DPL INC.

INDEX

Registrant   Description Shares Outstanding DPL Inc. Common Stock, $0.01 par value 113,553,444 The Dayton Power and Light Company Common Stock 41,172,173 This combined Form 10-Q is separately filed by DPL Inc. and The Dayton Power and Light Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to a registrant other than itself. DPL Inc. and The Dayton Power and Light Company Index Part I Financial Information Page No. Part I. Financial Information Item 1.1 Financial Statements — DPL and DP&L         Condensed Consolidated StatementsStatement of Results of Operations 3 Consolidated Statements of Cash Flows — DPL 4         Condensed Consolidated Balance SheetsStatement of Cash Flows — DPL 5         Notes toCondensed Consolidated Financial StatementsBalance Sheet — DPL 76         Condensed Consolidated Statement of Results of Operations — DP&L 8 Condensed Consolidated Statement of Cash Flows — DP&L 9 Condensed Consolidated Balance Sheet — DP&L 10 Notes to Condensed Consolidated Financial Statements 12 Item 2.2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 2136 Operating Statistics 35         Operating Statistics 57 Item 3.3 Quantitative and Qualitative Disclosures about Market Risk 3657       Item 4.4 Controls and Procedures 3657       Part II. II Other Information   Item 1. Legal Proceedings 37       Item 1A.1 Risk FactorsLegal Proceedings 3858       Item 1A Risk Factors 58   Item 6.2 Unregistered Sales of Equity Securities and Use of Proceeds 58 Item 3 Defaults Upon Senior Securities 59 Item 4 Submission of Matters to a Vote of Security Holders 59 Item 5 Other Information 59 Item 6 Exhibits 3959       Other     Signatures 40       Signatures 60 Certifications     2 Available Information: DPL Inc. (DPL, the and The Dayton Power and Light Company we, us, our, or ours unless the context indicates otherwise) files file current, annual and quarterly reports, proxy statements (as to DPL Inc.) and other information required by the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission (SEC). You may read and copy any document we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549, USA. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov. Our public Internetinternet site is 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 and 5 filed on behalf of our directors and executive officers and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, our public Internetinternet site includes other items related to corporate governance matters, including, among other things, our governance guidelines, charters of various committees of the Board of Directors and our code of business conduct and ethics applicable to all employees, officers and directors. You may obtain copies of these documents, free of charge, by sending a request, in writing, to DPL Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432. 2 Part I.1 — Financial Information This report includes the combined filing of DPL Inc. (DPL) and The Dayton Power and Light Company(DP&L). DP&L is the principal subsidiary of DPL providing approximately 99% of DPL’s total consolidated revenue and approximately 93% of DPL’s total consolidated asset base. Throughout this report, the terms we, us, our and ours are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section. Historically, DPL and DP&L have filed separate SEC filings. DPL and DP&L now file combined SEC reports on an interim and annual basis. 3 Item 1.1 — Financial Statements DPL INC. CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF RESULTS OF OPERATIONS $ in millions except per share amounts   Three Months Ended September 30,   Nine Months Ended September 30,       2007   2006   2007   2006   Revenues   $ 422.0   $ 392.4   $ 1,145.6   $ 1,042.5                       Cost of revenues:                   Fuel   95.9   99.4   250.5   262.2   Purchased power   82.1   61.1   217.5   123.4   Total cost of revenues   178.0   160.5   468.0   385.6   Gross margin   244.0   231.9   677.6   656.9                       Operating expenses:                   Operation and maintenance   67.3   64.4   198.1   197.4   Depreciation and amortization   33.9   39.1   102.9   114.2   General taxes   29.1   27.5   84.6   82.5   Amortization of regulatory assets   2.9   2.4   8.3   5.2   Total operating expenses   133.2   133.4   393.9   399.3   Operating income   110.8   98.5   283.7   257.6                       Other income / (expense), net                   