**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM10-Q**

| **x****QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |
| **For the  quarterly period ended June 30, 2007**                                                   |
|                                                                                                |
| **OR**                                                                                              |
|                                                                                                |
| **o****TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom                to                **
| **Commission  File Number** | ** ** | **Registrant,  State of Incorporation,  Address and Telephone Number** | ** ** | **I.R.S.  Employer  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**                                                       | ** ** | ** **                                |

 

Indicateby check mark whether each registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
|        | DPL Inc.                           |   | Yes x  No o |
|--------|------------------------------------|--------|-------------|
|   | The Dayton Power and Light Company |   | Yes x  No o |

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.
|        |                                |   | Large  accelerated filer |   | Accelerated  filer |   | Non-accelerated  filer |
|--------|-------------------------------------|--------|--------------------------|--------|--------------------|--------|------------------------|
|   | DPL Inc.                            |   | x                        |   | o                  |   | o                      |
|   | The Dayton Power and Light  Company |   | o                        |   | o                  |   | x                      |

 

Indicateby check mark whether each registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
|        | DPL Inc.                           |   | Yes o  No x |
|--------|------------------------------------|--------|-------------|
|   | The Dayton Power and Light Company |   | Yes o  No x |

 

As of July 25, 2007, each registrant had the followingshares of common stock outstanding:
| **Registrant**                         | ** ** | **Description**                   | ** ** | **Shares  Outstanding** |
|----------------------------------------|------------|-----------------------------------|------------|-------------------------|
|                                   |       |                              |       |                    |
| **DPL Inc.**                           | ** ** | **Common Stock, $0.01 par value** |       | 113,553,444             |
| ** **                             | ** ** | ** **                        |       |                    |
| **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** | ** **                                                                                  |
|----------------------------------|---------------------------------------------------------------------------------------------|
|                             |                                                                                        |   |
| 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 | 36 |
|                             |                                                                                        |   |
|                             | Operating  Statistics                                                                       | 57 |
|                             |                                                                                        |   |
| Item 3                           | Quantitative and Qualitative Disclosures about Market  Risk                                 | 57 |
|                             |                                                                                        |   |
| Item 4                           | Controls and  Procedures                                                                    | 57 |
|                             |                                                                                        |   |
| **Part II Other Information**    |                                                                                        |
|                             |                                                                                        |   |
| Item 1                           | Legal Proceedings                                                                           | 58 |
|                             |                                                                                        |   |
| Item 1A                          | Risk  Factors                                                                               | 59 |
|                             |                                                                                        |   |
| Item 2                           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 59 |
|                             |                                                                                        |   |
| Item 3                           | Defaults Upon  Senior Securities                                                            | 59 |
|                             |                                                                                        |   |
| Item 4                           | Submission of  Matters to a Vote of Security Holders                                        | 59 |
|                             |                                                                                        |   |
| Item 5                           | Other Information                                                                           | 60 |
|                             |                                                                                        |   |
| Item 6                           | Exhibits                                                                                    | 60 |
|                             |                                                                                        |   |
| **Other**                        |                                                                                        |   |
|                             |                                                                                        |   |
| Signatures                       |                                                                                        | 61 |
|                             |                                                                                        |   |
| 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**total consolidatedrevenue and approximately 93% 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.   **DPL**and **DP&L** file combined SEC reports on an interim and annualbasis.

3

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**Item 1 – Financial Statements**

**DPL INC.**

**CONDENSEDCONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS**
| ** **                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions except per share amounts** | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Revenues**                                                             | ** ** | **$**                                           | **343.1**  |                                          | $          | 309.0 | ** ** | **$** | **722.8** |   | $ | 650.1 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Cost of revenues:**                                                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fuel                                                                     | ** ** | **63.5**                                        |       | 78.6                                          | ** ** | **153.8** |   | 162.8 |   |
| Purchased power                                                          | ** ** | **83.2**                                        |       | 37.0                                          | ** ** | **135.4** |   | 62.3 |   |
| Total cost of  revenues                                                  | ** ** | **146.7**                                       |       | 115.6                                         | ** ** | **289.2** |   | 225.1 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Gross margin**                                                         | ** ** | **196.4**                                       |       | 193.4                                         | ** ** | **433.6** |   | 425.0 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Operating expenses:**                                                  | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operation and  maintenance                                               | ** ** | **61.5**                                        |       | 70.6                                          | ** ** | **130.8** |   | 133.0 |   |
| Depreciation and  amortization                                           | ** ** | **35.5**                                        |       | 38.2                                          | ** ** | **69.0** |   | 75.1 |   |
| General taxes                                                            | ** ** | **27.5**                                        |       | 27.0                                          | ** ** | **55.5** |   | 55.0 |   |
| Amortization of  regulatory assets                                       | ** ** | **2.5**                                         |       | 1.7                                           | ** ** | **5.4** |   | 2.8 |   |
| Total operating  expenses                                                | ** ** | **127.0**                                       |       | 137.5                                         | ** ** | **260.7** |   | 265.9 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Operating income**                                                     | ** ** | **69.4**                                        |       | 55.9                                          | ** ** | **172.9** |   | 159.1 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Other income / (expense), net**                                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net gain on settlement  of executive litigation                          | ** ** | **31.0**                                        |       | —                                        | ** ** | **31.0** |   | — |   |
| Investment income                                                        | ** ** | **5.3**                                         |       | 4.5                                           | ** ** | **8.3** |   | 10.9 |   |
| Interest expense                                                         | ** ** | **(19.4**                                       | **)**      | (25.9                                         | )          | **(42.5** | **)** | (52.2 | ) |
| Other income  (deductions)                                               | ** ** | **(0.2**                                        | **)**      | 0.6                                           | ** ** | **0.6** |   | 0.3 |   |
| Total other income /  (expense), net                                     | ** ** | **16.7**                                        |       | (20.8                                         | )          | **(2.6** | **)** | (41.0 | ) |
| ** **                                                               | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| **Earnings from continuing  operations before income tax**               | ** ** | **86.1**                                        |       | 35.1                                          | ** ** | **170.3** |   | 118.1 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Income tax expense                                                       | ** ** | **32.5**                                        |       | 12.5                                          | ** ** | **65.5** |   | 44.2 |   |
| ** **                                                               | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| **Earnings from continuing  operations**                                 | ** ** | **53.6**                                        |       | 22.6                                          | ** ** | **104.8** |   | 73.9 |   |
| ** **                                                               | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| **Earnings from discontinued  operations, net of tax**                   | ** ** | **5.1**                                         |       | —                                        | ** ** | **10.0** |   | 7.6 |   |
| ** **                                                               | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| **Net Income**                                                           | ** ** | **$**                                           | **58.7**   |                                          | $          | 22.6 | ** ** | **$** | **114.8** |   | $ | 81.5 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Average number of common shares  outstanding (millions)**              | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                                    | ** ** | **107.9**                                       |       | 114.1                                         | ** ** | **107.7** |   | 117.1 |   |
| Diluted                                                                  | ** ** | **119.5**                                       |       | 123.4                                         | ** ** | **119.4** |   | 126.3 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Earnings per share of common  stock**                                  | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic:                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                                           | **0.50**   |                                          | $          | 0.20 | ** ** | **$** | **0.98** |   | $ | 0.63 |   |
| Earnings from  discontinued operations                                   | ** ** | **0.04**                                        |       | —                                        | ** ** | **0.09** |   | 0.07 |   |
| Total Basic                                                              | ** ** | **$**                                           | **0.54**   |                                          | $          | 0.20 | ** ** | **$** | **1.07** |   | $ | 0.70 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Diluted:                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                                           | **0.45**   |                                          | $          | 0.18 | ** ** | **$** | **0.88** |   | $ | 0.59 |   |
| Earnings from  discontinued operations                                   | ** ** | **0.04**                                        |       | —                                        | ** ** | **0.08** |   | 0.06 |   |
| Total Diluted                                                            | ** ** | **$**                                           | **0.49**   |                                          | $          | 0.18 | ** ** | **$** | **0.96** |   | $ | 0.65 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Dividends paid per share of  common stock**                            | ** ** | **$**                                           | **0.26**   |                                          | $          | 0.25 | ** ** | **$** | **0.52** |   | $ | 0.50 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*Theseinterim statements are unaudited.*

4

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**DPLINC.**

**CONDENSED CONSOLIDATED STATEMENT OFCASH FLOWS**
| ** **                                                                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                                                                           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                                                            | ** ** | **$**                                         | **114.8**  |   | $ | 81.5 |   |
| Less: Income  from discontinued operations                                                            | ** ** | **(10.0**                                     | **)**      | (7.6 | ) |
| Income from continuing operations                                                                     | ** ** | **104.8**                                     |       | 73.9 |   |
|                                                                                                  |       |                                          |       |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                    |       |                                          |       |   |   |
| Depreciation and amortization                                                                         | ** ** | **69.0**                                      |       | 75.1 |   |
| Gain on settlement of executive litigation                                                            | ** ** | **(31.0**                                     | **)**      | — |   |
| Gain on sale of aircraft                                                                              | ** ** | **(6.0**                                      | **)**      | — |   |
| Amortization of regulatory assets                                                                     | ** ** | **5.4**                                       |       | 2.8 |   |
| Deferred income taxes                                                                                 | ** ** | **14.0**                                      |       | 3.4 |   |
| Captive insurance provision                                                                           | ** ** | **0.3**                                       |       | 3.5 |   |
| Gain on sale of other investments                                                                     | ** ** | **(3.1**                                      | **)**      | (2.2 | ) |
| Changes in  certain assets and liabilities:                                                           |       |                                          |       |   |   |
| Accounts receivable                                                                                   | ** ** | **(42.2**                                     | **)**      | (15.2 | ) |
| Accounts payable                                                                                      | ** ** | **20.4**                                      |       | 63.3 |   |
| Accrued taxes payable                                                                                 | ** ** | **(30.8**                                     | **)**      | (59.1 | ) |
| Accrued interest payable                                                                              | ** ** | **(6.1**                                      | **)**      | 1.3 |   |
| Prepayments                                                                                           | ** ** | **(0.2**                                      | **)**      | 1.3 |   |
| Inventories                                                                                           | ** ** | **(11.4**                                     | **)**      | (16.5 | ) |
| Deferred compensation assets                                                                          | ** ** | **7.7**                                       |       | 3.5 |   |
| Deferred compensation obligations                                                                     | ** ** | **1.3**                                       |       | (1.4 | ) |
| Other                                                                                                 | ** ** | **20.3**                                      |       | (0.3 | ) |
| **Net cash provided by operating activities**                                                         | ** ** | **112.4**                                     |       | 133.4 |   |
|                                                                                                  |       |                                          |       |   |   |
| **Cash  flows from investing activities:**                                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                                 | ** ** | **(171.2**                                    | **)**      | (200.3 | ) |
| Purchases of  short-term investments and securities                                                   | ** ** | **—**                                    |       | (856.0 | ) |
| Sales of  short-term investments and securities                                                       | ** ** | **—**                                    |       | 984.0 |   |
| Proceeds from  the sale of peaking units, net                                                         | ** ** | **151.0**                                     |       | — |   |
| Proceeds from  the sale of aircraft                                                                   | ** ** | **7.4**                                       |       | — |   |
| Proceeds held in  trust                                                                               | ** ** | **(2.2**                                      | **)**      | — |   |
| **Net cash used for investing activities**                                                            | ** ** | **(15.0**                                     | **)**      | (72.3 | ) |
|                                                                                                  |       |                                          |       |   |   |
| **Cash  flows from financing activities:**                                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Purchase of  treasury shares                                                                          | ** ** | **—**                                    |       | (348.2 | ) |
| Exercise of  stock options                                                                            | ** ** | **14.5**                                      |       | 0.2 |   |
| Tax impact  related to exercise of stock options                                                      | ** ** | **0.5**                                       |       | — |   |
| Retirement of  long-term debt                                                                         | ** ** | **(225.0**                                    | **)**      | — |   |
| Withdrawal of  restricted funds held in trust                                                         | ** ** | **10.1**                                      |       | — |   |
| Dividends paid  on common stock                                                                       | ** ** | **(55.8**                                     | **)**      | (59.0 | ) |
| Issuance of  short-term debt, net                                                                     | ** ** | **95.0**                                      |       | — |   |
| Retirement of  short-term debt, net                                                                   | ** ** | **(95.0**                                     | **)**      | — |   |
| **Net cash used for financing activities**                                                            | ** ** | **(255.7**                                    | **)**      | (407.0 | ) |
|                                                                                                  |       |                                          |       |   |   |
| **Cash  and cash equivalents:**                                                                       | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net change                                                                                            | ** ** | **(158.3**                                    | **)**      | (345.9 | ) |
| Balance at  beginning of period                                                                       | ** ** | **262.2**                                     |       | 595.8 |   |
| **Cash and cash equivalents at end of period**                                                        | ** ** | **$**                                         | **103.9**  |   | $ | 249.9 |   |
|                                                                                                  |       |                                          |       |   |   |
| **Supplemental  cash flow information:**                                                              | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Interest paid,  net of amounts capitalized                                                            | ** ** | **$**                                         | **47.2**   |   | $ | 48.4 |   |
| Income taxes  paid, net                                                                               | ** ** | **$**                                         | **79.3**   |   | $ | 77.0 |   |
| Restricted funds  held in trust (see Note 7 of Notes to  Condensed Consolidated Financial Statements) | ** ** | **$**                                         | **2.2**    |   | $ | — |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*These interim statements areunaudited.*

5

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**DPL INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEET**
| **$ in millions**                                                                    | ** ** | **At  June 30,  2007** | ** **  | **At  December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
|                                                                                           |       |                        |        |                            |       |
| **ASSETS**                                                                                     | ** ** | ** **                  | ** **  | ** **                      | ** ** |
|                                                                                           |       |                        |        |                            |       |
| **Current assets:**                                                                            | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Cash and cash  equivalents                                                                     | ** ** | **$**                       | **103.9**   |                            | $          | 262.2 |   |
| Restricted funds  held in trust                                                                | ** ** | **2.2**                     |        | 10.1                            |       |
| Accounts receivable,  less provision for uncollectible accounts of $1.6 and $1.4, respectively |       | **264.7**                   |        | 225.0                           |       |
| Inventories, at  average cost                                                                  | ** ** | **96.8**                    |        | 85.4                            |       |
| Taxes applicable  to subsequent years                                                          | ** ** | **23.7**                    |        | 48.0                            |       |
| Other current  assets                                                                          | ** ** | **12.5**                    |        | 37.7                            |       |
| Total current  assets                                                                          | ** ** | **503.8**                   |        | 668.4                           |       |
|                                                                                           |       |                        |        |                            |       |
| **Property:**                                                                                  | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| **Held  and used:**                                                                            | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Property, plant  and equipment                                                                 | ** ** | **4,885.2**                 |        | 4,718.5                         |       |
| Less:  Accumulated depreciation and amortization                                               | ** ** | **(2,198.9**                | **)**       | (2,159.2                        | )          |
| Total net  property held and used                                                              | ** ** | **2,686.3**                 |        | 2,559.3                         |       |
|                                                                                           |       |                        |        |                            |       |
| **Assets  held for sale:**                                                                     | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Property, plant  and equipment                                                                 | ** ** | **—**                  |        | 283.5                           |       |
| Less:  Accumulated depreciation and amortization                                               | ** ** | **—**                  |        | (132.3                          | )          |
| Total net  property held for sale                                                              | ** ** | **—**                  |        | 151.2                           |       |
|                                                                                           |       |                        |        |                            |       |
| **Other noncurrent assets:**                                                                   | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Regulatory assets                                                                              | ** ** | **140.4**                   |        | 148.6                           |       |
| Other assets                                                                                   | ** ** | **52.0**                    |        | 84.7                            |       |
| Total other  noncurrent assets                                                                 | ** ** | **192.4**                   |        | 233.3                           |       |
|                                                                                           |       |                        |        |                            |       |
| **Total Assets**                                                                               | ** ** | **$**                       | **3,382.5** |                            | $          | 3,612.2 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*Theseinterim statements are unaudited.*

6

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* *

**DPL INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEET**

 

** **
| $ in millions                                         | ** ** | **At  June 30,  2007** | ** **  | **At  December 31,  2006** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
|                                                            |       |                        |        |                            |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                   | ** ** | ** **                  | ** **  | ** **                      | ** ** |
|                                                            |       |                        |        |                            |       |
| **Current liabilities:**                                        | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Current portion - long-term debt                                | ** ** | **$**                       | **100.8**   |                            | $          | 225.9 |   |
| Accounts  payable                                               | ** ** | **207.4**                   |        | 169.4                           |       |
| Accrued taxes                                                   | ** ** | **100.5**                   |        | 155.2                           |       |
| Accrued  interest                                               | ** ** | **29.4**                    |        | 35.2                            |       |
| Other current liabilities                                       | ** ** | **29.3**                    |        | 38.3                            |       |
| Total  current liabilities                                      | ** ** | **467.4**                   |        | 624.0                           |       |
|                                                            |       |                        |        |                            |       |
| **Noncurrent liabilities:**                                     | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Long-term debt                                                  | ** ** | **1,451.7**                 |        | 1,551.8                         |       |
| Deferred  taxes                                                 | ** ** | **372.7**                   |        | 355.2                           |       |
| Unamortized investment tax credit                               | ** ** | **42.1**                    |        | 43.6                            |       |
| Insurance  and claims costs                                     | ** ** | **22.2**                    |        | 21.9                            |       |
| Other deferred credits                                          | ** ** | **222.0**                   |        | 280.7                           |       |
| Total  noncurrent liabilites                                    | ** ** | **2,110.7**                 |        | 2,253.2                         |       |
|                                                            |       |                        |        |                            |       |
| Cumulative  preferred stock not subject to mandatory redemption | ** ** | **22.9**                    |        | 22.9                            |       |
|                                                            |       |                        |        |                            |       |
| Commitments  and contingencies (Note 9)                         | ** ** | **—**                  | ** **  | **—**                      | ** ** |
|                                                            | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| **Common shareholders’ equity:**                           | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Common stock, at  par value of $0.01 per share:                 |       |                        |        |                            |       |
|                                                            |       |                        |        |                            |       |
|                                                                 | ** ** | **June 2007**          | ** **  | **December 2006**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Shares  authorized                                              |       | 250,000,000                 |        | 250,000,000                     |       |   |   |   |   |
| Shares issued                                                   |       | 163,724,211                 |        | 163,724,211                     |       |   |   |   |   |
| Treasury  shares                                                |       | 50,170,767                  |        | 50,705,239                      |       |   |   |   |   |
| Shares  outstanding                                             |       | 113,553,444                 |        | 113,018,972                     |       | **1.1** |   | 1.1 |   |
| Warrants                                                        |       | **50.0**                    |        | 50.0                            |       |
| Common stock held by employee plans                             |       | **(72.3**                   | **)**       | (69.0                           | )          |
| Accumulated  other comprehensive loss                           |       | **(9.4**                    | **)**       | (6.5                            | )          |
| Retained earnings                                               |       | **812.1**                   |        | 736.5                           |       |
| Total  common shareholders’ equity                         |       | **781.5**                   |        | 712.1                           |       |
|                                                            |       | ** **                  |        |                            |       |
| **Total Liabilities and Shareholders’ Equity**             |       | **$**                       | **3,382.5** |                            | $          | 3,612.2 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*Theseinterim statements are unaudited.*

7

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS**
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                     | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenues**                                    | ** ** | **$**                                           | **341.2**  |                                          | $          | 306.7 | ** ** | **$** | **718.7** |   | $ | 645.8 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Cost of  revenues:**                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fuel                                            | ** ** | **62.3**                                        |       | 76.2                                          | ** ** | **151.8** |   | 160.1 |   |
| Purchased power                                 | ** ** | **83.8**                                        |       | 38.4                                          | ** ** | **136.5** |   | 64.0 |   |
| Total cost of revenues                          | ** ** | **146.1**                                       |       | 114.6                                         | ** ** | **288.3** |   | 224.1 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Gross  margin**                               | ** ** | **195.1**                                       |       | 192.1                                         | ** ** | **430.4** |   | 421.7 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Operating  expenses:**                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operation and maintenance                       | ** ** | **72.4**                                        |       | 59.6                                          | ** ** | **131.8** |   | 113.8 |   |
| Depreciation and amortization                   | ** ** | **33.1**                                        |       | 32.5                                          | ** ** | **63.8** |   | 63.8 |   |
| General taxes                                   | ** ** | **27.4**                                        |       | 25.6                                          | ** ** | **55.0** |   | 53.1 |   |
| Amortization of regulatory assets               | ** ** | **2.5**                                         |       | 1.7                                           | ** ** | **5.4** |   | 2.8 |   |
| Total operating expenses                        | ** ** | **135.4**                                       |       | 119.4                                         | ** ** | **256.0** |   | 233.5 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Operating  income**                           | ** ** | **59.7**                                        |       | 72.7                                          | ** ** | **174.4** |   | 188.2 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Other  income / (expense), net**              | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment  income                              | ** ** | **4.7**                                         |       | 1.3                                           | ** ** | **6.2** |   | 3.2 |   |
| Other income  (deductions)                      | ** ** | **(0.2**                                        | **)**      | 0.8                                           | ** ** | **0.6** |   | 0.3 |   |
| Net gain on  settlement of executive litigation | ** ** | **35.3**                                        |       | —                                        | ** ** | **35.3** |   | — |   |
| Interest expense                                | ** ** | **(4.8**                                        | **)**      | (5.3                                          | )          | **(10.2** | **)** | (12.0 | ) |
| Total other income / (expense), net             | ** ** | **35.0**                                        |       | (3.2                                          | )          | **31.9** |   | (8.5 | ) |
| ** **                                      | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| **Earnings  Before Income Tax**                 | ** ** | **94.7**                                        |       | 69.5                                          | ** ** | **206.3** |   | 179.7 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| Income tax  expense                             | ** ** | **35.6**                                        |       | 25.5                                          | ** ** | **77.4** |   | 68.8 |   |
| ** **                                      | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| **Net  Income**                                 | ** ** | **$**                                           | **59.1**   |                                          | $          | 44.0 | ** ** | **$** | **128.9** |   | $ | 110.9 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| Preferred  dividends                            | ** ** | **0.2**                                         |       | 0.2                                           | ** ** | **0.4** |   | 0.4 |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Earnings on common stock**                    | ** ** | **$**                                           | **58.9**   |                                          | $          | 43.8 | ** ** | **$** | **128.5** |   | $ | 110.5 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

