**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**x** ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended****December 31, 2006**

**OR**

**o** TRANSITION REPORT PURSUANT TO SECTION 13OR 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                            |   |           |

 

Each of the following classes or series ofsecurities registered pursuant to Section 12 (b) of the Act is registered onthe New York Stock Exchange:
| Registrant                             | ** ** | **Description**                                                        |
|----------------------------------------|------------|------------------------------------------------------------------------|
| **DPL Inc.**                           | ** ** | **Common Stock, $0.01 par value and Preferred  Share Purchase Rights** |
| **The Dayton Power and Light Company** | ** ** | **None**                                                               |

Securities registeredpursuant to Section 12(g) of the Act:**  None**

Indicateby check mark if each registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

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

 

Indicateby check mark if each registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Exchange Act.

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

 

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 if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of each registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.

| DPL Inc.                            |   | x |
|-------------------------------------|--------|---|
| The Dayton Power and Light  Company |   | x |

 

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 |

 

The aggregate market value of DPL Inc.’s common stockheld by non-affiliates of DPL Inc. as of June 30, 2006 was approximately $3.1billion based on a closing sale price of $26.80 on that date as reported on theNew York Stock Exchange.  All of thecommon stock of The Dayton Power and Light Company is owned by DPL Inc.  As of February 22, 2007, each registrant hadthe following shares of common stock outstanding:
| Registrant                             | ** ** | **Description**                                                        | ** ** | **Shares Outstanding** |
|----------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------|
| **DPL Inc.**                           | ** ** | **Common Stock, $0.01 par value and Preferred  Share Purchase Rights** |       | 113,101,211            |
| **The Dayton Power and Light Company** | ** ** | **Common Stock**                                                       |       | 41,172,173             |

 

This combined Form 10-K is separately filed by DPL Inc.and The Dayton Power and Light Company. Information contained herein relating to any individual registrant isfiled by such registrant on its own behalf. Each registrant makes no representation as to information relating to aregistrant other than itself.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of **DPL**’sdefinitive proxy statement for its 2007 Annual Meeting of Shareholders areincorporated by reference in Part III of this Form 10-K.

 

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DPL Inc. and The Dayton Power and Light Company

Index to Annual Report on Form 10-K

# Fiscal Year EndedDecember 31, 2006

 
|            | ** ** | ** **                                                                                                          | ** ** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** ** | ** ** | **Part I**                                                                                                          | ** ** | ** ** |
| Item 1     |       | Business                                                                                                            | 3          |       |
| Item  1a   |       | Risk  Factors                                                                                                       | 14         |       |
| Item 1b    |       | Unresolved Staff  Comments                                                                                          | 19         |       |
| Item 2     |       | Properties                                                                                                          | 19         |       |
| Item 3     |       | Legal  Proceedings                                                                                                  | 19         |       |
| Item 4     |       | Submission of Matters to  a Vote of Security Holders                                                                | 22         |       |
|       |       |                                                                                                                |       |       |
|       | ** ** | **Part II**                                                                                                         |       |       |
| Item 5     |       | Market for  Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Securities | 22         |       |
| Item 6     |       | Selected Financial  Data                                                                                            | 24         |       |
| Item 7     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 25         |       |
| Item 7A    |       | Quantitative and  Qualitative Disclosures about Market Risk                                                         | 48         |       |
| Item 8     |       | Financial Statements and  Supplementary Data                                                                        | 48         |       |
| Item 9     |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               | 104        |       |
| Item 9A    |       | Controls and  Procedures                                                                                            | 104        |       |
| Item  9B   |       | Other  Information                                                                                                  | 104        |       |
|       |       |                                                                                                                |       |       |
|       | ** ** | **Part III**                                                                                                        |       |       |
| Item 10    |       | Directors and  Executive Officers of the Registrant                                                                 | 104        |       |
| Item 11    |       | Executive  Compensation                                                                                             | 104        |       |
| Item 12    |       | Security Ownership of  Certain Beneficial Owners and Management and Related Shareholder Matters                     | 105        |       |
| Item 13    |       | Certain Relationships  and Related Transactions                                                                     | 105        |       |
| Item 14    |       | Principal  Accountant Fees and Services                                                                             | 105        |       |
|       |       |                                                                                                                |       |       |
|       | ** ** | **Part IV**                                                                                                         |       |       |
| Item 15    |       | Exhibits and  Financial Statement Schedules                                                                         | 106        |       |
|       |       |                                                                                                                |       |       |
|       | ** ** | **Other**                                                                                                           |       |       |
|       |       | Signatures                                                                                                          | 117        |       |
|       |       | Schedule II Valuation and Qualifying Accounts                                                                       | 119        |       |
|       |       | Subsidiaries of DPL Inc. and The Dayton Power and  Light Company                                                    |       |       |
|       |       | Consent of Independent Registered Public Accounting  Firm                                                           |       |       |

 

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## **PART I**

**Item 1 — Business**

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 86% of **DPL’s**totalconsolidated asset base. Throughout this report the terms we, us, our and oursare used to refer to both **DPL** and **DP&L**, respectively and altogether, unless the contextindicates otherwise. Discussions or areas of this report that apply only to **DPL** or **DP&L**willbe clearly noted in the section. Historically, **DPL** and **DP&L** have filed separate SEC filings.  Beginning with this report and in the future,**DPL Inc**. and **The DaytonPower and Light Company** will file combined SEC reports on aninterium and annual basis.

**WEBSITE ACCESS TO REPORTS**

**DPLInc.** and **The Dayton Powerand Light Company**  filecurrent, annual and quarterly reports, proxy statement and other informationrequired by the Securities Exchange Act of 1934, as amended, with theSecurities and Exchange Commission (SEC). You may read and copy any document we file at the SEC’s public referenceroom located at 100 F Street N.E., Washington, D.C. 20549, USA.  Please call the SEC at (800) SEC-0330 forfurther 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 make available,free of charge, through our internet site, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and Forms 3, 4 and5 filed on behalf of our directors and executive officers and amendments tothose reports filed or furnished pursuant to the Securities Exchange Act of1934, as amended, as soon as reasonably practicable after we electronicallyfile 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.

**ORGANIZATION**

**DPL Inc.**  **(DPL)**is a diversified regional energy company organized in 1985 under the laws ofOhio.  Our executive offices are locatedat 1065 Woodman Drive, Dayton, Ohio 45432 - telephone (937) 224-6000.

**DPL’s**principal subsidiary is **The Dayton Power andLight Company (DP&L)**.  **DP&L** is a public utility incorporatedin 1911 under the laws of Ohio.  **DP&L** sells electricity to residential,commercial, industrial and governmental customers in a 6,000 square mile areaof West Central Ohio.  Electricity for **DP&L’s** 24 county service area isprimarily generated at eight coal-fired power plants and is distributed to morethan 500,000 retail customers.  **DP&L** also purchases retail peak loadrequirements from DPL Energy, LLC (DPLE, one of **DPL’s**wholly-owned subsidiaries).  Principalindustries served include automotive, food processing, paper, plasticmanufacturing and defense.  **DP&L’s** sales reflect the generaleconomic conditions and seasonal weather patterns of the area.  **DP&L**sells any excess energy and capacity into the wholesale market.

**DPL’s**other significant subsidiaries (all of which are wholly-owned) include DPLE,which engages in the operation of peaking generating facilities; DPL EnergyResources, Inc. (DPLER), which sells retail electric energy under contract tomajor industrial and commercial customers in West Central Ohio; MVE, Inc.,which was primarily responsible for the management of our financial assetportfolio; and Miami Valley Insurance Company (MVIC), which is our captiveinsurance company that provides insurance sources to us and our subsidiaries.

**DP&L**has one significant subsidiary, DPL Finance Company, Inc.,which is wholly-owned and provides financing to **DPL**, **DP&L** andother affiliated companies.

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

3

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Under the recently enactedPublic Utility Holding Company Act of 2005, the Federal Energy RegulatoryCommission (FERC) requires that utility holding companies comply with certainaccounting, record retention and filing requirements.  **DPL**believes it is exempt from these requirements because **DP&L’s** operations are confined to asingle state.  On January 31, 2006, **DPL** filed a FERC 65B Waiver Notificationwith the FERC, requesting that the FERC approve **DPL’s** waiver and avoid FERC regulation.

**DPL**,**DP&L** and its subsidiaries employed1,452 persons as of January 31, 2007, of which 1,203 were full-timeemployees and 249 were part-time employees.

**SIGNIFICANT DEVELOPMENTS**

**Credit Rating Upgrades**

In early 2007 and during2006, our rating agencies upgraded our corporate credit and debt ratings.  The following table outlines the rating ofeach company and the date of the upgrade:

|                                   | ** ** | **DPL** | ** ** | **DP&L** | ** ** | **Date**      |
|-----------------------------------|------------|---------|------------|--------------|------------|---------------|
| Fitch Ratings                     |       | BBB     |       | A            |       | April 2006    |
| Moody’s Investors  Service   |       | Baa3    |       | A3           |       | June 2006     |
| Standard &  Poor’s Corp. |       | BBB-    |       | BBB+         |       | February 2007 |

 

**Peaking Unit Sales**

In connection with DPLE’s(subsidiary of **DPL**) decision to sell theGreenville Station and Darby Station electric peaking generation facilities, **DPL** concluded that an impairment charge for the GreenvilleStation and Darby Station assets was required. During the fourth quarter of2006, **DPL** recorded a $71.0 million impairmentcharge to record the write-down of the assets to fair market value and otherassociated costs related to the sales.

**Pollution Control Bonds**

On September 13, 2006,the Ohio Air Quality Development Authority (OAQDA) issued $100 million of4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September1, 2036. In turn, **DP&L** thenborrowed these funds from the OAQDA.  **DP&L** is using the proceeds from this borrowing to assistin financing its portion of the costs of acquiring, constructing and installingcertain solid waste disposal and air quality facilities at Miami Fort, Killenand Stuart Generating Stations.

**Share Repurchase of DPL’s CommonStock**

On July 27, 2005, **DPL’s** Board authorized the repurchase of up to $400 millionof common stock from time to time in the open market or through privatetransactions.  **DPL**completed this share repurchase program through a series of open marketpurchases on August 21, 2006.  This resultedin 14.9 million shares being repurchased at an average price of $26.91 per share and a total cost of $400million.  These shares are currently heldas treasury shares at **DPL****Inc**.

**Increasein Dividends on DPL’s Common Stock**

OnFebruary 1, 2007, **DPL’s** Board ofDirectors announced that it had raised the quarterly dividend to $0.26 pershare payable March 1, 2007 to common shareholders of record on February 14,2007.  This increase results in an annualized dividend rate of $1.04 pershare, or a 4% increase.

4

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**ELECTRIC SALES AND REVENUES**
| ** **                                | ** ** | **DPL Inc.** | ** **    | **DP&L (a)** | ** ** |
|-------------------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                                | ** ** | **2006**          | ** **    | **2005**              | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Electric Sales  (millions in kWh)         | ** ** | ** **        |          |                  |       |   | ** ** | ** ** |   |   |   |   |   |
| Residential                               | ** ** | **5,218**         |          | 5,520                 |       | 5,140 |   | **5,218** |   | 5,520 |   | 5,140 |   |
| Commercial                                | ** ** | **3,835**         |          | 3,901                 |       | 3,777 |   | **3,835** |   | 3,901 |   | 3,777 |   |
| Industrial                                | ** ** | **4,286**         |          | 4,332                 |       | 4,393 |   | **4,286** |   | 4,332 |   | 4,393 |   |
| Other retail                              | ** ** | **1,428**         |          | 1,437                 |       | 1,407 |   | **1,428** |   | 1,437 |   | 1,407 |   |
| Total Retail                              | ** ** | **14,767**        |          | 15,190                |       | 14,717 |   | **14,767** |   | 15,190 |   | 14,717 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Wholesale                                 | ** ** | **3,651**         |          | 2,716                 |       | 3,748 |   | **3,651** |   | 2,716 |   | 3,748 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Total                                     | ** ** | **18,418**        |          | 17,906                |       | 18,465 |   | **18,418** |   | 17,906 |   | 18,465 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Operating  Revenues ($ in thousands) | ** ** | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Residential                               | ** ** | **$**             | **490,514**   |                  | $          | 478,226 |   | $ | 449,411 |   | **$** | **490,514** |   | $ | 478,226 |   | $ | 449,411 |   |
| Commercial                                | ** ** | **300,908**       |          | 276,157               |       | 267,831 |   | **278,082** |   | 247,912 |   | 239,952 |   |
| Industrial                                | ** ** | **240,450**       |          | 220,453               |       | 223,335 |   | **130,119** |   | 126,506 |   | 128,059 |   |
| Other retail                              | ** ** | **88,307**        |          | 81,716                |       | 80,370 |   | **88,203** |   | 81,877 |   | 80,623 |   |
| Other miscellaneous revenues              | ** ** | **11,174**        |          | 10,069                |       | 15,863 |   | **11,215** |   | 10,317 |   | 15,914 |   |
| Total Retail                              | ** ** | **1,131,353**     |          | 1,066,621             |       | 1,036,810 |   | **998,133** |   | 944,838 |   | 913,959 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Wholesale                                 | ** ** | **174,114**       |          | 133,283               |       | 135,219 |   | **309,885** |   | 257,632 |   | 260,341 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| RTO ancillary revenues                    | ** ** | **77,231**        |          | 74,419                |       | 17,905 |   | **77,231** |   | 74,419 |   | 17,905 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Other revenues, net of fuel costs         | ** ** | **10,821**        |          | 10,586                |       | 10,054 |   | **—** |   | — |   | — |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Total                                     | ** ** | **$**             | **1,393,519** |                  | $          | 1,284,909 |   | $ | 1,199,988 |   | **$** | **1,385,249** |   | $ | 1,276,889 |   | $ | 1,192,205 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Electric  Customers at End of Period      | ** ** | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Residential                               | ** ** | **457,054**       |          | 456,146               |       | 453,653 |   | **457,054** |   | 456,146 |   | 453,653 |   |
| Commercial                                | ** ** | **49,284**        |          | 48,853                |       | 48,172 |   | **49,284** |   | 48,853 |   | 48,172 |   |
| Industrial                                | ** ** | **1,822**         |          | 1,837                 |       | 1,851 |   | **1,822** |   | 1,837 |   | 1,851 |   |
| Other                                     | ** ** | **6,349**         |          | 6,304                 |       | 6,337 |   | **6,349** |   | 6,304 |   | 6,337 |   |
| ** **                                |       | ** **        |          |                  |       |   |   | ** ** |   |   |   |   |   |
| Total                                     | ** ** | **514,509**       |          | 513,140               |       | 510,013 |   | **514,509** |   | 513,140 |   | 510,013 |   |

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(a)             *DP&L sells power to DPLER (a subsidiary of DPL). These sales areclassified as wholesale on DP&L’s financial statements and retail sales forDPL. The kWh volumes contain all volumes distributed on the DP&L systemwhich include the retail sales by DPLER. The sales for resale volumes areomitted to avoid duplicate reporting.*

**ELECTRIC OPERATIONS AND FUEL SUPPLY**
| ** **           | ** ** | **2006 Summer Generating Capacity** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Amounts in MWs)** | ** ** | **Coal Fired**                      | ** ** | **Peaking Units** | ** ** | **Total** | ** ** |
|                 |       |                                |       |   |   |   |   |
| **DPL**              |       | 2,860                               |       | 1,549 | (a) | 4,409 |   |
|                 |       |                                |       |   |   |   |   |
| **DP&L**         |       | 2,860                               |       | 435 |   | 3,295 |   |
|                 |       |                                |       |   |   |   |   |

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*(a)**          Amountsinclude 630 MW of peaking capacity relating to the Darby and Greenvillestations**that DPL enteredinto agreements to sell during the fourth quarter of 2006.*

**DPL’s** present summergenerating capacity, including Peaking Units, is approximately 4,409 MW.  Of this capacity, approximately 2,860 MW or65% is derived from coal-fired steam generating stations and the balance ofapproximately 1,549 MW or 35% consists of combustion turbine and diesel peakingunits.

**DP&L’s**present summer generating capacity, including Peaking Units, is approximately3,295 MW.  Of this capacity,approximately 2,860 MW or 87% is derived from coal-fired steam generatingstations and the balance of approximately 435 MW or 13% consists of combustionturbine and diesel peaking units.

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Combustionturbine output is dependent on ambient conditions and is higher in the winterthan in the summer.  Our all-time netpeak load was 3,243 MW, occurring July 25, 2005.

Approximately87% of the existing steam generating capacity is provided by certain unitsowned as tenants in common with (Duke Energy) The Cincinnati Gas & ElectricCompany (CG&E) or its subsidiary, Union Heat, Light & Power, and (AEP)Columbus Southern Power Company (CSP). As tenants in common, each company owns a specified undivided share ofeach of these units, is entitled to its share of capacity and energy output,and has a capital and operating cost responsibility proportionate to itsownership share.  **DP&L’s** remaining steam generatingcapacity (approximately 365 MW) is derived from a generating station ownedsolely by **DP&L**.  Additionally, **DP&L,** CG&E and CSP own as tenants in common, 884circuit miles of 345,000-volt transmission lines.  **DP&L**has several interconnections with other companies for the purchase, sale andinterchange of electricity.

In2006, we generated 99% of our electric output from coal-fired units and 1% fromoil and natural gas-fired units.

Thefollowing table sets forth **DP&L’s**and DPLE’s generating stations and, where indicated, those stations which **DP&L** owns as tenants in common.
| ** **                                    | ** ** | ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | **Approximate Summer** | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------------------|------------|-------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | **MW Rating**          | ** ** |
| **Station**                                   | ** ** | **Ownership*** | ** ** | **Operating  Company** | ** ** | **Location**      | ** ** | **DPL  Portion**            | ** ** | **Total** | ** ** |
| Coal Units                                    |       |           |       |                   |       |              |       |                        |       |   |   |
| Hutchings                                     |       | W              |       | DP&L               |       | Miamisburg,  OH   |       | 365                         |       | 365 |   |
| Killen                                        |       | C              |       | DP&L               |       | Wrightsville,  OH |       | 412                         |       | 615 |   |
| Stuart                                        |       | C              |       | DP&L               |       | Aberdeen,  OH     |       | 836                         |       | 2,388 |   |
| Conesville-Unit  4                            |       | C              |       | CSP                    |       | Conesville,  OH   |       | 129                         |       | 780 |   |
| Beckjord-Unit 6                               |       | C              |       | CG&E               |       | New  Richmond, OH |       | 207                         |       | 414 |   |
| Miami Fort-Units  7 & 8                   |       | C              |       | CG&E               |       | North  Bend, OH   |       | 360                         |       | 1,000 |   |
| East Bend-Unit 2                              |       | C              |       | CG&E               |       | Rabbit  Hash, KY  |       | 186                         |       | 600 |   |
| Zimmer                                        |       | C              |       | CG&E               |       | Moscow,  OH       |       | 365                         |       | 1,300 |   |
|                                          |       |           |       |                   |       |              |       |                        |       |   |   |
| Combustion Turbines  or Diesel                |       |           |       |                   |       |              |       |                        |       |   |   |
| Hutchings                                     |       | W              |       | DP&L               |       | Miamisburg,  OH   |       | 23                          |       | 23 |   |
| Yankee Street                                 |       | W              |       | DP&L               |       | Centerville,  OH  |       | 107                         |       | 107 |   |
| Monument                                      |       | W              |       | DP&L               |       | Dayton,  OH       |       | 12                          |       | 12 |   |
| Tait Diesels                                  |       | W              |       | DP&L               |       | Dayton,  OH       |       | 10                          |       | 10 |   |
| Sidney                                        |       | W              |       | DP&L               |       | Sidney,  OH       |       | 12                          |       | 12 |   |
| Tait Units 1-3                                |       | W              |       | DP&L               |       | Moraine,  OH      |       | 256                         |       | 256 |   |
| Killen                                        |       | C              |       | DP&L               |       | Wrightsville,  OH |       | 12                          |       | 18 |   |
| Stuart                                        |       | C              |       | DP&L               |       | Aberdeen,  OH     |       | 3                           |       | 10 |   |
| Greenville Units  1-4 (a)                     |       | W              |       | DPLE                   |       | Greenville,  OH   |       | 192                         |       | 192 |   |
| Darby Station  Units 1-6 (a)                  |       | W              |       | DPLE                   |       | Darby,  OH        |       | 438                         |       | 438 |   |
| Montpelier Units  1-4                         |       | W              |       | DPLE                   |       | Montpelier,  IN   |       | 192                         |       | 192 |   |
| Tait Units 4-7                                |       | W              |       | DPLE                   |       | Moraine,  OH      |       | 292                         |       | 292 |   |
| Total approximate  summer generating capacity |       |           |       |                   |       |              |       | 4,409                       |       | 9,024 |   |

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*W= Wholly-Owned

C= Commonly-Owned

*(a)**          Amountsinclude 630 MW of peaking capacity relating to the Darby and Greenvillestations**that DPL enteredinto agreements to sell during the fourth quarter of 2006.*

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We have substantially allof the total expected coal volume needed to meet our retail and firm wholesalesales requirements for 2007 under contract. The majority of our contracted coal is purchased at fixed prices.  Some contracts provide for periodicadjustments and some are priced based on market indices.  Substantially all contracts have featuresthat limit price escalations in any given year.   Our sulfur dioxide (SO2) allowance consumption will bereduced in 2007 due to installation of emission control equipment at a portionof the Companies’ generation facilities. We do not expect to purchase SO2 allowances for 2007.  The exact consumption of SO2 allowances will depend on market prices forpower, availability of our generating units, the timing of FGD (flu gasdesulfurization) completion and the actual sulfur content of the coalburned.  We do not plan to purchase anynitrogen oxide (NOx)allowances for 2007.

The average cost of fuelused per kilowatt-hour (kWh) was as follows:

|              | ** ** | **Average Cost of Fuel Used (¢/kWh)** | ** ** |
|--------------|------------|---------------------------------------------------------------------|------------|
| ** **   | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **   | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|         |       |                                                                |       |   |   |   |   |
| **DPL**      |       | 2.00                                                                |       | 1.93 |   | 1.56 |   |
|         |       |                                                                |       |   |   |   |   |
| **DP&L** |       | 1.94                                                                |       | 1.84 |   | 1.53 |   |
|         |       |                                                                |       |   |   |   |   |

 

**SEASONALITY**

The power generation anddelivery business is seasonal and weather patterns have a material impact onoperating performance.  In the regionserved by our subsidiaries, demand for electricity is generally greater in thesummer months associated with cooling and in the winter months associated withheating as compared to other times of the year. Historically, the power generation and delivery operations of oursubsidiaries have generated less revenue and income when weather conditions arewarmer in the winter and cooler in the summer.

**RATE REGULATION AND GOVERNMENTLEGISLATION**

**DP&L’s**sales to retail customers are subject to rate regulation by the PublicUtilities Commission of Ohio (PUCO).  **DP&L’s** transmission and wholesaleelectric rates to municipal corporations, rural electric co-operatives andother distributors of electric energy are subject to regulation by the FederalEnergy Regulatory Commission (FERC) under the Federal Power Act.

Ohio law establishes theprocess for determining rates charged by public utilities.  Regulation of rates encompasses the timing ofapplications, the effective date of rate increases, the cost basis upon whichthe rates are based and other related matters. Ohio law also established the Office of the Ohio Consumers’ Counsel(OCC), which has the authority to represent residential consumers in state andfederal judicial and administrative rate proceedings.

Ohio legislation extendsthe jurisdiction of the PUCO to the records and accounts of certain publicutility holding company systems, including **DPL**.  The legislation extends the PUCO’ssupervisory powers to a holding company system’s general condition andcapitalization, among other matters, to the extent that they relate to thecosts associated with the provision of public utility service.  Based on existing PUCO and FERC authorization,regulatory assets and liabilities are recorded on the Consolidated BalanceSheets.  See Note 3 of Notes toConsolidated Financial Statements.

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**COMPETITION AND REGULATION**

**Ohio Retail Rates**

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 PUCO maintainsjurisdiction over **DP&L’s**delivery of electricity, the standard offer supply service that customersreceive if they do not choose an alternative retail electricity supplier, andover other rates and charges associated with the market development period thatbegan January 2001.

In2003, the PUCO approved a Stipulation executed by **DP&L**and other parties that extended the market development period through the endof 2005, and included provisions that generation rates may be modified as ofJanuary 1, 2006, by up to 11% of generation rates to reflect increased costsassociated with fuel, environmental compliance, taxes, regulatory changes, andsecurity measures.  In 2006, the OhioSupreme Court affirmed the PUCO’s Order approving the Stipulation.

On April 4, 2005, **DP&L** filed a request at the PUCO toimplement a new rate stabilization surcharge effective January 1, 2006 torecover cost increases associated with environmental capital, relatedoperations and maintenance costs and fuel expenses.  On November 3, 2005, **DP&L** entered into a settlementagreement that extended **DP&L’s**rate stabilization period through December 31, 2010.  During this time, **DP&L**will continue to provide retail electric service at fixed rates with theability to recover increased fuel and environmental costs through surchargesand riders.  Specifically, the agreementprovides for:

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

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

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

On December 28, 2005, the PUCO adopted the settlementwith certain modifications (RSS Stipulation). The PUCO ruled that the environmental rider will be bypassable by allcustomers who take service from alternate generation suppliers.  Thus, future additional revenues aredependent upon actual sales and levels of customer switching.  Applications for rehearing were denied andthe case was appealed to the Ohio Supreme Court by the Ohio Consumers’ Counselon April 21, 2006.  The Company cannotpredict whether the Ohio Supreme Court will affirm the PUCO’s approval of theRSS Stipulation, affirm it in part subject to modifications, or reject it.  An oral argument has been set for April 17,2007.

Consistent with the RSS Stipulation approved by thePUCO and prior orders, **DP&L** made atariff filing to implement the environmental investment rider beginning January1, 2007, which was approved by the PUCO in November 2006.

In 2005, **DP&L** made a tariff filing to recover previously deferredcosts associated with administrative fees charged to **DP&L**under PJM’s FERC-approved tariffs.  InJanuary 2006, the PUCO approved the recovery, effective February 1, 2006, whichshould result in approximately $8.5 million in additional revenue per year forthree years and $6.0 million per year thereafter.

In March 2006, the PUCOapproved the recovery of costs and carrying costs associated with billingsystem changes made to permit **DP&L** toprovide billing services to Competitive Retail Electric Service (CRES)providers.  These costs had previouslybeen deferred for later recovery under a settlement approved in 2004.  In separate orders issued in September andDecember 2006, the Ohio Supreme Court affirmed the PUCO orders approving thesettlement and approving the recovery of costs. This will result in approximately $7 million in additional annualrevenue beginning March 2006 through 2010.

On September 1, 2005, **DP&L** requested the PUCO authority torecover distribution costs associated with storm restoration efforts for icestorms that took place in December 2004 and January 2005.  In February 2006, **DP&L**

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filed updated schedulesin support of its application.  On July12, 2006, the PUCO approved **DP&L’s**filing,allowing the Company to recover approximately $8.6 million in additionalrevenues over a two-year period.  SeeNote 3 of Notes to Consolidated Financial Statements.

**Ohio Competitive Considerations and Proceedings**

As of December 31, 2006,four unaffiliated marketers were registered as CRES providers in **DP&L’s** service territory.  While there has been some customer switchingto date, it represents less than 0.15 percent of sales in 2006. DPLER, anaffiliated company, is also a registered CRES provider and accounted for 99.8%of the total kWh supplied by CRES providers within **DP&L’s** service territory in 2006.  In addition,several communities in **DP&L’s**service area have passed ordinances allowing the communities to becomegovernment aggregators for the purpose of offering alternative electricgeneration supplies to their citizens. To date, none of these communities have aggregated their generationload.

**DP&L** agreed toimplement a Voluntary Enrollment Program (VEP) that would provide customerswith an option to choose a competitive supplier to provide their retailgeneration service should switching not reach 20% in each customer class.  The 20% threshold has never beenreached.  In both 2005 and 2006,customers who elected to participate in the program were grouped together andcollectively bid out to CRES providers. No bids were received in either year resulting in zero customerswitching under the program.  **DP&L**is required to execute the same process again in2007.  Future period effects cannot bedetermined at this time.

In August of 2006, anelectric supply contract with Wright Patterson Air Force Base (WPAFB)expired.  WPAFB is **DP&L’s**singlelargest retail customer and represents approximately 1% of its annualrevenues.  In November 2006, WPAFB signeda long-term agreement to allow DPLER to supply competitive generationservice to WPAFB through 2010.

OnFebruary 20, 2003, the PUCO requested comments from interested stakeholders onthe proposed rules for the conduct of a competitive bidding process that willtake place at the end of the rate stabilization period.  **DP&L**submitted comments in March 2003.  ThePUCO issued final rules on December 23, 2003. Under **DP&L’s** RSSStipulation discussed above, these rules will not affect **DP&L** until January 1, 2011.  However, the PUCO retains the authority to,at any time, require an Ohio electric utility to conduct a competitive biddingprocess to measure the market price of competitive retail generation.

**Other State RegulatoryProceedings**

On August 28, 2006, theStaff of the PUCO issued a report relating to compliance with the FederalEnergy Policy of 2005.  In that reportthe Staff makes recommendations to the Commission to implement new rules andprocedures relating to net metering, customer generator interconnection, standby power, time-of-use rates, and renewable energy portfolio standards.  **DP&L**, amongothers, filed comments on September 18, 2006, and reply comments on October 2,2006.  If adopted by the Commission, theStaff’s recommendations may result in new regulatory requirements for Ohioinvestor owned utilities related to renewable energy standards, fuel sources,automated meter infrastructure and time differentiated rate options forcustomers.  **DP&L**cannot predict the outcome of this proceeding nor the potential cost that maybe associated with any new regulations that may be adopted.

**FederalMatters**

Like other electricutilities and energy marketers, **DP&L**and DPLE may sell or purchase 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.

As part of Ohio’s electricderegulation law, all of the state’s investor-owned utilities are required tojoin a Regional Transmission Organization (RTO).  In October 2004, **DP&L**successfully integrated its 1,000 miles of high-voltage transmission into thePJM Interconnection, L.L.C. (PJM) RTO. The role of the RTO is to administer an electric marketplace and ensurereliability of the transmission grid. PJM ensures the reliability of the high-voltage electric power systemserving 51 million people in all or parts of Delaware, Illinois, Indiana, Kentucky,Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee,Virginia, West Virginia and the District of Columbia.  PJM coordinates and directs the operation ofthe region’s transmission grid, administers the world’s

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largest competitivewholesale electricity market and plans regional transmission expansionimprovements to maintain grid reliability and relieve congestion.

As a member of PJM, **DP&L** is subject to charges and costs associated with PJMoperations as approved by the FERC.  Asdiscussed above in connection with the recovery of such costs in retail rates,these include significant administrative charges.  Additionally, PJM’s role in administering theregional transmission grid and planning regional transmission expansionimprovements results in periodic proposals by PJM and other stakeholder membersof PJM to the FERC to allocate and charge costs associated with thetransmission system to various entities operating within PJM including **DP&L**.  **DP&L** and other interested parties have the right tointervene and offer counter-proposals. The FERC is currently considering how to allocate costs associated withnew planned transmission facilities. None of these costs were allocated to **DP&L**under PJM’s original filing in the case, but other parties have proposedmodified allocation methods that could result in allocations to **DP&L**.  The FERC isalso considering the justness and reasonableness of PJM’s transmission ratedesign for existing facilities.  **DP&L**, along with ten other transmissionowners, filed in support of PJM’s existing rate design, but other participantshave proposed rate designs that would shift significant costs to **DP&L**.  Due tocomplexity of the issues and the number of competing proposals underconsideration, **DP&L**cannot determine whateffect the final outcome of this proceeding may have on its costs or the extentto which it may be able to recover such costs.

Asa member of PJM, the value of **DPL’s**generation capacity will be affected by changes in the PJM capacityconstruct.  The new construct introducesa new Reliability Pricing Model (RPM) that will change the way generationcapacity is priced and planned for by PJM. In September 2006, **DP&L**, alongwith most of the parties relating to the case, entered into a settlementagreement that generally retains the RPM concept as proposed by PJM, withcertain modifications.  The settlementwas approved by the FERC on December 21, 2006. The economic effects of the new capacity market will vary depending onpresent and projected market conditions.

Inconnection with **DP&L** and other utilitiesjoining PJM, the FERC ordered utilities to eliminate certain charges toimplement transitional payments, known as Seams Elimination Charge Adjustment(SECA), effective December 1, 2004 through March 31, 2006, subject to refund.Through this proceeding, **DP&L** wasobligated to pay SECA charges to other utilities, but received a net benefitfrom these transitional payments. Several parties have sought rehearing of the FERC orders, which arestill pending.  The hearing was held inMay 2006 and an initial decision was issued on August 10, 2006 that, if upheldby the Commission, would reduce the amount of SECA charges **DP&L**and other parties are permitted to recover. **DP&L,**among others, have takenexception to the initial decision.  Afinal Commission order on this issue is still pending.  We have entered into a significant number ofbi-lateral settlement agreements with certain parties to resolve the matter,which by design will be unaffected by the Commission’s decision to affirm,modify or reject the initial decision.  **DP&L** management believes thatappropriate reserves have been established in the event that SECA collectionsnot resolved by settlement are required to be refunded.  The ultimate outcome of the proceedingestablishing SECA rates is uncertain at this time. However, based on the amountof reserves established for this item, the results of this proceeding are notexpected to have a material adverse effect on **DP&L’s**results of operations.

OnAugust 8, 2005, the Energy Policy Act of 2005 (the 2005 Act) was enacted.  This new law encompasses several areasincluding, but not limited to:  electricreliability, repeal of the Public Utility Holding Company Act of 1935, promotionof energy infrastructure, preservation of a diverse fuel supply for electricitygeneration and energy efficiency.  Alsoin response to the Energy Policy Act of 2005, the FERC issued a Notice ofProposed Rulemaking to amend its regulations to incorporate the criteria anyentity must satisfy to qualify to be an Electric Reliability Organization (ERO)that will propose and enforce reliability standards subject to FERCapproval.  The proposed rule alsoincluded related matters on delegating ERO authority, the creation of advisorybodies and reporting requirements.  InOctober 2006, the FERC also approved new mandatory reliability standards to beeffective mid-2007, with requirements applying to certain assets and activitiesof **DP&L**and **DPL.** The new regulations include potentialpenalties for failure to comply with these standards.  **DPL**iscurrently assessing the compliance plans in place to comply with similar, butvoluntary, reliability standards administered by the North American ElectricReliability Council and believes that it will be in full compliance with thenew mandatory standards when they become effective.

**DP&L** provides transmissionand wholesale electric service to twelve municipal customers in itsservice territory, which in turn distribute electricity principally withintheir incorporated limits.  **DP&L** also maintains an interconnection agreement withone municipality that has the capability to generate a portion of its ownenergy requirements.   Approximately 1%of total electricity sales in 2006 represented sales to these municipalities.

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**ENVIRONMENTAL CONSIDERATIONS**

**DPL, DP&L** andour subsidiaries’ facilities and operations are subject to a wide range ofenvironmental regulations 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, weaccrue for the low end of the range.  Because of uncertaintiesrelated to these matters, accruals are based on the best information availableat the time. **DPL,**through itscaptive 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.

**DP&L’s**coal-firedunits are subject to the acid rain provisions of the Clean Air Act and the NOx and Ozone Transport rule.   All of the SO2 and NOx emissions data submitted to the UnitedStates Environmental Protection Agency (USEPA) pursuant to these provisions for2005 and the first quarter 2006 were recorded and reported in compliance withUSEPA regulations.  Subsequently **DP&L** detected a malfunction with its emission monitoringsystem at one of its generation stations and ultimately determined its SO2 and NOx emissions datawere under reported.  **DP&L** has petitioned the USEPA to accept an alternativemethodology for calculating actual emissions for 2005 and the first quarter2006.  **DP&L**has sufficient allowances in its general account to cover the understatementand is working with the USEPA to resolve the matter.  Management does not believe the ultimateresolution of this matter will have a material impact on operating results orfinancial position.

**EnvironmentalRegulation and Litigation Related to Air Quality**

*RegulationProceedings — Air*

In 1990 thefederal government amended the Clean Air Act (CAA) to further regulate airpollution.  Under the law, the USEPA setslimits on how much of a pollutant can be in the air anywhere in the UnitedStates.  The CAA allows individual statesto have stronger pollution controls, but states are not allowed to have weakerpollution controls than those set for the whole country. The CAA has a materialeffect on our operations and such effects are detailed below with respect tocertain programs under the CAA.On October 27, 2003, the USEPA published final rules regarding theequipment replacement provision (ERP) of the routine maintenance, repair andreplacement (RMRR) exclusion of the CAA.  Subsequently, on December 24,2003, the United States Court of Appeals for the D.C. Circuit stayed theeffective date of the rule pending its decision on the merits of the lawsuitsfiled by numerous states and environmental organizations challenging the finalrules.  As a result of the stay, the OhioEnvironmental Protection Agency (Ohio EPA) delayed its previously announcedintent to adopt the RMRR rule.  On October 20, 2005, USEPA proposed torevise the emissions test for existing electric generating units.  At thistime, we are unable to determine the impact of the ERP appeal or the outcome ofthe proposed emissions test.In a regulation proceeding relating to the same issue pending before the U.S.Supreme Court in the Duke Energy case, discussed below, the USEPA issued aproposed rule in October 2005 concerning the test for measuring whethermodifications to electric generating units should trigger application of NewSource Review (NSR) standards under the CAA. The proposed rule seeks comments on two different hourly emissions testoptions as well as the USEPA’s current method of measuring previous actualemission levels to projected actual emission levels after themodification.  A third option that testsemissions increase based upon emissions per unit of energy output is alsoavailable for comment.  We cannot predictthe outcome of this rulemaking or its impact on current environmentallitigation.On December 17, 2003, the USEPA proposed the Interstate Air Quality Rule(IAQR) designed to reduce and permanently cap SO2 and NOx emissions from electricutilities.  The proposed IAQR focused onstates, including Ohio, whose power plant emissions are believed to besignificantly contributing to fine particle and ozone pollution in otherdownwind states in the eastern United States. On June 10, 2004, the USEPA issued a supplemental proposal to theIAQR, now renamed as the Clean Air Interstate Rule (CAIR).  The final rules were signed on March 10, 2005and were published on May 12, 2005.  OnAugust 24, 2005, the USEPA proposed additional revisions to the CAIR andinitiated reconsideration on one issue. Although we cannot predict the

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outcomeof the reconsideration proceedings, the petitions or the pending litigation,CAIR has had and will have a material effect on our operations.  Phase I of CAIR incentivizes the installationof flue gas desulfurization (FGD) equipment and continual operation of thecurrently installed Selective Catalytic Reduction equipment.  As a result, **DP&L** is proceeding with the installation of FGD equipmentat various generating units.

OnJanuary 30, 2004, the USEPA published its proposal to restrict mercury andother air toxics from coal-fired and oil-fired utility plants.  The final Clean Air Mercury Rule (CAMR) wassigned March 15, 2005 and was published on May 18, 2005.  The final rules will have a material effecton our operations.  We anticipate thatthe FGD equipment being installed to meet the requirements of CAIR may beadequate to meet the Phase I requirements of CAMR effective January 1,2010.  We expect that additional controlswill be needed to meet the Phase II requirements of CAMR that go into effectJanuary 1, 2018.  On March 29, 2005, ninestates sued USEPA, opposing the regulatory approach taken by USEPA.  On March 31, 2005, various groups requestedthat USEPA stay implementation of CAMR. On August 4, 2005, the United States Court of Appeals for the Districtof Columbia denied the motion for stay. USEPA is expected to initiate reconsideration proceedings on one or moreissues.  We cannot predict the outcome ofthe reconsideration proceedings or pending litigation.

Underthe CAIR and CAMR cap and trade programs for SO2, NOx and mercury, we estimate we will spend morethan $225 million from 2007 through 2009 to install the necessary pollutioncontrols.  If CAMR litigation results inplant specific mercury controls, our costs may be higher.  Due to the ongoing uncertainties associatedwith the litigation of the CAMR, we cannot project the final costs at thistime.

On July15, 2003, the Ohio EPA submitted to the USEPA its recommendations foreight-hour ozone non-attainment boundaries for the metropolitan areas withinOhio.  On April 15, 2004, the USEPA issued its list of ozone non-attainmentdesignations.  **DP&L** ownsand/or operates a number of facilities in counties designated as non-attainmentwith the ozone national ambient air quality standard.  **DP&L** does not know at this time whatfuture regulations may be imposed on its facilities and will closely monitorthe regulatory process.  Ohio EPA will have until April 15, 2007 todevelop regulations to attain and maintain compliance with the eight-hour ozonenational ambient air quality standard.  Numerous parties have filedpetitions for review.  **DP&L**cannot predict the outcome of USEPA’s reconsideration petitions.

OnJanuary 5, 2005, the USEPA published its final non-attainment designations forthe national ambient air quality standard for Fine Particulate Matter 2.5 (PM2.5).  These designations included counties and partial counties in which **DP&L** operates and/or owns generating facilities. On March 4, 2005, **DP&L** andother Ohio electric utilities and electric generators filed a petition forreview in the D.C. Circuit Court of Appeals, challenging the final rulecreating these designations.  On November 30, 2005, the court orderedUSEPA to decide on all petitions for reconsideration by January 20, 2006.  On January 20, 2006, USEPA denied thepetitions for reconsideration.  The OhioEPA will have three years to develop regulations to attain and maintaincompliance with the PM 2.5 national ambient air quality standard.  **DP&L** cannot determine the outcome ofthe petition for review or the effect such Ohio EPA regulations will have onits operations.

On May5, 2004, the USEPA issued its proposed regional haze rule, which addresses howstates should determine the best available retrofit technology (BART) forsources covered under the regional haze rule.  Final rules were publishedJuly 6, 2005, providing states with several options for determining whethersources in the state should be subject to BART.  In the final rule, USEPAmade the determination that CAIR achieves greater progress than BART and may beused by states as a BART substitute.  Numerous units owned and operated byus will be impacted by BART.  We cannot determine the extent of the impactuntil Ohio determines how BART will be implemented.

*SierraClub Litigation*

Pending before theU.S. Supreme Court is a proceeding, Environmental Defense v. Duke Energy (DukeEnergy) that does not involve the Company as a party but may have a significanteffect on the outcome of litigation described below that involves allegationsof violations of the CAA.  A key issue inthat litigation that may be dispositive with respect to other pending cases iswhat test to apply for measuring whether modifications to electric generatingunits should trigger application of New Source Review (NSR) standards under theCAA.   In general terms, the dispute iswhether to measure pre- and post-modification emissions based on the rate ofemissions per hour of operation or based on total emissions over time.  The latter test, if applied, could triggerNSR requirements for equipment replacements that result in a plant running moreoften because it is more economical or dependable, even if the emissions rateper hour of operation does not change.  Aruling is expected in the first or second quarter of 2007.  The Company cannot predict the outcome of theDuke Energy

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case.  Moreover, in each of the cases identifiedbelow, there may be case-specific facts and allegations that may cause a judgeto find that the U.S. Supreme Court’s ruling is based on different facts andallegations and is therefore not controlling in the case before the judge.

In September 2004,the Sierra Club filed a lawsuit against the Company and the other owners of theStuart Generating Station in the United States District Court for the SouthernDistrict of Ohio for alleged violations of the CAA, including issues that maybe decided by the Supreme Court in the Duke Energy case and other issues relatingto alleged violations of opacity limitations. **DP&L**, on behalf of all co-owners,is leading the defense of this matter.  Asizable amount of discovery has taken place and expert reports are scheduled tobe filed at various times from May through September, 2007.  Dispositive motions are to be filed inJanuary 2008.  No trial date has been setyet.

*LitigationInvolving Co-Owned Plants*

In March 2000, as amendedin June 2004, the United States Department of Justice filed a complaint in anIndiana federal court against Cinergy Corporation (now part of Duke Energy) andtwo subsidiaries for alleged violations of the CAA at various generation unitsoperated by PSI Energy, Inc. and CG&E, including generation units co-ownedby **DP&L** (Beckjord 6 and MiamiFort 7).  In August 2006, the SeventhCircuit upheld the district court’s 2005 ruling that an increase in annualemissions could trigger the permitting requirements of the CAA even if therewere no increase in hourly emissions per hour of operations.

In November 2004, theState of New York and seven other states filed suit against the AmericanElectric Power Corporation (AEP) and various subsidiaries, alleging various CAAviolations at a number of AEP electric generating facilities, includingConesville Unit 4 (co-owned by CG&E, **DP&L**and Columbus Southern Power (CSP)).  AEP,on behalf of all co-owners, is leading the defense of this matter.  During 2006, a number of procedural anddiscovery-related disputes were resolved by the Southern District Court ofOhio.  Discovery is ongoing.

In July 2004 andNovember 2004, various residents of the Village of Moscow, Ohio notifiedCG&E, as the operator of Zimmer (co-owned by CG&E, **DP&L** and CSP), of their intent to suefor alleged violations of the CAA and air pollution nuisances.  CG&E, on behalf of all co-owners, isleading the defense of this matter.  Onelawsuit was dismissed on procedural grounds. Several counts of the remaining suit have been dismissed because theywere based on activity outside the statute of limitations.

In June 2000, theUSEPA issued a Notice of Violation (NOV) to **DP&L**operated Stuart Generating Station (co-owned by **DP&L**, CG&E and CSP) for alleged violations of theCAA.  The NOV contained allegationsconsistent with NOVs and complaints that the USEPA had recently brought againstnumerous other coal-fired utilities in the Midwest.  The NOV indicated the USEPA may (1) issue anorder requiring compliance with the requirements of the Ohio StateImplementation Plan (SIP) or (2) bring a civil action seeking injunctive reliefand civil penalties of up to $27,500 per day for each violation.  To date, neither action has been taken.

In November 1999,the USEPA filed civil complaints and NOVs against operators and owners ofcertain generation facilities for alleged violations of the CAA.  Generation units operated by CG&E(Beckjord 6) and CSP (Conesville 4) and co-owned by **DP&L** were referenced in these actions.  Numerous northeast states have filedcomplaints or have indicated that they will be joining the USEPA’s actionagainst CG&E and CSP.  **DP&L** was not identified in the NOVs,civil complaints or state actions.

**EnvironmentalRegulation and Litigation Related to Water Quality**

On July9, 2004 the USEPA issued final rules pursuant to the Clean Water Act governingexisting facilities that have cooling water intake structures.  The rulesrequire an assessment of impingement and/or entrainment of organisms as aresult of cooling water withdrawal.  Anumber of parties appealed the rules to the federal Court of Appeals for theSecond Circuit in New York and the Court issued an opinion on January 25, 2007remanding several aspects of the rule to USEPA for reconsideration.  Weare undertaking studies at two facilities but cannot predict the impact suchstudies may have on future operations or the outcome of the remandedrulemaking.

In May2004, the Ohio EPA issued a final National Pollutant Discharge EliminationSystem permit for J.M. Stuart Station that continued the station’s 316(a)variance which exempts **DP&L** fromhaving to meet the temperature Standards in the Ohio River.  During the three-year term of the permit, **DP&L** conducted a thermal discharge

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studyto evaluate the technical feasibility and economic reasonableness of watercooling methods other than cooling towers. We cannot predict the impact of this issue on future operations.

**EnvironmentalRegulation and Litigation Related to Land Use and Solid Waste Disposal**

**DP&L**has been identified, either by a government agency or by a private partyseeking contribution to site clean-up costs, as a potentially responsible party(PRP) at a site pursuant to state and federal laws.

InSeptember 2002, **DP&L** and otherparties received a special notice that the USEPA considers us to be PRPs forthe clean-up of hazardous substances at the South Dayton Dump landfillsite.  In August 2005, **DP&L** and other parties received ageneral notice regarding the performance of a Remedial Investigation andFeasibility Study (RI/FS) under a Superfund Alternative approach.  In October 2005, **DP&L** received a special notice letter inviting it to enterinto negotiations with USEPA to conduct the RI/FS. Although the informationavailable to **DP&L** does notdemonstrate that it contributed hazardous substances to the site, **DP&L** will seek from USEPA a de minimissettlement at the site.  Should USEPA pursue a civil action, **DP&L** will vigorously challenge it.  In December 2003, **DP&L**andother parties received a special notice that the USEPA considers us to be PRPsfor the clean-up of hazardous substances at the Tremont City landfillsite.  Information available to **DP&L**does not demonstrate that it contributed hazardoussubstances to the site.

InAugust 2006, Ohio EPA issued draft rules for interested party comment relatedto the disposal of industrial waste.  **DP&L,**through the Ohio Electric Utility Institutesubmitted comments on the draft rules. We cannot predict the impact of the draft rules on future operations.

**CONSTRUCTION ADDITIONS**
|                             | ** ** | **Actual** | ** ** | **Projected** | ** ** |
|-----------------------------|------------|------------|------------|---------------|------------|
| **$ in millions** | ** ** | **2006**   | ** ** | **2005**      | ** ** | **2004** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|                        |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DPL  Inc.**               | ** ** | **$**      | **352**    |          | $          | 180 |   | $ | 98 |   | $ | 310 |   | $ | 165 |   | $ | 130 |   |
| ** **                  |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DP&L**                | ** ** | **$**      | **349**    |          | $          | 178 |   | $ | 93 |   | $ | 310 |   | $ | 165 |   | $ | 130 |   |

 

**DPL’s** constructionadditions were $352 million, $180 million and $98 million in 2006, 2005and 2004, respectively, and are expected to approximate $310 million in 2007.

**DP&L’s**construction additions were $349 million, $178 million and $93 million in2006, 2005 and 2004, respectively, and are expected to approximate $310 millionin 2007.  Planned construction additionsfor 2007 relate to **DP&L’s**environmental compliance program, power plant equipment, and its transmissionand distribution system.

Capitalprojects are subject to continuing review and are revised in light of changesin financial and economic conditions, load forecasts, legislative andregulatory developments and changing environmental standards, among otherfactors.  Over the next three years, **DPL,**through its subsidiary **DP&L**,is projecting to spend an estimated $605 million in capital projects,approximately 40% of which is to meet changing environmental standards.  Our ability to complete capital projects andthe reliability of future service will be affected by our financial condition,the availability of internal funds and the reasonable cost of externalfunds.  We expect to finance ourconstruction additions in 2007 with a combination of cash on hand, short-termfinancing, tax-exempt debt and cash flows from operations.

**Item1a — Risk Factors**

This annual report andother documents that we file with the SEC and other regulatory agencies, aswell as other oral or written statements we may make from time to time, containinformation based on management’s beliefs and include forward-lookingstatements (within the meaning of the Private Securities Litigation Reform Actof 1995) that involve a number of known and unknown risks, uncertainties andassumptions. These forward-looking statements are not guarantees of futureperformance, and there are a number of factors including, but not limited to,those listed below, which could cause actual outcomes and results to differmaterially from the results contemplated by such forward-looking statements. Wedo not undertake any obligation to publicly update

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or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. These forward-looking statements are identified by termsand phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”,“should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similarexpressions.

