecognized as a result of 16 employees who participated in*

*a voluntary early retirement program and retired atvarious dates during 2006; this program was completed*

*as of April 1, 2006.*

21

----

 

Thefollowing estimated benefit payments, which reflect future service, areexpected to be paid as follows:

**Estimated Future Benefit Payments**
| $ in millions | ** ** | **Pension**                                     | ** ** | **Postretirement**                                                                                               | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| 2007                    |       | $       14.5 |       | $                  2.0 |       |
| 2008                    |       | $       19.8 |       | $                  2.6 |       |
| 2009                    |       | $       20.2 |       | $                  2.6 |       |
| 2010                    |       | $       20.7 |       | $                  2.5 |       |
| 2011                    |       | $       20.9 |       | $                  2.4 |       |
| 2012 — 2016        |       | $     111.9            |       | $                10.0            |       |

 

**8.     Stock-BasedCompensation**

Forthe quarter ended March 31, 2007, total compensation expense was $5.1 millionfor all share-based compensation (stock options, RSUs, restricted shares andperformance shares) with an associated tax benefit of $1.8 million.  Compensation expense for the year endedDecember 31, 2006 was $5.8 million for all share-based compensation and the taxbenefit associated with these expenses was $2.1 million.

Share-based awards willbe issued from treasury stock.  **DPL** believes it has sufficient treasury stock to satisfy alloutstanding share-based awards.

Per FAS 123R, stockoptions and RSUs are valued using a Black-Scholes-Merton model, performanceshares are valued using a Monte Carlo simulation and restricted shares arevalued at the market price on the day of grant.

**Options**

 

In 2000, **DPL’s** Board of Directors adopted and **DPL’s** shareholders approved The DPL Inc.Stock Option Plan.  On April 26, 2006, **DPL’s** shareholders approved The DPL Inc. 2006 Equity andPerformance Incentive Plan (EPIP).  Withthe approval of the EPIP, no new awards will be granted under The DPL Inc.Stock Option Plan, but shares relating to awards that are forfeited orterminated under The DPL Inc. Stock Option Plan may be granted under theEPIP.  There are currently 10,000unvested stock options outstanding that will vest as of December 31, 2007.

The schedule of option activity for the three monthsended March 31, 2007 was as follows:

 
|                                       | ** ** | ** **         | ** ** | **Weighted-Avg.**                                                                                                                     | ** ** |
|---------------------------------------|------------|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Grant Date**                                                                                                                   | ** ** |
| **$ in millions**           | ** ** | ** **         | ** ** | **Options**                                                                                                                           | ** ** | **Fair Value** | ** ** |
| Non-vested at January  1, 2007        |       | 10,000             |       | $                  0.05                     |       |
| Granted in first three  months 2007   |       | —             |       | $                     — |       |
| Vested in first three  months 2007    |       | —             |       | $                     — |       |
| Forfeited in first three  months 2007 |       | —             |       | $                     — |       |
| Non-vested at March 31, 2007          |       | 10,000             |       | $                  0.05                     |       |
|                                       |            |                    |            |                                                                                                                                       |            |  |  |

 

22

----

 

Summarized stock option activity was as follows:

 

 
| ** **                                 | ** ** | **Three Months**                                                                                                         | ** ** | **Twelve Months**                                                                                        | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Ended**                                                                                                                     | ** ** | **Ended**                                                                                                     | ** ** |
| ** **                                 | ** ** | **March 31,**                                                                                                            | ** ** | **December 31,**                                                                                         | ** ** |
| ** **                                 | ** ** | **2007**                                                                                                                      | ** ** | **2006**                                                                                                      | ** ** |
| Options:                                   |       |                                                                                                                          |       |                                                                                                          |       |
| Outstanding at  beginning of year          | ** ** | **5,091,500**                                                                                                                 |       | 5,486,500                                                                                                     |       |
| Granted                                    | ** ** | **—**                                                                                                                    |       | —                                                                                                        |       |
| Exercised                                  | ** ** | **(150,000**                                                                                                                  | **)**      | (355,000                                                                                                      | )          |
| Forfeited                                  | ** ** | **—**                                                                                                                    |       | (40,000                                                                                                       | )          |
| Outstanding at year-end  (a)               | ** ** | **4,941,500**                                                                                                                 |       | 5,091,500                                                                                                     |       |
| Exercisable at year-end                    | ** ** | **4,931,500**                                                                                                                 |       | 5,081,500                                                                                                     |       |
|                                       | ** ** | ** **                                                                                                                    |       |                                                                                                          |       |
| Weighted average option  prices per share: | ** ** | ** **                                                                                                                    |       |                                                                                                          |       |
| Outstanding at  beginning of year          | ** ** | **$             21.95**                                      |       | $            21.86                                |       |
| Granted                                    | ** ** | **$                   —** |       | $                 — |       |
| Exercised                                  | ** ** | **$             26.43**                                      |       | $            21.00                                |       |
| Forfeited                                  | ** ** | **$                   —** |       | $            15.88                                |       |
| Outstanding at year-end                    | ** ** | **$             21.79**                                      |       | $            21.95                                |       |
| Exercisable at year-end                    | ** ** | **$             21.78**                                      |       | $            21.94                                |       |

----

| *(a)* | * * | *In dispute with certain former executives, among  other things, are approximately 1 million forfeited options not included  above and 3.6 million outstanding options that are included above.* |
|-------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The stock options exercised in the first quarter of2007 were valued at $4.5 million and produced proceeds of $3.9 million.  The market value of options that were vestedat March 31, 2007 was approximately $48.5 million.

**Restricted Stock Units (RSUs)**

 

In addition, RSUs weregranted to certain key employees prior to 2001. There were 1.3 million RSUs outstanding as of March 31, 2007, of whichonly $0.1 million have not vested. Substantially all of the vested RSUs are in dispute as part of ourongoing litigation with Peter H. Forster, formerly **DPL’s**Chairman; Caroline E. Muhlenkamp, formerly **DPL’s** GroupVice President and Interim Chief Financial Officer; and Stephen F. Koziar, Jr.,formerly **DPL’s** Chief Executive Officer andPresident.  The remaining 0.1 million non-vestedRSUs will be paid in cash upon vesting and will vest as follows:  20,097 in 2007; 14,688 in 2008; 10,205 in2009; and 5,008 in 2010.  Vested RSUs aremarked to market each quarter and any adjustment to compensation expense isrecognized at that time.  Non-vested RSUsare valued quarterly at fair value using the Black-Scholes-Merton model todetermine the amount of compensation expense to be recognized.  Non-vested RSUs do not earn dividends.

**Performance Shares**

 

Underthe EPIP, the Board adopted a Long-Term Incentive Plan (LTIP) under which **DPL** will award a targeted number of performance shares ofcommon stock to executives.  Awards underthe LTIP will be awarded based on a Total Shareholder Return Relative to Peersperformance.  No performance shares willbe earned in a performance period if the three-year Total Shareholder ReturnRelative to Peers is below the threshold of the 40th percentile. Further, the LTIP awards will be capped at 200% of the target number ofperformance shares, if the Total Shareholder Return Relative to Peers is at orabove the threshold of the 90th percentile. The Total Shareholder Return Relative to Peers is considered a marketcondition under FAS 123R.  There is athree year requisite service period for each tranche of the Performance Shares.

23

----

 

Theschedule of non-vested performance share activity for the three months endedMarch 31, 2007 follows:

 
| ** **                            | ** ** | **Number of** | ** ** | **Weighted-Avg.**                                                                                                               | ** ** |
|---------------------------------------|------------|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Performance**    | ** ** | **Grant Date**                                                                                                             | ** ** |
| **$ in millions**           | ** ** | ** **         | ** ** | **Shares**                                                                                                                      | ** ** | **Fair Value** | ** ** |
| Non-vested at January  1, 2007        |       | 110,723            |       | $                   2.7          |       |
| Granted in first three  months 2007   |       | 69,184             |       | $                   2.4          |       |
| Vested in first three  months 2007    |       | —             |       | $                    — |       |
| Forfeited in first  three months 2007 |       | (14,172            | )          | $                  (0.5               | )          |
| Non-vested at March 31, 2007          |       | 165,735            |       | $                   4.6          |       |
|                                       |            |                    |            |                                                                                                                                 |            |  |  |

 
| ** **                        | ** ** | **Three Months**        | ** ** | **Twelve Months**          | ** ** |
|-----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Ended**                    | ** ** | **Ended**                       | ** ** |
| ** **                        | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| Performance Shares:               |       |                         |       |                            |       |
| Outstanding at  beginning of year | ** ** | **154,768**                  |       | **—**                      |       |
| Granted                           | ** ** | **69,184**                   |       | 244,423                         |       |
| Exercised                         | ** ** | **(22,462**                  | **)**      | —                          |       |
| Expired                           | ** ** | **(21,583**                  | **)**      | —                          |       |
| Forfeited                         | ** ** | **(14,172**                  | **)**      | (89,655                         | )          |
| Outstanding at end of  period     | ** ** | **165,735**                  |       | 154,768                         |       |
| Exercisable at end of period      | ** ** | **—**                   |       | 44,045                          |       |

 

Theperformance shares exercised in the first quarter of 2007 were valued at $1.3million, however, there were no proceeds because performance shares do not havean exercise price.

Asof March 31, 2007, there was $3.1 million of total unrecognized compensationcost related to non-vested performance shares granted under the LTIP.  We expect to recognize $1.3 million of thiscost in 2007, $1.1 million in 2008 and $0.7 million in 2009.  A forfeiture rate of 20% was estimated incalculating the compensation expense.

**Restricted Shares**

 

Underthe EPIP, the Board granted shares of DPL Inc. Restricted Shares to variousexecutives.  The Restricted Shares are tobe registered in the executive’s name, receive dividends as declared and paidon all **DPL** common stock and will vest after aspecified service period.

During the first quarterof 2007, 5,000 restricted shares were awarded to two of our executive officers.

 
| ** **                            | ** ** | **Number of** | ** ** | **Weighted-Avg.**                                                                                          | ** ** |
|---------------------------------------|------------|--------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Performance**    | ** ** | **Grant Date**                                                                                        | ** ** |
| **$ in millions**           | ** ** | ** **         | ** ** | **Shares**                                                                                                 | ** ** | **Fair Value** | ** ** |
| Non-vested at January  1, 2007        |       | 19,000             |       | $                 0.5 |       |
| Granted in first three  months 2007   |       | 5,000              |       | 0.1                                                                                                        |       |
| Vested in first three  months 2007    |       | —             |       | —                                                                                                     |       |
| Forfeited in first  three months 2007 |       | —             |       | —                                                                                                     |       |
| Non-vested at March 31, 2007          |       | 24,000             |       | $                 0.6 |       |
|                                       |            |                    |            |                                                                                                            |            |  |  |

 
| ** **                        | ** ** | **Three Months**        | ** ** | **Twelve Months**          | ** ** |
|-----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Ended**                    | ** ** | **Ended**                       | ** ** |
| ** **                        | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| Restricted Shares:                |       |                         |       |                            |       |
| Outstanding at  beginning of year |       | **19,000**                   |       | —                          |       |
| Granted                           |       | **5,000**                    |       | 19,000                          |       |
| Exercised                         |       | **—**                   |       | —                          |       |
| Forfeited                         |       | **—**                   |       | —                          |       |
| Outstanding at end of  period     |       | **24,000**                   |       | 19,000                          |       |
| Exercisable at end of period      |       | **—**                   |       | —                          |       |

 

24

----

 

Restrictedshares do not have an exercise price.

Asof March 31, 2007, there was $0.6 million of total unrecognized compensationcost related to non-vested restricted shares granted under the EPIP.  We expect to recognize $0.1 million of thiscost in 2007, $0.2 million in 2008 and $0.3 million during the period from 2009- 2011.