*Theseinterim statements are unaudited.*

8

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS**
| ** **                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                    | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                     | ** ** | **$**                                         | **128.9**  |   | $ | 110.9 |   |
| Adjustments:                                   |       |                                          |       |   |   |
| Depreciation and amortization                  | ** ** | **63.8**                                      |       | 63.8 |   |
| Amortization of regulatory assets              | ** ** | **5.4**                                       |       | 2.8 |   |
| Net gain on settlement of executive litigation | ** ** | **(35.3**                                     | **)**      | — |   |
| Deferred income taxes                          | ** ** | **14.0**                                      |       | (4.0 | ) |
| Gain on sale of other investments              | ** ** | **$**                                         | **(3.1**   | **)** | $ | — |   |
| Changes in  certain assets and liabilities:    |       |                                          |       |   |   |
| Accounts receivable                            | ** ** | **(42.1**                                     | **)**      | (7.5 | ) |
| Accounts payable                               | ** ** | **22.3**                                      |       | 65.5 |   |
| Accrued taxes payable                          | ** ** | **(31.9**                                     | **)**      | (42.8 | ) |
| Accrued interest payable                       | ** ** | **0.2**                                       |       | 1.3 |   |
| Prepayments                                    | ** ** | **0.7**                                       |       | 1.9 |   |
| Inventories                                    | ** ** | **(12.4**                                     | **)**      | (16.2 | ) |
| Deferred compensation assets                   | ** ** | **7.8**                                       |       | 4.3 |   |
| Deferred compensation obligations              | ** ** | **1.3**                                       |       | (3.6 | ) |
| Other                                          | ** ** | **18.3**                                      |       | (1.2 | ) |
| **Net cash provided by operating activities**  | ** ** | **137.9**                                     |       | 175.2 |   |
|                                           |       |                                          |       |   |   |
| **Cash  flows from investing activities:**     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Capital  expenditures                          | ** ** | **(169.3**                                    | **)**      | (199.3 | ) |
| **Net cash used for investing activities**     | ** ** | **(169.3**                                    | **)**      | (199.3 | ) |
|                                           |       |                                          |       |   |   |
| **Cash  flows from financing activities:**     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Issuance of  short-term debt, net              | ** ** | **105.0**                                     |       | — |   |
| Withdrawal of  restricted funds held in trust  | ** ** | **10.1**                                      |       | — |   |
| Dividends paid  on preferred stock             | ** ** | **(0.4**                                      | **)**      | (0.4 | ) |
| Dividends paid  on common stock to parent      | ** ** | **(125.0**                                    | **)**      | — |   |
| **Net cash used for financing activities**     | ** ** | **(10.3**                                     | **)**      | (0.4 | ) |
|                                           |       |                                          |       |   |   |
| **Cash  and cash equivalents:**                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net change                                     | ** ** | **(41.7**                                     | **)**      | (24.5 | ) |
| Balance at  beginning of period                | ** ** | **46.1**                                      |       | 46.2 |   |
| **Cash and cash equivalents at end of period** | ** ** | **$**                                         | **4.4**    |   | $ | 21.7 |   |
|                                           |       |                                          |       |   |   |
| **Supplemental  cash flow information:**       | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Interest paid,  net of amounts capitalized     | ** ** | **$**                                         | **9.7**    |   | $ | 9.2 |   |
| Income taxes paid, net                         | ** ** | **$**                                         | **78.5**   |   | $ | 91.5 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*These interim statements areunaudited*

9

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEET**
| ** **                                                                                      | ** ** | **At**            | ** **  | **At**                | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                     | ** ** | **2007**          | ** **  | **2006**              | ** ** |
|                                                                                            |       |              |        |                  |       |
| **ASSETS**                                                                                      |       |              |        |                  |       |
|                                                                                            |       |              |        |                  |       |
| **Current assets:**                                                                             |       |              |        |                  |       |
| Cash and cash  equivalents                                                                      | ** ** | **$**             | **4.4**     |                  | $          | 46.1 |   |
| Restricted funds  held in trust                                                                 | ** ** | **—**        |        | 10.1                  |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.6 and $1.4,  respectively |       | **245.0**         |        | 205.6                 |       |
| Inventories, at  average cost                                                                   | ** ** | **95.4**          |        | 83.0                  |       |
| Taxes applicable  to subsequent years                                                           | ** ** | **23.6**          |        | 48.0                  |       |
| Other current  assets                                                                           | ** ** | **14.2**          |        | 38.2                  |       |
| Total current  assets                                                                           | ** ** | **382.6**         |        | 431.0                 |       |
|                                                                                            |       |              |        |                  |       |
| **Property:**                                                                                   |       |              |        |                  |       |
| Property, plant  and equipment                                                                  | ** ** | **4,616.1**       |        | 4,450.6               |       |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(2,112.9**      | **)**       | (2,079.0              | )          |
| Net property                                                                                    | ** ** | **2,503.2**       |        | 2,371.6               |       |
|                                                                                            |       |              |        |                  |       |
| **Other noncurrent assets:**                                                                    |       |              |        |                  |       |
| Regulatory  assets                                                                              | ** ** | **140.4**         |        | 148.6                 |       |
| Other assets                                                                                    | ** ** | **107.9**         |        | 139.1                 |       |
| Total other  noncurrent assets                                                                  | ** ** | **248.3**         |        | 287.7                 |       |
|                                                                                            |       |              |        |                  |       |
| **Total Assets**                                                                                | ** ** | **$**             | **3,134.1** |                  | $          | 3,090.3 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

10

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEET**

 
| ** **                                                      | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                      | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                     | ** ** | **2007**          | ** **  | **2006**              | ** ** |
|                                                            | ** ** | ** **        |        |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                  | ** ** | ** **        |        |                  |       |
|                                                            | ** ** | ** **        |        |                  |       |
| **Current liabilities:**                                        | ** ** | ** **        |        |                  |       |
| Current portion  - long-term debt                               | ** ** | **$**             | **0.8**     |                  | $          | 0.9 |   |
| Accounts payable                                                | ** ** | **205.7**         |        | 166.2                 |       |
| Accrued taxes                                                   | ** ** | **103.1**         |        | 159.6                 |       |
| Accrued interest                                                | ** ** | **13.0**          |        | 12.6                  |       |
| Short-term debt                                                 | ** ** | **105.0**         |        | —                |       |
| Other current  liabilities                                      | ** ** | **29.3**          |        | 35.4                  |       |
| Total current  liabilities                                      | ** ** | **456.9**         |        | 374.7                 |       |
|                                                            | ** ** | ** **        |        |                  |       |
| **Noncurrent liabilities:**                                     | ** ** | ** **        |        |                  |       |
| Long-term debt                                                  | ** ** | **784.9**         |        | 785.2                 |       |
| Deferred taxes                                                  | ** ** | **372.6**         |        | 360.2                 |       |
| Unamortized  investment tax credit                              | ** ** | **42.2**          |        | 43.6                  |       |
| Other deferred  credits                                         | ** ** | **222.0**         |        | 272.5                 |       |
| Total noncurrent  liabilities                                   | ** ** | **1,421.7**       |        | 1,461.5               |       |
|                                                            | ** ** | ** **        |        |                  |       |
| Cumulative preferred  stock not subject to mandatory redemption | ** ** | **22.9**          |        | 22.9                  |       |
|                                                            | ** ** | ** **        |        |                  |       |
| Commitments and  contingencies (Note 9)                         | ** ** | **—**        |        | —                |       |
|                                                            | ** ** | ** **        |        |                  |       |
| **Common shareholders’ equity:**                           | ** ** | ** **        |        |                  |       |
| Common stock, at  par value of $0.01 per share:                 | ** ** | **0.4**           |        | 0.4                   |       |
| Other paid-in  capital                                          | ** ** | **783.2**         |        | 783.7                 |       |
| Accumulated  other comprehensive income                         | ** ** | **13.5**          |        | 15.1                  |       |
| Retained  earnings                                              | ** ** | **435.5**         |        | 432.0                 |       |
| Total common  shareholders’ equity                         | ** ** | **1,232.6**       |        | 1,231.2               |       |
|                                                            | ** ** | ** **        |        |                  |       |
| **Total Liabilities and Shareholders’ Equity**             | ** ** | **$**             | **3,134.1** |                  | $          | 3,090.3 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

11

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**Notes toCondensed Consolidated Financial Statements**

**1.     Basisof Presentation**

**Description of Business**

**DPL**is a diversified regional energy companyorganized in 1985 under the laws of Ohio. **DPL’s** principal subsidiaryis **The Dayton Power and Light 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-owned subsidiaries).  Principal industries served includeautomotive, food processing, paper, plastic manufacturing, and defense.  **DP&L’s**sales reflect the general economic conditions and seasonal weather patterns ofthe area.  **DP&L** sells any excess energy and capacity into thewholesale market.

**DPL’s** other significant subsidiaries (allof which are wholly-owned) include DPLE, which engages in the operation ofpeaking generating facilities; DPL Energy Resources, Inc. (DPLER), which sellsretail electric energy under contract to major industrial and commercialcustomers in West Central Ohio; MVE, Inc., which was primarily responsible forthe management of our financial asset portfolio; and Miami Valley InsuranceCompany (MVIC), our captive insurance company that provides insurance sourcesto us and our subsidiaries.  ** DP&L**hasone significant subsidiary, DPL Finance Company, Inc., which is wholly-ownedand provides financing to **DPL**, **DP&L** and other affiliated companies.

**DPL**and **DP&L** conduct theirprincipal business in one business segment - Electric.

**Financial Statement Presentation**

Weprepare consolidated financial statements in accordance with Generally AcceptedAccounting Principles (GAAP) in the United States of America.  The condensed consolidated financialstatements include the accounts of **DPL**and **DP&L** and theirmajority-owned subsidiaries.  Investmentsthat are not majority owned are accounted for using the equity method when ourinvestment allows us the ability to exert significant influence, as defined byGAAP.  Undivided interests injointly-owned generation facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation. Interim results for the quarter and six months ended June 30, 2007 maynot be indicative of our results that will be realized for the full year endingDecember 31, 2007.

Pursuant to theSecurities and Exchange Commission (SEC) rules, certain information andfootnote disclosures normally included in the annual financial statementsprepared in accordance with GAAP have been omitted from interim reports.Therefore, these financial statements should be read along with the annualfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2006.  In the opinionof our management, the condensed consolidated financial statements contain alladjustments (which are all of a normal recurring nature) necessary to fairlystate our financial condition as of June 30, 2007, our results of operationsfor the quarter and six months ended June 30, 2007, and our cash flows for thesix months ended June 30, 2007 in accordance with GAAP.

**Estimates, Judgments and Reclassifications**

The preparation offinancial statements in conformity with GAAP requires us to make estimates andjudgments that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the revenue and expenses of the period reported.  Different estimates could have a materialeffect on our financial results. Judgments and uncertainties affecting the application of these estimatesmay result in materially different amounts being reported under differentconditions or circumstances.  Significantitems subject to such estimates and judgments include the carrying value ofproperty, plant and equipment; unbilled revenues; the valuation of derivativeinstruments; the valuation of insurance and claims costs; valuation allowancesfor receivables and deferred income taxes; regulatory assets and liabilities;reserves recorded for income tax exposures; litigation; and assets andliabilities related to employee benefits. Actual results may differ from those estimates.  Certain amounts from prior periods have beenreclassified to conform to the current reporting presentation.

12

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**Depreciation Expense**

Depreciation expense iscalculated using the straight-line method, which depreciates the cost ofproperty over its estimated useful life. For **DPL’s** and **DP&L’s** generation, transmission, and distributionassets, straight-line depreciation is applied on an average annual compositebasis using group rates.  With theaddition of scrubbers at certain of its generation facilities, **DP&L** has undertaken an evaluation of its depreciationrates which it expects to be completed during the third quarter of 2007.  Management expects depreciation rates todecrease due to the extension of depreciation lives for certain of its assets.The Public Utility Commission of Ohio would need to approve a change indepreciation rates for our regulated assets.

**RecentlyAdopted Accounting Standards**

***Accounting for Uncertainty in Income Taxes***

On January 1,2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was nosignificant impact to our overall results of operations, cash flows orfinancial position.  The total amount of unrecognized tax benefits as ofthe date of adoption was $36.8 million and we have recorded $3.5 million (netof tax) of accrued interest.  During the second quarter ending June 30,2007, we recorded an additional $0.9 million in accrued interest resulting in atotal reserve for uncertain tax positions of $41.2 million as of June 30,2007.  None of the amount of unrecognized tax benefits is due touncertainty in the timing of deductibility.

We recognizeinterest and penalties related to unrecognized tax benefits in income taxes.

Taxes for calendaryears 2004 – 2006 remain open to examination by the jurisdictions in which weare subject to taxation.

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

In January 2007,we adopted Emerging Issues Task Force No. 6-03 “How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement” (EITF No. 6-03).  EITFNo. 6-03 requires a registrant to disclose how taxes collected from customersare presented in the financial statements, i.e. gross or net.  **DP&L**collects certain excise taxes levied by state or local governments from itscustomers. **DP&L’s** excise taxes areaccounted for on a gross basis and recorded as revenues in the accompanyingCondensed Consolidated Statements of Operations for the quarter and six monthsended June 30, 2007 and June 30, 2006 as follows:

 
|                               | ** ** | ** **             | ** ** | **Six Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended** | ** ** | **June 30,**              | ** ** |
| **($ in millions)** | ** ** | **2007**               | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       | $                      | 12.1       |                           | $          | 11.7 |   | $ | 26.4 |   | $ | 25.2 |   |
|                               |            |                        |            |                                |            |  |  |  |  |  |  |  |  |

** **

**RecentlyIssued Accounting Standards**

***Accountingfor Fair Value Measurements***

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements,” (SFAS 157) effective for fiscal years beginning afterNovember 15, 2007.  SFAS 157 applieswhenever other standards require (or permit) assets or liabilities to bemeasured at fair value.  SFAS 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability.  In support of this principle, SFAS 157establishes a fair value hierarchy that prioritizes the information used todevelop those standards.  The fair valuehierarchy gives the highest priority to quoted prices in active markets and thelowest priority to unobservable data, for example, the reporting entity’s owndata.  Under SFAS 157, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy.  SFAS 157 does not expand the useof fair value in any new circumstances. In February 2007, the FASB issued Statement of Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities – Including an amendment of FASB Statement No. 115” (SFAS 159)effective for fiscal years beginning 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 the impact of adopting SFAS 157 and SFAS 159,and have not yet determined the significance of these new rules to our overallresults of operations, financial position or cash flows.

13

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**2.     Earningsper Share**

Basicearnings per share (EPS) is based on the weighted-average number of **DPL** common shares outstanding during theyear.  Diluted earnings per share isbased on the weighted-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).

As aresult of the May 21, 2007 settlement of the litigation with three formerexecutives (see Note 10 of  Notes toCondensed Consolidated Financial Statements), the three former executivesrelinquished all of their rights to certain deferred compensation, restrictedstock units (RSUs), MVE incentives, stock options and reimbursement of legalfees.  There were approximately 1.3million RSUs and 3.6 million stock options relinquished and cancelled that wereincluded in the dilutive share calculation through May 20, 2007.  These RSUs and stock options will no longerbe included in the dilutive share calculation.

For the quarterended June 30, 2007, there were no dilutive securities excluded from thecomputation of diluted earnings per share while for the quarter ended June 30,2006, there were 0.4 million stock options excluded from the calculationbecause they were anti-dilutive.  For thesix months ended June 30, 2007, there were 25 thousand restricted andperformance shares excluded from the computation of diluted earnings pershare.  For the six months ended June 30,2006, there were 0.4 million stock options excluded from the computation ofdiluted earnings per share because they were anti-dilutive.

Thefollowing illustrates the reconciliation of the numerators and denominators ofthe basic and diluted earnings per share computations for income afterdiscontinued operations:
|                                                   | ** ** | **Three Months Ended June 30,** | ** **     |
|---------------------------------------------------|------------|-----------------------------------------------------|----------------|
| ** **                                        | ** ** | **2007**                                            | ** **     | **2006** | ** ** |
| **$ in millions except per**  | ** ** | **Net**                                             | ** **     | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                            | ** ** | **Income**                                          | ** **     | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic  EPS**                                    | ** ** | **$**                                               | ** 58.7** |   | **107.9** | ** ** | **$** | ** 0.54** |   | $ | 22.6 |   | 114.1 | ** ** | $ | 0.20 |   |
|                                              | ** ** | ** **                                          |           |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive Securities:**               | ** ** | ** **                                          |           |   |   |   |   |   |   |   |   |   |   |
| Restricted Stock  Units                           | ** ** | ** **                                          |           | **0.7** |   |   |   |   |   | 1.3 |   |   |   |
| Warrants                                          | ** ** | ** **                                          |           | **9.9** |   |   |   |   |   | 6.9 |   |   |   |
| Stock options,  performance and restricted shares | ** ** | ** **                                          |           | **1.0** |   |   |   |   |   | 1.1 |   |   |   |
| ** **                                        | ** ** | ** **                                          | ** **     | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |
| **Diluted EPS**                                   | ** ** | **$**                                               | **58.7**       | ** ** | **119.5** | ** ** | **$** | **0.49** |   | $ | 22.6 |   | 123.4 |   | $ | 0.18 |   |

 
|                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **$ in millions except per**  | ** ** | **Net**                                           | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                            | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic  EPS**                                    | ** ** | **$**                                             | **114.8**  | ** ** | **107.7** | ** ** | **$** | **1.07** |   | $ | 81.5 |   | 117.1 |   | $ | 0.70 |   |
|                                              | ** ** | ** **                                        |       |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive Securities:**               | ** ** | ** **                                        |       |   |   |   |   |   |   |   |   |   |   |
| Restricted Stock  Units                           | ** ** | ** **                                        |       | **1.0** |   |   |   |   |   | 1.3 |   |   |   |
| Warrants                                          | ** ** | ** **                                        |       | **9.5** |   |   |   |   |   | 6.7 |   |   |   |
| Stock options,  performance and restricted shares | ** ** | ** **                                        |       | **1.2** |   |   |   |   |   | 1.2 |   |   |   |
|                                              | ** ** | ** **                                        |       | ** ** |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                   | ** ** | **$**                                             | **114.8**  | ** ** | **119.4** | ** ** | **$** | **0.96** |   | $ | 81.5 |   | 126.3 |   | $ | 0.65 |   |

 

14

----

**3.     DiscontinuedOperations**
|                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions**                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       | ** ** | ** **                       |       |                           | ** ** | ** ** |   |   |   |
| Investment expenses                        | ** ** | **$**                            | **(0.1**   | **)**                          | $          | — | ** ** | **$** | **(0.4** | **)** | $ | (0.5 | ) |
| Income from discontinued operations        | ** ** | **(0.1**                         | **)**      | —                         | ** ** | **(0.4** | **)** | (0.5 | ) |
|                                       | ** ** | ** **                       |       |                           | ** ** | ** ** |   |   |   |
| Gain realized from sale                    | ** ** | **—**                       |       | —                         | ** ** | **8.2** |   | 13.2 |   |
| Net gain on sale                           | ** ** | **—**                       |       | —                         | ** ** | **8.2** |   | 13.2 |   |
|                                       | ** ** | ** **                       |       |                           | ** ** | ** ** |   |   |   |
| Gain on settlement of executive litigation | ** ** | **8.2**                          |       | —                         | ** ** | **8.2** |   | — |   |
|                                       | ** ** | ** **                       |       |                           | ** ** | ** ** |   |   |   |
| Earnings before income taxes               | ** ** | **8.1**                          | ** ** | **—**                     | ** ** | **16.0** |   | 12.7 |   |
| Income tax expense                         | ** ** | **(3.0**                         | **)**      | —                         | ** ** | **(6.0** | **)** | (5.1 | ) |
| Earnings from discontinued operations, net | ** ** | **$**                            | **5.1**    |                           | $          | — | ** ** | **$** | **10.0** |   | $ | 7.6 |   |

 

On February 13,2005, **DPL’s** subsidiaries, MVE andMVIC, entered into an agreement to sell their respective interests in forty-sixprivate equity funds to AlpInvest/Lexington 2005, LLC, a joint venture ofAlpInvest Partners and Lexington Partners, Inc. Sales proceeds and any related gains or losses were recognized during2005 as the sale of each of these funds closed.

During 2005, MVEentered into alternative closing arrangements with AlpInvest/Lexington 2005,LLC for the remaining funds where legal title to said funds could not betransferred until a later time.  Pursuantto these arrangements, MVE transferred the economic aspects of the remainingprivate equity funds, consisting of two funds and a portion of one fund, toAlpInvest/Lexington 2005, LLC without a change in ownership of theinterests.  The alternative arrangementsresulted in a 2005 deferred gain of $27.1 million in 2005 and $18.9 million in2006. The remaining portion of the gain, $8.2 million, was recognized in thefirst quarter of 2007 as all legal and economic considerations relating to thealternative closing arrangements were satisfied.

As a result of theMay 21, 2007 settlement of the litigation with three former executives (seeNote 10 of the Notes to Condensed Consolidated Financial Statements), the threeformer executives relinquished all of their rights to certain deferredcompensation, RSUs, MVE incentives, stock options and reimbursement of legalfees.  The reversal of accruals relatedto the performance of the financial asset portfolio were recorded indiscontinued operations.  Additionally, aportion of the $25 million settlement expense was allocated to discontinued operations.  These transactions resulted in a net gain of$8.2 million on the settlement of litigation, being recorded in discontinuedoperations.