Net gain on settlement of executive litigation   —   —   31.0   —   Investment income   1.2   3.0   9.5   13.9   Interest expense   (16.9 ) (24.9 ) (59.4 ) (77.1 ) Other income (deductions)   2.0   (0.2 ) 2.6   0.1   Total other income / (expense), net   (13.7 ) (22.1 ) (16.3 ) (63.1 ) Earnings from continuing operations before income tax   97.1   76.4   267.4   194.5   Income tax expense   36.4   29.0   101.9   73.2   Earnings from continuing operations   60.7   47.4   165.5   121.3   Earnings from discontinued operations, net of tax   —   3.4   10.0   11.0   Net income   $ 60.7   $ 50.8   $ 175.5   $ 132.3   Average number of common shares outstanding (millions)                   Basic   108.0   107.7   107.8   113.9   Diluted   115.4   117.4   118.1   123.3                       Earnings per share of common stock                   Basic:                   Earnings from continuing operations   $ 0.56   $ 0.44   $ 1.54   $ 1.06   Earnings from discontinued operations   —   0.03   0.09   0.10   Total Basic   $ 0.56   $ 0.47   $ 1.63   $ 1.16                       Diluted:                   Earnings from continuing operations   $ 0.53   $ 0.40   $ 1.40   $ 0.98   Earnings from discontinued operations   —   0.03   0.09   0.09   Total Diluted   $ 0.53   $ 0.43   $ 1.49   $ 1.07                       Dividends paid per share of common stock   $ 0.26   $ 0.25   $ 0.78   $ 0.75   See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 4 DPL INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS $ in millions   Nine Months Ended September 30,       2007   2006   Cash flows from operating activities:           Net income   $ 175.5   $ 132.3   Less: Income from discontinued operations   (10.0 ) (11.0 ) Income from continuing operations   165.5   121.3               Adjustments to reconcile net income to net cash provided by operating activities:           Depreciation and amortization   102.9   114.2   Gain on settlement of executive litigation   (31.0 ) —   Gain on sale of aircraft   (6.0 ) —   Amortization of regulatory assets   8.3   5.2   Deferred income taxes   12.1   (4.7 ) Captive insurance provision   1.5   —   Gain on sale of other investments   (3.0 ) (2.2 ) Changes in certain assets and liabilities:           Accounts receivable   (39.9 ) (32.8 ) Accounts payable   (0.8 ) 38.4   Accrued taxes payable   5.7   (11.8 ) Accrued interest payable   (11.4 ) (7.3 ) Prepayments   0.4   6.0   Inventories   (18.8 ) (7.6 ) Deferred compensation assets   6.9   1.3   Deferred compensation obligations   1.1   (0.3 ) Other   18.3   (7.3 ) Net cash provided by operating activities   211.8   212.4               Cash flows from investing activities:           Capital expenditures   (250.1 ) (283.9 ) Purchases of short-term investments and securities   —   (856.0 ) Sales of short-term investments and securities   —   984.0   Proceeds from the sale of peaking units, net   151.0   —   Proceeds from the sale of aircraft   7.4   —   Net cash used for investing activities   (91.7 ) (155.9 )             Cash flows from financing activities:           Purchase of treasury shares   —   (400.0 ) Issuance of pollution control bonds   —   100.0   Pollution control bond proceeds held in trust   —   (100.0 ) Exercise of stock options   14.5   0.2   Excess tax impact related to exercise of stock options   0.5   —   Retirement of long-term debt   (225.0 ) —   Withdrawal of restricted funds held in trust   10.1   23.1   Dividends paid on common stock   (83.7 ) (85.7 ) Issuance of short-term debt, net   95.0   —   Retirement of short-term debt, net   (95.0 ) —   Net cash used for financing activities   (283.6 ) (462.4 )             Cash and cash equivalents:           Net change   (163.5 ) (405.9 ) Balance at beginning of period   262.2   595.8   Cash and cash equivalents at end of period   $ 98.7   $ 189.9               Supplemental cash flow information:           Interest paid, net of amounts capitalized   $ 68.8   $ 80.4   Income taxes paid   $ 87.6   $ 79.7   Restricted funds held in trust   $ 0.5   $ 75.5   See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 5 DPL INC. CONDENSED CONSOLIDATED BALANCE SHEET $ in millions   At September 30, 2007   At December 31, 2006               ASSETS                       Current assets:           Cash and cash equivalents   $ 98.7   $ 262.2   Restricted funds held in trust   0.5   10.1   Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively   