4. The Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149") and Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150") during the second quarter of 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including those embedded in other contracts, and for hedging activities and is effective for contracts entered into or modified after June 30, 2003. This standard is not expected to have a material impact on the Company. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with both liability and equity characteristics. This standard, which is effective at the beginning of the third quarter of 2003, is not expected to have an effect on the Company at this time.

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4.5. The Company adopted the provisions of the Financial Accounting Standard Board’s (“FASB”Standards Board's ("FASB") Statement of Financial Accounting Standards No. 143, “Accounting"Accounting for Asset Retirement Obligations” (“Obligations" ("SFAS No. 143”143") as of January 1, 2003. SFAS No. 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. SFAS No. 143 also requires that components of previously recorded depreciation related to the cost of removal of assets upon retirement, whether legal asset retirement obligations or not, must be removed from a company’scompany's accumulated depreciation reserve. The Company’sCompany's legal obligations associated with the retirements of its long-lived assets consist primarily of river intake and discharge structures, coal unloading facilities, loading docks, ice breakers, and ash disposal facilities. Application of SFAS No. 143 in 2003 resulted in

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an increase in net property, plant and equipment of $0.8 million, the recognition of an asset retirement obligation of $4.6 million and reduced the Company’sCompany's accumulated depreciation reserve by $32.1 million. If the new accounting rules had been adopted on January 1, 2002, the asset retirement obligation would have approximated $4.3 million. Beginning in January 2003, depreciation rates were reduced to reflect the discontinuation of the cost of removal accrual for applicable non-regulated generation assets. This change will reduce annual depreciation and amortization expense by $1.9 million. On a pro forma basis, the impact for the quarter and six-month period ended March 31,June 30, 2002 would have been $0.3 million and $0.6 million, respectively, after tax. In addition, costs for the removal of retired assets are charged to operation and maintenance when incurred. Since the generation assets are not subject to Ohio regulation, the Company recorded the net effect of adopting this standard in its Consolidated Statement of Results of Operations. The total cumulative effect of the adoption of SFAS No. 143 increased earnings on common stock and shareholder’sshareholder's equity by $28.3 million before tax.

5.6. On January 1, 2003, the Company began accounting for DPL stock options under the fair value method set forth in FASB Statement of Financial Accounting Standards No. 123, “Accounting"Accounting for Stock-Based Compensation (“Compensation" ("SFAS No. 123”123").” This standard requires the recognition of compensation expense for stock-based awards to reflect the fair value of the award on the date of grant. The Company previously followed Accounting Principles Board Opinion No. 25, “Accounting"Accounting for Stock Issued to Employees” (“Employees" ("APB 25”25") and related Accounting Principles Board and FASB interpretations in accounting for DPL stock options granted to its employees. The Company has adopted SFAS No. 123 on a prospective basis for all grants issued after January 1, 2003. If the Company had used a fair-value method of accounting for stock-based compensation cost related to DPL stock options granted prior to 2003, earnings on common stock would have been reported as follows:

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6.     DPL’s7. DP&L's transmission and distribution and base load and peaking generation operations are managed and evaluated as a single operating segment, “Electric.”"Electric."

(a) Includes unallocated corporate items.

8. Net intercompany receivables consist primarily of $36 million due from a wholly owned captive insurance subsidiary of DPL that provides insurance coverage solely to DPL and its subsidiaries, for the settlement of claims under the business interruption policy (see "Other Matters").

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Item 2.Management’s Management's Discussion and Analysis of Financial Condition and Results of Operations

The Dayton Power and Light Company (“("DP&L”&L" or “the Company”the "Company") reported earnings on common stock of $44.1 million for the second quarter of 2003 compared to $55.7 million for the second quarter of 2002. Results for the current quarter included reduced operating income of $25.4 million primarily from lower retail sales resulting from mild weather and increased operation and maintenance expenses. The decline in retail sales was partially offset by an increase in wholesale sales for the quarter. Earnings on common stock for the second quarter of 2002 reflected lower operation and maintenance expenses as discussed below.