15

----

**4.     SupplementalFinancial Information**

**DPL Inc.**
| ** **                                          | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                         | ** ** | **2007**          | ** **  | **2006**              | ** ** |
|                                                | ** ** | ** **        |        |                  |       |
| **Accounts  receivable, net:**                      | ** ** | ** **        |        |                  |       |
| Unbilled  revenue                                   | ** ** | **$**             | **68.2**    |                  | $          | 68.7 |   |
| Retail  customers                                   | ** ** | **65.4**          |        | 65.0                  |       |
| Partners  in commonly-owned plants                  | ** ** | **73.8**          |        | 51.5                  |       |
| Wholesale  and subsidiary customers                 | ** ** | **15.8**          |        | 15.8                  |       |
| PJM  including financial transmission rights        | ** ** | **23.1**          |        | 13.1                  |       |
| Other                                               | ** ** | **14.8**          |        | 7.1                   |       |
| Refundable  franchise tax                           | ** ** | **5.2**           |        | 5.2                   |       |
| Provision  for uncollectible accounts               | ** ** | **(1.6**          | **)**       | (1.4                  | )          |
| **Total accounts receivable, net**                  | ** ** | **$**             | **264.7**   |                  | $          | 225.0 |   |
|                                                | ** ** | ** **        |        |                  |       |
| **Inventories,  at average cost:**                  | ** ** | ** **        |        |                  |       |
| Fuel  and emission allowances                       | ** ** | **$**             | **63.4**    |                  | $          | 52.4 |   |
| Plant  materials and supplies                       | ** ** | **33.2**          |        | 32.6                  |       |
| Other                                               | ** ** | **0.2**           |        | 0.4                   |       |
| **Total inventories, at average cost**              | ** ** | **$**             | **96.8**    |                  | $          | 85.4 |   |
|                                                | ** ** | ** **        |        |                  |       |
| **Other  current assets:**                          | ** ** | ** **        |        |                  |       |
| Deposits  and other advances                        | ** ** | **$**             | **0.9**     |                  | $          | 17.8 |   |
| Prepayments                                         | ** ** | **6.9**           |        | 13.3                  |       |
| Derivatives                                         | ** ** | **0.6**           |        | 3.2                   |       |
| Current  deferred income taxes                      | ** ** | **0.8**           |        | 2.0                   |       |
| Other                                               | ** ** | **3.3**           |        | 1.4                   |       |
| **Total other current assets**                      | ** ** | **$**             | **12.5**    |                  | $          | 37.7 |   |
| ** **                                          | ** ** | ** **        |        |                  |       |
| **Property,  plant and equipment:**                 | ** ** | ** **        |        |                  |       |
| Construction  work in process                       | ** ** | **$**             | **460.1**   |                  | $          | 376.0 |   |
| Property,  plant and equipment (a)                  | ** ** | **4,425.1**       |        | 4,626.0               |       |
| **Total property, plant and equipment**             | ** ** | **$**             | **4,885.2** |                  | $          | 5,002.0 |   |
| ** **                                          | ** ** | ** **        |        |                  |       |
| **Other assets:**                                   |       |              |        |                  |       |
| Master  Trust assets                                | ** ** | **$**             | **8.4**     |                  | $          | 39.4 |   |
| Unamortized  loss on reacquired debt                | ** ** | **19.6**          |        | 20.4                  |       |
| Unamortized  debt expense                           | ** ** | **10.1**          |        | 10.6                  |       |
| Commercial  activities tax benefit                  | ** ** | **6.8**           |        | 6.8                   |       |
| Investments                                         | ** ** | **6.9**           |        | 7.0                   |       |
| Other                                               | ** ** | **0.2**           |        | 0.5                   |       |
| **Total other assets**                              | ** ** | **$**             | **52.0**    |                  | $          | 84.7 |   |
|                                                | ** ** | ** **        |        |                  |       |
| **Accounts  payable:**                              | ** ** | ** **        |        |                  |       |
| Trade  payables                                     | ** ** | **$**             | **78.3**    |                  | $          | 75.7 |   |
| Fuel  accruals                                      | ** ** | **45.4**          |        | 37.3                  |       |
| Other                                               | ** ** | **83.7**          |        | 56.4                  |       |
| **Total accounts payable**                          | ** ** | **$**             | **207.4**   |                  | $          | 169.4 |   |
|                                                | ** ** | ** **        |        |                  |       |
| **Other  current liabilities:**                     | ** ** | ** **        |        |                  |       |
| Customer  security deposits                         | ** ** | **$**             | **18.8**    |                  | $          | 19.4 |   |
| Pension  and retiree benefits payable               | ** ** | **0.8**           |        | 5.8                   |       |
| Financial  transmission rights - future proceeds    | ** ** | **—**        |        | 2.7                   |       |
| Payroll  taxes payable                              | ** ** | **0.1**           |        | 0.1                   |       |
| Other                                               | ** ** | **9.6**           |        | 10.3                  |       |
| **Total other current liabilities**                 | ** ** | **$**             | **29.3**    |                  | $          | 38.3 |   |
|                                                | ** ** | ** **        |        |                  |       |
| **Other  deferred credits:**                        | ** ** | ** **        |        |                  |       |
| Asset  retirement obligations - regulated property  | ** ** | **$**             | **88.4**    |                  | $          | 86.3 |   |
| Trust  obligations                                  | ** ** | **21.0**          |        | 76.2                  |       |
| Pension  liabilities                                | ** ** | **36.4**          |        | 37.7                  |       |
| Retiree  health and life benefits                   | ** ** | **27.8**          |        | 28.5                  |       |
| SECA  net revenue subject to refund                 | ** ** | **20.6**          |        | 18.7                  |       |
| Asset  retirement obligations - generation property | ** ** | **12.0**          |        | 11.7                  |       |
| Deferred  gain on sale of portfolio                 | ** ** | **—**        |        | 8.2                   |       |
| Claims  reserves                                    | ** ** | **4.6**           |        | 3.4                   |       |
| Environmental  reserves                             | ** ** | **0.1**           |        | 0.1                   |       |
| Other                                               | ** ** | **11.1**          |        | 9.9                   |       |
| **Total other deferred credits**                    | ** ** | **$**             | **222.0**   |                  | $          | 280.7 |   |

 

----

*(a) Thesale of $283.5 million of assets held for sale at December 31, 2006 wascompleted on April 25, 2007.*

16

----

**4.     SupplementalFinancial Information (Continued)**

**DP&L**

* *
| ** **                                          | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                         | ** ** | **2007**          | ** **  | **2006**              | ** ** |
| **Accounts  receivable, net:**                      | ** ** | ** **        |        |                  |       |   |
| Retail  customers                                   | ** ** | **$**             | **65.4**    |                  | $          | 65.0 |   |   |
| Partners  in commonly-owned plants                  | ** ** | **73.8**          |        | 51.5                  |       |   |
| Unbilled  revenue                                   | ** ** | **60.2**          |        | 61.0                  |       |   |
| PJM  including financial transmission rights        | ** ** | **23.1**          |        | 13.9                  |       |   |
| Wholesale  and subsidiary customers                 | ** ** | **10.2**          |        | 8.3                   |       |   |
| Refundable  franchise tax                           | ** ** | **3.1**           |        | 3.1                   |       |   |
| Other                                               | ** ** | **10.8**          |        | 4.2                   |       |   |
| Provision  for uncollectible accounts               | ** ** | **(1.6**          | **)**       | (1.4                  | )          |   |
| **Total accounts receivable, net**                  | ** ** | **$**             | **245.0**   |                  | $          | 205.6 |   |   |
|                                                | ** ** | ** **        |        |                  |       |   |
| **Inventories,  at average cost:**                  | ** ** | ** **        |        |                  |       |   |
| Fuel  and emission allowances                       | ** ** | **$**             | **63.4**    |                  | $          | 52.4 |   |   |
| Plant  materials and supplies                       | ** ** | **31.8**          |        | 30.2                  |       |   |
| Other                                               | ** ** | **0.2**           |        | 0.4                   |       |   |
| **Total inventories, at average cost**              | ** ** | **$**             | **95.4**    |                  | $          | 83.0 |   |   |
|                                                | ** ** | ** **        |        |                  |       |   |
| **Other  current assets:**                          | ** ** | ** **        |        |                  |       |   |
| Deposits  and other advances                        | ** ** | **$**             | **0.7**     |                  | $          | 17.0 |   |   |
| Prepayments                                         | ** ** | **8.6**           |        | 15.8                  |       |   |
| Derivatives                                         | ** ** | **0.6**           |        | 3.2                   |       |   |
| Current  deferred income taxes                      | ** ** | **0.9**           |        | 0.7                   |       |   |
| Other                                               | ** ** | **3.4**           |        | 1.5                   |       |   |
| **Total other current assets**                      | ** ** | **$**             | **14.2**    |                  | $          | 38.2 |   |   |
| ** **                                          | ** ** | ** **        |        |                  |       |   |
| **Property,  plant and equipment:**                 | ** ** | ** **        |        |                  |       |   |
| Construction  work in process                       | ** ** | **$**             | **459.2**   |                  | $          | 375.2 |   |   |
| Property,  plant and equipment                      | ** ** | **4,156.9**       |        | 4,075.4               |       |   |
| **Total property, plant and equipment**             | ** ** | **$**             | **4,616.1** |                  | $          | 4,450.6 |   |   |
| ** **                                          | ** ** | ** **        |        |                  |       |   |
| **Other assets:**                                   |       |              |        |                  |       |   |
| Master  Trust assets                                | ** ** | **$**             | **78.9**    |                  | $          | 109.0 |   |   |
| Unamortized  loss on reacquired debt                | ** ** | **19.6**          |        | 20.4                  |       |   |
| Unamortized  debt expense                           | ** ** | **8.4**           |        | 8.6                   |       |   |
| Investments                                         | ** ** | **0.6**           |        | 0.6                   |       |   |
| Other                                               | ** ** | **0.4**           |        | 0.5                   |       |   |
| **Total other assets**                              | ** ** | **$**             | **107.9**   |                  | $          | 139.1 |   |   |
|                                                | ** ** | ** **        |        |                  |       |   |
| **Accounts  payable:**                              | ** ** | ** **        |        |                  |       |   |
| Trade  payables                                     | ** ** | **$**             | **78.1**    |                  | $          | 74.7 |   |   |
| Fuel  accruals                                      | ** ** | **43.3**          |        | 36.7                  |       |   |
| Other                                               | ** ** | **84.3**          |        | 54.8                  |       |   |
| **Total accounts payable**                          | ** ** | **$**             | **205.7**   |                  | $          | 166.2 |   |   |
|                                                | ** ** | ** **        |        |                  |       |   |
| **Other  current liabilities:**                     | ** ** | ** **        |        |                  |       |   |
| Customer  security deposits                         | ** ** | **$**             | **18.8**    |                  | $          | 19.4 |   |   |
| Financial  transmission rights - future proceeds    | ** ** | **—**        |        | 2.7                   |       |   |
| Payroll  taxes payable                              | ** ** | **0.1**           |        | 0.2                   |       |   |
| Pension  and retiree benefits payable               | ** ** | **0.8**           |        | 5.8                   |       |   |
| Other                                               | ** ** | **9.6**           |        | 7.3                   |       |   |
| **Total other current liabilities**                 | ** ** | **$**             | **29.3**    |                  | $          | 35.4 |   |   |
|                                                | ** ** | ** **        |        |                  |       |   |
| **Other  deferred credits:**                        | ** ** | ** **        |        |                  |       |   |
| Asset  retirement obligations - regulated property  | ** ** | **$**             | **88.4**    |                  | $          | 86.3 |   |   |
| Trust  obligations                                  | ** ** | **21.0**          |        | 76.2                  |       |   |
| Retiree  health and life benefits                   | ** ** | **27.8**          |        | 28.5                  |       |   |
| Pension  liabilities                                | ** ** | **36.4**          |        | 37.7                  |       |   |
| SECA  net revenue subject to refund                 | ** ** | **20.6**          |        | 18.7                  |       |   |
| Asset  retirement obligations - generation property | ** ** | **12.0**          |        | 11.7                  |       |   |
| Claims  reserves                                    | ** ** | **4.6**           |        | 3.4                   |       |   |
| Environmental  reserves                             | ** ** | **0.1**           |        | 0.1                   |       |   |
| Other                                               | ** ** | **11.1**          |        | 9.9                   |       |   |
| **Total other deferred credits**                    | ** ** | **$**             | **222.0**   |                  | $          | 272.5 |   |   |
|                                                     |            |                   |             |                       |            |  |  |  |  |  |  |  |  |

 

17

----

**4.     SupplementalFinancial Information (Continued)**

**DPL Inc.**
| ** **                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------|------------|---------------------------------------------------|------------|
| **$ in millions**   | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Cash  flows - other:**      | ** ** | ** **                                        |       |   |   |
| Payroll  taxes payable        | ** ** | **$**                                             | **—** |   | $ | (1.4 | ) |
| Employee/director  stock plan | ** ** | **2.2**                                           |       | 1.8 |   |
| Lump  sum retirement payment  | ** ** | **(4.9**                                          | **)**      | — |   |
| Deposits  and other advances  | ** ** | **17.3**                                          |       | 0.7 |   |
| Other                         | ** ** | **5.7**                                           |       | (1.4 | ) |
| **Total cash flows - other**  | ** ** | **$**                                             | **20.3**   |   | $ | (0.3 | ) |

 
| ** **                                                        | ** ** | **Three  Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Comprehensive  income:**                                        | ** ** | ** **                                      |       |                                              | ** ** | ** ** |   |   |   |
| Net  income                                                       | ** ** | **$**                                           | **58.7**   |                                              | $          | 22.6 | ** ** | **$** | **114.8** |   | $ | 81.5 |   |
| Net  change in unrealized gains (losses) on financial instruments | ** ** | **(1.9**                                        | **)**      | 0.4                                               | ** ** | **(1.5** | **)** | 0.8 |   |
| Net  change in deferred gains (losses) on cash flow hedges        | ** ** | **(0.8**                                        | **)**      | 2.2                                               | ** ** | **(4.4** | **)** | 2.8 |   |
| Minimum  pension liability                                        | ** ** | **0.6**                                         |       | —                                            | ** ** | **1.1** |   | — |   |
| Deferred  income taxes related to unrealized gains and (losses)   | ** ** | **0.8**                                         |       | (1.3                                              | )          | **1.9** |   | (3.1 | ) |
| **Comprehensive income**                                          | ** ** | **$**                                           | **57.4**   |                                              | $          | 23.9 | ** ** | **$** | **111.9** |   | $ | 82.0 |   |

 

**DP&L**
| ** **                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| **$ in millions**  | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                         | ** ** | ** **                                        |       |   |   |
| **Cash  flows - other:**     | ** ** | ** **                                        |       |   |   |
| Payroll  taxes payable       | ** ** | **$**                                             | **—** |   | $ | (1.4 | ) |
| Deposits  and other advances | ** ** | **16.7**                                          |       | (1.8 | ) |
| Lump  sum retirement payment | ** ** | **(4.9**                                          | **)**      | — |   |
| Other                        | ** ** | **6.5**                                           |       | 2.0 |   |
| **Total cash flows - other** | ** ** | **$**                                             | **18.3**   |   | $ | (1.2 | ) |

 
| ** **                                                        | ** ** | **Three  Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Comprehensive  income:**                                        |       |                                            |       |                                              |       |   |   |   |   |
| Net  income                                                       | ** ** | **$**                                           | **59.1**   |                                              | $          | 44.0 | ** ** | **$** | **128.9** |   | $ | 110.9 |   |
| Net  change in unrealized gains (losses) on financial instruments |       | **(8.8**                                        | **)**      | (0.2                                              | )          | **(0.4** | **)** | 0.6 |   |
| Net  change in deferred gains (losses) on cash flow hedges        | ** ** | **(0.8**                                        | **)**      | 2.2                                               | ** ** | **(4.4** | **)** | 2.8 |   |
| Minimum  pension liability                                        | ** ** | **0.5**                                         |       | —                                            | ** ** | **1.1** |   | — |   |
| Deferred  income taxes related to unrealized gains and (losses)   | ** ** | **3.5**                                         |       | (1.0                                              | )          | **2.1** |   | (2.4 | ) |
| **Comprehensive income**                                          | ** ** | **$**                                           | **53.5**   |                                              | $          | 45.0 | ** ** | **$** | **127.3** |   | $ | 111.9 |   |

 

18

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**5.     AssetSales**

**Sale of Peaking Units**

OnApril 25, 2007, DPLE completed the sale of its Darby and Greenville electricpeaking generation facilities providing **DPL**withapproximately $151 million in cash. Darby Station was sold to Columbus Southern Power Company, a utilitysubsidiary of American Electric Power Company (AEP), for approximately $102million in cash.  Greenville Station wassold to Buckeye Power, Inc. for approximately $49 million in cash.

Duringthe fourth quarter of 2006, **DPL** recorded a$71.0 million impairment charge that included the fair market value write-downof the peaking unit assets, accrued legal fees and other costs associated withthe sale.  There were no material costsor adjustments to the $71.0 million impairment charge that would result in areportable gain or loss on the sale realized in 2007.

**Sale of Corporate Aircraft**

On June 7, 2007, Miami Valley CTC, Inc. (indirect wholly-ownedsubsidiary of **DPL**), sold itscorporate aircraft and associated inventory and parts for $7.4 million.  The net book value of the assets written downand subsequently sold were approximately $1.0 million and severance and othercosts of approximately $0.4 million were accrued.  Miami Valley CTC, Inc. recorded a net gain onthe sale of approximately $6.0 million for the quarter and the six-month periodended June 30, 2007, which is included in **DPL’s**operation and maintenance expense.

In relation to this sale, Miami Valley CTC, Inc.,placed in escrow approximately $2.2 million. These funds are listed as the caption “Restricted funds held in trust”in the Condensed Consolidated Balance Sheet for **DPL**.  These funds werereleased from escrow on July 12, 2007.

**6.     Pension andPostretirement Benefits**

We sponsor a definedbenefit plan for substantially all full-time employees.  For collective bargaining employees, thedefined benefits are based on a specific dollar amount per year ofservice.  For all other employees, the definedbenefit plan is based primarily on compensation and years of service. We fundpension plan benefits as accrued in accordance with the minimum fundingrequirements of the Employee Retirement Income Security Act of 1974, as amended(ERISA).  In addition, we have aSupplemental Executive Retirement Plan (SERP) for certain active and retiredkey executives.  Benefits under this SERPhave been frozen and no additional benefits can be earned.  We****also haveunfunded liabilities related to retirement benefits for certain active,terminated and retired key executives (not related to the litigation settlementwith three former executives) that include The DPL Inc. Supplemental ExecutiveDefined Contribution Retirement Plan (SEDCRP). These liabilities totaled approximately $0.8 million at June 30, 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.

19

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Thenet periodic benefit costs of the pension and postretirement benefit plans forthe quarter ended June 30, 2007 and 2006 were:

**Net periodic benefit cost**
| ** **                     | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|--------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**    | ** ** | **2007**    | ** ** | **2006**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                   | ** ** | **$**       | **1.1**    |               | $          | 1.1 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                  | ** ** | **4.1**     |       | 4.1                | ** ** | **0.3** |   | 0.4 |   |
| Expected return  on assets (a) | ** ** | **(5.4**    | **)**      | (5.4               | )          | **(0.1** | **)** | (0.1 | ) |
|                           |       |        |       |               |       |   |   |   |   |
| Amortization of  unrecognized: |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss          | ** ** | **0.9**     |       | 1.0                | ** ** | **(0.3** | **)** | (0.2 | ) |
| Prior service cost             | ** ** | **0.6**     |       | 0.6                | ** ** | **—** |   | — |   |
| Transition obligation          | ** ** | **—**  |       | —             | ** ** | **0.1** |   | — |   |
| Net periodic benefit  cost     | ** ** | **$**       | **1.3**    |               | $          | 1.4 | ** ** | **$** | **—** |   | $ | 0.1 |   |

 

----

*(a)**      **The market-related value ofassets is equal to the fair value of assets at implementation with subsequent assetgains and losses recognized in the market-value systematically over athree-year period.*

The net periodic benefit costs of the pension andpostretirement benefit plans for the six months ended June 30, 2007 and 2006were:

**Net periodic benefit cost**
| ** **                                   | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|----------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                  | ** ** | **2007**    | ** ** | **2006**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                 | ** ** | **$**       | **2.2**    |               | $          | 2.2 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                                | ** ** | **8.2**     |       | 8.2                | ** ** | **0.7** |   | 0.8 |   |
| Expected return  on assets (a)               | ** ** | **(10.9**   | **)**      | (10.8              | )          | **(0.2** | **)** | (0.2 | ) |
|                                         |       |        |       |               |       |   |   |   |   |
| Amortization of  unrecognized:               |       |        |       |               |       |   |   |   |   |
| Actuarial (gain) loss                        | ** ** | **1.8**     |       | 2.0                | ** ** | **(0.5** | **)** | (0.4 | ) |
| Prior service cost                           | ** ** | **1.2**     |       | 1.2                | ** ** | **—** |   | **—** |   |
| Transition obligation                        | ** ** | **—**  |       | **—**         | ** ** | **0.1** |   | 0.1 |   |
| Net periodic  benefit cost before adjustment | ** ** | **2.5**     |       | 2.8                | ** ** | **0.1** |   | 0.3 |   |
| Special  termination benefit cost (b)        | ** ** | **—**  |       | 0.3                | ** ** | **—** |   | **—** |   |
| Net periodic benefit  cost after adjustment  | ** ** | **$**       | **2.5**    |               | $          | 3.1 | ** ** | **$** | **0.1** |   | $ | 0.3 |   |

 

----

*(a)**      **The market-related value of**assets**is equal to the fair valueof assets at implementation with subsequent**assetgains and losses recognized in the market-value systematically over athree-year period.*

*(b)**      **In 2006, a specialtermination benefit cost was recognized as a result of 16 employees whoparticipated in a voluntary early retirement program and retired at variousdates during 2006; this program was completed a**s of April 1, 2006.*

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

**EstimatedFuture Benefit Payments**
| $ in millions | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------|------------|-------------|------------|--------------------|------------|
| 2007                    |       | $           | 9.7        |               | $          | 1.3 |   |
| 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 |   |

 

20

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**7.     Share-Based Compensation**

Asa result of the May 21, 2007 settlement of the litigation with three formerexecutives (see Note 10 of the Notes to the Condensed Consolidated FinancialStatements), the three former executives relinquished all of their rights tocertain deferred compensation, restricted stock units (RSUs), MVE incentives,stock options and reimbursement of legal fees. A portion of this settlement included the forfeitures and cancellationsof RSUs and stock options of 1.3 million and 3.6 million, respectively.

The following tablesummarizes share-based compensation expense:
| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions**                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock options                                                            | ** ** | **$**                            | **—** |                           | $          | 0.6 | ** ** | **$** | **—** |   | $ | 1.3 |   |
| Restricted stock  units                                                  | ** ** | **—**                       |       | (0.2                           | )          | **0.1** |   | 1.2 |   |
| Performance shares                                                       | ** ** | **0.4**                          |       | 0.8                            | ** ** | **0.8** |   | 0.8 |   |
| Restricted shares                                                        | ** ** | **0.1**                          |       | —                         | ** ** | **0.1** |   | — |   |
| Non-employee directors’  restricted stock units                     | ** ** | **0.1**                          |       | —                         | ** ** | **0.1** |   | — |   |
| Share-based  compensation included in operations and maintenance expense | ** ** | **0.6**                          |       | 1.2                            | ** ** | **1.1** |   | 3.3 |   |
| Income tax expense                                                       | ** ** | **(0.2**                         | **)**      | (0.4                           | )          | **(0.4** | **)** | (1.2 | ) |
| Total share-based  compensation, net of tax                              | ** ** | **$**                            | **0.4**    |                           | $          | 0.8 | ** ** | **$** | **0.7** |   | $ | 2.1 |   |

 

Share-based awards issuedin **DPL’s** common stock will be distributedfrom treasury stock.  **DPL** believes it has sufficient treasury stock to satisfy alloutstanding share-based awards.

**DeterminingFair Value**

*Valuation and Amortization Method.*We estimate the fair value of stock options andRSUs using a Black-Scholes-Merton model; performance shares are valued using aMonte Carlo simulation; restricted shares are valued at the market price on theday of grant and the Directors’ RSUs are valued at the market price on the dayprior to the grant date.  We amortize thefair value of all awards on a straight-line basis over the requisite serviceperiods, which are generally the vesting periods.

*Expected Volatility.*The Company’s expected volatility assumptions are based on thehistorical volatility of **DPL’s** stock.The volatility range captures the high and low volatility values for each awardgranted based on its specific terms.

*Expected Life.*Theexpected life assumption represents the estimated period of time from grantuntil exercise and reflects historical employee exercise patterns.

*Risk-Free Interest Rate.*The risk-free interest rate for the expected term of the award is basedon the corresponding yield curve in effect at the time of the valuation forU.S. Treasury bonds having the same term as the expected life of the award,i.e., a five year bond rate is used for valuing an award with a five year expectedlife.

*Expected Dividend Yield.*The expected dividend yield is based on **DPL’s**current dividend rate, adjusted as necessary to capture anticipated dividendchanges and the 12 month average **DPL** Inc. stockprice.

*Expected Forfeitures.*The forfeiture rate used to calculate compensation expense is based onthe Company’s historical experience, adjusted as necessary to reflect specialcircumstances.

21

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**Stock Options**

In 2000, **DPL’s**Board of Directors adopted, and **DPL’s**shareholders approved, The **DPL** Inc. StockOption Plan.  On April 26, 2006, **DPL’s** shareholders approved The **DPL** Inc. 2006 Equity and Performance Incentive Plan(EPIP).  With the approval of the EPIP,no new awards will be granted under The **DPL** Inc. StockOption Plan, but shares relating to awards that are forfeited or terminatedunder The **DPL** Inc. Stock Option Plan may begranted under the EPIP.  There arecurrently 10,000 unvested stock options outstanding under The **DPL** Inc. Stock Option Plan that will vest as of December 21,2007.