262.1   225.0   Inventories, at average cost   104.2   85.4   Taxes applicable to subsequent years   11.9   48.0   Other current assets   8.4   37.7   Total current assets   485.8   668.4               Property:           Held and used:           Property, plant and equipment   4,943.6   4,718.5   Less: Accumulated depreciation and amortization   (2,208.5 ) (2,159.2 ) Total net property held and used   2,735.1   2,559.3               Assets held for sale:           Property, plant and equipment   —   283.5   Less: Accumulated depreciation and amortization   —   (132.3 ) Total net property held for sale   —   151.2               Other noncurrent assets:           Regulatory assets   137.0   148.6   Other assets   54.2   84.7   Total other noncurrent assets   191.2   233.3               Total Assets   $ 3,412.1   $ 3,612.2   See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 6 DPL INC. CONDENSED CONSOLIDATED BALANCE SHEET $ in millions   At September 30, 2007   At December 31, 2006               LIABILITIES AND SHAREHOLDERS’ EQUITY                       Current liabilities:           Current portion - long-term debt   $ 100.7   $ 225.9   Accounts payable   186.0   169.4   Accrued taxes   124.8   155.2   Accrued interest   24.2   35.2   Other current liabilities   27.4   38.3   Total current liabilities   463.1   624.0               Noncurrent liabilities:           Long-term debt   1,451.6   1,551.8   Deferred taxes   371.1   355.2   Unamortized investment tax credit   41.4   43.6   Insurance and claims costs   23.4   21.9   Other deferred credits   222.6   280.7   Total noncurrent liabilites   2,110.1   2,253.2               Cumulative preferred stock not subject to mandatory redemption   22.9   22.9               Commitments and contingencies (Note 9)   —   —               Common shareholders’ equity:           Common stock, at par value of $0.01 per share:               September 2007   December 2006           Shares authorized   250,000,000   250,000,000           Shares issued   163,724,211   163,724,211           Treasury shares   50,170,767   50,705,239           Shares outstanding   113,553,444   113,018,972   1.1   1.1   Warrants   50.0   50.0   Common stock held by employee plans   (71.1 ) (69.0 )  Accumulated other comprehensive loss   (9.9 ) (6.5 )  Retained earnings   845.9   736.5   Total common shareholders’ equity   816.0   712.1               Total Liabilities and Shareholders’ Equity   $ 3,412.1   $ 3,612.2   See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 7 THE DAYTON POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions except per share amounts   2006   2005   2006   2005                       Revenues   $ 392.5   $ 357.4   $ 1,042.6   $ 957.9                       Cost of revenues:                   Fuel   99.5   101.4   262.3   251.1   Purchased power   61.1   37.4   123.4   103.7   Total cost of revenues   160.6   138.8   385.7   354.8                       Gross margin   231.9   218.6   656.9   603.1                       Operating expenses:                   Operation and maintenance   64.4   52.0   197.4   164.6   Depreciation and amortization   39.1   37.6   114.2   110.4   General taxes   27.5   28.8   82.5   82.8   Amortization of regulatory assets   2.4   0.6   5.2   1.5   Total operating expenses   133.4   119.0   399.3   359.3                       Operating income   98.5   99.6   257.6   243.8                       Investment income   3.0   33.8   13.9   44.6   Interest expense   (24.9 ) (34.1 ) (77.1 ) (110.5 ) Charge for early redemption of debt   —   (59.1 ) —   (61.2 ) Other income (deductions)   (0.2 ) 0.4   0.1   11.6                       Earnings from continuing operations before income tax   76.4   40.6   194.5   128.3                       Income tax expense   29.0   14.9   73.2   49.8                       Earnings from continuing operations   47.4   25.7   121.3   78.5                       Earnings from discontinued operations, net of tax   3.4   0.2   11.0   43.0                       Net Income   $ 50.8   $ 25.9   $ 132.3   $ 121.5                       Average number of common shares outstanding (millions)                   Basic   107.7   121.2   113.9   120.8   Diluted   117.4   130.5   123.3   128.9                       Earnings per share of common stock                   Basic:                   Earnings from continuing operations   $ 0.44   $ 0.21   $ 1.06   $ 0.65   Earnings