For the six months ended June 30, 2003, the Company reported earnings on common stock before the cumulative effect of an accounting change of $63.8$107.9 million compared to $108.1 million for the first quarter of 2003, an increase of 22% over earnings on common stock of $52.4 million for the first quarter ofsix months ending June 30, 2002. The earnings improvement was primarily attributable to higher retailRetail and wholesale sales and margins.combined grew 1% over the same period last year while revenues grew 3%. Results for the current six months included increased operating income of $2.5 million primarily as a result of increased wholesale sales. The cumulative effect of an accounting change in the current quarter of $17.0 million after tax resulted from the adoption of a new accounting standard for asset retirement obligations.obligations in 2003.

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Income Statement Highlights

IncreasedRetail electric revenues resulteddecreased $28.8 million in the second quarter due to reduced sales resulting from increasesmild weather. This was significantly offset by a $21.2 million increase in bothwholesale revenues resulting from the sale of available generating capacity into the wholesale market at favorable market rates. For the six months ended June 2003, electric retail revenues were down $24.3 million primarily because of mild summer temperatures while wholesale revenues increased $40.1 million from higher market rates and a 6% gain in sales.

For the three months ended June 30, 2003, fuel costs increased slightly by $0.8 million due to lower retail sales and the use of internal generation to support increased wholesale sales. Purchased power costs were $3.6 million higher in the second quarter reflecting higher market prices and increased wholesale sales. Fuel costs increased $8.9 million or 9% in the six month period primarily from increased generation output. Purchased power costs dropped $9.5 million or 17% reflecting the use of internal generation to support retail and wholesale revenues.  Retail residential revenuessales.

Operation and maintenance expense increased $10.8$14.7 million or 9%in the second quarter and $12.8 million in the six months ended June 30, 2003, primarily as a result of higher sales volume drivenoperating plant costs associated with the increase in production and the expensing of cost of removal for retired assets required by colder weather as comparedthe Financial Accounting Standard Board's ("FASB") Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS No. 143") effective January 1, 2003. Higher corporate costs including increased insurance premiums also contributed to 2002 with heating degree days of 3,193the variation in both periods.

Depreciation and amortization expense decreased $0.7 million or 1% in the first quarter of 2003 compared to 2,563 in the first quarter last year.  Wholesale capacity and energy revenues increased $19.0 million or 73%six month period primarily as a result of increased operating output at the Company’s generating units and higher average wholesale electric commodity prices.  Fuel costs increased $8.1 million or 17% as a resultadoption of increased production and higher plant availability.  Purchased power costs decreased $13.1 million or 40% as a resultSFAS No. 143 which required the elimination of lower purchased power volumesthe cost of removal accrual component of depreciation rates. This accounting change offset the additional depreciation resulting from increased production and higher plant availability.

Operation and maintenance expense decreased $1.9 million or 5% primarily as a resultthe completion of lower employee benefits costs, including charges of $1.1 million incurred in the prior year for a union severance program.

selective catalytic reduction installations at certain facilities.

General taxes increased $2.4$1.8 million or 9%3% in the six month period primarily as a result of increased sales causing an increase in the Ohio kWh excise tax and increases in property base resulting in higher property tax expense, as well as property tax rate increases.

Other income decreased $9.3increased $6.5 million or 90%in the second quarter of 2003, primarily as a result of higher interest income, of $7.3 million recognized in the prior year for the business interruption insurance policy related to deregulation (see “Issuesreduced miscellaneous fees, and Financial Risks - Other Matters”).

Interest expense decreased $1.2 million or 9% higher capitalized interest for selective catalytic reduction installations in 2003.

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increased non-operating gains.

The cumulative effect of an accounting change reflects the Company’sCompany's adoption of the provisions of the Financial Accounting Standard Board’s (“FASB”) Statement of Financial Accounting StandardsSFAS No. 143 “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) as of January 1, 2003 (see Note 4 to the Consolidated Financial Statements).2003.

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Capital Resources and Requirements

Construction Program and Financing

Construction additionsCapital expenditures were $20$65.7 million for the first threesix months of 2003 and are expected to approximate $109 million for the year. Current year additions relate to the Company’sCompany's environmental compliance program, power plant equipment, and the installation of meters and distribution lines.