The schedule of option activity for the six monthsended June 30, 2007 was as follows:
|                                                                   | ** ** | ** **         | ** ** | **Wei**ghted-Avg.   | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                        | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| **$ in millions (except share amounts)** | ** ** | **Options**        | ** ** | **Fair Value** | ** ** |
| Non-vested at  January 1, 2007                                    |       | 10,000             |       | $                   | 0.05       |   |
| Granted in first  half 2007                                       |       | —             |       | —              |       |
| Vested in first  half 2007                                        |       | —             |       | —              |       |
| Forfeited in  first half 2007                                     |       | —             |       | —              |       |
| Non-vested at June 30,  2007                                      |       | 10,000             |       | $                   | 0.05       |   |

 

Summarized stockoption activity was as follows:
|                                            | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 30,**              | ** ** |
| ** **                                 | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Options:                                   |       |                           |       |   |   |
| Outstanding at beginning of year           | ** ** | **5,091,500**                  |       | 5,486,500 |   |
| Granted                                    | ** ** | —                         |       | — |   |
| Exercised                                  | ** ** | **(520,000**                   | **)**      | (10,000 | ) |
| Forfeited (a)                              | ** ** | **(3,620,000**                 | **)**      | — |   |
| Outstanding at  period-end                 | ** ** | **951,500**                    |       | 5,476,500 |   |
| Exercisable at  period-end                 | ** ** | **941,500**                    |       | 5,416,000 |   |
|                                       |       |                           |       |   |   |
| Weighted average  option prices per share: |       |                           |       |   |   |
| Outstanding at beginning of year           | ** ** | **$**                          | **21.95**  |   | $ | 21.86 |   |
| Granted                                    | ** ** | **$**                          | —     |   | $ | — |   |
| Exercised                                  | ** ** | **$**                          | **26.83**  |   | $ | 21.00 |   |
| Forfeited                                  | ** ** | **$**                          | **20.38**  |   | $ | — |   |
| Outstanding at  period-end                 | ** ** | **$**                          | **24.08**  |   | $ | 21.90 |   |
| Exercisable at  period-end                 | ** ** | **$**                          | **24.07**  |   | $ | 20.98 |   |

 

----

*(a)  As a result of the settlement of the formerexecutive litigation on May 21, 2007, 3.6 million outstanding options shown abovewere forfeited in the second quarter of 2007 and another approximately one milliondisputed options not shown above were also forfeited.*

The following table reflects information about stockoptions outstanding at June 30, 2007:
| ** **                              | ** ** | ** **      | ** ** | **Options Outstandin**g              | ** ** | **Options Exercisable**            | ** ** |
|-----------------------------------------|------------|-----------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Outstandin**g | ** ** | **Wei**ghted-  Average  Contractual  Life | ** ** | **Wei**ghted-  Average  Exercise  Price | ** ** | **Exercisable** | ** ** | **Wei**ghted-  Average  Exercise  Price | ** ** |
|                                    |       |            |       |                                      |       |                                    |       |   |   |   |   |
| $14.95 - $21.00                         |       | 625,000         |       | 3.3 years                                 |       | $                                       | 20.60      |   | 625,000 |   | $ | 20.60 |   |
| $21.01 - $29.63                         |       | 326,500         |       | 4.0 years                                 |       | $                                       | 28.83      |   | 316,500 |   | $ | 28.93 |   |

 

22

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The following table reflects information about stockoption activity during the period:

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions**                                                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  grant date fair value of options granted during the period | ** ** | **$**                            | **—** |                           | $          | **—** | ** ** | **$** | **—** |   | $ | **—** |   |
| Intrinsic value  of options exercised during the period                      | ** ** | **$**                            | **1.6**    |                           | $          | **—** | ** ** | **$** | **2.3** |   | $ | 0.1 |   |
| Proceeds from  stock options exercised during the period                     | ** ** | **$**                            | **10.6**   |                           | $          | **—** | ** ** | **$** | **14.5** |   | $ | 0.2 |   |
| Tax benefit from  proceeds of stock options exercised                        | ** ** | **$**                            | **(0.9**   | **)**                          | $          | **—** | ** ** | **$** | **0.5** |   | $ | **—** |   |
| Fair value of  shares that vested during the period                          | ** ** | **$**                            | **—** |                           | $          | 1.0 | ** ** | **$** | **—** |   | $ | 1.0 |   |
| Unrecognized  compensation expense                                           | ** ** | **$**                            | **—** |                           | $          | 0.2 | ** ** | **$** | **—** |   | $ | 0.2 |   |
| Weighted average  period to recognize compensation expense (in years)        |       | **0.5**                          |       | 1.0                            |       | **0.5** |   | 1.0 |   |

 

The following table shows the assumptions used in theBlack-Scholes-Merton model to calculate the fair value of the non-vested stockoptions at the time of grant:
| Number of Non-vested Shares           |   | 10,000             |
|---------------------------------------|--------|--------------------|
| Date of Grant                         |   | December 29,  2004 |
| Expected  Volatility                  |   | 26.1%              |
| Weighted-average  expected volatility |   | 26.1%              |
| Expected life  (in years)             |   | 9.9                |
| Expected  dividends                   |   | 4.7%               |
| Weighted-average  expected dividends  |   | 4.7%               |
| Risk-free  interest rate              |   | 4.3%               |

 

No options were granted during 2006 and 2007.

**RestrictedStock Units (RSUs)**

 

RSUs were granted to certain key employees prior to2001.  As a result of the settlement ofthe former executive litigation, all disputed RSUs were forfeited by the threeformer executives.  There were 49,998RSUs outstanding as of June 30, 2007, of which all have not vested. Thenon-vested RSUs will be paid in cash upon vesting and will vest asfollows:  20,097 in the second half of2007; 14,688 in 2008; 10,205 in 2009; and 5,008 in 2010.  Non-vested RSUs are valued quarterly at fairvalue using the Black-Scholes-Merton model to determine the amount ofcompensation expense to be recognized. Non-vested RSUs do not earn dividends.
|                                                                   | ** ** | ** **         | ** ** | **Wei**ghted-Avg.   | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                        | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| **$ in millions (except share amounts)** | ** ** | **RSUs**           | ** ** | **Fair Value** | ** ** |
| Non-vested at  January 1, 2007                                    |       | 49,998             |       | $                   | 1.2        |   |
| Granted in first  half 2007                                       |       | —             |       | —              |       |
| Vested in first  half 2007                                        |       | —             |       | —              |       |
| Forfeited in  first half 2007                                     |       | —             |       | —              |       |
| Non-vested at June 30,  2007                                      |       | 49,998             |       | $                   | 1.2        |   |

 

Summarized RSU activity was as follows:
|                                  | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **June 30,**              | ** ** |
| ** **                       | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| RSUs:                            |       |                           |       |   |   |
| Outstanding at beginning of year | ** ** | **1,345,995**                  |       | 1,340,912 |   |
| Granted                          | ** ** | **—**                     | ** ** | **—** | ** ** |
| Exercised                        | ** ** | **—**                     | ** ** | **—** | ** ** |
| Forfeited                        | ** ** | **(1,295,997**                 | **)**      | **—** | ** ** |
| Outstanding at  period-end       | ** ** | **49,998**                     |       | 1,340,912 |   |
| Exercisable at  period-end       | ** ** | **—**                     | ** ** | **—** | ** ** |

 

23

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Compensation expense is recognized each quarter basedon the change in the market price of **DPL**common shares.

As of June 30, 2007 and 2006, liabilities recorded foroutstanding RSUs were $1.4 million and $35.7 million, respectively, which areincluded in “Other deferred credits” on the Condensed Consolidated BalanceSheets.  The decrease in the liability isdue to the executive litigation settlement and the forfeiture of 1.3 millionRSUs (see Note 10 to Condensed Consolidated Financial Statements).

The following table shows the assumptions used in theBlack-Scholes-Merton model to calculate the fair value of the non-vested RSUsduring the respective periods:
|                                       | ** ** | **Three Months Endin**g | ** ** | **Six Months Endin**g | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **June 30,**                 | ** ** | **June 30,**               | ** ** |
| ** **                            | ** ** | **2007**                          | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                  |       |                              |       |                            |       |   |   |   |   |
| Expected  Volatility                  |       | 15.7-43.5%                        |       | 7.3-25.4%                       |       | 10.6-43.5% |   | 7.3-28.6% |   |
| Weighted-average  expected volatility |       | 19.5%                             |       | 19.0%                           |       | 16.6% |   | 23.5% |   |
| Expected life  (in years)             |       | 0.1-3.1                           |       | 0.1-4.1                         |       | 0.1-3.3 |   | 0.1-4.3 |   |
| Expected  dividends                   |       | 3.5%                              |       | 3.8%                            |       | 3.5% |   | 3.8% |   |
| Weighted-average  expected dividends  |       | 3.5%                              |       | 3.8%                            |       | 3.5% |   | 3.8% |   |
| Risk-free interest rate               |       | 4.4-5.0%                          |       | 4.7-5.2%                        |       | 4.4-5.0% |   | 4.7-5.2% |   |

 

**PerformanceShares**

 

Under the EPIP, theBoard 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.

 

The schedule of non-vested performance share activityfor the six months ended June 30, 2007 follows:
|                                                                   | ** ** | **Number of** | ** ** | **Wei**ghted-Avg.   | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                        | ** ** | **Performance**    | ** ** | **Grant Date** | ** ** |
| **$ in millions (except share amounts)** | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Non-vested at  January 1, 2007                                    |       | 110,723            |       | $                   | 2.7        |   |
| Granted in first  half 2007                                       |       | 74,714             |       | 2.5                 |       |
| Vested in first  half 2007                                        |       | —             |       | —              |       |
| Forfeited in  first half 2007                                     |       | (14,172            | )          | (0.5                | )          |
| Non-vested at June 30,  2007                                      |       | 171,265            |       | $                   | 4.7        |   |

 
|                                  | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **June 30,**              | ** ** |
| ** **                       | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Performance  Shares:             |       |                           |       |   |   |
| Outstanding at beginning of year | ** ** | **154,768**                    |       | — |   |
| Granted                          | ** ** | **74,714**                     |       | 223,289 |   |
| Exercised                        | ** ** | **(22,462**                    | **)**      | — |   |
| Expired                          | ** ** | **(21,583**                    | **)**      | — |   |
| Forfeited                        | ** ** | **(14,172**                    | **)**      | — |   |
| Outstanding at  period-end       | ** ** | **171,265**                    |       | 223,289 |   |
| Exercisable at  period-end       |       | —                         |       | — |   |

 

24

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The following table reflects information aboutperformance share activity during the period:
| ** **                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                                                             | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average grant  date fair value of performance shares granted during the period |       | **$**                                           | **0.1**    |                                          | $          | — | ** ** | **$** | **2.5** |   | $ | 5.9 |   |
| Intrinsic value of  performance shares exercised during the period                      | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **1.3** |   | $ | — |   |
| Proceeds from  performance shares exercised during the period                           | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Tax benefit from  proceeds of performance shares exercised                              | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Fair value of  performance shares that vested during the period                         | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Unrecognized  compensation expense                                                      | ** ** | **$**                                           | **2.7**    |                                          | $          | 2.0 | ** ** | **$** | **2.7** |   | $ | 3.9 |   |
| Weighted average period  to recognize compensation expense (in years)                   |       | **1.5**                                         |       | 1.1                                           | ** ** | **1.5** |   | 1.1 |   |

 

Thefollowing table shows the assumptions used in the Monte Carlo Simulation tocalculate the fair value of the performance shares granted during the period:
|                                       | ** ** | **Three Months Ending  June 30,** | ** ** | **Six Months Ending  June 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                         | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                  |       |                                             |       |                                           |       |   |   |   |   |
| Expected  Volatility                  |       | 16.1%                                            |       | 20.3%                                          |       | 16.1-17.3% |   | 20.3% |   |
| Weighted-average  expected volatility |       | 16.1%                                            |       | 20.3%                                          |       | 16.5% |   | 20.3% |   |
| Expected life  (in years)             |       | 3.0                                              |       | 3.0                                            |       | 3.0 |   | 3.0 |   |
| Expected  dividends                   |       | 3.3%                                             |       | 3.7%                                           |       | 3.3-3.5% |   | 3.7% |   |
| Weighted-average  expected dividends  |       | 3.3%                                             |       | 3.7%                                           |       | 3.3% |   | 3.7% |   |
| Risk-free interest rate               |       | 4.7-4.9%                                         |       | 4.7%                                           |       | 4.5-4.9% |   | 4.7% |   |

 

**Restricted Shares**

 

Under the EPIP, the Board granted shares of **DPL** Restricted Shares to various executives.  The Restricted Shares are to be registered inthe executive’s name, receive dividends as declared and paid on all **DPL** common stock and will vest after a specified serviceperiod.

During the second quarter of 2007, 11,400restricted shares were awarded.
| $ in millions (except share amounts) | ** ** | **Number of  Restricted  Shares** | ** ** | **Weighted-Avg.  Grant Date  Fair Value** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|
| Non-vested at  January 1, 2007                                |       | 19,000                                 |       | $                                                   | 0.5        |   |
| Granted in first  half 2007                                   |       | 16,400                                 |       | 0.5                                                 |       |
| Vested in first  half 2007                                    |       | —                                 |       | —                                              |       |
| Forfeited in  first half 2007                                 |       | —                                 |       | —                                              |       |
| Non-vested at  June 30, 2007                                  |       | 35,400                                 |       | $                                                   | 1.0        |   |

 

|                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Restricted  Shares:              |       |                                          |       |   |   |
| Outstanding at beginning of year | ** ** | **19,000**                                    |       | — |   |
| Granted                          | ** ** | **16,400**                                    |       | — |   |
| Exercised                        | ** ** | **—**                                    |       | — |   |
| Forfeited                        | ** ** | **—**                                    |       | — |   |
| Outstanding at  period-end       | ** ** | **35,400**                                    |       | — |   |
| Exercisable at  period-end       |       | —                                        |       | — |   |

 

25

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The following table reflects information aboutrestricted share activity during the period:
| ** **                                                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                                                            | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  grant date fair value of restricted shares granted during the period |       | **$**                                           | **0.4**    |                                          | $          | — | ** ** | **$** | **0.5** |   | $ | — |   |
| Intrinsic value  of restricted shares exercised during the period                      | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Proceeds from  restricted shares exercised during the period                           | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Tax benefit from  proceeds of restricted shares exercised                              | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Fair value of  restricted shares that vested during the period                         | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Unrecognized  compensation expense                                                     | ** ** | **$**                                           | **0.9**    |                                          | $          | — | ** ** | **$** | **0.9** |   | $ | — |   |
| Weighted average  period to recognize compensation  expense (in years)                 |       | **2.7**                                         |       | —                                        | ** ** | **2.7** |   | — |   |

 

**Non-Employee Director Restricted Stock Units**

Underthe EPIP, as part of their annual compensation for service to **DPL** and **DP&L**, eachnon-employee Director received a $54,000 retainer in restricted stock units(RSUs) on the date of the annual meeting. The RSUs will become non-forfeitable on April 15 of the following yearbut, if the Director resigns, dies or retires prior to the April 15 vestingdate, the vested shares will be distributed on a pro rata basis.  The RSUs accrue quarterly dividends in theform of additional RSUs.  Upon vesting,the RSUs will become exercisable and will be distributed in **DPL** common shares, unless the Director chooses to deferreceipt of the shares until a later date. The RSUs are valued at the closing stock price on the day prior to thegrant and the compensation expense is recognized evenly over the vestingperiod.  
| $ in millions (except for share amounts) | ** ** | **Number of   Director  RSUs** | ** ** | **Weighted-Avg.  Grant Date  Fair Value** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------|------------|
| Non-vested at  January 1, 2007                                         |       | —                                   |       | $                                                   | —     |   |
| Granted in first  half 2007                                            |       | 13,552                                   |       | 0.4                                                 |       |
| Dividends  accrued in the first half 2007                              |       | 99                                       |       | —                                              |       |
| Vested in first  half 2007                                             |       | (3,204                                   | )          | (0.1                                                | )          |
| Forfeited in  first half 2007                                          |       | (1,553                                   | )          | —                                              |       |
| Non-vested at  June 30, 2007                                           |       | 8,894                                    |       | $                                                   | 0.3        |   |

 
|                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Restricted Stock  Units:         |       |                                          |       |   |   |
| Outstanding at beginning of year | ** ** | **—**                                    |       | — |   |
| Granted                          | ** ** | **13,552**                                    |       | — |   |
| Dividends accrued                | ** ** | **99**                                        | ** ** | — | ** ** |
| Exercised                        | ** ** | **(142**                                      | **)**      | — |   |
| Forfeited                        | ** ** | **(1,553**                                    | **)**      | — |   |
| Outstanding at  period-end       | ** ** | **11,956**                                    |       | — |   |
| Exercisable at  period-end       |       | —                                        |       | — |   |

 

26

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The following table reflects informationabout non-employee Director RSU activity during the period:

 
| ** **                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                                                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  grant date fair value of Director RSUs granted during the period |       | **$**                                           | **0.4**    |                                          | $          | — | ** ** | **$** | **0.4** |   | $ | — |   |
| Intrinsic value  of Director RSUs exercised during the period                      | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Proceeds from  Director RSUs exercised during the period                           | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Tax benefit from  proceeds of Director RSUs exercised                              | ** ** | **$**                                           | **—** |                                          | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Fair value of  Director RSUs that vested during the period                         | ** ** | **$**                                           | **0.1**    |                                          | $          | — | ** ** | **$** | **0.1** |   | $ | — |   |
| Unrecognized  compensation expense                                                 | ** ** | **$**                                           | **0.3**    |                                          | $          | — | ** ** | **$** | **0.3** |   | $ | — |   |
| Weighted average  period to recognize compensation expense (in years)              |       | **0.8**                                         |       | —                                        | ** ** | **0.8** |   | — |   |

 

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**8.     Long-Term Debt and Notes Payable**

**DPL Inc.**

 
| $ in millions   | ** ** | ** **                                      | ** **  | **At  June 30,  2007** | ** ** | **At  December 31,  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 2034 - 4.80% | ** **  | **137.8**                   |       | 137.8                           |       |
| DP&L -                     |       | Pollution  control series maturing 2034 - 4.80% | ** **  | **41.3**                    |       | 41.3                            |       |
| DP&L -                     |       | Pollution  control series maturing 2028 - 4.70% | ** **  | **35.3**                    |       | 35.3                            |       |
| ** **                     | ** ** | ** **                                      |        | **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                           |       |
| DPL Inc. -                     |       | Senior  Notes 8.00% Series due 2009             | ** **  | **175.0**                   |       | 175.0                           |       |
| DP&L -                     |       | Obligations  for capital leases                 | ** **  | **1.7**                     |       | 2.0                             |       |
| Unamortized  debt discount (a) | ** ** | **(1.8**                                        | **)**       | (2.0                        | )          |
| Total                          | ** ** | **$**                                           | **1,451.7** |                        | $          | 1,551.8                         |       |

 

----

*(a)**      ****DP&L’s****unamortized debt discount was $(1.2) million and$(1.2) million for June 30, 2007 and December 31, 2006, respectively.*

**DP&L**

 
| $ in millions                                              | ** ** | **At  June 30,  2007** | ** ** | **At  December 31,  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 2034 - 4.80%           | ** ** | **137.8**                   |       | 137.8                           |       |
| DP&L - Pollution control series maturing  2034 - 4.80%      |       | **41.3**                    |       | 41.3                            |       |
| DP&L - Pollution control series maturing  2028 - 4.70%      |       | **35.3**                    |       | 35.3                            |       |
| ** **                                                           | ** ** | **784.4**                   |       | 784.4                           |       |
|                                                                 |       |                        |       |                            |       |
| Obligations for  capital leases                                      | ** ** | **1.7**                     |       | 2.0                             |       |
| Unamortized debt  discount                                           | ** ** | **(1.2**                    | **)**      | (1.2                            | )          |
| Total                                                                | ** ** | **$**                       | **784.9**  |                            | $          | 785.2 |   |

 

At June 30, 2007, **DPL’s** scheduled maturities of long-termdebt, including capital lease obligations, over the next five years are $0.4million for the remainder of 2007, $100.7 million in 2008, $175.8 million in2009, $0.6 million in 2010 and $297.4 million in 2011.

At June 30, 2007, **DP&L’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five yearsare $0.4 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.  

During the first quarter of 2006, theOhio Department of Development (ODOD) awarded **DP&L**the ability to issue over the next three years up to $200 million of qualifiedtax-exempt financing from the ODOD’s 2005

28

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volume cap carryforward.  The financing is to be used to partially fundthe ongoing flue gas desulfurization (FGD) capital projects.  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**is considering issuing in conjunction with the OAQDA another series oftax-exempt bonds to finance the remaining qualifying solid waste disposalfacility costs at Miami Fort, Killen and Stuart Generating Stations.

On November 21, 2006, **DP&L** entered into a new $220 million unsecured revolvingcredit agreement replacing its $100 million facility.  This new agreement has a five-year term thatexpires November 21, 2011 and provides **DP&L** withthe ability to increase the size of the facility by an additional $50 millionat any time.  The facility contains onefinancial covenant:  **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 June 30, 2007,**DP&L**had no borrowings outstanding under this facility.  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 andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.  As of June 30, 2007, **DP&L**had no outstanding letters of credit against the facility.

During the second quarterof 2007, **DPL** entered into a short-term loan to **DP&L** for $105 million. There are no other inter-company debt collateralizations or debtguarantees between **DPL**, **DP&L** and their subsidiaries.  None of the debt obligations of **DPL** or **DP&L** areguaranteed or secured by affiliates and no cross-collateralization exists betweenany subsidiaries.