from discontinued operations   0.03   —   0.10   0.36   Total Basic   $ 0.47   $ 0.21   $ 1.16   $ 1.01                       Diluted:                   Earnings from continuing operations   $ 0.40   $ 0.20   $ 0.98   $ 0.61   Earnings from discontinued operations   0.03   —   0.09   0.33   Total Diluted   $ 0.43   $ 0.20   $ 1.07   $ 0.94                       Dividends paid per share of common stock   $ 0.25   $ 0.24   $ 0.75   $ 0.72   $ in millions   Three Months Ended September 30,   Nine Months Ended September 30,       2007   2006   2007   2006                       Revenues   $ 419.6   $ 390.3   $ 1,139.1   $ 1,036.1                       Cost of revenues:                   Fuel   87.6   90.9   240.2   251.0   Purchased power   91.7   70.7   228.2   134.7   Total cost of revenues   179.3   161.6   468.4   385.7                       Gross margin   240.3   228.7   670.7   650.4                       Operating expenses:                   Operation and maintenance   64.0   59.0   195.8   172.8   Depreciation and amortization   31.4   33.0   95.2   96.8   General taxes   28.8   27.2   83.8   80.3   Amortization of regulatory assets   2.9   2.4   8.3   5.2   Total operating expenses   127.1   121.6   383.1   355.1                       Operating income   113.2   107.1   287.6   295.3                       Other income / (expense), net                   Net gain on settlement of executive litigation   —   —   35.3   —   Investment income   1.3   1.6   7.5   4.8   Interest expense   (3.9 ) (5.5 ) (14.1 ) (17.5 ) Other income (deductions)   2.1   (0.2 ) 2.7   0.1   Total other income / (expense), net   (0.5 ) (4.1 ) 31.4   (12.6 ) Earnings before income tax   112.7   103.0   319.0   282.7                       Income tax expense   42.1   39.0   119.5   107.8   Net income   $ 70.6   $ 64.0   $ 199.5   $ 174.9                       Preferred dividends   0.2   0.2   0.6   0.6                       Earnings on common stock   $ 70.4   $ 63.8   $ 198.9   $ 174.3     See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 8 DPL INC.THE DAYTON POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS     Nine Months Ended       September 30,   $ in millions   2006   2005   Cash flows from operating activities:           Net income   $ 132.3   $ 121.5   Less: Earnings from discontinued operations   (11.0 ) (43.0 ) Earnings from continuing operations   121.3   78.5               Adjustments:           Depreciation and amortization   114.2   110.4   Amortization of regulatory assets   5.2   1.5   Deferred income taxes   (4.7 ) (6.7 ) Charge for early redemption of debt   —   61.2   Captive insurance provision   —   3.8   Gain on sale of other investments   (2.2 ) (28.2 ) Changes in certain assets and liabilities:           Accounts receivable   (32.8 ) (12.5 ) Accounts payable   38.4   (21.1 ) Accrued taxes payable   (11.8 ) (7.1 ) Accrued interest payable   (7.3 ) (21.4 ) Prepayments   6.0   4.2   Inventories   (7.6 ) (9.7 ) Deferred compensation assets   1.3   3.1   Deferred compensation obligations   (0.3 ) 8.6   Other   (7.3 ) 15.3   Net cash provided by operating activities   212.4   179.9               Cash flows from investing activities:           Capital expenditures   (283.9 ) (138.2 ) Purchases of short-term investments and securities   (856.0 ) (215.6 ) Sales of short-term investments and securities   984.0   294.5   Cash flow from discontinued operations   —   868.4   Net cash provided by/(used for) investing activities   (155.9 ) 809.1               Cash flows from financing activities:           Issuance of long-term debt, net   —   211.2   Issuance of pollution control bonds   100.0   —   Pollution control bond proceeds held in trust   (100.0 ) —   Withdrawal of restricted funds held in trust   23.1   —   Purchase of treasury shares   (400.0 ) —   Exercise of stock options   0.2   18.7   Retirement of long-term debt   —   (673.8 ) Premiums paid for early redemption of debt   —   (54.7 ) Retirement of preferred securities   —   (0.1 ) Dividends paid on common stock   (85.7 ) (86.3 ) Net cash (used for) financing activities   (462.4 ) (585.0 )             Cash and cash equivalents:           Net change   (405.9 ) 404.0   Balance at beginning of period   595.8   202.1   Cash and cash equivalents at end of period   $ 189.9   $ 606.1               Supplemental cash flow information:           Interest paid, net of amounts capitalized   $ 80.4   $ 127.9   