**9.     Long-term Debt**

 

**DPL Inc.**
|                                | ** ** | ** **                                                         | ** ** | **At**                                                                                   | ** ** | **At**                                                                         | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **March 31,**                                                 | ** ** | **December 31,**                                                                    | ** ** |
| **$ in millions**    | ** ** | ** **                                                         | ** ** | **2007**                                                                                 | ** ** | **2006**                                                                       | ** ** |
| DP&L -                     |       | First  mortgage bonds maturing                                     | ** ** | ** **                                                                               |       |                                                                           |       |
|                                |       | 2013 - 5.125%                                                      | ** ** | **$             470.0** |       | $            470.0 |       |
| DP&L -                     |       | Pollution  control series maturing                                 | ** ** | ** **                                                                               |       |                                                                           |       |
|                           |       | 2036 - 4.80%                                                       | ** ** | **100.0**                                                                                |       | 100.0                                                                          |       |
| DP&L -                     |       | Pollution  control series maturing                                 | ** ** | ** **                                                                               |       |                                                                           |       |
|                                |       | through 2034 - 4.78% (a)                                           | ** ** | **214.4**                                                                                |       | 214.4                                                                          |       |
|                           | ** ** | ** **                                                         |       | **784.4**                                                                                |       | 784.4                                                                          |       |
| DPL Inc. -                     |       | Note  to Capital Trust II 8.125% due 2031                          | ** ** | **195.0**                                                                                |       | 195.0                                                                          |       |
| DPL Inc. -                     |       | Senior  Notes 6.875% Series due 2011                               | ** ** | **297.4**                                                                                |       | 297.4                                                                          |       |
| DPL Inc. -                     |       | Senior  Notes 6.25% Series due 2008                                | ** ** | **100.0**                                                                                |       | 100.0                                                                          |       |
| DPL Inc. -                     |       | Senior  Notes 8.00% Series due 2009                                | ** ** | **175.0**                                                                                |       | 175.0                                                                          |       |
| DP&L -                     |       | Obligations  for capital leases                                    | ** ** | **1.9**                                                                                  |       | 2.0                                                                            |       |
| Unamortized  debt discount (b) |       | **(1.9**                                                           | **)**      | (2.0                                                                                     | )          |
| Total                          |       | **$         1,551.8** |       | $         1,551.8                           |       |
|                                |            |                                                                    |            |                                                                                          |            |                                                                                |            |  |  |  |  |

----

| *(a)*    | * * | *Weighted average interest rate for 2007 and 2006.*                                    |
|----------|----------|----------------------------------------------------------------------------------------|
| * * | * * | * *                                                                               |
| *(b)*    | * * | *DP&L’s unamortized debt discount was $(1.2)  million and $(1.2) million for* |
| * * | * * | *March 31, 2007 and December 31, 2006,  respectively.*                                 |

* *

**DP&L**
|                                    | ** ** | **At**                                                                                   | ** ** | **At**                                                                         | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **March 31,**                                                                       | ** ** | **December 31,**                                                          | ** ** |
| **$ in millions**        | ** ** | ** **                                                                               | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| First mortgage bonds  maturing     | ** ** | ** **                                                                               |       | ** **                                                                     |       |
| 2013 - 5.125%                      | ** ** | **$             470.0** |       | $            470.0 |       |
| Pollution control  series maturing | ** ** | ** **                                                                               |       |                                                                           |       |
| 2036 - 4.80%                       | ** ** | **100.0**                                                                                |       | 100.0                                                                          |       |
| Pollution control series  maturing | ** ** | ** **                                                                               |       |                                                                           |       |
| through 2034 - 4.78% (a)           | ** ** | **214.4**                                                                                |       | 214.4                                                                          |       |
|                               |       | **784.4**                                                                                | ** ** | 784.4                                                                          |       |
| Obligations for capital  leases    | ** ** | **1.9**                                                                                  |       | 2.0                                                                            |       |
| Unamortized debt  discount         | ** ** | **(1.2**                                                                                 | **)**      | (1.2                                                                           | )          |
| Total                              |       | **$             785.1** | ** ** | $            785.2 |       |
|                                    |            |                                                                                          |            |                                                                                |            |  |  |

----

| *(a)* | * * | *Weighted average interest rate for quarter ended  March 31, 2007 and 2006.* |
|-------|----------|------------------------------------------------------------------------------|

* *

* *

At March 31, 2007, **DPL’s** scheduled maturities of long-termdebt, including capital lease obligations, over the next five years are $0.7million for the remainder of 2007, $100.7 million in 2008, $175.8 millionin 2009, $0.6 million in 2010 and $297.4 million in 2011.

25

----

 

At March 31, 2007, **DP&L’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five yearsare $0.7 million for the remainder of 2007, $0.7 million in 2008, $0.8 millionin 2009, $0.6 million in 2010 and none in 2011.  Substantially all property of **DP&L** is subject to the mortgage liensecuring the first mortgage bonds.  

OnAugust 29, 2005, **DPL** redeemed $200 million of its8.25% Senior Notes due 2007.  Theremaining $225 million of these notes were retired March 1, 2007, theirmaturity date.

Duringthe first quarter of 2006, the Ohio Department of Development (ODOD) awarded **DP&L** the ability to issue over the next three years upto $200 million of qualified tax-exempt financing from the ODOD’s 2005 volumecap carryforward.  The financing is to beused to partially fund the ongoing flue gas desulfurization (FGD) capitalprojects.  On September 13, 2006, theOhio Air Quality Development Authority (OAQDA) issued $100 million of 4.80%fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1,2036.  All funds from this borrowing havebeen drawn as of April 3, 2007.  In turn,**DP&L** borrowed these funds from theOAQDA.  These funds were placed in escrowwith a trustee and, as of April 3, 2007, **DP&L** hasdrawn out the entirety of the funds.

**DP&L**expects to use the remaining $100 million of volume cap carryforward prior tothe end of 2008.  **DP&L**is planning to issue in conjunction with the OAQDA another $100 million oftax-exempt bonds to finance the remaining qualifying solid waste disposalfacilities at Miami Fort, Killen, Stuart and Conesville Generating Stations.

OnNovember 21, 2006, **DP&L**entered into a new $220 million unsecured revolving credit agreement replacingits $100 million facility.  This newagreement has a five-year term that expires November 21, 2011 and provides **DP&L** with the ability to increase the size of thefacility by an additional $50 million at any time.  The facility contains one financialcovenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of March 31, 2007,**DP&L**has borrowed $65 million from this facility for ninety-two days at 5.63%.  Fees associated with this credit facility areapproximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicableinterest rate.  This revolving creditagreement also contains a $50 million letter of credit sublimit.  **DP&L** hascertain contractual agreements for the sale and purchase of power, fuel and relatedenergy services that contain credit rating related clauses allowing the counterparties to seek additional surety under certain conditions.  As of March 31, 2007, **DP&L**had no outstanding letters of credit against the facility.

OnFebruary 24, 2005, **DP&L**enteredinto an amendment to extend the term of its Master Letter of Credit Agreementwith a financial lending institution for one year and to reduce the maximumdollar volume of letters of credit to $10 million.  On February 17, 2006, **DP&L**renewed its $10 million agreement for one year. In February 2007, **DP&L** optednot to renew this agreement.

There are nointer-company debt collateralizations or debt guarantees between **DPL**, **DP&L**and their subsidiaries.  None of the debtobligations of **DPL** or **DP&L** are guaranteed or secured byaffiliates and no cross-collateralization exists between any subsidiaries.

**10.  Commitments andContingencies**

**ContractualObligations and Commercial Commitments**

We enter into variouscontractual obligations and other commercial commitments that may affect theliquidity of our operations.  At March31, 2007, these include:

26

----

 

**ContractualObligations**
| ** **                           | ** ** | ** **                                             | ** ** | **Payment Year**                                                                             | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                                             | ** ** | **Less Than**                                                                                | ** ** | **2 - 3** | ** ** | **4 - 5** | ** ** | **More Than** | ** ** |
| **$ in millions**          | ** ** | ** **                                             | ** ** | **Total**                                                                                         | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| **DPL**                              |       |                                                   |       |                                                                                              |       |   |   | ** ** |   |   |   |
|                                 |       |                                                   |       |                                                                                              |       |   |   |   |   |   |   |
| Long-term debt                       |       | $     1,549.9                 |       | $               — |       | $        275.0 |   | $          297.4 |   | $     977.5 |   |
| Interest payments                    |       | 1,074.3                                                |       | 71.8                                                                                              |       | 170.7 |   | 144.0 |   | 687.8 |   |
| Pension and  postretirement payments |       | 230.1                                                  |       | 16.5                                                                                              |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                       |       | 2.8                                                    |       | 0.7                                                                                               |       | 1.5 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.7                                                    |       | 0.3                                                                                               |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 467.8                                                  |       | 246.5                                                                                             |       | 110.5 |   | 110.8 |   | — |   |
| Limestone contracts                  |       | 58.4                                                   |       | 1.5                                                                                               |       | 9.4 |   | 10.8 |   | 36.7 |   |
| Other contractual  obligations       |       | 436.7                                                  |       | 370.0                                                                                             |       | 57.1 |   | 9.6 |   | — |   |
| Total  contractual obligations       |       | $     3,820.7                 |       | $          707.3                                |       | $        669.7 |   | $          619.8 |   | $  1,823.9 |   |
|                                 |       |                                                   |       |                                                                                              |       |   |   |   |   |   |   |
|                                 |       |                                                   |       |                                                                                              |       |   |   |   |   |   |   |
| **DP&L**                         |       |                                                   |       |                                                                                              |       |   |   |   |   |   |   |
|                                 |       |                                                   |       |                                                                                              |       |   |   |   |   |   |   |
| Long-term debt                       |       | $        783.2 |       | $               — |       | $            — |   | $               — |   | $     783.2 |   |
| Interest payments                    |       | 562.2                                                  |       | 29.4                                                                                              |       | 78.3 |   | 78.3 |   | 376.2 |   |
| Pension and  postretirement payments |       | 230.1                                                  |       | 16.5                                                                                              |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                       |       | 2.8                                                    |       | 0.7                                                                                               |       | 1.5 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.7                                                    |       | 0.3                                                                                               |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 467.8                                                  |       | 246.5                                                                                             |       | 110.5 |   | 110.8 |   | — |   |
| Limestone contracts                  |       | 58.4                                                   |       | 1.5                                                                                               |       | 9.4 |   | 10.8 |   | 36.7 |   |
| Other contractual  obligations       |       | 436.7                                                  |       | 370.0                                                                                             |       | 57.1 |   | 9.6 |   | — |   |
| Total  contractual obligations       |       | $     2,541.9                 |       | $          664.9                                |       | $        302.3 |   | $          256.7 |   | $  1,318.0 |   |
|                                      |            |                                                        |            |                                                                                                   |            |  |  |  |  |  |  |  |  |

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(a)   **DP&L**-operatedunits

 

Long-term debt:

**DPL’s**long-term debt as of March 31, 2007, consists of **DP&L’s** first mortgage bonds, tax-exempt pollution controlbonds, **DPL** unsecured notes andincludes current maturities and unamortized debt discounts.

**DP&L’s**long-term debt as of March 31, 2007, consists of first mortgage bonds,tax-exempt pollution control bonds and includes an unamortized debt discount.

See Note 9 ofNotes to Condensed Consolidated Financial Statements.

Interest payments:

Interest paymentsassociated with the long-term debt described above.

Pension and postretirement payments:

As of March 31,2007, **DP&L** had estimatedfuture benefit payments as outlined in Note 7 of Notes to CondensedConsolidated Financial Statements.  Theseestimated future benefit payments are projected through 2015.

Capital leases:

As of March 31,2007, **DP&L** had two capitalleases that expire in November 2007 and September 2010.

Operating leases:

As of March 31,2007, **DPL** and **DP&L** had several operating leases withvarious terms and expiration dates.  Notincluded in this total is approximately $88,000 per year related to right-of-wayagreements that are assumed to have no definite expiration dates.

Coal contracts:

**DP&L**has entered into various long-term coal contracts to supply portions of itscoal requirements for its generating plants. Contract prices are subject to periodic adjustment and have featuresthat limit price escalation in any given year.

Limestone contracts:

**DP&L**has entered into various limestone contracts to supply limestone for its generatingfacilities.

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Other contractualobligations:

As of March 31, 2007, **DPL** and **DP&L**had various other contractual obligations including non-cancelable contracts topurchase goods and services with various terms and expiration dates.

We enter into variouscommercial commitments, which may affect the liquidity of our operations.  At March 31, 2007, these include:

Credit facilities:

In November 2006, **DP&L**replaced its previous $100 million revolving credit agreement with a $220million five-year facility that expires on November 21, 2011.  **DP&L** hasthe ability to increase the size of the facility by an additional $50 millionat any time.  At March 31, 2007, therewas $65 million outstanding under this credit agreement due on May 29, 2007 at5.63% interest.

Guarantees:

**DP&L** owns a4.9% equity ownership interest in an electric generation company.  As of March 31, 2007, **DP&L** could be responsible for therepayment of 4.9%, or $21.8 million, of a $445 million debt obligation thatmatures in 2026.

In two separatetransactions in November and December 2006, **DPL**agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPLEnergy, LLC (DPLE) regarding the pending sale of the Darby Electric PeakingStation to American Electric Power and the sale of the Greenville ElectricPeaking Station to Buckeye Electric Power, Inc. In both cases, **DPL** has agreedto guarantee the obligations of DPLE over a multiple year period as follows:

 
|            | ** ** | **2007**                                                    | ** ** | **2008**                            | ** ** | **2009**                                                   | ** ** | **2010**                                                   | ** ** |
|------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Darby      |       | $         30.6 |       | $     23.0 |       | $       15.3            |       | $         7.7 |       |
|       |       |                                                        |       |                                |       |                                                       |       |                                                       |       |
| Greenville |       | $         14.8 |       | $     11.1 |       | $         7.4 |       | $         3.7 |       |
|       |       |                                                        |       |                                |       |                                                       |       |                                                       |       |

 

 

**Contingencies**

 

In the normalcourse of business, we are subject to various lawsuits, actions, proceedings,claims and other matters asserted under laws and regulations.  We believe the amounts provided in our CondensedConsolidated Financial Statements, as prescribed by GAAP, are adequate in lightof the probable and estimable contingencies. However, there can be no assurances that the actual amounts required tosatisfy alleged liabilities from various legal proceedings, claims, taxexaminations and other matters discussed below, and to comply with applicablelaws and regulations, will not exceed the amounts reflected in our CondensedConsolidated Financial Statements.  Assuch, costs, if any, that may be incurred in excess of those amounts providedas of March 31, 2007, cannot be reasonably determined.