The following is alisting of risk factors that we consider to be the most significant to yourdecision to invest in our stock.  If anyof these events occurs, our business, financial position or results ofoperation could be materially affected.

**The electric industry in Ohio ispartially deregulated**   

Before2001, electric utilities provided electric generation, transmission anddistribution services as a single product to retail customers at prices set by thePUCO.  In 1999, Ohio enacted legislation,effective January 1, 2001, that partially deregulated utility service, makingretail generation service a competitive service.  Customers may choose to take generationservice from CRES providers that register with the PUCO but are otherwiseunregulated.  In connection with thisderegulation of the electric industry in Ohio, electric utilities have had torestructure their service and their rates to accommodate competition.

Manyof the requirements of the Ohio deregulation law were premised on theassumption that the wholesale generation market and, in turn, the retailgeneration market, would fully develop by the end of 2005, and that the pricefor generation for even those customers who choose to continue to purchase theservice from the regulated utility would be set purely by the market.  That did not occur.  As a result, the Commission and theutilities, including **DP&L,**have worked out plans to provide market-based pricing for generation service,but also to stabilize those rates for several years.  What **DP&L**may propose and what the PUCO will approve in the future regarding pricing andcost recovery will depend on the degree to which the wholesale and retailelectric generation markets have developed.

Moreover,the uncertainty of the future of the wholesale and retail markets could causethe Ohio General Assembly to revisit the issue of competition and customerchoice.

**Switching by DP&L’s customers tounaffiliated CRES providers could occur in the future, despite insignificantactivity to date. **

Althoughretail generation service has been a competitive service since January 1, 2001,the competitive generation market has not developed in **DP&L’s** service territory to anysignificant degree.  The following arefactors that could result in increased switching by customers to CRES providersin the future:

·                  VoluntaryEnrollment Program

As part of a settlement in a PUCOproceeding, **DP&L** initiated, in November2004, a VEP to encourage customers to change electric suppliers.  Although the VEP did not result in asignificant increase in the number of customers switching to CRES providers in2005 or 2006, the VEP will be initiated again in 2007 and could producedifferent results.

·                  **DP&L’s**StandardService Offer

The RSS Stipulation discussed above,permits customers that take service from a CRES provider to bypass theenvironmental investment rider (EIR). Because this charge increases each year, the price that a CRES providercan offer to save customers money changes each year.  Depending on the development of the wholesalemarket and the level of wholesale prices, CRES providers could become more activein **DP&L’s**service territory.

·                  CRESSupplier Initiatives

Customers can elect to take generationservice from a CRES provider offering services to customers in **DP&L’s**service territory.  As of December 31, 2006, five CRES providershave been certified by the PUCO to provide generation service to **DP&L**customers. One of those five, DPL Energy Resources, Inc. (DPLER), is an affiliateof **DP&L.**  Although DPLER supplied 99.8% of the totalkWh consumed by customers served by CRES providers in **DP&L’s** service territory in 2006, atthe end of 2006 there was a slight increase in unaffiliated CRES provideractivity.  There has been zeroresidential customer switching to date. Depending on the development of the wholesale market and the level ofwholesale prices, CRES providers could become more active in **DP&L’s** service territory and may beginto offer

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prices lower than **DP&L’s**standard offer.  This could result inmore switching by **DP&L’s**customers and a further loss of revenues by **DP&L**.

·                  GovernmentalAggregation Programs

Another way in which **DP&L** could experience customerswitching is through “governmental aggregation.”  Under this program, municipalities maycontract with a CRES provider to provide generation service to the customerslocated within the municipal boundaries. Several communities in **DP&L’s**service territory have passed ordinances allowing them to become governmentaggregators.  Although none has yetimplemented an aggregation program, that too, could change provided CRESproviders offer prices below **DP&L’s**standard offer.

**DP&L has agreed to provide service at pre-determinedrates through December 31, 2010, which limits its ability to pass through itscosts to customers. **

**DP&L** has provided service at rates governed by thePUCO-approved transition, market development, and rate stabilizationplans.  Those rates have included astatutorily-required 5% rate reduction in the generation component of itsresidential rates, a further 2.5% reduction to the residential generation ratethrough 2008, fixed generation rates through December 31, 2010, and frozendistribution rates through December 31, 2008.  The protection afforded by retail fuel clauserecovery mechanisms was eliminated effective January 1, 2001 by theimplementation of customer choice in Ohio. Likewise, through the RSS Stipulation, **DP&L**extended its commitment to maintain pre-determined rates for generation throughDecember 31, 2010, and in exchange is permitted to charge two new rate ridersto offset increases in fuel and environmental costs.   Beginning January 1, 2006 a new Rate StabilizationSurcharge was implemented that recovered approximately $65 million additionalrevenue in 2006, net of customer discounts and considering less than a fulltwelve months recovery due to the timing of the PUCO order.  The new environmental investment rider couldresult in approximately $35 million additional revenue in 2007, net of customerdiscounts and assuming insignificant levels of customer switching.  The PUCO ruled this rider will be bypassableby all customers who take service from alternative generation suppliers.  Accordingly, the rates **DP&L** is allowed to charge may or maynot match its expenses at any given time. Therefore, during this period (or possibly earlier by order of thePUCO), while **DP&L** will besubject to prevailing market prices for electricity, it would not necessarilybe able to charge rates that produce timely or full recovery of itsexpenses.  **DP&L** has historically maintained its rates at consistentlevels since 1994, when the final phase of **DP&L’s**last traditional rate case was implemented. However, as **DP&L**operates under its PUCO-approved RSS Stipulation, there can be no assurancethat **DP&L** would be able totimely or fully recover unanticipated levels of expenses, including but notlimited to those relating to fuel, coal and purchased power, compliance withenvironmental regulation, reliability initiatives, and capital expenditures forthe maintenance or repair of its plants or other properties.  Furthermore, the RSS Stipulation is currentlysubject to an appeal to the Ohio Supreme Court, the result of which cannot bedetermined.

**There are uncertainties relating to the operation andcontinued development of Regional Transmission Organizations (RTOs).  DP&L has turned over operational controlof its high voltage transmission functions to PJM and much of its generation issubject to dispatch by PJM and is therefore subject to PJM’s market rules.**

On October 1, 2004, in compliance with Ohio law, **DP&L** turned over control of itstransmission functions and fully integrated into PJM.  The price at which **DP&L** can sell its generation capacity and energy is nowmore dependent upon the overall operation of the PJM market.  While **DP&L**can continue to make bi-lateral transactions to sell its generationthrough a willing-buyer and willing-seller relationship, any transactions thatare not pre-arranged are subject to market conditions at PJM.  The rules governing the various regionalpower markets also change from time to time which could affect **DP&L’s**cost and revenues.  **DP&L**incursfees and costs to participate in the Regional Transmission Organization(RTO).  We may be limited with respect tothe price at which power may be sold from certain generating units, and we maybe required to expand our transmission system according to decisions made bythe RTO rather than our internal planning process.  While RTO transmission rates were initiallydesigned to be revenue neutral, various proposals and proceedings currentlytaking place at FERC may cause transmission rates to change from time to time.  In addition, developing rules associated withthe allocation and methodology of assigning costs associated with improvedtransmission reliability, reduced transmission congestion and firm transmissionrights may have a financial impact on **DP&L**.  Likewise, in December 2006, FERC approved PJM’snew Reliability Pricing Model (RPM).  RPMwill be effective in mid-2007, and will provide forward and locational pricingfor generation capacity.  The financialimpact of RPM on **DP&L** willdepend on a variety of factors, including the market behavior of variousparticipants, and as such is unknown at this time.  Because the RTO market rules are continuingto evolve, we

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cannot fully assess the impact that these powermarkets or other ongoing RTO developments may have on **DPL.**

**We relyprincipally on coal as the fuel to operate virtually all of the power plantsthat serve our customers daily. **

Some ofour coal suppliers have not performed their contracts as promised and havefailed to timely deliver all coal as specified under their contracts.  Such failure could significantly reduce **DP&L’s** inventory of coal and may cause **DP&L** to purchase higher priced coal onthe spot market.  When the failure is fora short period of time, **DP&L**can absorb the irregularity due to existing inventory levels.  If we are required to purchase coal on thespot market, it may affect our cost of operations.

**DP&L** is a co-owner in certain generationfacilities where it is a non-operating partner. **DP&L** does not procure the fuel forthese facilities.  Partner operatedfacilities do not always have realized coal costs that are equal to our co-owners’projections.

**Greenhouse Gas Emissions**

Greenhouse gas (GHG)emissions, consisting primarily of carbon dioxide emissions, are presentlyunregulated.  Numerous bills have beenintroduced in Congress to regulate GHG emissions, but to date none havepassed.  Future regulation of GHGemissions is uncertain. However, such regulation would be expected to imposecosts on our operations.  Such costscould include measures as advanced by various constituencies, including acarbon tax; investments in energy efficiency; installation of CO2 emissions control technology, to the extentsuch technology exists; purchase of emission allowances, should a tradingmechanism be developed; or the use of higher-cost, lower CO2 emitting fuels.  We will continue to make prudent investmentsin energy efficiency that reduces our GHG emissions intensity.

**Flue Gas Desulfurization Project**

We are currentlyconstructing flue gas desulfurization (FGD) facilities at five units located atour J. M. Stuart and Killen Electric Generating Stations.  Construction of the FGD facilities at eachunit is scheduled to be completed in phases commencing mid-year 2007 through 2009.  We are also co-owners of electric generatingstations operated by other investor-owned utilities, who are in various stagesof constructing FGD facilities at these stations.  Significant construction delays couldadversely affect our ability to operate or may substantially increase our costto operate these electric generating stations under federal environmental lawsand regulations that become effective in 2010. For those electric generating stations where we are co-owners but do notoperate, significant construction delays may substantially increase our prorata share of the cost to operate those facilities beginning in 2010.

**PJM Infrastructure Risks**

Annually, PJM, theregional transmission organization that provides transmission services for alarge portion of the Midwest United States, performs a review of the capitaladditions required to provide reliable electric transmission servicesthroughout its territory.  PJM allocatesthe costs of constructing these facilities to the applicable entity that willbenefit from the new construction.  FERCis authorized to provide rate recovery to utilities for the costs they incur toconstruct these transmission facilities. To date, we have not been required to construct any new facilities norhave we been assigned any costs as a result of PJM’s annual review, but thereis no guarantee that we will not be assigned some costs or be required toconstruct facilities in the future.

**Ourstock price may fluctuate**

The market price of **DPL’s** common stock has fluctuated over a wide range.  In addition, the stock market in recent yearshas experienced significant price and volume variations that have often beenunrelated to our operating performance. Over the past three years, the market price of our common stock hasfluctuated with a low of $17.21 and a high of $28.72.  The market price of our common stock maycontinue to fluctuate in the future and may be affected adversely by factorssuch as actual or anticipated changes in our operating results, acquisitionactivity, changes in financial estimates by securities analysts, general marketconditions, rumors and other factors.

**The following are additional factors, including, but notlimited to, regulation and competition, economic conditions, reliance on thirdparties, operating results fluctuations, regulatory uncertainties andlitigation, warrant exercise,  internalcontrols and environmental compliance, that may affect our future results.**

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**Regulationand Competition**

We operate in a rapidlychanging industry with evolving industry standards and regulations.  In recent years a number of federal and statedevelopments aimed at promoting competition triggered industryrestructuring.  Regulatory factors, suchas changes in the policies and procedures that set rates; changes in tax laws,tax rates, and environmental laws and regulations; changes in **DP&L’s** ability to recover expendituresfor environmental compliance, fuel and purchased power costs and investmentsmade under traditional regulation through rates; and changes to the frequencyand timing of rate increases could affect our results of operations andfinancial condition.  Changes in ourcustomer base, including municipal customer aggregation, could lead to theentrance of competitors in our marketplace, affecting our results of operationsand financial condition.  Additionally,financial or regulatory accounting principles or policies imposed by governingbodies can increase our operational and monitoring costs affecting our resultsof operations and financial condition.

**EconomicConditions**

Economicpressures, as well as changing market conditions and other factors related tophysical energy and financial trading activities, which include price, credit,liquidity, volatility, capacity, transmission and interest rates can have asignificant effect on our operations and the operations of our retail,industrial and commercial customers.

Duringthe past few years, the merchant energy industry in many parts of the UnitedStates has suffered from oversupply of merchant generation and a decline intrading and marketing activity.  As aresult of these market conditions, we continue to evaluate the carrying valuesof certain long-lived generation assets.

**Relianceon Third Parties**

We rely on many suppliersfor the purchase and delivery of inventory, including coal and equipmentcomponents, to operate our energy production, transmission and distributionfunctions.  Unanticipated changes in ourpurchasing processes, delays and supplier availability may affect our businessand operating results.  In addition, werely on others to provide professional services, such as, but not limited to,actuarial calculations, internal audit services, payroll processing and variousconsulting services.

**OperatingResults Fluctuations**

Futureoperating results are subject to fluctuations based on a variety of factors,including but not limited to: unusual weather conditions; catastrophicweather-related damage; unscheduled generation outages; unusual maintenance orrepairs; changes in fuel and purchased power costs, emissions allowance costs,or availability constraints; environmental compliance; and electrictransmission system constraints.

**RegulatoryUncertainties and Litigation**

In thenormal course of business, we are subject to various lawsuits, actions,proceedings, claims and other matters asserted under laws and regulations.  Additionally, we are subject to diverse andcomplex laws and regulations, including those relating to corporate governance,public disclosure and reporting, and taxation, which are rapidly changing andsubject to additional changes in the future. As further described in Item 3-“Legal Proceedings,” we are alsocurrently involved in various pieces of litigation in which the outcome isuncertain.  Compliance with these rapidchanges may substantially increase costs to our organization and could affectour future operating results.

**WarrantExercise**

**DPL’s** warrant holders could exercise their 31,560,000 warrants at theirdiscretion until March 12, 2012.  As aresult, **DPL** could be required toissue up to 31,560,000 common shares in exchange for the receipt of theexercise price of $21.00 per share or pursuant to a cashless exerciseprocess.  The exercise of all warrantswould have a dilutive effect on us and would increase the number of commonshares outstanding and increase our common share of dividend costs, affectingany existing guidance on EPS and affect our cash flows.

**InternalControls**

Ourinternal controls, accounting policies and practices, and internal informationsystems are designed to enable us to capture and process transactions in atimely and accurate manner in compliance with generally accepted accountingprinciples (GAAP) in the United States of America, laws and regulations,taxation requirements, and federal securities laws and regulations.  We implemented corporate governance, internalcontrol and accounting rules issued in connection with the Sarbanes-Oxley Actof 2002.  Our internal controls

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andpolicies have been and continue to be closely monitored by management and ourBoard of Directors to ensure continued compliance with Section 404 of theAct.  While we believe these controls,policies, practices and systems are adequate to verify data integrity,unanticipated and unauthorized actions of employees, temporary lapses ininternal controls due to shortfalls in oversight or resource constraints couldlead to improprieties and undetected errors that could impact our financialcondition, cash flows or results of operations.

**EnvironmentalCompliance**

Our facilities (bothwholly-owned and co-owned with others) are subject to continuing federal andstate environmental laws and regulations. We believe that we currently comply with all existing federal and stateenvironmental laws and regulations.  Weown a non-controlling, minority interest in several generating stationsoperated by The Cincinnati Gas & Electric Company (CG&E) or itsaffiliate, Union Heat, Light & Power, and Columbus Southern Power Company(CSP).  Either or both of these partiesare likely to take steps to ensure that these stations remain in compliancewith applicable environmental laws and regulations.  As a non-controlling owner in thesegenerating stations, we will be responsible for our pro rata share of theseexpenditures based upon our ownership interest.

**Climate Change**

Recently we have seen agrowing interest in considering legislation or regulation in response togreenhouse gases generated by numerous sources, vehicles, manufacturing and theelectric utility industry.  Although, **DPL,****DP&L** andits subsidiaries have operated facilities in compliance with state and federalenvironmental laws and regulations and is currently engaged in significantcapital improvements of five units at the Stuart and Killen Generating Stationsfor the reduction of SO2,Congress could approve legislation that in the long term may impact operationsof the units we and our partners manage or increase the cost for us to do so.

**Employees**

Many of our employees areunder a collective bargaining agreement. If we are unable to negotiate futurecollective bargaining agreements, we could experience work stoppages which mayaffect its business and operating results.

**Item1b — Unresolved Staff Comments**

None
| **Item 2 — Properties** |
|------------------------------|

 

**Electric**

Informationrelating to our properties is contained in Item 1 — CONSTRUCTION ADDITIONS, andELECTRIC OPERATIONS AND FUEL SUPPLY, and Note 10 of Notes to ConsolidatedFinancial Statements.

Substantially allproperty and plant of **DP&L** issubject to the lien of the mortgage securing **DP&L’s**First and Refunding Mortgage, dated as of October 1, 1935 with the Bank of NewYork, as Trustee (Mortgage).
| **Item 3 - 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 ourconsolidated financial statements, as prescribed by GAAP, for these matters areadequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, and other matters discussed below, and to comply withapplicable laws and regulations will not exceed the amounts reflected in ourConsolidated Financial Statements.  Assuch, costs, if any, that may be incurred in excess of those amounts providedas of December 31, 2006, cannot be reasonably determined.

**FormerExecutive Litigation**

OnAugust 24, 2004, **DPL**, and itssubsidiaries **DP&L** and MVE,filed a Complaint (and subsequently, amended complaints) againstMr. Forster, Ms. Muhlenkamp and Mr. Koziar (the Defendants) inthe Court of Common Pleas of Montgomery County, Ohio asserting legal claimsagainst them relating to the termination of the Valley Partners Agreements,challenging the validity of the purported amendments to the deferredcompensation plans and to the employment and consulting agreements, includingMVE incentives, with the Defendants, and the propriety of the distributionsfrom the plans to the Defendants, and alleging that the Defendants breachedtheir fiduciary duties and breached their consulting and employmentcontracts.  **DPL**, **DP&L** andMVE seek, among

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otherthings, damages in excess of $25,000, disgorgement of all amounts improperlywithdrawn by the Defendants from the plans and a court order declaring that **DPL**, **DP&L**and MVE have no further obligations under the consulting and employmentcontracts due to those breaches.

TheDefendants have filed their answers (and subsequently, amended answers)denyingliability and filed counterclaims (and subsequently, amended counterclaims)against **DPL**, **DP&L**, MVE, various compensation plans(the Plans), and current and former employees and current and former members ofour Board of Directors.  Thesecounterclaims, as amended, allege generally that **DPL**, **DP&L**,MVE, the Plans and the individual defendants breached the terms of theemployment and consulting contracts of the Defendants and the terms of thePlans.  They further allege theories ofbreach of fiduciary duty, breach of contract, promissory estoppel, tortiousinterference, conversion, replevin and violations of ERISA under which theyseek distribution of deferred compensation balances, conversion of stock incentiveunits, exercise of options and payment of amounts allegedly owed under thecontracts and the Plans.  Defendants’counterclaims also demand payment of attorneys’ fees.

OnMarch 15, 2005, Mr. Forster and Ms. Muhlenkamp filed a lawsuit in New Yorkstate court against the purchasers of the private equity investments in thefinancial asset portfolio and against outside counsel to **DPL** and **DP&L**concerning purported entitlements in connection with the purchase of thoseinvestments.  **DPL**, **DP&L**andMVE are not defendants in that case; however, **DPL,DP&L**and MVE are parties to an indemnification agreement withrespect to the purchaser defendants.  OnAugust 18, 2005, the Ohio court issued a preliminary injunction against Mr.Forster and Ms. Muhlenkamp that precludes them from pursuing certain key issuesraised by Mr. Forster and Ms. Muhlenkamp in their New York lawsuit that areidentical to the issues raised in the pending Ohio lawsuit in the New Yorkcourt or any other forum other than the Ohio litigation.  In addition, the New York court has stayedthe New York litigation pending the outcome of the Ohio litigation.  Mr. Forster and Ms. Muhlenkamp have appealedthe preliminary injunction and the appeal is pending at the Ohio Supreme Court.

Thetrial commencement date for this case is set for April 30, 2007.

Cumulatively throughDecember 31, 2006, we have accrued for accounting purposes, obligations ofapproximately $56 million to reflect claims regarding deferred compensation,estimated MVE incentives and/or legal fees that Defendants assert are payableper contracts.  We dispute Defendants’entitlement to any of those sums and any other sums the Defendants assert aredue to them and, as noted above, we are pursuing litigation against themcontesting all such claims.

Onor about June 24, 2004, the SEC commenced a formal investigation into theissues raised by the Memorandum (see Note 17 of the Notes to the ConsolidatedFinancial Statements).  Although the SEChas not taken any significant action in furtherance of their investigationduring 2006, we stand ready to cooperate with their investigation.

On May 28, 2004,the U.S. Attorney’s Office for the Southern District of Ohio, assisted by theFederal Bureau of Investigation, notified us that it has initiated an inquiry involvingthe subject matters covered by our internal investigation.   Although the U.S. Attorney’s office and theFBI have not taken any significant action in furtherance of their investigationduring 2006, we stand ready to cooperate with their investigation.

On June 24, 2004, theInternal Revenue Service (IRS) began an audit of tax years 1998 through 2003and issued a series of data requests to us including issues raised in theMemorandum.  The staff of the IRS requested that we provide certaindocuments, including but not limited to, matters concerning executive/directordeferred compensation plans, management stock incentive plans and MVE financialstatements.  On September 1, 2005, the IRS issued an audit report for taxyears 1998 through 2003 that showed proposed changes to our federal income taxliability for each of those years.  The proposed changes resulted in atotal tax deficiency, penalties and interest of approximately $23.9 million asof December 31, 2005.  On November 4, 2005, we filed a written protest toone of the proposed changes.  On April 3, 2006, the IRS conceded theproposed changes that we filed a written protest to and issued a revised auditreport for tax years 1998 through 2003.  The revised audit report resultedin a total tax deficiency, penalties and interest of approximately $1.2million.  We had previously made a deposit with the IRS of approximately$1.3 million that we requested on April 14, 2006 be applied to offset the $1.2million tax deficiency, penalties and interest for tax years 1998 through2003.  The Joint Committee on Taxation completed its review of the revisedaudit report for tax years 1998 through 2003 and sent us a letter dated June16, 2006 stating that it took no exception to the revised audit report.

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**Insurance Recovery Claim**

On January 13, 2006, we fileda claim against one of our insurers, Associated Electric & Gas InsuranceServices (AEGIS), under a fiduciary liability policy to recoup legal feesassociated with our litigation against three former executives.   Anarbitration of this matter was held on August 4, 2006.  The arbitrationpanel ruled on or about September 12, 2006 that the AEGIS policy does notrequire an advance of defense expenses to us.  Rather, the arbitration panelstated that we are required to file a written undertaking as a conditionprecedent to repay expenses finally established not to be insured.  Wehave filed a written undertaking with AEGIS and will continue to pursueresolution of the claim through mediation and arbitration in 2007.

**State Income Tax Audit**

On February 13, 2006, wereceived correspondence from the Ohio Department of Taxation (ODT) notifying usthat ODT has completed their examination and review of our Ohio CorporationFranchise Tax Returns for tax years 2002 through 2004 and that the finalproposed audit adjustments result in a balance due of $90.8 million beforeinterest and penalties.  We have reviewed the proposed audit adjustmentsand are vigorously contesting the ODT findings and notice of assessment throughall administrative and judicial means available. On March 29, 2006, we filedpetitions for reassessment with the ODT to protest each assessment as well asrequest corrected assessments for each tax year.  On October 12, 2006, wesigned a Memorandum of Understanding with the ODT that stated if the ODT’spositions are ultimately sustained in judicial proceedings, the totaladditional tax liability that we would be subject to for tax years 2002 through2004 would be no more than $50.7 million before interest as opposed to the$90.8 million stated in the ODT’s correspondence of February 13, 2006.  Webelieve we have recorded adequate tax reserves related to the proposedadjustments; however, we cannot predict the outcome, which could be material toour results of operations and cash flows.

We are also under audit reviewby various state agencies for tax years 2002 through 2004.  We have alsofiled an appeal to the Ohio Board of Tax Appeals for tax years 1998 through2001.  Depending upon the outcome of these audits and the appeal, we maybe required to increase our tax provision if actual amounts ultimatelydetermined exceed recorded reserves.  We believe we have adequate reservesin each tax jurisdiction but cannot predict the outcome of these audits.

**Labor Relations Unasserted Claim**

In September 2006, we becameaware of an unasserted claim under the Fair Labor Standards Act concerning thecalculation of overtime rates for our unionized workforce.  By agreement of Local #175 and **DP&L**, we jointly submitted the claim to a neutral thirdparty who ruled in favor of **DP&L’s**position.  As a result of this decision,Local #175 has decided not to pursue any claim against **DP&L**.

**Environmental**

Pending before theU.S. Supreme Court is a proceeding, Environmental Defense v. Duke Energy (DukeEnergy) that does not involve **DP&L** as aparty but may have a significant effect on the outcome of litigation describedbelow that involves allegations of violations of the CAA.  A key issue in that litigation that may bedispositive with respect to other pending cases is what test to apply formeasuring whether modifications to electric generating units should triggerapplication of New Source Review (NSR) standards under the CAA.   In general terms, the dispute is whether tomeasure pre- and post-modification emissions based on the rate of emissions perhour of operation or based on total emissions over time.  The latter test, if applied, could triggerNSR requirements for equipment replacements that result in a plant running moreoften because it is more economical or dependable, even if the emissions rateper hour of operation does not change.  Aruling is expected in the first or second quarter of 2007.  **DP&L** cannotpredict the outcome of the Duke Energy case. Moreover, in each of the cases identified below, there may becase-specific facts and allegations that may cause a judge to find that theU.S. Supreme Court’s ruling is based on different facts and allegations and istherefore not controlling in the case before the judge.

In September 2004,the Sierra 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,including issues that may be decided by the Supreme Court in the Duke Energycase and other issues relating to alleged violations of opacitylimitations.  **DP&L**,on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken placeand expert reports are scheduled to be filed at various times from May throughSeptember, 2007.  Dispositive motions areto be filed in January 2008.  No trialdate has been set yet.

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Additionalinformation relating to legal proceedings involving **DPL**and **DP&L**iscontained in Item 1 — ENVIRONMENTAL CONSIDERATIONS, Item 1 — COMPETITION ANDREGULATION, and Item 8 — Note 15 of Notes to Consolidated Financial Statements.

**Item 4 -****Submission of Matters to a Vote of Security Holders**

NONE

**PART II**

**Item 5 -****Market for Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities**

As of December 31,2006, there were 24,434 holders of record of **DPL**common equity, excluding individual participants in security position listings.The following table presents the high and low per share sales prices for **DPL**common stock as reported by the NewYork Stock Exchange for each quarter of 2006 and 2005:
| ** **     | ** ** | **2006** | ** ** | **2005**   | ** ** |
|----------------|------------|----------|------------|------------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  | ** ** | **$**    | **27.58**  | ** ** | **$**      | **25.11** |   | $ | 26.77 |   | $ | 24.27 |   |
| Second Quarter | ** ** | **$**    | **27.82**  | ** ** | **$**      | **26.25** |   | $ | 27.67 |   | $ | 24.08 |   |
| Third Quarter  | ** ** | **$**    | **27.93**  | ** ** | **$**      | **26.74** |   | $ | 28.12 |   | $ | 26.70 |   |
| Fourth Quarter | ** ** | **$**    | **28.72**  | ** ** | **$**      | **27.16** |   | $ | 28.01 |   | $ | 24.55 |   |

 

**DP&L’s**common stock is held solely by **DPL**and,as a result, is not listed for trading on any stock exchange.

As long as **DP&L** preferred stock is outstanding, **DP&L’s** Amended Articles ofIncorporation contain provisions restricting the payment of cash dividends onany of its common stock if, after giving effect to such dividend, the aggregateof all such dividends distributed subsequent to December 31, 1946 exceeds thenet income of **DP&L** availablefor dividends on its Common Stock subsequent to December 31, 1946, plus$1.2 million.  As of year-end, allearnings reinvested in the business of **DP&L**were available for **DP&L** commonstock dividends.  We expect all 2006earnings reinvested in the business of **DP&L**to be available for **DP&L**common stock dividends, payable to **DPL.**

On February 1, 2006, ourBoard of Directors authorized a 4% dividend increase on **DPL’s**common stock, raising the annual dividend on common shares from $0.96 per shareto $1.00 per share.  These dividends werepaid in each quarter of 2006.

On February 1, 2007, ourBoard of Directors authorized a 4% dividend increase on **DPL’s** common stock, raising the annualdividend on common shares from $1.00 per share to $1.04 per share.  These dividends will be paid each quarterduring 2007.

Additional informationconcerning dividends paid on **DPL**common stock is set forth under Selected Quarterly Information in Item 8 —Financial Statements and Supplementary Data.

Informationregarding our equity compensation plans as of December 31, 2006, isdisclosed in Item 12 — Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters, which incorporates such informationby reference to our proxy statement for the 2007 Annual Meeting ofShareholders.

22

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****

23

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**Item 6 - Selected Financial Data**
| ** **                                                                                                | ** ** | **For years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in millions except per share amounts or as indicated)** | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **DPL Inc.**                                                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings  (loss) per share of common stock:                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |
| Continuing operations (d)                                                                                 |       | $                                                    | 1.12       |   | $ | 1.03 |   | $ | 1.01 |   | $ | 0.96 |   | $ | 1.48 |   |
| Discontinued operations                                                                                   |       | $                                                    | 0.12       |   | $ | 0.44 |   | $ | 0.80 |   | $ | 0.14 |   | $ | (0.72 | ) |
| Cumulative effect of accounting change (a)                                                                |       | $                                                    | —     |   | $ | (0.03 | ) | $ | — |   | $ | 0.14 |   | $ | — |   |
| Total basic earnings per common share                                                                     |       | $                                                    | 1.24       |   | $ | 1.44 |   | $ | 1.81 |   | $ | 1.24 |   | $ | 0.76 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share of common stock:                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |
| Continuing operations (d)                                                                                 |       | $                                                    | 1.03       |   | $ | 0.97 |   | $ | 1.00 |   | $ | 0.94 |   | $ | 1.42 |   |
| Discontinued operations                                                                                   |       | $                                                    | 0.12       |   | $ | 0.41 |   | $ | 0.78 |   | $ | 0.14 |   | $ | (0.69 | ) |
| Cumulative effect of accounting change (a)                                                                |       | $                                                    | —     |   | $ | (0.03 | ) | $ | — |   | $ | 0.14 |   | $ | — |   |
| Total dilutive earnings per common share                                                                  |       | $                                                    | 1.15       |   | $ | 1.35 |   | $ | 1.78 |   | $ | 1.22 |   | $ | 0.73 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Dividends paid  per share                                                                                 |       | $                                                    | 1.00       |   | $ | 0.96 |   | $ | 0.96 |   | $ | 0.94 |   | $ | 0.94 |   |
| Dividends payout  ratio                                                                                   |       | 80.7                                                 | %          | 66.7 | % | 53.0 | % | 75.8 | % | 123.7 | % |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total Electric  sales (millions of kWh)                                                                   |       | 18,418                                               |       | 17,906 |   | 18,465 |   | 19,345 |   | 19,247 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Results of  Operations:                                                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                                  |       | $                                                    | 1,393.5    |   | $ | 1,284.9 |   | $ | 1,199.9 |   | $ | 1,191.0 |   | $ | 1,186.4 |   |
| Earnings from continuing operations, net of tax (d)                                                       |       | $                                                    | 125.6      |   | $ | 124.7 |   | $ | 121.5 |   | $ | 114.9 |   | $ | 177.6 |   |
| Earnings (loss) from discontinued operations, net of  tax                                                 |       | $                                                    | 14.0       |   | $ | 52.9 |   | $ | 95.8 |   | $ | 16.6 |   | $ | (86.5 | ) |
| Cumulative effect of accounting change, net of tax                                                        |       | $                                                    | —     |   | $ | (3.2 | ) | $ | — |   | $ | 17.0 |   | $ | — |   |
| Net Income                                                                                                |       | $                                                    | 139.6      |   | $ | 174.4 |   | $ | 217.3 |   | $ | 148.5 |   | $ | 91.1 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Financial  Position items at December 31, :                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total Assets                                                                                              |       | $                                                    | 3,612.2    |   | $ | 3,791.7 |   | $ | 4,165.5 |   | $ | 4,444.7 |   | $ | 4,277.7 |   |
| Long-term Debt (b)                                                                                        |       | $                                                    | 1,551.8    |   | $ | 1,677.1 |   | $ | 2,117.3 |   | $ | 1,954.7 |   | $ | 2,142.3 |   |
| Trust preferred securities (b)                                                                            |       | $                                                    | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 292.6 |   |
| Total construction additions                                                                              |       | $                                                    | 351.6      |   | $ | 179.7 |   | $ | 98.0 |   | $ | 102.2 |   | $ | 165.9 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Senior unsecured  debt ratings at December 31, : (c)                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Fitch Ratings                                                                                             |       | BBB                                                  |       | BBB- |   | BB |   | BBB |   | BBB |   |
| Moody’s Investors Service                                                                            |       | Baa3                                                 |       | Ba1 |   | Ba3 |   | Ba1 |   | Baa2 |   |
| Standard & Poor’s Corporation                                                                    |       | BB                                                   |       | BB- |   | B+ |   | BB- |   | BBB- |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Number of  Shareholders - Common Stock                                                                    |       | 24,434                                               |       | 26,601 |   | 28,079 |   | 30,366 |   | 31,856 |   |
| ** **                                                                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
|                                                                                                      |       |
| **The Dayton Power and Light Company**                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total Electric  sales (millions of kWh)                                                                   |       | 18,418                                               |       | 17,906 |   | 18,465 |   | 19,345 |   | 19,247 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Results of  Operations:                                                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                                  |       | $                                                    | 1,385.2    |   | $ | 1,276.9 |   | $ | 1,192.2 |   | $ | 1,183.4 |   | $ | 1,175.8 |   |
| Earnings on Common Stock (d)                                                                              |       | $                                                    | 241.6      |   | $ | 210.9 |   | $ | 208.1 |   | $ | 238.5 |   | $ | 244.7 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Financial  Position items at December 31, :                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total Assets                                                                                              |       | $                                                    | 3,090.3    |   | $ | 2,738.6 |   | $ | 2,641.4 |   | $ | 2,660.1 |   | $ | 2,757.3 |   |
| Long-term Debt (b)                                                                                        |       | $                                                    | 785.2      |   | $ | 685.9 |   | $ | 686.6 |   | $ | 687.3 |   | $ | 665.5 |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Senior secured  debt ratings at December 31, : (c)                                                        |       |                                                 |       |   |   |   |   |   |   |   |   |
| Fitch Ratings                                                                                             |       | A                                                    |       | A- |   | BBB |   | A |   | A |   |
| Moody’s Investors Service                                                                            |       | A3                                                   |       | Baa1 |   | Baa3 |   | Baa1 |   | A2 |   |
| Standard & Poor’s Corporation                                                                    |       | BBB                                                  |       | BBB- |   | BBB- |   | BBB- |   | BBB |   |
|                                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Number of  Shareholders - Preferred Stock                                                                 |       | 290                                                  |       | 329 |   | 357 |   | 402 |   | 426 |   |

 

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*(a)**      **In 2003, we recorded a cumulative effect of an accounting changerelated to the adoption of SFAS 143 “Accounting for Asset   Retirement Obligations”.  In 2005, we recorded an additional obligationin response to FASB Interpretation Number (FIN) 47, “Accounting for ConditionalAsset Retirement Obligations, an interpretation of FASB Statement No. 143.”  See Item 7 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations.*

*(b)**      **Excludes current maturities of long-term debt.  Upon adoption of FASB Interpretation Number46R “Consolidation of Variable Interest Entities (Revised December 2003) aninterpretation of ARB No. 51” at December 31, 2003, DPL deconsolidated the DPLCapital Trust II.*

*(c)**       **During 2006, our rating agencies upgraded our corporate credit and debtratings.  In February 2007, S&Pupgraded the corporate credit rating and debt rating from BB to BBB- for DPLand from BBB to BBB+ for DP&L.*

*(d)**      **In the fourth quarter of 2006, DPL entered into agreements to sell twoof its peaking facilities resulting in a $44.2 million ($71 million pre-tax)**impairment charge.  During 2006, DPL recorded a $37.3 million($61.2 million pre-tax) charge for early redemption of debt.  DP&L recorded**a $2.5 million ($4.1 millionpre-tax) charge for early redemption of debt.*

 

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**Item 7 - Management’s Discussion and Analysis of Financial Condition andResults of Operations**

Certainstatements contained in this discussion are “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995. Mattersdiscussed in this report that relate to events or developments that areexpected to occur in the future, including management’s expectations, strategicobjectives, business prospects, anticipated economic performance and financialcondition and other similar matters constitute forward-looking statements. Forward-lookingstatements are based on management’s beliefs, assumptions and expectations ofour future economic performance, taking into account the information currentlyavailable to management. These statements are not statements of historicalfact. Such forward-looking statements are subject to risks and uncertaintiesand investors are cautioned that outcomes and results may vary materially fromthose projected due to various factors beyond our control, including but notlimited to: abnormal or severe weather; unusual maintenance or repairrequirements; changes in fuel costs and purchased power, coal, environmentalemissions, gas and other commodity prices; increased competition; regulatorychanges and decisions; changes in accounting rules; financial marketconditions; and general economic conditions.

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

The followingdiscussion should be read in conjunction with the accompanying financials andrelated footnotes included in Item 8 — Financial Statements and SupplementaryData.

**BUSINESSOVERVIEW**

This reportincludes the combined filing of **DPL Inc**. **(DPL)** and **The Dayton Power and LightCompany****(DP&L). DP&L**isthe principal subsidiary of **DPL**providingapproximately 99% of **DPL’s**totalconsolidated revenue and approximately 86% of **DPL’s**totalconsolidated asset base. Throughout this report the terms we, us, our and oursare used to refer to both **DPL** and **DP&L**, respectively and altogether, unless the contextindicates otherwise. Discussions or areas of this report that apply only to **DPL** or **DP&L** willclearly be noted in the section.  Historically,**DPL** and **DP&L**have filed separate SEC filings. Beginning with this report and in the future, **DPL Inc**. and **The Dayton Power and LightCompany** will file combined SEC reports on an interium and annualbasis.

**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, maximizing profits while effectively managing exposure tomovements in energy and fuel prices and utilizing the transmission anddistribution assets that transfer electricity at the most efficient cost whilemaintaining the highest level of customer service and reliability.

We operate and managegeneration assets and are exposed to a number of risks through this management.These risks include but are not limited to electricity wholesale price risk,fuel supply and price risk and power plant performance.  We attempt to manage these risks throughvarious means. For instance, we operate a portfolio of wholly owned and jointlyowned generation assets that is diversified as to fuel source, cost structureand operating characteristics.  We arefocused on the operating efficiency of these power plants and maintaining theiravailability.

We****operateand manage****transmission and distribution assetsin a rate-regulated environment. Accordingly, this subjects us to regulatoryrisk in terms of the costs that they may recover and the investment returnsthat they may collect in customer rates. We are focused on deliveringelectricity and to maintain high standards of customer service and reliabilityin a cost-effective manner.

We operate in a regulatedand deregulated environment. The electric utility industry has historicallyoperated in a regulated environment. However, in recent years, there have beena number of federal and state regulatory and legislative decisions aimed atpromoting competition and providing customer choice. Market participants havetherefore created new business models to exploit opportunities. The marketplaceis now comprised of independent power producers, energy marketers and traders,energy merchants, transmission and

25

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distribution providersand retail energy suppliers. There have also been new market entrants andactivity among the traditional participants, such as mergers, acquisitions,asset sales and spin-offs of lines of business. In addition, transmissionsystems are being operated by Regional Transmission Organizations (RTOs).

As part of Ohio’selectric deregulation law, all of the state’s investor-owned utilities wererequired to join an RTO.**DP&L** successfully integratedits 1,000 miles of high-voltage transmission into the PJM Interconnection,L.L.C. (PJM) RTO in October 2004. As an RTO, PJM’s role is to administer anelectric marketplace and ensure the reliability of the high-voltage electricpower system serving 51 million people in all or parts of Delaware, Illinois,Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio,Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJMcoordinates and directs the operation of the region’s transmission grid;administers the world’s largest competitive wholesale electricity market andplans regional transmission expansion improvements to maintain grid reliabilityand relieve congestion.

**2006 FINANCIAL OVERVIEW**

As more fully discussed in later sections of thisMD&A, the following were the significant themes and events for 2006:

·                  **DPL’s** revenues increased 8% over 2005 resulting from therate stabilization surcharge and other regulated asset recovery ridersimproving gross margin and profitability.  **DPL**’sfuel, purchased power costs, and operation and maintenance increased over 2005by 4%, 19% and 21%, respectively.  **DPL**’s cash flowfrom operations of $308.7 million was in line with the cash flow fromoperations of $314.7 million in 2005.

·                  **DP&L’s** revenues increased 8% over 2005 resulting fromthe rate stabilization surcharge and other regulated asset recovery ridersimproving gross margin and profitability.   **DP&L’s**fuel, purchased power costs, and operation and maintenance increased over 2005by 5%, 17% and 17%, respectively. **DP&L**’s cashflow from operations of $365.7 million was in line with the cash flow fromoperations of $366.8 million in 2005.

·                  Inconnection with DPLE’s decision to sell the Greenville Station and DarbyStation electric peaking generation facilities, **DPL**concluded that an impairment charge for the Greenville Station and DarbyStation assets was required. During the fourth quarter of 2006, **DPL** recorded a $71.0 million impairment charge to record thefair market write-down of the assets and other associated costs related to thesale.

·                  On September 13,2006, the Ohio Air Quality Development Authority (OAQDA) issued$100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006Series A due September 1, 2036. In turn, **DP&L**then borrowed these funds from the OAQDA. **DP&L** is usingthe proceeds from these borrowings to assist in financing its portion of thecosts of acquiring, constructing and installing certain solid waste disposal andair quality facilities at Miami Fort, Killen and Stuart Generating Stations.

·                  OnJuly 27, 2005, **DPL’s** Board authorized therepurchase of up to $400 million of common stock from time to time in the openmarket or through private transactions. **DPL** completedthis share repurchase program on August 21, 2006. These Board-authorizedrepurchase transactions resulted in 14.9 million shares being repurchased, or11.7% of the outstanding stock at December 31, 2005 at an average price of$26.91 per share. These shares are currently held as treasury shares at **DPL**.

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**RESULTS OF OPERATIONS — DPL Inc.**

**DPL’s**results of operations include the results of itssubsidiaries, including the consolidated results of its principal subsidiary **The Dayton Power and Light Company** (**DP&L)**and all of **DP&L’s** consolidatedsubsidiaries. **DP&L**provides approximately99% of the total revenues of **DPL.**Allmaterial intercompany accounts and transactions have been eliminated inconsolidation. A separate specific discussion of the results of operations for **DP&L** is presented elsewhere in thisreport.

**FinancialHighlights - DPL**
| **$ in millions**                | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                              | ** ** | ** ** |       |       |       |       |       |
| Retail                                     |       | $          | 1,131.4    |       | $          | 1,066.6    |       | $ | 1,036.8 |   |
| Wholesale                                  |       | 174.1      |       | 133.3      |       | 135.1      |       |
| RTO ancillary                              |       | 77.2       |       | 74.4       |       | 17.9       |       |
| Other revenues, net of fuel costs          |       | 10.8       |       | 10.6       |       | 10.1       |       |
| Total Revenues                             |       | $          | 1,393.5    |       | $          | 1,284.9    |       | $ | 1,199.9 |   |
|                                       |       |       |       |       |       |       |       |
| Less: Fuel                                 |       | 349.1      |       | 336.9      |       | 263.1      |       |
| Purchased power (a)                        |       | 159.0      |       | 133.3      |       | 113.1      |       |
| Gross margins  (b)                         |       | $          | 885.4      |       | $          | 814.7      |       | $ | 823.7 |   |
|                                       |       |       |       |       |       |       |       |
| Gross margins as  a percentage of revenues |       | 63.5       | %          | 63.4       | %          | 68.6       | %          |
|                                       |       |       |       |       |       |       |       |
| **Operating  Income**                      |       | $          | 281.0      |       | $          | 339.1      |       | $ | 336.5 |   |
| ** **                                 |       |       |       |       |       |       |       |
| **Earnings  per share:**                   |       |       |       |       |       |       |       |
| Continuing Operations                      |       | $          | 1.12       |       | $          | 1.03       |       | $ | 1.01 |   |
| Discontinued Operations                    |       | 0.12       |       | 0.44       |       | 0.80       |       |
| Cumulative effect of accounting change     |       | —     |       | (0.03      | )          | —     |       |
| Net Income                                 |       | $          | 1.24       |       | $          | 1.44       |       | $ | 1.81 |   |

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*(a)**             **Purchased power includesancillary charges from PJM of $49.4 million, $48.5 million and $12.3 millionfor 2006, 2005 and 2004 respectively.*

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

**DPL Inc.- 2006 Compared to 2005**

For the year endedDecember 31, 2006, basic earnings per share of $1.24 decreased $0.20 from thesame period in 2005. The decline was primarily due to a $0.32 per sharedecrease in Earnings from Discontinued Operations reflecting lower investmentincome and lower gains on the sale of investments. Most of the investments weresold during 2005. Basic earnings per share for Earnings from ContinuingOperations were $0.09 higher in 2006 compared to 2005. This increase is theresult of higher revenues relating to the impact of the rate stabilization planand lower interest expense, partially offset by a $71.0 million impairmentcharge for the peaking units, higher fuel and purchased power costs and higheroperation and maintenance expenses.

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**DPL Inc.- 2005 Compared to 2004**

For the year endedDecember 31, 2005, basic earnings per share of $1.44 decreased $0.37 from thesame period in 2004. The decline was primarily due to a $0.36 per sharedecrease in Earnings from Discontinued Operations reflecting lower investmentincome, partially offset by the gain on the sale of investments (In February2005, **DPL** agreed to sell its respectiveinterests in forty-six private equity funds). Basic earnings per share forEarnings from Continuing Operations were $0.02 higher in 2005 compared to 2004.This increase is the result of higher revenues relating to higher retail salesvolume and ancillary revenues associated with the participation in PJM. Alsocontributing to this increase were lower operation and maintenance expensesdriven by lower corporate costs, higher investment income and lower interestexpense related to debt refinancing in 2004. These increases were partiallyoffset by higher fuel and purchased power costs and a $61.2 million charge forthe early redemption of debt.

For 2005, basic earningsper share includes a $0.03 after-tax charge related to the cumulative effect ofa change in accounting for asset retirement obligations at certain powergenerating stations.

**DPL Inc.— Revenues**

For the year endedDecember 31, 2006, revenues increased $108.6 million, or 8% to $1,393.5 from$1,284.9 for the same period in the prior year. This increase was primarily theresult of higher average retail rates and higher wholesale sales volume,partially offset by lower retail sales volume and lower average rates forwholesale revenues. Retail revenues increased $64.8 million primarily resultingfrom an increase in average rates related to the Rate Stabilization Plansurcharge and other regulated asset recovery riders resulting in a $93.0million price variance, partially offset by lower retail sales volume resultingin a $29.4 million volume variance. Sales volume declined 3% in 2006 from 2005due to milder weather which resulted in lower heating and cooling degree days. Heatingdegree days declined 11% and cooling degree days declined 20%. Wholesalerevenue increased $40.8 million primarily related to a 34% increase in salesvolume (935 GWh) resulting in a $45.8 million volume variance, partially offsetby a decrease in wholesale average rates resulting in a $5.0 million pricevariance. For 2006, the RTO ancillary revenues increased $2.8 million or 4% to$77.2 million from $74.4 million in 2005. RTO ancillary revenues primarilyconsist of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves.

Forthe year ended December 31, 2005, revenues of $1,284.9 million increased $85million, or 7% from $1,199.9 million for the same period in 2004. This increasewas primarily the result of increased retail sales volume, higher average ratesfor wholesale revenues, and ancillary revenues associated with participation inPJM that was partially offset by lower wholesale sales volume. Retail revenuesincreased $29.8 million, primarily resulting from increased sales volume of$32.8 million and $2.8 million in higher average rates, partially offset by$5.8 million in lower miscellaneous retail revenues reflecting transmissionservices provided in 2004 that are now provided through PJM. Residentialcustomers comprised the bulk of the increase in sales volume reflecting greaterweather extremes experienced in 2005 compared to 2004 as cooling degree dayswere up 39% to 1,075 in 2005 compared to 771 in 2004 and heating degree dayswere up 4% to 5,702 in 2005 compared to 5,500 in 2004. Wholesale revenuedecreased $1.8 million, primarily related to a $37.2 million decline in salesvolume that was nearly offset by a $35.4 million increase related to higheraverage market rates. For 2005, ancillary revenues from RTOs were $74.4 millioncompared to $17.9 million for 2004, as we did not participate in PJM untilOctober 2004.

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

For 2006, gross margin of$885.4 million increased $70.7 million, or 9%, from $814.7 million in 2005. Asa percentage of total revenues, gross margin remained flat in 2006 at 63.5%compared to 63.4% in 2005. This result reflects the favorable impact of therate stabilization plan on revenues offsetting the increasing fuel and purchasepower costs. In prior years, rising fuel and purchase power costs had erodedgross margin. Fuel costs, which include coal, gas, oil and emission allowancecosts, increased by $12.2 million, or 4%, in 2006 compared to the same periodin 2005 primarily due to increased fuel prices. Purchased power increased $25.7million, or 19% in 2006 compared to the same period in 2005 primarily resultingfrom increased charges of $30.8 million relating to higher purchased powervolume and an increase of $0.9 million in RTO ancillary costs. These increaseswere partially offset by lower average market rates reducing purchased powercosts by $6.0 million. The increase in purchase power volume resulted from ourdecision to purchase power at lower average market rates instead of running ourhigher cost generating facilities. In addition, from time to time, we purchasedpower when our generating facilities were not available due to scheduledmaintenance and forced outages.

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For 2005, gross margin of$814.7 million decreased by $9.0 million from $823.7 million for 2004. As apercentage of total revenues, gross margin decreased by 5.2 percentage pointsto 63.4% from 68.6%. This decline is primarily the result of increased fuel andpurchased power costs, partially offset by an increase in revenues, principallyfrom RTO ancillary revenues and higher average wholesale rates. Fuel costs,which include coal, gas, oil and emission allowance costs, increased by $73.8million or 28% for 2005 compared to the same period in 2004 primarily resultingfrom higher average fuel prices of $64.1 million as well as increasedgeneration of $9.7 million. Purchased power costs increased by $20.2 millionfor 2005 compared to 2004 primarily resulting from increased charges of $36.2million associated with operating in PJM (we did not participate in PJM untilOctober 2004) and $28.2 million related to higher average market prices,partially offset by $44.2 million related to lower purchased power volume.