29

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**9.     Commitments andContingencies**

**Contractual Obligations and Commercial Commitments**

Weenter into various contractual obligations and other commercial commitmentsthat may affect the liquidity of our operations.  At June 30, 2007, these include:

**ContractualObligations**

 
| ** **                            | ** ** | **Payment Year** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| **$ in millions**           | ** ** | **Total**             | ** ** | **2007** | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **2012-  Thereafter** | ** ** |
| **DPL**                               |       |                  |       |   |   |   |   |   |   |   |   |
|                                  |       |                  |       |   |   |   |   |   |   |   |   |
| Long-term debt                        |       | $                     | 1,550.0    |   | $ | — |   | $ | 275.0 |   | $ | 297.4 |   | $ | 977.6 |   |
| Interest  payments                    |       | 1,050.3               |       | 47.8 |   | 170.7 |   | 144.0 |   | 687.8 |   |
| Pension and  postretirement payments  |       | 224.6                 |       | 11.0 |   | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                        |       | 2.5                   |       | 0.4 |   | 1.5 |   | 0.6 |   | — |   |
| Operating leases                      |       | 0.7                   |       | 0.3 |   | 0.3 |   | 0.1 |   | — |   |
| Coal contracts  (a)                   |       | 716.4                 |       | 195.9 |   | 362.8 |   | 157.7 |   | — |   |
| Limestone  contracts(a)               |       | 58.1                  |       | 1.0 |   | 9.5 |   | 10.9 |   | 36.7 |   |
| Reserve for  uncertain tax provisions |       | 41.2                  |       | 41.2 |   | — |   | — |   | — |   |
| Other  contractual obligations        |       | 465.6                 |       | 397.0 |   | 55.4 |   | 11.0 |   | 2.2 |   |
| Total contractual obligations         |       | $                     | 4,109.4    |   | $ | 694.6 |   | $ | 920.4 |   | $ | 668.2 |   | $ | 1,826.2 |   |
|                                  |       |                  |       |   |   |   |   |   |   |   |   |
| **DP&L**                          | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                  |       |                  |       |   |   |   |   |   |   |   |   |
| Long-term debt                        |       | $                     | 783.2      |   | $ | — |   | $ | — |   | $ | — |   | $ | 783.2 |   |
| Interest  payments                    |       | 552.4                 |       | 19.6 |   | 78.3 |   | 78.3 |   | 376.2 |   |
| Pension and  postretirement payments  |       | 224.6                 |       | 11.0 |   | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                        |       | 2.5                   |       | 0.4 |   | 1.5 |   | 0.6 |   | — |   |
| Operating leases                      |       | 0.7                   |       | 0.3 |   | 0.3 |   | 0.1 |   | — |   |
| Coal contracts  (a)                   |       | 716.4                 |       | 195.9 |   | 362.8 |   | 157.7 |   | — |   |
| Limestone  contracts(a)               |       | 58.1                  |       | 1.0 |   | 9.5 |   | 10.9 |   | 36.7 |   |
| Reserve for  uncertain tax provisions |       | 41.2                  |       | 41.2 |   | — |   | — |   | — |   |
| Other  contractual obligations        |       | 465.6                 |       | 397.0 |   | 55.4 |   | 11.0 |   | 2.2 |   |
| Total contractual obligations         |       | $                     | 2,844.7    |   | $ | 666.4 |   | $ | 553.0 |   | $ | 305.1 |   | $ | 1,320.2 |   |

 

----

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

Long-term debt:

 

**DPL’s** long-term debt as of June 30, 2007consists of **DP&L’s** firstmortgage bonds and tax-exempt pollution control bonds, **DPL** unsecured notes and includes currentmaturities and unamortized debt discounts.

**DP&L’s** long-term debt as of June 30,2007 consists of first mortgage bonds, tax-exempt pollution control bonds andincludes an unamortized debt discount.

SeeNote 8 of Notes to Condensed Consolidated Financial Statements.

Interest payments:

 

Interestpayments associated with the long-term debt described above.

Pension andpostretirement payments:

 

As ofJune 30, 2007, **DP&L** hadestimated future benefit payments as outlined in Note 6 of Notes to CondensedConsolidated Financial Statements.  Theseestimated future benefit payments are projected through 2016.

Capital leases:

 

As of June 30,2007, **DP&L** had two capitalleases that expire in November 2007 and September 2010.

Operating leases:

 

As of June 30,2007, **DPL** and **DP&L** had several operating leases withvarious terms and expiration dates.  Notincluded in this total is approximately $88,000 per year related toright-of-way agreements 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.

30

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Limestonecontracts:

 

**DP&L** has entered into alimestone contract to supply limestone for its generating facilities.

Reserve foruncertain tax positions:

 

On January 1, 2007, weadopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(FIN 48).  There was no significant impact to our overall results ofoperations, cash flows or financial position.  The total amount ofunrecognized tax benefits as of the date of adoption was $36.8 million and wehave recorded $3.5 million (net of tax) of accrued interest.  During the secondquarter ending June 30, 2007, we recorded an additional $0.9 million inaccrued interest resulting in a total reserve for uncertain tax positions of$41.2 million as of June 30, 2007.  None of the amount of unrecognized taxbenefits is due to uncertainty in the timing of deductibility.

 

Other contractualobligations:

 

As of June 30, 2007, **DPL**and **DP&L** had various othercontractual obligations including non-cancelable contracts to purchase goodsand services with various terms and expiration dates.

We enter into various commercial commitments, which may affect theliquidity of our operations.  At June 30,2007, 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 June 30, 2007, therewere no outstanding borrowings under this facility.

Guarantees: 

 

**DP&L** owns a4.9% equity ownership interest in an electric generation company.  As of June 30, 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 sale of the Darby Electric Peaking Station to American Electric Power andthe sale of the Greenville Electric Peaking Station to Buckeye Electric Power,Inc.  In both cases, **DPL**has agreed to guarantee the obligations of DPLE over a multiple year period asfollows:
| **$ in millions** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Darby                  |       | $        | 30.6       |     | $          | 23.0     |       | $        | 15.3       |   | $ | 7.7 |   |
|                   |       |     |       |     |       |     |       |     |       |
| Greenville             |       | $        | 14.8       |     | $          | 11.1     |       | $        | 7.4        |   | $ | 3.7 |   |

 

31

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**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 ourCondensed Consolidated Financial Statements, as prescribed by GAAP, 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, tax examinations and other matters discussed below, and tocomply with applicable laws and regulations, will not exceed the amountsreflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of June 30, 2007, cannot be reasonablydetermined.

**Employees**

 

Approximately 53%of our employees are under a collective bargaining agreement.

**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.

In September 2004, the Sierra Club filed a lawsuitagainst **DP&L**and the other owners of theStuart Generating Station in the United States District Court for the SouthernDistrict of Ohio for alleged violations of the Clean Air Act (CAA) and theStation’s operating permit.  **DP&L**, on behalf of all co-owners, is leading the defenseof this matter.  A sizable amount ofdiscovery has taken place, the first set of expert reports have been filed withadditional reports scheduled to be filed in September 2007.  Dispositive motions are to be filed inJanuary 2008.  No trial date has been setyet.

 

In February 2007, Ohio’s Regional Air PollutionControl Agency (RAPCA), issued a Notice of Violation (NOV) to **DP&L** with respect to an allegedly failed performancetest of one boiler in November 2006 for particulate matter at **DP&L’s** Hutchings Generating Station.  On June 29, 2007, the federal EnvironmentalProtection Agency Region V, issued an NOV to **DP&L**with respect to the same performance test and with respect to earlier tests forparticulates conducted in 1996 and 1998 for a different boiler at the same station.  Representatives from **DP&L**met with officials from EPA Region V and RAPCA on July 24, 2007 to discuss thereferenced performance tests, subsequent performance tests, and past andplanned operations at the station.  **DP&L** is unable to predict at this time what furtheractions, if any, will be taken by the US EPA or RAPCA with respect to theseNOVs.

**10.Executive Litigation**

On May 21, 2007,we settled the litigation with the three former executives.  As part ofthis settlement, the three former executives relinquished and dismissed alltheir claims including those related to certain deferred compensation, RSUs,MVE incentives, stock options and legal fees. The RSUs and stock optionsrelinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, **DPL** had accrued obligations of approximately $64.2 millionof which **DP&L** had accrued obligations ofapproximately $60.3 million.  Included in these amounts is approximately$3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million,all of these claims were settled.

As a result ofthis settlement, **DPL**realized anet pre-tax gain in continuing and discontinued operations of approximately$31.0 million and $8.2 million, respectively.  The net gain is comprisedof the reversal of the $64.2 million of accrued obligations less the $25million settlement.  The obligations related to the discontinuedoperations were associated with the management of **DPL’s**financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005with the sale of the financial asset portfolio. The $25 million settlement expense was allocated between continuing anddiscontinued operations based on

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the proportionateshare of continuing and discontinued obligations.  The following tableoutlines the components of **DPL’s**net pre-tax gain for continuing and discontinued operations:
| **Continuing operations:**            | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| Reversal of  accrued obligations      |       | $          | 50.8       |   |
| Allocated  settlement expense         |       | (19.8      | )          |
| Net gain from continuing operations   |       | $          | 31.0       |   |
|                                  |       |       |       |
| **Discontinued  operations:**         | ** ** | ** ** | ** ** |
| Reversal of  accrued obligations      |       | $          | 13.4       |   |
| Allocated  settlement expense         |       | (5.2       | )          |
| Net gain from discontinued operations |       | $          | 8.2        |   |

 

As a result ofthis settlement, **DP&L**realizeda net pre-tax gain in continuing operations of approximately $35.3million.  Accrued obligations associated with the former executives’litigation were recorded by **DP&L** sincethe obligations were associated with our non-qualified benefit plans. **DP&L** had no ownership of **DPL’s**discontinued financial asset portfolio business, therefore these liabilitieswere reversed and **DP&L’s** netpre-tax gain was recorded within continuing operations. The following tableoutlines the components of **DP&L’s**net gain:
| **Continuing operations:**          | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| Reversal of accrued  obligations    |       | $          | 60.3       |   |
| Allocated  settlement expense       |       | (25.0      | )          |
| Net gain from continuing operations |       | $          | 35.3       |   |

 

The $25 millionsettlement was funded from the sale of financial assets held in **DP&L’s** Master Trust Plan for deferred compensation.  As part of this transaction, **DPL** and **DP&L**recorded a $3.2 million realized gain which is reflected in investment income**.**

**11.  Insurance Recovery Claim**

OnApril 30, 2007, **DP&L** executeda settlement agreement with one of our insurers, Associated Electric & GasInsurance Services (AEGIS), under a fiduciary liability policy to recoup aportion of legal fees associated with our litigation against the three formerexecutives for $14.5 million.  This wasrecorded as a reduction to operation and maintenance expense during the quarterended June 30, 2007.

On May 16, 2007, **DPL** and **DP&L**notified one of our insurers, Energy Insurance Mutual Limited, under anumbrella fiduciary liability policy, of our intent to pursue a claim for legalfees that **DPL** and **DP&L**incurred in defending claims made by the three former executives.

**12.  Regulatory Matters**

We apply the provisions of SFAS 71 to our regulatedoperations.  This accounting standarddefines regulatory assets as the deferral of costs expected to be recovered infuture customer rates and regulatory liabilities as current cost recovery ofexpected future expenditures.

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Regulatory liabilities are reflected on the CondensedConsolidated Balance Sheet under the caption entitled “Other Deferred Credits”.  Regulatory assets and liabilities on theCondensed Consolidated Balance Sheet include:
| ** **                                        | ** ** | ** **            | ** ** | ** **       | ** ** | **At**            | ** ** | **At**                | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **Type of**      | ** ** | **Amortization** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                       | ** ** | **Recovery (a)** | ** ** | **Through**      | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Regulatory  Assets:**                           | ** ** | ** **            | ** ** | ** **       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Deferred recoverable income taxes                 |       | C/B                   |       | Ongoing          | ** ** | **$**             | **52.0**   |                  | $          | 53.1 |   |
| Pension and postretirement benefits               |       | C                     |       | Ongoing          | ** ** | **45.3**          |       | 47.1                  |       |
| Electric Choice systems costs                     |       | F                     |       | 2010             | ** ** | **11.9**          |       | 13.5                  |       |
| Regional transmission organization costs          |       | C                     |       | 2014             | ** ** | **10.7**          |       | 11.4                  |       |
| Deferred storm costs                              |       | C                     |       | 2008             | ** ** | **3.7**           |       | 5.4                   |       |
| PJM administrative costs                          |       | F                     |       | 2009             | ** ** | **3.8**           |       | 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             | ** ** | **1.2**           |       | 1.4                   |       |
| Other costs                                       | ** ** | ** **            |       |             |       | **3.5**           |       | 1.0                   |       |
| **Total regulatory assets**                       | ** ** | ** **            |       |             |       | **$**             | **140.4**  |                  | $          | 148.6 |   |
|                                              |       |                  |       |             |       |              |       |                  |       |
| **Regulatory  Liabilities:**                      | ** ** | ** **            | ** ** | ** **       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Asset retirement obligations - regulated property | ** ** | ** **            |       |             |       | **$**             | **88.4**   |                  | $          | 86.3 |   |
| Postretirement benefits                           | ** ** | ** **            |       |             |       | **7.3**           |       | 7.6                   |       |
| SECA net revenue subject to refund                | ** ** | ** **            |       |             |       | **20.6**          |       | 18.7                  |       |
| **Total regulatory liabilities**                  | ** ** | ** **            |       |             |       | **$**             | **116.3**  |                  | $          | 112.6 |   |

 

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| *(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.* |

 

**Regulatory Assets**

Weevaluate our regulatory assets each period and believe recovery of these assetsis probable.  We have received orrequested a return on certain regulatory assets for which we are currentlyrecovering 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.

Pensionand postretirement 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 been historicallyrecovered through rates.  This factor,combined with the historical precedents from the PUCO and the FERC, makesfuture rate recovery of these costs probable.

Electric Choicesystems costs represent costs incurred to modify the customerbilling system 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.

Regionaltransmission organization costs represent costs incurred tojoin a Regional 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 stormcosts include costs incurred by us to repair damage fromDecember 2004 and January 2005 ice storms. On July 12, 2006, the PUCO approved our tariff as proposed and we beganrecovering these deferred costs over a two-year period beginning August 1,2006.

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PJM administrative costscontain the administrative fees billed to us by PJM Interconnection, L.L.C.(PJM) as a member of PJM.  Pursuant to aPUCO order issued on January 25, 2006, these deferred costs will be recoveredover a 3-year period from retail 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 our next transmission rate case that will befiled at the FERC.  The timing of thiscase is uncertain at this time.

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.

**Regulatory Liabilities**

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.  We have 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 June 30, 2007, no ruling has been issued.  We received and paid these transitionalpayments from May 2005 through March 2006.

**13.****         Ownership of Facilities**

**DP&L**andother Ohio utilities have undivided ownership interests in seven electricgenerating facilities and numerous transmission facilities.  Certain expenses, primarily fuel costs forthe generating units, are allocated to the owners based on their energyusage.  The remaining expenses, as wellas investments in fuel inventory, plant materials and operating supplies, andcapital additions, are allocated to the owners in accordance with theirrespective ownership interests.  As ofJune 30, 2007, **DP&L** had $425.0 million ofconstruction in progress at such facilities.

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**DP&L’s**undividedownership interest in such jointly owned facilities at June 30, 2007 is asfollows:
| ** **                             | ** ** | **DP&L Share** | ** ** | **DP&L Investment** | ** ** |
|----------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Ownership**           | ** ** | **Production  Capacity**     | ** ** | **Gross Plant  in Service** | ** ** | **Accumulated  Depreciation** | ** ** | **Construction Work  in Progress** | ** ** |
| ** **                             | ** ** | **(%)**                 | ** ** | **(MW)**                     | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** |
| Production Units:                      |       |                    |       |                         |       |   |   |   |   |   |   |
| Beckjord Unit 6                        |       | 50.0                    |       | 207                          |       | 63 |   | 53 |   | 3 |   |
| Conesville Unit 4                      |       | 16.5                    |       | 129                          |       | 34 |   | 27 |   | 21 |   |
| East Bend Station                      |       | 31.0                    |       | 186                          |       | 197 |   | 127 |   | 1 |   |
| Killen Station                         |       | 67.0                    |       | 424                          |       | 419 |   | 246 |   | 150 |   |
| Miami Fort Units 7&8               |       | 36.0                    |       | 360                          |       | 264 |   | 101 |   | 55 |   |
| Stuart Station                         |       | 35.0                    |       | 839                          |       | 383 |   | 204 |   | 189 |   |
| Zimmer Station                         |       | 28.1                    |       | 365                          |       | 1,050 |   | 562 |   | 6 |   |
| Transmission (at  varying percentages) |       |                    |       |                         |       | 90 |   | 49 |   | 0 |   |

 

**DPL’s** and **DP&L** shares of operating costs associated with thejointly-owned generating facilities are included within the corresponding lineon the Condensed Consolidated Statements of Results of Operations and our shareof the investment in facilities is included in the Condensed ConsolidatedBalance Sheets.

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

Certainstatements contained in this report are “forward-looking statements” within themeaning 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 future economic performance, taking intoaccount the information currently available to management.  These statements are not statements of historicalfact and are typically identified by terms and phrases such as “anticipate,”“believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,”“may,” “plan,” “project,” “predict,” “will” and similar expressions.  Such forward-looking statements are subjectto risks and uncertainties, and investors are cautioned that outcomes andresults may vary materially from those projected due to various factors beyondDPL’s control, including but not limited to: abnormal or severe weather andcatastrophic weather-related damage; unusual maintenance or repairrequirements; changes in fuel costs and purchased power, coal, environmentalemissions, gas and other commodity prices; volatility and changes in marketsfor electricity and other energy-related commodities; increased competition andderegulation in the electric utility industry; increased competition in theretail generation market; changes in interest rates; state, federal and foreignlegislative and regulatory initiatives that affect cost and investmentrecovery, emission levels, rate structures or tax laws; changes in federaland/or state environmental laws and regulations to which DPL and itssubsidiaries are subject; the development of Regional TransmissionOrganizations, including the PJM to which DPL’s operating subsidiary has givencontrol of its transmission functions; changes in DPL’s purchasing processes,pricing, delays, contractor and supplier performance and availability;significant delays associated with large construction projects; growth in DPL’sservice territory and changes in demand and demographic patterns; changes inaccounting rules and the effect of accounting pronouncements issuedperiodically by accounting standard-setting bodies; financial marketconditions; the outcomes of litigation and regulatory investigations,proceedings or inquiries; general economic conditions; and the risks and otherfactors discussed in DPL’s filings with the Securities and Exchange Commission.

Forward-lookingstatements speak only as of the date of the document in which they aremade.  We disclaim any obligation orundertaking to provide any updates or revisions to any forward-lookingstatement to reflect any change in our expectations or any change in events, conditionsor circumstances on which the forward-looking statement is based. 

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**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**providingapproximately 99% of **DPL’s**totalconsolidated revenue and approximately 93% 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 process.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 andjointly-owned generation assets that is diversified as to fuel source, coststructure and operating characteristics. We are focused on the operatingefficiency of these power 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 collect in customer rates. We are focused on delivering electricity andmaintaining high standards of customer service and reliability in acost-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.  The role of theRTO is to administer an electric marketplace and ensure reliability of thetransmission grid.  In October 2004, **DP&L** successfully integrated its 1,000 miles ofhigh-voltage transmission into the PJM Interconnection, L.L.C. (PJM) RTO.  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 ofPJM, **DP&L** is subject to charges andcosts associated with PJM operations as approved by the Federal EnergyRegulatory Commission (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

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associated with thetransmission system to PJM’s members, including **DP&L**.  **DP&L** andother interested parties have the right to intervene and offercounter-proposals.

**UPDATES /OTHER MATTERS**

**Executive Litigation**

On May 21, 2007, wesettled the litigation with the three former executives.  As part of thissettlement, the three former executives relinquished and dismissed all theirclaims including those related to certain deferred compensation, RSUs, MVEincentives, stock options and legal fees. The RSUs and stock optionsrelinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, **DPL** had accrued obligations of approximately $64.2 millionof which **DP&L** had accrued obligations ofapproximately $60.3 million.  Included in these amounts is approximately$3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million,all of these claims were settled.

As a result of thissettlement, **DPL**realized a netpre-tax gain in continuing and discontinued operations of approximately $31.0million and $8.2 million, respectively.  The net gain is comprised of thereversal of the $64.2 million of accrued obligations less the $25 millionsettlement.  The obligations related to the discontinued operations wereassociated with the management of **DPL’s** financialasset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005with the sale of the financial asset portfolio. The $25 million settlement expense was allocated between continuing anddiscontinued operations based on the proportionate share of continuing anddiscontinued obligations.  The following table outlines the components of **DPL’s** net pre-tax gain for continuing anddiscontinued operations:
| **Continuing operations:**             |   |   |   |
|----------------------------------------|--------|--------|--------|
| Reversal of accrued obligations        |   | $      | 50.8   |   |
| Allocated settlement expense           |   | (19.8  | )      |
| Net gain from  continuing operations   |   | $      | 31.0   |   |
|                                   |   |   |   |
| **Discontinued operations:**           |   |   |   |
| Reversal of accrued obligations        |   | $      | 13.4   |   |
| Allocated settlement expense           |   | (5.2   | )      |
| Net gain from  discontinued operations |   | $      | 8.2    |   |

 

As a result of thissettlement, **DP&L**realized anet pre-tax gain in continuing operations of approximately $35.3 million. Accrued obligations associated with the former executives’ litigation wererecorded by **DP&L** since the obligationswere associated with our non-qualified benefit plans. **DP&L**had no ownership of **DPL’s**discontinued financial asset portfolio business, therefore these liabilitieswere reversed and **DP&L’s** netpre-tax gain was recorded within continuing operations. The following tableoutlines the components of **DP&L’s**net gain:
| **Continuing operations:**           | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Reversal of  accrued obligations     |       | $          | 60.3       |   |
| Allocated  settlement expense        |       | (25.0      | )          |
| Net gain from  continuing operations |       | $          | 35.3       |   |

 

The $25 millionsettlement was funded from the sale of financial assets held in **DP&L’s** Master Trust Plan for deferred compensation.  As part of this transaction, **DPL** and **DP&L**recorded a $3.2 million realized gain which is reflected in investment income**.**

**Sale of Corporate Aircraft**

On June 7, 2007, Miami Valley CTC, Inc. (indirect wholly-ownedsubsidiary of DPL), sold its corporate aircraft and associated inventory andparts for $7.4 million.  The net bookvalue of the assets being written down and subsequently sold were approximately$1.0 million and severance and other costs of approximately $0.4 million wereaccrued.  Miami Valley CTC, Inc. recordeda net gain on the sale of approximately $6.0 million for the quarter and thesix-month period ended June 30, 2007, which is included in **DPL’s**operation and maintenance expense.

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In relation to this sale, Miami Valley CTC, Inc.,placed in escrow approximately $2.2 million. These funds are listed as thecaption “Restricted funds held in trust” in the Condensed Consolidated BalanceSheet for **DPL**.  These funds were released from escrow on July12, 2007.

**Sale ofPeaking Units**

OnApril 25, 2007, DPL Energy, LLC, completed the sale of its Darby and Greenvilleelectric peaking generation facilities providing **DPL**with approximately $151 million in cash. Darby Station was sold to Columbus Southern Power Company, a utilitysubsidiary of American Electric Power Company (AEP), for approximately $102million in cash. Greenville Station was sold to Buckeye Power, Inc. forapproximately $49 million in cash. See Note 5 of the Notes to CondensedConsolidated Financial Statements.

**InsuranceRecovery Claim**

On April 30, 2007, **DP&L**executed a settlement agreement with one of our insurers, Associated Electric& Gas Insurance Services (AEGIS), under a fiduciary liability policy torecoup a portion of legal fees associated with our litigation against threeformer executives for $14.5 million. This was recorded as a reduction to operation and maintenance expenseduring the second quarter ended June 30, 2007.

On May 16, 2007, **DPL**and **DP&L**noticed one of our insurers, Energy Insurance Mutual Limited, under an umbrellafiduciary liability policy, of our intent to pursue a claim for legal fees that**DPL**and **DP&L** incurred in defending claims made by the three formerexecutives.

**Depreciation Study**

Depreciation expense iscalculated using the straight-line method, which depreciates the cost ofproperty over its estimated useful life. For **DPL’s** and **DP&L’s** generation, transmission, and distributionassets, straight-line depreciation is applied on an average annual compositebasis using group rates. With the addition of scrubbers at certain of itsgeneration facilities, **DP&L** hasundertaken an evaluation of its depreciation rates which it expects to becompleted during the third quarter of 2007. Management expects depreciationrates to decrease due to the extension of depreciation lives for certain of itsassets. The Public Utility Commission of Ohio would need to approve a change indepreciation rates for our regulated assets.