**EnvironmentalMatters**

 

**DPL**, **DP&L**and our subsidiaries’ facilities and operations are subject to a wide range ofenvironmental regulations and law.  Inthe normal course of business, we haveinvestigatory and remedial activities underway at these facilities to comply,or to determine compliance, with such regulations.  Wehave been identified, either by a government agency or by a privateparty seeking contribution to site clean-up costs, as a potentially responsibleparty (PRP) at two sites pursuant to state and federal laws.  Werecord liabilities for probable estimated loss in accordance withStatement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting forContingencies.”  To the extent a probableloss can only be estimated by reference to a range of equally probableoutcomes, and no amount within the range appears to be a better estimate thanany other amount, we accrue forthe low end of the range.  Because ofuncertainties related to these matters, accruals are based on the bestinformation available at the time.  We evaluate the potential liabilityrelated to probable losses quarterly and may revise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results of operationsand financial position.

**Former Executive Litigation**

 

Cumulatively throughMarch 31, 2007, we have accrued for accounting purposes, obligations ofapproximately $61 million to reflect claims regarding deferred compensation,estimated MVE incentives and/or legal fees that certain former executivesassert are payable per contracts.  Wedispute the former executives’ entitlement to any of those sums and arepursuing litigation against them contesting all such claims.

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** **

**Environmental**

 

In September 2004, theSierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart Generating Station in the United States DistrictCourt for the Southern District of Ohio for alleged violations of the Clean AirAct (CAA) and the Station’s operating permit. **DP&L**, on behalf of all co-owners,is leading the defense of this matter.  Asizable amount of discovery has taken place and expert reports are scheduled tobe filed at various times from May through September 2007.  Dispositive motions are to be filed inJanuary 2008.  No trial date has been setyet.

On April 2, 2007,the U.S. Supreme Court unanimously overturned the rulings of two lower courtsand concluded that the CAA’s New Source Review (NSR) requirements are triggeredwhen a major physical or operational change at a facility results in anincrease in the facility’s annual emissions (*EnvironmentalDefense et al, v. Duke Energy Corp. et al.*).  The outcome of this case is significant to **DP&L** because it eliminates one of **DP&L’s**major arguments in the lawsuit filed against it by the Sierra Club .  The Court decided that an annual rate ofemissions could be used to determine if major modifications have been made to aplant as opposed to an hourly emission rate as Duke had argued.  Using the annual rate makes it more likelythat most plant modifications will be found to be “major” modifications, thusrequiring EPA permits.  **DP&L** can still defend against the allegations of NSRviolations if it can establish that the activities at issue did not cause totalannual emissions to increase or that the projects that resulted in increasedemissions were undertaken for routine maintenance, repair and replacementactivities.

**11. SubsequentEvents**

**Sale of PeakingUnits**

On April 25, 2007, DPL Energy, LLC, completed the saleof its Darby and Greenville electric peaking generation facilities providing **DPL** with approximately $151.2 million in cash.  Darby Station was sold to Columbus SouthernPower, a utility subsidiary of American Electric Power (AEP), for approximately$102 million in cash. Greenville Station was sold to Buckeye Power, Inc. forapproximately $49.2 million in cash. 

The sale proceeds will be used to pay down short-termborrowings and fund **DP&L's**major construction projects. 

Darby station has a summer capacity of 450 megawattsand is located 20 miles southwest of Columbus, Ohio and Greenville station hasa summer capacity of 200 megawatts and is located in Greenville, Ohio. With theclosing of these sales, **DPL** ownsapproximately 950 megawatts of peaking generation and 2,800 megawatts ofcoal-fired generation.

**Insurance RecoveryClaim**

On January 13, 2006, we filed a claim against one ofour insurers, Associated Electric & Gas Insurance Services (AEGIS), under afiduciary liability policy to recoup legal fees associated with our litigationagainst three former executives.  OnApril 17-18, 2007, **DP&L** andAEGIS mediated the issue and reached a settlement in which AEGIS agreed to pay **DP&L** $14.5 million for legal fees incurred by **DP&L** associated with our litigation against three formerexecutives. The settlement agreement was signed and executed on April 30, 2007.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

Certainstatements contained in this discussion are “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relateto events or developments that are expected to occur in the future, includingmanagement’s expectations, strategic objectives, business prospects,anticipated economic performance and financial condition and other similarmatters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs,assumptions and expectations of our future economic performance, taking intoaccount the information currently available to management.  These statements are not statements ofhistorical fact.  Such forward-lookingstatements are subject to risks and uncertainties and investors are cautionedthat outcomes and results may vary materially from those projected due tovarious factors beyond our control, including but not limited to:  abnormal or severe weather; unusualmaintenance or repair requirements; changes in fuel costs, purchased power,coal, environmental emissions, gas and other commodity prices; increasedcompetition; regulatory changes and decisions; changes in accounting rules;financial market conditions; and general economic conditions.

Forward-lookingstatements speak only as of the date of the document in which they aremade.  These forward-looking statementsare identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”,“expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”,and similar expressions.  We disclaim anyobligation or undertaking to provide any updates or revisions to anyforward-looking statement to reflect any change in our expectations or anychange in events, conditions or circumstances on which the forward-lookingstatement is based.

The followingdiscussion should be read in conjunction with the accompanying financials andrelated footnotes included in Part 1 — Financial Information.

**BUSINESS OVERVIEW**

This report includes thecombined filing of **DPL Inc. (DPL)**and **The Dayton Power and Light Company****(DP&L).  DP&L**isthe principal subsidiary of **DPL**providing approximately99% of **DPL’s**total consolidated revenue andapproximately 89% of **DPL’s**totalconsolidated asset base.  Throughout thisreport the terms we, us, our and ours are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section. Historically, **DPL** and **DP&L** have filed separate SEC filings.  Beginning with the 2006 Form 10-K and in thefuture, **DPL**and **DP&L**willfile combined SEC reports on an interim and annual basis.

**DPL** is aregional electric energy and utility company and through its principalsubsidiary, **DP&L**, is primarily engaged inthe generation, transmission and distribution of electricity in West CentralOhio. **DPL**and **DP&L**strive to achieve disciplined growth in energy margins while limitingvolatility in both cash flows and earnings and to achieve stable, long-termgrowth through efficient operations and strong customer and regulatoryrelations. More specifically, **DPL**and**DP&L’s**strategy is to match energy supply with load orcustomer demand, maximize profits while effectively managing exposure tomovements in energy and fuel prices and utilize the transmission anddistribution assets that transfer electricity at the most efficient cost, whilemaintaining the highest level of customer service and reliability.

We operate and managegeneration assets and are exposed to a number of risks through this management.These risks include but are not limited to electricity wholesale price risk,fuel supply and price risk and power plant performance.  We attempt to manage these risks throughvarious means. For instance, we operate a portfolio of wholly-owned and jointly-ownedgeneration assets that is diversified as to fuel source, cost structure andoperating characteristics. We are focused on the operating efficiency of thesepower plants and maintaining their availability.

Like other electricutilities and energy marketers, **DP&L**and DPL Energy, LLC (DPLE, one of our wholly-owned subsidiaries) may sell orpurchase electric products on the wholesale market.  **DP&L**and DPLE compete with other generators, power marketers, privately andmunicipally-owned electric utilities, and rural electric cooperatives whenselling electricity.  The ability of **DP&L** and DPLE to sell this electricitywill depend on how **DP&L’s** andDPLE’s price, terms and conditions compare to those of other suppliers.

We****operateand manage****transmission and distribution assetsin a rate-regulated environment. Accordingly, this subjects us to regulatoryrisk in terms of the costs that we may recover and the investment returns thatwe may 

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collect in customerrates. We are focused on delivering electricity and maintaining high standardsof customer service and reliability in a cost-effective manner.

We operate in a regulatedand deregulated environment.  Theelectric utility industry has historically operated in a regulatedenvironment.  However, in recent years,there have been a number of federal and state regulatory and legislativedecisions aimed at promoting competition and providing customer choice.  Market participants have therefore creatednew business models to exploit opportunities. The marketplace is now comprised of independent power producers, energymarketers and traders, energy merchants, transmission and distributionproviders and retail energy suppliers. There have also been new market entrants and activity among thetraditional participants, such as mergers, acquisitions, asset sales andspin-offs of lines of business.  Inaddition, transmission systems are being operated by Regional TransmissionOrganizations (RTOs).

As part of Ohio’selectric deregulation law, all of the state’s investor-owned utilities arerequired to join a RTO.  In October 2004,**DP&L** successfully integrated its1,000 miles of high-voltage transmission into the PJM Interconnection, L.L.C.(PJM) RTO.  The role of the RTO is toadminister an electric marketplace and ensure reliability of the transmissiongrid.  PJM ensures the reliability of thehigh-voltage electric power system serving 51 million people in all or parts ofDelaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, NorthCarolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and theDistrict of Columbia.  PJM coordinatesand directs the operation of the region’s transmission grid, administers theworld’s largest competitive wholesale electricity market and plans regionaltransmission expansion improvements to maintain grid reliability and relievecongestion.

As a member of PJM, **DP&L** is subject to charges and costs associated with PJMoperations as approved by the FERC.  Asdiscussed below, in connection with the recovery of such costs in retail rates,**DP&L**incurs significantadministrative charges.  Additionally,PJM’s role in administering the regional transmission grid and planningregional transmission expansion improvements results in periodic proposals byPJM and other stakeholder members of PJM to the FERC to allocate and chargecosts associated with the transmission system to various entities operatingwithin PJM including **DP&L**.  **DP&L** andother interested parties have the right to intervene and offercounter-proposals.

**UPDATES /OTHER MATTERS**

**Sale of Peaking Units**

On April 25, 2007, DPL Energy, LLC, completed the sale of its Darby andGreenville electric peaking generation facilities providing **DPL** with approximately $151.2 million in cash.  Darby Station was sold to Columbus SouthernPower, a utility subsidiary of American Electric Power (AEP), for approximately$102 million in cash. Greenville Station was sold to Buckeye Power, Inc. forapproximately $49.2 million in cash. 

 

The sale proceeds will be used to pay down short-term borrowings andfund **DP&L's** major construction projects.

 

Darby station has a summer capacity of 450 megawatts and is located 20miles southwest of Columbus, Ohio and Greenville station has a summer capacityof 200 megawatts and is located in Greenville, Ohio. With the closing of thesesales, **DPL** owns approximately 950 megawatts ofpeaking generation and 2,800 megawatts of coal-fired generation.

 

**Insurance Recovery Claim**

On January 13, 2006, we filed a claim againstone of our insurers, Associated Electric & Gas Insurance Services (AEGIS),under a fiduciary liability policy to recoup legal fees associated with ourlitigation against three former executives. On April 17-18, 2007, **DP&L**and AEGIS mediated the issue and reached a settlement in which AEGIS agreed topay **DP&L** $14.5 million forlegal fees incurred by **DP&L**associated with our litigation against three former executives. Thesettlement agreement was signed and executed on April 30, 2007.

**Updates on Competition and Regulation**

**Ohio Matters**

Since January 2001, **DP&L’s** electric customers have been permitted to choosetheir retail electric generation supplier. **DP&L** continues to have theexclusive right to provide delivery service in its state certifiedterritory.  The Public UtilitiesCommission of Ohio (PUCO) maintains jurisdiction over **DP&L’s**delivery of electricity, the standard offer supply service that customers receiveif they do not choose an alternative retail electricity supplier, and otherrates and charges associated with the provision of retail electric service.

On April 4, 2005, **DP&L** filed a request with the PUCO to implement a new RateStabilization Surcharge (RSS) effective January 1, 2006 to recover costincreases associated with environmental capital, related operations andmaintenance costs and fuel expenses.  **DP&L** entered into a settlement agreement that extended **DP&L’s** rate stabilization period through December 31,2010.  During this time, **DP&L** will continue to provide retail

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electric service at fixedrates with the ability to recover increased fuel and environmental coststhrough surcharges and riders. Specifically, the agreement provides for:

·                  Arate stabilization surcharge equal to 11% of generation rates beginning January1, 2006 and continuing through December 2010. Based on 2004 sales, this rider is expected to result in approximately$65 million in net revenues per year.

·                  Anew environmental investment rider beginning January 1, 2007 equal to 5.4% ofgeneration rates, with incremental increases equal to 5.4% each year through2010.  Based on 2004 sales, this rider isexpected to result in approximately $35 million in annual net revenuesbeginning January 2007, growing to approximately $140 million by 2010.

·                  Anincrease to the residential generation discount from January 1, 2006 throughDecember 31, 2008, which is expected to result in a revenue decrease ofapproximately $7 million per year for three years, based on 2004 sales.  The residential discount is accounted for inthe $65 million net revenue stated above and will expire on December 31, 2008.

On December 28, 2005, the PUCO adopted the settlementwith certain modifications (RSS Stipulation). The PUCO ruled that the environmental rider will be bypassable by allcustomers who take service from alternate generation suppliers.  Thus, future additional revenues aredependent upon actual sales and levels of customer switching.  Applications for rehearing were denied andthe case was appealed to the Ohio Supreme Court by the Ohio Consumers’Counsel.  Oral argument was heard by theSupreme Court on April 17, 2007.  TheCompany cannot predict whether the Ohio Supreme Court will affirm the PUCO’sapproval of the RSS Stipulation, affirm it in part subject to modifications, orreject it.  The decision of the OhioSupreme Court is pending.