**DPL Inc. - Operation and Maintenance**

 
| **$ in millions**                                                  | ** ** | **2006 vs. 2005** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
| Legal costs                                                                  |       | $                           | 13.5       |   |
| Power production  costs                                                      |       | 10.4                        |       |
| RTO  administrative fees                                                     |       | 5.5                         |       |
| Low-Income  Assistance Program                                               |       | 5.1                         |       |
| Lump sum bonus  and retirement payments                                      |       | 3.7                         |       |
| Line clearance                                                               |       | 2.7                         |       |
| Mark-to-market  adjustments and forfeitures of restricted stock units (RSUs) |       | 2.6                         |       |
| Long-term  incentive compensation                                            |       | 2.1                         |       |
| Pension and  benefits                                                        |       | 1.0                         |       |
| Directors’ and  Officers’ liability insurance                      |       | (3.2                        | )          |
| Sarbanes-Oxley  compliance fees                                              |       | (1.1                        | )          |
| Other, net                                                                   |       | 4.1                         |       |
| **Total operation and maintenance expense**                                  |       | $                           | 46.4       |   |

 

For 2006, operation and maintenance expense increased$46.4 million or 21% compared to 2005 year primarily resulting from a $13.5million increase in legal fees primarily related to the litigation with formerexecutives; a $10.4 million increase in power production costs consisting of$4.1 million of coal brokering credits received in 2005 that were notreceived in 2006 and increased operating and maintenance expenses of $3.1million which related to cost of removal and peaker engine repairs; $5.5 millionin PJM administrative fees, including $2.5 million deferred in 2005 by PUCOauthority (rate relief was granted in February 2006); $5.1 million increase inthe low-income assistance program costs; $3.7 million of lump sum bonus andretirement payments to former executives (not related to our ongoing litigationwith the three former executives); $2.7 million of line clearance; a $2.6million increase in mark-to-market adjustments and forfeitures of restrictedstock units; $2.1 million in long-term incentive compensation relating toperformance and restricted shares compensation; and a $1.0 million increase inpension and benefits expenses.  These increases were partially offset by a$3.2 million decrease in Directors’ and Officers’ liability insurance premiums anda $1.1 million decrease in Sarbanes-Oxley compliance fees.
| **$ in millions**                                 | ** ** | **2005 vs 2004** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|
| Directors’ &  Officers’ liability insurance   |       | $                          | (8.3       | ) |
| Legal and  special investigations                           |       | (5.8                       | )          |
| Executive and  management compensation                      |       | (5.8                       | )          |
| Sarbanes-Oxley  compliance and external/internal audit fees |       | (3.5                       | )          |
| Low-Income  Assistance Program                              |       | (2.3                       | )          |
| Pension and  benefits                                       |       | (0.7                       | )          |
| Electric  production, transmission and distribution costs   |       | 4.5                        |       |
| Other, net                                                  |       | 3.8                        |       |
| **Total  operation and maintenance expense**                |       | $                          | (18.1      | ) |

 

29

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For 2005, operation andmaintenance expense decreased $18.1 million or 8% compared to 2004 as aresult of lower corporate costs that were partially offset by increasedelectric production, transmission and distribution expenses. Corporate costsdeclined from the prior year primarily resulting from a decrease of $8.3million in Directors’ and Officers’ liability insurance premiums; approximately$5.8 million related to the decreased level of activity regarding variousinternal and governmental investigations as well as the securities litigation;$5.8 million in lower executive and management compensation costs; $3.5 millionin reduced Sarbanes-Oxley 404 compliance costs and external/internal auditfees; $2.3 million in decreased Low Income Assistance Program costs; and $0.7million of lower benefits costs (a decrease of $2.8 million for a 2004adjustment in disability reserves was nearly offset by an increase in pensioncosts of $2.1 million). These decreases were partially offset by a $4.5 millionincrease in electric production, transmission, and distribution costs,primarily related to generation operations costs for lime used for pollutioncontrol and electric production boiler maintenance costs as well as highercosts related to electric distribution operation and maintenance.

**DPL Inc. — Impairment of Peaking Stations**

In connection with DPLE’s decision to sell theGreenville Station and Darby Station electric peaking generation facilities, **DPL** concluded that an impairment charge for the GreenvilleStation and Darby Station assets was required.  Greenville Stationconsists of four natural gas peaking units with a net book value ofapproximately $66 million. Darby Station consists of six natural gas peakingunits with a net book value of approximately $156 million. DPLE plans to sellthe Greenville and Darby Station assets for $49 million and $102 million,respectively. These sales are expected to take place during the first half of2007.

During the fourth quarterof 2006, **DPL** recorded a $71.0 million impairmentcharge to record the fair market write-down of the assets and other associatedcosts related to the sale. These assets are now held for sale and are no longerbeing depreciated. There was no such activity in 2005. See Note 14 of the Notesto the Consolidated Financial Statements.

**DPL Inc. — Depreciation and Amortization**

For2006, depreciation and amortization expense increased $4.5 million from 2005 relatingto completed projects in both the distribution and production areas increasingour overall plant base.

Depreciation and amortization expense was $3.2 millionhigher in 2005 as compared to 2004 primarily as a result of completed projectsin the distribution area (including new services, line transformers, poles,station equipment and overhead and underground conductor) and in the productionarea (mainly due to the SCRs for Stuart, Killen and Zimmer) that were put intoservice in the second quarter of 2004.

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

For2006, amortization of regulatory assets increased $5.6 million to $7.6 millioncompared to the same period in 2005. The increase in amortization of regulatoryassets reflects $2.6 million for the amortization of costs incurred toaccommodate unbundled rates and electric choice bills in the customer billingsystem; $1.3 million for the amortization of PJM administrative fees deferredfor the period October 2004 through January 2006; $1.2 million for theamortization of incremental 2004/2005 severe storm costs; $0.3 million for theamortization of costs incurred to integrate **DP&L**into the PJM system; and $0.2 million for the amortization of the RateStabilization Surcharge rate case expenses.

For2005, amortization of regulatory assets increased $1.3 million to $2.0 millioncompared to the same period in 2004 primarily resulting from PJM start-up costsamortization of $1.1 million and PJM integration costs amortization of $0.2million reflecting **DP&L**’s entranceinto the PJM market on October 1, 2004.

## **DPL Inc. - Investment Income**

## For 2006, investment income decreased $33.1 million to $17.8 millionfrom $50.9 million for the same period in 2005. This decrease was primarily theresult of a $23.4 million decrease in gains on public and income investmentsrealized in 2005, a $4.6 million in foreign currency translation gains realizedin 2005 for the liquidation of investments denominated in Euros, and a $4.8million decrease in interest income resulting from lower cash balances in 2006compared to 2005.

For2005, investment income increased by $43.0 million compared to 2004 primarilyresulting from a net gain on the disposal of public equity and incomeinvestments of $23.5 million and from $18.5 million in interest income,principally from new short-term investments relating to a cash surplus from thesale of the private equity portfolio.

30

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## **DPL Inc. - Interest Expense**

## For 2006, interest expense decreased $35.5million, or 26%, compared to the same period in 2005 resulting from the debtreduction that occurred in 2004 and 2005 and a higher capitalized interest of$10.9 million in 2006 compared to 2005 associated with our major constructionprojects.

For2005, interest expense decreased $22.5 million, or 14%, compared to 2004 due tothe debt reduction of $462.6 million and a full year impact of the $500 milliondebt retirement completed in 2004 (partially financed with a $175 millionnote).

**DPL Inc. - Charge for Early Redemption of Debt**

In2005, **DPL** recorded $61.2 million in chargesresulting from premiums paid for the early redemption of debt, including write-offsof unamortized debt expense and debt discounts. 

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

For2006, other income (deductions) was $14.7 million less than the same period in2005 primarily due to gains of $12.3 million realized in 2005 from the sale ofpollution control emission allowances. There were no sales of pollution controlemission allowances during 2006.

For 2005, other incomewas $9.7 million greater than 2004 primarily reflecting $3.5 million ofadditional gains realized in 2005 over 2004 resulting from sales of pollutioncontrol emission allowances; $1.6 million of lower fees resulting from the 2004cancellation and replacement of **DP&L**’srevolving credit facility and our term loan termination and $1.5 million fromthe 2004 write-off of the remaining term loan debt expense resulting from ourterm loan termination.

## **DPL Inc. - Income Tax Expense**

## For 2006, income taxes from continuing operations decreased $10.1million, or 13%, compared to 2005 due to a decrease in pre-tax book income, adecrease in the effective tax rate primarily reflecting the phase-out of theOhio Franchise Tax and adjustments recorded in 2005 and 2006 to true-up booktax expense to the tax return.

For 2005, income taxexpense from continuing operations increased $13.4 million compared to 2004resulting from higher income, increased accrual for open tax years and lowerstate tax coal credits.

On June 30, 2005,Governor Taft signed House Bill 66 into law which significantly changed the taxstructure in Ohio.  The major provisions of the bill included phasing-outthe Ohio Franchise Tax, phasing-out the Ohio Personal Property Tax fornon-utility taxpayers and phasing-in a Commercial Activities Tax.  TheOhio Franchise Tax phase-out required second quarter 2005 adjustments to incometax expense.  Income taxes from continuing operations were reduced by $1.5million while income taxes from discontinued operations were increased by $1.3million as a result of the tax law change.  Other applicable provisions ofHouse Bill 66 have been reflected in the consolidated financial statements.

**DPL Inc.- Discontinued Operations, Net of Tax**

On February 13, 2005, oursubsidiaries, MVE and MVIC, entered into an agreement to sell their respectiveinterests in forty-six private equity funds to AlpInvest/Lexington 2005, LLC, ajoint venture of AlpInvest Partners and Lexington Partners, Inc.   Salesproceeds and any related gains or losses were recognized as the sale of eachfund closed. Among other closing conditions, each fund required the transactionto be approved by the respective general partner of each fund. During 2005, MVEand MVIC completed the sale of their interests in forty-three and a portion ofone of those private equity funds resulting in a $46.6 million pre-tax gain($53.1 million less $6.5 million professional fees) from discontinuedoperations and provided approximately $796 million in net proceeds, includingapproximately $52 million in net distributions from funds while held for sale. Aspart of this pre-tax gain, **DPL** realized$30 million that was previously recorded as an unrealized gain as part of othercomprehensive income.

During 2005, MVE enteredinto alternative closing arrangements with AlpInvest/Lexington 2005, LLC forfunds where legal title to said funds could not be transferred until a latertime. Pursuant to these arrangements, MVE transferred the economic aspects ofthe remaining private equity funds, consisting of two funds and a portion ofanother fund, to AlpInvest/Lexington 2005, LLC without a change in ownership ofthe interests. The terms of the alternative arrangements do not meet thecriteria for recording a sale. We are obligated to remit to AlpInvest/Lexington2005, LLC any distributions MVE receives from these funds, andAlpInvest/Lexington 2005,

31

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LLC is obligated toprovide funds to us to pay any contribution notice, capital call or otherpayment notice or bill for which MVE receives notice with respect to suchfunds. The alternative arrangements resulted in a deferred gain of $27.1million until such terms of a sale can be completed (contingent upon receipt ofgeneral partner approvals of the transfer) and in 2005 provided approximately$72 million in net proceeds on these funds.   **DPL** recorded an impairment loss of $5.6 million in thesecond quarter of 2005 to write down assets transferred pursuant to thealternative arrangements to estimated fair value. Ownership of these fundstransfer after the general partners of each of the separate funds consent to thetransfer.

On March 31, 2006, MVEcompleted the sale of the remaining portion of one private equity fund, forwhich MVE had previously entered into an alternative closing arrangementresulting in the recognition of $13.2 million of the deferred gain. On August31, 2006, MVE completed the sale of a portion of one of the two remainingprivate equity funds, resulting in recognition of $5.7 million of the deferredgain. The sale of the residual portion of this private equity fund will becompleted during the first quarter of 2007, resulting in the recognition ofapproximately $8.2 million of the deferred gain. The transfer of the remainingfund is expected to be completed in 2008.

 
| ** **                                     | ** ** | **For the years ended** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **December 31,**                  | ** ** |
| **$ in millions**                    | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                   |       |   |   |   |   |
| **Earnings  from discontinued operations:**    |       |                                   |       |   |   |   |   |
| Investment  income                             |       | $                                      | —     |   | $ | 41.3 |   | $ | 178.5 |   |
| Investment  expenses                           |       | (1.3                                   | )          | (9.5 | ) | (23.6 | ) |
| Income from discontinued operations            |       | (1.3                                   | )          | 31.8 |   | 154.9 |   |
|                                           |       |                                   |       |   |   |   |   |
| Gain realized  from sale                       |       | 18.9                                   |       | 53.1 |   | — |   |
| Broker fees and  other expenses                |       | —                                 |       | (6.5 | ) | — |   |
| Loss recorded                                  |       | —                                 |       | (5.6 | ) | — |   |
| Net gain on sale                               |       | 18.9                                   |       | 41.0 |   | — |   |
|                                           |       |                                   |       |   |   |   |   |
| Earnings before  income taxes                  |       | 17.6                                   |       | 72.8 |   | 154.9 |   |
| Income tax  expense                            |       | (3.6                                   | )          | (19.9 | ) | (59.1 | ) |
| **Earnings from discontinued operations, net** |       | $                                      | 14.0       |   | $ | 52.9 |   | $ | 95.8 |   |
|                                           |       |                                   |       |   |   |   |   |
| **Cash  Flow:**                                |       |                                   |       |   |   |   |   |
| Net proceeds  from sale of portfolio           |       | $                                      | —     |   | $ | 744.2 |   | $ | — |   |
| Net proceeds  from transfer                    |       | —                                 |       | 72.3 |   | — |   |
| Net  distributions from funds                  |       | —                                 |       | 51.9 |   | 203.9 |   |
| Total cash flow from discontinued operations   |       | $                                      | —     |   | $ | 868.4 |   | $ | 203.9 |   |

 

There was no investmentincome from discontinued operations during 2006, however there was $1.3 millionof legal costs associated with the ongoing litigation (see Note 11 of Notes toConsolidated Financial Statements). Income from discontinued operations(pre-tax) for the year ended December 31, 2005 of $31.8 million is comprised of$41.3 million of investment income less $9.5 million of associatedmanagement fees and other expenses.

For the year endedDecember 31, 2006, we recognized $18.9 million of the deferred gain from thesale of the remaining private equity funds described above. For the year endedDecember 31, 2005, we recognized a $46.6 million pre-tax gain ($53.1 millionless $6.5 million of professional fees), recorded a $5.6 million impairmentloss, deferred gains of $27.1 million on transferred funds from discontinuedoperations, and provided approximately $868 million in net proceeds, includingapproximately $52 million in net distributions from funds held for sale. Wewill continue to incur minor amounts of fees in the near term.

## **DPL Inc. - Cumulative Effect of Accounting Change, Net of Tax**

## In 2005, the cumulative effect of an accounting change resulted in acharge of $3.2 million related to the adoption of the provisions of FASBInterpretation No. 47, “Accounting for Conditional Asset Retirement Obligationsan interpretation of FASB Statement No. 143” (FIN 47).  (See Note 1 ofNotes to Consolidated Financial Statements.)

32

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

**IncomeStatement Highlights — DP&L**

** **
| **$ in millions**                | ** ** | **2006**   | ** **  | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
|                                       | ** ** | ** ** |        |     |       |     |       |
| Revenues:                                  | ** ** | ** ** |        |     |       |     |       |
| Retail                                     | ** ** | **$**      | **998.1**   |     | $          | 944.9    |       | $ | 914.0 |   |
| Wholesale                                  | ** ** | **309.9**  |        | 257.6    |       | 260.3    |       |
| RTO ancillary                              | ** ** | **77.2**   |        | 74.4     |       | 17.9     |       |
| Total Revenues                             | ** ** | **$**      | **1,385.2** |     | $          | 1,276.9  |       | $ | 1,192.2 |   |
|                                       | ** ** | ** ** |        |     |       |     |       |
| Less: Fuel                                 | ** ** | **335.2**  |        | 317.9    |       | 257.0    |       |
| Purchased power  (a)                       | ** ** | **171.9**  |        | 147.1    |       | 116.4    |       |
| Gross margins (b)                          | ** ** | **$**      | **878.1**   |     | $          | 811.9    |       | $ | 818.8 |   |
|                                       | ** ** | ** ** |        |     |       |     |       |
| Gross  margins as a percentage of revenues | ** ** | **63.4**   | **%**       | 63.6     | %          | 68.7     | %          |
|                                       | ** ** | ** ** |        |     |       |     |       |
| Operating Income                           | ** ** | **$**      | **402.5**   |     | $          | 382.6    |       | $ | 369.4 |   |

----

*(a)**                  **Purchased power includesancillary charges from PJM of $49.4 million, $48.5 million and $12.3 millionfor 2006, 2005 and 2004  respectively.*

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

**DP&L— Revenues**

For 2006, revenuesincreased 8% to $1,385.2 million compared to $1,276.9 million in 2005,reflecting an increase of $108.3 million. This increase was primarily the result of higher average rates forretail sales, greater wholesale sales volume and increased ancillary revenuesassociated with participation in a RTO. These increases were partially offset by lower retail sales volume andlower average rates for wholesale sales. Retail revenues increased $53.2 million, primarily resulting from a$78.3 million increase relating to higher average rates and increasedmiscellaneous revenues of $0.9 million, partially offset by decreased salesvolume of $26.0 million resulting from milder weather experienced in 2006compared to 2005.  The higher averagerates were primarily the result of the rate stabilization plan surcharge, andregulated asset recovery riders implemented throughout 2006.  Wholesale revenues increased $52.3 million,primarily related to a $88.6 million increase in sales volume, partially offsetby a $36.3 million decrease in average market rates.  During 2006, RTO ancillary revenues increased$2.8 million to $77.2 million from $74.4 million in 2005.  Heating degree days were down 11% to 5,076 in2006 compared to 5,702 in 2005.  Inaddition, cooling degree days were down 20% to 855 in 2006 compared to 1,075 in2005.

For2005, revenues increased 7% to $1,276.9 million compared to $1,192.2 million in2004, reflecting an increase of $84.7 million. This increase was primarily the result of increased retail sales volume,higher average rates for wholesale and retail revenues, and ancillary revenuesassociated with participation in PJM that was partially offset by lowerwholesale sales volume.  Retail revenuesincreased $30.9 million, primarily resulting from increased sales volume of$28.9 million and $7.6 million in higher average rates, partially offset by$5.6 million in lower miscellaneous retail revenues reflecting transmissionservices provided in 2004 that are now provided through PJM.  Residential customers comprised the bulk ofthe increase in sales volume reflecting greater weather extremes experienced in2005 compared to 2004 as cooling degree days were up 39% to 1,075 in 2005compared to 771 in 2004 and heating degree days were up 4% to 5,702 in 2005compared to 5,500 in 2004.  Wholesalerevenue decreased $2.7 million, primarily related to a $71.6 million decline insales volume that was nearly offset by a $68.9 million increase related tohigher average market rates.  For 2005,ancillary revenues from RTOs were $74.4 million compared to $17.9 million for2004, as we did not participate in PJM until October 2004.  RTO ancillary revenues primarily consist ofcompensation for use of our transmission assets, regulation services, reactivesupply and operating reserves.

33

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

For 2006, gross marginincreased $66.2 million to $878.1 million from $811.9 million in 2005.  As a percentage of total revenues, grossmargin remained relatively flat in 2006 at 63.4% compared to 63.6% in2005.  This result reflects the favorableimpact of the rate stabilization plan on revenues offsetting the increasingfuel and purchased power costs.  In prioryears, rising fuel and purchased power costs had eroded gross margin.  Fuel costs, which include coal, gas, oil andemission allowance costs, increased by $17.3 million or 5% in 2006 as a resultof higher market prices. Purchased power costs increased by $24.8 million or17% in 2006 compared to 2005 primarily resulting from higher volumes of powerpurchased.  The increase in purchasedpower volume resulted from our decision to purchase power at lower averagemarket rates instead of running our higher cost generating facilities.  In addition, from time to time, we had topurchase power to source power sales when our generating facilities were notavailable due to scheduled maintenance and forced outages.

For 2005, gross margindecreased by $6.9 million to $811.9 million from $818.8 million in 2004.  As a percentage of total revenues, grossmargin decreased by 5.1 percentage points to 63.6% from 68.7%.  This decline is primarily the result of a$91.6 million increase in fuel and purchased power costs, offset by an $84.7million increase in revenues (see discussion of revenue variance above).  Fuel costs increased by $60.9 million for2005 compared to the same period in 2004 primarily resulting from higheraverage fuel prices as well as an increased volume of electric generation.  Purchased power costs increased by $30.7million for 2005 compared to the same period in 2004 primarily resulting fromincreased ancillary charges of $36.2 million associated with moving poweracross PJM (we did not participate in PJM until October 2004) as well asincreases related to higher average market prices, partially offset by lowerpurchased power volume.

**DP&L- Operation and Maintenance**

 
| **$ in millions**                                                  | ** ** | **2006 vs. 2005** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                         |       |                        |       |
| Power production  costs                                                      |       | $                           | 10.4       |   |
| Low-Income  Assistance Program                                               |       | 5.6                         |       |
| RTO  administration fees                                                     |       | 5.5                         |       |
| Lump sum bonus  and retirement payments                                      |       | 3.7                         |       |
| Line clearance                                                               |       | 2.7                         |       |
| Long-term  incentive compensation                                            |       | 1.9                         |       |
| Reserves for  insurance, injuries/damages/environmental                      |       | 1.9                         |       |
| Pension and  benefits                                                        |       | 0.9                         |       |
| Mark-to-market  adjustments and forfeitures of restricted stock units (RSUs) |       | 0.9                         |       |
| Directors’ and  Officers’ liability insurance                      |       | (1.2                        | )          |
| Sarbanes-Oxley  compliance fees                                              |       | (1.1                        | )          |
| Other, net                                                                   |       | 2.2                         |       |
| **Total operation and maintenance  expense**                                 |       | $                           | 33.4       |   |

 

For 2006, operation andmaintenance expense increased $33.4 million or 17% compared to 2005 primarilyresulting from a $10.4 million increase in power production costs consisting of$4.1 million of coal brokering credits received in 2005 that were not receivedin 2006 and increased operating and maintenance expenses of $3.1 million whichrelated to cost of removal and peaker engine repairs; a $5.6 million increasein the Low-Income Assistance Program costs; $5.5 million in PJM administrativefees, including $2.5 million deferred in 2005 by PUCO authority (rate reliefwas granted in February 2006); $3.7 million of lump sum bonus and retirementpayments for former executives (not related to our ongoing litigation with thethree former executives); $2.7 million related to line clearance; $1.9 millionincrease in long-term incentive costs; a $1.9 million increase in reserves forinsurance, injuries and damages; a $0.9 million increase in pension andbenefits expenses; and a $0.9 million increase in mark-to-market adjustmentsand forfeitures of restricted stock units. These increases were partially offset by a $1.2 million decrease inDirectors’ and Officers’ liability insurance premiums and a $1.1 milliondecrease in Sarbanes-Oxley compliance fees.

34

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| **$ in millions**                                 | ** ** | **2005 vs 2004** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|
|                                                        |       |                       |       |
| Directors’ and Officers’  liability insurance     |       | (14.8                      | )          |
| Executive and  management compensation                      |       | (10.2                      | )          |
| Sarbanes-Oxley  compliance and external/internal audit fees |       | (3.5                       | )          |
| RTO  administrative fees                                    |       | (1.6                       | )          |
| Reduction in  capitalized insurance and claims costs        |       | (0.3                       | )          |
| Pension and  benefits                                       |       | 0.6                        |       |
| Electric production,  transmission and distribution costs   |       | $                          | 4.1        |   |
| Other, net                                                  |       | (0.4                       | )          |
| **Total operation and maintenance  expense**                |       | $                          | (26.1      | ) |

 

For 2005, operation andmaintenance expense decreased $26.1 million or 12% compared to same periodin 2004 as a result of lower corporate costs that were partially offset byincreased electric production, transmission and distribution expenses.  Corporate costs declined from the prior yearprimarily resulting from a decrease of $14.8 million in Directors’ and Officers’liability insurance premiums; $10.2 million in lower executive and managementcompensation costs; $3.5 million in reduced Sarbanes-Oxley 404 compliance costsand external / internal audit fees; and $1.6 million in lower PJMadministrative fees resulting from a PUCO order to defer these costs until theycan be recovered through rates starting in February 2006.  These decreases were partially offset by a$4.1 million increase in electric production, transmission and distributioncosts, primarily related to generation operations costs for lime used forpollution control and electric production boiler maintenance costs as well ashigher costs related to electric distribution, operation and maintenance.  In addition, pension and benefits costs roseby $0.6 million reflecting an increase in pension costs of $2.0 million thatwas nearly offset by a $1.4 million decrease for other post employmentbenefits, principally a 2004 adjustment in disability reserves.

**DP&L - Depreciation andAmortization**

Depreciation and amortizationincreased $6.1 million in 2006 compared to 2005 primarily reflecting a higherplant base.

Depreciation and amortization increased $2.8 millionin 2005 as compared to 2004 primarily as a result of completed projects in thedistribution area (including new services, line transformers, poles, stationequipment, and overhead and underground conductor) and in the production area(mainly due to the SCRs for Stuart, Killen and Zimmer) that were put intoservice in the second quarter of 2004.

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

For2006, amortization of regulatory assets increased $5.6 million to $7.6 millioncompared to the same period in 2005.  Theincrease in amortization of regulatory assets reflects $2.6 million for theamortization of costs incurred to accommodate unbundled rates and electricchoice bills in the customer billing system; $1.3 million for the amortizationof PJM administrative fees deferred for the period October 2004 through January2006; $1.2 million for the amortization of incremental 2004/2005 severe stormcosts; $0.3 million for the amortization of costs incurred to integrate **DP&L** into the PJM system; and $0.2 million for theamortization of the Rate Stabilization Surcharge rate case expenses.

For2005, amortization of regulatory assets increased $1.3 million to $2.0 millioncompared to the same period in 2004 primarily resulting from PJM start-up costsamortization of $1.1 million and PJM integration costs amortization of $0.2million reflecting **DP&L**’sentrance into the PJM market on October 1, 2004.

**DP&L- Interest Expense**

Interest expensedecreased $14.7 million or 39% in 2006 compared to 2005, primarily relating to$10.9 million of increased capitalized interest resulting from higher pollutioncontrol capital expenditures at the generating plants and $5.3 million of lowerinterest expense reflecting the refinancing of pollution control bonds atreduced interest rates in 2005, lower debtservice charges associated with **DPL’s** earlyretirement of ESOP debt, and the elimination of the interest penaltyresulting from the delayed exchange offer of the $470 million 5.125% Series FirstMortgage Bonds. These decreases wereslightly offset by $1.4 million of interest expense associated with **DP&L**’s new $100 million 4.8% Series pollution controlbonds issued September 13, 2006.

Interestexpense decreased $5.4 million or 12% in 2005 compared to 2004, primarily from$2.6 million of lower debt service charges associated with our early retirementof ESOP debt; lower amortization of $1.1 million

35

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associatedwith reacquired debt; $1.0 million from the elimination of the interest penaltyon the $470 million 5.125% Series First Mortgage Bonds resulting from thedelayed exchange offer registration of those securities; and $0.2 million ofgreater capitalized interest in 2005 as compared to 2004.

**DP&L- Charge for Early Redemption of Debt**

In 2005, **DP&L** recorded $4.1 million in charges resulting frompremiums paid for the early redemption of debt, including write-offs ofunamortized debt expense and debt discounts. 

**DP&L - Other Income**

For 2006, other income(deductions) decreased $7.8 million compared to the same period in 2005.  This decrease is primarily attributable to$12.3 million in gains recognized on the sale of pollution control emissionallowances during 2005, partially offset by $7.0 million in reduced investmentmanagement fees.

For 2005, other incomewas $7.7 million greater than 2004 primarily reflecting $3.5 million of additionalgains in 2005 over 2004 from sales of pollution control emission allowance.

## **DP&L - Income Tax Expense**

For 2006, income taxexpense increased $4.1 million compared to the same period in 2006 primarilyresulting from higher income.

For 2005, income taxexpense increased $17.3 million compared to the same period in 2004 resultingfrom higher income, increased accrual for open tax years and lower state coaltax credits.

On June 30, 2005,Governor Taft signed House Bill 66 into law which significantly changed the taxstructure in Ohio.  The major provisions of the bill include phasing-outthe Ohio Franchise Tax, phasing-out the Personal Property Tax for non-utilitytaxpayers and phasing-in a Commercial Activities Tax.  As a result of House Bill 66, income taxeswere reduced by $1.6 million.  Otherapplicable provisions of House Bill 66 have been reflected in the consolidatedfinancial statements.

## **DP&L - Cumulative Effect of Accounting Change, Net of Tax**

In 2005, the cumulativeeffect of an accounting change resulted in a charge of $3.2 million related tothe adoption of the provisions of FASB Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations an interpretation of FASB StatementNo. 143” (FIN 47).  See Note 1 of Notesto Consolidated Financial Statements.

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**FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL REQUIREMENTS**

**DPL’s**financial condition, liquidity and capital requirements,includes the consolidated results of its principal subsidiary The Dayton Powerand Light Company and all of **DP&L’s**consolidated subsidiaries.  All materialintercompany accounts and transactions have been eliminated in consolidation.

On July 27, 2005, **DPL’s** Board authorized the repurchase of up to $400 millionof common stock from time to time in the open market or through privatetransactions.  **DPL**completed this share repurchase program through a series of open marketpurchases on August 21, 2006.  Thisresulted in 14.9 million shares being repurchased at an average price of $26.91per share and a total cost of $400 million. These shares are currently held as treasury shares at **DPL****Inc**.

The following details the repurchase activity and options exercisedduring 2006 affecting treasury shares:
|                                      |   | **Number of  Treasury  Shares Held** | ** ** | **Settlement  Dollar Amount  ($ in millions)** |   |   |
|-------------------------------------------|--------|--------------------------------------|------------|-----------------------------------------------------|--------|--------|
| Balance at  December 31, 2005             |   | 36,197,807                           |       |                                                |   |   |
|                                      |   |                                 |       |                                                |   |   |
| Activity:                                 |   |                                 |       |                                                |   |   |
| January                                   |   | 406,000                              |       | $                                                   | 10.6   |   |   |
| February                                  |   | 564,000                              |       | 15.2                                                |   |   |
| March                                     |   | 4,765,700                            |       | 129.5                                               |   |   |
| April                                     |   | 214,700                              |       | 5.9                                                 |   |   |
| May                                       |   | 2,163,000                            |       | 57.9                                                |   |   |
| June                                      |   | 4,848,300                            |       | 129.1                                               |   |   |
| July                                      |   | 417,400                              |       | 11.1                                                |   |   |
| August                                    |   | 1,483,332                            |       | 40.7                                                |   |   |
| Total  repurchased at December 31, 2006   |   | 14,862,432                           |       | $                                                   | 400.0  |   |   |
| Options  exercised first quarter of 2006  |   | (10,000                              | )          |                                                |   |   |
| Options  exercised fourth quarter of 2006 |   | (345,000                             | )          |                                                |   |   |
|  Net activity                        |   | 14,507,432                           |       |                                                |   |   |
|  Balance at December 31, 2006        |   | 50,705,239                           |       |                                                |   |   |

 

**DPL’s Cash Position**

**DPL’s**cash and cash equivalents totaled $262.2 million at December 31, 2006, comparedto $595.8 million at December 31, 2005, a decrease of $333.6 million.  In addition, **DPL**had no short-term investments available for sale at December 31, 2006 incomparison to $125.8 million at December 31, 2005. The decrease in cash andcash equivalents and short-term investments available for sale was primarilyattributed to $357.5 million in capital expenditures, $400.0 million used forthe purchase of treasury shares and $112.4 million in dividends paid on commonstock, partially offset by $308.7 million in cash generated from operatingactivities and $89.9 million restricted fund draws to fund pollution control capitalexpenditures.  At December 31, 2006, **DPL**had $10.1 million restricted funds held in trustrelating to the issuance of the $100 million pollution control bonds.  These funds will be used to fund thepollution control capital expenditures.

In 2005, **DPL** began investing in Auction Rate Securities (ARS).  ARS are variable rate state and municipalbonds that trade at par value.  Interestrates on ARS are reset every seven, twenty-eight or thirty-five days through amodified Dutch auction.  **DPL** had the option to hold at market, re-bid or sell eachARS on the interest reset date.  AlthoughARS are issued and rated as long-term bonds, they are priced and traded asshort-term securities available for resale because of the market liquidityprovided through the interest rate reset mechanism.  Each ARS purchased by **DPL**was tax-exempt, AAA rated and insured by a third-party insurance company.            As of June 30, 2006, all of **DPL’s** ARS were sold.

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**DP&L’s Cash Position**

**DP&L’s**cash and cash equivalents totaled $46.1 million at December 31, 2006, remainedrelatively unchanged when compared to $46.2 million at December 31, 2005.  At December 31, 2006, **DP&L**had$10.1 million restricted funds held in trust relating to the issuance of the$100 million pollution control bonds. These funds will be used to fund the pollution control capitalexpenditures.

**Operating Activities**

For the years endedDecember 31, 2006, 2005 and 2004, cash flows from operations were as follows:

**Net Cash provided by OperatingActivities**

 

|              | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|------------|------------|----------|------------|----------|------------|
|         | ** ** | ** ** |       |     |       |     |       |
| **DPL**      | ** ** | **$**      | **308.7**  |     | $          | 314.1    |       | $ | 132.7 |   |
| ** **   | ** ** | ** ** |       |     |       |     |       |
| **DP&L** | ** ** | **$**      | **365.7**  |     | $          | 366.8    |       | $ | 381.2 |   |
|         |       |       |       |     |       |     |       |

 

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 gross cash flow fromoperations.

**DPL’s Cashprovided by Operating Activities**

**DPL**generated net cash from operating activities of $308.7 million, $314.1 millionand $132.7 million in 2006, 2005 and 2004, respectively.  The net cash provided by operating activitiesin 2006 was primarily the result of operating profitability, partially offsetby an increase in cash used for working capital, specifically payments fortaxes and inventories.  The net cashprovided by operating activities for 2005 was primarily the result of operatingprofitability, partially offset by cash used for working capital, specificallyaccounts payable and inventories.  Thenet cash provided by operating activities in 2004 was primarily the result ofoperating profitability, partially offset by cash used for the shareholderlitigation settlement and cash used for working capital, specifically paymentsfor taxes and inventories.

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

**DP&L**generated net cash from operating activities of $365.7 million, $366.8 millionand $381.2 million in 2006, 2005 and 2004, respectively.  The net cash provided by operating activitiesfor 2006 was primarily the result of operating profitability, partially offsetby cash used for working capital, specifically for accounts payable andinventories. The net cash provided by operating activities for 2005 wasprimarily the result of operating profitability, partially offset by cash usedfor working capital, specifically for accounts payable, inventories and thetiming of tax payments.  The net cashprovided by operating activities in 2004 was primarily the result of operatingprofitability, and cash provided from working capital, specifically the timingof tax payments, offset by the rising cost of coal inventories.

**Investing Activities**

For the years ended December31, 2006, 2005 and 2004, cash flows from investing activities were as follows:

**Net Cash (used for)/provided byInvesting Activities**

 

|              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
|         |       |     |       |     |       |     |       |
| **DPL**      |       | **$**    | **(229.5** | **)**    | $          | 689.6    |       | $ | 182.3 |   |
|         |       |     |       |     |       |     |       |
| **DP&L** |       | **$**    | **(354.8** | **)**    | $          | (178.4   | )          | $ | (79.9 | ) |

 

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**DPL’sCash (used for) / provided by Investing Activities**

**DPL’s**net cash used forinvesting activities was $229.5 million in 2006 compared to **DPL’s** net cash flows provided byinvesting activities of $689.6 million and $182.3 million in 2005 and 2004,respectively.  Net cash flows used forinvesting activities in 2006 were related to capital expenditures and thepurchases of short-term investments and securities, partially offset by thesale of short-term investments and securities. Net cash flows provided by investing activities for 2005 were related tothe proceeds from the sale of the private equity securities which areclassified as discontinued operations and the sale of short-term investmentsand public securities unrelated to discontinued operations, partially offset bycapital expenditures and purchases of short-term investments and securities.Net cash flows provided by investing activities for 2004 were related to theproceeds from the sale of the private equity securities which are classified asdiscontinued operations, proceeds from the sale of property and the sale ofshort-term investments and public securities unrelated to discontinuedoperations.  These cash inflows werepartially offset by capital expenditures and purchases of short-terminvestments and securities.

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

**DP&L’s**net cash flows used for investing activities were $354.8 million, $178.4million and $79.9 million in 2006, 2005 and 2004, respectively.  Net cash flows used for investing activitiesfor 2006 and 2005 were due to capital expenditures. Net cash flows used forinvesting activities for 2004 were due to capital expenditures, offset by theproceeds from the sale of property.

**Financing Activities**

For the years endedDecember 31, 2006, 2005 and 2004, cash flows from financing activities were asfollows:

 

**Net Cash (used for) FinancingActivities**

 

|              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
|         |       |     |       |     |       |     |       |
| **DPL**      |       | **$**    | **(412.8** | **)**    | $          | (610.0   | )          | $ | (450.5 | ) |
|         |       |     |       |     |       |     |       |
| **DP&L** |       | **$**    | **(11.0**  | **)**    | $          | (159.4   | )          | $ | (301.3 | ) |

 

**DPL’sCash (used for) Financing Activities**

**DPL’s**net cash flows used for financing activities were $412.8 million, $610.0million and $450.5 million in 2006, 2005 and 2004, respectively.  Net cash flows used for financing activitiesin 2006 were the result of cash used to repurchase $400.0 million of commonstock and pay dividends to common stockholders of $112.4 million.  These uses of cash were partially offset by$89.9 million of withdrawals from the trust set up as a result of issuing thepollution control bonds and cash received relating to the exercise of stockoptions of $7.8 million.  Net cash flowsused for financing activities for 2005 were primarily the result of cash usedto retire $462.6 million of long-term debt, pay premiums on the earlyredemption of debt of $54.7 million and pay dividends to common stockholders of$115.3 million.  These uses of cash werepartially offset by cash received relating to the exercise of stock options of$22.7 million.  Net cash flows used forfinancing activities for 2004 were primarily the result of funds used for theretirement of $500 million of the 6.82% Series Senior Notes and dividends paidto common stockholders, partially offset by the issuance of $175 millionunsecured 8% Series Senior Notes used to provide partial funding for theretirement of the $500 million 6.82% Series Senior Notes.  Annual dividends declared increased to $0.96per share in 2004 from $0.94 per share in 2003.

OnFebruary 1, 2006, our Board of Directors announced that it had raised thequarterly dividend to $0.25 per share payable March 1, 2006 to **DPL’s** common shareholders of record onFebruary 14, 2006.  This increase resulted in an annualized dividend rateof $1.00 per share, or a 4% increase during 2006.  On February 1, 2007, our Board of Directorsannounced that it had raised the quarterly dividend to $0.26 per share payableMarch 1, 2007 to common shareholders of record on February 14, 2007.  Thisincrease results in an annualized dividend rate of $1.04 per share, or a 4%increase that will be paid during 2007.

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

**DP&L’s**net cash flows used for financing activities were $11.0 million, $159.4 millionand $301.3 million in 2006, 2005 and 2004, respectively.  Net cash flows used for financing activitiesfor 2006 were the result of cash used to pay common stock dividends to **DPL** of $100.0 million, partially offset by $89.9 million ofwithdrawals

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from the trust set up asa result of issuing the pollution control bonds.  Net cash flows used for financing activitiesfor 2005 were primarily the result of cash used to retire $218.9 million oflong-term debt and pay common stock dividends to **DPL**of $150.0 million.  These uses of cashwere partially offset by the net cash received from the issuance of long-termdebt.      Net cash flows used forfinancing activities for 2004 were for the payment of common and preferreddividends and the retirement of long-term debt.

**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 flows from operations, the credit facilities (existingor future arrangements), the senior notes, and other short- and long-term debtfinancing, will be sufficient to satisfy our future working capital, capitalexpenditures and other financing requirements for the foreseeable future.  Our ability to generate positive cash flowsfrom operations is dependent on general economic conditions, competitivepressures, and other business and risk factors described in Item 1a of thisForm 10-K.   If we are unable to generatesufficient cash flows from operations, or otherwise comply with the terms ofour credit facilities and the senior notes, we may be required to refinance allor a portion of our existing debt or seek additional financingalternatives.  A discussion of each ofour critical liquidity commitments is outlined below.

**Capital Requirements**

**CONSTRUCTION ADDITIONS**
| ** **                  | ** ** | **Actual** | ** ** | **Projected** | ** ** |
|-----------------------------|------------|------------|------------|---------------|------------|
| **$ in millions** | ** ** | **2006**   | ** ** | **2005**      | ** ** | **2004** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                  |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DPL  Inc.**               | ** ** | **$**      | **352**    |          | $          | 180 |   | $ | 98 |   | $ | 310 |   | $ | 165 |   | $ | 130 |   |
| ** **                  |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DP&L**                | ** ** | **$**      | **349**    |          | $          | 178 |   | $ | 93 |   | $ | 310 |   | $ | 165 |   | $ | 130 |   |

 

**DPL’s**construction additions were $352 million, $180 million and $98 million in2006, 2005 and 2004, respectively, and are expected to approximate $310 millionin 2007.

**DP&L’s**construction additions were $349 million, $178 million and $93 million in2006, 2005 and 2004, respectively, and are expected to approximate $310 millionin 2007.  Planned construction additionsfor 2007 relate to **DP&L’s**environmental compliance program, power plant equipment, and its transmission anddistribution system.

Capitalprojects are subject to continuing review and are revised in light of changesin financial and economic conditions, load forecasts, legislative andregulatory developments and changing environmental standards, among other factors.  Over the next three years, **DPL**, through its subsidiary **DP&L**,is projecting to spend an estimated $605 million in capital projects,approximately 40% of which is to meet changing environmental standards.  Our ability to complete capital projects andthe reliability of future service will be affected by our financial condition,the availability of internal funds and the reasonable cost of externalfunds.  We expect to finance ourconstruction additions in 2007 with a combination of cash on hand, short-termfinancing, tax-exempt debt and cash flows from operations.

**Debt and Debt Covenants**

On March 25, 2004, **DPL** completed a $175 million private placement of unsecured8% Series Senior Notes due March 2009.  TheSenior Notes will not be redeemable prior to maturity except that **DPL** has the right to redeem the notes for a make-wholepayment at the adjusted treasury rate plus 0.25%.  The 8% Series Senior Notes were issuedpursuant to its indenture dated as of March 1, 2000, and pursuant to authoritygranted in the Board resolutions dated March 25, 2004.  The notes impose a limitation on theincurrence of liens on the capital stock of any of **DPL’s**significant subsidiaries and require **DPL** and itssubsidiaries to meet a consolidated coverage ratio of 2 to 1 prior to incurringadditional indebtedness.  The limitationon the incurrence of additional indebtedness does not apply to (i) indebtednessincurred to refinance existing indebtedness, (ii) subordinated indebtedness and(iii) up to $150 million of additional indebtedness.  In addition to the events of defaultspecified in the indenture, an event of default under the notes includes apayment default or acceleration of indebtedness under any other indebtedness of**DPL** or any of its subsidiaries whichaggregates $25 million or more.  The

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purchaserswere granted registration rights in connection with the private placement underan Exchange and Registration Rights Agreement. Pursuant to this agreement, **DPL** wasobligated to file an exchange offer registration statement by July 22, 2004,have the registration statement declared effective by September 20, 2004 andconsummate the exchange offer by October 20, 2004.                **DPL** failed (1)to have a registration statement declared effective and (2) to complete theexchange offer according to this timeline. As a result, **DPL** had beenaccruing additional interest at a rate of 0.5% per year for each of these twoviolations, up to an additional interest rate not to exceed in the aggregate1.0% per year.  As each violation wascured, the additional interest rate decreased by 0.5% per annum.  **DPL’s** exchangeoffer registration statement for these securities was declared effective by theSEC on June 27, 2006.  As a result, onJune 27, 2006, **DPL** ceased accruing 0.5% of the additionalinterest.  On July 31, 2006, **DPL** ceased accruing the other 0.5% of additional interestwhen the exchange of registered notes for the unregistered notes wascompleted.  By completing the exchange, **DPL** reduced the annual interest expense by $1.8 million.

Duringthe first quarter 2006, the Ohio Department of Development (ODOD) awarded **DP&L** the ability to issue over the next three years upto $200 million of qualified tax-exempt financing from the ODOD’s 2005 volumecap carryforward.  The financing is to beused to partially fund the ongoing flue gas desulfurization capitalprojects.  The PUCO approved **DP&L’s** application for this additional financing on July26, 2006.

OnSeptember 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued$100 million of 4.80% fixed interest rate OAQDA Revenue bonds 2006 Series A dueSeptember 1, 2036.  In turn, **DP&L** borrowed these funds from the OAQDA.  The payment of principal and interest on theBonds when due is insured by an insurance policy issued by Financial GuarantyInsurance Company.  **DP&L**is using the proceeds from these borrowings to assist in financing its portionof the costs of acquiring, constructing and installing certain solid wastedisposal and air quality facilities at Miami Fort, Killen and Stuart GeneratingStations.  These facilities are currentlyunder construction and the proceeds from the borrowing have been placed inescrow with the trustee (the Bank of New York) and are being drawn upon only asfacilities are built and qualified costs are incurred.  In the event any of the proceeds are notdrawn, **DP&L** would eventually be requiredto return the unused proceeds to bondholders. **DP&L** expects to draw down theremaining available funds from this borrowing during the first quarter of 2007.

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

OnNovember 21, 2006, **DP&L**entered into a new $220 million unsecured revolving credit agreement replacingits $100 million facility.  This newagreement has a five year term that expires on November 21, 2011 and thatprovides**DP&L** with the ability to increasethe size of the facility by an additional $50 million at any time.  The facility contains one financialcovenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  **DP&L**had nooutstanding borrowings under this credit facility at December 31, 2006.  Fees associated with this credit facility areapproximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicableinterest.  This revolving creditagreement also contains a $50 million letter of credit sublimit.  As of December 31, 2006, **DP&L**had no outstanding letters of credit against the facility.

OnFebruary 24, 2005, DP&L entered into an amendment to extend the term of itsMaster Letter of Credit Agreement with a financial lending institution for oneyear and to reduce the maximum dollar volume of letters of credit to $10million.  On February 17, 2006, **DP&L** renewed its $10 million  agreement for one year.  This agreement supports performance assuranceneeds in the ordinary course of business. This agreement was not renewed in 2007. **DP&L**has certain contractual agreements for the sale and purchase of  power, fuel and related energy services thatcontain credit rating related clauses allowing the counter parties to seekadditional surety under certain conditions. As of December 31, 2006, **DP&L** hadtwo outstanding letters of credit for a total of $2.2 million.

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.

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

 

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**Credit Ratings**

Currently, **DPL’s** seniorunsecured and **DP&L**’s senior secured debtcredit ratings are as follows:

 

|                                  | ** ** | **DPL Inc.** | ** ** | **DP&L** | ** ** | **Outlook** | ** ** | **Effective** |
|----------------------------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|
|                             |       |         |       |         |       |        |       |          |
| Fitch Ratings                    |       | BBB          |       | A            |       | Stable      |       | April 2006    |
| Moody’s Investors Service   |       | Baa3         |       | A3           |       | Positive    |       | June 2006     |
| Standard & Poor’s Corp. |       | BBB-         |       | BBB+         |       | Stable      |       | February 2007 |

 

**Off-BalanceSheet Arrangements**

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

**ContractualObligations and Commercial Commitments**

Weenter into various contractual obligations and other commercial commitmentsthat may affect the liquidity of our operations.  At December 31, 2006, these include:

**ContractualObligations**

 

|                                      | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Less Than**    | ** ** | **2 - 3** | ** ** | **4 - 5** | ** ** | **More Than** | ** ** |
| **$ in millions**          | ** ** | **Total**  | ** ** | **1 Year**       | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| **DPL Inc.**                         | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |                  |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 1,774.8    |                  | $          | 225.0 |   | $ | 275.0 |   | $ | 297.4 |   | $ | 977.4 |   |
| Interest payments                    |       | 1,101.8    |       | 98.8                  |       | 171.2 |   | 144.0 |   | 687.8 |   |
| Pension and  postretirement payments |       | 235.6      |       | 22.0                  |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                       |       | 2.9        |       | 0.9                   |       | 1.4 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.7        |       | 0.3                   |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 554.6      |       | 324.4                 |       | 118.4 |   | 111.8 |   | — |   |
| Limestone contracts                  |       | 58.7       |       | 1.7                   |       | 9.5 |   | 10.8 |   | 36.7 |   |
| Other contractual  obligations       |       | 391.7      |       | 328.5                 |       | 53.7 |   | 9.5 |   | — |   |
| Total  contractual obligations       |       | $          | 4,120.8    |                  | $          | 1,001.6 |   | $ | 674.7 |   | $ | 620.7 |   | $ | 1,823.8 |   |
|                                 |       |       |       |                  |       |   |   |   |   |   |   |
| **DP&L**                         | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |                  |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 783.2      |                  | $          | — |   | $ | — |   | $ | — |   | $ | 783.2 |   |
| Interest payments                    |       | 571.9      |       | 39.1                  |       | 78.3 |   | 78.3 |   | 376.2 |   |
| Pension and  postretirement payments |       | 235.6      |       | 22.0                  |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                       |       | 2.9        |       | 0.9                   |       | 1.4 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.7        |       | 0.3                   |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 554.6      |       | 324.4                 |       | 118.4 |   | 111.8 |   | — |   |
| Limestone contracts                  |       | 58.7       |       | 1.7                   |       | 9.5 |   | 10.8 |   | 36.7 |   |
| Other contractual  obligations       |       | 391.5      |       | 328.4                 |       | 53.6 |   | 9.5 |   | — |   |
| Total contractual  obligations       |       | $          | 2,599.1    |                  | $          | 716.8 |   | $ | 306.7 |   | $ | 257.6 |   | $ | 1,318.0 |   |

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

 

Long-term debt: 

**DPL’s** long-termdebt as of December 31, 2006, consists of **DP&L’s**first mortgage bonds, tax-exempt pollution control bonds, **DPL** unsecured notes and includes currentmaturities and unamortized debt discounts. During 2006, **DP&L**entered into $100 million of long-term tax-exempt debt.

**DP&L’s**long-term debt as of December 31, 2006, consists of first mortgage bonds,tax-exempt pollution control bonds and includes an unamortized debt discount.

See Note 8 of Notes to Consolidated FinancialStatements.

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Interest payments:

Interest payments associated with the Long-term debtdescribed above.

Pension and postretirementpayments: 

As of December 31, 2006, **DP&L** had estimated future benefit payments as outlined inNote 5 of Notes to Consolidated Financial Statements.  These estimated future benefit payments areprojected through 2015.