The Company’sCompany's scheduled maturities of long-term debt, including capital lease obligations, over the next three years are $0.3 million for the remainder of 2003 and $1.1 million each year.year for 2004 and 2005. The Company expects to finance its construction program and debt maturities in 2003 and 2004 with internal funds.

DPL and the Company have $50.0 million and $105.0 million, respectively, available through 364-day revolving credit agreements with a consortium of banks.  The primary purpose of these revolving credit facilities is to provide back-up liquidity for DPL’s and the Company’s commercial paper programs.  Current agreements, which expire in December of 2003, provide an appropriate amount of credit support for the Company’s business requirements over the remainder of the year.  At March 31, 2003, DPL and the Company had no outstanding borrowings under these credit agreements and no outstanding commercial paper balances.

The Company has $65.0 million available in short-term informal lines of credit.  Borrowings under these lines of credit were zero at March 31, 2003.

Fees associated with these revolving credit agreements and the Company’s lines of credit are approximately $0.3 million in total per year.

Issuance of additional amounts of first mortgage bonds by the Company is limited by provisions of its mortgage.  The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.  Themortgage, however, the Company currently hascontinues to have sufficient capacity to issue first mortgage bonds to satisfy its requirements in connection with its refinancing and construction programs duringthrough 2007. The amounts and timing of future financings depend upon market and other conditions, rate increases, levels of sales, and construction plans.

In May 2003, DPL announced plans to refinance significant amounts of its consolidated long-term debt to take advantage of favorable interest rates and to reduce long-term debt by $300 million over the five-year period 2003-2007.next 30 months. On July 24, 2003, the Company received authorization from the Public Utility Commission of Ohio ("PUCO") to issue up to $471 million of first mortgage bonds to refinance a portion of its outstanding first mortgage bonds.

In June 2003, Moody's Investors Service placed the debt ratings of the Company under review for possible downgrade. On July 30, 2003, Fitch Ratings reaffirmed the investment grade debt ratings for the Company. Also on July 30, 2003, Moody's Investor Service concluded their review and lowered the Company's debt rating.

As of July 30, 2003, the Company's senior secured debt credit ratings were as follows:

Debt ratings from the three rating agencies remain investment grade.

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The Company has $105.0 million available through a 364-day revolving credit agreement with a consortium of banks. The primary purpose of this revolving credit facility is to provide back-up liquidity for the Company's commercial paper program. This agreement, which expires in December of 2003, provides an appropriate amount of credit support for the Company's business requirements over the remainder of the year. At June 30, 2003, the Company had no outstanding borrowings under this credit facility and no outstanding commercial paper balance. Fees associated with this credit facility are approximately $0.2 million in total per year.

Market Risk

The Company’sCompany's financial results are affected by changes in electricity, coal, and gas commodity prices, increased competition, the effect of weather and economic conditions in the sales area on retail sales volume, financial market conditions, foreign currency market risk, and adverse economic conditions. SixEleven percent of the Company’s expected 2003 revenues areCompany's year-to-date revenue is from spot energy sales in the wholesale market.

Fuel and purchased power costs represented 42%41% and 43% of total operating costs in the first quartersix months of 2003 and for the year 2002, respectively. The Company has contracted for approximately 90%100% of its coal needs for 2003. Purchased power costs depend, in part, upon the timing and extent of planned and

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unplanned outages of the Company’sCompany's generating capacity. The Company does not anticipate significant purchasedwill purchase power needson a discretionary basis when wholesale market conditions provide opportunities to cover scheduled maintenance for the remainder of 2003.obtain power at a cost below its internal production costs. A 2% change in overallannual fuel and purchased power costs would result in aan approximate $3.5 million change in net income.

The carrying value of the Company’sCompany's debt was $667.0$665.9 million at December 31, 2002,June 30, 2003, consisting of the Company’sCompany's first mortgage bonds and guaranteed air quality development obligations. The fair value of this debt was $690.2$692.0 million at December 31, 2002,June 30, 2003, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The principal cash repayments and related weighted average interest rates by maturity date for long-term, fixed-ratefixed rate debt at December 31, 2002June 30, 2003 are as follows.follows:

At March 31,June 30, 2003, the Company had no short-term debt outstanding.