As of March 31, 2007,four unaffiliated marketers were registered as Competitive Retail ElectricServices (CRES) providers in **DP&L’s**service territory.  While there has beensome customer switching to date, it represented less than 0.15 percent of salesin 2006.  DPL Energy Resources, Inc. (DPLER), an affiliated company, isalso a registered CRES provider and accounted for nearly all of the total kWhsupplied by CRES providers within **DP&L’s**service territory in 2006.  In addition, several communities in **DP&L’s** service area have passedordinances allowing the communities to become government aggregators for thepurpose of offering alternative electric generation supplies to theircitizens.  To date, none of thesecommunities have aggregated their generation load.

**DP&L**agreed to implement a Voluntary Enrollment Program (VEP) that would provide customerswith an option to choose a competitive supplier to provide their retailgeneration service should switching not reach 20% in each customer class.  The 20% threshold has never been reached.  Customers who elected to participate in theprogram have been grouped together and collectively bid out to CRESproviders.  The first of four rounds ofbidding for the 2007 program was conducted in April resulting in no bids beingreceived.  To date, the VEP process hasresulted in zero customer switching. Future period effects cannot be determined at this time.

On August 28, 2006, theStaff of the PUCO issued a report relating to compliance with the FederalEnergy Policy of 2005.  In that reportthe Staff made recommendations to the Commission to implement new rules andprocedures relating to net metering, customer generator interconnection, standby power, time-of-use rates and renewable energy portfolio standards.  **DP&L**, amongothers, filed comments and reply comments. On March 28, 2007, the PUCO issued a Finding and Order that establishednew requirements for Ohio investor owned utilities related to distributioninterconnection standards and net metering programs.  It initiates further discussions at theCommission on topics such as renewable energy standards, fuel sourcerequirements, automated meter infrastructure and time differentiated rateoptions for customers.  **DP&L** cannot predict the potential cost that may beassociated with any new regulations that may be adopted as a result of theseproceedings.

On April 3, 2007, thePUCO issued proposed revisions to the Commission’s minimum electric service andsafety standards.  These rules govern avariety of utility operations such as maintenance programs, new construction,meter reading and distribution circuit performance.  The proposed changes impact customer servicerequirements, reliability reporting and distribution inspection and maintenanceprograms, as well as increase the penalty the Commission may invoke if a utilityis found to be in violation of these rules. **DP&L** may experience an increase indistribution operation and maintenance expense associated with the newrules.  However, the  amount of said increase is unknown at thistime.  The Company and other stakeholderswill have an opportunity to offer comments and reply comments prior tofinalization of the new rules.

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** **

**Federal Matters**

OnApril 19, 2007, the FERC issued an Order with regard to the allocation of costsassociated with new planned transmission facilities.  FERC ordered thatthe cost of new, high-voltage facilities be socialized across the PJM regionand the costs of new facilities at lower voltages be assigned to the loadcenters that benefit from the new facilities.  The methodology foridentifying beneficiaries has been set for hearing.  Also on April 19,2007, the FERC issued an Order relating to the allocation of costs associatedwith existing transmission facilities, upholding the existing PJM ratedesign.  These Orders are subject to rehearing and the appealprocess.  **DP&L** is currently evaluatingthe potential financial impacts of the Orders.

As a member of PJM, thevalue of **DPL’s** generation capacitywill be affected by changes in the PJM capacity construct.  The new construct introduces a newReliability Pricing Model (RPM) that will change the way generation capacity ispriced and planned for by PJM.  **DP&L**, along with most of the parties relating to thecase, entered into a settlement agreement that generally retains the RPMconcept as proposed by PJM, with certain modifications.  The settlement was approved by the FERC onDecember 21, 2006.  PJM held its firstRPM auction in April 2007 for the 2007/2008 planning year.  **DP&L** does not expect any material changes in forecastedfinancial results due to the outcome of this auction.  Additional auctionswill be held during 2007 for the 2008/2009 and 2009/2010 planning years. The financial impact of these auctions is unknown and will depend on a numberof factors including projections made by PJM as well as market participantbidding behavior.

**DP&L** provides transmissionand wholesale electric service to thirteen municipal customers in itsservice territory.  Municipalities, inturn, distribute electricity principally within their incorporated limits.  Approximately 1% of total electricity salesin 2006 represented sales to these municipalities.

**ENVIRONMENTAL CONSIDERATIONS**

**DPL**,**DP&L** and our subsidiaries’facilities and operations are subject to a wide range of environmentalregulations and laws.  In the normal course of business, we have investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.  We recordliabilities for probable estimated loss in accordance with Statement ofFinancial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.” To the extent a probable loss can only be estimated by reference to a range ofequally probable outcomes, and no amount within the range appears to be abetter estimate than any other amount, we accrue for the low end of the range.  Because ofuncertainties related to these matters, accruals are based on the bestinformation available at the time.  **DPL**,through its captive insurance subsidiary, MVIC, has an actuarialcalculated reserve for environmental matters.   We****evaluate the potential liability relatedto probable losses quarterly and may revise our estimates.  Suchrevisions in the estimates of the potential liabilities could have a materialeffect on our results of operations, financial position or cash flows.

**DP&L’s**coal-firedunits are subject to the acid rain provisions of the Clean Air Act and the NOx and Ozone Transport rule.   All of the SO2 and NOx emissions data submitted to the UnitedStates Environmental Protection Agency (USEPA), pursuant to these provisions, for2005 and the first quarter of 2006 were recorded and reported in compliancewith USEPA regulations.  Subsequently, **DP&L** detected a malfunction with its emission monitoringsystem at one of its generation stations and ultimately determined its SO2 and NOx emissions datawere under reported.  **DP&L** has petitioned the USEPA to accept an alternativemethodology for calculating actual emissions for 2005 and the first quarter of2006.  **DP&L**hassufficient allowances in its general account to cover the understatement and isworking with the USEPA to resolve the matter. Management does not believe the ultimate resolution of this matter willhave a material impact on operating results or financial position.

**EnvironmentalRegulation and Litigation Related to Air Quality**

**RegulationProceedings – Air**

On July15, 2003, the Ohio EPA submitted to the USEPA its recommendations foreight-hour ozone non-attainment boundaries for the metropolitan areas withinOhio.  On April 15, 2004, the USEPA issued its list of ozone non-attainmentdesignations.  **DP&L** ownsand/or operates a number of facilities in counties designated as non-attainmentwith the ozone national ambient air quality standard.  **DP&L** does not know at this time whatfuture regulations may be imposed on its facilities and will closely monitorthe regulatory process.  Ohio EPA will develop regulations to attain andmaintain compliance with the eight-hour ozone national ambient air quality 

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standard. Numerous parties have filed petitions for review.  **DP&L** cannot predict the outcome ofUSEPA’s reconsideration petitions.

In February 2007, theOhio EPA, Regional Air Pollution Control Agency, issued a Notice of Violation(NOV) to **DP&L** with respect to an allegedlyfailed performance test in November 2006 for particulate matter at **DP&L’s** Hutchings Station.  The EPA requested additional data, proposedthat a retest be made of two boilers at Hutchings Station and noted that anydecision to seek penalties would be made at another time.  **DP&L** hasresponded to the NOV noting that a retest taken in December 2006 demonstratedthat the November results were not representative of normal operations andproposing that all boilers at Hutchings Station be tested again in June 2007. Webelieved any penalties assessed related to this matter will be immaterial toour results of operations, financial position or cash flows.

**EnvironmentalRegulation and Litigation Related to Water Quality**

On July9, 2004, the USEPA issued final rules pursuant to the Clean Water Act governingexisting facilities that have cooling water intake structures.  The rulesrequire an assessment of impingement and/or entrainment of organisms as aresult of cooling water withdrawal.  Anumber of parties appealed the rules to the Federal Court of Appeals for theSecond Circuit in New York and the Court issued an opinion on January 25, 2007remanding several aspects of the rule to USEPA for reconsideration.  OnMarch 20, 2007, USEPA issued a memorandum regarding the agency’s implementationof this opinion stating that, because so many provisions of the rules had beenremedied, the rule should be suspended. We are undertaking studies at two facilities but cannot predict theimpact such studies may have on future operations, the outcome of the remandedrulemaking or how Ohio EPA will implement the USEPA memorandum.

**FINANCIALOVERVIEW**

As more fully discussed in later sections of this Form10-Q, the following were the significant themes and events for the firstquarter of 2007:

·                  **DPL’s** revenues for the three months ended March 31, 2007increased 11% over the same period in 2006 mainly due to colder weather, therate stabilization surcharge and other regulated asset recovery riders, whichbegan in the first quarter of 2006, improving gross margin andprofitability.  **DPL’s** fuel, purchasedpower costs, and operation and maintenance increased****overthe first quarter of 2006 by $6.1 million, $26.9 million and $6.9 million,respectively. The increase in purchasepower volume was primarily the result of **DPL**and partner operated generating facilities being unavailable due to planned andunplanned outages.  In addition, we purchase power when market prices arebelow the marginal costs associated with our higher cost generating facilities. **DPL’s**cash flows from operations for the three months ended March 31, 2007 of $97.1million was 6% higher than the cash flows from operations of $91.6 million forthe same period of 2006.

·                  **DP&L’s** revenues for the first quarter of 2007 increased11% over the first quarter of 2006 resulting from the colder weather, ratestabilization surcharge and other regulated asset recovery riders which beganin the first quarter of 2006 improving gross margin and profitability.  **DP&L’s** fuel, purchased power costs, and operation andmaintenance increased over the first quarter of 2006 by $5.6 million, $27.1million and $5.2 million, respectively. Theincrease in purchase power volume was primarily the result of **DP&L** and Partner operated generatingfacilities being unavailable due to planned and unplanned outages.  Inaddition, we purchase power when market prices are below the marginal costsassociated with our higher cost generating facilities.  **DP&L’s** cashflows from operations for the three months ended March 31, 2007 of $137.0million was 5% lower than the cash flows from operations of $143.5 million forthe same period in 2006.

·                  On February 26, 2007, **DP&L** borrowed $65 million against the $220 millionunsecured revolving credit facility.

 

34

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** **

**RESULTS OF OPERATIONS – DPL Inc.**

**DPL’s**results of operations include the results of itssubsidiaries, including the consolidated results of **DP&L**and all of **DP&L’s** consolidatedsubsidiaries.  **DP&L**providesapproximately 99% of the total revenues of **DPL. **All material intercompany accountsand transactions have been eliminated in consolidation.  A separate specific discussion of the resultsof operations for **DP&L** ispresented elsewhere in this report.

**FinancialHighlights - DPL**
|                                    | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 31,**               | ** ** |
| **$ in millions**        | ** ** | ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               | ** ** | ** **                       |       |   |   |
| **Revenues:**                      | ** ** | ** **                       |       |   |   |
| Retail                             | ** ** | **$**                            | **304.5**  |   | $ | 283.3 |   |
| Wholesale                          | ** ** | **56.7**                         |       | 37.4 |   |
| RTO ancillary                      | ** ** | **15.7**                         |       | 17.7 |   |
| Other revenues,  net of fuel costs | ** ** | **2.8**                          |       | 2.7 |   |
| Total revenues                     | ** ** | **$**                            | **379.7**  |   | $ | 341.1 |   |
|                               | ** ** | ** **                       |       |   |   |
| Less: Fuel                         | ** ** | **$**                            | **90.3**   |   | $ | 84.2 |   |
| Purchased power  (a)               | ** ** | **52.2**                         |       | 25.3 |   |
| Gross margins (b)                  | ** ** | **$**                            | **237.2**  |   | $ | 231.6 |   |
|                               | ** ** | ** **                       |       |   |   |
| Gross margins as a  percentage of  | ** ** | ** **                       |       |   |   |
| revenues                           | ** ** | **62.5**                         | **%**      | 67.9 | % |
|                               | ** ** | ** **                       |       |   |   |
| **Operating income**               | ** ** | **$**                            | **103.5**  |   | $ | 103.2 |   |
|                               | ** ** | ** **                       |       |   |   |
| **Earnings per share:**            | ** ** | ** **                       |       |   |   |
| Continuing operations              | ** ** | **$**                            | **0.48**   |   | $ | 0.43 |   |
| Discontinued  operations           | ** ** | **0.04**                         |       | 0.06 |   |
| Net income                         | ** ** | **$**                            | **0.52**   |   | $ | 0.49 |   |
|                                    |            |                                  |            |  |  |  |  |  |  |

----

*(a)**             **Purchased power includes RTOancillary charges of $12.4 million and $12.2 million for the three months ended2007 and 2006, respectively.*

*(b)**             **For purposes of discussing operating results, wepresent and discuss gross margins. This format is useful to investors becauseit allows analysis and comparability of operating trends and includes the sameinformation that is used by management to make decisions regarding ourfinancial performance.*

35

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** **

**DPL Inc. – Revenues**

 

 
|                               | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** |
| **$ in millions**   | ** ** | ** **                       | ** ** | **2007 vs**. 2006 | ** ** |
|                          |       |                             |       |
| **Retail**                    |       |                             |       |
| Rate                          |       | $                                | 6.2        | ** ** |
| Volume                        |       | 15.1                             |       |
| Other miscellaneous           |       | (0.1                             | )          |
| **Total  retail change**      | ** ** | **$**                            | **21.2**   |   |
|                          |       |                             |       |
| **Wholesale**                 |       |                             |       |
| Rate                          |       | $                                | 5.5        |   |
| Volume                        |       | 13.8                             |       |
| **Total  wholesale change**   | ** ** | **$**                            | **19.3**   |   |
|                          |       |                             |       |
| **RTO ancillary & other** |       |                             |       |
| RTO services                  |       | $                                | (2.0       | ) |
| Other                         |       | 0.1                              |       |
| **Total  revenues change**    | ** ** | **$**                            | **(1.9**   | **)** |
| ** **                    | ** ** | ** **                       |       |
| **Total revenues**            | ** ** | **$**                            | **38.6**   |   |
|                               |            |                                  |            |  |  |  |  |  |  |

 

For the quarter endedMarch 31, 2007, revenues increased $38.6 million, or 11% to $379.7 from $341.1for the same period in the prior year.  This increase was primarily theresult of higher average rates and sales volume for both retail andwholesale.  Retail revenues increased $21.2 million resulting from a 5%increase in sales volume driven by colder weather and a 2% increase in averageretail rates related to the Rate Stabilization Plan surcharge and otherregulated asset recovery riders.  These increases resulted in a $15.1million sales volume variance and a $6.2 million price variance for retailrevenues.  Wholesale revenue increased $19.3 million for the first quarterof 2007 primarily as a result of a 37% increase in sales volume (301 GWh) andan 11% increase in wholesale average rates.  These increases resulted in a$13.8 million sales volume variance and a $5.5 million price volume variancefor wholesale revenues.  For the first quarter of 2007, the RTO ancillaryrevenues decreased $2.0 million, or 11%, to $15.7 million compared to the firstquarter of 2006.  RTO ancillary revenues primarily consist of compensationfor use of **DP&L’s** transmissionassets, regulation services, reactive supply and operating reserves.