Capital leases:

As of December 31, 2006, **DP&L** had two capital leases that expirein November 2007 and September 2010.

Operating leases: 

As of December 31, 2006, **DPL** and **DP&L**had several operating leases with various terms and expiration dates.  Not included in this total is approximately$88,000 per year related to right of way agreements that are assumed to have nodefinite expiration dates.

Coal contracts: 

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

Limestonecontracts:

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

Other contractualobligations: 

As of December 31, 2006, **DPL** and **DP&L**had various other contractual obligations including non-cancelable contracts topurchase goods and services with various terms and expiration dates.

Weenter into various commercial commitments, which may affect the liquidity ofour operations.  At December 31, 2006,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.  At December 31, 2006, there were noborrowings outstanding under this credit agreement.  **DP&L** hasthe ability to increase the size of the facility by an additional $50 millionat any time.

Guarantees:

**DP&L** owns a4.9% equity ownership interest in an electric generation company.  As of December 31, 2006, **DP&L** could be responsible for therepayment of 4.9%, or $21.8 million, of a $445 million debt obligation thatmatures in 2026.

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

 

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

 

43

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**MARKET RISK**

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

**Commodity Pricing Risk**

Approximately12.5% of **DPL’s** and 22% of **DP&L’s** 2006 electric revenues were fromsales of excess energy and capacity in the wholesale market.  Energy and capacity in excess of the needs ofexisting retail customers are sold in the wholesale market when we can identifyopportunities with positive margins. As of December 31, 2006, ahypothetical increase or decrease of 10% in **DPL’s**annual wholesale revenues could result in approximately an $11 million increaseor decrease to net income, assuming no increases in fuel and purchased powercosts.  As of December 31, 2006, ahypothetical increase or decrease of 10% in **DP&L’s**annual wholesale revenues could result in approximately a $20 million increaseor decrease to net income, assuming no increases in fuel and purchased power costs.

**DPL’s**fuel (including coal, gas, oil and emission allowances) and purchased powercosts as a percent of total operating costs in 2006 and 2005 were 46% and 50%,respectively.   **DP&L’s** fuel (including coal, gas, oiland emission allowances) and purchased power costs as a percent of totaloperating costs was 52% in both 2006 and 2005. 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.  Based on weather normalized salesand our co-owners’ projections, fuel costs are forecasted to be flat in 2007compared to 2006.

Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofour generating capacity.  We willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below our internal productioncosts. As of December 31, 2006, a hypothetical increase or decrease of 10% in **DPL’s** annual fuel and purchased power costscould result in approximately a $30 million increase or decrease to netincome.  As of December 31, 2006, ahypothetical increase or decrease of 10% in **DP&L’s**annual fuel and purchased power costs could result in approximately a $29million increase or decrease to net income.

**Interest Rate Risk**

As a result of our normal borrowing and leasing activities,our results are exposed to fluctuations in interest rates, which we managethrough our regular financing activities. We maintain both cash on deposit and investments in cash equivalentsthat may be affected by adverse interest rate fluctuations.  Our long-term debt represents publicly andprivately held secured and unsecured notes and debentures with fixed interestrates.  At December 31, 2006, we had noshort-term borrowings.

The carrying value of **DPL’s** debt was $1,777.7 million at December31, 2006, 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 $1,798.5million, 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 December 31, 2006, are as follows:

44

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|                            | ** ** | **DPL’s** Long-term Debt |
|----------------------------|------------|-------------------------------|
| ** **                 | ** ** | **Amount**                    | ** ** | ** ** |
| **Expected  MaturityDate** | ** ** | **($ in millions)**      | ** ** | **Average Rate** |
|                       |       |                          |   |   |
| 2007                       |       | $                             | 225.9 |   | 8.2% |
| 2008                       |       | 100.7                         |   | 6.3% |
| 2009                       |       | 175.7                         |   | 8.0% |
| 2010                       |       | 0.6                           |   | 6.9% |
| 2011                       |       | 297.4                         |   | 6.9% |
| Thereafter                 |       | 977.4                         |   | 5.6% |
| Total                      |       | $                             | 1,777.7 |   | 6.4% |
|                       |       |                          |   |   |
| Fair Value                 |       | $                             | 1,798.5 |   |   |

 

The carrying value of **DP&L’s** debt was $786.1 million at December 31, 2006,consisting of our first mortgage bonds, our tax-exempt pollution control bonds,and our capital leases.  The fair valueof this debt was $785.8 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 December 31, 2006, are as follows:

 

|                            | ** ** | **DP&L’s Long-term Debt** |
|----------------------------|------------|------------------------------------|
| ** **                 | ** ** | **Amount**                         | ** ** | ** ** |
| **Expected  MaturityDate** | ** ** | **($ in millions)**           | ** ** | **Average Rate** |
|                       |       |                               |   |   |
| 2007                       |       | $                                  | 0.9 |   | 6.2% |
| 2008                       |       | 0.7                                |   | 6.9% |
| 2009                       |       | 0.7                                |   | 6.9% |
| 2010                       |       | 0.6                                |   | 6.9% |
| 2011                       |       | —                             |   | — |
| Thereafter                 |       | 783.2                              |   | 5.0% |
| Total                      |       | $                                  | 786.1 |   | 5.0% |
|                       |       |                               |   |   |
| Fair Value                 |       | $                                  | 785.8 |   |   |

 

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

Debt retirements occurringin 2006 are discussed under FINANCIAL CONDITION, LIQUIDITY AND CAPITALREQUIREMENTS.

45

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**CRITICAL ACCOUNTING ESTIMATES**

**DPL’s**and **DP&L’s** consolidatedfinancial statements are prepared in accordance with GAAP.  In connection with the preparation of these financialstatements, our management is required to make assumptions, estimates andjudgments that affect the reported amounts of assets, liabilities, revenues,expenses and the related disclosure of contingent liabilities. Theseassumptions, estimates and judgments are based on our historical experience andassumptions that we believed to be reasonable at the time. However, becausefuture events and their effects cannot be determined with certainty, thedetermination of estimates requires the exercise of judgment. Our criticalaccounting estimates are those which require assumptions to be made aboutmatters 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.

**Long-LivedAssets:**  In accordancewith Statement of Financial Accounting Standards No. 144 “Accounting for theImpairment or Disposal of Long-Lived Assets” (SFAS 144), long-lived assets tobe held and used are reviewed for impairment whenever events or circumstancesindicate that the carrying amount may not be recoverable. When required,impairment losses on assets to be held and used are recognized based on thefair value of the asset. We determine the fair value of these assets based uponestimates of future cash flows, market value of similar assets, if available orindependent appraisals, if required. In analyzing the fair value andrecoverability using future cash flows, we make projections based on a numberof assumptions and estimates of growth rates, future economic conditions,assignment of discount rates and estimates of terminal values. An impairmentloss is recognized, if the carrying amount of the long-lived asset is notrecoverable from its undiscounted cash flows. The measurement of impairmentloss is the difference between the carrying amount and fair value of the asset.Long-lived assets to be disposed of and/or held for sale are reported at thelower of carrying amount or fair value less cost to sell. We determine the fairvalue of these assets in the same manner as described for assets held and used.

**RevenueRecognition (including Unbilled Revenue)**:  We consider revenue realized, or realizable,and earned when persuasive evidence of an arrangement exists, the products orservices have been provided to the customer, the sales price is fixed ordeterminable, and collectibility is reasonably assured.  We** **recordelectric revenues when delivered to customers.  Customers are billedthroughout the month as electric meters are read.  We recognize revenuesusing an accrual method for retail and other energy sales that have not yetbeen billed, but where electricity has been consumed.  This is termed “unbilledrevenues” and is a widely recognized and accepted practice for utilities. Our estimates of unbilled revenues use systems that consider various factors tocalculate retail customer consumption at the end of each month.  Theseestimates are based on the volume of energy delivered, historical usage andgrowth by customer class, and the effect of weather variations on usagepatterns.  Given the use of these systemsand the fact that customers are billed monthly, we believe it is unlikely thatmaterially different results will occur in future periods when these amountsare subsequently billed.

Additionally, **DP&L** is subject to regulatory ordersaddressing the justness and reasonableness of the PJM and Midwest IndependentTransmission System Operator (MISO) rates and related revenue distributionprotocols.  **DP&L’s** management is required to make assumptions,estimates and judgments relating to the possibility of refund of theserevenues.  These assumptions, estimatesand judgments are based on management’s experience and are believed to bereasonable at the time.  As a result ofthese assumptions, estimates and judgments, **DP&L**is deferring a portion of these revenues for which management believes issubject to refund.  The deferred amountrecorded was $18.7 million and $20.5 million at December 31, 2006 and December31, 2005, respectively.  The above amountcollected under the Seams Elimination Charge Adjustment (SECA) rates aresubject to refund, and the ultimate outcome of the proceeding establishing SECArates is uncertain at this time. However, based on the amount of reserves established for this item, theresults of this proceeding are not expected to have a material adverse effecton our financial condition, results of operations or cash flows.

**IncomeTaxes:**  We apply theprovisions of FASB Statement of Financial Accounting Standards No. 109, “Accountingfor Income Taxes” (SFAS 109).  SFAS 109requires an asset and liability approach for financial accounting and reportingof income taxes with tax effects of differences, based on currently enactedincome tax rates between the financial reporting and tax basis of accountingreported as Deferred Taxes in the 

46

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Consolidated BalanceSheets.  Deferred Tax Assets arerecognized for deductible temporary differences. Valuation reserves areprovided unless it is more likely than not that the asset will be realized.

Investment tax credits,which have been used to reduce federal income taxes payable, have been deferredfor financial reporting purposes.  Thesedeferred investment tax credits are amortized over the useful lives of theproperty to which they are related.  Forrate-regulated operations, additional deferred income taxes and offsettingregulatory assets or liabilities are recorded to recognize that the incometaxes will be recoverable / refundable through future revenues.

We file a consolidatedU.S. federal income tax return in conjunction with our subsidiaries.  The consolidated tax liability is allocatedto each subsidiary as specified in our tax allocation agreement which providesa consistent, systematic and rational approach. See Note 4 of Notes toConsolidated Financial Statements.

**RegulatoryAssets and Liabilities:** Application of FASB Statement of Financial Accounting Standards No. 71, “Accountingfor the Effects of Certain Types of Regulation”**(SFAS 71) depends on our ability to collect cost-based rates fromcustomers.  The recognition of regulatoryassets requires a continued assessment of the recovery of the costs based onactions of the regulators.  We capitalizeincurred costs as deferred regulatory assets when there is a probableexpectation that the costs incurred will be recovered in future revenues as aresult of the regulatory process. Regulatory liabilities represent currentrecovery of expected future costs. When applicable we apply judgment in the useof these principles and these estimates are based on expected usage by acustomer class over the designated recovery period. See Note 3 of Notes toConsolidated Financial Statements for further disclosure of regulatory amounts.

**AssetRetirement Obligations: **Inaccordance with FASB Statement of Financial Accounting Standards No.143, “Accountingfor Asset Retirement Obligations” (SFAS 143) and FASB Interpretation No. 47(FIN No. 47), “Accounting for Conditional Asset Retirement Obligations, aninterpretation of FASB Statement No. 143,” legal obligations associated withthe retirement of long-lived assets are required to be recognized at their fairvalue at the time those obligations are incurred.  Upon initial recognition of a legalliability, costs are capitalized as part of the related long-lived asset andallocated to expense over the useful life of the asset.  SFAS 143 also requires that components ofpreviously recorded depreciation related to the cost of removal of assets uponretirement, whether legal asset retirement obligations or not, must be removedfrom a company’s accumulated depreciation reserve.  We make assumptions, estimates and judgmentsthat affect the reported amounts of assets, liabilities and expenses as theyrelate to asset retirement obligations. These assumptions and estimates arebased on historical experience and assumptions that we believe to be reasonableat the time.

### **Insurance and Claims Costs**: In addition to insurance provided throughthird-party providers, our wholly-owned captive subsidiary (MVIC) providesinsurance coverage solely to us and to our subsidiaries.  Insurance and Claims Costs on theConsolidated Balance Sheets includes insurance reserves of approximately $22million and $24 million for 2006 and 2005, respectively, based on actuarialmethods and loss experience data.  Suchreserves are actuarially determined, in the aggregate, based on a reasonableestimation of insured events occurring. There is uncertainty associated with the loss estimates, and actualresults may differ from the estimates. Modification of these loss estimates based on experience and changedcircumstances is reflected in the period in which the estimate is re-evaluated.

**Pension and Postretirement Benefits**

Weaccount and disclose pension and postretirement benefits in accordance with theprovisions of Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pensions and other Postretirement Plans, anamendment to FASB Statements 87, 88, 106 and 132R.”  This Standard requires the use ofassumptions, such as the discount rate and long-term rate of return on assets,in determining the obligations, annual cost and funding requirements of theplans.

In2007, we are maintaining our long-term rate of return assumptions of 8.50% forpension and 6.75% for other postretirement benefits assets that reflect theeffect of recent trends on our long-term view.  We are also maintainingour assumed discount rate of 5.75% for pension and postretirement benefitsexpense to reflect current interest rate conditions.  Changes in othercomponents used in the determination of pension and postretirement benefitscosts will result in approximately the same level of expense in 2007 as in 2006($5.5 million), excluding any special adjustments required under SFAS 88. We do not anticipate any special adjustments to expense in 2007.

47

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In future periods,differences in the actual return on pension plan assets and assumed return, orchanges in the discount rate, will affect the timing of contributions to thepension plan, if any.  We providepostretirement healthcare benefits to employees who retired prior to 1987.  A one percentage point change in the assumedhealthcare trend rate would affect postretirement benefit costs by approximately$0.1 million.

## **LEGAL AND OTHER MATTERS**

Adiscussion of LEGAL AND OTHER MATTERS is described in Note 15 of Notes toConsolidated Financial Statements and in Item 3 - LEGAL PROCEEDINGS.  Such discussions are incorporated byreference in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and made a part hereof.

**Recently Issued Accounting Pronouncements**

Adiscussion of recently issued accounting pronouncements is described in Note 1of Notes to 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.

**Item 7A — Quantitative and Qualitative Disclosures about MarketRisk**

The information requiredby this item of Form 10-K is set forth in the MARKET RISK section under Item 7- Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

**Item 8 —Financial Statements andSupplementary Data**

This report includes thecombined filing of **DPL Inc**. **(DPL)** and **The Dayton Power and LightCompany****(DP&L).  DP&L**is the principalsubsidiary of **DPL**providing approximately 99% of**DPL’s**total consolidated revenue andapproximately 86% 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,**respectivelyand altogether, unless the context indicates otherwise. Discussions or areas ofthis report that apply only to **DPL** or **DP&L** will clearly be noted in the section.  Historically, **DPL**and **DP&L** have filed separate SECfilings.  Beginning with this report andin the future, **DPL Inc**. and **The DaytonPower and Light Company** will file combined SEC reports on aninterium and annual basis.

48

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**DPL INC.**

**CONSOLIDATEDSTATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                                               | ** ** | **For the years ended December 31,** | ** **  |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| **$ in millions except per share amounts** | ** ** | **2006**                                                      | ** **  | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                                             | ** ** | **$**                                                         | **1,393.5** |   | $ | 1,284.9 |   | $ | 1,199.9 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| **Cost of revenues:**                                                    |       |                                                          |        |   |   |   |   |
| Fuel                                                                     | ** ** | **349.1**                                                     |        | 336.9 |   | 263.1 |   |
| Purchased power                                                          | ** ** | **159.0**                                                     |        | 133.3 |   | 113.1 |   |
| Total cost of  revenues                                                  | ** ** | **508.1**                                                     |        | 470.2 |   | 376.2 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| **Gross margin**                                                         | ** ** | **885.4**                                                     |        | 814.7 |   | 823.7 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| **Operating expenses:**                                                  |       |                                                          |        |   |   |   |   |
| Operation and  maintenance                                               | ** ** | **265.4**                                                     |        | 219.0 |   | 237.1 |   |
| Impairment of  peaking stations                                          | ** ** | **71.0**                                                      |        | — |   | — |   |
| Depreciation and  amortization                                           | ** ** | **151.8**                                                     |        | 147.3 |   | 144.1 |   |
| General taxes                                                            | ** ** | **108.6**                                                     |        | 107.3 |   | 105.3 |   |
| Amortization of  regulatory assets                                       | ** ** | **7.6**                                                       |        | 2.0 |   | 0.7 |   |
| Total operating  expenses                                                | ** ** | **604.4**                                                     |        | 475.6 |   | 487.2 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| **Operating income**                                                     | ** ** | **281.0**                                                     |        | 339.1 |   | 336.5 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| Investment income                                                        | ** ** | **17.8**                                                      |        | 50.9 |   | 7.9 |   |
| Interest expense                                                         | ** ** | **(102.2**                                                    | **)**       | (137.7 | ) | (160.2 | ) |
| Charge for early  redemption of debt                                     | ** ** | **—**                                                    |        | (61.2 | ) | — |   |
| Other income  (deductions)                                               | ** ** | **(1.2**                                                      | **)**       | 13.5 |   | 3.8 |   |
| **Earnings from continuing  operations before income tax**               | ** ** | **195.4**                                                     |        | 204.6 |   | 188.0 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| Income tax expense                                                       | ** ** | **69.8**                                                      |        | 79.9 |   | 66.5 |   |
| **Earnings from continuing  operations**                                 | ** ** | **125.6**                                                     |        | 124.7 |   | 121.5 |   |
| **Earnings from discontinued  operations, net of tax**                   | ** ** | **14.0**                                                      |        | 52.9 |   | 95.8 |   |
| **Cumulative effect of accounting  change, net of tax**                  | ** ** | **—**                                                    |        | (3.2 | ) | — |   |
| **Net Income**                                                           | ** ** | **$**                                                         | **139.6**   |   | $ | 174.4 |   | $ | 217.3 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| **Average number of common shares  outstanding (millions)**              |       |                                                          |        |   |   |   |   |
| Basic                                                                    | ** ** | **112.3**                                                     |        | 121.0 |   | 120.1 |   |
| Diluted                                                                  | ** ** | **121.9**                                                     |        | 129.1 |   | 122.1 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| **Earnings per share of common  stock**                                  |       |                                                          |        |   |   |   |   |
| Basic:                                                                   |       |                                                          |        |   |   |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                                                         | **1.12**    |   | $ | 1.03 |   | $ | 1.01 |   |
| Earnings from  discontinued operations                                   | ** ** | **0.12**                                                      |        | 0.44 |   | 0.80 |   |
| Cumulative  effect of accounting change                                  | ** ** | **—**                                                    |        | (0.03 | ) | — |   |
| Total Basic                                                              |       | **$**                                                         | **1.24**    |   | $ | 1.44 |   | $ | 1.81 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| Diluted:                                                                 |       |                                                          |        |   |   |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                                                         | **1.03**    |   | $ | 0.97 |   | $ | 1.00 |   |
| Earnings from  discontinued operations                                   | ** ** | **0.12**                                                      |        | 0.41 |   | 0.78 |   |
| Cumulative  effect of accounting change                                  | ** ** | **—**                                                    |        | (0.03 | ) | — |   |
| Total Diluted                                                            | ** ** | **$**                                                         | **1.15**    |   | $ | 1.35 |   | $ | 1.78 |   |
|                                                                     |       |                                                          |        |   |   |   |   |
| **Dividends paid per share of common stock**                             | ** ** | **$**                                                         | **1.00**    |   | $ | 0.96 |   | $ | 0.96 |   |

 

 

           *See Notes to Consolidated Financial Statements.*

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**DPL INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**
| ** **                                                                                 | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **$ in millions**                                                                | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                                                 |       |                                                          |       |   |   |   |   |
| Net income                                                                                 | ** ** | **$**                                                         | **139.6**  |   | $ | 174.4 |   | $ | 217.3 |   |
| Less: Income  from discontinued operations                                                 | ** ** | **(14.0**                                                     | **)**      | (52.9 | ) | (95.8 | ) |
| Income from continuing operations                                                          | ** ** | **125.6**                                                     |       | 121.5 |   | 121.5 |   |
|                                                                                       |       |                                                          |       |   |   |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:         |       |                                                          |       |   |   |   |   |
| Depreciation and amortization                                                              | ** ** | **151.8**                                                     |       | 147.3 |   | 144.1 |   |
| Impairment of peaking stations                                                             | ** ** | **71.0**                                                      |       | — |   | — |   |
| Amortization of regulatory assets                                                          | ** ** | **7.6**                                                       |       | 2.0 |   | 0.7 |   |
| Charge for early redemption of debt                                                        | ** ** | **—**                                                    |       | 61.2 |   | — |   |
| Cumulative effect of accounting change, net of tax                                         | ** ** | **—**                                                    |       | 3.2 |   | — |   |
| Shareholder litigation                                                                     | ** ** | **—**                                                    |       | — |   | (70.0 | ) |
| Deferred income taxes                                                                      | ** ** | **(32.7**                                                     | **)**      | (7.1 | ) | 22.2 |   |
| Captive insurance provision                                                                | ** ** | **(2.4**                                                      | **)**      | (0.6 | ) | (1.1 | ) |
| Gain on sale of other investments                                                          | ** ** | **(2.2**                                                      | **)**      | (28.8 | ) | (3.3 | ) |
| Gain on sale of property                                                                   | ** ** | **—**                                                    |       | — |   | (1.8 | ) |
| Changes in  certain assets and liabilities:                                                |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                                        | ** ** | **(36.4**                                                     | **)**      | (12.5 | ) | 7.1 |   |
| Accounts payable                                                                           | ** ** | **41.8**                                                      |       | (11.7 | ) | (12.9 | ) |
| Accrued taxes payable                                                                      | ** ** | **(12.7**                                                     | **)**      | 15.0 |   | (62.8 | ) |
| Accrued interest payable                                                                   | ** ** | **4.9**                                                       |       | (13.2 | ) | (8.0 | ) |
| Prepayments                                                                                | ** ** | **5.4**                                                       |       | 2.2 |   | 0.4 |   |
| Inventories                                                                                | ** ** | **(5.2**                                                      | **)**      | (8.0 | ) | (20.0 | ) |
| Deferred compensation assets                                                               | ** ** | **0.4**                                                       |       | 4.4 |   | 12.6 |   |
| Deferred compensation obligations                                                          | ** ** | **2.3**                                                       |       | 7.4 |   | 5.2 |   |
| Other                                                                                      | ** ** | **(10.5**                                                     | **)**      | 31.8 |   | (1.2 | ) |
| **Net cash provided by operating activities**                                              | ** ** | **308.7**                                                     |       | 314.1 |   | 132.7 |   |
|                                                                                       |       |                                                          |       |   |   |   |   |
| **Cash  flows from investing activities:**                                                 |       |                                                          |       |   |   |   |   |
| Capital expenditures                                                                       | ** ** | **(357.5**                                                    | **)**      | (180.1 | ) | (87.7 | ) |
| Purchases of  short-term investments and securities                                        | ** ** | **(856.0**                                                    | **)**      | (641.2 | ) | (26.1 | ) |
| Sales of  short-term investments and securities                                            | ** ** | **984.0**                                                     |       | 642.5 |   | 89.9 |   |
| Proceeds from  the sale of property                                                        | ** ** | **—**                                                    |       | — |   | 2.3 |   |
| Cash flow from  discontinued operations                                                    | ** ** | **—**                                                    |       | 868.4 |   | 203.9 |   |
| **Net cash (used for)/provided by investing  activities**                                  | ** ** | **(229.5**                                                    | **)**      | 689.6 |   | 182.3 |   |
|                                                                                       |       |                                                          |       |   |   |   |   |
| **Cash  flows from financing activities:**                                                 |       |                                                          |       |   |   |   |   |
| Issuance of  long-term debt, net                                                           | ** ** | **—**                                                    |       | 211.2 |   | 174.7 |   |
| Exercise of  stock options                                                                 | ** ** | **7.8**                                                       |       | 22.7 |   | — |   |
| Tax impact  related to exercise of stock options                                           |       | **1.9**                                                       |       | — |   | — |   |
| Retirement of  long-term debt                                                              | ** ** | **—**                                                    |       | (673.8 | ) | (510.4 | ) |
| Premiums paid  for early redemption of debt                                                | ** ** | **—**                                                    |       | (54.7 | ) | — |   |
| Retirement of  preferred securities                                                        | ** ** | **—**                                                    |       | (0.1 | ) | — |   |
| Issuance of  pollution control bonds                                                       | ** ** | **100.0**                                                     |       | — |   | — |   |
| Pollution  control bond proceeds held in trust                                             | ** ** | **(100.0**                                                    | **)**      | — |   | — |   |
| Withdrawal of  restricted funds held in trust                                              | ** ** | **89.9**                                                      |       | — |   | — |   |
| Dividends paid  on common stock                                                            | ** ** | **(112.4**                                                    | **)**      | (115.3 | ) | (114.8 | ) |
| Purchase of  Company’s common stock                                                   | ** ** | **(400.0**                                                    | **)**      | — |   | — |   |
| **Net cash (used for) financing activities**                                               | ** ** | **(412.8**                                                    | **)**      | (610.0 | ) | (450.5 | ) |
|                                                                                       |       |                                                          |       |   |   |   |   |
| **Cash  and cash equivalents:**                                                            |       |                                                          |       |   |   |   |   |
| Net change                                                                                 | ** ** | **(333.6**                                                    | **)**      | 393.7 |   | (135.5 | ) |
| Balance at  beginning of period                                                            | ** ** | **595.8**                                                     |       | 202.1 |   | 337.6 |   |
| **Cash and cash equivalents at end of period**                                             | ** ** | **$**                                                         | **262.2**  |   | $ | 595.8 |   | $ | 202.1 |   |
|                                                                                       |       |                                                          |       |   |   |   |   |
| **Supplemental  cash flow information:**                                                   |       |                                                          |       |   |   |   |   |
| Interest paid,  net of amounts capitalized                                                 | ** ** | **$**                                                         | **91.4**   |   | $ | 146.1 |   | $ | 162.1 |   |
| Income taxes  paid, net                                                                    | ** ** | **$**                                                         | **113.6**  |   | $ | 71.2 |   | $ | 107.9 |   |
| Non-cash  financing and investing activities:                                              |       |                                                          |       |   |   |   |   |
| Restricted funds  held in trust (see Note 8 of Notes to Consolidated Financial Statements) | ** ** | **$**                                                         | **10.1**   |   | $ | — |   | $ | — |   |

 

*See Notes to Consolidated FinancialStatements.*

 

50

----

 

**DPL INC.**

**CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                     | ** ** | **At December 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| **$ in millions**                                                                    | ** ** | **2006**                      | ** **  | **2005** | ** ** |
|                                                                                           | ** ** | ** **                    |        |   |   |
| **ASSETS**                                                                                     | ** ** | ** **                    |        |   |   |
|                                                                                           | ** ** | ** **                    |        |   |   |
| **Current  assets:**                                                                           | ** ** | ** **                    |        |   |   |
| Cash and cash equivalents                                                                      | ** ** | **$**                         | **262.2**   |   | $ | 595.8 |   |
| Short-term investments available for sale                                                      | ** ** | **—**                    |        | 125.8 |   |
| Restricted funds held in trust                                                                 | ** ** | **10.1**                      |        | — |   |
| Accounts receivable, less provision for  uncollectible accounts of $1.4 and $1.0, respectively | ** ** | **225.0**                     |        | 194.9 |   |
| Inventories, at average cost                                                                   | ** ** | **85.4**                      |        | 80.2 |   |
| Taxes applicable to subsequent years                                                           | ** ** | **48.0**                      |        | 45.9 |   |
| Other current assets                                                                           | ** ** | **37.7**                      |        | 20.2 |   |
| Total current assets                                                                           | ** ** | **668.4**                     |        | 1,062.8 |   |
|                                                                                           | ** ** | ** **                    |        |   |   |
| **Property:**                                                                                  | ** ** | ** **                    |        |   |   |
| **Held and used:**                                                                             | ** ** | ** **                    |        |   |   |
| Property, plant and equipment                                                                  | ** ** | **4,718.5**                   |        | 4,667.7 |   |
| Less: Accumulated depreciation and amortization                                                | ** ** | **(2,159.2**                  | **)**       | (2,094.8 | ) |
| Total net property held and used                                                               | ** ** | **2,559.3**                   |        | 2,572.9 |   |
|                                                                                           | ** ** | ** **                    |        |   |   |
| **Assets held for sale**(Note 14):                                                             | ** ** | ** **                    |        |   |   |
| 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 (Note 3)                                                                    | ** ** | **148.6**                     |        | 83.8 |   |
| Other assets                                                                                   | ** ** | **84.7**                      |        | 72.2 |   |
| Total other  noncurrent assets                                                                 | ** ** | **233.3**                     |        | 156.0 |   |
|                                                                                           | ** ** | ** **                    |        |   |   |
| **Total Assets**                                                                               | ** ** | **$**                         | **3,612.2** |   | $ | 3,791.7 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

51

----

**DPL INC.**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------------------|------------|
| **$ in millions**                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **2006**                      | ** ** | **2005** | ** ** |
|                                                            |       |       |       |       |       |                          |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                  |       |       |       |       |       |                          |       |   |   |
|                                                            |       |       |       |       |       |                          |       |   |   |
| **Current  liabilities:**                                       | ** ** | ** ** |       |       |       |                          |       |   |   |
| Current portion - long-term debt                                |       |       | ** ** | ** ** |       | **$**                         | **225.9**  |   | $ | 0.9 |   |
| Accounts payable                                                |       |       | ** ** | ** ** |       | **169.4**                     |       | 130.2 |   |
| Accrued taxes                                                   |       |       | ** ** | ** ** |       | **155.2**                     |       | 178.5 |   |
| Accrued interest                                                |       |       | ** ** | ** ** |       | **35.2**                      |       | 28.9 |   |
| Other current liabilities                                       |       |       | ** ** | ** ** |       | **38.3**                      |       | 31.1 |   |
| Total current liabilities                                       |       |       | ** ** | ** ** |       | **624.0**                     |       | 369.6 |   |
|                                                            |       |       |       |       |       |                          |       |   |   |
| **Noncurrent  liabilities:**                                    | ** ** | ** ** |       |       |       |                          |       |   |   |
| Long-term debt                                                  |       |       | ** ** | ** ** |       | **1,551.8**                   |       | 1,677.1 |   |
| Deferred taxes                                                  |       |       | ** ** | ** ** |       | **355.2**                     |       | 327.0 |   |
| Unamortized investment tax credit                               |       |       | ** ** | ** ** |       | **43.6**                      |       | 46.4 |   |
| Insurance and claims costs                                      |       |       | ** ** | ** ** |       | **21.9**                      |       | 24.3 |   |
| Other deferred credits                                          |       |       | ** ** | ** ** |       | **280.7**                     |       | 286.3 |   |
| Total noncurrent liabilites                                     |       |       | ** ** | ** ** |       | **2,253.2**                   |       | 2,361.1 |   |
|                                                            |       |       |       |       |       |                          |       |   |   |
| Cumulative  preferred stock not subject to mandatory redemption | ** ** | ** ** |       |       |       | **22.9**                      |       | 22.9 |   |
|                                                            |       |       |       |       |       |                          |       |   |   |
| Commitments and  contingencies (Note 15)                        |       |       |       |       |       |                          |       |   |   |
|                                                            |       |       |       |       |       |                          |       |   |   |
| **Common  shareholders’ equity:**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Common stock, at par value of $0.01 per share:                  |       |       |       |       |       |                          |       |   |   |
|                                                                 |            |            |            |            |            |                               |            |  |  |  |  |

 
|                                                     |       | **December 2006** | ** ** | **December 2005** |       |       |        |    |   |
|-----------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|-------------|---------|--------|
| Shares authorized                                   |       | 250,000,000       |       | 250,000,000       |       |       |        |    |   |
| Shares issued                                       |       | 163,724,211       |       | 163,724,211       |       |       |        |    |   |
| Shares outstanding                                  |       | 113,018,972       |       | 127,526,404       | ** ** | **1.1**    |        | 1.3     |   |
| Other paid-in capital, net of treasury stock        |       |              | ** ** | ** **        |       | **—** |        | 25.1    |   |
| Warrants                                            |       |              | ** ** | ** **        |       | **50.0**   |        | 50.0    |   |
| Common stock held by employee plans                 |       |              | ** ** | ** **        |       | **(69.0**  | **)**       | (86.1   | )      |
| Accumulated other  comprehensive loss               |       |              | ** ** | ** **        |       | **(6.5**   | **)**       | (14.2   | )      |
| Retained earnings                                   |       |              | ** ** | ** **        |       | **736.5**  |        | 1,062.0 |   |
| Total common shareholders’  equity             |       |              | ** ** | ** **        |       | **712.1**  |        | 1,038.1 |   |
|                                                     |       |              |       |              |       |       |        |    |   |
| **Total Liabilities and Shareholders’ Equity** | ** ** | ** **        | ** ** | ** **        |       | **$**      | **3,612.2** |    | $      | 3,791.7 |   |
|                                                     |            |                   |            |                   |            |            |             |         |        |  |  |

 

See Notes to ConsolidatedFinancial Statements.

52

----

**DPL Inc.**

**ConsolidatedStatement of Shareholders’ Equity**

 
| ** **                                                                                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** **  | ** ** | ** **       | ** ** | **Common**   | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** **  | ** ** | ** **       | ** ** | **Stock**    | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Common Stock (a)** | ** ** | **Other**  | ** ** | ** **  | ** ** | **Held by** | ** ** | **Other**    | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **                                                                                       | ** ** | **Outstanding**                | ** ** | ** ** | ** ** | **Paid-in** | ** ** | ** **       | ** ** | **Employee** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| **$ in millions**                                                                      | ** ** | **Shares**                     | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Warrants**     | ** ** | **Plans**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                                             |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
| Beginning balance                                                                                |       | 126,501,404                    |       | $          | 1.3        |        | $          | 12.0             |       | $            | 50.0       |              | $          | (84.4        | )          | $          | 57.7       |   | $ | 865.7 |   | $ | 902.3 |   |
|                                                                                             |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
| **2004:**                                                                                        |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
| Net income                                                                                       |       |                           |       |       |       |        |       |             |       |         |       |              |       | 217.3        |       |       |       |
| Net change in unrealized  gains on financial instruments, net of reclassification adjustments    |       |                           |       |       |       |        |       |             |       |         |       | 9.3               |       |         |       |       |       |
| Net change in unrealzed  gains on foreign currency translation adjustments                       |       |                           |       |       |       |        |       |             |       |         |       | 6.2               |       |         |       |       |       |
| Net change in deferred gains  on cash flow hedges                                                |       |                           |       |       |       |        |       |             |       |         |       | (1.5              | )          |         |       |       |       |
| Minimum pension  liability                                                                       |       |                           |       |       |       |        |       |             |       |         |       | (0.4              | )          |         |       |       |       |
| Deferred income taxes  related unrealized gains (losses)                                         |       |                           |       |       |       |        |       |             |       |         |       | (5.8              | )          |         |       |       |       |
| Total comprehensive  income                                                                      |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       | 225.1      |       |
| Common stock dividends  (b)                                                                      |       |                           |       |       |       |        |       |             |       |         |       |              |       | (86.2        | )          | (86.2      | )          |
| Employee / Director  stock plans                                                                 |       |                           |       |       |       | 4.1         |       |             |       | (1.3         | )          |              |       | 0.4          |       | 3.2        |       |
| Other                                                                                            |       |                           |       |       |       | (0.3        | )          |             |       |         |       |              |       | (0.1         | )          | (0.4       | )          |
| Ending balance                                                                                   |       | 126,501,404                    |       | $          | 1.3        |        | $          | 15.8             |       | $            | 50.0       |              | $          | (85.7        | )          | $          | 65.5       |   | $ | 997.1 |   | $ | 1,044.0 |   |
|                                                                                             |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
| **2005:**                                                                                        |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
| Net income                                                                                       |       |                           |       |       |       |        |       |             |       |         |       |              |       | 174.4        |       |       |       |
| Net change in unrealized  (losses) on financial instruments, net of reclassification adjustments |       |                           |       |       |       |        |       |             |       |         |       | (15.3             | )          |         |       |       |       |
| Net change in unrealzed  (losses) on foreign currency translation adjustments                    |       |                           |       |       |       |        |       |             |       |         |       | (46.3             | )          |         |       |       |       |
| Net change in deferred  gains on cash flow hedges                                                |       |                           |       |       |       |        |       |             |       |         |       | (3.4              | )          |         |       |       |       |
| Minimum pension  liability                                                                       |       |                           |       |       |       |        |       |             |       |         |       | (63.0             | )          |         |       |       |       |
| Deferred income taxes  related unrealized gains (losses)                                         |       |                           |       |       |       |        |       |             |       |         |       | 48.2              |       |         |       |       |       |
| Total comprehensive  income                                                                      |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       | 94.6       |       |
| Common stock dividends  (b)                                                                      |       |                           |       |       |       |        |       |             |       |         |       |              |       | (115.3       | )          | (115.3     | )          |
| Treasury shares  purchased (c)                                                                   |       | —                         |       |       |       | (10.6       | )          |             |       |         |       |              |       | —       |       | (10.6      | )          |
| Treasury stock reissued                                                                          |       | 1,025,000                      |       |       |       | 16.9        |       |             |       |         |       |              |       | 5.8          |       | 22.7       |       |
| Employee / Director  stock plans                                                                 |       |                           |       |       |       | 3.0         |       |             |       | (0.4         | )          |              |       |         |       | 2.6        |       |
| Other                                                                                            |       |                           |       |       |       |        |       |             |       |         |       | 0.1               |       |         |       | 0.1        |       |
| Ending balance                                                                                   |       | 127,526,404                    |       | $          | 1.3        |        | $          | 25.1             |       | $            | 50.0       |              | $          | (86.1        | )          | $          | (14.2      | ) | $ | 1,062.0 |   | $ | 1,038.1 |   |
|                                                                                             |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
| **2006:**                                                                                        |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
|                                                                                             |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       |       |       |
| Net income                                                                                       |       |                           |       |       |       |        |       |             |       |         |       |              |       | 139.6        |       |       |       |
| Net change in unrealized  gains on financial instruments, net of reclassification adjustments    |       |                           |       |       |       |        |       |             |       |         |       | 1.6               |       |         |       |       |       |
| Net change in deferred  gains on cash flow hedges                                                |       |                           |       |       |       |        |       |             |       |         |       | 0.7               |       |         |       |       |       |
| Minimum pension  liability                                                                       |       |                           |       |       |       |        |       |             |       |         |       | 11.8              |       |         |       |       |       |
| Deferred income taxes  related unrealized gains (losses)                                         |       |                           |       |       |       |        |       |             |       |         |       | (29.9             | )          |         |       |       |       |
| Total comprehensive  income                                                                      |       |                           |       |       |       |        |       |             |       |         |       |              |       |         |       | 123.8      |       |
| Common stock dividends  (b)                                                                      |       |                           |       |       |       |        |       |             |       |         |       |              |       | (112.4       | )          | (112.4     | )          |
| Treasury shares  purchased (c)                                                                   |       | (14,862,432                    | )          | (0.1       | )          | (389.3      | )          |             |       |         |       |              |       |         |       | (389.4     | )          |
| Treasury stock reissued                                                                          |       | 355,000                        |       |       |       | 360.4       |       |             |       |         |       |              |       | (352.6       | )          | 7.8        |       |
| Tax effects to equity                                                                            |       |                           |       |       |       | 1.8         |       |             |       |         |       |              |       |         |       | 1.8        |       |
| Employee / Director  stock plans                                                                 |       |                           |       |       |       | 1.8         |       |             |       | 17.1         |       |              |       | (0.1         | )          | 18.8       |       |
| Other                                                                                            |       |                           |       | (0.1       | )          | 0.2         |       |             |       |         |       |              |       | —       |       | 0.1        |       |
| FAS  158 adjustmenet                                                                             |       |                           |       |       |       |        |       |             |       |         |       | 23.5              |       |         |       | 23.5       |       |
| Ending balance                                                                                   |       | 113,018,972                    |       | $          | 1.1        |        | $          | (0.0             | )          | $            | 50.0       |              | $          | (69.0        | )          | $          | (6.5       | ) | $ | 736.5 |   | $ | 712.1 |   |

----

*(a)   $0.01 par value,250,000,000 shares authorized.*

*(b)   Common stockdividends were $0.96 per share in 2004 and 2005, respectively, and $1.00 in2006.*

*(c)   Number of shares outstanding at December 31,2005 were not affected by the December 30, 2005 transaction to purchase 406,000shares as the share repurchase was settled in early January 2006.  DPL completed the share repurchase program inAugust 2006.*

 

 

See Notes to ConsolidatedFinancial Statements

53

----

**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENTS OF RESULTSOF OPERATIONS**

 
| ** **                                                                 | ** ** | **For the years ended December 31,** | ** **  |
|----------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| **$ in millions except per share amounts**   | ** ** | **2006**                                                      | ** **  | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                                               | ** ** | **$**                                                         | **1,385.2** |   | $ | 1,276.9 |   | $ | 1,192.2 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| **Cost of  revenues:**                                                     |       |                                                          |        |   |   |   |   |
| Fuel                                                                       | ** ** | **335.2**                                                     |        | 317.9 |   | 257.0 |   |
| Purchased power                                                            | ** ** | **171.9**                                                     |        | 147.1 |   | 116.4 |   |
| Total cost of revenues                                                     | ** ** | **507.1**                                                     |        | 465.0 |   | 373.4 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| **Gross  margin**                                                          | ** ** | **878.1**                                                     |        | 811.9 |   | 818.8 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| **Operating  expenses:**                                                   |       |                                                          |        |   |   |   |   |
| Operation and maintenance                                                  | ** ** | **231.7**                                                     |        | 198.3 |   | 224.4 |   |
| Depreciation and amortization                                              | ** ** | **130.0**                                                     |        | 123.9 |   | 121.1 |   |
| General taxes                                                              | ** ** | **106.3**                                                     |        | 105.1 |   | 103.2 |   |
| Amortization of regulatory assets                                          | ** ** | **7.6**                                                       |        | 2.0 |   | 0.7 |   |
| Total operating expenses                                                   | ** ** | **475.6**                                                     |        | 429.3 |   | 449.4 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| **Operating  income**                                                      | ** ** | **402.5**                                                     |        | 382.6 |   | 369.4 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| Investment  income                                                         | ** ** | **6.7**                                                       |        | 6.1 |   | 5.0 |   |
| Interest expense                                                           | ** ** | **(23.4**                                                     | **)**       | (38.1 | ) | (43.5 | ) |
| Charge for early  redemption of debt                                       | ** ** | **—**                                                    |        | (4.1 | ) | — |   |
| Other income  (deductions)                                                 | ** ** | **(1.2**                                                      | **)**       | 6.6 |   | (1.1 | ) |
|                                                                       | ** ** | ** **                                                    | ** **  |   |   |   |   |
| **Earnings  Before Income Tax and Cumulative Effect of Accounting Change** | ** ** | **384.6**                                                     |        | 353.1 |   | 329.8 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| Income tax  expense                                                        | ** ** | **142.2**                                                     |        | 138.1 |   | 120.8 |   |
| ** **                                                                 | ** ** | ** **                                                    |        |   |   |   |   |
| **Earnings  before Cumulative Effect of Accounting Change**                | ** ** | **242.4**                                                     |        | 215.0 |   | 209.0 |   |
| ** **                                                                 |       |                                                          |        |   |   |   |   |
| Cumulative  effect of accounting change, net of tax                        | ** ** | **—**                                                    |        | (3.2 | ) | — |   |
| ** **                                                                 | ** ** | ** **                                                    |        |   |   |   |   |
| **Net  Income**                                                            | ** ** | **$**                                                         | **242.4**   |   | $ | 211.8 |   | $ | 209.0 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| Preferred  dividends                                                       | ** ** | **0.8**                                                       |        | 0.9 |   | 0.9 |   |
|                                                                       |       |                                                          |        |   |   |   |   |
| **Earnings on common stock**                                               | ** ** | **$**                                                         | **241.6**   | ** ** | **$** | **210.9** | ** ** | **$** | **208.1** | ** ** |

 

See Notes to ConsolidatedFinancial Statements.

 

54

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**THE DAYTON****POWER****AND LIGHT COMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                     | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **$ in millions**                                    | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                     |       |                                                          |       |   |   |   |   |
| Net income                                                     | ** ** | **$**                                                         | **242.4**  |   | $ | 211.8 |   | $ | 209.0 |   |
| Adjustments:                                                   |       |                                                          |       |   |   |   |   |
| Depreciation and amortization                                  | ** ** | **130.0**                                                     |       | 123.9 |   | 121.1 |   |
| Amortization of regulatory assets                              | ** ** | **7.6**                                                       |       | 2.0 |   | 0.7 |   |
| Deferred income taxes                                          | ** ** | **(16.3**                                                     | **)**      | (13.3 | ) | (16.2 | ) |
| Charge for early redemption of debt                            | ** ** | **—**                                                    |       | 4.1 |   | — |   |
| Cumulative effect of accounting change, net of tax             | ** ** | **—**                                                    |       | 3.2 |   | — |   |
| Gain on sale of property                                       | ** ** | **—**                                                    |       | — |   | (1.8 | ) |
| Changes in  certain assets and liabilities:                    |       |                                                          |       |   |   |   |   |
| Accounts receivable                                            | ** ** | **(29.0**                                                     | **)**      | (17.1 | ) | 6.6 |   |
| Accounts payable                                               | ** ** | **43.3**                                                      |       | 6.5 |   | 11.5 |   |
| Net intercompany receivables from parent                       | ** ** | **0.5**                                                       |       | (0.1 | ) | (0.2 | ) |
| Accrued taxes payable                                          | ** ** | **0.5**                                                       |       | 31.5 |   | 58.4 |   |
| Accrued interest payable                                       | ** ** | **1.3**                                                       |       | (0.9 | ) | 0.5 |   |
| Prepayments                                                    | ** ** | **5.5**                                                       |       | 2.3 |   | 0.6 |   |
| Inventories                                                    | ** ** | **(5.2**                                                      | **)**      | (7.9 | ) | (20.2 | ) |
| Deferred compensation assets                                   | ** ** | **2.5**                                                       |       | 0.7 |   | 8.8 |   |
| Deferred compensation obligations                              | ** ** | **0.1**                                                       |       | 6.7 |   | 5.2 |   |
| Other                                                          | ** ** | **(17.5**                                                     | **)**      | 13.4 |   | (2.8 | ) |
| **Net cash provided by operating activities**                  | ** ** | **365.7**                                                     |       | 366.8 |   | 381.2 |   |
|                                                           |       |                                                          |       |   |   |   |   |
| **Cash  flows from investing activities:**                     |       |                                                          |       |   |   |   |   |
| Capital  expenditures                                          | ** ** | **(354.8**                                                    | **)**      | (178.4 | ) | (82.2 | ) |
| Proceeds from  the sale of property                            | ** ** | **—**                                                    |       | — |   | 2.3 |   |
| **Net cash (used for) investing activities**                   | ** ** | **(354.8**                                                    | **)**      | (178.4 | ) | (79.9 | ) |
|                                                           |       |                                                          |       |   |   |   |   |
| **Cash  flows from financing activities:**                     |       |                                                          |       |   |   |   |   |
| Issuance of  long-term debt, net                               | ** ** | **—**                                                    |       | 210.4 |   | — |   |
| Issuance of  pollution control bonds                           | ** ** | **100.0**                                                     |       | — |   | — |   |
| Pollution  control bond proceeds held in trust                 | ** ** | **(100.0**                                                    | **)**      | — |   | — |   |
| Withdrawal of  restricted funds held in trust                  | ** ** | **89.9**                                                      |       | — |   | — |   |
| Retirement of  long-term debt                                  | ** ** | **—**                                                    |       | (218.9 | ) | (0.4 | ) |
| Dividends paid  on preferred stock                             | ** ** | **(0.9**                                                      | **)**      | (0.9 | ) | (0.9 | ) |
| Dividends paid  on common stock                                | ** ** | **(100.0**                                                    | **)**      | (150.0 | ) | (300.0 | ) |
| **Net cash (used for) financing activities**                   | ** ** | **(11.0**                                                     | **)**      | (159.4 | ) | (301.3 | ) |
|                                                           |       |                                                          |       |   |   |   |   |
| **Cash  and cash equivalents:**                                |       |                                                          |       |   |   |   |   |
| Net change                                                     | ** ** | **(0.1**                                                      | **)**      | 29.0 |   | — |   |
| Balance at  beginning of period                                | ** ** | **46.2**                                                      |       | 17.2 |   | 17.2 |   |
| **Cash and cash equivalents at end of period**                 | ** ** | **$**                                                         | **46.1**   |   | $ | 46.2 |   | $ | 17.2 |   |
|                                                           |       |                                                          |       |   |   |   |   |
| **Supplemental  cash flow information:**                       |       |                                                          |       |   |   |   |   |
| Interest paid,  net of amounts capitalized                     | ** ** | **$**                                                         | **77.9**   |   | $ | 36.5 |   | $ | 39.5 |   |
| Income taxes  paid, net                                        | ** ** | **$**                                                         | **158.1**  |   | $ | 119.0 |   | $ | 79.9 |   |
| Non-cash financing  activities: Restricted funds held in trust | ** ** | **$**                                                         | **10.1**   |   | $ | — |   | $ | — |   |

 

See Notes toConsolidated Financial Statements.

 

55

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                     | ** ** | **At December 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| **$ in millions**                                                                    | ** ** | **2006**                      | ** **  | **2005** | ** ** |
| ** **                                                                                     | ** ** | ** **                    | ** **  | ** ** | ** ** |
| **ASSETS**                                                                                     | ** ** | ** **                    |        |   |   |
|                                                                                           | ** ** | ** **                    |        |   |   |
| **Current  assets:**                                                                           |       |                          |        |   |   |
| Cash and cash equivalents                                                                      | ** ** | **$**                         | **46.1**    |   | $ | 46.2 |   |
| Restricted funds held in trust                                                                 | ** ** | **10.1**                      |        | — |   |
| Accounts receivable, less provision for  uncollectible accounts of $1.4 and $1.0, respectively | ** ** | **205.6**                     |        | 182.7 |   |
| Inventories, at average cost                                                                   | ** ** | **83.0**                      |        | 77.7 |   |
| Taxes applicable to subsequent years                                                           | ** ** | **48.0**                      |        | 45.9 |   |
| Other current assets                                                                           | ** ** | **38.2**                      |        | 19.3 |   |
| Total current assets                                                                           | ** ** | **431.0**                     |        | 371.8 |   |
|                                                                                           |       |                          |        |   |   |
| **Property:**                                                                                  |       |                          |        |   |   |
| Property, plant and equipment                                                                  | ** ** | **4,450.6**                   |        | 4,118.0 |   |
| Less: Accumulated depreciation and amortization                                                | ** ** | **(2,079.0**                  | **)**       | (1,973.3 | ) |
| Net property                                                                                   | ** ** | **2,371.6**                   |        | 2,144.7 |   |
|                                                                                           |       |                          |        |   |   |
| **Other  noncurrent assets:**                                                                  |       |                          |        |   |   |
| Regulatory assets                                                                              | ** ** | **148.6**                     |        | 83.8 |   |
| Other assets                                                                                   | ** ** | **139.1**                     |        | 138.3 |   |
| Total other noncurrent assets                                                                  | ** ** | **287.7**                     |        | 222.1 |   |
|                                                                                           |       |                          |        |   |   |
| **Total Assets**                                                                               | ** ** | **$**                         | **3,090.3** |   | $ | 2,738.6 |   |

 

See Notes to ConsolidatedFinancial Statements.