Income taxes paid, net   $ 79.7   $ 55.3   Non-cash financing and investing activities:           Restricted funds held in trust (see Note 7 of Notes to Consolidated Financial Statements)   $ 75.5   $ —   $ in millions   Nine Months Ended September 30,       2007   2006               Cash flows from operating activities:           Net income   $ 199.5   $ 174.9   Adjustments to reconcile net income to net cash provided by operating activities:                       Depreciation and amortization   95.2   96.8   Gain on settlement of executive litigation   (35.3 ) —   Amortization of regulatory assets   8.3   5.2   Deferred income taxes   11.0   (13.0 ) Gain on sale of other investments   (3.0 ) —   Changes in certain assets and liabilities:           Accounts receivable   (40.0 ) (25.7 ) Accounts payable   (0.5 ) 41.2   Net receivable / payable from / to parent   (0.5 ) (2.3 ) Accrued taxes payable   (3.1 ) 1.5   Accrued interest payable   2.4   4.8   Prepayments   0.7   5.4   Inventories   (19.8 ) (7.5 ) Deferred compensation assets   7.1   3.4   Deferred compensation obligations   1.1   (2.5 ) Other   16.5   (11.5 ) Net cash provided by operating activities   239.6   270.7               Cash flows from investing activities:           Capital expenditures   (247.8 ) (281.7 ) Net cash used for investing activities   (247.8 ) (281.7 )             Cash flows from financing activities:           Short-term loan from parent   105.0   —   Payment on short-term loan to parent   (15.0 ) —   Issuance of pollution control bonds   —   100.0   Pollution control bond proceeds held in trust   —   (100.0 ) Withdrawal of restricted funds held in trust   10.1   23.1   Dividends paid on preferred stock   (0.7 ) (0.6 ) Dividends paid on common stock to parent   (125.0 ) —   Net cash (used for)/provided by financing activities   (25.6 ) 22.5               Cash and cash equivalents:           Net change   (33.8 ) 11.5   Balance at beginning of period   46.1   46.2   Cash and cash equivalents at end of period   $ 12.3   $ 57.7               Supplemental cash flow information:           Interest paid, net of amounts capitalized   $ 9.6   $ 10.3   Income taxes paid   $ 86.8   $ 108.3   Restricted funds held in trust   $ 0.5   $ 75.5     See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 9 DPL INC.THE DAYTON POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETSSHEET     At   At       September 30,   December 31,   $ in millions   2006   2005               ASSETS                       Current assets:           Cash and cash equivalents   $ 189.9   $ 595.8   Short-term investments available for sale   —   125.8   Restricted funds held in trust   75.5   —   Accounts receivable, less provision for uncollectible accounts of $1.7 and $1.0, respectively   223.0   194.9   Inventories, at average cost   87.7   80.2   Taxes applicable to subsequent years   11.5   45.9   Other current assets   34.9   20.2               Total current assets   622.5   1,062.8               Property:           Property, plant and equipment   4,913.9   4,667.7   Less: Accumulated depreciation and amortization   (2,188.0 ) (2,094.8 )             Net property   2,725.9   2,572.9               Other noncurrent assets:           Regulatory assets   78.8   83.8   Other deferred assets   79.5   72.2               Total other noncurrent assets   158.3   156.0               Total Assets   $ 3,506.7   $ 3,791.7       At   At       September 30,   December 31,   $ in millions   2007   2006               ASSETS                       Current assets:           Cash and cash equivalents   $ 12.3   $ 46.1   Restricted funds held in trust   0.5   10.1   Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively   243.0   205.6   Inventories, at average cost   102.8   83.0   Taxes applicable to subsequent years   11.8   48.0   Other current assets   10.8   38.2   Total current assets   381.2   431.0               Property:           Property, plant and equipment   4,688.3   4,450.6   Less: Accumulated depreciation and amortization   (2,134.3 ) (2,079.0 ) Total net property   2,554.0   2,371.6               Other noncurrent assets:           Regulatory assets   137.0   148.6   Other assets   103.0   139.1   Total other noncurrent assets   240.0   287.7               Total Assets   $ 3,175.2   $ 3,090.3     See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 10 DPL INC.THE DAYTON POWER AND LIGHT COMPANY CONDENSED CONSOLIDATED