## **DPL Inc. – Margins, Fuel and Purchased Power**

For the first quarter of2007, gross margin of $237.2 million increased $5.6 million, or 2%, from $231.6million in the first quarter of 2006.  Asa percentage of total revenues, gross margin decreased to 62.5% in 2007 comparedto 67.9% in 2006.  This result reflectsthe favorable impact of the rate stabilization plan on revenues offset byincreased fuel and purchase power costs. Fuel costs, which include coal, gas, oil and emission allowance costs,increased by $6.1 million, or 7%, in the first quarter of 2007 compared to thesame period in 2006 primarily due to increased fuel prices and highergeneration output.  Purchased powerincreased $26.9 million in the first quarter of 2007 compared to the sameperiod in 2006 primarily resulting from increased charges of $22.3 millionrelating to higher purchased power volume and $4.4 million increase due tohigher average market rates.  Theincrease in purchase power volume was primarily the result of **DPL**and partner operated generating facilities being unavailable due toplanned and unplanned outages.  Inaddition, we purchase power when market prices are below the marginal costsassociated with our higher cost generating facilities.

36

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** **

**DPL Inc.- Operation and Maintenance**

 
|                                                              | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**               | ** ** |
| **$ in millions**                                  | ** ** | ** **                       | ** ** | **2007 vs. 2006** | ** ** |
| Legal costs                                                  |       | $                                | 4.0        |   |
| Mark-to-market  adjustments of restricted stock units (RSUs) |       | 2.8                              |       |
| Power production costs                                       |       | 2.4                              |       |
| Service operations                                           |       | 1.9                              |       |
| Low-Income Assistance  Program costs                         |       | 0.4                              |       |
| Long-term and other  incentive compensation                  |       | (2.5                             | )          |
| Expenses for injuries  and damages                           |       | (1.3                             | )          |
| Pension and benefits                                         |       | (0.9                             | )          |
| RTO administrative fees                                      |       | (0.8                             | )          |
| Other, net                                                   |       | 0.9                              |       |
| **Total  operation and maintenance expense**                 |       | $                                | 6.9        |   |
|                                                              |            |                                  |            |  |  |  |

 

For the three months ended March 31, 2007, operationand maintenance expense increased $6.9 million or 11% compared to the sameperiod in 2006 primarily resulting from a $4.0 million increase in legal feeslargely related to the litigation with former executives; a $2.8 millionincrease in mark-to-market adjustments of restricted stock units; a $2.4million increase in power production costs primarily reflecting higher boilermaintenance and plant operating expenses; a $1.9 million increase in serviceoperation costs resulting primarily from two major ice storms in February 2007;and Low-Income Assistance Program costs of $0.4 million.  These increases were partially offset by a$2.5 million decrease in long-term and other incentive compensation; a $1.3million decrease in expenses for injuries and damages; a $0.9 million decreasein pension and benefits expenses; and a $0.8 million decrease in RTOadministrative fees.

**DPL Inc. – Depreciation and Amortization**

For the first quarter of 2007, depreciation andamortization expense decreased $3.4 million compared to the first quarter of2006 primarily reflecting the absence of depreciation on the peaking units andthe impact of asset retirements.

**DPL Inc. – Amortization of Regulatory Assets**

Forthe first quarter of 2007, amortization of regulatory assets increased $1.8million to $2.9 million compared to the same period in 2006.  The increase reflects the amortization ofcosts incurred to accommodate unbundled rates and electric choice bills in thecustomer billing system; the amortization of PJM administrative fees deferredfor the period October 2004 through January 2006; and the amortization ofincremental 2004/2005 severe storm costs.

## **DPL Inc. – Investment Income**

For the three monthsended March 31, 2007, investment income decreased $3.4 million to $3.0 millionfrom $6.4 million for the same period in 2006. This decrease was primarily the result of lower cash and short-terminvestment balances in 2007 compared to 2006.

**DPLInc. – Interest Expense**

Interestexpense for the first quarter of 2007 decreased $3.2 million, or 12%, comparedto the same period in 2006 resulting from the redemption of **DPL** $225 million 8.25% Senior Notes, the elimination of theinterest penalty on the **DPL** $175million 8% Senior Notes resulting from the delayed exchange offer registrationof those securities and a higher capitalized interest of $2.8 million in thefirst quarter of 2007 compared to 2006 associated with our major constructionprojects.  These decreases were partiallyoffset by interest expense associated with **DP&L’s**new$100 million 4.8% Series pollution control bonds issued September 13, 2006 andthe $65 million of short-term borrowing against **DP&L’s**$220 million unsecured revolving credit facility.

37

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** **

**DPL Inc.– Other Income (deductions)**

 

For the three monthsended March 31, 2007, other income (deductions) was $1.1 million higher than the same period in 2006 primarily due togains of $0.7 million realized inthe first quarter of 2007 from the sale of NOx allowances. There were no sales of pollution control emission allowances during2006.

## **DPL Inc. – Income Tax Expense**

For the first quarter of2007, income taxes increased $1.3 million, or 4%, compared to the same periodin 2006, primarily reflecting an increase in pre-tax book income and anincrease in the accrual for open tax years, partially offset by a decrease inthe effective tax rate resulting from the phase-out of the Ohio Franchise Tax.

**RESULTS OF OPERATIONS – The DaytonPower and Light Company (DP&L)**

**Income Statement Highlights – DP&L**

** **
|                                   | ** **           | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|----------------------|------------|----------------------------------|------------|
| ** **                        | ** **           | ** ** | **March 31,**               | ** ** |
| **$ in millions**       | ** **           | ** ** | ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |                 |       | ** **                       |       |   |   |
| Revenues:                         |                 | ** ** |                             |       |   |   |
| Retail                            |                 |       | **$**                            | **271.8**  |   | $ | 251.0 |   |
| Wholesale                         |                 | ** ** | **90.0**                         |       | 70.4 |   |
| RTO ancillary                     |                 | ** ** | **15.7**                         |       | 17.7 |   |
| Total revenues                    |                 | ** ** | **$**                            | **377.5**  |   | $ | 339.1 |   |
|                              |                 |       | ** **                       |       |   |   |
| Less:                             | Fuel                 |       |                             | **$**      | **89.5** |   | $ | 83.9 |   |
|                              | Purchased  power (a) |       |                             | **52.7**   |   | 25.6 |   |
| Gross margins (b)                 |                 | ** ** | **$**                            | **235.3**  |   | $ | 229.6 |   |
|                              |                 |       |                             |       |   |   |
| Gross margins as a  percentage of |                 | ** ** | ** **                       |       |   |   |
| revenues                          |                 | ** ** | **62.3**                         | **%**      | 67.7 | % |
|                              |                 |       |                             |       |   |   |
| Operating income                  |                 | ** ** | **$**                            | **114.7**  |   | $ | 115.5 |   |
|                                   |                      |            |                                  |            |  |  |  |  |  |  |  |  |

----

*(a)**                  **Purchased power includes RTOancillary charges of $12.4 million and $12.2 million for the three months endedMarch 31, 2007 and 2006, respectively.*

*(b)**                  **For purposes of discussingoperating results, we present and discuss gross margins. This format is usefulto investors because it allows analysis and comparability of operating trendsand includes the same information that is used by management to make decisionsregarding our financial performance.*

38

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** **

**DP&L– Revenues**
|                               | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** |
| **$ in millions**   | ** ** | ** **                       | ** ** | **2007 vs. 2006** | ** ** |
|                          |       |                             |       |
| **Retail**                    |       |                             |       |
| Rate                          |       | $                                | 7.5        |   |
| Volume                        |       | 13.4                             |       |
| Other miscellaneous           |       | (0.1                             | )          |
| **Total  retail change**      | ** ** | **$**                            | **20.8**   |   |
|                          |       |                             |       |
| **Wholesale**                 |       |                             |       |
| Rate                          |       | $                                | (6.3       | ) |
| Volume                        |       | 25.9                             |       |
| **Total  wholesale change**   |       | **$**                            | **19.6**   |   |
|                          |       |                             |       |
| **RTO ancillary & other** |       |                             |       |
| RTO services                  |       | $                                | (2.0       | ) |
| ** **                    | ** ** | ** **                       |       |
| **Total revenues**            |       | **$**                            | **38.4**   |   |
|                               |            |                                  |            |  |  |  |  |  |  |

 

For the first quarter of2007, revenues increased 11% to $377.5 million compared to $339.1 million inthe first quarter of 2006, reflecting an increase of $38.4 million.  Thisincrease was primarily the result of increased sales volume for both retail andwholesale sales and higher average retail rates, partially offset by loweraverage wholesale rates and ancillary revenues associated with participation ina RTO.  Retail revenues increased $20.8 million resulting from a 5%increase in sales volume driven by colder weather and a 3% increase in averageretail rates related to the Rate Stabilization Plan surcharge and otherregulated asset recovery riders.  These increases resulted in a $13.4million sales volume variance and a $7.5 million price variance for retailrevenues.  Wholesale revenues increased $19.6 million for the firstquarter of 2007 primarily due to a 37% increase in sales volume (301 GWh) and a7% decrease in wholesale average rates.  This resulted in a $25.9 millionsales volume variance an offsetting $6.3 million price volume variance forwholesale revenues.  RTO ancillary revenues decreased $2.0 million, or11%, for the first quarter of 2007 to $15.7 million compared to the firstquarter of 2006.  RTO ancillary revenues primarily consist of compensationfor use of **DP&L’s** transmissionassets, regulation services, reactive supply and operating reserves.

## **DP&L - Margins, Fuel and Purchased Power**

For the first quarter of2007, gross margin of $235.3 million increased $5.7 million, or 2%, from $229.6million in the first quarter of 2006.  Asa percentage of total revenues, gross margin decreased to 62.3% in 2007compared to 67.7% in 2006.  This resultreflects the increasing costs of fuel and purchased power despite the favorableimpact on revenues of the Rate Stabilization Plan surcharge.  Fuel costs, which include coal, gas, oil andemission allowance costs, increased by $5.6 million, or 7%, in the firstquarter of 2007 compared to the same period in 2006 primarily due to increasedfuel prices and higher generation output. Purchased power increased $27.1 million in the first quarter of 2007compared to the same period in 2006 primarily resulting from increased chargesof $22.5 million relating to higher purchased power volumes and a pricevariance of $4.4 million reflecting higher average market rates.  The increase in purchase power volume wasprimarily the result of **DP&L** and partner operated generatingfacilities being unavailable due to planned and unplanned outages.  In addition, we purchase power when marketprices are below the marginal costs associated with our higher cost generatingfacilities.

39

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** **

**DP&L– Operation and Maintenance**

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**               | ** ** |
| **$ in millions**                                  | ** ** | ** **                       | ** ** | **2007 vs. 2006** | ** ** |
| Mark-to-market  adjustments of restricted stock units (RSUs) |       | $                                | 2.6        |   |
| Power production costs                                       |       | 2.4                              |       |
| Service operations                                           |       | 1.9                              |       |
| Legal fees                                                   |       | 0.9                              |       |
| Low-Income Assistance  Program costs                         |       | 0.7                              |       |
| Long-term and other  incentive compensation                  |       | (2.3                             | )          |
| Expenses for injures  and damages                            |       | (1.3                             | )          |
| Pension and benefits                                         |       | (0.8                             | )          |
| RTO administrative fees                                      |       | (0.8                             | )          |
| Other, net                                                   |       | 1.9                              |       |
| **Total operation and maintenance  expense**                 |       | $                                | 5.2        |   |
|                                                              |            |                                  |            |  |  |  |

 

For the three months ended March 31, 2007, operationand maintenance expense increased $5.2 million or 10% compared to the sameperiod in 2006 primarily resulting from a $2.6 million increase inmark-to-market adjustments of restricted stock units; a $2.4 million increasein power production costs primarily reflecting higher boiler maintenance andplant operating expenses; a $1.9 million increase in service operation costs resultingprimarily from two major ice storms in February 2007; a $0.9 million increasein legal fees and Low-Income Assistance Program costs of $0.7 million.  These increases were partially offset by a$2.3 million decrease in long-term and other incentive compensation; a $1.3million decrease in expenses for injuries and damages a $0.8 million decreasein pension and benefits expenses; and a $0.8 million decrease in RTOadministrative fees.