56

----

 

**THE DAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATED BALANCE SHEETS**
| ** **                                                      | ** ** | **At December 31,** | ** **  |
|-----------------------------------------------------------------|------------|-------------------------------|-------------|
| **$ in millions**                                     | ** ** | **2006**                      | ** **  | **2005** | ** ** |
|                                                            |       | ** **                    |        |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                  |       | ** **                    |        |   |   |
|                                                            |       | ** **                    |        |   |   |
| **Current liabilities:**                                        | ** ** |                          |        |   |   |
| Accounts payable                                                |       | **166.2**                     |        | 116.2 |   |
| Accrued taxes                                                   |       | **159.6**                     |        | 167.7 |   |
| Accrued interest                                                |       | **12.6**                      |        | 9.8 |   |
| Other current  liabilities                                      |       | **36.3**                      |        | 28.4 |   |
| Total current  liabilities                                      |       | **374.7**                     |        | 322.1 |   |
|                                                            |       | ** **                    |        |   |   |
| **Noncurrent liabilities:**                                     | ** ** | ** **                    |        |   |   |
| Long-term debt                                                  |       | **785.2**                     |        | 685.9 |   |
| Deferred taxes                                                  |       | **360.2**                     |        | 323.2 |   |
| Unamortized  investment tax credit                              |       | **43.6**                      |        | 46.4 |   |
| Other deferred  credits                                         |       | **272.5**                     |        | 258.7 |   |
| Total noncurrent  liabilities                                   |       | **1,461.5**                   |        | 1,314.2 |   |
|                                                            |       | ** **                    |        |   |   |
| Cumulative preferred  stock not subject to mandatory redemption | ** ** | **22.9**                      |        | 22.9 |   |
|                                                            |       | ** **                    |        |   |   |
| Commitments and  contingencies (Note 15)                        |       | ** **                    |        |   |   |
|                                                            |       | ** **                    |        |   |   |
| **Common shareholders’ equity:**                           | ** ** | ** **                    |        |   | ** ** |
| Common stock, at  par value of $0.01 per share:                 |       | **0.4**                       |        | 0.4 |   |
| Other paid-in  capital                                          |       | **783.7**                     |        | 783.4 |   |
| Accumulated  other comprehensive income                         |       | **15.1**                      |        | 5.1 |   |
| Retained  earnings                                              |       | **432.0**                     |        | 290.5 |   |
|                                                            |       | ** **                    |        |   |   |
| Total common  shareholders’ equity                         |       | **1,231.2**                   |        | 1,079.4 |   |
|                                                            |       | ** **                    |        |   |   |
| **Total Liabilities and  Shareholders’ Equity**            | ** ** | **$**                         | **3,090.3** |   | $ | 2,738.6 |   |
|                                                                 |            |                               |             |  |  |  |  |

 

SeeNotes to Consolidated Financial Statements.

57

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** **

**THE DAYTON POWER AND LIGHTCOMPANY**

**CONSOLIDATED STATEMENT OFSHAREHOLDERS’ EQUITY**
| ** **                                                                                             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                             | ** ** | **Common Stock (a)** | ** ** | **Other**  | ** ** | **Other**   | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **                                                                                             | ** ** | **Outstanding**                | ** ** | ** ** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| **$ in millions**                                                                            | ** ** | **Shares**                     | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                                                   |       |                           |       |       |       |        |       |              |       |         |       |       |       |
| Beginning balance                                                                                      |       | 41,172,173                     |       | $          | 0.4        |        | $          | 780.5             |       | $            | 38.2       |       | $          | 321.7 |   | $ | 1,140.8 |   |
|                                                                                                   |       |                           |       |       |       |        |       |              |       |         |       |       |       |
| **2004:**                                                                                              |       |                           |       |       |       |        |       |              |       |         |       |       |       |
| Net income                                                                                             |       |                           |       |       |       |        |       |              |       | 209.0        |       |       |       |
| Net change in  unrealized gains (loses) on financial instruments, net of reclassification  adjustments |       |                           |       |       |       |        |       | 12.6              |       |         |       |       |       |
| Net change in deferred  gains on cash flow hedges                                                      |       |                           |       |       |       |        |       | (1.5              | )          |         |       |       |       |
| Minimum pension  liability                                                                             |       |                           |       |       |       |        |       | (0.4              | )          |         |       |       |       |
| Deferred income taxes  related unrealized gains (losses)                                               |       |                           |       |       |       |        |       | (5.8              | )          |         |       |       |       |
| Total comprehensive  income                                                                            |       |                           |       |       |       |        |       |              |       |         |       | 213.9      |       |
| Common stock dividends                                                                                 |       |                           |       |       |       |        |       |              |       | (300.0       | )          | (300.0     | )          |
| Preferred stock  dividend                                                                              |       |                           |       |       |       |        |       |              |       | (0.9         | )          | (0.9       | )          |
| Employee / Director  stock plans                                                                       |       |                           |       |       |       | 2.3         |       |              |       |         |       | 2.3        |       |
| Other                                                                                                  |       |                           |       |       |       | 0.1         |       |              |       | (0.1         | )          | —     |       |
| Ending balance                                                                                         |       | 41,172,173                     |       | $          | 0.4        |        | $          | 782.9             |       | $            | 43.1       |       | $          | 229.7 |   | $ | 1,056.1 |   |
|                                                                                                   |       |                           |       |       |       |        |       |              |       |         |       |       |       |
| **2005:**                                                                                              |       |                           |       |       |       |        |       |              |       |         |       |       |       |
| Net income                                                                                             |       |                           |       |       |       |        |       |              |       | 211.8        |       |       |       |
| Net change in  unrealized gains (loses) on financial instruments, net of reclassification adjustments  |       |                           |       |       |       |        |       | 1.9               |       |         |       |       |       |
| Net change in deferred  gains on cash flow hedges                                                      |       |                           |       |       |       |        |       | (3.4              | )          |         |       |       |       |
| Minimum pension  liability                                                                             |       |                           |       |       |       |        |       | (63.0             | )          |         |       |       |       |
| Deferred income taxes  related unrealized gains (losses)                                               |       |                           |       |       |       |        |       | 26.4              |       |         |       |       |       |
| Total comprehensive  income                                                                            |       |                           |       |       |       |        |       |              |       |         |       | 173.7      |       |
| Common stock dividends                                                                                 |       |                           |       |       |       |        |       |              |       | (150.0       | )          | (150.0     | )          |
| Preferred stock  dividend                                                                              |       |                           |       |       |       |        |       |              |       | (0.9         | )          | (0.9       | )          |
| Employee / Director  stock plans                                                                       |       |                           |       |       |       | 0.5         |       |              |       |         |       | 0.5        |       |
| Other                                                                                                  |       |                           |       |       |       |        |       | 0.1               |       | (0.1         | )          | —     |       |
| Ending balance                                                                                         |       | 41,172,173                     |       | $          | 0.4        |        | $          | 783.4             |       | $            | 5.1        |       | $          | 290.5 |   | $ | 1,079.4 |   |
|                                                                                                   |       |                           |       |       |       |        |       |              |       |         |       |       |       |
| **2006:**                                                                                              |       |                           |       |       |       |        |       |              |       |         |       |       |       |
| Net income                                                                                             |       |                           |       |       |       |        |       |              |       | 242.4        |       |       |       |
| Net change in  unrealized gains (loses) on financial instruments, net of reclassification adjustments  |       |                           |       |       |       |        |       | 3.9               |       |         |       |       |       |
| Net change in deferred  gains on cash flow hedges                                                      |       |                           |       |       |       |        |       | 0.7               |       |         |       |       |       |
| Minimum pension  liability                                                                             |       |                           |       |       |       |        |       | 11.8              |       |         |       |       |       |
| Deferred income taxes  related unrealized gains (losses)                                               |       |                           |       |       |       |        |       | (30.2             | )          |         |       |       |       |
| Total comprehensive  income                                                                            |       |                           |       |       |       |        |       |              |       |         |       | 228.6      |       |
| Common stock dividends                                                                                 |       |                           |       |       |       |        |       |              |       | (100.0       | )          | (100.0     | )          |
| Preferred stock  dividends                                                                             |       |                           |       |       |       |        |       |              |       | (0.8         | )          | (0.8       | )          |
| Tax effects to equity                                                                                  |       |                           |       |       |       | 1.8         |       |              |       |         |       | 1.8        |       |
| Employee / Director  stock plans                                                                       |       |                           |       |       |       | (1.6        | )          |              |       |         |       | (1.6       | )          |
| Other                                                                                                  |       |                           |       |       |       | 0.1         |       |              |       | (0.1         | )          | —     |       |
| FAS 158 adjustment                                                                                     |       |                           |       |       |       |        |       | 23.8              |       |         |       | 23.8       |       |
| Ending balance                                                                                         |       | 41,172,173                     |       | $          | 0.4        |        | $          | 783.7             |       | $            | 15.1       |       | $          | 432.0 |   | $ | 1,231.2 |   |

----

*(a)50,000,000 shares authorized.*

 

See Notes to ConsolidatedFinancial Statements.

** **

58

----

 

**Notes to Consolidated FinanialStatements**

This report includes thecombined filing of **DPL Inc**. **(DPL)** and **The Dayton Power and LightCompany****(DP&L).  DP&L**is the principalsubsidiary of **DPL**providing approximately 99% of**DPL’s**total consolidated revenue andapproximately 86% 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**, respectivelyand 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 this report and in the future, **DPL Inc**.and **The Dayton Power and Light Company** willfile combined SEC reports on an interim and annual basis.

**DPL’s**results of operations, financial position and cash flows,includes the consolidated results of its subsidiaries, including its subsidiary**DP&L**and all of its consolidated subsidiaries.  All material intercompany accounts andtransactions have been eliminated in consolidation.  Some of the Notes presented in this reportare only applicable to **DPL** or **DP&L** as indicated.  The other Notes apply to both registrants andthe financial information presented is segregated by registrant.

*1.     Summary of Significant Accounting Policiesand Overview*

**Descriptionof Business**

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

**DPL’s**significant subsidiaries (all of which are wholly-owned) include DPLE, whichengages in the operation of peaking generating facilities; DPL EnergyResources, Inc. (DPLER), which sells retail electric energy under contract tomajor industrial and commercial customers in West Central Ohio; MVE, Inc.,which was primarily responsible for the management of our financial assetportfolio; and Miami Valley Insurance Company (MVIC), our captive insurancecompany that provides insurance sources to us and our subsidiaries.  ** DP&L**has one significantsubsidiary, DPL Finance Company, Inc., which is wholly-owned and providesfinancing to **DPL**, **DP&L** and other affiliated companies.

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

**Basis ofConsolidation**

We prepareconsolidated financial statements in accordance with generally accepted accountingprinciples (GAAP) in the United States of America.  The consolidated financial statements includethe accounts of **DPL** and **DP&L** and their majority-ownedsubsidiaries.  Investments that are notmajority owned are accounted for using the equity method when our investmentallows us the ability to exert significant influence, as defined by GAAP.  Undivided interests in jointly-ownedgeneration facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation.

**Estimates,Judgments and Reclassifications**

The preparation of financial statements in conformitywith GAAP requires us to make estimates and judgments that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the revenue and expensesof the period reported.  Differentestimates could have a material effect on our financial results.  Judgments and uncertainties affecting theapplication of these policies and estimates may result in materially differentamounts being reported under different conditions or circumstances.  Significant items subject to such estimatesand judgments include the carrying value of property, plant and equipment;unbilled revenues; the valuation of derivative instruments; the valuation ofinsurance and claims costs; valuation allowances for receivables and deferredincome taxes; regulatory assets and liabilities; reserves recorded for incometax exposures; litigation; and assets and liabilities related to employeebenefits.  Actual results may differ fromthose estimates.  Certain amounts fromprior periods have been reclassified to conform to the current reportingpresentation.  In 2005, DPL has separatelydisclosed the earnings from discontinued operations, net of income taxes, whichin prior periods were reported with elements

59

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of continued operations.  In 2005, DPL also separately disclosed theinvesting portions of the cash flows attributable to its discontinuedoperations (there was no impact on the operating or investing portions of thecash flows), which in prior periods were reported on a combined basis as asingle amount.

## **Revenues**

We record revenue forservices provided but not yet billed to more closely match revenues withexpenses.  Accounts receivable on **DPL’s** Consolidated Balance Sheets includeunbilled revenue of $68.7 million and $63.6 million in 2006 and 2005,respectively.  Accounts receivable on **DP&L’s** Consolidated Balance Sheetsinclude unbilled revenue of $61.0 million and $57.5 million in 2006 and 2005,respectively.  Also included in revenuesare amounts charged to customers through a surcharge for recovery ofuncollected amounts from certain eligible low-income households.  These charges for both **DPL** and **DP&L**were $11.9 million for 2006, $6.2 million for 2005, and $8.3 million for 2004.

**Allowance for Uncollectible Accounts**

We establish provisionsfor uncollectible accounts using both historical average credit losspercentages of accounts receivable balances to project future losses andspecific provisions for known credit issues.

**Property, Plant and Equipment**

We record ourownership share of our undivided interest in jointly-held plants as an asset inproperty, plant and equipment.  Property,plant and equipment are stated at cost. For regulated property, cost includes direct labor and material,allocable overhead costs and an allowance for funds used during construction(AFUDC).  AFUDC represents the cost ofborrowed funds and equity used to finance regulated construction projects.  Capitalization of AFUDC ceases at eitherproject completion or as of the date specified by regulators.  AFUDC capitalized related to borrowed fundswas $50 thousand in 2006, and zero in 2005 and 2004.  AFUDC capitalized for equity funds was $0.4million in 2006, zero in 2005, and $0.5 million in 2004.

For unregulated property,cost includes direct labor, material and overhead costs and interestcapitalized during construction using FASB Statement of Accounting Standard No.34, Capitalization of Interest Cost.  Capitalizedinterest was $12.9 million in 2006, $2.6 million in 2005 and $1.8 million in2004.

For substantially alldepreciable property, when a unit of property is retired, the original cost ofthat property less any salvage value is charged to Accumulated Depreciation andAmortization.

Property is evaluated forimpairment when events or changes in circumstances indicate that its carryingamount may not be recoverable.

## **Depreciation**

Depreciation expense iscalculated using the straight-line method, which depreciates the cost ofproperty over its estimated useful life. For **DPL’s** generation,transmission, and distribution assets, straight-line depreciation is applied onan average annual composite basis using group rates that approximated 3.3% in2006, 3.3% in 2005 and 3.4% in 2004.  **DPL’s** depreciation expense was $151.8million in 2006, $147.3 million in 2005 and $144.1 million in 2004.

The following is asummary of **DPL’s** property, plantand equipment with corresponding composite depreciation rates at December 31,2006 and 2005:

60

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**DPL**

|                                      | ** ** | ** **  | ** **  | **Composite** | ** ** | ** ** | ** ** | **Composite** | ** ** |
|--------------------------------------|------------|-------------|-------------|---------------|------------|------------|------------|---------------|------------|
| **$ in millions**          | ** ** | **2006**    | ** **  | **Rate**      | ** ** | **2005**   | ** ** | **Rate**      | ** ** |
| Regulated:                           |       |        |        |          |       |       |       |          |       |
| Transmission                         | ** ** | **$**       | **343.5**   |          | 2.4        | %          | $          | 341.8         |       | 2.6 | % |
| Distribution                         | ** ** | **1,050.8** |        | 3.8           | %          | 968.9      |       | 3.4           | %          |
| General                              | ** ** | **66.0**    |        | 7.5           | %          | 63.1       |       | 9.5           | %          |
| Non-depreciable                      | ** ** | **54.2**    |        | 0.0           | %          | 54.0       |       | 0.0           | %          |
| Total regulated                      | ** ** | **$**       | **1,514.5** |          |       |       | $          | 1,427.8       |       |   |   |
|                                 |       | ** **  |        |          |       |       |       |          |       |
| Unregulated:                         |       | ** **  |        |          |       |       |       |          |       |
| Production (a)                       | ** ** | **$**       | **3,048.0** |          | 3.2        | %          | $          | 3,008.3       |       | 3.2 | % |
| Other                                | ** ** | **44.9**    |        | 7.0           | %          | 45.2       |       | 7.6           | %          |
| Non-depreciable                      | ** ** | **18.6**    |        | 0.0           | %          | 18.4       |       | 0.0           | %          |
| Total unregulated                    | ** ** | **$**       | **3,111.5** |          |       |       | $          | 3,071.9       |       |   |   |
|                                 |       | ** **  |        |          |       |       |       |          |       |
| Total property  in service           | ** ** | **$**       | **4,626.0** |          | 3.3        | %          | $          | 4,499.7       |       | 3.3 | % |
| Construction  work in process        | ** ** | **376.0**   |        | 0.0           | %          | 168.0      |       | 0.0           | %          |
|                                 |       | ** **  |        |          |       |       |       |          |       |
| Total property, plant  and equipment | ** ** | **$**       | **5,002.0** |          |       |       | $          | 4,667.7       |       |   |   |

 

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*(a)**      **During 2006, DPL entered into agreements to sell 630 MW of its peakingcapacity relating to the Darby**andGreenville stations of which $283.5 million of the assets presented in thistable are held for sale at December 31, 2006.*

For **DP&L’s** generation, transmission, anddistribution assets, straight-line depreciation is applied on an average annualcomposite basis using group rates that approximated 3.2% in 2006, 3.2% in 2005,and 3.3% in 2004.  **DP&L’s** depreciation expense was $130.0million in 2006, $123.9 million in 2005, and $121.1 million in 2004.

The following is asummary of **DP&L’s** property,plant and equipment with corresponding composite depreciation rates at December31, 2006 and 2005:

**DP&L**

|                                      | ** ** | ** **  | ** **  | **Composite** | ** ** | ** ** | ** ** | **Composite** | ** ** |
|--------------------------------------|------------|-------------|-------------|---------------|------------|------------|------------|---------------|------------|
| **$ in millions**          | ** ** | **2006**    | ** **  | **Rate**      | ** ** | **2005**   | ** ** | **Rate**      | ** ** |
| Regulated:                           |       |        |        |          |       |       |       |          |       |
| Transmission                         | ** ** | **$**       | **343.5**   |          | 2.4        | %          | $          | 341.8         |       | 2.6 | % |
| Distribution                         | ** ** | **1,050.8** |        | 3.8           | %          | 968.9      |       | 3.4           | %          |
| General                              | ** ** | **66.0**    |        | 7.5           | %          | 63.1       |       | 9.5           | %          |
| Non-depreciable                      | ** ** | **54.2**    |        | 0.0           | %          | 54.0       |       | 0.0           | %          |
| Total regulated                      | ** ** | **$**       | **1,514.5** |          |       |       | $          | 1,427.8       |       |   |   |
|                                 |       | ** **  |        |          |       |       |       |          |       |
| Unregulated:                         |       | ** **  |        |          |       |       |       |          |       |
| Production                           | ** ** | **$**       | **2,545.6** |          | 3.0        | %          | $          | 2,509.8       |       | 3.0 | % |
| Non-depreciable                      | ** ** | **15.3**    |        | 0.0           | %          | 15.3       |       | 0.0           | %          |
| Total unregulated                    | ** ** | **$**       | **2,560.9** |          |       |       | $          | 2,525.1       |       |   |   |
|                                 |       | ** **  |        |          |       |       |       |          |       |
| Total property  in service           | ** ** | **$**       | **4,075.4** |          | 3.2        | %          | $          | 3,952.9       |       | 3.2 | % |
| Construction  work in process        | ** ** | **375.2**   |        | 0.0           | %          | 165.1      |       | 0.0           | %          |
|                                 |       | ** **  |        |          |       |       |       |          |       |
| Total property,  plant and equipment | ** ** | **$**       | **4,450.6** |          |       |       | $          | 4,118.0       |       |   |   |

 

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## **Asset Retirement Obligations**

We adopted the provisionsof the Financial Accounting Standards Board (FASB) Statement of FinancialAccounting Standards No. 143, “Accounting for Asset Retirement Obligations”(SFAS 143) during 2003.  SFAS 143requires legal obligations associated with the retirement of long-lived assetsto be recognized at their fair value at the time those obligations areincurred.  Upon initial recognition of alegal liability, costs are capitalized as part of the related long-lived assetand allocated to expense over the useful life of the asset.  SFAS 143 also requires that components ofpreviously recorded depreciation related to the cost of removal of assets uponretirement, whether legal asset retirement obligations or not, must be removedfrom a company’s accumulated depreciation reserve.  Our legal obligations associated with theretirement of our long-lived assets under SFAS 143 consisted primarily of riverintake and discharge structures, coal unloading facilities, loading docks, icebreakers and ash disposal facilities. Estimating the amount and timing of future expenditures of this typerequires significant judgment.  Managementroutinely updates this estimating as additional information becomes available.

In March of 2005, theFASB issued FASB Interpretation No. 47 (FIN No. 47), “Accounting forConditional Asset Retirement Obligations, an interpretation of FASB StatementNo. 143.”  We implemented FIN No. 47 inthe fourth quarter of 2005 effective January 1, 2005 for certain assetretirement obligations, primarily the removal of asbestos, at some of ourgeneration stations.  Application of FINNo. 47 resulted in an increase in our net property, plant and equipment of $1.8million and an increase in our asset retirement obligation of $7.2million.  The difference of $5.3 millionrepresents the before tax ($3.2 million after tax) cumulative effect of theadoption of FIN No. 47, as of January 1, 2005. The before tax impact on 2005 net income was $0.9 million ($0.5 millionafter tax) which consisted of $0.6 million of accretion expense and $0.3million depreciation expense

If FIN No. 47 had beenapplied as of January 1, 2003, our asset retirement obligation would haveincreased by $9.4 million and $10.3 million at January 1, 2004 and December 31,2004, respectively. Our asset retirement obligation was $13.2 million atDecember 31, 2005, which consisted of $5.4 million related to the adoption ofSFAS 143 in 2003 and $7.8 million related to the adoption of FIN No. 47 in2005. Our asset retirement obligation was $11.7 million at December 31, 2006,which consisted of $5.4 million related to the adoption of SFAS 143 in 2003 and$7.8 million related to the adoption of FIN No. 47 in 2005.

**Changes in the Liability forAsset Obligations**
| $ in millions            | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Balance at  December 31, 2005 |       | $        | 13.2       |     | $          | 5.1 |   |
| Accretion  expense            |       | 0.3      |       | 0.9      |       |
| Additions                     |       | —   |       | 7.2      |       |
| Settlements                   |       | (0.4     | )          | —   |       |
| Estimated  cashflow revisions |       | (1.4     | )          | —   |       |
| Balance at  December 31, 2006 |       | $        | 11.7       |     | $          | 13.2 |   |

 

We continue to recordcost of removal for our regulated transmission and distribution assets throughour depreciation rates and recover those amounts in rates charged to ourcustomers.  There are no known legalasset retirement obligations associated with these assets.  We have recorded $86.2 million and$81.7 million in estimated costs of removal at December 31, 2006 and2005, respectively as regulatory liabilities for our transmission anddistribution property.  See Note 3 ofNotes to Consolidated Financial Statements.

**Changesin the Liability for Asset Obligations**
| $ in millions       | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Balance at December 31,  2005 |       | $        | 81.7       |     | $          | 77.5 |   |
| Accretion expense             |       | —   |       | —   |       |
| Additions                     |       | 7.8      |       | 6.9      |       |
| Settlements                   |       | (3.3     | )          | —   |       |
| Estimated cashflow  revisions |       | —   |       | (2.7     | )          |
| Balance at December 31,  2006 |       | $        | (86.2      | )        | $          | (81.7 | ) |

 

**RegulatoryAccounting**

We apply the provisionsof FASB Statement of Financial Accounting Standards No. 71, (SFAS 71) “Accountingfor the Effects of Certain Types of Regulation” to the transmission anddistribution portion of our business.  Inaccordance with SFAS 71, regulatory assets and liabilities are recorded in theConsolidated Balance Sheets.  Regulatoryassets are the deferral of costs expected to be recovered in future customerrates and regulatory liabilities represent current recovery of expected futurecosts.

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We evaluate ourregulatory assets each period and believe recovery of these assets isprobable.  We have received or requesteda return on certain regulatory assets for which we are currently recovering orseeking recovery through rates.  See Note3 of Notes to Consolidated Financial Statements.

We evaluate ourregulatory assets each period and believe recovery of these is probable.  We have received or requested a return oncertain regulatory assets for which we are currently recovering or seekingrecovery through rates.  If we wererequired to terminate application of SFAS 71 for all of our regulatedoperations, we would have to record the amounts of all regulatory assets andliabilities in the Consolidated Statement of Results of Operations at thattime.  See Note 3 of Notes toConsolidated Financial Statements.

**Accounts Receivable**

Our accounts receivableincludes utility customer receivables, amounts due from our partners forjointly-owned property, wholesale and subsidiary customer receivables, andelectric unbilled revenue.  We alsoinclude miscellaneous accounts receivables such as refundable Franchise taxes.  The amount is presented net of a provisionfor uncollectible accounts on the accompanying consolidated balance sheets.

**Inventory**

Inventories, carried ataverage cost, include coal, emission allowances, limestone, oil and gas usedfor electric generation, and materials and supplies for utility operations.

## **Emission Allowances**

We account for ouremission allowances as inventory, and record emission allowance inventory athistorical cost.  We calculate theweighted average cost by each vintage (year) for which emission allowances canbe used, and charge to fuel costs the weighted average cost of emissionallowances used each quarter.  Emissionallowances are added to inventory when the EPA issues us emission allowances atno cost or when we purchase emission allowances.  Purchased emission allowances are recorded ininventory at the purchase price, including any related transaction fees.  Emission allowances are deducted frominventory when used in the production of electricity or when we sell excessemission allowances.  Emission allowancesused during the production of electricity are charged to fuel costs at theweighted average cost for that vintage. The excess / (shortfall) of the sales price over the weighted averagecost for any emission allowances sold, less related fees, is recorded as a gain/ (loss) in other income (deductions). Emission allowances received as part of an exchange of emissionallowances are recorded at the carrying cost of the emission allowances givenup, with no gain or loss recorded.

## **Repairs and Maintenance**

Costs associated with allplanned work and maintenance activities, primarily power plant outages, arerecognized at the time the work is performed. These costs, which include labor, materials and supplies, and outsideservices required to maintain equipment and facilities, are either capitalizedor expensed based on defined units of property as required by the FederalEnergy Regulatory Commission (FERC).

**Income Taxes**

We apply the provisionsof FASB Statement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes” (SFAS 109).  SFAS 109requires an asset and liability approach for financial accounting and reportingof income taxes with tax effects of differences, based on currently enactedincome tax rates between the financial reporting and tax basis of accountingreported as Deferred Taxes in the Consolidated Balance Sheets.  Deferred tax assets are recognized fordeductible temporary differences. Valuation reserves are provided unless it is more likely than not thatthe asset will be realized.

Investment tax credits,which have been used to reduce federal income taxes payable, have been deferredfor financial reporting purposes.  Thesedeferred investment tax credits are amortized over the useful lives of the propertyto which they are related.  For rate-regulatedoperations, additional deferred income taxes and offsetting regulatory assetsor liabilities are recorded to recognize that the income taxes will berecoverable / refundable through future revenues.

We file a consolidatedU.S. federal income tax return in conjunction with our subsidiaries.  The consolidated tax liability is allocatedto each subsidiary as specified in our tax allocation agreement which providesa consistent, systematic and rational approach. See Note 4 of Notes to Consolidated Financial Statements.

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**Cash and Cash Equivalents**

Cash and cash equivalentsare stated at cost, which approximates fair value.  All highly liquid short-term investments withoriginal maturities of three months or less are considered cash equivalents.  **DPL’s** cash andcash equivalents were $262.2 million at December 31, 2006 and $595.8 million atDecember 31, 2005.  **DP&L’s**cash and cash equivalents were $46.1 million at December 31, 2006 and $46.2million at December 31, 2005.  AtDecember 31, 2006, we had $10.1 million restricted funds held in trustrelating to the issuance of the $100 million pollution control bonds.  These funds will be used to fund thepollution control capital expenditures.

**FinancialInstruments**

We apply the provision ofFASB Statement of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities” * *(SFAS 115), for ourinvestments in debt and equity financial instruments of publicly tradedentities and classify the securities into different categories:held-to-maturity and available-for-sale. Available-for-sale securities are carried at fair value and unrealizedgains and losses on those securities, net of deferred income taxes, arepresented as a separate component of shareholders’ equity.  Other-than-temporary declines in value arerecognized currently in earnings. Financial instruments classified as held-to-maturity are carried atamortized cost.  The valuation of publicequity security investments is based upon market quotations.  The cost basis for public equity security andfixed maturity investments is average cost and amortized cost, respectively.

### **Captive Insurance Subsidiary**

In addition to insuranceprovided through third-party providers, a wholly-owned captive subsidiary of **DPL** provides insurance coverage solely tous and to our subsidiaries. Insurance and Claims Costs on the ConsolidatedBalance Sheets includes insurance reserves of approximately $22 million and $24million for 2006 and 2005, respectively, based on actuarial methods and lossexperience data.  Such reserves areactuarially determined, in the aggregate, based on a reasonable estimation ofinsured events occurring.  There isuncertainty associated with the loss estimates, and actual results may differfrom the estimates.  Modification ofthese loss estimates based on experience and changed circumstances is reflectedin the period in which the estimate is re-evaluated.

### **Financial Derivatives**

Wefollow FASB Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activity” (SFAS 133), as amended.  SFAS 133 requires that all derivatives berecognized as either assets or liabilities in the Consolidated Balance Sheetsand be measured at fair value, and changes in the fair value be recorded inearnings, unless they are designated as a cash flow hedge of a forecastedtransaction or qualify for the normal purchases and sales exception asdiscussed below.

The FASB issued Statementof Financial Accounting Standards No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities” (SFAS 149).  SFAS 149 amends and clarifies financialaccounting and reporting for derivative instruments, including those embeddedin other contracts, and for hedging activities and is effective for contractsentered into or modified after June 30, 2003.

We use forward contractsand options to reduce our exposure to changes in energy and commodity pricesand as a hedge against the risk of changes in cash flows associated withexpected electricity purchases.  Thesepurchases are required to meet full load requirements during times of peakdemand or during planned and unplanned generation facility outages.  We also hold forward sales contracts thathedge against the risk of changes in cash flows associated with power salesduring periods of projected generation facility availability.  The FASB concluded that electric utilitiescould apply the normal purchases and sales exception for option-type contractsand forward contracts in electricity subject to specific criteria for the powerbuyers and sellers under capacity contracts. Accordingly, we apply the normal purchases and sales exception asdefined in SFAS 133 and account for these contracts upon settlement.

**Pension and Postretirement Benefits**

Weaccount and disclose pension and postretirement benefits in accordance with theprovisions of Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pensions and other Postretirement Plans, anamendment to FASB Statements 87, 88, 106 and 132R.”  This Standard requires the use ofassumptions, such as the discount rate and long-term rate of return on assets,in determining the obligations, annual cost and funding requirements of the plans.

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**Legal, Environmental and Regulatory Contingencies**

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in our consolidatedfinancial statements, as prescribed by GAAP, adequately reflect probable andestimable contingencies.  We recordliabilities for probable estimated loss in accordance with Statement ofFinancial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.”  To the extent of a probable loss can only beestimated by reference to a range of equally probable outcomes, and no amountwithin the range appears to be a better estimate than any other amount, weaccrue for the low end of the range.  However,there can be no assurances that the actual amounts required to satisfy allegedliabilities from various legal proceedings, claims, and other matters, and tocomply with applicable laws and regulations, will not exceed the amountsreflected in our consolidated financial statements or will not have a materialadverse effect on our consolidated results of operations, financial conditionor cash flows.  As such, costs, if any,that may be incurred in excess of those amounts provided as of December 31, 2006,cannot currently be reasonably determined.

**RecentlyIssued Accounting Standards**

**Stock-Based Compensation**

In December 2004, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard No. 123 (revised 2004), “Share-Based Payment” (SFAS123R).  SFAS 123R replaces SFAS 123, “Accountingfor Stock-Based Compensation,” and supersedes Accounting Principles Board (APB)Opinion No. 25 (Opinion 25), “Accounting for Stock Issued to Employees.”  SFAS 123R requires a public entity to measurethe cost of employee services received and paid with equity instruments to bebased on the fair-value of such equity on the grant date.  This cost is recognized in results ofoperations over the period in which employees are required to provideservice.  Liabilities initially incurredare based on the fair-value of equity instruments and are to be re-measured ateach subsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options andother similar instruments at the grant date are estimated using option-pricingmodels and any excess tax benefits are recognized as an addition to paid-incapital.  Cash retained from the excesstax benefits is presented in the statement of cash flows as financing cashinflows.  The provisions of thisStatement became effective as of January 1, 2006.  Our December 31, 2006 year-to-date pre-taxresults of operations were increased by approximately $0.7 million as a resultof the adoption of SFAS 123R.  See Note 9of Notes to Consolidated Financial Statements.

**How Taxes Collected from Customersand Remitted to Governmental Authorities Should be Presented in the IncomeStatement**

In June 2006, the FASB ratified the consensus ofEmerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes Collectedfrom Customers and Remitted to Governmental Authorities Should be Presented inthe Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-3).EITF 06-3 indicates that the income statement presentation on either a grossbasis or a net basis of the taxes within the scope of the issue is anaccounting policy decision.   The consensus is this issue should beapplied to interim and annual reporting periods beginning after December 15,2006.  We are in the process of evaluating EITF 06-3 and have notdetermined the impact to our overall results of operations, financial positionor cash flows.

**Accounting for Uncertainty in Income Taxes**

In July 2006, the FASB issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48), effective for fiscal years beginningafter December 15, 2006.  FIN 48 requiresa two-step approach to determine how to recognize tax benefits in the financialstatements where recognition and measurement of a tax benefit must be evaluatedseparately.  A tax benefit will berecognized only if it meets a “more-likely-than-not” recognitionthreshold.  For tax positions that meetthis threshold, the tax benefit recognized is based on the largest amount oftax benefit that is greater than 50 percent likely of being realized uponultimate settlement with the taxing authority. We have evaluated the requirements of FIN 48 and the adoption of thisinterpretation and we do not believe at this time that the impact will besignificant to our overall results of operations, cash flows or financialposition.

**Accounting for Fair ValueMeasurements**

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements,” (SFAS 157) effective for fiscal years beginning after November15, 2007.  This Standard applies wheneverother standards require (or permit) assets or liabilities to be measured atfair value.  The Standard clarifies theprinciple that fair value should be based on the assumptions marketparticipants would use when pricing the asset or liability.  In support of this principle, the Standardestablishes 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 the Standard, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy.  The Standard does not expandthe use of fair value in any new

65

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circumstances.  We are currently evaluating the impact ofadopting SFAS 157, and have not yet determined the significance of this newrule to our overall results of operations, financial position or cash flows.

**Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans**

In September 2006, the FASB issued FinancialAccounting Standards  No. 158,  “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106 and 132(R)”**(SFAS158).  This Statement requires an employer that is abusiness entity and sponsors one or more single-employer defined benefit plansto:  a.) recognize the funded status of abenefit plan; b.) recognize as a component of other comprehensive income, netof tax, the gains or losses and prior service costs or credits that ariseduring the period but are not recognized as components of net periodic benefitcost; c.) measure defined benefit plan assets and obligations as of the date ofthe employer’s fiscal year-end statement of financial position; d.) disclose inthe notes to financial statements additional information about certain effectson net periodic benefit cost for the next fiscal year that arise from delayedrecognition of the gains or losses, prior service costs or credits, andtransition asset or obligation. This Statement is effective for fiscal yearsending after December 15, 2006 except for the measuring of plan assets at theemployer’s fiscal year end which is effective for fiscal years ending afterDecember 15, 2008.  We haveadopted FAS 158 effective December 31, 2006. See Note 5 of the Consolidated Financial Statements.

**Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements**

In September 2006, theSecurities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.108 (Topic 1N):  “Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current Year FinancialStatements” (SAB 108).  The SECbelieves that a registrant should quantify a current year misstatement usingboth the iron curtain approach and the rollover approach.  If the over/understatement of current year expense is material to thecurrent year, after all of the relevant quantitative and qualitative factorsare considered, the prior year financial statements should be corrected.  Correcting prior year financial statementsfor immaterial errors would not require previously filed reports to be amended.  We have evaluated our accounts anddetermined that SAB 108 does not impact our reported results.

**Accounting for Planned MajorMaintenance Activity**

In September 2006, theFASB posted Financial Statement of Position AUG AIR-1 — “Accounting for PlannedMajor Maintenance Activity” (FSP AUG AIR-1).  Previous guidance for planned major maintenance, such as repairing orreplacing a boiler, allowed four different methods for accruing for these majorrepairs.  These included direct expense,built-in overhaul, deferral and accrue-in-advance.  The FASB has decided that theaccrue-in-advance method is no longer valid because it allows a liability toaccrue for future charges that may or may not happen.  We use the direct expense method for majorplanned maintenance which calls for expensing the charges as incurred.  Since we do not use the accrue-in-advancemethod, this FSP will have no effect on our overall results of operations,financial position or cash flows.

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*2. SupplementalFinancial Information*

 

**DPL Inc.**

 
| ** **                                               | ** ** | **At December 31,** | ** **  |
|----------------------------------------------------------|------------|-------------------------------|-------------|
| **$ in millions**                              | ** ** | **2006**                      | ** **  | **2005** | ** ** |
|                                                     |       |                          |        |   |   |
| **Accounts receivable, net:**                            |       |                          |        |   |   |
| Unbilled revenue                                         | ** ** | **$**                         | **68.7**    |   | $ | 63.6 |   |
| Retail customers                                         | ** ** | **65.0**                      |        | 60.8 |   |
| Partners in  commonly-owned plants                       | ** ** | **51.5**                      |        | 37.7 |   |
| Wholesale and  subsidiary customers                      | ** ** | **15.8**                      |        | 6.0 |   |
| PJM including  financial transmission rights             | ** ** | **13.1**                      |        | 11.0 |   |
| Other                                                    | ** ** | **7.1**                       |        | 2.5 |   |
| Refundable  franchise tax                                | ** ** | **5.2**                       |        | 14.3 |   |
| Provision for  uncollectible accounts                    | ** ** | **(1.4**                      | **)**       | (1.0 | ) |
| **Total  accounts receivable, net**                      | ** ** | **$**                         | **225.0**   |   | $ | 194.9 |   |
|                                                     |       |                          |        |   |   |
| **Inventories, at average cost:**                        |       |                          |        |   |   |
| Fuel and  emission allowances                            | ** ** | **$**                         | **52.4**    |   | $ | 48.6 |   |
| Plant materials  and supplies                            | ** ** | **32.6**                      |        | 31.4 |   |
| Other                                                    | ** ** | **0.4**                       |        | 0.2 |   |
| **Total  inventories, at average cost**                  | ** ** | **$**                         | **85.4**    |   | $ | 80.2 |   |
|                                                     |       |                          |        |   |   |
| **Other current assets:**                                |       |                          |        |   |   |
| Deposits and  other advances                             | ** ** | **$**                         | **17.8**    |   | $ | 9.2 |   |
| Prepayments                                              | ** ** | **13.3**                      |        | 5.1 |   |
| Derivatives                                              | ** ** | **3.2**                       |        | — |   |
| Current deferred  income taxes                           | ** ** | **2.0**                       |        | 5.4 |   |
| Other                                                    | ** ** | **1.4**                       |        | 0.5 |   |
| **Total  other current assets**                          | ** ** | **$**                         | **37.7**    |   | $ | 20.2 |   |
| ** **                                               |       |                          |        |   |   |
| **Property, plant and equipment:**                       |       |                          |        |   |   |
| Construction  work in process                            | ** ** | **$**                         | **376.0**   |   | $ | 168.0 |   |
| Property, plant  and equipment                           | ** ** | **4,626.0**                   |        | 4,499.7 |   |
| **Total  property, plant and equipment (a)**             | ** ** | **$**                         | **5,002.0** |   | $ | 4,667.7 |   |
| ** **                                               |       |                          |        |   |   |
| **Other deferred assets:**                               |       |                          |        |   |   |
| Master Trust  assets                                     | ** ** | **$**                         | **39.4**    |   | $ | 32.0 |   |
| Unamortized loss  on reacquired debt                     | ** ** | **20.4**                      |        | 22.0 |   |
| Unamortized debt  expense                                | ** ** | **10.6**                      |        | 10.2 |   |
| Commercial  activities tax benefit                       | ** ** | **6.8**                       |        | — |   |
| Investments                                              | ** ** | **7.0**                       |        | 7.2 |   |
| Other                                                    | ** ** | **0.5**                       |        | 0.8 |   |
| **Total  other deferred assets**                         | ** ** | **$**                         | **84.7**    |   | $ | 72.2 |   |
|                                                     |       |                          |        |   |   |
| **Accounts Payable:**                                    |       |                          |        |   |   |
| Trade payables                                           | ** ** | **$**                         | **75.7**    |   | $ | 26.1 |   |
| Fuel accruals                                            | ** ** | **37.3**                      |        | 39.5 |   |
| Other                                                    | ** ** | **56.4**                      |        | 64.6 |   |
| **Total  accounts payable**                              | ** ** | **$**                         | **169.4**   |   | $ | 130.2 |   |
|                                                     |       |                          |        |   |   |
| **Other current liabilities:**                           |       |                          |        |   |   |
| Customer  security deposits                              | ** ** | **$**                         | **19.4**    |   | $ | 19.2 |   |
| Pension and  retiree benefits payable                    | ** ** | **5.8**                       |        | — |   |
| Financial  transmission rights — future proceeds    | ** ** | **2.7**                       |        | — |   |
| Payroll taxes  payable                                   | ** ** | **0.1**                       |        | 2.3 |   |
| Other                                                    | ** ** | **10.3**                      |        | 9.6 |   |
| **Total  other current liabilities**                     | ** ** | **$**                         | **38.3**    |   | $ | 31.1 |   |
|                                                     |       |                          |        |   |   |
| **Other deferred credits:**                              |       |                          |        |   |   |
| Asset retirement  obligations — regulated property  | ** ** | **$**                         | **86.3**    |   | $ | 81.7 |   |
| Trust  obligations                                       | ** ** | **76.2**                      |        | 74.5 |   |
| Pension  liabilities                                     | ** ** | **37.7**                      |        | 23.7 |   |
| Retiree health  and life benefits                        | ** ** | **28.5**                      |        | 32.9 |   |
| SECA net revenue  subject to refund                      | ** ** | **18.7**                      |        | 20.5 |   |
| Asset retirement  obligations — generation property | ** ** | **11.7**                      |        | 13.2 |   |
| Deferred gain on  sale of portfolio                      | ** ** | **8.2**                       |        | 27.1 |   |
| Legal reserves                                           | ** ** | **3.4**                       |        | 3.0 |   |
| Environmental  reserves                                  | ** ** | **0.1**                       |        | 0.1 |   |
| Other                                                    | ** ** | **9.9**                       |        | 9.6 |   |
| **Total  other deferred credits**                        | ** ** | **$**                         | **280.7**   |   | $ | 286.3 |   |

----

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

67

----

 

**DP&L**
| ** **                                              | ** ** | **At December 31,** | ** **  |
|---------------------------------------------------------|------------|-------------------------------|-------------|
| **$ in millions**                             | ** ** | **2006**                      | ** **  | **2005** | ** ** |
|                                                    |       |                          |        |   |   |
| **Accounts  receivable, net:**                          |       |                          |        |   |   |
| Retail customers                                        | ** ** | **$**                         | **65.0**    |   | $ | 60.7 |   |
| Partners in commonly-owned plants                       | ** ** | **51.5**                      |        | 37.7 |   |
| Unbilled revenue                                        | ** ** | **61.0**                      |        | 57.5 |   |
| PJM including financial transmission rights             | ** ** | **13.9**                      |        | 11.0 |   |
| Wholesale and subsidiary customers                      | ** ** | **8.3**                       |        | 2.7 |   |
| Refundable franchise tax                                | ** ** | **3.1**                       |        | 11.8 |   |
| Other                                                   | ** ** | **4.2**                       |        | 2.3 |   |
| Provision for uncollectible accounts                    | ** ** | **(1.4**                      | **)**       | (1.0 | ) |
| **Total accounts receivable, net**                      | ** ** | **$**                         | **205.6**   |   | $ | 182.7 |   |
|                                                    |       |                          |        |   |   |
| **Inventories,  at average cost:**                      |       |                          |        |   |   |
| Fuel and emission allowances                            | ** ** | **$**                         | **52.4**    |   | $ | 48.6 |   |
| Plant materials and supplies                            | ** ** | **30.2**                      |        | 29.0 |   |
| Other                                                   | ** ** | **0.4**                       |        | 0.1 |   |
| **Total inventories, at average cost**                  | ** ** | **$**                         | **83.0**    |   | $ | 77.7 |   |
|                                                    |       |                          |        |   |   |
| **Other  current assets:**                              |       |                          |        |   |   |
| Deposits and other advances                             | ** ** | **$**                         | **17.0**    |   | $ | 5.8 |   |
| Prepayments                                             | ** ** | **15.8**                      |        | 7.7 |   |
| Derivatives                                             | ** ** | **3.2**                       |        | — |   |
| Current deferred income taxes                           | ** ** | **0.7**                       |        | 4.9 |   |
| Other                                                   | ** ** | **1.5**                       |        | 0.9 |   |
| **Total other current assets**                          | ** ** | **$**                         | **38.2**    |   | $ | 19.3 |   |
| ** **                                              |       |                          |        |   |   |
| **Property,  plant and equipment:**                     |       |                          |        |   |   |
| Construction work in process                            | ** ** | **$**                         | **375.2**   |   | $ | 165.1 |   |
| Property, plant and equipent                            | ** ** | **4,075.4**                   |        | 3,952.9 |   |
| **Total property, plant and equipment**                 | ** ** | **$**                         | **4,450.6** |   | $ | 4,118.0 |   |
| ** **                                              |       |                          |        |   |   |
| **Other  deferred assets:**                             |       |                          |        |   |   |
| Master Trust assets                                     | ** ** | **$**                         | **109.0**   |   | $ | 107.7 |   |
| Unamortized loss on reacquired debt                     | ** ** | **20.4**                      |        | 22.0 |   |
| Unamortized debt expense                                | ** ** | **8.6**                       |        | 7.4 |   |
| Investments                                             | ** ** | **0.6**                       |        | 0.6 |   |
| Other                                                   | ** ** | **0.5**                       |        | 0.6 |   |
| **Total other deferred assets**                         | ** ** | **$**                         | **139.1**   |   | $ | 138.3 |   |
|                                                    |       |                          |        |   |   |
| **Accounts  Payable:**                                  |       |                          |        |   |   |
| Trade payables                                          | ** ** | **$**                         | **74.7**    |   | $ | 25.6 |   |
| Fuel accruals                                           | ** ** | **36.7**                      |        | 38.1 |   |
| Other                                                   | ** ** | **54.8**                      |        | 52.5 |   |
| **Total accounts payable**                              | ** ** | **$**                         | **166.2**   |   | $ | 116.2 |   |
|                                                    |       |                          |        |   |   |
| **Other  current liabilities:**                         |       |                          |        |   |   |
| Customer security deposits                              | ** ** | **$**                         | **19.4**    |   | $ | 19.2 |   |
| Financial transmission rights — future proceeds    | ** ** | **2.7**                       |        | — |   |
| Current portion long-term debt                          | ** ** | **0.9**                       |        | 0.9 |   |
| Payroll taxes payable                                   | ** ** | **0.2**                       |        | 2.3 |   |
| Pension and retiree benefits payable                    | ** ** | **5.8**                       |        | — |   |
| Other                                                   | ** ** | **7.3**                       |        | 6.0 |   |
| **Total other current liabilities**                     | ** ** | **$**                         | **36.3**    |   | $ | 28.4 |   |
|                                                    |       |                          |        |   |   |
| **Other deferred  credits:**                            |       |                          |        |   |   |
| Asset retirement obligations — regulated property  | ** ** | **$**                         | **86.3**    |   | $ | 81.7 |   |
| Trust obligations                                       | ** ** | **76.2**                      |        | 74.5 |   |
| Retiree health and life benefits                        | ** ** | **28.5**                      |        | 32.9 |   |
| Pension liabilities                                     | ** ** | **37.7**                      |        | 23.7 |   |
| SECA net revenue subject to refund                      | ** ** | **18.7**                      |        | 20.5 |   |
| Asset retirement obligations — generation property | ** ** | **11.7**                      |        | 13.2 |   |
| Legal reserves                                          | ** ** | **3.4**                       |        | 3.0 |   |
| Environmental reserves                                  | ** ** | **0.1**                       |        | 0.1 |   |
| Other                                                   | ** ** | **9.9**                       |        | 9.1 |   |
| **Total  other deferred credits**                       | ** ** | **$**                         | **272.5**   |   | $ | 258.7 |   |

 

**DPL Inc.**
| ** **                         | ** ** | **For the years ended** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| **$ in millions**        | ** ** | **2006**                               | ** ** | **2005** | ** ** |
|                               |       |                                   |       |   |   |
| **Cash  flows - Other:**           |       |                                   |       |   |   |
| Payroll taxes payable              | ** ** | **$**                                  | **(2.1**   | **)** | $ | 2.3 |   |
| Deferred management fees           | ** ** | **—**                             |       | 7.9 |   |
| Deposits and other advances        | ** ** | **(8.5**                               | **)**      | (0.9 | ) |
| Deferred storm costs               | ** ** | **(0.1**                               | **)**      | (5.5 | ) |
| FERC transitional payment deferral | ** ** | **(1.8**                               | **)**      | 20.5 |   |
| Other                              | ** ** | **2.0**                                |       | 7.5 |   |
| **Total  cash flows - Other**      | ** ** | **$**                                  | **(10.5**  | **)** | $ | 31.8 |   |

 

**DP&L**
| ** **                         | ** ** | **For the years ended** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| **$ in millions**        | ** ** | **2006**                               | ** ** | **2005** | ** ** |
|                               |       |                                   |       |   |   |
| **Cash  flows - other:**           |       |                                   |       |   |   |
| Payroll taxes payable              | ** ** | **$**                                  | **(2.1**   | **)** | $ | 2.3 |   |
| Deposits and other advances        | ** ** | **(11.0**                              | **)**      | (2.1 | ) |
| Deferred storm costs               | ** ** | **(0.1**                               | **)**      | (5.5 | ) |
| FERC transitional payment deferral | ** ** | **(1.8**                               | **)**      | 20.5 |   |
| Other                              | ** ** | **(2.5**                               | **)**      | (1.8 | ) |
| **Total  cash flows - other**      | ** ** | **$**                                  | **(17.5**  | **)** | $ | 13.4 |   |

 

68

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*3. Regulatory Matters*

 

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

Regulatory liabilities are reflected on the Consolidated Balance Sheetsunder the caption entitled “Other Deferred Credits”.  Regulatory assets and liabilities on theConsolidated Balance Sheets include:
| ** **                                        | ** ** | **Type of**      | ** ** | **Amortization** | ** ** | **At December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|------------------|------------|-------------------------------|------------|
| **$ in millions**                       | ** ** | **Recovery (a)** | ** ** | **Through**      | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| **Regulatory  Assets:**                           |       |                  |       |             |       |                          |       |   |   |
| Deferred recoverable income taxes                 |       | C/B                   |       | Ongoing          | ** ** | **$**                         | **53.1**   |   | $ | 28.8 |   |
| Pension and postretirement benefits               |       | C                     |       | Ongoing          | ** ** | **47.1**                      |       | — |   |
| Electric Choice systems costs                     |       | F                     |       | 2010             | ** ** | **13.5**                      |       | 16.7 |   |
| Regional transmission organization costs          |       | C                     | ** ** | 2014             |       | **11.4**                      |       | 12.9 |   |
| Deferred storm costs                              |       | C                     |       | 2008             | ** ** | **5.4**                       |       | 6.5 |   |
| PJM administrative costs                          |       | F                     |       | 2009             | ** ** | **4.6**                       |       | 5.6 |   |
| Power plant emission fees                         |       | C                     |       | Ongoing          | ** ** | **4.5**                       |       | 3.8 |   |
| Rate case expenses                                |       | F                     |       | 2010             | ** ** | **3.5**                       |       | 3.5 |   |
| Retail settlement system costs                    |       |                  | ** ** | ** **       |       | **3.1**                       |       | 3.1 |   |
| PJM integration costs                             |       | F                     |       | 2015             | ** ** | **1.4**                       |       | 1.9 |   |
| Other costs                                       |       |                  | ** ** | ** **       |       | **1.0**                       |       | 1.0 |   |
| **Total regulatory assets**                       |       |                  | ** ** | ** **       |       | **$**                         | **148.6**  |   | $ | 83.8 |   |
|                                              |       |                  |       |             |       |                          |       |   |   |
| **Regulatory  Liabilities:**                      |       |                  |       |             |       |                          |       |   |   |
| Asset retirement obligations - regulated property |       |                  | ** ** | ** **       |       | **$**                         | **86.3**   |   | $ | 81.7 |   |
| Postretirement benefits                           |       |                  | ** ** | ** **       |       | **7.6**                       |       | — |   |
| SECA net revenue subject to refund                |       |                  | ** ** | ** **       |       | **18.7**                      |       | 20.5 |   |
| **Total  regulatory liabilities**                 |       |                  | ** ** | ** **       |       | **$**                         | **112.6**  |   | $ | 102.2 |   |

 

----

| *(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**

We evaluate ourregulatory assets each period and believe recovery of these assets isprobable.  We have received or requesteda return on certain regulatory assets for which we are currently recovering orseeking recovery through rates.