**Updates on Competition and Regulation**

**Ohio Matters**

SinceJanuary 2001, **DP&L’s** electriccustomers have been permitted to choose their retail electric generationsupplier.  **DP&L**continues to have the exclusive right to provide delivery service in its statecertified territory.  The PublicUtilities Commission of Ohio (PUCO) maintains jurisdiction over **DP&L’s** delivery of electricity, the standard offersupply service that customers receive if they do not choose an alternativeretail electricity supplier, and other rates and charges associated with theprovision of retail electric service.

As of June 30, 2007, fourunaffiliated marketers were registered as Competitive Retail Electric Service(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 providecustomers with an option to choose a competitive supplier to provide theirretail generation service should switching not reach 20% in each customerclass.  The 20% threshold has never beenreached.  Customers who elected to participatein the program have been grouped together and collectively bid out to CRESproviders.  The second of four rounds ofbidding for the 2007 program was conducted in June resulting in no bids beingreceived.  To date, the VEP process hasresulted in no customer switching. Future period effects cannot be determined at this time.

**Federal Matters**

On April 19, 2007, the FERC issued an Order with regard to theallocation of costs associated with new planned transmission facilities.  FERC ordered that the cost of new,high-voltage facilities be socialized across the PJM region and the costs ofnew facilities at lower voltages be assigned to the load centers that benefitfrom the new facilities.  The methodologyfor identifying beneficiaries has been set for hearing.  On April 19, 2007, the FERC issued an Orderrelating to the allocation of costs associated with existing transmissionfacilities, upholding the existing PJM rate design.  These Orders are subject to rehearing and theappeal process.  The financial impact ofthe order to socialize new, high-voltage facilities will be passed on as costsare incurred by utilities

39

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constructing such projects and will be reflected in PJM charges to **DP&L.**  Over time,this order is likely to increase PJM charges to **DP&L.**  Although the impact of cost allocation couldbe material, management believes these costs should be recoverable throughretail rates.

 

As a member of PJM, the value of **DP&L’s**generation capacity will be affected by changes in and the clearing results ofthe PJM capacity construct.  The newconstruct introduces a new Reliability Pricing Model (RPM) that changes the waygeneration capacity is priced and planned for by PJM. PJM held its first RPMauction during April 2007 for the 2007/2008 planning year and held its secondRPM auction during July 2007 for the 2008/2009 planning year.  **DP&L** doesnot expect a material impact on its results of operations, financial positionor cash flows due to the outcome of these auctions.  An additional auction will be held during2007 for the 2009/2010 planning year. The financial results and impact of this auction is unknown and willdepend on a number of factors including projections made by PJM as well asmarket participant bidding behavior.

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**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,**throughits captive insurance subsidiary, MVIC, has an actuarial calculated reserve forenvironmental matters.   We****evaluatethe potential liability related to probable losses quarterly and mayrevise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results ofoperations, financial position or cash flows.

**FINANCIALOVERVIEW**

As more fully discussed in later sections of this Form10-Q, the following were the significant themes and events for the quarter andsix months ended June 30, 2007:

·                  **DPL’s** revenues for the quarter and six months ended June 30,2007 increased 11% and 11%, respectively, over the same periods in 2006primarily due to weather driven retail sales volume, the rate stabilizationsurcharge and other regulated asset recovery riders.  **DPL’s**purchased power costs for the quarter and six months ended June 30, 2007increased****$46.2 million and $73.1 million, respectively,over the same periods in 2006.  Theincrease in purchased power volume was primarily the result of higher salesvolume and **DPL** and partneroperated generating facilities being less available than the same period of theprior year due to planned and unplanned outages.  In addition, we purchasepower when market prices are below the marginal costs associated with ourhigher cost generating facilities.

·                  **DPL’s** cash flows from operations for the six months endedJune 30, 2007 of $112.4 million were 16% lower than the cash flows fromoperations of $133.4 million for the same period of 2006 primarily due tochanges in working capital.

·                  **DPL**realized a net (pre-tax) gain in both continuing anddiscontinued operations of approximately $31.0 million and $8.2 million,respectively, resulting from the $25.0 million settlement of the litigationwith the three former executives.  Seenote 10 of the Notes to Condensed Consolidated Financial Statements.

·                  **DP&L’s** revenues for the quarter and six months endedJune 30, 2007 increased 11% and 11%, respectively, compared to the same periodsin 2006 resulting from the weather driven sales volume, rate stabilizationsurcharge and other regulated asset recovery riders.  **DP&L’s**purchased power costs for the quarter and six months ended June 30, 2007,increased $45.4 million and $72.5 million, respectively, over the same periodsin 2006.  The increase in purchased power volume was primarily the result of highersales volume and **DP&L** andpartner operated generating facilities being less available than the sameperiod of the prior year 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** cash flows from operations for the six monthsended June 30, 2007 of $137.9 million were 21% lower than the cash flows fromoperations of $175.2 million for the same period in 2006 primarily due tochanges in working capital.

·                  **DP&L** realized a net (pre-tax) gain of approximately$35.3 million resulting from the settlement of the litigation with the threeformer executives.  See Note 10 of theNotes to Condensed Consolidated Financial Statements.

·                  **DP&L** had borrowings against the $220 millionrevolving line of credit facility of $65 million from February 26, 2007 throughMay 28, 2007 and of $30 million from April 12, 2007 through May 13, 2007.  At June 30, 2007, there were no outstandingborrowings against the revolving credit facility.

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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  June 30, ** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**               | ** ** | **2007**                                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                                                  |       |                                          |       |   |   |   |   |
| **Revenues:**                             | ** ** | ** **                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Retail                                    | ** ** | **$**                                                 | **284.2**  |                                          | $          | 258.2 | ** ** | **$** | **588.7** |   | $ | 541.5 |   |
| Wholesale                                 | ** ** | **30.4**                                              |       | 30.5                                          | ** ** | **87.1** |   | 67.9 |   |
| RTO ancillary                             | ** ** | **25.8**                                              |       | 17.4                                          | ** ** | **41.5** |   | 35.1 |   |
| Other revenues, net of  fuel costs        | ** ** | **2.7**                                               |       | 2.9                                           | ** ** | **5.5** |   | 5.6 |   |
| Total revenues                            | ** ** | **$**                                                 | **343.1**  |                                          | $          | 309.0 | ** ** | **$** | **722.8** |   | $ | 650.1 |   |
|                                      |       |                                                  |       |                                          |       |   |   |   |   |
| Less: Fuel                                | ** ** | **$**                                                 | **63.5**   |                                          | $          | 78.6 | ** ** | **$** | **153.8** |   | $ | 162.8 |   |
|  Purchased power  (a)                | ** ** | **83.2**                                              |       | 37.0                                          | ** ** | **135.4** |   | 62.3 |   |
| Gross margins (b)                         | ** ** | **$**                                                 | **196.4**  |                                          | $          | 193.4 | ** ** | **$** | **433.6** |   | $ | 425.0 |   |
|                                      |       |                                                  |       |                                          |       |   |   |   |   |
| Gross margins as a percentage of revenues | ** ** | **57.2**                                              | **%**      | 62.6                                          | %          | **60.0** | **%** | 65.4 | % |
|                                      |       |                                                  |       |                                          |       |   |   |   |   |
| **Operating income**                      | ** ** | **$**                                                 | **69.4**   |                                          | $          | 55.9 | ** ** | **$** | **172.9** |   | $ | 159.1 |   |
|                                      |       |                                                  |       |                                          |       |   |   |   |   |
| **Basic Earnings per share:**             | ** ** | ** **                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                     | ** ** | **$**                                                 | **0.50**   |                                          | $          | 0.20 | ** ** | **$** | **0.98** |   | $ | 0.63 |   |
| Discontinued operations                   | ** ** | **0.04**                                              |       | —                                        | ** ** | **0.09** |   | 0.07 |   |
| Net income                                | ** ** | **$**                                                 | **0.54**   |                                          | $          | 0.20 | ** ** | **$** | **1.07** |   | $ | 0.70 |   |

 

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| *(a)* | * * | *Purchased power includes RTO ancillary charges of  $17.0 million and $12.1 million for the quarter ended June 30, 2007 and 2006,  respectively. Purchased power includes RTO ancillary charges of $29.4 million  and $24.3 million for the six months ended June 30, 2007 and 2006,  respectively.*              |
|-------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | * * | *For purposes of discussing operating results, we  present and discuss gross margins. This format is useful to investors because  it allows analysis and comparability of operating trends and includes the  same information that is used by management to make decisions regarding our  financial performance.* |

 

**DPL Inc.– Revenues**

Retailcustomers, especially residential and commercial customers, consume moreelectricity on warmer and colder days. Therefore, **DPL’s**retail sales volume is impacted by the number of heating and cooling degreedays occurring during a year.  Since **DPL** plans to utilize its internal generating capacity tosupply its retail customers’ needs first, increases in retail demand willdecrease the volume of internal generation available to be sold in thewholesale market and vice versa.

Thewholesale market covers a multi-state area and settles on an hourly basisthroughout the year. Factors impacting **DPL’s** wholesalesales volume each hour of the year include wholesale market prices, **DPL’s** retail demand, retail demand elsewhere throughout theentire wholesale market area, **DPL** and non-**DPL** plants’ availability to sell into the wholesale marketand weather conditions across the multi-state region. **DPL’s**plan is to make wholesale sales when market prices allow for the economicoperation of its generation facilities not being utilized to meet its retaildemand.

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|                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**      | ** ** | **2007 vs. 2006**                     | ** ** | **2007 vs. 2006**                   | ** ** |
|                             |       |                                            |       |                                          |       |
| **Retail**                       | ** ** | ** **                                      | ** ** | ** **                                    | ** ** |
| Rate                             |       | $                                               | 11.5       |                                          | $          | 17.8 |   |
| Volume                           |       | 15.4                                            |       | 30.5                                          |       |
| Other miscellaneous              |       | (0.9                                            | )          | (1.1                                          | )          |
| **Total  retail change**         |       | $                                               | 26.0       |                                          | $          | 47.2 |   |
|                             |       |                                            |       |                                          |       |
| **Wholesale**                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** |
| Rate                             |       | $                                               | 5.4        |                                          | $          | 11.1 |   |
| Volume                           |       | (5.5                                            | )          | 8.1                                           |       |
| **Total  wholesale change**      |       | $                                               | (0.1       | )                                             | $          | 19.2 |   |
|                             |       |                                            |       |                                          |       |
| **Other**                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** |
| RTO services                     |       | $                                               | 8.4        |                                          | $          | 6.4 |   |
| Other                            |       | (0.2                                            | )          | (0.1                                          | )          |
| **Total other  revenues change** |       | $                                               | 8.2        |                                          | $          | 6.3 |   |
| ** **                       | ** ** | ** **                                      | ** ** | ** **                                    | ** ** |
| **Total  revenues change**       |       | $                                               | 34.1       |                                          | $          | 72.7 |   |

 

For the quarter endedJune 30, 2007, revenues increased $34.1 million, or 11% to $343.1 million from$309.0 million for the same period in the prior year.  This increase wasprimarily the result of higher average rates for retail and wholesale, higherretail sales volume and an increase in RTO ancillary revenue.  Retailrevenues increased $26.0 million, or 10%, resulting from a 6% increase inweather driven sales volume as total degree days increased 18% and a 4%increase in average retail rates related to the Rate Stabilization Plansurcharge and other regulated asset recovery riders.  These increasesresulted in a $15.4 million sales volume variance and a $11.5 million pricevariance.  Wholesale revenue remainedflat for the second quarter of 2007 compared to the same period of the prioryear resulting from lower wholesale sales volume, partially offset by higheraverage market rates.  The decrease in wholesale sales volume of 123 GWhresulted in an unfavorable sales volume variance of $5.5 million which waspartially offset by a 22% increase in average market rates resulting in $5.4million price variance.  For the secondquarter of 2007, the RTO ancillary revenues increased $8.4 million compared tothe second quarter of 2006 primarily resulting from $4.3 million realized fromthe PJM capacity auction, $1.8 million of PJM transmission congestion creditsand $1.0 million from the sale of financial transmission rights (FTRs). RTOancillary revenues primarily consist of compensation for use of **DP&L’s** transmission assets, regulationservices, reactive supply and operating reserves.  These revenues are substantially offset byRTO ancillary charges included in purchased power costs.

For the six months endedJune 30, 2007, revenues increased $72.7 million, or 11% to $722.8 million from$650.1 million for the same period in the prior year.  This increase wasprimarily the result of higher average rates and sales volume for both retailand wholesale.  Retail revenues increased $47.2 million resulting from a6% increase in weather driven sales volume as total degree days increased 16%and a 3% increase in average retail rates related to the Rate StabilizationPlan surcharge and other regulated asset recovery riders.  These increasesresulted in a $30.5 million sales volume variance and a $17.8 million pricevariance.  For the six months ended June30, 2007, wholesale revenue increased $19.2 million over the same period of theprior year primarily as a result of a 12% increase in sales volume (178 GWh)and a 15% increase in wholesale average rates.  These increases resultedin an $11.1 million sales volume variance and an $8.1 million price volumevariance for wholesale revenues.  For the six months ended June 30, 2007,the RTO ancillary revenues increased $6.4 million compared to the same periodin 2006 primarily resulting from $4.3 million realized from the PJM capacityauction, $1.8 million of PJM transmission congestion credits and $2.4 millionfrom the sale of financial transmission rights (FTRs), partially offset by anadjustment of $2.8 million for Seams Elimination Cost Adjustment (SECA). RTO ancillary revenues primarily consist of compensation for use of **DP&L’s** transmission assets, regulationservices, reactive supply and operating reserves.  These revenues are substantially offset byRTO ancillary charges included in purchased power costs.

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

For the second quarter of 2007, gross margin of $196.4million increased $3.0 million, or 2%, from $193.4 million in the secondquarter of 2006.  As a percentage oftotal revenues, gross margin decreased to 57.2% in

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the second quarter of2007 compared to 62.6% in the second quarter of 2006.  This result reflects the favorable impact ofthe increase in retail revenues and lower fuel costs, offset by increasedpurchased power costs.  Fuel costs, whichinclude coal, gas, oil and emission allowance costs, decreased by $15.1million, or 19%, in the second quarter of 2007 compared to the same period in 2006due to lower average fuel prices and a 16% (629 GWh) decrease in generationoutput.  Purchased power increased $46.2million in the second quarter of 2007 compared to the same period in 2006primarily resulting from increased charges of $34.5 million relating to higherpurchased power volume (685 GWh) and $6.9 million increase due to higheraverage market rates.  The increase in purchased power volume wasprimarily the result of increased sales volume and partner operated generatingfacilities being less available compared to the same period of the prior yeardue to planned and unplanned outages.  In addition, we purchase power whenmarket prices are below the marginal costs associated with our higher costgenerating facilities.

For the six months endedJune 30, 2007, gross margin of $433.6 million increased $8.6 million, or 2%,from $425.0 million compared to the same period in 2006.  As a percentage of total revenues, grossmargin decreased to 60.0% in 2007 compared to 65.4% in 2006.  This result reflects the favorable impact ofboth retail and wholesale revenues discussed above and lower fuel costs offsetby increased purchased power costs.  Fuelcosts, which include coal, gas, oil and emission allowance costs, decreased by$9.0 million, or 6%, for the six months ended June 30, 2007 compared to thesame period in 2006 primarily due to a 7% decrease in generation output (580GWh), partially offset by an increase in average fuel prices.  Purchased power increased $73.1 million forthe six months ended June 30, 2007 compared to the same period in 2006primarily resulting from increased charges of $56.9 million relating to higherpurchased power volume (1,148 GWh) and $11.1 million increase due to higheraverage market rates.  The increase inpurchased power volume was primarily the result of increased sales volume andpartner operated generating facilities being less available compared to theprior year due to planned and unplanned outages.  In addition, we purchasepower when market prices are below the marginal costs associated with ourhigher cost generating facilities.

**DPLInc.**–**Operation andMaintenance**
|                                                              | ** ** | **Three Months  Ended**     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**           | ** ** | **June 30,**              | ** ** |
| **$ in millions**                                  | ** ** | **2007 vs. 2006** | ** ** | **2007 vs. 2006**    | ** ** |
| Legal costs                                                  |       | $                           | 0.3        |                           | $          | 4.3 |   |
| Mark-to-market adjustments of restricted stock units  (RSUs) |       | (0.5                        | )          | 2.3                            |       |
| Power production costs                                       |       | 12.0                        |       | 14.2                           |       |
| Service operations                                           |       | 1.3                         |       | 1.9                            |       |
| Long-term and other incentive compensation                   |       | —                      |       | (2.5                           | )          |
| MVIC reserve adjustment                                      |       | (2.0                        | )          | (2.0                           | )          |
| Insurance settlement                                         |       | (14.5                       | )          | (14.5                          | )          |
| Gain on sale of corporate aircraft                           |       | (6.0                        | )          | (6.0                           | )          |
| Other, net                                                   |       | 0.3                         |       | 0.1                            |       |
| **Total operation and maintenance expense**                  |       | $                           | (9.1       | )                              | $          | (2.2 | ) |

 

For the quarter ended June 30, 2007, operation andmaintenance expense decreased $9.1 million, or 13%, compared to the same periodin 2006 primarily resulting from a $14.5 million insurance settlementreimbursing us for legal fees relating to the litigation with the three formerexecutives, the gain on the sale of the corporate aircraft of $6.0 million andan actuarial adjustment reducing our MVIC reserve by $2.0 million, partiallyoffset by increased power production costs largely related to boilermaintenance of $6.6 million and other power production maintenance costs of$5.4 million.

For the six months ended June 30, 2007, operation andmaintenance expense decreased $2.2 million, or 2%, compared to the same periodin 2006 primarily resulting from a $14.5 million insurance settlementreimbursing us for legal fees relating to the litigation with the three formerexecutives, the gain on sale of the corporate aircraft of $6.0 million and anactuarial adjustment of $2.0 million, partially offset by increased powerproduction costs largely related to boiler maintenance of $7.1 million andother power production maintenance costs of $7.1 million and increased legalcosts of $4.3 million related to the litigation with the three formerexecutives.

**DPL Inc. – Depreciation and Amortization**

For the quarter and six months ended June 30, 2007, depreciationand amortization expense decreased $2.7 million and $6.1 million, respectively,compared to the same periods in 2006 primarily reflecting the absence ofdepreciation on the peaking units, the corporate aircraft becoming fullydepreciated and the impact of asset retirements.  These decreases were partially offset byincreased depreciation relating to the increased plant balances.

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

Forthe quarter and six months ended June 30, 2007, amortization of regulatoryassets increased $0.8 million and $2.6 million, respectively, compared to thesame period in 2006.  These increasesreflect the amortization of costs incurred to accommodate unbundled rates andelectric choice 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.

## **DPL Inc.**–**Investment Income**

For the quarter endedJune 30, 2007, investment income increased $0.8 million to $5.3 million from$4.5 million for the same period in 2006. This increase was primarily the result of $3.2 million realized gainsfrom the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation used for the settlement payment tothe three former executives, partially offset by lower interest income relatingto lower cash and short-term investment balances in 2007 compared to 2006.

For the six months endedJune 30, 2007, investment income decreased $2.6 million to $8.3 million from$10.9 million for the same period in 2006. This decrease was primarily the result of lower interest income relatingto lower cash and short-term investment balances in 2007 compared to 2006,partially offset by $3.2 million realized gains from the sale of financialassets held in **DP&L’s** Master Trust Plan fordeferred compensation used for the settlement payment to the three formerexecutives.

**DPL Inc. – Net Gain on Settlement of Executive Litigation**

On May 21, 2007, wesettled the litigation with the three former executives.  In exchange for a payment of $25 million, thethree former executives relinquished and dismissed all of their claimsincluding those related to deferred compensation, RSUs, MVE incentives, stockoptions and legal fees.  As a result ofthis settlement, **DPL**realized anet pre-tax gain in continuing and discontinued operations of approximately$39.2 million.  See Note 10 of Notes toCondensed Consolidated Financial Statements.

**DPL Inc.**–**Interest Expense**

Forthe quarter ended June 30, 2007, interest expense decreased $6.5 million or 25%compared to the same period in 2006 primarily from lower interest of $4.6million associated with the redemption of **DPL** debt ($225million 8.25% Senior Note) and $2.9 million of greater capitalized interestthan the prior year mostly relating to increased pollution control capitalexpenditures.  These decreases werepartially offset by $1.2 million of interest expense associated with **DP&L’s** new $100 million 4.8% Series pollution controlbonds issued September 13, 2006.

Forthe six months ended June 30, 2007, interest expense decreased $9.7 million or19% compared to 2006 primarily from $5.7 million of greater capitalizedinterest than the prior year mostly relating to increased pollution controlcapital expenditures; and lower interest of $6.2 million from redemption of **DPL** debt ($225 million 8.25% Senior Note).  These decreases were partially offset by $2.4million of interest expense associated with **DP&L’s**new $100 million 4.8% Series pollution control bonds issued September 13, 2006and $1.1 million of interest expense associated with **DP&L’s**short-term borrowing of $95 million from its unsecured revolving creditagreement of $220 million.

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

For the quarter endedJune 30, 2007, other deductions of $0.2 million changed from $0.6 million ofother income in 2006 primarily resulting from a refund of tax penalties in 2006.

For the six months endedJune 30, 2007, other income of $0.6 million increased from $0.3 million ofother income in 2006 primarily resulting from the sale of emission allowancesand gains realized on the expiration of forward contracts partially offset by arefund of tax penalties in 2006.

## **DPL Inc. – Income Tax Expense**

For the secondquarter and six months ended June 30, 2007, income taxes increased $20.0million and $21.3 million, respectively, compared to the same periods in 2006,primarily reflecting an increase in pre-tax book income.

**DPL Inc. –Discontinued Operations**

For the quarter endedJune 30, 2007, discontinued operations increased $5.1 million compared to thesame period in 2006, primarily resulting from the net (pre-tax) gain of $8.2million realized from the settlement of the litigation with the three formerexecutives less associated income taxes.

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For the six months endedJune 30, 2007, discontinued operations increased $2.4 million compared to thesame period in 2006 primarily resulting from the net (pre-tax) gain of $8.2million realized from the settlement of the litigation with the three formerexecutives less associated income taxes. This increase was partially offset by a decrease in the deferred gainsof $5.0 million relating to the financial asset portfolio realized during 2007compared to the same period of the prior year less associated income taxes.

See Note 3 and Note 10 ofthe Notes to Condensed Consolidated Financial Statements.