**DP&L – Depreciation andAmortization**

Depreciation andamortization decreased $0.6 million in the first quarter of 2007, compared tothe same period in 2006, primarily reflecting the impact of asset retirements.

**DP&L – Amortization of Regulatory Assets**

Forthe three months ended March 31, 2007, amortization of regulatory assetsincreased $1.8 million to $2.9 million compared to the same period in2006.  The increase reflects theamortization of costs incurred to accommodate unbundled rates and electricchoice bills in the customer billing system; the amortization of PJMadministrative fees deferred for the period October 2004 through January 2006;and the amortization of incremental 2004/2005 severe storm costs.

**DP&L– Interest Expense**

Interest expensedecreased $1.3 million or 19% in the three months ended March 31, 2007,compared to the same period of 2006, primarily relating to $2.8 million ofincreased capitalized interest resulting from pollution control capitalexpenditures at the generating plants, partially offset by increased interestof $1.2 million related to the $100 million 4.8% Series pollution control bondsissued in September 2006 and $0.3 million of interest related to the $65million draw on our revolving credit facility in February 2007.

**DP&L – Other Income (deductions)**

For the three monthsended March 31, 2007, other income (deductions) was $1.3 million higher than the same period in 2006 primarily due togains of $0.7 million realized inthe first quarter of 2007 from the sale of NOx allowances and $0.3 million of greater gainsrealized in 2007 compared to 2006 related to derivative activity.  There were no sales of pollution control emissionallowances during 2006.

## **DP&L – Income Tax Expense**

For the first quarter of2007, income taxes decreased $1.5 million, or 3%, compared to the same periodin 2006, primarily reflecting a decrease in the effective tax rate resultingfrom the phase-out of the Ohio Franchise Tax that was partially offset by anincrease in pre-tax book income and an increase in the accrual for open taxyears.

40

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**0FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL REQUIREMENTS**

**DPL’s**financial condition, liquidity and capital requirements,includes the consolidated results of **DP&L**and all of **DP&L’s** consolidatedsubsidiaries.  All material intercompanyaccounts and transactions have been eliminated in consolidation.

**DPL’s Cash Position**

**DPL’s**cash and cash equivalents totaled $106.4 million at March 31, 2007, compared to$262.2 million at December 31, 2006, a decrease of $155.8 million.  In addition, **DPL**had no restricted funds held in trust at March 31, 2007 in comparison to $10.1million at December 31, 2006 related to the issuance of the $100 millionpollution control bonds. The decrease in cash and cash equivalents wasprimarily attributed to the retirement of the $225.0 million **DPL** 8.25% Senior Notes, $80.5 million in capitalexpenditures and $27.8 million in dividends paid on common stock.  The decrease caused by such payments waspartially offset by $97.1 million in cash generated from operating activities,$65.0 million of short-term debt issued against the $220.0 million unsecuredrevolving credit agreement, and $10.1 million of restricted funds drawn to fundpollution control capital expenditures.

**DP&L’s Cash Position**

**DP&L’s**cash and cash equivalents totaled $53.4 million at March 31, 2007, compared to$46.1 million at December 31, 2006, an increase of $7.3 million.  The increase in cash and cash equivalents wasprimarily attributed to $137.0 million in cash generated from operatingactivities, $65.0 million in a draw on our revolving credit facility and $10.1million in restricted fund draws to finance pollution control capitalexpenditures at our generating plants, partially offset by $125.0 million individends paid on common stock to our parent **DPL**and $79.6 million in capital expenditures.

**Operating Activities**

For the quarters endedMarch 31, 2007 and 2006, cash flows from operations were as follows:

| Net Cash provided by  Operating Activities | ** ** |
|--------------------------------------------|------------|
| ** **                                 | ** ** | **Quarters Ended  March 31,** | ** ** |
| ** **                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       |       |   |   |   |   |
| **DPL**                                    | ** ** | **$** | **97.1** |   | $ | 91.6 |   |
| ** **                                 |       |   |   |   |   |
| **DP&L**                               | ** ** | **$** | **137.0** |   | $ | 143.5 |   |

 

The tariff-based revenuefrom our energy business continues to be the principal source of cash fromoperating activities.  Managementbelieves that the diversified retail customer mix of residential, commercial,and industrial classes coupled with the rate relief approved by the PUCO for2006 and beyond provides us with a reasonably predictable gross cash flow fromoperations.

**DPL’sCash provided by Operating Activities**

**DPL**generated net cash from operating activities of $97.1 million and $91.6 millionin the first quarter of 2007 and 2006, respectively.  The net cash provided by operating activitiesin the first quarter of 2007 was primarily the result of operatingprofitability, partially offset by an increase in cash used for workingcapital, specifically payments for interest. The net cash provided by operating activities for 2006 was primarily theresult of operating profitability, partially offset by cash used for workingcapital, specifically taxes and inventories.

**DP&L’sCash provided by Operating Activities**

**DP&L**generated net cash from operating activities of $137.0 million and $143.5million in the first quarter of 2007 and 2006, respectively.  The net cash provided by operating activitiesfor both years was primarily the result of operating profitability as well ascash generated from working capital, specifically from accounts payable andaccrued taxes.

**Investing Activities**

For the quarters endedMarch 31, 2007 and 2006, cash flows from investing activities were as follows:

41

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| Net Cash used for Investing  Activities | ** ** |
|-----------------------------------------|------------|
| ** **                              | ** ** | **Quarters Ended  March 31,** | ** ** |
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |   |   |   |   |
| **DPL**                                 | ** ** | **$** | **(80.5** | **)** | $ | (110.9 | ) |
|                                    |       |   |   |   |   |
| **DP&L**                            | ** ** | **$** | **(79.6** | **)** | $ | (110.5 | ) |

 

**DPL’sCash used for Investing Activities**

**DPL’s**net cash used forinvesting activities was $80.5 million and $110.9 million in the first quarterof 2007 and 2006, respectively. Net cash flows used for investing activities in the first quarter of2007 were related to capital expenditures. Net cash flows used for investing activities for the quarter ended March31, 2006 were related to capital expenditures; the sale and purchases ofinvestments had no effect on investing activities for the quarter.

**DP&L’sCash used for Investing Activities**

**DP&L’s**net cash flows used for investing activities were $79.6 million and $110.5million in the first quarter of 2007 and 2006, respectively.  Net cash flows used for investing activitiesfor both years were related to capital expenditures.

**Financing Activities**

For the quarters endedMarch 31, 2007 and 2006, cash flows from financing activities were as follows:

| Net Cash used for  Financing Activities | ** ** |
|-----------------------------------------|------------|
| ** **                              | ** ** | **Quarters Ended**March 31, | ** ** |
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |   |   |   |   |
| **DPL**                                 | ** ** | **$** | **(172.4** | **)** | $ | (185.4 | ) |
|                                    |       |   |   |   |   |
| **DP&L**                            | ** ** | **$** | **(50.1** | **)** | $ | (0.2 | ) |

 

**DPL’sCash used for Financing Activities**

**DPL’s**net cash flows usedfor financing activities for the first quarter of 2007 were $172.4 millioncompared to the first quarter of 2006 of $185.4 million.  Net cash flows used for financing activitiesin the first quarter of 2007 were the result of cash used to redeem the $225million 8.25% Senior Notes on March 1, 2007 and to pay dividends tostockholders of $27.8 million partially offset by cash received from borrowing$65.0 million against the $220 million unsecured revolving credit facility andthe $10.1 million of restricted funds held in trust.  Net cash flows used for financing activitiesin the first quarter of 2006 were the result of cash used to repurchase $155.3million of common stock and pay dividends to common stockholders of $30.2million.

**DP&L’sCash used for Financing Activities**

**DP&L’s**net cash flows used for financing activities were $50.1 million and $0.2million in the first quarters of 2007 and 2006, respectively.  Net cash flows used for financing activitiesfor 2007 were the result of cash used to pay common stock dividends to ourparent **DPL** of $125.0 million and preferreddividends to third parties of $0.2 million, partially offset by $65.0 millionfrom a draw on our revolving credit facility and $10.1 million of withdrawalsfrom the trust set up as a result of issuing the $100 million 4.8% Seriespollution control bonds in September 2006. Net cash flows used for financing activities in 2006 were for thepayment of preferred dividends.

**DPL** and **DP&L** have obligations to make future payments forcapital expenditures, debt agreements, lease agreements and other long-termpurchase obligations, and have certain contingent commitments such asguarantees.  We believe our cash flowsfrom operations, the credit facilities (existing or future arrangements), thesenior notes and other short- and long-term debt financing, will be sufficientto satisfy our future working capital, capital expenditures and other financingrequirements for the foreseeable future. Our ability to generate positive cash flows from operations is dependenton general economic conditions, competitive pressures and

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other business and riskfactors described in Item 1a of our fiscal 2006 Form 10-K and Part II, Item 1aof this Form 10-Q.  If we are unable togenerate sufficient cash flows from operations, or otherwise comply with theterms of our credit facilities, the senior notes and other long-term debt, wemay be required to refinance all or a portion of our existing debt or seekadditional financing alternatives.  Adiscussion of each of our critical liquidity commitments is outlined below.

**Capital Requirements**

**DPL’s** constructionadditions were $78.9 million and $94.8 million in the first quarter of2007 and 2006, respectively, and are expected to approximate $345 million in2007.

**DP&L’s**construction additions were $78.0 million and $94.4 million in the firstquarter of 2007 and 2006, respectively, and are expected to approximate $345million in 2007.  Planned constructionadditions for 2007 relate to **DP&L’s**environmental compliance program, power plant equipment and its transmissionand distribution system.

Capital projects aresubject to continuing review and are revised in light of changes in financialand economic conditions, load forecasts, legislative and regulatorydevelopments and changing environmental standards, among other factors.  Over the next three years, **DPL,** through its subsidiary **DP&L,**is projecting to spend an estimated $645 millionin capital projects, approximately 40% of which is to meet changingenvironmental standards.   In our Form10-K as of December 31, 2006, we reported our estimated capital spending to beapproximately $605 million.  Thisincrease is due primarily to increases in the flue gas desulfurization projectsat both DPL-operated and partner-operated generating plants.  Our ability to complete capital projects andthe reliability of future service will be affected by our financial condition,the availability of internal funds and the reasonable cost of externalfunds.  We expect to finance ourconstruction additions in 2007 with a combination of cash on hand, short-termfinancing, tax-exempt debt and cash flows from operations.

**Debt and Debt Covenants**

OnAugust 29, 2005, **DPL** redeemed $200 million of its8.25% Senior Notes due 2007.  Theremaining $225 million of these notes were retired March 1, 2007, the maturitydate.

Duringthe first quarter of 2006, the Ohio Department of Development (ODOD) awarded **DP&L** the ability to issue over the next three years upto $200 million of qualified tax-exempt financing from the ODOD’s 2005 volumecap carryforward.   On September 13, 2006, the Ohio Air QualityDevelopment Authority (OAQDA) issued $100 million of 4.80% fixed interest rateOAQDA Revenue bonds 2006 Series A due September 1, 2036.  In turn, **DP&L**borrowed these funds from the OAQDA. These funds were placed in escrow with a trustee and, as of April 3,2007, **DP&L** has drawn out the entirety ofthe funds.

**DP&L**expects to use the remaining $100 million of volume cap carryforward prior tothe end of 2008.  **DP&L**is planning to issue in conjunction with the OAQDA this $100 million oftax-exempt bonds to finance the remaining solid waste disposal facilities atMiami Fort, Killen, Stuart and Conesville Generating Stations.

OnNovember 21, 2006, **DP&L**entered into a new $220 million unsecured revolving credit agreement replacingits $100 million facility.  This newagreement has a five year term that expires on November 21, 2011 and thatprovides**DP&L** with the ability to increasethe size of the facility by an additional $50 million at any time.  The facility contains one financialcovenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of March 31, 2007, **DP&L**has borrowed $65 million from this facility for ninety-two days at 5.63%.  Fees associated with this credit facility areapproximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicableinterest.  This revolving creditagreement also contains a $50 million letter of credit sublimit.  **DP&L** hascertain contractual agreements for the sale and purchase of power, fuel andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.  As of March 31, 2007, **DP&L**had no outstanding letters of credit against the facility.

OnFebruary 24, 2005, **DP&L**enteredinto an amendment to extend the term of its Master Letter of Credit Agreementwith a financial lending institution for one year and to reduce the maximumdollar volume of letters of credit to $10 million.  On February 17, 2006, **DP&L**renewed its $10 million agreement for one year. This agreement supports performance assurance needs in the ordinarycourse of business.  In February 2007, **DP&L** opted not to renew this agreement.

Issuanceof additional amounts of first mortgage bonds by **DP&L** is limited by the provisions of its mortgage;however, management believes that **DP&L**continues to have sufficient capacity to issue first mortgage bonds to

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satisfyits requirements in connection with its current refinancing and constructionprograms.  The amounts and timing of futurefinancings will depend upon market and other conditions, rate increases, levelsof sales and construction plans.