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

Pension and postretirementbenefits represent the unfunded benefit obligation related tothe transmission and distribution areas of our electric business.  We have historically recorded these costs onthe accrual basis and this is how these costs have been historically recoveredthrough rates.  This factor, combinedwith the historical precedents from the PUCO and the FERC, make these costsprobable of future rate recovery.

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

Regionaltransmission organization costs represent costs incurred tojoin a Regional Transmission Organization 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.

69

----

Deferred storm costsinclude costs incurred by us to repair damage from December 2004 and January2005 ice storms.  We filed to recover thesecosts from retail ratepayers over a two year period.  On July 12, 2006, the PUCO approved ourtariff as proposed and we began recovering these deferred costs over a two-yearperiod beginning August 1, 2006.   

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

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

Retail settlement systemcosts represent costs to implement a retail settlement systemthat reconciles the amount of energy a competitive retail electric service(CRES) supplier delivers to its customers and what its customers actuallyuse.  Based on case precedent in otherutilities’ cases, the cost of this system is recoverable through **DP&L**’s next transmission rate case that will be filed atthe FERC.  The timing of this case isuncertain 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 Rate Stabilization Surchargethat was approved by the PUCO and implemented in January 2006.  These costs are being amortized over afive-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 retirement obligations — regulatedproperty reflect an estimate of amounts recovered inrates that are expected to be expended to remove existing transmission anddistribution property from service upon retirement.

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

SECA (Seams Elimination Charge Adjustment) net revenuesubject to refund represents our estimate of probable refundsfor net revenue collected in 2005 and 2006. SECA revenue and expenses represent FERC-ordered transitional paymentsfor the use of transmission lines within PJM. A hearing was held in early 2006 to determine if these transitionalpayments are subject to refund, but no ruling has been issued.  We began receiving and paying thesetransitional payments in May 2005.

*4.  IncomeTaxes*

For the years ended December 31, 2006, 2005 and 2004, **DPL’s** components of income tax were asfollows:

70

----

 

**DPL Inc.**
| ** **                                         | ** ** | **For the years ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **December 31,**                  | ** ** |
| **$ in millions**                        | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Computation  of Tax Expense**                    | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal income tax (a)                             | ** ** | **$**                                  | **68.7**   |   | $ | 71.9 |   | $ | 66.3 |   |
|                                               |       |                                   |       |   |   |   |   |
| Increases (decreases) in tax resulting from — |       |                                   |       |   |   |   |   |
| State income taxes, net of federal effect (b)      | ** ** | **(4.0**                               | **)**      | 1.2 |   | 1.2 |   |
| Depreciation                                       | ** ** | **(3.1**                               | **)**      | (1.3 | ) | (4.0 | ) |
| Investment tax credit amortized                    | ** ** | **(2.9**                               | **)**      | (2.9 | ) | (2.9 | ) |
| Non-deductible compensation                        | ** ** | **0.2**                                |       | 0.2 |   | — |   |
| Section 199 — domestic production deduction   | ** ** | **(0.8**                               | **)**      | (1.6 | ) | — |   |
| Accrual for open tax years (c)                     | ** ** | **5.1**                                |       | 11.2 |   | 5.3 |   |
| Other, net                                         | ** ** | **6.6**                                |       | 1.2 |   | 0.6 |   |
| Total tax expense (d)                              | ** ** | **$**                                  | **69.8**   |   | $ | 79.9 |   | $ | 66.5 |   |
|                                               |       |                                   |       |   |   |   |   |
| **Components  of Tax Expense**                     | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Taxes currently payable (b)                        | ** ** | **$**                                  | **109.3**  |   | $ | 85.0 |   | $ | 44.3 |   |
| Deferred taxes —                              |       |                                   |       |   |   |   |   |
| Depreciation and amortization                      | ** ** | **(37.9**                              | **)**      | (11.7 | ) | (3.3 | ) |
| Shareholder litigation                             | ** ** | **—**                             |       | — |   | 23.2 |   |
| Other                                              | ** ** | **1.3**                                |       | 9.5 |   | 5.2 |   |
| Deferred investment tax credit, net                | ** ** | **(2.9**                               | **)**      | (2.9 | ) | (2.9 | ) |
| Total tax  expense (d)                             | ** ** | **$**                                  | **69.8**   |   | $ | 79.9 |   | $ | 66.5 |   |

** **

**Components of Deferred Tax Assets and Liabilities**
| ** **                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| **$ in millions**               | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| **Net  Non-Current Assets (Liabilities)** | ** ** | ** **                    | ** ** | ** ** |   |
| Depreciation/property basis               | ** ** | **$**                         | **(380.3** | **)** | $ | (402.2 | ) |
| Income taxes recoverable                  | ** ** | **(18.6**                     | **)**      | (10.1 | ) |
| Regulatory assets                         | ** ** | **(9.7**                      | **)**      | (9.4 | ) |
| Investment tax credit                     | ** ** | **15.2**                      |       | 16.3 |   |
| Investment loss                           | ** ** | **2.9**                       |       | 9.6 |   |
| Compensation and employee benefits        | ** ** | **39.2**                      |       | 38.7 |   |
| Insurance                                 | ** ** | **1.6**                       |       | 1.8 |   |
| Other (e)                                 | ** ** | **(5.5**                      | **)**      | 28.3 |   |
| Net non-current (liabilities)             | ** ** | **$**                         | **(355.2** | **)** | $ | (327.0 | ) |
|                                      |       |                          |       |   |   |
| **Net  Current Assets**                   | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Other                                     | ** ** | **$**                         | **2.0**    |   | $ | 5.4 |   |
| Net current  assets                       | ** ** | **$**                         | **2.0**    |   | $ | 5.4 |   |

----

| *(a)   The statutory tax rate of  35% was applied to pre-tax income from continuing operations before preferred  dividends.*                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)   We  have recorded $10.4 million, ($2.1) million and $11.7 million in 2006, 2005  and 2004, respectively, for state tax credits available related to the  consumption of coal mined in Ohio.*                                                                                                                                                                                                                                                                                                                                                                      |
| *(c)   We  have recorded $5.1 million, $11.2 million and $5.3 million in 2006, 2005 and  2004, respectively, of tax provision for tax deduction or income positions  taken in prior tax returns that we believe were properly treated on such tax  returns but for which it is possible that these positions may be contested.*                                                                                                                                                                                                                                          |
| *(d)   Excludes  ($2.1) million in 2005 of income taxed reported as cumulative effect of  accounting change, net of income taxes. Also excludes $3.6 million in 2006,  $19.9 million in 2005 and $59.1 million in 2004 of income taxes reported as  discontinued operations.*                                                                                                                                                                                                                                                                                            |
| *(e)   The  Other non-current liabilities caption includes deferred tax assets related to  state tax net operating loss carryforwards, net of related valuation allowances  of $10.1 million in 2006 and $6.8 million in 2005. The majority of these net  operating losses are Ohio franchise tax loss carryforwards that expire after  the phase-out of the Ohio franchise tax is completed in 2008. Remaining Ohio  franchise tax loss carryforwards after 2008 can be used to offset the Ohio  Commercial Activity Tax liability and do not expire until after 2029.* |

 

71

----

For the years endedDecember 31, 2006, 2005 and 2004, **DP&L’s**components of income tax were as follows:

**DP&L**
| ** **                                         | ** ** | **For the years ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **December 31,**                  | ** ** |
| **$ in millions**                        | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Computation  of Tax Expense**                    | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal income tax (a)                             | ** ** | **$**                                  | **134.6**  |   | $ | 123.6 |   | $ | 115.4 |   |
|                                               |       |                                   |       |   |   |   |   |
| Increases (decreases) in tax resulting from — |       |                                   |       |   |   |   |   |
| State income taxes, net of federal effect (b)      | ** ** | **2.4**                                |       | 7.4 |   | 7.0 |   |
| Depreciation                                       | ** ** | **(3.1**                               | **)**      | (1.3 | ) | (3.9 | ) |
| Investment tax credit amortized                    | ** ** | **(2.9**                               | **)**      | (2.9 | ) | (2.9 | ) |
| Non-deductible compensation                        | ** ** | **0.1**                                |       | 0.2 |   | — |   |
| Section 199 — domestic production deduction   | ** ** | **(0.8**                               | **)**      | (1.6 | ) | — |   |
| Accrual for open tax years (c)                     | ** ** | **5.1**                                |       | 11.2 |   | 5.3 |   |
| Other, net                                         | ** ** | **6.8**                                |       | 1.5 |   | (0.1 | ) |
| Total tax expense (d)                              | ** ** | **$**                                  | **142.2**  |   | $ | 138.1 |   | $ | 120.8 |   |
|                                               |       |                                   |       |   |   |   |   |
| **Components  of Tax Expense**                     | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Taxes currently payable (b)                        | ** ** | **$**                                  | **158.5**  |   | $ | 149.4 |   | $ | 136.8 |   |
| Deferred taxes —                              |       |                                   |       |   |   |   |   |
| Depreciation and amortization                      | ** ** | **(17.1**                              | **)**      | (16.4 | ) | (10.0 | ) |
| Other                                              | ** ** | **3.7**                                |       | 8.0 |   | (3.1 | ) |
| Deferred investment tax credit, net                | ** ** | **(2.9**                               | **)**      | (2.9 | ) | (2.9 | ) |
| Total tax  expense (d)                             | ** ** | **$**                                  | **142.2**  |   | $ | 138.1 |   | $ | 120.8 |   |

 

**Components of Deferred Tax Assets and Liabilities**
| ** **                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| **$ in millions**               | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| **Net  Non-Current Assets (Liabilities)** | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Depreciation/property basis               | ** ** | **$**                         | **(368.1** | **)** | $ | (367.6 | ) |
| Income taxes recoverable                  | ** ** | **(18.6**                     | **)**      | (10.1 | ) |
| Regulatory assets                         | ** ** | **(9.7**                      | **)**      | (9.4 | ) |
| Investment tax credit                     | ** ** | **15.3**                      |       | 16.3 |   |
| Compensation and employee benefits        | ** ** | **39.2**                      |       | 38.7 |   |
| Other (e)                                 | ** ** | **(18.3**                     | **)**      | 8.9 |   |
| Net non-current (liabilities)             | ** ** | **$**                         | **(360.2** | **)** | $ | (323.2 | ) |
|                                      |       |                          |       |   |   |
| **Net  Current Assets**                   | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Other                                     | ** ** | **$**                         | **0.7**    |   | $ | 4.9 |   |
| Net current  assets                       | ** ** | **$**                         | **0.7**    |   | $ | 4.9 |   |

----

| *(a)   The statutory tax rate of  35% was applied to pre-tax income from continuing operations before preferred  dividends.*                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)   We  have recorded $10.4 million, ($2.1) million and $11.7 million in 2006, 2005  and 2004, respectively, for state tax credits available related to the  consumption of coal mined in Ohio.*                                                                                                                                                                                                                                                                                                                                                             |
| *(c)   We  have recorded $5.1 million, $11.2 million and $5.3 million in 2006, 2005 and  2004, respectively, of tax provision for tax deduction or income positions  taken in prior tax returns that we believe were properly treated on such tax  returns but for which it is possible that these positions may be contested.*                                                                                                                                                                                                                                 |
| *(d)   Excludes  ($2.1) million in 2005 of income taxed reported as cumulative effect of  accounting change, net of income taxes.*                                                                                                                                                                                                                                                                                                                                                                                                                              |
| *(e)   The  Other non-current liabilities caption includes deferred tax assets related to  state tax net operating loss carryforwards, net of related valuation  allowances of $0.3 million in 2006 and zero in 2005. The majority of these  net operating losses are Ohio franchise tax loss carryforwards that expire  after the phase-out of the Ohio franchise tax is completed in 2008. Remaining  Ohio franchise tax loss carryforwards after 2008 can be used to offset the  Ohio Commercial Activity Tax liability and do not expire until after 2029.* |

 

72

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*5.  Pension and Postretirement Benefits*

 

We sponsor a definedbenefit plan for substantially all employees. For collective bargaining employees, the defined benefits are based on aspecific dollar amount per year of service. For all other employees, the defined benefit plan is based primarily oncompensation and years of service. We fund pension plan benefits as accrued inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974 (ERISA).  Inaddition, we have a Supplemental Executive Retirement Plan (SERP) for certainactive and retired key executives. Benefits under this SERP have been frozen and no additional benefits canbe earned.  We also have unfundedliabilities related to retirement benefits for certain active, terminated andretired key executives (not related to our ongoing litigation with three formerexecutives).  These liabilities totaledapproximately $0.5 million at December 31, 2006.

On February 23, 2006, **DPL**’s Board of Directors approved a new compensation andbenefits program that includes The DPL Inc. Supplemental Executive DefinedContribution Retirement Plan (New SERP) which replaces the Company’sSupplemental Executive Retirement Plan (SERP) that was terminated as to newparticipations in 2000. The Compensation Committee of the Board of Directorswill designate the eligible employees. Pursuant to the New SERP, we will provide a supplemental retirementbenefit to participants by crediting an account established for eachparticipant in accordance with the Plan requirements.  We shall designate as hypothetical investmentfunds under the New SERP one or more of the investment funds provided under TheDayton Power and Light Company Employee Savings Plan. Each participantmay change his or her hypothetical investment fund selection at specifiedtimes.  If a participant does not elect ahypothetical investment fund(s), then we shall select the hypotheticalinvestment fund(s) for such participant.

A participant shallbecome 100% vested in all amounts credited to his or her account upon thecompletion of five vesting years, as defined in The Dayton Power and LightCompany Retirement Income Plan, or upon a change of control or the participant’sdeath or disability.  If a participant’semployment is terminated, other than by death or disability, prior to suchparticipant becoming 100% vested in his or her account, the account shall beforfeited as of the date of termination.

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.

We adopted SFAS 158“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” for the yearended December 31, 2006.  Certaindisclosures in regard to prior service costs, transition costs and netgains/losses are not available for 2006 because SFAS 158 was adopted on aprospective basis.  The incrementaleffects of adopting FAS 158 are set out in the following table:

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**Incremental Effect of Applying FASB Statement No. 158 on Individual Line Items in the Consolidated BalanceSheet for Pension and Postretirement Benefits**

**December 31, 2006**

**(in millions)**

 
| ** **                                                | ** ** | **Before Application  of Statement 158** | ** ** | **Adjustments** | ** ** | **After Application  of Statement 158** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------|------------|
| **debit/(credit)**                                        | ** ** | **December 31, 2006**                         | ** ** | **Pension**     | ** ** | **Post-Retirement**                                    | ** ** | **December 31, 2006** | ** ** |
| Other current  liabilities                                |       | —                                                  |       | (0.4            | )          | (0.5                                                   | )          | (0.9 | ) |
| Other deferred  credits                                   |       | (32.3                                                   | )          | (25.9           | )          | 10.8                                                   |       | (47.4 | ) |
| Deferred income  taxes                                    |       | 8.0                                                     |       | 12.5            |       | (3.6                                                   | )          | 16.9 |   |
|                                                      |       |                                                    |       |            |       |                                                   |       |   |   |
| Regulatory asset                                          |       | —                                                  |       | 47.0            |       | 0.1                                                    |       | 47.1 |   |
| Deferred income  taxes                                    |       | —                                                  |       | (16.4           | )          | (0.1                                                   | )          | (16.5 | ) |
|                                                      |       |                                                    |       |            |       |                                                   |       |   |   |
| Regulatory  liability—Other deferred credits         |       | —                                                  |       | —          |       | (7.6                                                   | )          | (7.6 | ) |
| Deferred income  taxes                                    |       | —                                                  |       | —          |       | 2.7                                                    |       | 2.7 |   |
|                                                      |       |                                                    |       |            |       |                                                   |       |   |   |
| Accumulated  other comprehensive (gain)/loss (before tax) |       | 55.1                                                    |       | (20.6           | )          | (2.9                                                   | )          | 31.6 |   |
| Deferred income  taxes                                    |       | (19.3                                                   | )          | 7.2             |       | 1.0                                                    |       | (11.1 | ) |
| Accumulated other  comprehensive (gain)/loss (after tax)  |       | 35.8                                                    |       | (13.4           | )          | (1.9                                                   | )          | 20.5 |   |

 

A regulatory asset wasrecorded for the portion of the unfunded obligation related to the transmissionand distribution areas of our electric business.  We have historically recorded these costs onthe accrual basis and this is how these costs have been historicallyrecovered.  This factor, combined withthe historical precedents from the PUCO and FERC, make these costs probable offuture rate recovery.

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The following tables setforth our pension and postretirement benefit plans obligations, assets andamounts recorded on the Consolidated Balance Sheets as of December 31.  The amounts presented in the following tablesfor pension include both the defined benefit pension plan and the SupplementalExecutive Retirement Plan in the aggregate.
| ** **                                                                                                          | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                                                                                         | ** ** | **2006**    | ** ** | **2005**           | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Change in Benefit Obligation  During Year**                                                                       | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| Benefit obligation at  January 1                                                                                    | ** ** | **$**       | **299.1**  |               | $          | 280.5 | ** ** | **$** | **31.1** |   | $ | 32.0 |   |
| Service cost                                                                                                        | ** ** | **4.2**     |       | 3.9                | ** ** | **—** |   | — |   |
| Interest cost                                                                                                       | ** ** | **16.7**    |       | 15.7               | ** ** | **1.5** |   | 1.8 |   |
| Plan amendments                                                                                                     | ** ** | **—**  |       | 9.3                | ** ** | **—** |   | — |   |
| Actuarial (gain) loss                                                                                               | ** ** | **0.3**     |       | 8.2                | ** ** | **(2.6** | **)** | 0.4 |   |
| Benefits paid                                                                                                       | ** ** | **(25.8**   | **)**      | (18.5              | )          | **(2.9** | **)** | (3.1 | ) |
| Benefit obligation at  December 31                                                                                  | ** ** | **$**       | **294.5**  |               | $          | 299.1 | ** ** | **$** | **27.1** |   | $ | 31.1 |   |
|                                                                                                                | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| **Change in Plan Assets During  Year**                                                                              | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| Fair value of plan  assets at January 1                                                                             | ** ** | **$**       | **260.0**  |               | $          | 265.9 | ** ** | **$** | **7.9** |   | $ | 8.9 |   |
| Actual return on plan  assets                                                                                       | ** ** | **26.8**    |       | 12.2               | ** ** | **0.2** |   | 0.1 |   |
| Contributions to plan  assets                                                                                       | ** ** | **5.4**     |       | 0.4                | ** ** | **1.8** |   | 2.0 |   |
| Benefits paid                                                                                                       | ** ** | **(25.8**   | **)**      | (18.5              | )          | **(2.9** | **)** | (3.1 | ) |
| Fair value of plan  assets at December 31                                                                           | ** ** | **$**       | **266.4**  |               | $          | 260.0 | ** ** | **$** | **7.0** |   | $ | 7.9 |   |
|                                                                                                                | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| **Funded Status of Plan**                                                                                           | ** ** | **$**       | **(28.1**  | **)**              | $          | (39.1 | ) | **$** | **(20.1** | **)** | $ | (23.2 | ) |
|                                                                                                                | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| **Amounts Recognized in the  Consolidated Balance Sheets at December 31 (a)**                                       | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| Current liabilities                                                                                                 | ** ** | **$**       | **(0.4**   | **)**              | N/A        | ** ** | **$** | **(0.4** | **)** | N/A |   |
| Non-current liabilities                                                                                             | ** ** | **(27.7**   | **)**      | N/A                | ** ** | **(19.7** | **)** | N/A |   |
| Net asset/(liability)  at December 31                                                                               | ** ** | **$**       | **(28.1**  | **)**              | N/A        | ** ** | **$** | **(20.1** | **)** | N/A |   |
|                                                                                                                | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| **Amounts Recognized in Accumulated  Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities (a)** | ** ** | ** **  |       |               | ** ** | ** ** |   |   |   |
| Net transition  obligation (asset)                                                                                  | ** ** | **$**       | **—** |               | N/A        | ** ** | **$** | **0.2** |   | N/A |   |
| Prior service cost  (credit)                                                                                        | ** ** | **14.6**    |       | N/A                | ** ** | **—** |   | N/A |   |
| Net actuarial loss  (gain)                                                                                          | ** ** | **66.8**    |       | N/A                | ** ** | **(10.6** | **)** | N/A |   |
| Accumulated other comprehensive income, regulatory assets and  regulatory liabilities, pre-tax                      | ** ** | **$**       | **81.4**   |               | N/A        | ** ** | **$** | **(10.4** | **)** | N/A |   |

----

*(a)**          Therequirements of SFAS 158 are not applied retrospectively and do not apply todisclosures for 2005.*

The accumulated benefitobligation for our defined benefit pension plans was $282.7 million and $287.6million at December 31, 2006 and 2005, respectively.

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The net periodic benefitcost (income) of the pension and postretirement benefit plans atDecember 31 were:
| **Net Periodic Benefit Cost (Income)**        | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                   | ** ** | **2006**    | ** ** | **2005**           | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                  | ** ** | **$**       | **4.2**    |               | $          | 3.9 |   | $ | 3.5 | ** ** | **$** | **—** |   | $ | — |   | $ | — |   |
| Interest cost                                 | ** ** | **16.6**    |       | 15.7               |       | 16.0 | ** ** | **1.5** |   | 1.8 |   | 1.9 |   |
| Expected return  on assets (a)                | ** ** | **(21.7**   | **)**      | (21.5              | )          | (21.7 | ) | **(0.5** | **)** | (0.5 | ) | (0.6 | ) |
| Amortization of  unrecognized:                |       |        | ** ** | ** **         |       |   |   |   |   |   |   |   |   |
| Actuarial (gain) loss                         | ** ** | **3.9**     |       | 3.8                |       | 2.0 | ** ** | **(1.3** | **)** | (0.8 | ) | (1.1 | ) |
| Prior service cost                            | ** ** | **2.6**     |       | 2.3                |       | 2.7 | ** ** | **—** |   | — |   | — |   |
| Transition obligation (asset)                 | ** ** | **—**  |       | —             |       | — | ** ** | **0.2** |   | 0.2 |   | 0.2 |   |
| Net benefit cost  (income) before adjustments | ** ** | **5.6**     |       | 4.2                |       | 2.5 | ** ** | **(0.1** | **)** | 0.7 |   | 0.4 |   |
|                                          |       |        | ** ** | ** **         |       |   |   |   |   |   |   |   |   |
| Settlement costs  (b)                         | ** ** | **2.6**     |       | —             |       | — | ** ** | **—** |   | — |   | — |   |
| Special  termination benefit cost (c)         | ** ** | **0.3**     |       | 0.2                |       | — | ** ** | **—** |   | — |   | — |   |
| Curtailment cost  (d)                         | ** ** | **—**  |       | 0.1                |       | — | ** ** | **—** |   | — |   | — |   |
| Net benefit cost  (income) after adjustments  | ** ** | **$**       | **8.5**    |               | $          | 4.5 |   | $ | 2.5 | ** ** | **$** | **(0.1** | **)** | $ | 0.7 |   | $ | 0.4 |   |

----

(a)             The market-relatedvalue of assets is equal to the fair value of assets at implementation withsubsequent asset gains and losses recognized in the market-related valuesystematically over a three-year period.

(b)            The settlement costrelates to a former officer (not related to our ongoing litigation with threeformer executives) who has elected to receive a lump sum distribution in 2007from the Supplemental Executive Retirement Plan.

(c)             In 2006 and 2005,special termination benefit costs were recognized as a result of 32 employeeswho participated in a voluntary early retirement program.  16 employees retired at various dates during2005 and 16 additional employees retired at various dates during 2006; thisprogram was completed as of April 1, 2006.

(d)            In 2005, a curtailmentcost was recognized as a result of a freeze in benefits for the remainingactive employee participating in the Supplemental Executive Retirement Plan.

 

**DP&L’s**pension and postretirement plan assets were comprised of the following assetcategories at December 31:
| ** **              | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------|------------|-------------|------------|--------------------|------------|
| **Asset Category** | ** ** | **2006**    | ** ** | **2005**           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity  securities      | ** ** | **59**      | **%**      | 51                 | %          | 0 | % | 0 | % |
| Debt secruities         | ** ** | **38**      | **%**      | 48                 | %          | 100 | % | 100 | % |
| Real estate             | ** ** | **0**       | **%**      | 0                  | %          | 0 | % | 0 | % |
| Other                   | ** ** | **3**       | **%**      | 1                  | %          | 0 | % | 0 | % |
| Total                   | ** ** | **100**     | **%**      | 100                | %          | **100** | **%** | 100 | % |

 

Plan assets are investedusing a total return investment approach whereby a mix of equity securities,debt securities and other investments are used to preserve asset values,diversify risk and achieve our target investment return benchmark.  Investment strategies and asset allocationsare based on careful consideration of plan liabilities, the plan’s fundedstatus and our financial condition. Investment performance and asset allocation are measured and monitoredon an ongoing basis.  At December 31,2006, there were no shares of **DPL** commonstock held as plan assets.

Our expected return onplan asset assumptions, used to determine benefit obligations, are based onhistorical long-term rates of return on investment, which use the widelyaccepted capital market principle that assets with higher volatility generate agreater return over the long run. Current market factors, such as inflation and interest rates, as well asasset diversification and portfolio rebalancing, are evaluated when long-termcapital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonabilityand appropriateness.

Our overall expectedlong-term rate of return on assets is approximately 8.50% for pension planassets and approximately 6.75% for retiree welfare plan assets.  This expected return is based exclusively onhistorical returns, without adjustments. There can be no assurance of our ability to generate that rate of returnin the future.

Our overall discount ratewas evaluated in relation to the December 31, 2006 Hewitt Yield Curve.  The Hewitt Yield Curve represents a portfolioof top-quartile AA-rated bonds used to settle pension obligations and supporteda weighted average discount rate of 5.75% at December 31, 2006.  Peer data and historical returns were alsoreviewed to verify the reasonability and appropriateness of our discount rateused in the calculation of benefit obligations and expense.

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The weighted averageassumptions used to determine benefit obligations for the years ended December31 were:
| ** **                                   | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|----------------------------------------------|------------|-------------|------------|--------------------|------------|
| **Benefit Obligation Assumptions** | ** ** | **2006**    | ** ** | **2005**           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Discount rate  for obligations               | ** ** | **5.75**    | **%**      | 5.75               | %          | **5.75** | **%** | 5.75 | % |
| Rate of compensation  increases              | ** ** | **4.00**    | **%**      | 4.00               | %          | **N/A** |   | N/A |   |

 

The weighted-averageassumptions used to determine net periodic benefit cost (income) for the yearsended December 31 were:
| ** **                                                                  | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **Net Periodic Benefit Cost (Income) Assumptions** | ** ** | **2006**    | ** ** | **2005**           | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                                                               | ** ** | **5.75**    | **%**      | 5.75               | %          | 6.25 | % | **5.75** | **%** | 5.75 | % | 6.25 | % |
| Expected rate of  return on plan assets                                     | ** ** | **8.50**    | **%**      | 8.50               | %          | 8.50 | % | **6.75** | **%** | 6.75 | % | 6.75 | % |
| Rate of compensation  increases                                             | ** ** | **4.00**    | **%**      | 4.00               | %          | 4.00 | % | **N/A** |   | N/A |   | N/A |   |

 

The assumed health carecost trend rates at December 31 are as follows:
| ** **                                      | ** ** | **Expense** | ** ** | **Benefit Obligations** | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------------------------|------------|
| **Health Care Cost Assumptions** | ** ** | **2006**    | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current health  care cost trend rate            | ** ** | **10.00**   | **%**      | 10.00                        | %          | **10.00** | **%** | 10.00 | % |
| Ultimate health  care cost trend rate           | ** ** | **5.00**    | **%**      | 5.00                         | %          | **5.00** | **%** | 5.00 | % |
| Ultimate health care  cost trend rate - year    | ** ** | **2011**    |       | 2010                         | ** ** | **2012** |   | 2011 |   |

 

The assumed health carecost trend rates have a significant effect on the amounts reported for thehealth care plans.  A one-percentagepoint change in assumed health care cost trend rates would have the followingeffects on the net periodic postretirement benefit cost and the accumulatedpostretirement benefit obligation:

| Effect of Change in Health Care Cost Trend Rate ($ in millions) | ** ** | **Increase 1%** | ** ** | **Decrease 1%** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Service cost  plus interest cost                                                                                       |       | $                    | 0.1        |                 | $          | (0.1) |   |
| Benefit obligation                                                                                                     |       | $                    | 1.5        |                 | $          | (1.3) |   |

 

The following benefitpayments, which reflect future service, are expected to be paid as follows:

| Estimated Future Benefit Payments | ** ** | ** **  | ** ** | ** **         | ** ** |
|--------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                      | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|                                             |       |        |       |               |       |
| 2007                                             |       | $           | 19.4       |               | $          | 2.6 |   |
| 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 |   |

 

We expect to contribute$0.4 million to its pension plan and $2.6 million to its other postretirementbenefit plan in 2007.

77

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*6.  CommonShareholders’ Equity*

 

**DPL** has250,000,000 authorized common shares, of which 113,018,972 are outstanding atDecember 31, 2006.  **DPL**had 902,490 authorized but unissued shares reserved for its dividendreinvestment plan at December 31, 2005. The plan provides that either original issue shares or shares purchasedon the open market may be used to satisfy plan requirements.

On July 27, 2005, **DPL’s** Board authorized the repurchase of up to $400 millionof common stock from time to time in the open market or through privatetransactions.  **DPL**completed this share repurchase program on August 21, 2006.  In total, 14.9 million shares wererepurchased at a cost of $400.0 million. These Board-authorized repurchase transactions resulted in an 11.7%reduction of the outstanding stock of December 31, 2005 at an average price of$26.91 per share.  These shares arecurrently held as treasury shares.  Therewere no other repurchases during 2006 and 2005.

In September 2001, **DPL’s** Board of Directors renewed its Shareholder RightsPlan, attaching one right to each common share outstanding at the close ofbusiness on December 13, 2001.  Therights separate from the common shares and become exercisable at the exerciseprice of $130 per right in the event of certain attempted businesscombinations.  The renewed plan expireson December 31, 2011.

In February 2000, **DPL** entered into a series of recapitalization transactionsincluding the issuance of $550 million of a combination of voting preferred andtrust preferred securities and warrants to an affiliate of investment companyKohlberg Kravis Roberts & Co. (KKR). As part of this recapitalization transaction, 31.6 million warrants wereissued.  These warrants were sold for anaggregate purchase price of $50 million. The warrants are exercisable, in wholeor in part, for common shares at any time during the twelve-year period commencingon March 13, 2000.  Each warrant isexercisable for one common share, subject to anti-dilution adjustments (i.e.,stock split, stock dividend).  Theexercise price of the warrants is $21.00 per common share, subject toanti-dilution adjustments.

In addition, in the eventof a declaration, issuance or consummation of any dividend, spin-off or otherdistribution or similar transaction by **DPL** of thecapital stock of any of its subsidiaries, additional warrants of suchsubsidiary will be issued to the warrant holder so that after the transaction,the warrant holder will have the same interest in the fully diluted number ofcommon shares of such subsidiary the warrant holder had in **DPL**immediately prior to such transaction.

Pursuant to the warrantagreement, **DPL** has reserved authorized commonshares sufficient to provide for the exercise in full of all outstandingwarrants.

During December 2004 andJanuary 2005, Dayton Ventures, LLC requested that we transfer all of DaytonVentures, LLC’s warrants to Lehman Brothers, Inc. (Lehman) in fourtransactions.  Lehman has subsequentlytransferred a large number of these warrants to unaffiliated thirdparties.  During one of thesetransactions in 2005, Dayton Ventures, LLC agreed to sell back to **DPL** at par all of the outstanding 6,600,000 voting preferredshares.  As a result of the reduction ofDayton Ventures, Inc.’s warrant ownership below 12,640,000, Dayton Ventures,LLC was no longer eligible to receive an annual $1 million management,consulting and financial services fee and it no longer had the right todesignate one person to serve as a director of the **DPL**and **DP&L** and no longer had the right todesignate one person to serve as a non-voting observer of **DPL**and **DP&L**.  Currently, Dayton Ventures, LLC does not haveany ownership interest in **DPL** or **DP&L**.

**DPL** has aleveraged Employee Stock Ownership Plan (ESOP) to fund matching contributionsto **DP&L’s** 401(k) retirement savingsplan and certain other payments to full-time employees.  Common shareholders’ equity is reduced forthe cost of 3.8 million unallocated shares held by the trust and for2.7 million shares related to other employee plans, of which a total of6.5 million shares reduce the number of common shares used in the calculationof earnings per share.

Dividends received by theESOP for unallocated shares were used to repay the principal and interest on anESOP loan to **DPL**.  As debt service payments were made on theloan, shares are released on a pro-rata basis. Dividends on the allocated shares are charged to retained earnings.

ESOP cumulative sharesallocated to employees and outstanding for the calculation of earnings pershare were 3.4 million in 2006, 3.2 million in 2005, and 3.0 million in2004.  Compensation expense associated with

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the ESOP, which is basedon the fair value of the shares allocated, amounted to $3.7 million in 2006,$3.1 million in 2005, and $2.5 million in 2004.

In April 2006, **DPL’s** Shareholders approved The DPL Inc. Equity andPerformance Incentive Plan (the EPIP) which became immediately effective andwill remain in effect for a term of ten years, unless sooner terminated inaccordance with its terms. The Compensation Committee of the Board of Directorswill designate the employees and directors eligible to participate in the EPIPand the times and types of awards to be granted. Under the EPIP, theCompensation Committee may grant equity-based compensation in theform of stock options, stock appreciation rights, restricted stock,restricted stock units, performance shares and units, and other stock-basedawards. Awards may be subject to the achievement of certain managementobjectives. In addition, the EPIP provides, upon recommendation of the ChiefExecutive Officer and Chairman of the Board, for a grant of a special equityaward to recognize outstanding performance. A total of 4,500,000 shares of theCompany’s common stock were reserved for issuance under the EPIP.

*7.  Preferred Stock*

| **DPL:**      |   | Series B, no par  value, 8,000,000 shares authorized; no shares outstanding as of December 31,  2006                                                                                       |   |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **    |   |                                                                                                                                                                                       |   |
| **DP&L:** |   | $25 par value,  4,000,000 shares authorized, no shares outstanding; and $100 par value,  4,000,000 shares authorized, 228,508 shares without mandatory redemption  provisions outstanding. |   |

 

 

|                                    | ** ** | ** ** | ** ** | ** **     | ** ** | **Current Shares** | ** ** | **Par Value at**    | ** ** | **Par Value at**    | ** ** |
|------------------------------------|------------|------------|------------|----------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Current**    | ** ** | **Outstanding at** | ** ** | **December 31,**         | ** ** | **December 31,**         | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **Redemption** | ** ** | **December 31,**   | ** ** | **2006**                      | ** ** | **2005**                      | ** ** |
| **Preferred Stock Rate** | ** ** | ** ** | ** ** | **Price**      | ** ** | **2006**                | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** |
| DPL Series B (a)                   |       | 0.00       | %          | $              | 0.01       | ** **              | **—** |                          | **$**      | **—**                    |       | $ | — |   |
| DP&L Series  A                 |       | 3.75       | %          | $              | 102.50     |                    | 93,280     | ** **                    | **9.3**    |                          | 9.3        |   |
| DP&L Series  B                 |       | 3.75       | %          | $              | 103.00     |                    | 69,398     | ** **                    | **7.0**    |                          | 7.0        |   |
| DP&L Series  C                 |       | 3.90       | %          | $              | 101.00     |                    | 65,830     | ** **                    | **6.6**    |                          | 6.6        |   |
| Total                              |       |       |       |           | ** ** | 228,508                 |       | **$**                         | **22.9**   |                          | $          | 22.9 |   |

----

(a)             DPLpurchased all of its outstanding Series B shares during 2005.

In February 2000, **DPL** entered into a series of recapitalization transactionsincluding the issuance of $550 million of a combination of voting preferred andtrust preferred securities and warrants to an affiliate of investment companyKKR.  As part of **DPL’s**2000 recapitalization transaction, trust preferred securities sold to KKR hadan aggregate face amount of $550 million, and were issued at an initialdiscounted aggregate price of $500 million, with a maturity of 30 years(subject to acceleration six months after the exercise of the warrants), anddistributions at a rate of 8.5% of the aggregate face amount per year.  **DPL** recognizedthe entire trust preferred securities original issue discount of $50 millionupon issuance.

In August 2001, **DPL** issued $300 million of trust preferred securities toinstitutional investors at 8.125% and $400 million of senior unsecured notes at6.875%.  The August 2001 trust preferredsecurities have a term of 30 years and the senior unsecured notes have a termof 10 years.  In the fourth quarter of2003, **DPL** adopted FIN46R and deconsolidatedthe **DPL** Capital Trust II, which resulted intransferring the August 2001 trust preferred securities to the **DPL** Capital Trust II and establishing a note to CapitalTrust II for $300 million at 8.125%.  InAugust 2005, **DPL** redeemed $105 million of theseCapital Securities, leaving $195 million outstanding.

The votingpreferred shares (**DPL** Series B)were not redeemable, except at the option of the holder.  **DPL** agreed toredeem such number so that at no time would the holder and its affiliatesmaintain an ownership interest of greater than 4.9% of the voting rights of **DPL**.  **DPL’s** Series B preferred shares may only be transferred orotherwise disposed of together with a corresponding number of warrants, unlessthe holder and its affiliates hold a greater number of warrants than **DPL’s** Series B preferred shares, in which case the holdermay transfer any such excess warrants without transferring **DPL’s**Series B preferred shares.  If the holderof a warrant wishes to exercise warrants that are not excess warrants, **DPL** will redeem simultaneously with the exercise of suchwarrants an equal number of **DPL’s** Series Bpreferred shares held by such holder. **DPL** repurchased6,600,000 

79

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**DPL**Series B preferred shares on January 12, 2005 at par for an aggregate purchaseprice of $66,000.  There are currently noSeries B preferred shares outstanding.

The **DP&L**preferred stock may be redeemed at **DPL’s** option atthe per-share prices indicated, plus cumulative accrued dividends.

As long as any **DP&L** preferred stock is outstanding, **DP&L’s** Amended Articles of Incorporation containprovisions restricting the payment of cash dividends on any of its Common Stockif, after giving effect to such dividend, the aggregate of all such dividendsdistributed subsequent to December 31, 1946 exceeds the net income of **DP&L** available for dividends on its Common Stocksubsequent to December 31, 1946, plus $1.2 million.  As of year-end, all earnings reinvested inthe business of **DP&L** were available for CommonStock dividends.  **DPL**records dividends on preferred stock of **DP&L** aspart of interest expense.  We expect all2006 earnings reinvested in the business of **DP&L**to be available for **DP&L** commonstock dividends, payable to **DPL**.

 

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*8.  Long-term Debt*
| **DPL Inc.**              | ** ** | **At December 31,**                               | ** **  |
|--------------------------------|------------|-------------------------------------------------------------|-------------|
| **$ in millions**    | ** ** | **2006**                                                    | ** **  | **2005** | ** ** |
| DP&L  —               |       | First mortgage bonds  maturing 2013 - 5.125%                | ** **  | **$** | **470.0** |   | $ | 470.0 |   |
| DP&L  —               |       | Pollution control  series maturing 2036 - 4.80%             | ** **  | **100.0** |   | — |   |
| DP&L  —               |       | Pollution control  series maturing through 2034 - 4.78% (a) | ** **  | **214.4** |   | 214.4 |   |
|                           | ** ** | ** **                                                  |        | **784.4** |   | 684.4 |   |
|                           | ** ** | ** **                                                  |        | ** ** |   |   |   |
| DPL  Inc. —               |       | Note to Capital Trust  II 8.125% due 2031                   | ** **  | **195.0** |   | 195.0 |   |
| DPL  Inc. —               |       | Senior Notes 6.875%  Series due 2011                        | ** **  | **297.4** |   | 297.4 |   |
| DPL  Inc. —               |       | Senior Notes 6.25%  Series due 2008                         | ** **  | **100.0** |   | 100.0 |   |
| DPL  Inc. —               |       | Senior Notes 8.25%  Series due 2007                         | ** **  | **—** |   | 225.0 |   |
| DPL  Inc. —               |       | Senior Notes 8.00%  Series due 2009                         | ** **  | **175.0** |   | 175.0 |   |
| DP&L  —               |       | Obligations for capital  leases                             | ** **  | **2.0** |   | 3.0 |   |
| Unamortized debt  discount (b) | ** ** | **(2.0**                                                    | **)**       | (2.7 | ) |
| Total                          | ** ** | **$**                                                       | **1,551.8** |   | $ | 1,677.1 |   |

----

*(a)**          Weightedaverage interest rate for 2006 and 2005.*

*(b)**          DP&L’sunamortized debt discount was $(1.2) million and $(1.5) million for December31, 2006 and 2005, respectively.*

 
| **DP&L**                                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------|------------|
| **$ in millions**                                 | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| First mortgage bonds maturing  2013 - 5.125%                |       | **$**                         | **470.0**  |   | $ | 470.0 |   |
| Pollution control  series maturing 2036 - 4.80%             |       | **100.0**                     |       | — |   |
| Pollution control  series maturing through 2034 - 4.78% (a) |       | **214.4**                     |       | 214.4 |   |
|                                                        | ** ** | **784.4**                     |       | 684.4 |   |
|                                                        |       |                          |       |   |   |
| Obligations for capital  leases                             | ** ** | **2.0**                       |       | 3.0 |   |
| Unamortized debt  discount                                  | ** ** | **(1.2**                      | **)**      | (1.5 | ) |
| Total                                                       | ** ** | **$**                         | **785.2**  |   | $ | 685.9 |   |

----

*(a)   Weightedaverage interest rate for 2006 and 2005.*

At December 31, 2006, **DPL’s** scheduled maturities of long-termdebt, including capital lease obligations, over the next five years are $225.9million in 2007, $100.7 million in 2008, $175.7 million in 2009,$0.6 million in 2010 and $297.4 million in 2011.

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At December 31, 2006, **DP&L’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five years are$0.9 million in 2007, $0.7 million in 2008, $0.7 million in 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.  

OnMarch 25, 2004, **DPL** completed a $175 millionprivate placement of unsecured 8% Series Senior Notes due March 2009.  The Senior Notes will not be redeemable priorto maturity except that **DPL** has theright to redeem the notes for a make-whole payment at the adjusted treasuryrate plus 0.25%.  The 8% Series SeniorNotes were issued pursuant to its indenture dated as of March 1, 2000, andpursuant to authority granted in Board resolutions dated March 25, 2004.  The notes impose a limitation on theincurrence of liens on the capital stock of any of **DPL’s**significant subsidiaries and require **DPL** and itssubsidiaries to meet a consolidated coverage ratio of 2 to 1 prior to incurringadditional indebtedness.  The limitationon the incurrence of additional indebtedness does not apply to (i) indebtednessincurred to refinance existing indebtedness, (ii) subordinated indebtedness and(iii) up to $150 million of additional indebtedness.  In addition to the events of defaultspecified in the indenture, an event of default under the notes includes apayment default or acceleration of indebtedness under any other indebtedness of**DPL** or any of its subsidiaries whichaggregates $25 million or more.  Thepurchasers were granted registration rights in connection with the privateplacement under an Exchange and Registration Rights Agreement.  Pursuant to this agreement, **DPL** was obligated to file an exchange offer registrationstatement by July 22, 2004, have the registration statement declared effectiveby September 20, 2004 and consummate the exchange offer by October 20,2004.    **DPL**failed (1) to have a registration statement declared effective and (2) tocomplete the exchange offer according to this timeline.  As a result, **DPL**had been accruing additional interest at a rate of 0.5% per year for each of thesetwo violations, up to an additional interest rate not to exceed in theaggregate 1.0% per year.  As eachviolation was cured, the additional interest rate decreased by 0.5% per annum.  **DPL’s** exchangeoffer registration statement for these securities was declared effective by theSEC on June 27, 2006.  As a result, onJune 27, 2006, **DPL** ceased accruing 0.5% of theadditional interest.  On July 31, 2006, **DPL** ceased accruing the other 0.5% of additional interestwhen the exchange of registered notes for the unregistered notes wascompleted.  By completing the exchange, **DPL** reduced the annual interest expense by $1.8 million.

Duringthe first quarter of 2006, the Ohio Department of Development (ODOD) awarded **DP&L** the ability to issue over the next three years upto $200 million of qualified tax-exempt financing from the ODOD’s 2005 volumecap carryforward.  The financing is to beused to partially fund the ongoing flue gas desulfurization (FGD) capitalprojects.  The PUCO approved **DP&L’s** application for this additional financing on July26, 2006.

OnSeptember 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued$100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A dueSeptember 1, 2036.  In turn, **DP&L** borrowed these funds from the OAQDA.  The payment of principal and interest on theBonds when due is insured by an insurance policy issued by Financial GuarantyInsurance Company.  **DP&L**is using the proceeds from these borrowings to assist in financing its portionof the costs of acquiring, constructing and installing certain solid wastedisposal and air quality facilities at Miami Fort, Killen and Stuart GeneratingStations.  These facilities are currentlyunder construction and the proceeds from the borrowing have been placed inescrow with a trustee (the Bank of New York) and are being drawn upon only asfacilities are built and qualified costs are incurred.  In the event any of the proceeds are notdrawn, **DP&L** would eventually be requiredto return the unused proceeds to bondholders. **DP&L** expects to draw down theremaining available funds from this borrowing by the end of the second quarter2007.

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

OnNovember 21, 2006, **DP&L**entered into a new $220 million unsecured revolving credit agreement replacingits $100 million facility.  This newagreement has a five-year term that expires November 21, 2011 and provides **DP&L** with the ability to increase the size of thefacility by an additional $50 million at any time.  The facility contains one financialcovenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  **DP&L**had nooutstanding borrowings under this credit facility at December 31, 2006.  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.  As of December 31, 2006, **DP&L**had no outstanding letters of credit against the facility.

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OnFebruary 24, 2005, **DP&L**enteredinto an amendment to extend the term of its Master Letter of Credit Agreementwith a financial lending institution for one year and to reduce the maximumdollar volume of letters of credit to $10 million.  On February 17, 2006, **DP&L**renewed its $10 million agreement for one year. This agreement supports performance assurance needs in the ordinarycourse of business.  This agreement wasnot renewed in 2007.  **DP&L** has certain contractual agreements for the sale andpurchase of power, fuel and related energy services that contain credit ratingrelated clauses allowing the counter parties to seek additional surety undercertain conditions.  As of December 31,2006, **DP&L** had two outstanding letters ofcredit for a total of $2.2 million.

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

*9.  Stock-Based Compensation*

We adopted SFAS 123R onJanuary 1, 2006 using the modified prospective approach for stock options andrestricted stock units (RSUs).  As aresult of the adoption of SFAS 123R, we recognized $0.7 million lesscompensation expense for the year ended December 31, 2006, as compared to whatwe would have recognized under SFAS 123.

In 2000, **DPL’s**Board of Directors adopted and **DPL’s** shareholders approved The DPL Inc.Stock Option Plan.  The plan providesthat “no single Participant shall receive Options with respect to more than2,500,000 shares.”  Options granted in2000, 2001 and 2002 were fully vested as of December 31, 2005 and expire tenyears from the grant date.  In 2003,100,000 options were granted which vest equitably over five years and expireten years from the grant date.  In 2004,200,000 options were granted that vested over nineteen months and expireapproximately 6.5 years from the grant date; 100,000 of these options vested inMay 2005 and the remaining 100,000 vested in May 2006.  Another 20,000 options were granted in 2004that vested in five months and expire ten years from the grant date.  In December 2004, 30,000 options were grantedthat vest equitably over three years and expire ten years from the grantdate.  In 2005, 350,000 options weregranted that vested in June 2006 and expire three years from the grantdate.  At December 31, 2006, there were1,528,500 options available for grant. On April 26, 2006, **DPL’s** shareholdersapproved The DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP).  With the approval of EPIP, no new awards willbe granted under The DPL Inc. Stock Option Plan, but shares relating to awardsthat are forfeited or terminated under The DPL Inc. Stock Option Plan may begranted.