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

**IncomeStatement Highlights – DP&L**

|                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       |       |                                            |       |                                          |       |   |   |   |   |
| Revenues:                                  |       |                                            |       |                                          |       |   |   |   |   |
| Retail                                     | ** ** | **$**                                           | **246.3**  |                                          | $          | 225.7 | ** ** | **$** | **518.1** |   | $ | 476.7 |   |
| Wholesale                                  | ** ** | **69.0**                                        |       | 63.7                                          | ** ** | **159.0** |   | 134.1 |   |
| RTO ancillary                              | ** ** | **25.9**                                        |       | 17.3                                          | ** ** | **41.6** |   | 35.0 |   |
| Total revenues                             | ** ** | **$**                                           | **341.2**  |                                          | $          | 306.7 | ** ** | **$** | **718.7** |   | $ | 645.8 |   |
|                                       |       |                                            |       |                                          |       |   |   |   |   |
| Less: Fuel                                 |       | **$**                                           | **62.3**   | ** **                                    | $          | 76.2 |   | **$** | **151.8** | ** ** | $ | 160.1 |   |
| Purchased power  (a)                       |       | **83.8**                                        | ** ** | 38.4                                          |       | **136.5** | ** ** | 64.0 |   |
| Gross margins  (b)                         | ** ** | **$**                                           | **195.1**  |                                          | $          | 192.1 | ** ** | **$** | **430.4** |   | $ | 421.7 |   |
|                                       |       |                                            |       |                                          |       |   |   |   |   |
| Gross margins as  a percentage of revenues | ** ** | **57.2**                                        | **%**      | 62.6                                          | %          | **59.9** | **%** | 65.3 | % |
|                                       |       |                                            |       |                                          |       |   |   |   |   |
| Operating income                           | ** ** | **$**                                           | **59.7**   |                                          | $          | 72.7 | ** ** | **$** | **174.4** |   | $ | 188.2 |   |

 

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| *(a)* | * * | *Purchased power includes RTO ancillary charges of  $17.0 million and $12.1 million for the quarter ended June 30, 2007 and 2006,  respectively. Purchased power includes RTO ancillary charges of $29.4 million  and $24.3 million for the six months ended June 30, 2007 and 2006,  respectively.*             |
|-------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | * * | *For purposes of discussing operating results, we  present and discuss gross margins. This format is useful to investors because  it allows analysis and comparability of operating trends and includes the  same information that is used by management to make decisions regarding our  financial performance* |

*.*

**DP&L– Revenues**

Retailcustomers, especially residential and commercial customers, consume moreelectricity on warmer and colder days. Therefore, **DP&L’s**retail sales volume is impacted by the number of heating and cooling degreedays occurring during a year.  Since **DP&L** plans to utilize its internal generating capacityto supply its retail customers’ needs first, increases in retail demand willdecrease the volume of internal generation available to be sold in the wholesalemarket and vice versa.

Thewholesale market covers a multi-state area and settles on an hourly basisthroughout the year. Factors impacting **DP&L’s**wholesale sales volume each hour of the year include wholesale market prices, **DP&L’s** retail demand, retail demand elsewhere throughoutthe entire wholesale market area, **DP&L** andnon-**DP&L** plants’ availability to sellinto the wholesale market and weather conditions across the multi-state region.**DP&L’s** plan is to make wholesalesales when market prices allow for the economic operation of its generationfacilities not being utilized to meet its retail demand.

46

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|                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions** | ** ** | **2007 vs. 2006**                     | ** ** | **2007 vs. 2006**                   | ** ** |
|                        |       |                                            |       |                                          |       |
| **Retail**                  |       |                                            |       |                                          |       |
| Rate                        |       | $                                               | 8.1        | ** **                                    | $          | 15.7 |   |
| Volume                      |       | 13.4                                            |       | 26.8                                          |       |
| Other miscellaneous         |       | (0.9                                            | )          | (1.1                                          | )          |
| **Total  retail change**    | ** ** | **$**                                           | **20.6**   |                                          | **$**      | **41.4** | ** ** |
|                        |       |                                            |       |                                          |       |
| **Wholesale**               |       |                                            |       |                                          |       |
| Rate                        |       | $                                               | 16.8       |                                          | $          | 9.0 |   |
| Volume                      |       | (11.5                                           | )          | 15.9                                          |       |
| **Total  wholesale change** | ** ** | **$**                                           | **5.3**    |                                          | **$**      | **24.9** | ** ** |
|                        |       |                                            |       |                                          |       |
| **RTO ancillary**           |       |                                            |       |                                          |       |
| RTO services                |       | $                                               | 8.6        |                                          | $          | 6.6 |   |
| ** **                  | ** ** | ** **                                      |       | ** **                                    | ** ** |
| **Total  revenues change**  | ** ** | **$**                                           | **34.5**   |                                          | **$**      | **72.9** | ** ** |

 

For the quarter endedJune 30, 2007, revenues increased $34.5 million, or 11%, to $341.2 million from$306.7 million for the same period in the prior year.  This increase wasprimarily the result of higher average rates for retail and wholesale sales,higher retail sales volume and an increase in RTO ancillary revenue. Retail revenues increased $20.6 million, or 9%, resulting from a 6% increase inweather driven sales volume as total degree days increased 18% and a 3%increase in average retail rates related to the Rate Stabilization Plansurcharge and other regulated asset recovery riders.  These increasesresulted in a $13.4 million sales volume variance and a $8.1 million pricevariance.  Wholesale revenue increased$5.3 million for the second quarter of 2007 compared to the same period of theprior year resulting from higher average market rates, partially offset by lowerwholesale sales volume.  The increase in average market rates of 32%resulted in a $16.8 million price variance, partially offset by a decrease inwholesale sales volume of 123 GWh resulting in an unfavorable sales volumevariance of $11.5 million.  For thesecond quarter of 2007, the RTO ancillary revenues increased $8.6 millioncompared to the second quarter of 2006 primarily resulting from $4.3 millionrealized from the PJM capacity auction, $1.8 million of PJM transmissioncongestion credits and $1.0 million from the sale of financial transmissionrights (FTRs). RTO ancillary revenues primarily consist of compensation for useof **DP&L’s** transmission assets,regulation services, reactive supply and operating reserves.  These revenues are substantially offset byRTO ancillary charges included in purchased power costs.

For the six months endedJune 30, 2007, revenues increased $72.9 million, or 11%, to $718.7 million from$645.8 million for the same period in the prior year.  This increase wasprimarily the result of higher average rates and greater sales volumes for bothretail and wholesale customers.  Retail revenues increased $41.4 millionresulting from a 6% increase in weather driven sales volume as total degreedays increased 16% and a 3% increase in average retail rates related to theRate Stabilization Plan surcharge and other regulated asset recovery riders. These increases resulted in a $26.8 million sales volume variance and a$15.7 million price variance.  For thesix months ended June 30, 2007, wholesale revenue increased $24.9 million overthe same period of the prior year primarily as a result of a 12% increase insales volume (178 GWh) and an 6% increase in wholesale average rates. These increases resulted in a $15.9 million sales volume variance and a $9.0million price volume variance for wholesale revenues.  For the six monthsended June 30, 2007, the RTO ancillary revenues increased $6.6 million comparedto the same period in 2006 primarily resulting from $4.3 million realized fromthe PJM capacity auction, $1.8 million of PJM transmission congestion creditsand $2.4 million from the sale of financial transmission rights (FTRs),partially offset by an adjustment of $2.8 million for Seams Elimination CostAdjustment (SECA).  RTO ancillary revenues primarily consist of compensationfor use of **DP&L’s** transmissionassets, regulation services, reactive supply and operating reserves.  These revenues are substantially offset byRTO ancillary charges included in purchased power costs.

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

For the second quarter of2007, gross margin of $195.1 million increased $3.0 million, or 2%, from $192.1million in the second quarter of 2006. As a percentage of total revenues, gross margin decreased to 57.2% inthe second quarter of 2007 compared to 62.6% in the second quarter of2006.  This result reflects the favorableimpact of the increase in revenues and lower fuel costs, offset by increasedpurchased power costs.  Fuel costs, whichinclude coal, gas, oil and emission allowance costs, decreased by $13.9million, or 18%, in the second quarter of 2007 compared to the same period in2006 due to lower average fuel prices and a 16% (629 GWh) decrease ingeneration output.  Purchased powerincreased $45.4 million in the second quarter of 2007

47

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compared to the sameperiod in 2006 primarily resulting from increased charges of $39.6 millionrelating to higher purchased power volume (685 GWh) and $5.8 million increasedue to higher average market rates.  The increase in purchased power volume wasprimarily the result of increased sales volume and partner operated generatingfacilities being less available compared to the same period of the prior yeardue to planned and unplanned outages.  In addition, we purchase power whenmarket prices are below the marginal costs associated with our higher costgenerating facilities.

For the six months endedJune 30, 2007, gross margin of $430.4 million increased $8.7 million, or 2%,from $421.7 million compared to the same period in 2006.  As a percentage of total revenues, grossmargin decreased to 59.9% in 2007 compared to 65.3% in 2006.  This result reflects the favorable impact ofboth retail and wholesale revenues discussed above and lower fuel costs offsetby increased purchased power costs.  Fuelcosts, which include coal, gas, oil and emission allowance costs, decreased by$8.3 million, or 5%, for the six months ended June 30, 2007 compared to thesame period in 2006 primarily due to a 7% decrease in generation output (580GWh), partially offset by an increase in average fuel prices.  Purchased power increased $72.5 million forthe six months ended June 30, 2007 compared to the same period in 2006primarily resulting from increased charges of $62.2 million relating to higherpurchased power volume (1,148 GWh) and $10.3 million increase due to higheraverage market rates.  The increase inpurchased power volume was primarily the result of increased sales volume andpartner operated generating facilities being less available compared to theprior year due to planned and unplanned outages.  In addition, we purchasepower when market prices are below the marginal costs associated with ourhigher cost generating facilities.

**DP&L****– Operation and Maintenance**
|                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| **$ in millions**                                  | ** ** | **2007 vs. 2006**           | ** ** | **2007 vs. 2006**                   | ** ** |
| Mark-to-market  adjustments of restricted stock units (RSUs) |       | $                                     | (0.5       | )                                             | $          | 2.1 |   |
| Power production  costs                                      |       | 12.0                                  |       | 14.2                                          |       |
| Low income  payment program                                  |       | 0.8                                   |       | 1.5                                           |       |
| Service operations                                           |       | 1.3                                   |       | 1.9                                           |       |
| Long-term and  other incentive compensation                  |       | —                                |       | (2.4                                          | )          |
| Legal fees                                                   |       | (2.3                                  | )          | (1.4                                          | )          |
| Other, net                                                   |       | 1.5                                   |       | 2.1                                           |       |
| **Total  operation and maintenance expense**                 |       | $                                     | 12.8       |                                          | $          | 18.0 |   |

 

For the quarter ended June 30, 2007, operation andmaintenance expense increased $12.8 million, or 21%, compared to the sameperiod in 2006 primarily resulting from increased power production costslargely related to boiler maintenance of $6.6 million and other powerproduction maintenance expense of $5.4 million.

For the six months ended June 30, 2007, operation andmaintenance expense increased $18.0 million, or 16%, compared to the sameperiod in 2006 primarily resulting from increased power production costslargely related to boiler maintenance of $7.1 million and other power productionmaintenance of $7.1 million.  Inaddition, we had increased mark-to-market adjustments relating to RSUs andincreased expense in service operation’s costs relating to overhead linemaintenance.

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

For thequarter and six months ended June 30, 2007, amortization of regulatory assetsincreased $0.8 million and $2.6 million, respectively, compared to the sameperiod in 2006.  These increases reflectthe amortization 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 – Investment Income**

For the quarter endedJune 30, 2007, investment income increased $3.4 million to $4.7 million from$1.3 million for the same period in 2006. This increase was primarily the result of $3.2 million realized gainsfrom the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation used for the settlement payment tothe three former executives.

For the six months endedJune 30, 2007, investment income increased $3.0 million to $6.2 million from$3.2 million for the same period in 2006. This increase was primarily the result of $3.2 million realized gainsfrom the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation used for the settlement payment tothe three former executives, partially offset by lower interest income relatingto lower cash and short-term investment balances in 2007 compared to 2006.

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**DP&L – Net Gain on Settlement of Executive Litigation**

On May 21, 2007, wesettled the litigation with the three former executives.  In exchange for a payment of $25 million, thethree former executives relinquished and dismissed all of their claimsincluding those related to deferred compensation, RSUs, MVE incentives, stockoptions and legal fees.  As a result ofthis settlement, **DP&L**realizeda net pre-tax gain in continuing operations of approximately $35.3million.  See Note 10 of Notes toCondensed Consolidated Financial Statements.

**DP&L****– Interest Expense**

For the quarter endedJune 30, 2007, interest expense decreased $0.5 million compared to the sameperiod of 2006, primarily relating to $2.9 million of increased capitalizedinterest resulting from pollution control capital expenditures at thegenerating plants, partially offset by increased interest of $1.2 millionrelated to the $100 million 4.8% Series pollution control bonds issued inSeptember 2006 and $0.7 million of interest related to the $95 million draw onour revolving credit facility.

For the six months endedJune 30, 2007, interest expense decreased $1.8 million compared to the same periodsof 2006, primarily relating to $5.7 million of increased capitalized interestresulting from pollution control capital expenditures at the generating plants,partially offset by increased interest of $2.4 million related to the $100million 4.8% Series pollution control bonds issued in September 2006 and $1.1million of interest related to the $95 million draw on our revolving creditfacility.

**DP&L****– Other Income (Deductions)**

For the quarter endedJune 30, 2007, other deductions of $0.2 million changed from $0.8 million ofother income in 2006 primarily resulting from a refund of tax penalties in 2006.

For the six months endedJune 30, 2007, other income of $0.6 million increased from $0.3 million ofother income in 2006 primarily resulting from the sale of emission allowancesand gains realized on the expiration of forward contracts partially offset by arefund of tax penalties in 2006.

## **DP&L – Income Tax Expense**

For the second quarterand six months ended June 30, 2007, income taxes increased $10.1 million and$8.6 million compared to the same periods in 2006, primarily reflecting anincrease in pre-tax book income.

**FINANCIAL 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’sCash Position**

**DPL’s**cash and cash equivalents totaled $103.9 million at June 30, 2007, compared to$262.2 million at December 31, 2006, a decrease of $158.3 million.  In addition, **DPL**had restricted funds held in trust at June 30, 2007 of $2.2 million incomparison to $10.1 million at December 31, 2006.  The decrease in cash and cash equivalents wasprimarily attributed to the retirement of the $225.0 million **DPL** 8.25% Senior Notes, $171.2 million in capitalexpenditures and $55.8 million in dividends paid on common stock.  The decrease caused by such payments waspartially offset by $158.4 million in proceeds realized from the sale ofproperty ($151.0 million for two peaking units and $7.4 million for anaircraft); $112.4 million in cash generated from operating activities; $15.0million from the exercise of stock options, including tax effects; and $10.1million of restricted funds drawn to fund pollution control capitalexpenditures.

**DP&L’sCash Position**

**DP&L’s**cash and cash equivalents totaled $4.4 million at June 30, 2007, compared to$46.1 million at December 31, 2006, a decrease of $41.7 million.  The decrease in cash and cash equivalents wasprimarily attributed to $169.3 million in capital expenditures and $125.0million in dividends paid on common stock to our parent **DPL**.  These cash outflows were largely offset by$137.9 million in cash generated from operating activities, $105.0 million inshort-term debt owed to our parent **DPL**, and $10.1million in restricted fund draws to finance pollution control capitalexpenditures at our generating plants.

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**Operating Activities**

For the six months endedJune 30, 2007 and 2006, cash flows from operations were as follows:

**NetCash provided by Operating Activities**

| **$ in millions** | ** ** | **2007**   | ** ** | **2006** | ** ** |
|------------------------|------------|------------|------------|----------|------------|
|                   | ** ** | ** ** |       |     |       |
| **DPL**                | ** ** | **$**      | **112.4**  |     | $          | 133.4 |   |
| ** **             | ** ** | ** ** |       |     |       |
| **DP&L**           | ** ** | **$**      | **137.9**  |     | $          | 175.2 |   |

 

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 cash flow fromoperations.

**DPL’sCash provided by Operating Activities**

**DPL**generated net cash from operating activities of $112.4 million and $133.4million for the six months ended June 30, 2007 and 2006, respectively.  The net cash provided by operating activitiesfor the six months ended June 30, 2007 was primarily the result of operatingprofitability, partially offset by an increase in cash used for workingcapital, specifically receivables, taxes and inventories.  The net cash provided by operating activitiesfor the six months ended June 30, 2006 was primarily the result of operatingprofitability, partially offset by cash used for working capital, specificallytaxes.

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

**DP&L**generated net cash from operating activities of $137.9 million and $175.2million in the six months ended June 30, 2007 and 2006, respectively.  The net cash provided by operating activitiesfor the six months ended June 30, 2007 was primarily the result of operatingprofitability, partially offset by an increase in cash used for workingcapital, specifically receivables, taxes and inventories.  The net cash provided by operating activitiesfor the six months ended June 30, 2006 was primarily the result of operatingprofitability.

**Investing Activities**

For the six months endedJune 30, 2007 and 2006, cash flows from investing activities were as follows:

**Net Cash used for Investing Activities**

| **$ in millions** | ** ** | **2007**   | ** ** | **2006** | ** ** |
|------------------------|------------|------------|------------|----------|------------|
|                   | ** ** | ** ** |       |     |       |
| **DPL**                | ** ** | **$**      | **(15.0**  | **)**    | $          | (72.3 | ) |
| ** **             | ** ** | ** ** |       |     |       |
| **DP&L**           | ** ** | **$**      | **(169.3** | **)**    | $          | (199.3 | ) |

 

**DPL’sCash used for Investing Activities**

**DPL’s**net cash used forinvesting activities was $15.0 million and $72.3 million for the six monthsended June 30, 2007 and 2006, respectively.  Net cash flows used for investing activities for the six months ended June 30, 2007were related to capital expenditures that were largely offset by proceeds fromthe sale of two peaking units and an aircraft. Net cash flows used for investing activities for the six months endedJune 30, 2006 were related to capital expenditures, partially offset by the netsale of short-term investments and securities.

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

**DP&L’s**net cash flows used for investing activities were $169.3 million and $199.3million for the six months ended June 30, 2007 and 2006, respectively.  Net cash flows used for investing activitiesfor both years were related to capital expenditures.

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**Financing Activities**

For the six months endedJune 30, 2007 and 2006, cash flows from financing activities were as follows:

**Net Cash used for Financing Activities**

| **$ in millions** | ** ** | **2007**   | ** ** | **2006** | ** ** |
|------------------------|------------|------------|------------|----------|------------|
|                   | ** ** | ** ** |       |     |       |
| **DPL**                | ** ** | **$**      | **(255.7** | **)**    | $          | (407.0 | ) |
| ** **             | ** ** | ** ** |       |     |       |
| **DP&L**           | ** ** | **$**      | **(10.3**  | **)**    | $          | (0.4 | ) |

 

**DPL’sCash used for Financing Activities**

**DPL’s**net cash flows usedfor financing activities for the six months ended June 30, 2007 were $255.7million compared to the same period of 2006 of $407.0 million.  Net cash flows used for financing activitiesfor the six months ended June 30, 2007 were the result of cash used to redeemthe $225 million 8.25% Senior Notes on March 1, 2007 and to pay dividends tostockholders of $55.8 million, partially offset by cash received from the exerciseof stock options, including tax effects, of $15.0 million and the $10.1 millionof restricted funds held in trust.  Netcash flows used for financing activities for the six months ended June 30, 2006were the result of cash used to repurchase $348.2 million of common stock andpay dividends to common shareholders of $59.0 million.

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

**DP&L’s**net cash flows used for financing activities were $10.3 million and $0.4million for the six months ended June 30, 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 $0.4 million, partially offset by $105.0 millionfrom short-term borrowings from our parent **DPL** and $10.1million of withdrawals from the trust set up as a result of issuing the $100million 4.8% Series pollution control bonds in September 2006.  Net cash flows used for financing activitiesin 2006 were for the payment of preferred dividends to third parties.

**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 other business andrisk factors described in Item 1a of our fiscal 2006 Form 10-K and Part II,Item 1a of this Form 10-Q.  If we areunable to generate sufficient cash flows from operations, or otherwise complywith the terms of our credit facilities, the senior notes and other long-termdebt, we may be required to refinance all or a portion of our existing debt orseek additional financing alternatives. A discussion of each of our critical liquidity commitments is outlinedbelow.

**Capital Requirements**

**DPL’s** constructionadditions were $193.5 million and $184.2 million for the first six monthsof 2007 and 2006, respectively.

**DP&L’s**construction additions were $192.0 million and $183.1 million for thefirst six months of 2007 and 2006, respectively, and are expected toapproximate $308 million in 2007.

Planned construction additions for 2007 relate to **DP&L’s** environmental complianceprogram, power plant equipment and its transmission and 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 $675 millionin capital projects, approximately 40% of which is to meet changingenvironmental standards.  In our Form10-Q as of March 31, 2007, we reported our estimated capital spending to beapproximately $645 million.  Thisincrease is due primarily to increases capital projects at partner-operatedgenerating plants.  Our ability tocomplete capital projects and the reliability of future service will beaffected by

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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**

**DP&L** isconsidering issuing in conjunction with the OAQDA another series of tax-exemptbonds to finance the remaining solid waste disposal facility costs at MiamiFort, Killen and Stuart Generating Stations.

On November 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 June 30, 2007, **DP&L**had no borrowings outstanding under this facility.  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 andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.  As of June 30, 2007, **DP&L** had no outstandingletters of credit against the facility.

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

Duringthe second quarter of 2007, **DPL** enteredinto a short-term loan to **DP&L** for$105 million.  This short-term loan doesnot affect our debt covenants.  There areno other inter-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.

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

**Credit Ratings**

Currently, **DPL’s** senior unsecuredand **DP&L**’s senior secured debt creditratings 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 sheet arrangements that have or are reasonablylikely to have a current or future effect on our financial condition, revenuesor expenses, results of operations, liquidity, capital expenditures or capitalresources that are material to investors.