In May 2003, the Company entered into 60 day interest rate swaps designed to capture existing favorable interest rates in anticipation of future financings of $750 million first mortgage bonds. At June 30, 2003, the market value of these rate risk hedges resulted in an unrealized gain of $1.3 million ($0.8 million net of tax) and is reflected in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. These hedges were settled on July 28, 2003, at a final market value of $51.4 million and as a result the Company received this amount. The change in value over the end of the quarter was attributed to increasing U.S. Treasury interest rates. The ultimate effectiveness of the hedges will be amortized to interest expense over the life of any newly issued securities with any remaining market value recognized immediately in earnings.

Issues and Financial Risks

This report contains certain forward-looking statements regarding plans and expectations for the future. Investors are cautioned that actual outcomes and results may vary materially from those projected due to various factors beyond the Company’sCompany's control, including abnormal weather, unusual maintenance or repair requirements, changes in fuel costs, changes in commodity prices, increased competition, regulatory changes and decisions, changes in accounting rules, financial market conditions, foreign currency market risk, and adverse economic conditions.

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Other Matters

A wholly-ownedwholly owned captive insurance subsidiary of DPL provides insurance coverage solely to DPL and its subsidiaries including the Company. Premiums for coverage are determined by a third party actuary and charged to expense by the insured over the term of the policy. The Company has, among other coverages, business interruption and specific risk coverage with respect to environmental law and electric deregulation. “Insurance ClaimsIn 2001 and Costs” on DPL’s Consolidated Balance Sheet as2002, the Company recognized income of March 31, 2003$29 million and December 31, 2002 includes insurance reserves of approximately $76$7 million for based on actuarial methods and historical loss experience.  Such amounts are established based upon claims reportedrespectively relating to DPL and include estimates of losses for claims incurred but not reported based on past and current experience.  The liability is believed by management to be adequate to cover the ultimate net cost of losses to date; however, the liability is an estimate.  There is uncertainty associated with the occurrence of insured events and actual loss results could differ from the estimates.  Modification of these loss estimates based on experience and changed circumstances are reflected in the period in which the estimate is reevaluated.  As the outcome of electric deregulation becomes certain during the three-year regulatory transition period ending December 31, 2003, policy payments from the captive subsidiary to DP&L will occur and/or reserves of the captive insurance company will be adjusted and be reflected in DPL’s income.  As of March 31, 2003, a $36 million receivable has been recognized by DP&L for insurance its

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claims under itsthe business interruption policy. Of this amount, $7.3By agreement dated December 31, 2001, the insurance subsidiary agreed to pay the Company $29 million and $29.0 million were reported as other income inwith respect to claims under the first quarter of 2002business interruption policy, and in June 2003 agreed to pay the second halfCompany an additional $7 million, as a result of 2001, respectively.

which the Company released the insurance subsidiary from future obligations under the business interruption policy. At June 30, 2003, the Company has an intercompany receivable for $36 million.

On January 1, 2003, the Company began accounting for DPL stock options under the fair value method set forth in FASB Statement of Financial Accounting Standards No. 123, “Accounting"Accounting for Stock-Based Compensation (“("SFAS No. 123”123").”" This standard requires the recognition of compensation expense for stock-based awards to reflect the fair value of the award on the date of grant. The Company previously followed Accounting Principles Board Opinion No. 25, “Accounting"Accounting for Stock Issued to Employees” (“Employees" ("APB 25”25") and related Accounting Principles Board and FASB interpretations in accounting for DPLits employee stock options granted to its employees.options. The Company has adopted SFAS No. 123 on a prospective basis for all grants issued after January 1, 2003. The effect on compensation expense, if any, will depend on the timing, amount, and terms of future stock option awards. During the first quartersix months of 2003, there was no material effect.

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THE DAYTON POWER AND LIGHT COMPANY

OPERATING STATISTICS