The schedule of optionactivity for the twelve months ended December 31, 2006 was as follows:
| ** **                       | ** ** | ** **         | ** ** | **Weighted-Avg.**   | ** ** |
|----------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                       | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| **$ in millions**      | ** ** | **Options**        | ** ** | **Fair Value** | ** ** |
| Non-vested at  January 1, 2006   |       | 510,000            |       | $                   | 2.2        |   |
| Granted in 2006                  |       | —             |       | $                   | —     |   |
| Vested in 2006                   |       | (460,000           | )          | $                   | (2.0       | ) |
| Forfeited in  2006               |       | (40,000            | )          | $                   | (0.1       | ) |
| Non-vested at  December 31, 2006 |       | 10,000             |       | $                   | 0.1        |   |

 

83

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Summarized stock optionactivity was as follows:
| ** **                                 | ** ** | **For year ended** | ** ** | **For year ended** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **December 31,**        | ** ** | **December 31,**        | ** ** |
| ** **                                 | ** ** | **2006**                     | ** ** | **2005**                     | ** ** |
| Options:                                   |       |                         |       |                         |       |
| Outstanding at beginning of year           | ** ** | **5,486,500**                |       | 6,165,500                    |       |
| Granted                                    | ** ** | **—**                   |       | 350,000                      |       |
| Exercised                                  | ** ** | **(355,000**                 | **)**      | (1,025,000                   | )          |
| Forfeited                                  | ** ** | **(40,000**                  | **)**      | (4,000                       | )          |
| Outstanding at  year-end (a)               | ** ** | **5,091,500**                |       | 5,486,500                    |       |
| Exercisable at  year-end                   | ** ** | **5,081,500**                |       | 4,100,000                    |       |
|                                       | ** ** | ** **                   |       |                         |       |
| Weighted average  option prices per share: | ** ** | ** **                   |       |                         |       |
| Outstanding at beginning of year           | ** ** | **$**                        | **21.86**  |                         | $          | 21.39 |   |
| Granted                                    | ** ** | **$**                        | **—** |                         | $          | 26.82 |   |
| Exercised                                  | ** ** | **$**                        | **21.00**  |                         | $          | 21.18 |   |
| Forfeited                                  | ** ** | **$**                        | **15.88**  |                         | $          | 29.63 |   |
| Outstanding at  year-end                   | ** ** | **$**                        | **21.95**  |                         | $          | 21.86 |   |
| Exercisable at year-end                    | ** ** | **$**                        | **21.94**  |                         | $          | 20.98 |   |

----

*(a)**          Indispute with certain former executives, among other things, are approximately 1million forfeited options not included above and 3.6 million outstandingoptions that are included above. See Note 15 of Notes to Consolidated FinancialStatements.*

No stock options were granted in 2006.  The weighted-average fair value of optionsgranted was $3.80 per share in 2005.  Thefair values of the options were estimated as of the dates of grant using aBlack-Scholes option pricing model.

There were 355,000 stock options exercised during2006.  The market value of options thatwere vested at December 31, 2006 was approximately $32 million.  Shares issued upon share option exercise areissued from treasury stock.  **DPL** has sufficient treasury stock to satisfy outstandingoptions.

Thefollowing table reflects information about stock options outstanding atDecember 31, 2006:

|                                         | ** ** | ** **      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|-----------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | ** **      | ** ** | **Weighted-**                | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                              | ** ** | ** **      | ** ** | **Average**                  | ** ** | **Average**                  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                              | ** ** | ** **      | ** ** | **Contractual**              | ** ** | **Exercise**                 | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **Range of Exercise  Prices** | ** ** | **Outstanding** | ** ** | **Life**                     | ** ** | **Price**                    | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                                    |       |            |       |                         |       |                         |       |   |   |   |   |
| $14.95 - $21.00                         |       | 4,305,000       |       | 3.5 years                    |       | $                            | 20.42      |   | 4,305,000 |   | $ | 20.42 |   |
| $21.01 - $29.63                         |       | 786,500         |       | 2.7 years                    |       | $                            | 28.01      |   | 776,000 |   | $ | 28.05 |   |

 

As of December 31, 2006,there was $0.1 million of total unrecognized compensation cost related tonon-vested stock options granted under the Plan.  We expect to recognize $0.1 million of thiscost in 2007.

In addition, RSUs weregranted to certain key employees prior to 2001.   There were 1.3 million RSUs outstanding asof December 31, 2006, of which 1.3 million were vested.  Substantially all of the vested RSUs are indispute as part of our ongoing litigation with Peter H. Forster, formerly **DPL’s** Chairman; Caroline E. Muhlenkamp, formerly **DPL’s** Group Vice President and Interim Chief FinancialOfficer; and Stephen F. Koziar, formerly **DPL’s** ChiefExecutive Officer and President.  Theremaining 0.1 million non-vested RSUs will be paid in cash upon vesting andwill vest as follows:  20,097 in 2007;14,688 in 2008; 10,205 in 2009; and 5,008 in 2010.  Vested RSUs are marked to market each quarterand any adjustment to compensation expense is recognized at that time.  Non-vested RSUs are valued quarterly at fairvalue using the Black-Scholes model to determine the amount of compensationexpense to be recognized.  Non-vestedRSUs do not earn dividends.

The following managementassumptions were used in the Black-Scholes model to calculate the fair value ofthe non-vested stock options and RSUs:

84

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|                         | ** ** | ** **                | ** ** |
|-------------------------|------------|---------------------------|------------|
| Volatility              | ** ** | **9.5 - 26.1**            | **%**      |
| Expected life  (years)  | ** ** | **0.6  -  3.6** | ** ** |
| Dividend yield  rate    | ** ** | **3.7  -  4.7** | **%**      |
| Risk-free interest rate | ** ** | **4.3  -  4.9** | **%**      |

 

Atthe 2006 Annual Shareholder’s Meeting, **DPL’s** shareholdersapproved The DPL Inc. 2006 Equity and Performance Incentive Plan.  Under the EPIP, the Board adopted a Long-TermIncentive Plan (LTIP) under which **DPL** will awarda targeted number of performance shares of common stock to executives.  Awards under the LTIP will be awarded basedon a Total Shareholder Return Relative to Peers performance.  No performance shares will be earned in aperformance period if the three-year Total Shareholder Return Relative to Peersis 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 aperformance condition under FAS 123R. The requisite performance period for each tranche of the PerformanceShares is:

| Tranche 1 |   | January 1, 2004 to December 31, 2006 |
|-----------|--------|--------------------------------------|
| Tranche 2 |   | January 1, 2005 to December 31, 2007 |
| Tranche 3 |   | January 1, 2006 to December 31, 2008 |

Theschedule of non-vested performance share activity for the twelve months endedDecember 31, 2006 follows:

|                                  | ** ** | **Number of** | ** ** | **Weighted-Avg.**   | ** ** |
|----------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                       | ** ** | **Performance**    | ** ** | **Grant Date** | ** ** |
| **$ in millions**      | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Non-vested at  January 1, 2006   |       | —             |       | $                   | —     |   |
| Granted in 2006                  |       | 244,423            |       | $                   | 6.3        |   |
| Vested in 2006                   |       | (44,045            | )          | $                   | (1.2       | ) |
| Forfeited in  2006               |       | (89,655            | )          | $                   | (2.4       | ) |
| Non-vested at  December 31, 2006 |       | 110,723            |       | $                   | 2.7        |   |

 

 

|                                  | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** |
| Performance  Shares:             |       |                  |       |
| Outstanding at beginning of year | ** ** | **—**            | ** ** |
| Granted                          | ** ** | **244,423**           | ** ** |
| Exercised                        | ** ** | **—**            | ** ** |
| Forfeited                        | ** ** | **(89,655**           | **)**      |
| Outstanding at  end of period    | ** ** | **154,768**           | ** ** |
| Exercisable at end of  period    | ** ** | **44,045**            | ** ** |

 

Performanceshares do not have an exercise price.

Asof December 31, 2006, there was $1.9 million of total unrecognized compensationcost related to non-vested performance shares granted under the LTIP.  We expect to recognize $1.5 million of thiscost in 2007 and $0.4 million in 2008.  Aforfeiture rate of 20% was estimated in calculating the compensation expense.

Sharesissued upon achievement of the required performance condition will be issuedfrom treasury stock.  **DPL** believes it has sufficient treasury stock to satisfyoutstanding performance shares.

 

85

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Thefollowing management assumptions were used in the Monte Carlo simulationcalculated by an actuarial consultant to estimate the fair value of theperformance shares:

 

| Volatility              | ** ** | ** ** | ** ** | **17.9% - 20.3%** |   |
|-------------------------|------------|------------|------------|-------------------|--------|
| Expected life (years)   | ** ** | ** ** | ** ** | **3.0**           |   |
| Dividend yield rate     | ** ** | ** ** | ** ** | **3.7%**          |   |
| Risk-free interest rate | ** ** | ** ** | ** ** | **4.6% - 4.7%**   |   |

 

OnOctober 2, 2006, Paul M. Barbas (President and Chief Executive Officer) wasgranted 19,000 shares of DPL Inc. Restricted Stock (Restricted Shares), grantedunder the 2006 Equity and Performance Incentive Plan.  The Restricted Shares are to be registered inMr. Barbas’ name, receive dividends as declared and paid on all **DPL** common stock and will vest in two tranches.  A total of 9,000 Restricted Shares shallbecome non-forfeitable on December 31, 2009 if Mr. Barbas remains in thecontinuous employ of the Company until such date.  The remaining 10,000 Restricted Shares willbecome non-forfeitable on December 31, 2011 if Mr. Barbas remains a Companyemployee.

 

|                                  | ** ** | **Number of** | ** ** | **Weighted-Avg.**   | ** ** |
|----------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                       | ** ** | **Performance**    | ** ** | **Grant Date** | ** ** |
| **$ in millions**      | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
| Non-vested at  January 1, 2006   |       | —             |       | $                   | —     |   |
| Granted in 2006                  |       | 19,000             |       | $                   | 0.5        |   |
| Vested in 2006                   |       | —             |       | $                   | —     |   |
| Forfeited in  2006               |       | —             |       | $                   | —     |   |
| Non-vested at  December 31, 2006 |       | 19,000             |       | $                   | 0.5        |   |

 

|                                  | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** |
| Restricted  Shares:              |       |                  |       |
| Outstanding at beginning of year |       | **—**            |       |
| Granted                          |       | **19,000**            |       |
| Exercised                        |       | **—**            |       |
| Forfeited                        |       | **—**            |       |
| Outstanding at  end of period    |       | **19,000**            |       |
| Exercisable at end of  period    |       | **—**            |       |

Restricted shares do nothave an exercise price.

Asof December 31, 2006, there was $0.5 million of total unrecognized compensationcost related to non-vested restricted shares granted under the EPIP.  We expect to recognize $0.1 million of thiscost annually over the next five years.

Restrictedshares will be issued from treasury stock. **DPL** believes it has sufficient treasurystock to satisfy outstanding restricted shares.

Forthe quarter ended December 31, 2006, total compensation expense was $1.7million with an associated tax benefit of $0.7 million.  Compensation expense for the year endedDecember 31, 2006 was $5.8 million for all share-based compensation (stockoptions, RSUs, restricted shares and performance shares) and the tax benefitassociated with these expenses was $2.1 million.

Forthe year ended December 31, 2006, operating income was $0.7 million higherunder SFAS 123R than under SFAS 123, while the impact to net income was $0.5million due to a decrease in the tax benefit of $0.2 million.  There was no impact on basic or dilutedearnings per share.

86

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*10. Ownership of Facilities*

We and other Ohioutilities have undivided ownership interests in seven electric generatingfacilities 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 ofDecember 31, 2006, we had$359 million of construction in progress at such facilities.  Ourshare of the operating cost of such facilities is included in the ConsolidatedStatement of Results of Operations, and its share of the investment in thefacilities is included in the Consolidated Balance Sheets.

Our undividedownership interest in such facilities at December 31, 2006, is as follows:

|                                        | ** ** | ** **              | ** ** | ** **     | ** ** | **DP&L**                  | ** ** |
|----------------------------------------|------------|-------------------------|------------|----------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **DP&L Share** | ** ** | **Investment** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | **Production** | ** ** | **Gross Plant**          | ** ** |
| ** **                             | ** ** | **Ownership**           | ** ** | **Capacity**   | ** ** | **In Service**           | ** ** |
| ** **                             | ** ** | **(%)**                 | ** ** | **(MW)**       | ** ** | **($ in millions)** | ** ** |
| Production Units:                      |       |                    |       |           |       |                          |       |
| Beckjord Unit 6                        |       | 50.0                    |       | 210            |       | $                             | 62         |   |
| Conesville Unit  4                     |       | 16.5                    |       | 129            |       | 34                            |       |
| East Bend  Station                     |       | 31.0                    |       | 186            |       | 198                           |       |
| Killen Station                         |       | 67.0                    |       | 428            |       | 427                           |       |
| Miami Fort Units  7 & 8            |       | 36.0                    |       | 360            |       | 195                           |       |
| Stuart Station                         |       | 35.0                    |       | 839            |       | 383                           |       |
| Zimmer Station                         |       | 28.1                    |       | 365            |       | 1,045                         |       |
|                                   |       |                    |       |           |       |                          |       |
| Transmission (at  varying percentages) |       |                    |       |           |       | 89                            |       |
|                                        |            |                         |            |                |            |                               |            |  |

 

*11.  Discontinued Operations*

 

|                                             | ** ** | **For the years ended** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **December 31,**                  | ** ** |
| **$ in millions**                 | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Investment income                           | ** ** | **$**                                  | **—** |   | $ | 41.3 |   | $ | 178.5 |   |
| Investment expenses                         | ** ** | **(1.3**                               | **)**      | (9.5 | ) | (23.6 | ) |
| Income from  discontinued operations        | ** ** | **(1.3**                               | **)**      | 31.8 |   | 154.9 |   |
|                                        | ** ** | ** **                             | ** ** |   |   |   |   |
| Gain realized from sale                     | ** ** | **18.9**                               |       | 53.1 |   | — |   |
| Broker fees and other  expenses             | ** ** | **—**                             |       | (6.5 | ) | — |   |
| Loss recorded                               | ** ** | **—**                             |       | (5.6 | ) | — |   |
| Net gain on sale                            | ** ** | **18.9**                               |       | 41.0 |   | — |   |
|                                        | ** ** | ** **                             |       |   |   |   |   |
| Earnings before income  taxes               | ** ** | **17.6**                               |       | 72.8 |   | 154.9 |   |
| Income tax expense                          | ** ** | **(3.6**                               | **)**      | (19.9 | ) | (59.1 | ) |
| Earnings from  discontinued operations, net | ** ** | **$ **                            | **14.0**   |   | $  | 52.9 |   | $ | 95.8 |   |

 

On February 13, 2005, **DPL’s**subsidiaries, MVE and MVIC, enteredinto an agreement to sell their respective interests in forty-six privateequity funds to AlpInvest/Lexington 2005, LLC, a joint venture of AlpInvestPartners and Lexington Partners, Inc. Sales proceeds and any related gains or losses were recognized as thesale of each fund closed.  Among otherclosing conditions, each fund required the transaction to be approved by therespective general partner of each fund. During 2005, MVE and MVIC completed the sale of their interests inforty-three and a portion of one of those private equity funds resulting in a$46.6 million pre-tax gain ($53.1 million less $6.5 million professionalfees) from discontinued operations and provided approximately $796 million innet proceeds, including approximately $52 million in net distributions fromfunds 

87

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while held for sale.  As part of this pre-tax gain, we realized $30million that was previously recorded as an unrealized gain in othercomprehensive income.

During 2005, MVE enteredinto alternative closing arrangements with AlpInvest/Lexington 2005, LLC forfunds where legal title to said funds could not be transferred until a latertime.  Pursuant to these arrangements,MVE transferred the economic aspects of the remaining private equity funds,consisting of two funds and a portion of one fund, to AlpInvest/Lexington 2005,LLC without a change in ownership of the interests.  The terms of the alternative arrangements donot meet the criteria for recording a sale. **DPL** is obligated to remitto AlpInvest/Lexington 2005, LLC any distributions MVE receives from thesefunds, and AlpInvest/Lexington 2005, LLC is obligated to provide funds to **DPL** to pay any contribution notice, capital call or otherpayment notice or bill for which MVE receives notice with respect to suchfunds.  The alternative arrangementsresulted in a 2005 deferred gain of $27.1 million until such terms of a sale canbe completed (contingent upon receipt of general partner approvals of thetransfer) and in 2005 provided approximately $72 million in net proceeds onthese funds.  We recorded an impairmentloss of $5.6 million in the second quarter of 2005 to write down assetstransferred pursuant to the alternative arrangements to estimated fairvalue.  Ownership of these funds willtransfer after the general partners of each of the separate funds consent tothe transfer.

On March 31, 2006, MVEcompleted the sale of the remaining portion of one private equity fund, forwhich MVE had previously entered into an alternative closing arrangementresulting in the recognition of $13.2 million of the deferred gain.  On August 31, 2006, MVE completed the sale ofa portion of one of the two remaining private equity funds, resulting inrecognition of $5.7 million of the deferred gain.  The sale of the residual portion of thisprivate equity fund was completed during the first quarter of 2007, resultingin the recognition of approximately $8.2 million of the deferred gain.  The transfer of the one remaining fund isexpected to be completed in 2008.

**DPL**did not have any income from discontinuedoperations in 2006 due to the sale of the portfolio, but there were $1.3million in legal fees directly relating to the ongoing litigation related tothe asset portfolio.  **DPL’s** incomefrom discontinued operations (pre-tax) for the year ended December 31,2005 of $31.8 million is comprised of $41.3 million of investment incomeless $9.5 million of associated management fees and other expenses.  Incomefrom discontinued operations (pre-tax) for the year ended December 31,2004 of $154.9 million is comprised of $178.5 million of investment income less$23.6 million of associated management fees and other expenses.

For the year endedDecember 31, 2006, **DPL**recognized$18.9 million of the gain deferred in 2005 from the sale of the portfolio.  For the year ended December 31, 2005, **DPL** recognized a $41.0 million pre-tax gain($53.1 million less $6.5 million of professional fees and $5.6 millionimpairment loss), deferred gains of $27.1 million on transferred funds fromdiscontinued operations, and provided approximately $868.4 million in netproceeds, including approximately $52 million in net distributions from fundsheld for sale.  **DPL**will continue to incur minor amounts of fees in the near term.

In 2006 and 2005, **DPL**has separately disclosed the earnings from discontinued operations, net ofincome taxes, which in prior periods were reported with elements of continuedoperations.  Also in 2006 and 2005, wehave separately disclosed the investing portions of the cash flows attributableto its discontinued operations (there was no impact on the operating orinvesting portions of the cash flows), which in prior periods were reported ona combined basis as a single amount.

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*12. Financial Instruments*

# The fair value of financial instruments is based oncurrent public market prices, discounted cash flows using current rates forsimilar issues with similar terms and remaining maturities or independent partyvaluations, which are believed to approximate market.  The basis on which the cost of a securitysold or the amount reclassified out of accumulated other comprehensive incomewas determined by specific identification. The table below presents the fair value, unrealized gains and losses,and cost of these instruments at December 31, 2006 and 2005.

| ** **                            | ** ** | **At December 31,** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** | ** ** | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | ** ** | ** ** | **Losses** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Losses** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | ** ** | ** ** | **less** | ** ** | **more** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **less** | ** ** | **more** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | ** ** | ** ** | **than 12** | ** ** | **than 12** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **than 12** | ** ** | **than 12** | ** ** | ** ** | ** ** |
| **$ in millions**           | ** ** | **Fair Value**           | ** ** | **Gains** | ** ** | **months** | ** ** | **months** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** | **Gains** | ** ** | **months** | ** ** | **months** | ** ** | **Cost** | ** ** |
| **DPL Inc.**                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                            | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Public Securities                     |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale  Securities        |       | $                             | 39.9       |   | $ | 5.5 |   | $ | (0.7 | ) | $ | (3.1 | ) | $ | 38.2 |   | $ | 24.8 |   | $ | 3.5 |   | $ | (0.2 | ) | $ | (2.9 | ) | $ | 24.4 |   |
| Hold-to-maturity  Debt securities (a) |       | —                        |       | — |   | — |   | — |   | — |   | 7.9 |   | — |   | (0.2 | ) | — |   | 8.1 |   |
| Derivatives                           |       | 3.2                           |       | 3.2 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total assets                          |       | $                             | 43.1       |   | $ | 8.7 |   | $ | (0.7 | ) | $ | (3.1 | ) | $ | 38.2 |   | $ | 32.7 |   | $ | 3.5 |   | $ | (0.4 | ) | $ | (2.9 | ) | $ | 32.5 |   |
|                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**                       | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt (b)                    |       | $                             | 1,798.5    |   |   |   |   |   |   |   | $ | 1,777.7 |   | $ | 1,717.5 |   |   |   |   |   |   |   | $ | 1,678.0 |   |
|                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Capitalization**                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unallocated shares in  ESOP           |       | $                             | 101.1      |   |   |   |   |   |   |   | $ | 44.1 |   | $ | 100.1 |   |   |   |   |   |   |   | $ | 49.3 |   |
|                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **DP&L**                          | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                            | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Public Securities                     |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale  Securities        |       | $                             | 109.5      |   | $ | 41.1 |   | $ | (0.7 | ) | (3.1 | ) | $ | 72.2 |   | $ | 100.4 |   | $ | 36.7 |   | $ | (0.2 | ) | $ | (2.9 | ) | $ | 66.8 |   |
| Hold-to-maturity  Debt securities (a) |       |                          |       |   |   |   |   |   |   |   |   | 7.9 |   | — |   | (0.2 | ) | — |   | 8.1 |   |
| Derivatives                           |       | 3.2                           |       | 3.2 |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total assets                          |       | $                             | 112.7      |   | $ | 44.3 |   | $ | (0.7 | ) | $ | (3.1 | ) | $ | 72.2 |   | $ | 108.3 |   | $ | 36.7 |   | $ | (0.4 | ) | $ | (2.9 | ) | $ | 74.9 |   |
|                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**                       | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt (b)                    |       | $                             | 785.8      |   |   |   |   |   |   |   | $ | 786.1 |   | $ | 685.2 |   |   |   |   |   |   |   | $ | 686.8 |   |

----

(a)  Maturitiesrange from 2006 to 2035.

(b)  Includescurrent maturities.

In the normal course ofbusiness, we enter into various financial instruments, including derivativefinancial instruments.  These instrumentsconsist of forward contracts that are used to reduce our exposure to changes inenergy and commodity prices.  Thesefinancial instruments are designated at inception as highly effective cash-flowhedges and are measured for effectiveness both at inception and on an ongoingbasis, with gains or losses deferred in Accumulated Other Comprehensive Incomeuntil the underlying hedged transaction is realized, canceled or otherwiseterminated.  The forward contracts generallymature within twelve months.

 

89

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*13.  Earningsper Share*

Basic earnings per share (EPS) are based on theweighted-average number of **DPL**commonshares outstanding during the year. Diluted earnings per share are based on the weighted-average number of **DPL** common and common equivalent shares outstandingduring the year, except in periods where the inclusion of such commonequivalent shares is anti-dilutive. Excluded from outstanding shares for this weighted-average computationare shares held by **DP&L’s**Master Trust Plan for deferred compensation and by the ESOP.

For the years 2006, 2005,and 2004, respectively, approximately 0.4 million, 0.5 million, and 28.0million warrants and stock options were excluded from the computation ofdiluted earnings per share because they were anti-dilutive.  These warrants and stock options could bedilutive in the future.

The following illustratesthe reconciliation of the numerators and denominators of the basic and dilutedearnings per share computations for income after discontinued operations andcumulative effect of accounting change:
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                             | ** ** | **2006**   | ** ** | **2005**   | ** ** | ** ** | **2004**    | ** ** |
| **$  in millions except per** | ** ** | **(a)**    | ** ** | ** ** | ** ** | **Per**    | ** **  | **(a)**    | ** ** | ** ** | ** ** | **Per**    | ** ** | **(a)**    | ** ** | ** ** | ** ** | **Per**    | ** ** |
| **share amounts**                                 | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share**  | ** **  | **Income** | ** ** | **Shares** | ** ** | **Share**  | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share**  | ** ** |
| **Basic EPS**                                          | ** ** | **$**      | **139.6**  | ** ** | **112.3**  | ** ** | **$**       | **1.24**   |       | $          | 174.4      |       | 121.0      |       | $          | 1.44       |       | $          | 217.3      |   | 120.1 |   | $ | 1.81 |   |
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |        |       |       |       |       |       |       |       |       |       |       |       |       |
| **Effect of Dilutive Securities:**                     | ** ** | ** ** | ** ** | ** ** |       |       |        |       |       |       |       |       |       |       |       |       |       |       |       |
| Stock Incentive Units                                  | ** ** | ** ** | ** ** | **1.3**    |       |       |        |       |       | 1.2        |       |       |       |       |       | 1.2        |       |       |       |
| Warrants                                               | ** ** | ** ** | ** ** | **7.1**    |       |       |        |       |       | 6.1        |       |       |       |       |       | 0.6        |       |       |       |
| Stock options,  performance and restricted shares      | ** ** | ** ** | ** ** | **1.2**    |       |       |        |       |       | 0.8        |       |       |       |       |       | 0.2        |       |       |       |
|                                                   | ** ** | ** ** | ** ** | ** ** |       |       |        |       |       |       |       |       |       |       |       |       |       |       |       |
| **Diluted EPS**                                        | ** ** | **$**      | **139.6**  | ** ** | **121.9**  | ** ** | **$ ** | **1.15**   |       | $     | 174.4      |       | 129.1      |       | $     | 1.35       |       | $     | 217.3      |   | 122.1 |   | $ | 1.78 |   |

----

(a)  Income after discontinued operationsand cumulative effect of accounting change.

90

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*14.  Assets Held for Sale*

Inconnection with DPLE’s (significant subsidiary of **DPL)**decisionto sell the Greenville Station and Darby Station electric peaking generationfacilities, **DPL** concluded that an impairmentcharge for the Greenville Station and Darby Station assets was required.  GreenvilleStation consists of four natural gas peaking units with a net book value ofapproximately $66 million.  Darby Stationconsists of six natural gas peaking units with a net book value ofapproximately $156 million.  DPLE plans tosell the Greenville Station and Darby Station assets for $49 million and $102million, respectively, in two separate transactions.  These sales are expected to take place duringthe first half of 2007.

During the fourth quarterof 2006, **DPL** recorded a $71.0 million impairmentcharge to record the fair market write-down of the assets and other associatedcosts related to the sale.

These assets are nolonger being depreciated.  The assets andliabilities held for sale in the Consolidated Balance Sheet are as follows:

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

 

*15.  Contractual Obligations, CommercialCommitments and Contingencies*

**ContractualObligations and Commercial Commitments**

Weenter into various contractual obligations and other commercial commitmentsthat may affect the liquidity of our operations.  At December 31, 2006, these include:

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**Contractual Obligations**
| ** **                           | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Less Than**    | ** ** | **2 - 3** | ** ** | **4 - 5** | ** ** | **More Than** | ** ** |
| **$ in millions**          | ** ** | **Total**  | ** ** | **1 Year**       | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| **DPL**                              |       |       |       |                  |       |   |   |   |   |   |   |
| ** **                           |       |       |       |                  |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 1,774.8    |                  | $          | 225.0 |   | $ | 275.0 |   | $ | 297.4 |   | $ | 977.4 |   |
| Interest payments                    |       | 1,101.8    |       | 98.8                  |       | 171.2 |   | 144.0 |   | 687.8 |   |
| Pension and  postretirement payments |       | 235.6      |       | 22.0                  |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                       |       | 2.9        |       | 0.9                   |       | 1.4 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.7        |       | 0.3                   |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 554.6      |       | 324.4                 |       | 118.4 |   | 111.8 |   | — |   |
| Limestone contracts                  |       | 58.7       |       | 1.7                   |       | 9.5 |   | 10.8 |   | 36.7 |   |
| Other contractual  obligations       |       | 391.7      |       | 328.5                 |       | 53.7 |   | 9.5 |   | — |   |
| Total  contractual obligations       |       | $          | 4,120.8    |                  | $          | 1,001.6 |   | $ | 674.7 |   | $ | 620.7 |   | $ | 1,823.8 |   |
|                                 |       |       |       |                  |       |   |   |   |   |   |   |
| **DP&L**                         | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt                       |       | $          | 783.2      |                  | $          | — |   | $ | — |   | $ | — |   | $ | 783.2 |   |
| Interest payments                    |       | 571.9      |       | 39.1                  |       | 78.3 |   | 78.3 |   | 376.2 |   |
| Pension and postretirement  payments |       | 235.6      |       | 22.0                  |       | 45.2 |   | 46.5 |   | 121.9 |   |
| Capital leases                       |       | 2.9        |       | 0.9                   |       | 1.4 |   | 0.6 |   | — |   |
| Operating leases                     |       | 0.7        |       | 0.3                   |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts (a)                   |       | 554.6      |       | 324.4                 |       | 118.4 |   | 111.8 |   | — |   |
| Limestone contracts                  |       | 58.7       |       | 1.7                   |       | 9.5 |   | 10.8 |   | 36.7 |   |
| Other contractual  obligations       |       | 391.5      |       | 328.4                 |       | 53.6 |   | 9.5 |   | — |   |
| Total contractual  obligations       |       | $          | 2,599.1    |                  | $          | 716.8 |   | $ | 306.7 |   | $ | 257.6 |   | $ | 1,318.0 |   |

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

 

Long-termdebt:**DPL’s**long-term debt as of December 31, 2006, consists of **DP&L’s**first mortgage bonds, tax-exempt pollution control bonds, **DPL**unsecured notes and includes current maturities and unamortized debtdiscounts.   During 2006, **DP&L** entered into $100 million of long-term tax-exemptdebt.

**DP&L’s**long-term debt as of December 31, 2006, consists of first mortgage bonds,tax-exempt pollution control bonds and includes an unamortized debt discount.

SeeNote 8 of Notes to Consolidated Financial Statements.

Interestpayments:Interest payments associated with theLong-term debt described above.

Pensionand postretirement payments:As of December 31, 2006, **DP&L** had estimated future benefit payments as outlinedin Note 5 of Notes to Consolidated Financial Statements.  These estimated future benefit payments are projectedthrough 2015.

Capitalleases:As of December 31, 2006, **DP&L** had two capital leases that expire in November 2007and September 2010.

Operatingleases:As of December 31, 2006, **DPL**and **DP&L** hadseveral operating leases with various terms and expiration dates.  Not included in this total is approximately$88,000 per year related to right of way agreements that are assumed to have nodefinite expiration dates.

Coalcontracts:**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 adjustments and have featuresthat limit price escalation in any given year.

 

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

Other contractualobligations:As of December 31, 2006, **DPL**and **DP&L** had various othercontractual obligations including non-cancelable contracts to purchase goodsand services with various terms and expiration dates.

Weenter into various commercial commitments, which may affect the liquidity ofour operations.  At December 31, 2006,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.  At December 31, 2006, there were noborrowings outstanding under this credit agreement.  **DP&L** hasthe ability to increase the size of the facility by an additional $50 millionat any time.

Guarantees:**DP&L** owns a4.9% equity ownership interest in an electric generation company.  As of December 31, 2006, **DP&L** could be responsible for therepayment of 4.9%, or $21.8 million, of a $445 million debt obligation thatmatures in 2026.

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

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

 

**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 ourconsolidated financial statements, as prescribed by GAAP, are adequate in lightof the probable and estimable contingencies. (See Note 1 of Notes to Consolidated Financial Statements.)  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 Consolidated Financial Statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of December 31, 2006, cannot bereasonably determined.

**EnvironmentalMatters**

**DPL**,**DP&L** and our subsidiaries’facilities and operations are subject to a wide range of environmentalregulations and law.  In the normalcourse of business, we have investigatory and remedial activities underway atthese facilities to comply, or to determine compliance, with suchregulations.  We have been identified,either by a government agency or by a private party seeking contribution tosite clean-up costs, as a potentially responsible party (PRP) at two sitespursuant to state and federal laws.  We record liabilities for 

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probable estimatedloss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS5), “Accounting for Contingencies.”  Tothe 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, weaccrue for the low end of the range. Because of uncertainties related to these matters accruals are based onthe best information available at the time. We evaluate the potentialliability related to probable losses quarterly and may revise itsestimates.  Such revisions in theestimates of the potential liabilities could have a material effect on ourresults of operations and financial position.

**LegalMatters**

**FormerExecutive Litigation**

OnAugust 24, 2004, **DPL**, and itssubsidiaries **DP&L** and MVE,filed a Complaint (and subsequently, amended complaints) againstMr. Forster, Ms. Muhlenkamp and Mr. Koziar (the Defendants) inthe Court of Common Pleas of Montgomery County, Ohio asserting legal claimsagainst them relating to the termination of the Valley Partners Agreements,challenging the validity of the purported amendments to the deferredcompensation plans and to the employment and consulting agreements with theDefendants, and the propriety of the distributions from the plans to theDefendants, and alleging that the Defendants breached their fiduciary dutiesand breached their consulting and employment contracts.  **DPL**,**DP&L** and MVE seek, among otherthings, damages in excess of $25,000, disgorgement of all amounts improperlywithdrawn by the Defendants from the plans and a court order declaring that **DPL**, **DP&L**and MVE have no further obligations under the consulting and employmentcontracts due to those breaches.

TheDefendants have filed their answers (and subsequently, amended answers)denyingliability and filed counterclaims (and subsequently, amended counterclaims)against **DPL**, **DP&L**, MVE, various compensation plans(the Plans), and current and former employees and current and former members ofour Board of Directors.  Thesecounterclaims, as amended, allege generally that **DPL**, **DP&L**,MVE, the Plans and the individual defendants breached the terms of theemployment and consulting contracts of the Defendants, and the terms of thePlans.  They further allege theories ofbreach of fiduciary duty, breach of contract, promissory estoppel, tortiousinterference, conversion, replevin and violations of ERISA under which theyseek distribution of deferred compensation balances, conversion of stockincentive units, exercise of options and payment of amounts allegedly owedunder the contracts and the Plans.  Defendants’counterclaims also demand payment of attorneys’ fees.

OnMarch 15, 2005, Mr. Forster and Ms. Muhlenkamp filed a lawsuit in New Yorkstate court against the purchasers of the private equity investments in thefinancial asset portfolio and against outside counsel to **DPL** and **DP&L**concerning purported entitlements in connection with the purchase of thoseinvestments.  **DPL**, **DP&L**andMVE are not defendants in that case; however, the three of us are parties to anindemnification agreement with respect to the purchaser defendants.  On August 18, 2005, the Ohio court issued apreliminary injunction against Mr. Forster and Ms. Muhlenkamp that precludesthem from pursuing certain key issues raised by Mr. Forster and Ms. Muhlenkampin their New York lawsuit that are identical to the issues raised in thepending Ohio lawsuit in the New York court or any other forum other than theOhio litigation.  In addition, the NewYork court has stayed the New York litigation pending the outcome of the Ohiolitigation.  Mr. Forster and Ms.Muhlenkamp have appealed the preliminary injunction and the appeal is pendingat the Ohio Supreme Court.

Thetrial commencement date for this case is set for April 30, 2007.

Cumulatively throughDecember 31, 2006, we have accrued for accounting purposes, obligations ofapproximately $56 million to reflect claims regarding deferred compensation,estimated MVE incentives and/or legal fees that Defendants assert are payableper contracts.  We dispute Defendants’entitlement to any of those sums and, as noted above, are pursuing litigationagainst them contesting all such claims.

On or about June 24,2004, the SEC commenced a formal investigation into the issues raised by theMemorandum (see Note 17 of the Notes to the Consolidated Financial Statements).  Although the SEC has not taken anysignificant action in furtherance of their investigation during 2006, we standready to cooperate with their investigation.

On May 28, 2004,the U.S. Attorney’s Office for the Southern District of Ohio, assisted by theFederal Bureau of Investigation, notified us that it has initiated an inquiryinvolving the subject matters covered by our internal 

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investigation.Although the U.S. Attorney’s office and the FBI have not taken any significantaction in furtherance of their investigation during 2006, we stand ready tocooperate with their investigation.

On June 24, 2004, theInternal Revenue Service (IRS) began an audit of tax years 1998 through 2003and issued a series of data requests to us including issues raised in theMemorandum.  The staff of the IRS requested that we provide certaindocuments, including but not limited to, matters concerning executive/directordeferred compensation plans, management stock incentive plans and MVE financialstatements.  On September 1, 2005, the IRS issued an audit report for taxyears 1998 through 2003 that showed proposed changes to our federal income taxliability for each of those years.  The proposed changes resulted in atotal tax deficiency, penalties and interest of approximately $23.9 million asof December 31, 2005.  On November 4, 2005, we filed a written protest toone of the proposed changes.  On April 3, 2006, the IRS conceded theproposed changes that we filed a written protest to and issued a revised auditreport for tax years 1998 through 2003.  The revised audit report resultedin a total tax deficiency, penalties and interest of approximately $1.2million.  We had previously made a deposit with the IRS of approximately$1.3 million that we requested on April 14, 2006 be applied to offset the $1.2million tax deficiency, penalties and interest for tax years 1998 through2003.  The Joint Committee on Taxation completed its review of the revisedaudit report for tax years 1998 through 2003 and sent us a letter dated June16, 2006 stating that it took no exception to the revised audit report.

**Insurance Recovery Claim**

On January 13, 2006, we filed a claim against one ofour insurers, Associated Electric & Gas Insurance Services (AEGIS), under afiduciary liability policy to recoup legal fees associated with our litigationagainst three former executives.   An arbitration of this matter washeld on August 4, 2006.  The arbitration panel ruled on or about September12, 2006 that the AEGIS policy does not require an advance of defense expensesto us.  Rather, the arbitration panel stated that we are required to filea written undertaking as a condition precedent to repay expenses finallyestablished not to be insured.  We have filed a written undertaking with AEGISand will continue to pursue resolution of the claim through mediation andarbitration in 2007.

**State Income Tax Audit**

On February 13, 2006, we received correspondence fromthe Ohio Department of Taxation (ODT) notifying us that ODT has completed theirexamination and review of our Ohio Corporation Franchise Tax Returns for taxyears 2002 through 2004 and that the final proposed audit adjustments result ina balance due of $90.8 million before interest and penalties.  We havereviewed the proposed audit adjustments and are vigorously contesting the ODTfindings and notice of assessment through all administrative and judicial meansavailable. On March 29, 2006, we filed petitions for reassessment with the ODTto protest each assessment as well as request corrected assessments for eachtax year.  On October 12, 2006, we signed a Memorandum of Understandingwith the ODT that stated if the ODT’s positions are ultimately sustained injudicial proceedings, the total additional tax liability that we would besubject to for tax years 2002 through 2004 would be no more than $50.7 millionbefore interest as opposed to the $90.8 million stated in the ODT’scorrespondence of February 13, 2006.  We believe we have recorded adequatetax reserves related to the proposed adjustments; however, we cannot predictthe outcome, which could be material to our results of operations and cashflows.

We are also under audit reviewby various state agencies for tax years 2002 through 2004.  We have alsofiled an appeal to the Ohio Board of Tax Appeals for tax years 1998 through2001.  Depending upon the outcome of these audits and the appeal, we maybe required to increase our tax provision if actual amounts ultimatelydetermined exceed recorded reserves.  We believe we have adequate reservesin each tax jurisdiction but cannot predict the outcome of these audits.

**Labor Relations Unasserted Claim**

In September 2006, **DP&L**became aware of an unasserted claim under the Fair Labor Standards Actconcerning the calculation of overtime rates for its unionized workforce.  By agreement of Local #175 and **DP&L**, we jointly submitted the claim to a neutral thirdparty who ruled in favor of **DP&L’s** position.  As a result of this decision, Local #175 hasdecided not to pursue any claim against **DP&L**.

**Environmental**

Pending before the U.S.Supreme Court is a proceeding, Environmental Defense v. Duke Energy that doesnot involve **DP&L** as a party but may have asignificant effect on the outcome of litigation described below that involvesallegations of violations of the CAA.  Akey issue in that litigation that may be dispositive with respect to otherpending cases is what test to apply for measuring whether modifications toelectric generating units should trigger application of New Source Review (NSR)standards under the CAA.   In generalterms, the dispute is whether to measure pre- and post-modification emissionsbased on the rate of 

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emissions per hour ofoperation or based on total emissions over time.  The latter test, if applied, could triggerNSR requirements for equipment replacements that result in a plant running moreoften because it is more economical or dependable, even if the emissions rateper hour of operation does not change.  Aruling is expected in the first or second quarter of 2007.  **DP&L** cannotpredict the outcome of the Duke Energy case. Moreover, in each of the cases identified below, there may becase-specific facts and allegations that may cause a judge to find that theU.S. Supreme Court’s ruling is based on different facts and allegations and istherefore not controlling in the case before the judge.

In September 2004,the Sierra 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,including issues that may be decided by the Supreme Court in the Duke Energycase and other issues relating to alleged violations of opacitylimitations.  **DP&L**,on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken placeand expert reports are scheduled to be filed at various times from May throughSeptember, 2007.  Dispositive motions areto be filed in January 2008.  No trialdate has been set yet.

*16.  Certain Relationships and RelatedTransactions*

On March 13, 2000, Dayton Ventures, Inc. and Dayton Ventures, LLC,affiliates of Kohlberg Kravis Roberts & Co. LLC (KKR), purchased acombination of trust preferred securities issued by a trust established by **DPL**, **DPL**voting preferred shares and warrants to purchase **DPL’s** common shares for an aggregate of $550 million. Thetrust preferred securities were redeemed at par in 2001 with proceeds of a newissuance of trust preferred securities and **DPL’s**Senior Notes.  The 6.6 million Series Bvoting preferred shares had voting power not exceeding 4.9% of the totaloutstanding voting power of our voting securities and were purchased by DaytonVentures, LLC for an aggregate purchase price of $68 thousand. The warrants topurchase approximately 31.6 million common shares (representing approximately19.9% of the common shares then outstanding) have a term of 12 years, anexercise price of $21 per share, and were purchased by Dayton Ventures, LLC foran aggregate purchase price of $50 million. In connection with the March 13,2000 transaction, **DPL** and KKR alsoentered into an agreement under which we paid KKR an annual management, consultingand financial services fee of $1.0 million. The agreement also stated that we would provide KKR with an opportunityto provide investment banking services on such terms as the parties may agreeand at such time as any such services may be required.  We also agreed toreimburse KKR and their affiliates for all reasonable expenses incurred inconnection with the services provided under this agreement, including travelexpenses and expenses of its counsel.  We and KKR terminated this agreementon January 12, 2005.  During December2004 through January 2005, KKR initiated a series of agreements to transfer allof the warrants to an unaffiliated third party. This transferee subsequently transferred a large portion of the warrantsto multiple unrelated third parties.  InJanuary 2005, as part of one of these transfers, KKR sold back to us all of theoutstanding Series B voting preferred shares at par of $0.01 per share for $66thousand.

Under the Securityholders and Registration Rights Agreement among **DPL Inc.**, DPL Capital Trust I, DaytonVentures, LLC and Dayton Ventures, Inc., KKR had the right to designate oneperson for election to, and one person to attend as a non-voting observer atall meetings of, the **DPL**and **DP&L** Boards of Directors for as long asDayton Ventures, LLC and its affiliates continue to beneficially own at least12.64 million of our common shares, including shares issuable uponexercise of warrants.  Scott M. Stuart, a director during fiscal 2003, andGeorge R. Roberts, a non-voting observer, were the KKR designees in 2003pursuant to this agreement.  Mr. Stuart resigned from the Board and Mr.Roberts ceased to be a non-voting observer of the Board as of April 2004.  As a result of the transfer of warrants fromKKR to an unaffiliated third party during December 2004 through January 2005,KKR no longer owned any warrants or common stock.  Accordingly, KKR no longer had the right toappoint one member and one observer to both **DPL**and **DP&L** Boards of Directorsand the Securityholders and Registration Rights Agreement was amended to deletethese, and other rights.

In 1996, **DPL** entered intoa consulting contract pursuant to which Peter H. Forster agreed to(i) serve, in a non-employee capacity, as Chairman of the Board ofDirectors of **DPL**, **DP&L** and MVE, and as Chairman of theExecutive Committee of our Board of Directors and (ii) provide advisoryand strategic planning consulting services. That contract became the subject of litigation after Mr. Forsterresigned on May 16, 2004.  (See Note 15of Notes to Consolidated Financial Statements.)

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In June 2001, **DPL’s**subsidiaries, MVE, of which Mr. Forster was Chairman, Miami Valley DevelopmentCompany (MVDC) and Miami Valley Insurance Company (MVIC), each entered into amanagement services agreement (the MSAs) with Valley Partners, Inc. (Valley)for the provision of ongoing oversight and management of each subsidiary’sfinancial asset holdings following a change of control of **DPL** or sale of the financial assetsportfolio to an unaffiliated third party.  Valley was a Floridacorporation the sole stockholders, directors and officers of which wereMr. Forster and Ms. Muhlenkamp.

In October 2001, we entered into an Administrative Services Agreement(the ASA) with Valley and the individual trustees of certain master trustswhich hold the assets of various executive and director compensationplans.  The ASA engaged Valley to provideadministrative and recordkeeping functions on behalf of the master trusts upona change of control of **DPL**, aswell as the provision of investment advice, in exchange for an administrationfee in addition to the annual management fee payable to Valley.

In October 2001, **DPL** and **DP&L** also entered into a Trustee FeeAgreement (the TFA) with Richard Chernesky, Richard Broock and FrederickCaspar, attorneys at Chernesky, Heyman & Kress P.L.L.  Upon a changeof control of **DPL** or **DP&L**, Messrs. Chernesky, Broockand Caspar would become the sole trustees of the master trusts for an annualfee of $500,000 and would succeed to all of the duties of our CompensationCommittee under the compensation plans funded through the master trusts.

The MSAs, ASA and TFA (Valley Partners Agreements) were terminated byan agreement executed in January 2004, but effective as of December 15,2003.  The financial assets were not sold or transferred prior to suchtermination and therefore the agreements never became effective and nocompensation was ever paid under them.  Copies of the Valley PartnersAgreements were filed as exhibits to our 2003 Form 10-K.

On April 26, 2004, **DPL**entered into a New Trustee Fee Agreement (New TFA) with Messrs. Chernesky,Broock and Caspar that would have become effective upon a change of control of **DPL** or **DP&L**. If the New TFA became effective, it provided that Messrs. Chernesky, Broock andCaspar would serve as the sole trustees of the master trusts in exchange for anannual fee of $250,000 during the New TFA’s term.  A copy of the New TFAwas filed as an exhibit to our 2003 Form 10-K.  On October 14, 2004, at the request of **DPL** and **DP&L**,Messrs. Chernesky, Broock and Caspar submitted their resignations to us and **DP&L**.

On February 2 and 3, 2004, Mr. Koziar sent letters to Mr. Forster andMs. Muhlenkamp purporting to amend their consulting and employment agreementsto provide change of control protections regarding their MVE payments.  Inaddition, on February 2, 2004, Mr. Koziar sent Mr. Forster a letter purportingto amend his consulting agreement to provide additional terms and to increasehis compensation.  However, none of those purported amendments had beenapproved by our Compensation Committee. Mr. Forster and Ms. Muhlenkamp resigned and Mr. Koziar retired on May16, 2004.

We have initiated legal proceedings asserting breach of fiduciary dutyand breach of contract by Messrs. Forster and Koziar and Ms. Muhlenkamp, andchallenging the propriety and/or validity of certain contract terminations,purported amendments and agreements. (See Note 15 of Notes to Consolidated Financial Statements.)

*17.  OtherMatters*

* *

**AuditCommittee Investigation and Related Matters**

On March 10, 2004, **DPL’s**and **DP&L’s** CorporateController, sent a memorandum (the Memorandum) to the Chairman of the AuditCommittee of our Board of Directors (the Audit Committee).  The Memorandum expressed the CorporateController’s “concerns, perspectives and viewpoints” regarding financialreporting and governance issues within the Company.

On March 15, 2004, ourAudit Committee retained the law firm of Taft, Stettinius & Hollister LLP(TS&H) to represent the Audit Committee in an independent review of each ofthe matters raised by the Memorandum. TS&H subsequently retained an accounting firm as a forensicaccountant to assist in this review.  OnApril 27, 2004, TS&H submitted a written report of its findings to themembers of the Audit Committee (the Report). A copy of the Report was filed as an exhibit to our 2003Form 10-K.  While TS&H statedthat it did not uncover and no person had indicated to it any uncorrectedmaterial inaccuracies in our books and records, it did, however, recommendfurther follow-up by the Audit Committee and improvements relating todisclosures, communication, access to information, internal controls and theculture of the Company in certain areas. Based upon information received after issuing the Report, TS&Hrevised its analysis and prepared a supplement to the 

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Report, datedMay 25, 2004 (the Supplement).  Acopy of the Supplement was filed as an exhibit to our 2003 Form 10-K.

Our Audit Committee considered the Report and Supplementat a meeting held on May 16, 2004. After its review and consideration, the Audit Committee recommended thatthe full Board of Directors accept the Report and the Supplement.  At a meeting held on May 16, 2004, ourBoard of Directors accepted the Report and Supplement, including the findingsand recommendations set forth therein. Mr. Forster and Ms. Muhlenkamp resigned and Mr. Koziar retired on May16, 2004, and subsequently **DPL** and **DP&L** have been involvedin litigation with them  (see Note 15 ofNotes to Consolidated Financial Statements). In addition, in 2004 corrective action was taken with regard to internalcontrols, process issues and tone at the top as identified in the Report.

**Governmentaland Regulatory Inquiries**

On May 20, 2004, the staff of the SEC notified **DPL** that it was conducting an inquirycovering our exempt status under the Public Utility Holding Company Act of 1935(the ‘35 Act).  The staff of the SECrequested **DPL** provide certaindocuments and information on a voluntary basis. On October 8, 2004, **DPL**receiveda notice from the SEC that a question existed as to whether such exemption fromthe Public Utility Holding Company Act was detrimental to the public interestor the interests of investors or consumers. On November 5, 2004, **DPL**filed a good faith application seeking an order of exemption from the SEC.  In light of the repeal of the ‘35 Act,effective February 8, 2006, and based upon the information previously providedto the staff of the SEC, this inquiry is moot.

On May 28, 2004, the U.S.Attorney’s Office for the Southern District of Ohio, assisted by the FederalBureau of Investigation, notified **DPL**and **DP&L** that it had initiatedan inquiry involving matters connected to our internal investigation.  We are cooperating with this investigation.