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**Contractual Obligations and Commercial Commitments**

Weenter into various contractual obligations and other commercial commitmentsthat may affect the liquidity of our operations.  At June 30, 2007, these include:

**ContractualObligations**

|                                       | ** ** | ** ** | **Payment Year** | ** ** |
|---------------------------------------|------------|------------|-----------------------|------------|
| ** **                            | ** ** | ** ** | ** **            | ** ** | ** ** | **2008-** | ** ** | **2010-** | ** ** | **2012 &** | ** ** |
| **$ in millions**           | ** ** | **Total**  | ** **            | **2007**   | ** ** | **2009** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| **DPL  Inc.**                         |       |       |                  |       |   |   |   |   |   |   |   |
|                                  |       |       |                  |       |   |   |   |   |   |   |   |
| Long-term debt                        |       | $          | 1,550.0               |       | $ | — |   | $ | 275.0 |   | $ | 297.4 |   | $ | 977.6 |   |
| Interest  payments                    |       | 1,050.3    |                  | 47.8       |   | 170.7 |   | 144.0 |   | 687.8 |   |
| Pension and  postretirement payments  |       | 224.6      |                  | 11.0       |   | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                        |       | 2.5        |                  | 0.4        |   | 1.5 |   | 0.6 |   | — |   |
| Operating leases                      |       | 0.7        |                  | 0.3        |   | 0.3 |   | 0.1 |   | — |   |
| Coal contracts  (a)                   |       | 716.4      |                  | 195.9      |   | 362.8 |   | 157.7 |   | — |   |
| Limestone  contracts (a)              |       | 58.1       |                  | 1.0        |   | 9.5 |   | 10.9 |   | 36.7 |   |
| Reserve for  uncertain tax provisions |       | 41.2       |                  | 41.2       |   | — |   | — |   | — |   |
| Other contractual  obligations        |       | 465.6      |                  | 397.0      |   | 55.4 |   | 11.0 |   | 2.2 |   |
| Total contractual obligations         |       | $          | 4,109.4               |       | $ | 694.6 |   | $ | 920.4 |   | $ | 668.2 |   | $ | 1,826.2 |   |

 

| **DP&L**                          |   |   |    |   |   |   |   |   |   |   |   |
|---------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                  |   |   |    |   |   |   |   |   |   |   |   |
| Long-term debt                        |   | $      | 783.2   |   | $      | — |   | $      | — |   | $      | — |   | $ | 783.2 |   |
| Interest  payments                    |   | 552.4  |    | 19.6   |   | 78.3   |   | 78.3   |   | 376.2  |   |
| Pension and  postretirement payments  |   | 224.6  |    | 11.0   |   | 45.2   |   | 46.5   |   | 121.9  |   |
| Capital leases                        |   | 2.5    |    | 0.4    |   | 1.5    |   | 0.6    |   | — |   |
| Operating leases                      |   | 0.7    |    | 0.3    |   | 0.3    |   | 0.1    |   | — |   |
| Coal contracts  (a)                   |   | 716.4  |    | 195.9  |   | 362.8  |   | 157.7  |   | — |   |
| Limestone  contracts (a)              |   | 58.1   |    | 1.0    |   | 9.5    |   | 10.9   |   | 36.7   |   |
| Reserve for  uncertain tax provisions |   | 41.2   |    | 41.2   |   | — |   | — |   | — |   |
| Other  contractual obligations        |   | 465.6  |    | 397.0  |   | 55.4   |   | 11.0   |   | 2.2    |   |
| Total contractual obligations         |   | $      | 2,844.7 |   | $      | 666.4  |   | $      | 553.0  |   | $      | 305.1 |   | $ | 1,320.2 |   |

 

 

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

 

Long-termdebt:

**DPL’s** long-term debt as of June 30, 2007,consists of **DP&L’s** firstmortgage bonds and tax-exempt pollution control bonds, **DPL** unsecured notes and includes currentmaturities and unamortized debt discounts.

**DP&L’s** long-term debt as of June 30,2007, consists of first mortgage bonds, tax-exempt pollution control bonds andincludes an unamortized debt discount.

See Note 8of Notes to Condensed Consolidated Financial Statements.

Interestpayments:

Interestpayments associated with the long-term debt described above.

Pensionand postretirement payments:

As of June 30,2007, **DP&L** had estimatedfuture benefit payments as outlined in Note 6 of Notes to CondensedConsolidated Financial Statements.  Theseestimated future benefit payments are projected through 2016.

Capitalleases:

As ofJune 30, 2007, **DP&L** had twocapital leases that expire in November 2007 and September 2010.

Operatingleases:

As ofJune 30, 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 toright-of-way agreements that are assumed to have no definite expiration dates.

Coalcontracts:

**DP&L** has entered into various long-termcoal contracts to supply portions of its coal requirements for its generatingplants.  Contract prices are subject toperiodic adjustment and have features that limit price escalation in any givenyear.

53

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Limestonecontracts:

**DP&L**has entered into a limestone contract to supply limestone for its generatingfacilities.

Reservefor uncertain tax positions:

OnJanuary 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (FIN 48).  There was no significant impact to our overallresults of operations, cash flows or financial position.  The total amountof unrecognized tax benefits as of the date of adoption was $36.8 million andwe have recorded $3.5 million (net of tax) of accrued interest.  Duringthe second quarter ending June 30, 2007, we recorded an additional $0.9million in accrued interest resulting in a total reserve for uncertain taxpositions of $41.2 million as of June 30, 2007.  None of the amount ofunrecognized tax benefits is due to uncertainty in the timing of deductibility.

Othercontractual obligations:

As ofJune 30, 2007, **DPL** and **DP&L** had various other contractualobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

Weenter into various commercial commitments, which may affect the liquidity ofour operations.  At June 30, 2007, theseinclude:

Creditfacilities: 

InNovember 2006, **DP&L** replacedits previous $100 million revolving credit agreement with a $220 millionfive-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 June 30, 2007, therewere no outstanding borrowings under this facility.

Guarantees: 

**DP&L** owns a 4.9% equity ownershipinterest in an electric generation company. As of June 30, 2007, **DP&L**could be responsible for the repayment of 4.9%, or $21.8 million, of a $445million debt obligation that matures in 2026.

In twoseparate transactions in November and December 2006, **DPL**agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPLEnergy, LLC (DPLE) regarding the sale of the Darby Electric Peaking Station toAmerican Electric Power and the sale of the Greenville Electric Peaking Stationto Buckeye Electric Power, Inc.  In bothcases, **DPL** has agreed to guarantee theobligations of DPLE over a multiple year period as follows:
| **$ in millions** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Darby                  |       | $        | 30.6       |     | $          | 23.0     |       | $        | 15.3       |   | $ | 7.7 |   |
|                   |       |     |       |     |       |     |       |     |       |
| Greenville             |       | $        | 14.8       |     | $          | 11.1     |       | $        | 7.4        |   | $ | 3.7 |   |

 

**MARKET RISK**

Asa result of our operating, investing and financing activities, we are subjectto certain market risks including changes in commodity prices for electricity,coal, environmental emissions and gas as well as fluctuations in interestrates.  Commodity pricing exposureincludes the impacts of weather, market demand, increased competition and othereconomic conditions.  For purposes ofpotential risk analysis, we use sensitivity analysis to quantify potentialimpacts of market rate changes on the results of operations.  The sensitivity analysis representshypothetical changes in market values that may or may not occur in the future.

**Commodity Pricing Risk**

Approximately12% of **DPL’s** and 22% of **DP&L’s** electric revenues for the sixmonths ended June 30, 2007 were from sales of excess energy and capacity in thewholesale market.  Energy and capacity inexcess of the needs of existing retail customers are sold on the wholesalemarket when we can identify opportunities with positive margins.  As of June 30, 2007, a hypotheticalincrease or decrease of 10% in **DPL’s**annual wholesale revenues could result in approximately an $11 million increaseor decrease to annual net income, assuming no increases or decreases in fueland purchased power costs.  As of June30, 2007, a hypothetical increase or decrease of 10% in **DP&L’s** annual wholesale revenues couldresult in approximately a $20 million increase or decrease to annual netincome, assuming no increases or decreases in fuel and purchased power costs.

54

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**DPL’s**fuel (including coal, gas, oil and emission allowances) and purchased powercosts as a percent of total operating costs in the six months ended June 30,2007 and 2006, respectively, were 52% and 46%, respectively.  **DP&L’s**fuel (including coal, gas, oil and emission allowances) and purchased powercosts as a percent of total operating costs were 53% and 49% in the six monthsended June 30, 2007 and 2006, respectively. We have substantially all of the total expected coal volume needed tomeet our retail and firm wholesale sales requirements for 2007 undercontract.  The majority of our contractedcoal is purchased at fixed prices.  Somecontracts provide for periodic adjustment and some are priced based on marketindices.  Substantially all contractshave features that limit price escalations in any given year.  Our consumption of SO2 allowances should decline in 2007 due toplanned emission control upgrades.  We donot expect to purchase SO2 allowancesfor 2007.  The exact consumption of SO2 allowances will depend onmarket prices for power, availability of our generation units, the timing ofemission control equipment upgrade completion and the actual sulfur content ofthe coal burned.  **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.  Fuel costs are forecasted to beflat in 2007 compared 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 June 30, 2007, ahypothetical increase or decrease of 10% in **DPL’s**annual fuel and purchased power costs could result in approximately a $32million decrease or increase to annual net income, assuming no decreases or increasesin sales revenues.  As of June 30, 2007,a hypothetical increase or decrease of 10% in **DP&L’s**annual fuel and purchased power costs could result in approximately a $32million increase or decrease to annual net income, assuming no decreases or increasesin sales 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 andinvestments in 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.  AtJune 30, 2007, we had no outstanding borrowings under our revolving creditfacility.

The carrying value of **DPL’s** debt was $1,552.5 million at June 30,2007, 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 $1,566.8million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.  The principal cash repayments and relatedweighted average interest rates by maturity date for long-term, fixed-rate debtat June 30, 2007, are as follows:
| **Expected Maturity** | ** ** | **DPL’s Long-term Debt** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| **Date**                   | ** ** | **Amount**                              | ** ** | **Average Rate** | ** ** |
| ** **                 | ** ** | **($ in millions)**           | ** ** | ** ** | ** ** |
|                       |       |                                    |       |   |   |
| 2007                       |       | $                                       | 0.4        |   | 6.3 | % |
| 2008                       |       | 100.7                                   |       | 6.3 | % |
| 2009                       |       | 175.8                                   |       | 8.0 | % |
| 2010                       |       | 0.6                                     |       | 6.9 | % |
| 2011                       |       | 297.4                                   |       | 6.9 | % |
| 2012                       |       | —                                  |       | — |   |
| Thereafter                 |       | 977.6                                   |       | 5.6 | % |
| Total                      |       | $                                       | 1,552.5    |   | 6.2 | % |
|                       |       |                                    |       |   |   |
| Fair Value                 |       | $                                       | 1,566.8    |   |   |   |

 

55

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The carrying value of **DP&L’s** debt was $785.7 million at June 30, 2007,consisting of our first mortgage bonds, our tax-exempt pollution control bondsand our capital leases.  The fair valueof this debt was $767.3 million, based on current market prices or discountedcash flows using current rates for similar issues with similar terms andremaining maturities.  The principal cashrepayments and related weighted average interest rates by maturity date forlong-term, fixed-rate debt at June 30, 2007, are as follows:
| **Expected Maturity** | ** ** | **DP&L’s Long-term Debt** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| **Date**                   | ** ** | **Amount**                                   | ** ** | **Average Rate** | ** ** |
| ** **                 | ** ** | **($ in millions)**                | ** ** | ** ** | ** ** |
|                       |       |                                         |       |   |   |
| 2007                       |       | $                                            | 0.4        |   | 6.3 | % |
| 2008                       |       | 0.7                                          |       | 6.9 | % |
| 2009                       |       | 0.8                                          |       | 6.9 | % |
| 2010                       |       | 0.6                                          |       | 6.9 | % |
| 2011                       |       | —                                       |       | — |   |
| 2012                       |       | —                                       |       | — |   |
| Thereafter                 |       | 783.2                                        |       | 5.0 | % |
| Total                      |       | $                                            | 785.7      |   | 5.0 | % |
|                       |       |                                         |       |   |   |
| Fair Value                 |       | $                                            | 767.3      |   |   |   |

 

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.

**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.

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**OPERATING STATISTICS**
| ** **                               | ** ** | **DPL Inc.**                | ** **  | **DP&L (a)**                         | ** ** |
|------------------------------------------|------------|----------------------------------|-------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                               | ** ** | **2007**                         | ** **  | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Electric sales  (millions in kWh)        |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                              | ** ** | **1,133**                        |        | 1,039                                         | ** ** | **2,771** |   | 2,507 | ** ** | **1,133** |   | 1,039 | ** ** | **2,771** |   | 2,507 |   |
| Commercial                               | ** ** | **1,005**                        |        | 938                                           | ** ** | **1,937** |   | 1,831 | ** ** | **1,005** |   | 938 | ** ** | **1,937** |   | 1,831 |   |
| Industrial                               | ** ** | **1,117**                        |        | 1,097                                         | ** ** | **2,094** |   | 2,085 | ** ** | **1,117** |   | 1,097 | ** ** | **2,094** |   | 2,085 |   |
| Other retail                             | ** ** | **376**                          |        | 351                                           | ** ** | **714** |   | 689 | ** ** | **376** |   | 351 | ** ** | **714** |   | 689 |   |
| Total retail                             | ** ** | **3,631**                        |        | 3,425                                         | ** ** | **7,516** |   | 7,112 | ** ** | **3,631** |   | 3,425 | ** ** | **7,516** |   | 7,112 |   |
|                                     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                | ** ** | **558**                          |        | 681                                           | ** ** | **1,678** |   | 1,500 | ** ** | **558** |   | 681 | ** ** | **1,678** |   | 1,500 |   |
|                                     | ** ** | ** **                       |        |                                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Total                                    | ** ** | **4,189**                        |        | 4,106                                         | ** ** | **9,194** |   | 8,612 | ** ** | **4,189** |   | 4,106 | ** ** | **9,194** |   | 8,612 |   |
|                                     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating revenues ($ in thousands) |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                              | ** ** | **$**                            | **114,340** |                                          | $          | 101,464 | ** ** | **$** | **262,317** |   | $ | 232,095 | ** ** | **$** | **114,340** |   | $ | 101,464 | ** ** | **$** | **262,317** |   | $ | 232,095 |   |
| Commercial                               | ** ** | **81,064**                       |        | 73,000                                        | ** ** | **155,762** |   | 144,299 | ** ** | **75,888** |   | 67,630 | ** ** | **146,875** |   | 133,520 |   |
| Industrial                               | ** ** | **62,993**                       |        | 59,687                                        | ** ** | **120,489** |   | 117,492 | ** ** | **34,905** |   | 32,537 | ** ** | **66,524** |   | 63,372 |   |
| Other retail                             | ** ** | **24,304**                       |        | 21,627                                        | ** ** | **45,830** |   | 42,234 | ** ** | **19,659** |   | 21,626 | ** ** | **38,067** |   | 42,295 |   |
| Other  miscellaneous revenues            | ** ** | **1,433**                        |        | 2,414                                         | ** ** | **4,283** |   | 5,393 | ** ** | **1,453** |   | 2,427 | ** ** | **4,317** |   | 5,411 |   |
| Total retail                             | ** ** | **$**                            | **284,134** |                                          | $          | 258,192 | ** ** | **$** | **588,681** |   | $ | 541,513 | ** ** | **$** | **246,245** |   | $ | 225,684 | ** ** | **$** | **518,100** |   | $ | 476,693 |   |
|                                     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                | ** ** | **30,418**                       |        | 30,522                                        | ** ** | **87,103** |   | 67,942 | ** ** | **68,975** |   | 63,671 | ** ** | **159,007** |   | 134,031 |   |
|                                     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| RTO ancillary  revenues                  | ** ** | **25,894**                       |        | 17,339                                        | ** ** | **41,556** |   | 35,043 | ** ** | **25,894** |   | 17,339 | ** ** | **41,556** |   | 35,043 |   |
|                                     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other revenues,  net of fuel costs       | ** ** | **2,694**                        |        | 2,925                                         | ** ** | **5,493** |   | 5,623 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
|                                     | ** ** | ** **                       |        |                                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Total                                    | ** ** | **$**                            | **343,140** |                                          | $          | 308,978 | ** ** | **$** | **722,833** |   | $ | 650,121 | ** ** | **$** | **341,114** |   | $ | 306,694 | ** ** | **$** | **718,663** |   | $ | 645,767 |   |
|                                     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric customers at  end of period     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                              | ** ** | **456,098**                      |        | 456,654                                       | ** ** | **456,098** |   | 456,654 | ** ** | **456,098** |   | 456,654 | ** ** | **456,098** |   | 456,654 |   |
| Commercial                               | ** ** | **49,450**                       |        | 49,134                                        | ** ** | **49,450** |   | 49,134 | ** ** | **49,450** |   | 49,134 | ** ** | **49,450** |   | 49,134 |   |
| Industrial                               | ** ** | **1,818**                        |        | 1,839                                         | ** ** | **1,818** |   | 1,839 | ** ** | **1,818** |   | 1,839 | ** ** | **1,818** |   | 1,839 |   |
| Other                                    | ** ** | **6,377**                        |        | 6,338                                         | ** ** | **6,377** |   | 6,338 | ** ** | **6,377** |   | 6,338 | ** ** | **6,377** |   | 6,338 |   |
|                                     |       |                             |        |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                    | ** ** | **513,743**                      |        | 513,965                                       | ** ** | **513,743** |   | 513,965 | ** ** | **513,743** |   | 513,965 | ** ** | **513,743** |   | 513,965 |   |

 

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*(a)   DP&L sells power to DPLER (a subsidiary ofDPL).  These sales are classified aswholesale on DP&L’s financial statements and retail sales for DPL.  The kWh volumes contain all volumesdistributed on the DP&L system which include the retail sales byDPLER.  The sales for resale volumes areomitted to avoid duplicate reporting*

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

See the “Market Risk” section of Item 2.

**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 be disclosedby us in the reports that 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 overfinancial reporting during the most recently completed quarter ended June 30,2007 that has materially affected, or is reasonably likely to materiallyaffect, internal control over reporting.

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**PART II**

**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 ourCondensed Consolidated Financial Statements, as prescribed by GAAP, for thesematters are adequate 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 June 30, 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.

**ExecutiveLitigation**

On May 21, 2007, wesettled the litigation with the three former executives.  As part of this settlement, the three formerexecutives relinquished and dismissed all their claims including those relatedto certain deferred compensation, restricted stock units (RSUs), MVEincentives, stock options and legal fees. The RSUs and stock optionsrelinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, **DPL** had accrued obligations of approximately $64.2 millionof which **DP&L** had accrued obligations ofapproximately $60.3 million. Included in these amounts is approximately$3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million,all of these claims were settled.

As a result of thissettlement **DPL**realized a netpre-tax gain in continuing and discontinued operations of approximately $31.0million and $8.2 million, respectively.  The net gain is comprised of thereversal of the $64.2 million of accrued obligations less the $25 millionsettlement.  The obligations related to the discontinued operations wereassociated with the management of **DPL’s** financialasset portfolio which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005with the sale of the financial asset portfolio. The $25 million settlement expense was allocated between continuing anddiscontinued operations based on the proportionate share of continuing anddiscontinued obligations.  The following table outlines the components of **DPL’s** net pre-tax gain for continuing anddiscontinued operations:
| **Continuing operations:**            | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| Reversal of  accrued obligations      |       | $          | 50.8       |   |
| Allocated  settlement expense         |       | (19.8      | )          |
| Net gain from continuing operations   |       | $          | 31.0       |   |
|                                  |       |       |       |
| **Discontinued  operations:**         | ** ** | ** ** | ** ** |
| Reversal of  accrued obligations      |       | $          | 13.4       |   |
| Allocated  settlement expense         |       | (5.2       | )          |
| Net gain from discontinued operations |       | $          | 8.2        |   |
|                                  |       |       |       |

 

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As a result of thissettlement, **DP&L**realized anet pre-tax gain in continuing operations of approximately $35.3 million. Accrued obligations associated with the former executives’ litigation wererecorded by **DP&L** since the obligationswere associated with our non-qualified benefit plans. **DP&L**had no ownership of **DPL’s** financialasset portfolio business which was discontinued, therefore these liabilitieswere reversed and **DP&L** netpre-tax gain was recorded within continuing operations. The following tableoutlines the components of **DP&L’s**net gain:

 
| **Continuing operations:**       | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| Reversal of  accrued obligations |       | $          | 60.3       |   |
| Allocated  settlement expense    |       | (25.0      | )          |
| Net gain                         |       | $          | 35.3       |   |

 

The $25 millionsettlement was funded from the sale of financial assets held in **DP&L’s** Master Trust Plan for deferred compensation.  As part of this transaction, **DPL** and **DP&L**recorded a $3.2 million realized gain which is reflected in investment income**.**

**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, the first set of expert reports have been filed withadditional report scheduled to be filed in September 2007.  Dispositive motions are to be filed inJanuary 2008.  No trial date has been setyet.

**Item1a – Risk Factors**

Acomprehensive listing of risk factors that we consider to be the mostsignificant to your decision to invest in our stock is provided in our mostrecent Annual Report 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. The following risk factors included in our 2006 Form 10-K for year endedDecember 31, 2006 has been updated as follows:

**Relianceon Third Parties**

 

We rely on many third party suppliers and contractors inour energy production, transmission and distribution functions, including thepurchase and delivery of coal and other inventory, the construction of capital assets,and waste disposal management associated with our production processes (such asbottom ash, fly ash, gypsum). Unanticipated changes in our purchasing processes, supplier availability,supplier performance and pricing may affect our business and operatingresults.  In addition, we rely on othersto provide professional services, such as, but not limited to, actuarialcalculations, internal audit services, payroll processing and variousconsulting services.

**Employees**

Approximately 53% our employees are under a collective bargainingagreement.  If we are unable to negotiatefuture collective bargaining agreements, we could experience work stoppageswhich may affect its business and operating results.

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

None

**Item3 – Defaults Upon Senior Securities**

None

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

**DPL** held itsAnnual Meeting of Shareholders on April 27, 2007 at which security holderselected three directors nominated for three-year terms expiring 2010.  The results of the voting were as follows:
| ** **           | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** | **BROKER NO-VOTE** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|-------------------------|------------|
| Robert D. Biggs      |       | 96,810,176 |       | 1,798,891    |       | —                  |       |
| W August Hillenbrand |       | 96,824,955 |       | 1,784,112    |       | —                  |       |
| Ned J. Sifferlen     |       | 97,139,872 |       | 1,469,195    |       | —                  |       |

 

The other directors whoseterms of office continued after the Annual Meeting are Paul M. Barbas, BarbaraS. Graham and Glenn E. Harder (each in the Class of 2008) and Paul R. Bishop,Ernie Green and General Lester L. Lyles (Ret.) (each of the class of 2009).  On May 29, 2007, Ernie Green retired from theBoard of Directors of **DPL Inc**.

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Shareholders also votedon an amendment to the Regulations of **DPL Inc**. toprovide a majority vote alternative for the election of directors.  The results of the voting were as follows:
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NO-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------------------|------------|
| 74,499,396 |       | 3,374,009   |       | 1,104,999   |       | 19,630,663              |       |

 

Shareholders also votedon two shareholder proposals.  The firstshareholder proposal covered a recommendation on executive bonuses.  The results of the voting were as follows:
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NO-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------------------|------------|
| 15,607,538 |       | 61,329,703  |       | 2,041,164   |       | 19,630,662              |       |

 

The second shareholderproposal covered majority vote reincorporation. The results of the voting were as follows:
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NO-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------------------|------------|
| 25,101,148 |       | 51,864,501  |       | 2,012,756   |       | 19,630,662              |       |

 

Shareholders also votedto ratify the selection of KPMG LLP as the Company’s independent auditor for2007.  The results of the voting were asfollows:
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NO-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------------------|------------|
| 96,680,131 |       | 1,055,580   |       | 873,354     |       | —                  |       |

 

**Item5 – Other Information**

None

**Item6 – 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:  |       | July 26, 2007                          |   |   | /s/ Paul M. Barbas |
|   |       |                                   |   |   | Paul M. Barbas |
|   |       |                                   |   |   | President and Chief Executive Officer |
|   |       |                                   |   |   | (principal executive officer) |
|   |       |                                   |   |   |   |
|   |       |                                   |   |   |   |
|   |       | July 26, 2007                          |   |   | /s/ John J. Gillen |
|   |       |                                   |   |   | John J. Gillen |
|   |       |                                   |   |   | Senior Vice President and Chief Financial Officer |
|   |       |                                   |   |   | (principal financial officer) |
|   |       |                                   |   |   |   |
|   |       |                                   |   |   |   |
|   |       | July 26, 2007                          |   |   | /s/ Frederick J. Boyle |
|   |       |                                   |   |   | Frederick J. Boyle |
|   |       |                                   |   |   | Controller and Chief Accounting Officer |
|   |       |                                   |   |   | (principal accounting officer) |

 

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