BALANCE SHEETSSHEET       At   At       September 30,   December 31,   $ in millions   2006   2005               LIABILITIES AND SHAREHOLDERS’ EQUITY                       Current liabilities:           Current portion - long-term debt   $ 226.0   $ 0.9   Accounts payable   139.1   130.2   Accrued taxes   122.9   178.5   Accrued interest   22.2   28.9   Other current liabilities   34.1   31.1   Total current liabilities   544.3   369.6               Noncurrent liabilities:           Long-term debt   1,551.9   1,677.1   Deferred taxes   335.0   327.0   Unamortized investment tax credit   44.3   46.4   Insurance and claims costs   24.3   24.3   Other deferred credits   277.1   286.3   Total noncurrent liabilites   2,232.6   2,361.1               Cumulative preferred stock not subject to mandatory redemption   22.9   22.9               Commitments and contingencies (Note 8)                       Common shareholders’ equity:           Common stock, at par value of $0.01 per share:               September 2006   December 2005             Shares authorized   250,000,000   250,000,000             Shares issued   163,724,211   163,724,211             Shares outstanding   112,673,972   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   (75.1 ) (86.1 ) Retained earnings   744.6   1,062.0   Accumulated other comprehensive loss   (13.7 ) (14.2 )             Total common shareholders’ equity   706.9   1,038.1               Total Liabilities and Shareholders’ Equity   $ 3,506.7   $ 3,791.7       At   At       September 30,   December 31,   $ in millions   2007   2006               LIABILITIES AND SHAREHOLDER’S EQUITY                       Current liabilities:           Current portion - long-term debt   $ 0.7   $ 0.9   Accounts payable   182.7   166.2   Accrued taxes   120.1   159.6   Accrued interest   15.3   12.6   Short-term debt owed to parent   90.0   —   Other current liabilities   27.4   35.4   Total current liabilities   436.2   374.7               Noncurrent liabilities:           Long-term debt   784.8   785.2   Deferred taxes   367.9   360.2   Unamortized investment tax credit   41.4   43.6   Other deferred credits   222.6   272.5   Total noncurrent liabilities   1,416.7   1,461.5               Cumulative preferred stock not subject to mandatory redemption   22.9   22.9               Commitments and contingencies (Note 9)   —   —               Common shareholder’s equity:           Common stock, at par value of $0.01 per share   0.4   0.4   Other paid-in capital   783.4   783.7   Accumulated other comprehensive income   9.8   15.1   Retained earnings   505.8   432.0   Total common shareholder’s equity   1,299.4   1,231.2               Total Liabilities and Shareholder’s Equity   $ 3,175.2   $ 3,090.3     See Notes to Condensed Consolidated Financial Statements. These interim statements are unaudited. 6 11 Notes to Condensed Consolidated Financial Statements 1.Basis of Presentation Description of Business We areDPL Inc. (DPL) is a regional energy company organized in 1985 under the laws of Ohio.  We conduct our principal business in one business segment – Electric Utility. OurDPL’s principal subsidiary is The Dayton Power and Light Company (DP&L).  DP&L is a public utility incorporated in 1911 under the laws of Ohio.  DP&L sells electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio.  Electricity for DP&L’s 24-county 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 500,000 retail customers.  DP&L also purchases retail peak load requirements from DPL Energy, LLC (DPLE)., one of our wholly-owned subsidiaries.  Principal industries served include automotive, food processing, paper, plastic manufacturing and defense.  DP&L’s sales reflect the general economic conditions and seasonal weather patterns of the area.  DP&L sells any excess energy and capacity into the wholesale market. Our DPL’s other significant subsidiaries (all of which are wholly-owned) include DPLE, which engages in the operation of peaking generating facilities; DPL Energy Resources, Inc. (DPLER), which sells retail electric energy under contract to major industrial and commercial customers in West Central Ohio; DPL Finance Company,MVE, Inc., which provides financing opportunities to us and towas primarily responsible for the management of our subsidiaries;financial asset portfolio; and Miami Valley Insurance Company (MVIC), aour captive insurance company forthat 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 and other affiliated companies. DPL and DP&L conduct their principal business in one business segment - Electric. Financial Statement Presentation We prepare our consolidated financial statements in accordance with accounting principles generally acceptedGenerally Accepted Accounting Principles (GAAP) in the United States of America (GAAP).America.  