On or about June 24,2004, the SEC commenced a formal investigation into the issues raised by theMemorandum.  **DPL** and **DP&L**are cooperating with the investigation.

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** **

**Report of IndependentRegistered Public Accounting Firm**

The Board of Directors**DPL****Inc.:**

We have audited theaccompanying consolidated balance sheets of **DPL****Inc.** and subsidiaries (the Company) asof December 31, 2006 and 2005, and the related consolidated statement ofresults of operations, shareholders’ equity, and cash flows for each of theyears in the three-year period ended December 31, 2006. In connection with ouraudits of the consolidated financial statements, we have audited theconsolidated financial statement schedule, “Schedule II - Valuation andQualifying Accounts” for each of the years in the three-year period endedDecember 31, 2006. These consolidated financial statements and the financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 31,2006 and 2005, and the consolidated results of their operations and their cashflows for each of the years in the three-year period ended December 31, 2006,in conformity with United States generally accepted accounting principles.Also, in our opinion, the related financial statement schedules when consideredin relation to the basic consolidated financial statements taken as a whole,present fairly in all materials respects, the information set forth therein.

As discussed in Note 1 to the consolidatedfinancial statements, effective January 1, 2006, the Company adopted FASB Statementof Financial Accounting Standard No. 123 (Revised), *Share-BasedPayment*.  Also discussed inNote 1 to the consolidated financial statements effective December 31, 2006 theCompany adopted FASB Statement of Financial Accounting Standard No. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans,* an amendment of FASB Statements No. 87, 88,106 and 132(R).

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of the Company’sinternal controls over financial reporting as of December 31, 2006, based oncriteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated February 22,2007 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.
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**Report ofIndependent Registered Public Accounting Firm on Internal Controls**

The Board of Directors **DPL Inc.:**

We have auditedmanagement’s assessment, included in the Management’s Report on InternalControl Over Financial Reporting appearing under Item 9A, that **DPL Inc.** and subsidiaries (the Company) maintained effectiveinternal control over financial reporting as of December 31, 2006, based oncriteria established in *Internal Control -Integrated Framework*issued by the**Committee of Sponsoring Organizations of the Treadway Commission(COSO).**The Company’s managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such other proceduresas we considered necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

In our opinion,management’s assessment that the Company maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on criteria established in *Internal Control - Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  Also, in our opinion, the Company maintained,in all material respects, effective internal controls over financial reportingas of December 31, 2006, based on criteria established in *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of the Company as of December31, 2006 and 2005, and the related consolidated statements of results ofoperations, shareholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2006, and our report dated February 22, 2007,expressed an unqualified opinion on those consolidated financial statements.
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** **

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**Report of IndependentRegistered Public Accounting Firm**

The Board of Directorsand Shareholder ofThe Dayton Power and Light Company:

We have audited the accompanying consolidated balancesheets of The Dayton Power and Light Company (**DP&L**)and subsidiaries as of December 31, 2006 and 2005, and the related consolidatedstatements of results of operations, shareholders’ equity, and cash flows foreach of the years in the three-year period ended December 31, 2006. Inconnection with our audits of the consolidated financial statements, we haveaudited the consolidated financial statement schedule, “Schedule II — Valuationand Qualifying Accounts*”* for eachof the years in the three-year period ended December 31, 2006. Theseconsolidated financial statements and the financial statement schedules are theresponsibility of **DP&L**’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of **DP&L**as of December 31, 2006 and 2005, and the consolidated results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2006, in conformity with United States generally acceptedaccounting principles. Also, in our opinion, the related financial statementschedules when considered in relation to the basic consolidated financialstatements taken as a whole, present fairly in all material respects, theinformation set forth therein.

As discussed in Note 1 tothe consolidated financial statements, effective January 1, 2006 the Companyadopted FASB Statement of Financial Accounting Standard No. 123 (Revised), *Share-Based Payment.* Also discussed in Note 1 to the consolidated financial statementseffective December 31, 2006 the Company adopted FASB Statement of FinancialAccounting Standard No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans,* an amendmentof FASB Statements No. 87, 88, 106 and 132(R).

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal controls overfinancial reporting as of December 31, 2006, based on criteria established in *Internal Control – Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated February 22, 2007 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.
| /s/ KPMG               |   |   |   |
|------------------------|--------|--------|--------|
|                   |   |   |   |
| KPMG                   |   |   |   |
| Kansas City,  Missouri |   |   |   |
| February 22,  2007     |   |   |   |

 

101

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**Reportof Independent Registered Public Accounting Firm on Internal Controls**

The Board of Directorsand Shareholders ofThe Dayton Power and Light Company:

We have auditedmanagement’s assessment, included in the Management’s Report on InternalControl Over Financial Reporting appearing under Item 9A, that The Dayton Powerand Light Company (**DP&L**) andsubsidiaries maintained effective internal control over financial reporting asof December 31, 2006, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  **DP&L**’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting.  Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of **DP&L**’sinternal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

In our opinion,management’s assessment that **DP&L**maintained effective internal control over financial reporting as of December31, 2006, is fairly stated, in all material respects, based on criteriaestablished in *Internal Control - IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).  Also, in ouropinion, **DP&L** maintained, in all materialrespects, effective internal controls over financial reporting as of December31, 2006, based on criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of **DP&L**as of December 31, 2006 and 2005, and the related consolidated statements ofresults of operations, shareholders’ equity, and cash flows for each of theyears in the three-year period ended December 31, 2006, and our report datedFebruary 22, 2007, expressed an unqualified opinion on those consolidatedfinancial statements.
| /s/ KPMG               |   |   |   |
|------------------------|--------|--------|--------|
|                   |   |   |   |
| KPMG                   |   |   |   |
| Kansas City,  Missouri |   |   |   |
| February 22,  2007     |   |   |   |

 

102

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**DPLInc. - Selected Quarterly Information (Unaudited)**
| ** **                                            | ** ** | **For the three months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                            | ** ** | **March 31,**                                 | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                           | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2005 (a)** | ** ** | **2006** | ** ** | **2005 (a)** | ** ** | **2006 (b)** | ** ** | **2005** | ** ** |
| Revenues                                              | ** ** | **$**                                              | **341.1**  |   | $ | 307.1 | ** ** | **$** | **309.0** |   | $ | 293.4 | ** ** | **$** | **392.5** |   | $ | 357.4 | ** ** | **$** | **350.9** |   | $ | 327.0 |   |
| Operating Income                                      | ** ** | **103.2**                                          |       | 81.9 | ** ** | **55.9** |   | 62.3 | ** ** | **98.5** |   | 99.6 | ** ** | **23.4** |   | 95.3 |   |
|                                                  | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Earnings from  continuing operations                  | ** ** | **51.3**                                           |       | 36.1 | ** ** | **22.6** |   | 16.7 | ** ** | **47.4** |   | 25.7 | ** ** | **4.3** |   | 46.2 |   |
|                                                  | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Earnings from  discontinued operations, net of taxes  | ** ** | **7.6**                                            |       | 37.6 | ** ** | **—** |   | 5.2 | ** ** | **3.4** |   | 0.2 | ** ** | **3.0** |   | 9.9 |   |
| Cumulative  effect of accounting change, net of taxes | ** ** | —                                             |       | — | ** ** | **—** |   | — | ** ** | **—** |   | — | ** ** | ** ** |   | (3.2 | ) |
| Net Income                                            | ** ** | **$**                                              | **58.9**   |   | $ | 73.7 | ** ** | **$** | **22.6** |   | $ | 21.9 | ** ** | **$** | **50.8** |   | $ | 25.9 | ** ** | **$** | **7.3** |   | $ | 52.9 |   |
|                                                  | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Basic earnings  per share of common stock:            | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Continuing  operations                                | ** ** | **$**                                              | **0.43**   |   | $ | 0.30 | ** ** | **$** | **0.20** |   | $ | 0.14 | ** ** | **$** | **0.44** |   | $ | 0.21 | ** ** | **$** | **0.04** |   | $ | 0.38 |   |
| Discontinued  operations                              | ** ** | **0.06**                                           |       | 0.31 | ** ** | **—** |   | 0.04 | ** ** | **0.03** |   | — | ** ** | **0.03** |   | 0.09 |   |
| Cumulative  effect of accounting change               | ** ** | **—**                                         |       | — | ** ** | **—** |   | — | ** ** | **—** |   | — | ** ** | **—** |   | (0.03 | ) |
| Total basic earnings per common share                 | ** ** | **$**                                              | **0.49**   |   | $ | 0.61 | ** ** | **$** | **0.20** |   | $ | 0.18 | ** ** | **$** | **0.47** |   | $ | 0.21 | ** ** | **$** | **0.07** |   | $ | 0.44 |   |
|                                                  | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Diluted earnings  per share of common stock:          | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Continuing  operations                                | ** ** | **$**                                              | **0.40**   |   | $ | 0.28 | ** ** | **$** | **0.18** |   | $ | 0.13 | ** ** | **$** | **0.40** |   | $ | 0.20 | ** ** | **$** | **0.04** |   | $ | 0.36 |   |
| Discontinued  operations                              | ** ** | **0.06**                                           |       | 0.30 | ** ** | **—** |   | 0.04 | ** ** | **0.03** |   | — | ** ** | **0.02** |   | 0.08 |   |
| Cumulative  effect of accounting change               | ** ** | **—**                                         |       | — | ** ** | **—** |   | — | ** ** | **—** |   | — | ** ** | **—** |   | (0.03 | ) |
| Total diluted earnings per common share               | ** ** | **$**                                              | **0.46**   |   | $ | 0.58 | ** ** | **$** | **0.18** |   | $ | 0.17 | ** ** | **$** | **0.43** |   | $ | 0.20 | ** ** | **$** | **0.06** |   | $ | 0.41 |   |
|                                                  | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Dividends paid  per share                             | ** ** | **$**                                              | **0.25**   |   | $ | 0.24 | ** ** | **$** | **0.25** |   | $ | 0.24 | ** ** | **$** | **0.25** |   | $ | 0.24 | ** ** | **$** | **0.25** |   | $ | 0.24 |   |
|                                                  | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Common stock  market price - High                     | ** ** | **$**                                              | **27.58**  |   | $ | 26.77 | ** ** | **$** | **27.82** |   | $ | 27.67 | ** ** | **$** | **27.93** |   | $ | 28.12 | ** ** | **$** | **28.72** |   | $ | 28.01 |   |
| — Low                                            | ** ** | **$**                                              | **25.11**  |   | $ | 24.27 | ** ** | **$** | **26.25** |   | $ | 24.08 | ** ** | **$** | **26.74** |   | $ | 26.70 | ** ** | **$** | **27.16** |   | $ | 24.55 |   |
|                                                  | ** ** | ** **                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |

----

(a)    Earnings from continuing operations in thesecond and third quarters of 2005 include charges of $2.1 million and $59.1million, respectively, for the early redemption of debt. 

(b)    Earningsfrom continuing operations in the fourth quarter of 2006 included a $44.2million ($71 million pre-tax) impairment charge resulting from DPL’s decisionto sell two of its peaking stations. See Note 14 of the Notes to theConsolidated Financial Statements.

**DP&L- Selected Quarterly Information (Unaudited)**
| ** **                                                             | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                             | ** ** | **March 31,**                                 | ** ** | **June 30,** | ** ** | **September 30** | ** ** | **December 31,** | ** ** |
| **$ in millions**                                            | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                               | ** ** | **$**                                              | **339.1**  |   | $ | 305.1 | ** ** | **$** | **306.7** |   | $ | 291.4 | ** ** | **$** | **390.3** |   | $ | 355.5 | ** ** | **$** | **349.1** |   | $ | 324.9 |   |
| Operating Income                                                       | ** ** | **115.5**                                          |       | 91.4 | ** ** | **72.7** |   | 76.0 | ** ** | **107.1** |   | 112.1 | ** ** | **107.2** |   | 103.1 |   |
| Income before income  taxes and cumulative effect of accounting change | ** ** | **110.2**                                          |       | 87.9 | ** ** | **69.5** |   | 65.1 | ** ** | **103.0** |   | 100.8 | ** ** | **101.9** |   | 99.3 |   |
| Income before  cumulative effect of accounting change                  | ** ** | **66.9**                                           |       | 53.3 | ** ** | **44.0** |   | 35.9 | ** ** | **64.0** |   | 63.1 | ** ** | **67.5** |   | 62.7 |   |
| Net Income                                                             | ** ** | **66.9**                                           |       | 53.3 | ** ** | **44.0** |   | 35.9 | ** ** | **64.0** |   | 63.1 | ** ** | **67.5** |   | 59.5 |   |
| Earnings on common stock                                               | ** ** | **66.7**                                           |       | 53.1 | ** ** | **43.8** |   | 35.7 | ** ** | **63.8** |   | 62.9 | ** ** | **67.3** |   | 59.2 |   |
| Cash dividends paid                                                    | ** ** | **$**                                              | **—** |   | $ | 75.0 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **100.0** |   | $ | 75.0 |   |

 

103

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**Item 9 -Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

None.

**Item 9A -Controls and Procedures**

**DisclosureControls and Procedures**

Our Chief ExecutiveOfficer (CEO) and Chief Financial Officer (CFO) are responsible for establishingand maintaining our disclosure controls and procedures.  These controls and procedures were designedto ensure that material information relating to us and our subsidiaries arecommunicated to the CEO and CFO.  Weevaluated these disclosure controls and procedures as of the end of the periodcovered by this report with the participation of our CEO and CFO.  Based on this evaluation, our CEO and CFOconcluded that our disclosure controls and procedures are effective: (i) toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms and(ii) to ensure that information required to be disclosed by us in the reportsthat we submit under the Exchange Act is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate, to allow timelydecisions regarding required disclosure.

There was no change inour internal control over financial reporting during the most recentlycompleted fiscal period that has materially affected, or is reasonably likelyto materially affect, internal control over reporting.

The following report isour report on internal control over financial reporting as of December 31,2006.

**Management’sReport on Internal Control Over Financial Reporting**

We are responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with theparticipation of management, including the CEO and CFO, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on an evaluation under the framework in *Internal Control - Integrated Framework,*we concluded thatour internal control over financial reporting was effective as of December 31,2006.

Our assessment of theeffectiveness of our internal control over financial reporting as of December31, 2006, has been audited by KPMG LLP, the independent registered publicaccounting firm that audited the financial statements contained herein, asstated in their report which is included herein.

**Item 9B -Other Information**

None.

**PARTIII**

**Item 10- Directors and Executive Officers of DPL Inc.**

The information requiredto be furnished pursuant to this item with respect to Directors of **DPL** Inc. will be set forth under captioned “Election ofDirectors” in **DPL** Inc.’s proxy statement (theProxy Statement) to be furnished to shareholders in connection with the solicitationof proxies by our Board of Directors for use at the 2007 Annual Meeting ofShareholders to be held on April 27, 2007 and is incorporated herein byreference.

The information requiredto be furnished pursuant to this item for **DPL** Inc. withrespect to the identification of the Audit Committee, the Audit Committeefinancial expert and the registrant’s code of ethics will be set forth underthe caption “Corporate Governance” in the Proxy Statement and is incorporatedherein by reference.

**Item 11-****Executive Compensation**

The information requiredto be furnished pursuant to this item for **DPL** Inc. willbe set forth under the caption “Executive Compensation” in the Proxy Statementand is incorporated herein by reference.

104

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**Item 12 -****Security Ownership of CertainBeneficial Owners and Management and Related Shareholder Matters**

The information requiredto be furnished pursuant to this item for **DPL** Inc. willbe set forth under the captions “Security Ownership of Certain BeneficialOwners,” “Security Ownership of Management” and “Equity Compensation PlanInformation” in the Proxy Statement and is incorporated herein by reference.

**Item 13 -Certain Relationships andRelated Transactions**

The information requiredto be furnished pursuant to this item for **DPL** Inc. willbe set forth under the caption “Certain Relationships and Related Transactions”in the Proxy Statement and is incorporated herein by reference.

**Item 14 -Principal Accountant Fees and Services**

The information requiredto be furnished pursuant to this item for **DPL** Inc. willbe set forth under the caption “Audit and Non-Audit Fees” in the ProxyStatement and is incorporated herein by reference.

**DP&LAccountant Fees and Services**

The followingtable presents the aggregate fees billed for professional services rendered tous by KPMG LLP and PricewaterhouseCoopers LLP for 2006 and 2005.  Other than as set forth below, noprofessional services were rendered or fees billed by KPMG LLP during 2006 and2005.

| KPMG LLP          | ** ** | **Fees Invoiced 2006** | ** ** | **Fees Invoiced 2005** | ** ** |
|------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Audit Fees (1)         |       | $                                | 1,762,728  |                             | $          | 2,511,912 |   |
| Audit-Related Fees (2) |       | 147,030                          |       | 55,712                           |       |
| Tax Fees (3)           |       | —                           |       | 2,435                            |       |
| All Other Fees (4)     |       | —                           |       | —                           |       |
| Total                  |       | $                                | 1,909,758  |                             | $          | 2,570,059 |   |

 

| PricewaterhouseCoopers LLP | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------|------------|------------|------------|
| Audit Fees (1)             |       | $          | —     |       | $          | 96,350 |   |
| Audit-Related Fees (2)     |       | —     |       | 14,400     |       |
| Tax Fees (3)               |       | —     |       | —     |       |
| All Other Fees (4)         |       | 1,500      |       | —     |       |
| Total                      |       | $          | 1,500      |       | $          | 110,750 |   |

 

----

(1)                      Audit feesrelate to professional services rendered for the audit of our annual financialstatements and the reviews of our quarterly financial statements.

(2)                      Audit-relatedfees relate to services rendered to us for assurance and related services.

(3)                      Tax feesrelate to services rendered to us for tax compliance, tax planning and advice.

(4)                      Otherservices performed include certain advisory services in connection withaccounting research and do not include any fees for financial informationsystems design and implementation.

 

105

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** **

**PARTIV**

**Item15 - Exhibits and Financial Statement Schedules**

 

(a)           The following documents are filed aspart of this report:
|                                                                                                                                        | ** ** | **Page No** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|
| 1.**  ****Financial  Statements**                                                                                            |       |        |
| ** **                                                                                                                             | ** ** | ** **  |
|                                                                                                                                   |       |        |
| **DPL Inc**.  - Consolidated Statements of Results of Operations for each of the three  years in the period ended December 31, 2006    |       | 49          |
| **DPL Inc**.  - Consolidated Statements of Cash Flows for each of the three years in the  period ended December 31, 2006               |       | 50          |
| **DPL Inc**. - Consolidated  Balance Sheets at December 31, 2006 and 2005                                                              |       | 51          |
| **DPL Inc**.  - Consolidated Statement of Shareholders’ Equity for each of the three years  in the period ended December 31, 2006 |       | 53          |
| **DP&L**  - Consolidated Statements of Results of Operations for each of the three  years in the period ended December 31, 2006    |       | 54          |
| **DP&L**- Consolidated Statements of Cash Flows for each of the  three years in the period ended December 31, 2006                 |       | 55          |
| **DP&L** - Consolidated  Balance Sheets at December 31, 2006 and 2005                                                              |       | 56          |
| **DP&L**  - Consolidated Statement of Shareholders’ Equity for each of the three years  in the period ended December 31, 2006 |       | 58          |
| Notes to Consolidated Financial Statements                                                                                             |       | 59          |
| **DPL Inc.** - Report of  Independent Registered Public Accounting Firm                                                                |       | 99          |
| **DPL Inc.** - Report of  Independent Registered Public Accounting Firm on Internal Controls                                           |       | 100         |
| **DP&L**- Report of  Independent Registered Public Accounting Firm                                                                 |       | 101         |
| **DP&L**- Report of  Independent Registered Public Accounting Firm on Internal Controls                                            |       | 102         |
|                                                                                                                                   |       |        |
|                                                                                                                                   |       |        |
| **2.  Financial Statement Schedule**                                                                                         |       |        |
|                                                                                                                                   |       |        |
| For each of the three years in the period ended  December 31, 2006:                                                                    |       |        |
|                                                                                                                                   |       |        |
| Schedule II — Valuation and Qualifying Accounts                                                                                   |       | 120         |

 

Theinformation required to be submitted in Schedules I, III, IV and V is omittedas not applicable or not required under rules of Regulation S-X.

106

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**3.  Exhibits**

**DPL** and **DP&L** exhibits are incorporated by reference as describedunless otherwise filed as set forth herein.

 

The exhibits filed aspart of **DPL’s** and **DP&L’s**Annual Report on Form 10-K, respectively, are:

 
| DPL Inc. | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                       | ** ** | **Location(1)**                                                                               |
|----------|------------|--------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| X        |       | X            |       | 2(a)                |       | Copy of Asset Purchase Agreement, dated December 14,  1999, between The Dayton Power and Light Company, Indiana Energy, Inc., and  Number-3CHK, Inc.                              |       | Exhibit 2 to Report on Form 10-Q for the quarter  ended September 30, 2000 (File No. 1-9052)  |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |
| X        |       |         |       | 3(a)                |       | Copy of Amended Articles of Incorporation of DPL  Inc. dated September 25, 2001                                                                                                   |       | Exhibit 3 to Report on Form 10-K/A for the year  ended December 31, 2001 (File No. 1-2385)    |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |
| X        |       |         |       | 3(b)                |       | Regulations of DPL Inc.                                                                                                                                                           |       | Exhibit 3(b) to Form 8-K filed on May 3, 2004 (File  No. 1-9052)                              |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |
|     |       | X            |       | 3(c)                |       | Copy of Amended Articles of Incorporation of The  Dayton Power and Light Company dated January 4, 1991                                                                            |       | Exhibit 3(b) to Report on Form 10-K/A for the year  ended December 31, 1991 (File No. 1-2385) |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |
|     |       | X            |       | 3(d)                |       | Regulations of The Dayton Power and Light Company                                                                                                                                 |       | Exhibit 3(a) to Report on Form 8-K filed on April  30, 2004 (File No. 1-2385)                 |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |
| X        |       | X            |       | 4(a)                |       | Copy of Composite Indenture dated as of October 1,  1935, between DP&L and The Bank of New York, Trustee with all amendments  through the Twenty-Ninth Supplemental Indenture |       | Exhibit 4(a) to Report on Form 10-K for the year  ended December 31, 1985 (File No. 1-2385)   |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |
| X        |       | X            |       | 4(b)                |       | Copy of Forty-First Supplemental Indenture dated as  of February 1, 1999, between DP&L and The Bank of New York, Trustee                                                      |       | Exhibit 4(m) to Report on Form 10-K for the year  ended December 31, 1998 (File No. 1-2385)   |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |
| X        |       | X            |       | 4(c)                |       | Copy of Forty-Second Supplemental Indenture dated as  of September 1, 2003, between DP&L and The Bank of New York, Trustee                                                    |       | Exhibit 4(r) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-2385)   |
|     |       |         |       |                |       |                                                                                                                                                                              |       |                                                                                          |

 

107

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| X      |   | X      |   | 4(d)   |   | Copy of Forty-Third Supplemental Indenture dated as  of August 1, 2005, between DP&L and The Bank of New York, Trustee                                                                    |   | Exhibit 4.4 to Report on Form 8-K filed on August  24, 2005 (File No. 1-2385)               |
|--------|--------|--------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   | X      |   | 4(e)   |   | Copy of Rights Agreement between DPL Inc. and Equiserve  Trust Company, N.A.                                                                                                                  |   | Exhibit 4 to Report on Form 8-K dated September 25,  2001 (File No. 1-9052)                 |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   |   |   | 4(f)   |   | Copy of Securities Purchase Agreement dated as of  February 1, 2000 by and among DPL Inc. and DPL Capital Trust I, Dayton  Ventures LLC and Dayton Ventures Inc. and certain exhibits thereto |   | Exhibit 99(b) to Schedule TO-I dated February 4,  2000 (File No. 1-9052)                    |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   |   |   | 4(g)   |   | Amendment to Securities Purchase Agreement dated as  of February 24, 2000 among DPL Inc., DPL Capital Trust I, Dayton Ventures LLC  and Dayton Ventures, Inc.                                 |   | Exhibit 4(g) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   |   |   | 4(h)   |   | Copy of Warrant Form initially issued as of February  1, 2000                                                                                                                                 |   | Exhibit 4(h) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   |   |   | 4(i)   |   | Securityholders and Registration Rights Agreement  dated as of February 1, 2000 among DPL Inc., DPL Capital Trust I, Dayton  Ventures LLC and Dayton Ventures, Inc.                           |   | Exhibit 4(i) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   |   |   | 4(j)   |   | Amendment to Securityholders and Registration Rights  Agreement, dated August 24, 2001 among DPL Inc., DPL Capital Trust I, Dayton  Ventures LLC and Dayton Ventures, Inc.                    |   | Exhibit 4(j) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   |   |   | 4(k)   |   | Amendment to Securityholders and Registration Rights  Agreement, dated December 6, 2004 among DPL Inc., DPL Capital Trust I, Dayton  Ventures LLC and Dayton Ventures, Inc.                   |   | Exhibit 4(k) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |
| X      |   |   |   | 4(l)   |   | Amendment to Securityholders and Registration Rights  Agreement, dated January 12, 2005 among DPL Inc., DPL Capital Trust I, Dayton  Ventures LLC and Dayton Ventures, Inc                    |   | Exhibit 4(j) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                          |   |                                                                                        |

 

 

108

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| X      |   | X      |   | 4(m)   |   | Copy of Credit Agreement dated as of June 1, 2004  between The Dayton Power and Light Company, KeyBank National Association (as  administrative agent and lead arranger) and the lending institutions named  therein     |   | Exhibit 4(ee) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-2385) |
|--------|--------|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   | X      |   | 4(n)   |   | Copy of Credit Agreement dated as of May 31, 2005  between The Dayton Power and Light Company, KeyBank National Association (as  administrative agent and lead arranger) and the lending institutions named  therein     |   | Exhibit 10.1 to Form 8-K filed on June 28, 2005  (File No. 1-9052)                           |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(o)   |   | Officer’s Certificate of DPL Inc. establishing $175  million Senior Note due 2009, dated March 25, 2004                                                                                                             |   | Exhibit 4.1 to Form 8-K, filed on March 29, 2004  (File No. 1-9052)                          |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(p)   |   | Exchange and Registration Rights Agreement dated  March 25, 2004 between DPL Inc. and the purchasers                                                                                                                     |   | Exhibit 4.2 to Form 8-K, filed on March 29, 2004  (File No. 1-9052)                          |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(q)   |   | Indenture dated as of March 1, 2000 between DPL Inc.  and Bank One Trust Company, National Association                                                                                                                   |   | Exhibit 4(b) to Registration Statement No. 333-37972                                         |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(r)   |   | Officer’s Certificate of DPL Inc. establishing  exchange notes, dated March 1, 2000                                                                                                                                 |   | Exhibit 4(c) to Registration Statement No. 333-37972                                         |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(s)   |   | Exchange and Registration Rights Agreement dated as  of August 24, 2001 between DPL Inc., Morgan Stanley & Co., Incorporated,  Bank One Capital Markets, Inc., Fleet Securities, Inc. and NatCity  Investments, Inc. |   | Exhibit 4(a) to Registration Statement No. 333-74568                                         |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(t)   |   | Officer’s Certificate of DPL Inc. establishing  exchange notes, dated August 31, 2001                                                                                                                               |   | Exhibit 4(c) to Registration Statement No. 333-74568                                         |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(u)   |   | Indenture dated as of August 31, 2001 between DPL  Inc. and The Bank of New York, Trustee                                                                                                                                |   | Exhibit 4(a) to Registration Statement No. 333-74630                                         |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |
| X      |   |   |   | 4(v)   |   | First Supplemental Indenture dated as of August 31,  2001 relating to the subordinated debentures between DPL Inc. and The Bank of  New York                                                                             |   | Exhibit 4(b) to Registration Statement No. 333-74630                                         |
|   |   |   |   |   |   |                                                                                                                                                                                                                     |   |                                                                                         |

 

109

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| X      |   |   |   | 4(w)   |   | Amended and Restated Trust Agreement dated as of  August 31, 2001 relating to DPL Capital Trust II, the Capital Securities and  the Common Securities among DPL Inc., the depositor, The Bank of New York, as  property trustee, The Bank of New York (Delaware) |   | Exhibit 4(c) to Registration Statement No. 333-74630                                         |
|--------|--------|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |
|   |   | X      |   | 4(x)   |   | Forty Fourth Supplemental Indenture to the First and  Refunding Mortgage, dated as of September 1, 2006 between the Bank of New  York, as trustee and The Dayton Power and Light Company                                                                         |   | Exhibit 4.2 to Form 8-K filed on September 19, 2006  (File No. 1-2385)                       |
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |
| X      |   |   |   | 4(y)   |   | Exchange and Registration Rights Agreement dated as  of August 24, 2001 among DPL Inc., DPL Capital Trust II and Morgan Stanley  & Co., Incorporated                                                                                                         |   | Exhibit 4(d) to Registration Statement No. 333-74630                                         |
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |
| X      |   | X      |   | 10(a)* |   | Copy of Directors’ Deferred Stock Compensation Plan  amended December 31, 2000                                                                                                                                                                              |   | Exhibit 10(a) to Report on Form 10-K for the year  ended December 31, 2000 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |
| X      |   | X      |   | 10(b)* |   | Copy of Directors’ 1991 Amended Deferred  Compensation Plan as amended through December 31, 2000                                                                                                                                                            |   | Exhibit 10(b) to Report on Form 10-K for the year  ended December 31, 2000 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |
| X      |   | X      |   | 10(c)* |   | Amendment No. 1 to Directors’ 1991 Amended Deferred  Compensation Plan as amended through December 31, 2000 and dated as of  December 7, 2004                                                                                                               |   | Exhibit 10(c) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |
| X      |   | X      |   | 10(d)* |   | Copy of Management Stock Incentive Plan amended  December 31, 2000                                                                                                                                                                                               |   | Exhibit 10(c) to Report on Form 10-K for the year  ended December 31, 2000 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |
| X      |   | X      |   | 10(e)* |   | Amendment No. 1 to Management Stock Incentive Plan  amended December 31, 2000 and dated as of December 7, 2004                                                                                                                                                   |   | Exhibit 10(e) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                                                             |   |                                                                                         |

 

110

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| X      |   | X      |   | 10(f)* |   | Copy of Key Employees Deferred Compensation Plan  amended December 31, 2000                                             |   | Exhibit 10(d) to Report on Form 10-K for the year  ended December 31, 2000 (File No. 1-9052) |
|--------|--------|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(g)* |   | Amendment No. 1 to Key Employees Deferred  Compensation Plan amended December 31, 2000 and dated as of December 7, 2004 |   | Exhibit 10(g) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(h)* |   | Copy of Supplemental Executive Retirement Plan  amended February 1, 2000                                                |   | Exhibit 10(e) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-2385) |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(i)* |   | Amendment No. 1 to Supplemental Executive Retirement  Plan amended February 1, 2000 and dated as of December 7, 2004    |   | Exhibit 10(i) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(j)* |   | Copy of Stock Option Plan                                                                                               |   | Exhibit 10(f) to Report on Form 10-K for the year  ended December 31, 2000 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(k)* |   | 2003 Long-Term Incentive Plan of DPL Inc. dated as  of January 20, 2003                                                 |   | Exhibit 10(aa) to Report on Form 10-K for the year  ended December 31,2003 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   |   |   | 10(l)* |   | Summary of Executive Life Insurance Plan                                                                                |   | Exhibit 10(l) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   |   |   | 10(m)* |   | Summary of Executive Medical Insurance Plan                                                                             |   | Exhibit 10(m) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(n)* |   | DPL Inc. Executive Incentive Compensation Plan                                                                          |   | Exhibit 10.1 to Form 8-K/A filed on March 2, 2006  (File No. 1-9052)                         |
|   |   |   |   |   |   |                                                                                                                    |   |                                                                                         |
| X      |   |   |   | 10(o)* |   | DPL Inc. Executive Incentive Compensation Plan and  Schedule A as amended September 5, 2006                             |   | Exhibit 10.3 to Form 8-K filed on September 8, 2006  (File No. 1-9052)                       |

 

 

111

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| X      |   | X      |   | 10(p)* |   | DPL Inc. 2006 Equity and Performance Incentive Plan                                                                                                                              |   | Exhibit 10.2 to Form 8-K/A filed on March 2, 2006  (File No. 1-9052)                     |
|--------|--------|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   | X      |   | 10(q)* |   | Form of the Long-Term Incentive Plan - Performance  Shares Agreement                                                                                                             |   | Exhibit 10.3 to Form 8-K/A filed on March 2, 2006  (File No. 1-9052)                     |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   | X      |   | 10(r)* |   | DPL Inc. Severance Pay and Change of Control Plan                                                                                                                                |   | Exhibit 10.4 to Form 8-K/A filed on March 2, 2006  (File No. 1-9052)                     |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   | X      |   | 10(s)* |   | DPL Inc. Supplemental Executive Defined Contribution  Retirement Plan                                                                                                            |   | Exhibit 10.5 to Form 8-K/A filed on March 2, 2006  (File No. 1-9052)                     |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   |   |   | 10(t)* |   | DPL Inc. 2006 Deferred Compensation Plan For  Executives                                                                                                                         |   | Exhibit 10.2 to Form 8-K filed on September 25, 2006  (File No. 1-9052)                  |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   |   |   | 10(u)* |   | DPL Inc. Pension Restoration Plan                                                                                                                                                |   | Exhibit 10.3 to Form 8-K filed on September 25, 2006  (File No. 1-9052)                  |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   | X      |   | 10(v)* |   | Letter Agreement dated as of September 20, 2004 and  Management Stock Option Agreement, as amended, dated as of October 5, 2004,  between DPL Inc. and Robert D. Biggs           |   | Exhibits 10.2 and 10.3 to Report on Form 8-K filed  on October 8, 2004 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   | X      |   | 10(w)* |   | Amended and Restated Employment Agreement Dated as  of August 31, 2005 effective as of January 1, 2005 between DPL Inc., The  Dayton Power and Light Company and Robert D. Biggs |   | Exhibit 10.1 to Report on Form 8-K filed on  September 2, 2005 (File No. 1-9052)         |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |
| X      |   | X      |   | 10(x)* |   | Management Stock Option Agreement dated as of August  31, 2005 between DPL Inc. and Robert D. Biggs                                                                              |   | Exhibit 10.2 to Report on Form 8-K filed on  September 2, 2005 (File No. 1-9052)         |
|   |   |   |   |   |   |                                                                                                                                                                             |   |                                                                                     |

 

112

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| X      |   | X      |   | 10(y)*  |   | Employment agreement dated as of January 3, 2003,  between DPL Inc., The Dayton Power and Light Company and James V. Mahoney                                                                                                            |   | Exhibit 10(j) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-9052) |
|--------|--------|--------|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(z)*  |   | Change of Control Agreement dated as of January 3,  2003, between DPL Inc., The Dayton Power and Light Company and James V.  Mahoney and Management Stock Option Agreement dated January 3, 2003 between  DPL Inc. and James V. Mahoney |   | Exhibit 10(o) to Report on Form 10-K for the year  ended December 31, 2003 (File No.1-9052)  |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(aa)* |   | Employment agreement dated as of December 21, 2004  between DPL Inc., The Dayton Power and Light Company and James V. Mahoney                                                                                                           |   | Exhibit 10.1 to Form 8-K filed on December 28, 2004  (File No. 1-9052)                       |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(bb)* |   | Participation Agreement and Waiver among DPL Inc.,  The Dayton Power and Light Company and James V. Mahoney, dated March 7, 2006                                                                                                        |   | Exhibit 10.1 to Form 8-K filed on March 10, 2006  (File No. 1-9052)                          |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(cc)* |   | Employment Agreement dated as of May 18, 2006 among  DPL Inc., The Dayton Power and Light Company and James V. Mahoney                                                                                                                  |   | Exhibit 10.1 to Form 8-K filed on May 24, 2006 (File  No. 1-9052)                            |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(dd)* |   | Amendment of Employment Agreement dated as of July  31, 2006 between James V. Mahoney, DPL Inc. and The Dayton Power and Light  Company                                                                                                 |   | Exhibit 10.5 to Report on Form 10-Q filed August 1,  2006 (File No. 1-9052)                  |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(ee)* |   | Employment agreement dated as of December 14, 2004  between DPL Inc., The Dayton Power and Light Company and John J. Gillen                                                                                                             |   | Exhibit 10.2 to Form 8-K filed on December 28, 2004  (File No. 1-9052)                       |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(ff)* |   | Management Stock Option Agreement dated as of  December 29, 2004 between DPL Inc. and John J. Gillen                                                                                                                                    |   | Exhibit 10(u) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(gg)* |   | Participation Agreement and Waiver dated June 29,  2006 between DPL Inc., The Dayton Power and Light Company and John J. Gillen                                                                                                         |   | Exhibit 10.2 to Form 8-K filed on July 3, 2006 (File  No. 1-9052)                            |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(hh)* |   | Employment agreement dated as of September 17, 2003,  between DPL Inc. and W. Steven Wolff                                                                                                                                              |   | Exhibit 10(k) to Report on Form 10-K for the year  ended December 31, 2003 (File No.1-9052)  |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |
| X      |   | X      |   | 10(ii)* |   | Change of Control Agreement dated as of September  10, 2004, between DPL Inc., The Dayton Power and Light Company and W. Steven  Wolff                                                                                                  |   | Exhibit 10(dd) to Report on Form 8-K filed September  23, 2004 (File No. 1-9052)             |
|   |   |   |   |    |   |                                                                                                                                                                                                                                    |   |                                                                                         |

 

113

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| X      |   | X      |   | 10(jj)* |   | Participation Agreement and Waiver among DPL Inc.,  The Dayton Power and Light Company and W. Steven Wolff, dated February 24,  2006                                                                                                          |   | Exhibit 10.7 to Form 8-K filed on March 2, 2006  (File No. 1-9052)                            |
|--------|--------|--------|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(kk)* |   | Employment Agreement dated as of December 17, 2003  between DPL Inc. and Patricia K. Swanke                                                                                                                                                   |   | Exhibit 10(l) to Report on Form 10-K for the year  ended December 31, 2003 (File No.1-9052)   |
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(ll)* |   | Change of Control Agreement dated as of July 1, 2004  between DPL Inc., The Dayton Power and Light Company and Patricia K. Swanke  and Management Stock Option Agreement dated as of January 1, 2001 between DPL  Inc. and Patricia K. Swanke |   | Exhibit 10(s) to Report on Form 10-K for the year  ended December 31, 2004 (File No. 1-9052)  |
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(mm)* |   | Participation Agreement and Waiver among DPL Inc.,  The Dayton Power and Light Company and Patricia K. Swanke, dated February 28,  2006                                                                                                       |   | Exhibit 10.6 to Form 8-K filed on March 2, 2006  (File No. 1-9052)                            |
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(nn)* |   | Employment Agreement and Change of Control Agreement  dated as of September 17, 2004 between DPL Inc., The Dayton Power and Light  Company and Gary Stephenson                                                                                |   | Exhibit 10(ee) to Report on Form 8-K filed on  September 23, 2004 (File No. 1-9052)           |
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(oo)* |   | Employment agreement dated as of June 9, 2003, as  amended by attached letter dated October 18, 2004, between DPL Inc., The  Dayton Power and Light Company and Miggie E. Cramblit                                                            |   | Exhibit 10(gg) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-9052) |
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(pp)* |   | Change of Control Agreement dated as of December 15,  2000 between DPL Inc., The Dayton Power and Light Company and Arthur G. Meyer                                                                                                           |   | Exhibit 10(bb) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(qq)* |   | Management Stock Option Agreement dated as of  January 1, 2001 between DPL Inc. and Arthur G. Meyer                                                                                                                                           |   | Exhibit 10(cc) to Report on Form 10-K for the year  ended December 31, 2005 (File No. 1-9052) |
|   |   |   |   |    |   |                                                                                                                                                                                                                                          |   |                                                                                          |
| X      |   | X      |   | 10(rr)* |   | Participation Agreement and Waiver among DPL Inc.,  The Dayton Power and Light Company and Arthur G. Meyer, dated March 6, 2006                                                                                                               |   | Exhibit 10.2 to Form 8-K filed on March 10, 2006  (File No. 1-9052)                           |

 

 

114

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| X      |   |   |   | 10(ss)* |   | Participation Agreement dated September 8, 2006  between DPL Inc., The Dayton Power and Light Company and Paul M. Barbas                                        |   | Exhibit 10.2 to Form 8-K filed on September 8, 2006  (File No. 1-9052) |
|--------|--------|--------|--------|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   | X      |   | 10(tt)* |   | Participation Agreement dated June 30, 2006 between  DPL Inc., The Dayton Power and Light Company and Frederick J. Boyle                                        |   | Exhibit 10.1 to Form 8-K filed on July 3, 2006 (File  No. 1-9052)      |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   |   |   | 10(uu)* |   | Letter Agreement between DPL Inc. and Glenn E.  Harder, dated as of June 20, 2006                                                                               |   | Exhibit 10.1 to Form 8-K filed on June 20, 2006  (File No. 1-9052)     |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   |   |   | 10(vv)  |   | Purchase and Sale Agreement dated as of February 13,  2005 between MVE, Inc., Miami Valley Insurance Company and AlpInvest/Lexington  2005, LLC                 |   | Exhibit 10.1 to Form 8-K filed on February 18, 2005  (File No. 1-9052) |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   |   |   | 10(ww)  |   | Asset Purchase Agreement dated as of December 21,  2006 between DPL Energy, LLC and Buckeye Power, Inc.                                                         |   | Filed herewith as Exhibit 10(ww)                                       |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   |   |   | 10(xx)  |   | Asset Purchase Agreement dated as of November 28,  2006 between DPL Energy, LLC and Columbus Southern Power Company                                             |   | Filed herewith as Exhibit 10(xx)                                       |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
|   |   | X      |   | 10(yy)  |   | Revolving Credit Agreement, dated as of November 21,  2006 between KeyBank N.A., JPMorgan Chase, N.A., Fifth Third Bank and The  Dayton Power and Light Company |   | Exhibit 10.1 to Form 8-K filed on November 28, 2006  (File No. 1-2385) |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   | X      |   | 10(zz)  |   | Form of the Long-Term Incentive Plan — Performance  Shares Agreement as amended February 20, 2007                                                     |   | Filed herewith as Exhibit 10(zz)                                       |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   | X      |   | 18      |   | Copy of preferability letter relating to change in  accounting for unbilled revenues from Price Waterhouse LLP                                                  |   | Exhibit 10.1 to Form 8-K filed on February 18, 2005  (File No. 1-9052) |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   | X      |   | 21      |   | List of Subsidiaries of DPL Inc.                                                                                                                                |   | Filed herewith as Exhibit 21                                           |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| X      |   |   |   | 23(a)   |   | Consent of KPMG LLP                                                                                                                                             |   | Filed herewith as Exhibit 23(a)                                        |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |
| 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)                                        |
|   |   |   |   |    |   |                                                                                                                                                            |   |                                                                   |

 

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| 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)                                                              |
|   |   |   |   |   |   |                                                                                                                                                                                                                            |   |                                                                                         |
| X      |   | X      |   | 99(a)  |   | Report of Taft, Stettinius & Hollister LLP,  dated April 26, 2004                                                                                                                                                           |   | Exhibit 99(a) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                            |   |                                                                                         |
| X      |   | X      |   | 99(b)  |   | Supplement to the April 26, 2004 Report of Taft,  Stettinius & Hollister LLP, dated May 15, 2004                                                                                                                            |   | Exhibit 99(b) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                            |   |                                                                                         |
| X      |   | X      |   | 99(c)  |   | Complaint filed in Montgomery County Court of Common  Pleas, Montgomery County, Ohio — DPL Inc., The Dayton Power and Light Company  and MVE, Inc. v. Peter H. Forster, Caroline E. Muhlenkamp and Stephen F.  Koziar, Jr. |   | Exhibit 99(d) to Report on Form 10-K for the year  ended December 31, 2003 (File No. 1-9052) |
|   |   |   |   |   |   |                                                                                                                                                                                                                            |   |                                                                                         |

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*                    Managementcontract or compensatory plan

(1)             Exhibitsreferencing File No. 1-9052 have been filed by DPL Inc. and those referencingFile No. 1-2385 have been filed by The Dayton Power and Light Company

Pursuant to paragraph (b)(4) (iii) (A) of Item 601 of Regulation S-K, we have not filed as an exhibit tothis Form 10-K certain instruments with respect to long-term debt if the totalamount of securities authorized thereunder does not exceed 10% of the totalassets of us and our subsidiaries on a consolidated basis, but we hereby agreeto furnish to the SEC on request any such instruments.

 

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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.**                                                                         |
|-------------------|--------|------------|--------------------------------------------------------------------------------------|
|              |   | ** ** | ** **                                                                           |
|              |   | ** ** | ** **                                                                           |
|              |   | ** ** | ** **                                                                           |
| February 22, 2007 | By:    |       | /s/ Paul M. Barbas                                                                   |
|              |   |       | Paul M. Barbas  President and Chief Executive Officer  (principal executive officer) |

 

 
|                   |   | ** ** | The Dayton Power and Light Company                                                   |
|-------------------|--------|------------|--------------------------------------------------------------------------------------|
|              |   | ** ** | ** **                                                                           |
|              |   | ** ** | ** **                                                                           |
|              |   | ** ** | ** **                                                                           |
| February 22, 2007 | By:    |       | /s/ Paul M. Barbas                                                                   |
|              |   |       | Paul M. Barbas  President and Chief Executive Officer  (principal executive officer) |

 

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Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of **DPL Inc.** and**The Dayton Power andLight Company** and in the capacities and on the dates indicated.
| /s/ R. D. Biggs       |   | Director                                                                        |   | February 22, 2007 |
|-----------------------|--------|---------------------------------------------------------------------------------|--------|-------------------|
| (R. D. Biggs)         |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ P. R. Bishop      |   | Director                                                                        |   | February 22, 2007 |
| (P. R. Bishop)        |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ B. S. Graham      |   | Director                                                                        |   | February 22, 2007 |
| (B. S. Graham)        |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ E. Green          |   | Director                                                                        |   | February 22, 2007 |
| (E. Green)            |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ G.E. Harder       |   | Director and Non-Executive Chairman                                             |   | February 22, 2007 |
| (G. E. Harder)        |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ W A.  Hillenbrand |   | Director and Vice-Chairman                                                      |   | February 22, 2007 |
| (W A.  Hillenbrand)   |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ L.L. Lyles        |   |                                                                            |   |              |
| (L. L. Lyles)         |   | Director                                                                        |   | February 22, 2007 |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ P.M. Barbas       |   | Director, President and Chief                                                   |   | February 22, 2007 |
| (P.M. Barbas)         |   | Executive Officer (principal executive officer)                                 |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ N.J.  Sifferlen   |   |                                                                            |   |              |
| (N.J. Sifferlen)      |   | Director                                                                        |   | February 22, 2007 |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ J. J. Gillen      |   | Senior Vice President and                                                       |   | February 22, 2007 |
| (J. J. Gillen)        |   | Chief Financial Officer (principal financial and  principal accounting officer) |   |              |
|                  |   |                                                                            |   |              |
|                  |   |                                                                            |   |              |
| /s/ F.J. Boyle        |   | Corporate Controller and                                                        |   | February 22, 2007 |
| (F.J. Boyle)          |   | Chief Accounting Officer                                                        |   |              |

 

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**ScheduleII**

DPL Inc.

VALUATION ANDQUALIFYING ACCOUNTS

For the years ended December 31, 2004-2006
| $ in thousands                 | ** ** | ** **                                     | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                                   | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|---------------|------------|---------------------|------------|----------------------------------------------|------------|
| **Description**                          | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions** | ** ** | **Deductions  (1)** | ** ** | **Balance at  End of Period** | ** ** |
|                                     |       |                                           |       |          |       |                |       |                                         |       |
| 2006:                                    |       |                                           |       |          |       |                |       |                                         |       |
| Deducted from accounts  receivable— |       |                                           |       |          |       |                |       |                                         |       |
| ** **                               | ** ** | ** **                                     | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                                   | ** ** |
| Provision for  uncollectible accounts    |       | $                                              | 1,044      |          | $          | 4,835               |       | $                                            | 4,449      |   | $ | 1,430 |   |
| ** **                               |       |                                           |       |          |       |                |       |                                         |       |
| 2005:                                    |       |                                           |       |          |       |                |       |                                         |       |
| Deducted from accounts  receivable— |       |                                           |       |          |       |                |       |                                         |       |
|                                     |       |                                           |       |          |       |                |       |                                         |       |
| Provision for  uncollectible accounts    |       | $                                              | 1,085      |          | $          | 3,582               |       | $                                            | 3,623      |   | $ | 1,044 |   |
|                                     |       |                                           |       |          |       |                |       |                                         |       |
|                                     |       |                                           |       |          |       |                |       |                                         |       |
| 2004:                                    |       |                                           |       |          |       |                |       |                                         |       |
| Deducted from accounts  receivable— |       |                                           |       |          |       |                |       |                                         |       |
|                                     |       |                                           |       |          |       |                |       |                                         |       |
| Provision for  uncollectible accounts    |       | $                                              | 6,003      |          | $          | 3,371               |       | $                                            | 8,289      |   | $ | 1,085 |   |

 

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*(1)**       Amounts written off, net ofrecoveries of accounts previously written off.*

 

The Dayton Power andLight Company

VALUATION ANDQUALIFYING ACCOUNTS

For the years ended December 31, 2004-2006
| $ in thousands                 | ** ** | ** **                                     | ** ** | ** **    | ** **   | ** **         | ** ** | ** **                                   | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|---------------|--------------|--------------------|------------|----------------------------------------------|------------|
| **Description**                          | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions** | *** *** | **Deductions (1)** | ** ** | **Balance at  End of Period** | ** ** |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
| 2006:                                    |       |                                           |       |          |         |               |       |                                         |       |
| Deducted from accounts  receivable— |       |                                           |       |          |         |               |       |                                         |       |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
| Provision for  uncollectible accounts    |       | $                                              | 1,044      |          | $            | 4,835              |       | $                                            | 4,449      |   | $ | 1,430 |   |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
| 2005:                                    |       |                                           |       |          |         |               |       |                                         |       |
| Deducted from accounts  receivable— |       |                                           |       |          |         |               |       |                                         |       |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
| Provision for  uncollectible accounts    |       | $                                              | 1,085      |          | $            | 3,582              |       | $                                            | 3,623      |   | $ | 1,044 |   |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
| 2004:                                    |       |                                           |       |          |         |               |       |                                         |       |
| Deducted from accounts  receivable— |       |                                           |       |          |         |               |       |                                         |       |
|                                     |       |                                           |       |          |         |               |       |                                         |       |
| Provision for  uncollectible accounts    |       | $                                              | 3,617      |          | $            | 885                |       | $                                            | 3,417      |   | $ | 1,085 |   |
|                                     |       |                                           |       |          |         |               |       |                                         |       |

 

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*(1)Amounts written off, net of recoveries of accounts previously written off.*

119

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