There are nointer-company debt collateralizations or debt guarantees between **DPL** and its subsidiaries.  None of the debt obligations of **DPL** or **DP&L**are guaranteed or secured by affiliates and no cross-collateralization existsbetween any subsidiaries.

There was no change toour debt covenants as described in our Form 10-K as of December 31, 2006.

**Credit Ratings**

Currently, **DPL’s** seniorunsecured and **DP&L**’s senior secured debtcredit ratings are as follows:
| ** **                       | ** ** | **DPL Inc.** | ** ** | **DP&L** | ** ** | **Outlook** | ** ** | **Effective** | ** ** |
|----------------------------------|------------|-------------------|------------|--------------|------------|-------------|------------|---------------|------------|
|                             |       |              |       |         |       |        |       |          |       |
| Fitch Ratings                    |       | BBB+              |       | A+           |       | Stable      |       | March 2007    |       |
| Moody’s Investors  Service  |       | Baa3              |       | A3           |       | Positive    |       | June 2006     |       |
| Standard & Poor’s Corp. |       | BBB-              |       | BBB+         |       | Stable      |       | February 2007 |       |

** **

**Off-BalanceSheet Arrangements**

**DPL** and **DP&L** do not have any off-balance sheetarrangements that have or are reasonably likely to have a current or futureeffect on our financial condition, revenues or expenses, results of operations,liquidity, capital expenditures or capital resources that are material toinvestors.

**ContractualObligations and Commercial Commitments**

We enter into variouscontractual obligations and other commercial commitments that may affect theliquidity of our operations.  At March31, 2007, these include:

**ContractualObligations**
| ** **                           | ** ** | ** ** | ** ** | **Payment Year** | ** ** |                |
|--------------------------------------|------------|------------|------------|-----------------------|------------|---------------------|
| ** **                           | ** ** | ** ** | ** ** | **Less Than**    | ** ** | **2 - 3** | ** ** | **4 - 5** | ** ** | **More Than** | ** ** |   |
| **$ in millions**          | ** ** | ** ** | ** ** | **Total**             | ** ** | **1 Year**     | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| **DPL Inc.**                         |       |       |       |                  |       |                |   |   |   |   |   |   |
|                                 |       |       |       |                  |       |                |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 1,549.9    |                  | $          | —              |   | $ | 275.0 |   | $ | 297.4 |   | $ | 977.5 |   |   |
| Interest payments                    |       | 1,074.3    |       | 71.8                  |       | 170.7               |   | 144.0 |   | 687.8 |   |   |
| Pension and  postretirement payments |       | 230.1      |       | 16.5                  |       | 45.2                |   | 46.5 |   | 121.9 |   |   |
| Capital leases                       |       | 2.8        |       | 0.7                   |       | 1.5                 |   | 0.6 |   | — |   |   |
| Operating leases                     |       | 0.7        |       | 0.3                   |       | 0.3                 |   | 0.1 |   | — |   |   |
| Coal contracts (a)                   |       | 467.8      |       | 246.5                 |       | 110.5               |   | 110.8 |   | — |   |   |
| Limestone contracts                  |       | 58.4       |       | 1.5                   |       | 9.4                 |   | 10.8 |   | 36.7 |   |   |
| Other contractual  obligations       |       | 436.7      |       | 370.0                 |       | 57.1                |   | 9.6 |   | — |   |   |
| Total  contractual obligations       |       | $          | 3,820.7    |                  | $          | 707.3               |   | $ | 669.7 |   | $ | 619.8 |   | $ | 1,823.9 |   |   |
|                                 |       |       |       |                  |       |                |   |   |   |   |   |   |
|                                 |       |       |       |                  |       |                |   |   |   |   |   |   |
| **DP&L**                         |       |       |       |                  |       |                |   |   |   |   |   |   |
|                                 |       |       |       |                  |       |                |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 783.2      |                  | $          | —              |   | $ | — |   | $ | — |   | $ | 783.2 |   |   |
| Interest payments                    |       | 562.2      |       | 29.4                  |       | 78.3                |   | 78.3 |   | 376.2 |   |   |
| Pension and  postretirement payments |       | 230.1      |       | 16.5                  |       | 45.2                |   | 46.5 |   | 121.9 |   |   |
| Capital leases                       |       | 2.8        |       | 0.7                   |       | 1.5                 |   | 0.6 |   | — |   |   |
| Operating leases                     |       | 0.7        |       | 0.3                   |       | 0.3                 |   | 0.1 |   | — |   |   |
| Coal contracts (a)                   |       | 467.8      |       | 246.5                 |       | 110.5               |   | 110.8 |   | — |   |   |
| Limestone contracts                  |       | 58.4       |       | 1.5                   |       | 9.4                 |   | 10.8 |   | 36.7 |   |   |
| Other contractual  obligations       |       | 436.7      |       | 370.0                 |       | 57.1                |   | 9.6 |   | — |   |   |
| Total contractual  obligations       |       | $          | 2,541.9    |                  | $          | 664.9               |   | $ | 302.3 |   | $ | 256.7 |   | $ | 1,318.0 |   |   |
|                                      |            |            |            |                       |            |                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)             **DP&L**-operated units

Long-term debt:

**DPL’s**long-term debt, as of March 31, 2007, consists of **DP&L’s** first mortgage bonds, tax-exempt pollution controlbonds, **DPL** unsecured notes andincludes current maturities and unamortized debt discounts.

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**DP&L’s**long-term debt, as of March 31, 2007, consists of first mortgage bonds,tax-exempt pollution control bonds and includes an unamortized debt discount.

See Note 9 of Notes toCondensed Consolidated Financial Statements.

Interest payments:

Interest paymentsassociated with the long-term debt is described above.

Pension andpostretirement payments:

As of March 31, 2007, **DP&L** had estimated future benefitpayments as outlined in Note 7 of Notes to Condensed Consolidated FinancialStatements.  These estimated futurebenefit payments are projected through 2016.

Capital leases:

As of March 31, 2007, **DP&L** had two capital leases that expire in November 2007and September 2010.

Operating leases:

As of March 31, 2007, **DPL** and **DP&L**had several operating leases with various terms and expiration dates.  Not included in this total is approximately$88,000 per year related to right of way agreements that are assumed to have nodefinite expiration dates.

Coal contracts:

**DP&L**has entered into various long-term coal contracts to supply portions of itscoal requirements for its generating plants. Contract prices are subject to periodic adjustment and have features thatlimit price escalation in any given year.

Limestonecontracts:

**DP&L** hasentered into various limestone contracts to supply limestone for its generatingfacilities.

Other ContractualObligation:

As of March 31, 2007, **DPL** and **DP&L**had various other contractual obligations including non-cancelable contracts topurchase goods and services with various terms and expiration dates.

We enter into variouscommercial commitments, which may affect the liquidity of our operations.  At March 31, 2007, these include:

Credit facilities:

In November 2006, **DP&L**replaced its previous $100 million revolving credit agreement with a $220million five year facility that expires on November 21, 2011.  **DP&L** hasthe ability to increase the size of the facility by an additional $50 millionat any time.  At March 31, 2007, therewas $65 million outstanding under this credit agreement due May 29, 2007 at5.63% interest.

Guarantees:

**DP&L** owns a4.9% equity ownership interest in an electric generation company.  As of March 31, 2007, **DP&L** could be responsible for therepayment of 4.9%, or $21.8 million, of a $445 million debt obligation thatmatures in 2026.

In two separate transactions in November and December2006, **DPL** agreed to be a guarantor of theobligations of its wholly-owned subsidiary, DPL Energy, LLC (DPLE) regardingthe pending sale of the Darby Electric Peaking Station to American ElectricPower and the sale of the Greenville Electric Peaking Station to BuckeyeElectric Power, Inc.  In both cases, **DPL** has agreed to guarantee the obligations of DPLE over amultiple year period as follows:

|            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Darby      |       | $        | 30.6       |     | $          | 23.0     |       | $        | 15.3       |   | $ | 7.7 |   |
|       |       |     |       |     |       |     |       |     |       |
| Greenville |       | $        | 14.8       |     | $          | 11.1     |       | $        | 7.4        |   | $ | 3.7 |   |
|       |       |     |       |     |       |     |       |     |       |

 

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**MARKETRISK**

Asa result of its operating, investing and financing activities, we are subjectto certain market risks including changes in commodity prices for electricity,coal, environmental emissions and gas and fluctuations in interest rates.  Commodity pricing exposure includes the impactsof weather, market demand, increased competition and other economicconditions.  For purposes of potentialrisk analysis, we use sensitivity analysis to quantify potential impacts ofmarket rate changes on the results of operations. The sensitivity analysisrepresents hypothetical changes in market values that may or may not occur inthe future.

**Commodity Pricing Risk**

Approximately 15% of **DPL’s** and 24% of **DP&L’s**first quarter of 2007 electric revenues were from sales of excess energy andcapacity in the wholesale market.  Energyand capacity in excess of the needs of existing retail customers are sold onthe wholesale market when we can identify opportunities with positive margins.As of March 31, 2007, a hypothetical increase or decrease of 10% in **DPL’s** annual wholesale revenues could result inapproximately a $14.0 million increase or decrease to annual net income,assuming no increases or decreases in fuel and purchased power costs.  As of March 31, 2007, a hypothetical increaseor decrease of 10% in **DP&L’s**annual wholesale revenues could result in approximately a $23.0 millionincrease or decrease to annual net income, assuming no increases or decreasesin fuel and purchased power costs.

**DPL’s**fuel (including coal, gas, oil and emission allowances) and purchased powercosts as a percent of total operating costs in the first quarter of 2007 and2006 were 52% and 46%, respectively.   **DP&L’s** fuel (including coal, gas, oiland emission allowances) and purchased power costs as a percent of totaloperating costs was 54% and 49% in the first quarter of 2007 and 2006,respectively.  We have substantially allof the total expected coal volume needed to meet our retail and firm wholesalesales requirements for 2007 under contract. The majority of our contracted coal is purchased at fixed prices.  Some contracts provide for periodicadjustment and some are priced based on market indices.  Substantially all contracts have features thatlimit price escalations in any given year. Our consumption of SO2 allowancesshould decline in 2007 due to planned emission control upgrades.  We do not expect to purchase SO2 allowances for 2007.  The exact consumption of SO2 allowances will depend on market pricesfor power, availability of our generation units, the timing of emission controlequipment upgrade completion, and the actual sulfur content of the coalburned.  **DP&L**does not plan to purchase NOx allowances for 2007.  Fuel costs are impacted by changes in volumeand price and are driven by a number of variables including weather,reliability of coal deliveries, scheduled outages and generation plantmix.  Based on weather normalized salesand our co-owners’ projections, fuel costs are forecasted to be flat in 2007compared to 2006.

Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofour generating capacity.  We willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below our internal productioncosts. As of March 31, 2007, a hypothetical increase or decrease of 10% in **DPL’s** annual fuel and purchased power costscould result in approximately a $33.0 million increase or decrease to annualnet income, assuming no increase or decreases in sale revenues. As of March 31,2007, a hypothetical increase or decrease of 10% in **DP&L’s** annual fuel and purchased power costs could resultin approximately a $34.0 million increase or decrease to annual net income, assumingno increase or decreases in sale revenues.

**Interest Rate Risk**

As a result of our normal borrowing and leasingactivities, our results are exposed to fluctuations in interest rates, which wemanage through our regular financing activities.  We maintain both cash on deposit and investmentsin cash equivalents that may be affected by adverse interest ratefluctuations.  Our long-term debtrepresents publicly and privately held secured and unsecured notes anddebentures with fixed interest rates.  AtMarch 31, 2007, we had $65 million in short-term borrowings at 5.63% againstthe $220 million unsecured revolving credit agreement.

The carrying value of **DPL’s** debt was $1,552.7 million at March31, 2007, consisting of **DP&L’s**first mortgage bonds, **DP&L’s**tax-exempt pollution control bonds, our unsecured notes and **DP&L’s** capital leases.  The fair value of this debt was $1,592.1million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.  The principal cash repayments and relatedweighted average interest rates by maturity date for long-term, fixed-rate debtat March 31, 2007, are as follows:

46

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|                            | ** ** | **DPL’s** Long-term Debt | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| **Expected Maturity** | ** ** | ** **                              | ** ** | **Amount** | ** ** | ** ** | ** ** |
| **Date**                   | ** ** | ** **                              | ** ** | **($ in millions)** | ** ** | **Average Rate** | ** ** |
| 2007                       |       | $                                       | 0.7        |   | 6.2 | % |
| 2008                       |       | 100.7                                   |       | 6.3 | % |
| 2009                       |       | 175.7                                   |       | 8.0 | % |
| 2010                       |       | 0.6                                     |       | 6.9 | % |
| 2011                       |       | 297.4                                   |       | 6.9 | % |
| 2012                       |       | —                                  |       | — |   |
| Thereafter                 |       | 977.6                                   |       | 5.6 | % |
| Total                      |       | $                                       | 1,552.7    |   | 6.2 | % |
|                       |       |                                    |       |   |   |
| Fair Value                 |       | $                                       | 1,592.1    |   |   |   |
|                            |            |                                         |            |  |  |  |  |  |  |  |

 

The carrying value of **DP&L’s** debt was $786.0 million at March 31, 2007,consisting of our first mortgage bonds, our tax-exempt pollution control bonds,and our capital leases.  The fair valueof this debt was $786.2 million, based on current market prices or discountedcash flows using current rates for similar issues with similar terms andremaining maturities.  The principal cashrepayments and related weighted average interest rates by maturity date forlong-term, fixed-rate debt at March 31, 2007, are as follows:

|                            | ** ** | **DP&L’s** Long-term Debt | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| **Expected Maturity** | ** ** | **Amount**                                   | ** ** | ** ** | ** ** |
| **Date**                   | ** ** | ** **                                   | ** ** | **($ in millions)** | ** ** | **Average Rate** | ** ** |
| 2007                       |       | $                                            | 0.7        |   | 6.2 | % |
| 2008                       |       | 0.7                                          |       | 6.9 | % |
| 2009                       |       | 0.7                                          |       | 6.9 | % |
| 2010                       |       | 0.6                                          |       | 6.9 | % |
| 2011                       |       | —                                       |       | — |   |
| 2012                       |       | —                                       |       | — |   |
| Thereafter                 |       | 783.3                                        |       | 5.0 | % |
| Total                      |       | $                                            | 786.0      |   | 5.0 | % |
|                       |       |                                         |       |   |   |
| Fair Value                 |       | $                                            | 786.2      |   |   |   |
|                            |            |                                              |            |  |  |  |  |  |

 

Debt maturities for **DPL** and **DP&L**in 2007 are expected to be financed with a combination of short-termborrowings, tax-exempt pollution control bonds and internal funds.