The condensed consolidated financial statements include the accounts of DPL and itsDP&L and their majority-owned subsidiaries.  Investments that are not majority owned are accounted for using the equity method when our investment allows us the ability to exert significant influence, as defined by GAAP.  Undivided interests in jointly-owned generation facilities are consolidated on a pro rata basis.  All material intercompany accounts and transactions are eliminated in consolidation.  Interim results for the three months and nine months ended September 30, 20062007 may not be indicative of our results that will be realized for the full year ending December 31, 2006.2007. Pursuant to the Securities and Exchange Commission (SEC) rules, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted from interim reports. Therefore, these financial statements should be read along with the annual financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005 and our quarterly reports on Form 10-Q ended March 31, 2006 and June 30, 2006.  In the opinion of our management, the condensed consolidated financial statements contain all adjustments (which are all of a normal recurring nature) necessary to fairly state our financial condition as of September 30, 2006,2007, our results of operations for the three months and nine months ended September 30, 2006,2007 and our cash flows for the nine months ended September 30, 20062007 in accordance with GAAP. Estimates, Judgments, Contingencies and Reclassifications The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the revenue and expenses of the period reported.  Different estimates could haveWe record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.”  To the extent a material effectprobable loss can only be estimated by reference to a range of equally probable outcomes and no amount within the range appears to be a better estimate than any other amount, we accrue for the low end of the range.  Because of uncertainties related to these matters, accruals are based on the best information available at the time.  We evaluate the potential liability related to probable losses quarterly and may revise our financial results.estimates.  Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances.circumstances that may affect our financial position and results of operations.  Significant items subject to such estimates and judgments includeinclude: the carrying value of property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims costs; the valuation allowances for receivables and deferred income 12 Notes to Condensed Consolidated Financial Statements (continued) taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; regulatory proceedings and orders;contingencies and assets and liabilities related to employee benefits.  Actual results may differ from those estimates.  Certain amounts from prior periods have been reclassified to conform to the current reporting presentation. Depreciation Expense and Study Update Depreciation expense is calculated using the straight-line method, which depreciates the cost of property over its estimated useful life.  For DPL’s and DP&L’s generation, transmission and distribution assets, straight-line depreciation is applied on an average annual composite basis using group rates.  In July 2007, DPL completed a depreciation rate study for non-regulated generation property based on its property, plant and equipment balances as of December 31, 2005, with adjustments for subsequent scrubber additions.  The results of the depreciation study concluded that DPL’s depreciation rates should be reduced due to asset lives being extended beyond previously estimated lives.  DPL adjusted the depreciation rates for its non-regulated generation property, effective August 1, 2007, reducing depreciation expense.  For the three months ended September 30, 2007, the reduction in depreciation expense increased income from continuing operations by $3.8 million, increased net income by approximately $2.4 million and increased earnings per share (EPS) by approximately $0.02 per share.  