**CRITICAL ACCOUNTING ESTIMATES**

**DPL’s**and **DP&L’s** condensedconsolidated financial statements are prepared in accordance with GAAP.  In connection with the preparation of thesefinancial statements, our management is required to make assumptions, estimatesand judgments that affect the reported amounts of assets, liabilities,revenues, expenses and the related disclosure of contingent liabilities.  These assumptions, estimates and judgmentsare based on our historical experience and assumptions that we believed to bereasonable at the time.  However, becausefuture events and their effects cannot be determined with certainty, thedetermination of estimates requires the exercise of judgment.  Our critical accounting estimates are thosewhich require assumptions to be made about matters that are highly uncertain.

Different estimates couldhave a material effect on our financial results. Judgments and uncertaintiesaffecting the application of these policies and estimates may result inmaterially different amounts being reported under different conditions orcircumstances.  Significant items subjectto such judgments include: the carrying value of property, plant and equipment;unbilled revenues; the valuation of insurance and claims costs; valuationallowances for receivables and deferred income taxes; the valuation of reservesrelated to current litigation; and assets and liabilities related to employeebenefits. Actual results may differ from those estimates.  Refer to our 2006 Annual Report filed on Form10-K for a complete listing of our critical accounting policies and estimates.

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**Recently Issued Accounting Pronouncements**

Adiscussion of recently issued accounting pronouncements is described in Note 1of Notes to Condensed Consolidated Financial Statements and such discussion isincorporated by reference in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and made a part hereof.

**OPERATING STATISTICS**
| ** **                                | ** ** | **DPL Inc.**                                | ** **  | **DP&L (a)**                            | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** **  | **Three Months Ended  March 31,** | ** ** |
| ** **                                | ** ** | **2007**                                         | ** **  | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Electric sales  (millions in kWh)         |       |                                             |        |                                             |       |   |   |   |   |
| Residential                               | ** ** | **1,638**                                        |        | 1,468                                            | ** ** | **1,638** |   | 1,468 |   |
| Commercial                                | ** ** | **932**                                          |        | 893                                              | ** ** | **932** |   | 893 |   |
| Industrial                                | ** ** | **977**                                          |        | 988                                              | ** ** | **977** |   | 988 |   |
| Other retail                              | ** ** | **338**                                          |        | 338                                              | ** ** | **338** |   | 338 |   |
| Total retail                              | ** ** | **3,885**                                        |        | 3,687                                            | ** ** | **3,885** |   | 3,687 |   |
|                                      |       |                                             |        |                                             |       |   |   |   |   |
| Wholesale                                 | ** ** | **1,120**                                        |        | 819                                              | ** ** | **1,120** |   | 819 |   |
| Total                                     | ** ** | **5,005**                                        |        | 4,506                                            | ** ** | **5,005** |   | 4,506 |   |
|                                      |       |                                             |        |                                             |       |   |   |   |   |
| Operating revenues ($ in  thousands) |       |                                             |        |                                             |       |   |   |   |   |
| Residential                               | ** ** | **$**                                            | **147,977** |                                             | $          | 130,631 | ** ** | **$** | **147,977** |   | $ | 130,631 |   |
| Commercial                                | ** ** | **74,698**                                       |        | 71,299                                           | ** ** | **70,987** |   | 65,890 |   |
| Industrial                                | ** ** | **57,496**                                       |        | 57,805                                           | ** ** | **31,619** |   | 30,835 |   |
| Other retail                              | ** ** | **21,526**                                       |        | 20,607                                           | ** ** | **18,408** |   | 20,669 |   |
| Other  miscellaneous revenues             | ** ** | **2,850**                                        |        | 2,979                                            | ** ** | **2,864** |   | 2,984 |   |
| Total retail                              | ** ** | **$**                                            | **304,547** |                                             | $          | 283,321 | ** ** | **$** | **271,855** |   | $ | 251,009 |   |
|                                      |       |                                             |        |                                             |       |   |   |   |   |
| Wholesale                                 | ** ** | **56,685**                                       |        | 37,420                                           | ** ** | **90,032** |   | 70,360 |   |
|                                      |       |                                             |        |                                             |       |   |   |   |   |
| RTO ancillary  revenues                   | ** ** | **15,662**                                       |        | 17,704                                           | ** ** | **15,662** |   | 17,704 |   |
|                                      |       |                                             |        |                                             |       |   |   |   |   |
| Other revenues,  net of fuel costs        | ** ** | **2,799**                                        |        | 2,698                                            | ** ** | **—** |   | — |   |
| Total                                     | ** ** | **$**                                            | **379,693** |                                             | $          | 341,143 | ** ** | **$** | **377,549** |   | $ | 339,073 |   |
|                                      |       |                                             |        |                                             |       |   |   |   |   |
| Electric customers at  end of period      |       |                                             |        |                                             |       |   |   |   |   |
| Residential                               | ** ** | **457,754**                                      |        | 457,248                                          | ** ** | **457,754** |   | 457,248 |   |
| Commercial                                | ** ** | **49,373**                                       |        | 48,977                                           | ** ** | **49,373** |   | 48,977 |   |
| Industrial                                | ** ** | **1,817**                                        |        | 1,840                                            | ** ** | **1,817** |   | 1,840 |   |
| Other                                     | ** ** | **6,350**                                        |        | 6,315                                            | ** ** | **6,350** |   | 6,315 |   |
| Total                                     | ** ** | **515,294**                                      |        | 514,380                                          | ** ** | **515,294** |   | 514,380 |   |

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*(a)**          DP&Lsells power to DPLER (a subsidiary of DPL). These sales are classified as wholesale on DP&L’s financialstatements and retail sales for DPL.  ThekWh volumes contain all volumes distributed on the DP&L system whichinclude the retail sales by DPLER.  Thesales for resale volumes are omitted to avoid duplicate reporting.*

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** **

**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

See the “Market Risk” section of Item 2.

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** **

**Item 4. Controls and Procedures**

Our Chief Executive Officer (CEO) and Chief FinancialOfficer (CFO) are responsible for establishing and maintaining our disclosurecontrols and procedures.  These controlsand procedures were designed to ensure that material information relating to usand our subsidiaries is communicated to the CEO and CFO.  We evaluated these disclosure controls andprocedures as of the end of the period covered by this report with theparticipation of our CEO and CFO.  Basedon this evaluation, our CEO and CFO concluded that our disclosure controls andprocedures are effective: (i) to ensure that information required to bedisclosed by us in the reports that 

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we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms and (ii) to ensure that information required to bedisclosed by us in the reports that we submit under the Exchange Act isaccumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate, to allow timely decisions regarding requireddisclosure.

There was no change in our internal control over financial reportingduring the most recently completed quarter ended March 31, 2007 that hasmaterially affected, or is reasonably likely to materially affect, internal controlover reporting.

**PART II**

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** **

**Item1 - Legal Proceedings**

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in our CondensedConsolidated Financial Statements, as prescribed by GAAP, for these matters areadequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, and other matters discussed below, and to comply withapplicable laws and regulations will not exceed the amounts reflected in ourCondensed Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of March 31, 2007, cannot be reasonably determined.

Certain legal proceedingsin which we are involved are discussed in Part I, Item 1-EnvironmentalConsiderations, Item 1-Competition and Regulation, Item 3 and Note 15 to theConsolidated Financial Statements included therein of our Annual Report on Form10-K for the fiscal year ended December 31, 2006.  The following discussion is limited to recentdevelopments concerning our legal proceedings and should be read in conjunctionwith this earlier report.

**FormerExecutive Litigation**

Cumulatively throughMarch 31, 2007, we have accrued for accounting purposes, obligations ofapproximately $61 million to reflect claims made by three former executivesregarding deferred compensation, estimated MVE incentives and/or legal feesthat the former executives assert are payable per contracts.  We dispute the former executives’ entitlementto any of those sums and any other sums the former executives assert are due tothem and, as noted above, we are pursuing litigation against them contestingall such claims.

**Environmental**

In September 2004, theSierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart Generating Station in the United States DistrictCourt for the Southern District of Ohio for alleged violations of the CAA andthe Station’s operating permit.  **DP&L**, on behalf of all co-owners, is leading the defenseof this matter.  A sizable amount ofdiscovery has taken place and expert reports are scheduled to be filed atvarious times from May through September, 2007. Dispositive motions are to be filed in January 2008.  No trial date has been set yet.

On April 2, 2007, the U.S. Supreme Court unanimouslyoverturned the rulings of two lower courts and concluded that the Clean Air Act’s(CAA) New Source Review (NSR) requirements are triggered when a major physicalor operational change at a facility results in an increase in the facility’sannual emissions (*Environmental Defense et al, v. Duke EnergyCorp. et al.*).  The outcome ofthis case is significant to **DP&L**

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because it eliminates one of **DP&L’s**major arguments in the lawsuit filed against it by the Sierra Club.  The Court decided that an annual rate ofemissions could be used to determine if major modifications have been made to aplant as opposed to an hourly emission rate as Duke had argued.  Using the annual rate makes it more likelythat most plant modifications will be found to be “major” modifications, thusrequiring EPA permits.  **DP&L** can still defend against the allegations of NSRviolations if it can establish that the activities at issue did not cause totalannual emissions to increase or that the projects that resulted in increasedemissions were undertaken for routine maintenance, repair and replacementactivities.

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** **

**Item1a – Risk Factors**

Acomprehensive listing of risk factors that we consider to be the most significantto your decision to invest in our stock is provided in our most recent AnnualReport on Form 10-K and is incorporated herein by reference.  The Form 10-K may be obtained as discussed onPage 4, ‘Website Access to Reports.’  Ifany of these events occur, our business, financial position or results ofoperation could be materially affected.

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** **

**Item2 – Unregistered Sale of Equity Securities and Use of Proceeds**

None

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** **

**Item3 – Defaults Upon Senior Securities**

None

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** **

**Item4 – Submission of Matters to a Vote of Security Holders**

None

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** **

**Item5 – Other Information**

None

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** **

**Item 6 – Exhibits**
| DPL Inc. | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                         | ** ** | **Location**                    |
|----------|------------|--------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------|
| X        |       | X            |       | 31(a)               |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 31(a) |
|     |       |         |       |                |       |                                                                                                |       |                            |
| X        |       | X            |       | 31(b)               |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 31(b) |
|     |       |         |       |                |       |                                                                                                |       |                            |
| X        |       | X            |       | 32(a)               |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 32(a) |
|     |       |         |       |                |       |                                                                                                |       |                            |
| X        |       | X            |       | 32(b)               |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |       | Filed herewith as Exhibit 32(b) |
|     |       |         |       |                |       |                                                                                                |       |                            |

 

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** **

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, **DPL** Inc. and The Dayton Power and LightCompany has duly caused this report to be signed on their behalf by theundersigned, thereunto duly authorized.

 
|        | ** ** | **DPL INC.**                           |
|--------|------------|----------------------------------------|
|   | ** ** | **The Dayton Power and Light Company** |
|   |       | (Registrants)                          |

 

 
| Date:  |   | April 30, 2007 |   | /s/ Paul M. Barbas                                |
|--------|--------|----------------|--------|---------------------------------------------------|
|   |   |           |   | Paul M. Barbas                                    |
|   |   |           |   | President and Chief Executive Officer             |
|   |   |           |   | (principal executive officer)                     |
|   |   |           |   |                                              |
|   |   | April 30, 2007 |   | /s/ John J. Gillen                                |
|   |   |           |   | John J. Gillen                                    |
|   |   |           |   | Senior Vice President and Chief Financial Officer |
|   |   |           |   | (principal financial officer)                     |
|   |   |           |   |                                              |
|   |   | April 30, 2007 |   | /s/ Frederick J. Boyle                            |
|   |   |           |   | Frederick J. Boyle                                |
|   |   |           |   | Controller and Chief Accounting Officer           |
|   |   |           |   | (principal accounting officer)                    |

 

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