For the period from August 1, 2007 to December 31, 2007, the reduction in depreciation expense will increase income from continuing operations of approximately $9.5 million, increase net income by approximately $5.9 million and increase EPS by approximately $0.06 per share. Recently Adopted Accounting Standards Recently Issued Accounting Standardsfor Uncertainty in Income Taxes Stock-Based Compensation In December 2004, theOn January 1, 2007, we adopted Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting StandardInterpretation No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R).  SFAS 123R replaces SFAS 123,48, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (APB) Opinion No. 25 (Opinion 25), “Accounting for Stock IssuedUncertainty in Income Taxes” (FIN 48).  There was no significant impact to Employees.”  SFAS 123R requires a public entity to measure the cost of employee services received and paid with equity instruments to be based on the fair-value of such equity on the grant date.  This cost is recognized inour overall results of operations, overcash flows or financial position.  The total amount of unrecognized tax benefits as of the perioddate of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  During 2007, we recorded an additional $1.6 million in which employees are required to provide service.  Liabilities initially incurred are based onaccrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007.  None of the fair-value of equity instruments and are to be re-measured at each subsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options and other similar instruments at the grant date are estimated using option-pricing models and any excessunrecognized tax benefits are recognized as an additiondue to paid-in capital.  Cash retained fromuncertainty in the excesstiming of deductibility. We recognize interest and penalties related to unrecognized tax benefits is presented in income taxes. Our tax returns for calendar years 2004 through 2006 remain open to examination by the statement of cash flows as financing cash inflows.  The provisions of this Statement became effective as of January 1, 2006.  Our September 30, 2006 year-to-date pre-tax results of operations were increased by approximately $0.6 million as a result of the adoption of SFAS 123R.  See Note 6 of Notesjurisdictions in which we are subject to Consolidated Financial Statements.taxation. HowAccounting for Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement In June 2006, the FASB ratified the consensuses ofJanuary 2007, we adopted Emerging Issues Task Force (EITF) Issue No. 06-3,6-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should beBe Presented in the Income Statement (That Is, Gross versus Net Presentation)”Statement” (EITF 06-3)No. 6-03).  EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision.   The consensus in this issue should be applied to interim and annual reporting periods beginning after December 15, 2006.  We are in the process of evaluating EITF 06-3 and have not determined the impact to our overall results of operations, financial position or cash flows. Accounting for Uncertainty in Income Taxes In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), effective for fiscal years beginning after December 15, 2006.  FIN 486-03 requires a two-step approachregistrant to determinedisclose how to recognize tax benefitstaxes collected from customers are presented in the financial statements, where recognitioni.e., gross or net.  DP&L collects certain excise taxes levied by state or local governments from its customers. DP&L’s excise taxes are accounted for on a gross basis and measurementrecorded as revenues in the accompanying Condensed Consolidated Statement of a tax benefit must be evaluated separately.  A tax benefit will be recognized only if it meets a “more-likely-than-not” recognition threshold.  For tax positions that meet this threshold,Results of Operations for the tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.  We are currently evaluating the impact of adopting FIN 48,three and have not yet determined the significance of this new rule to our overall results of operations, financial position or cash flows.nine months ended September 30, 2007 and September 30, 2006 as follows:     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007   2006   2007   2006   State/Local excise taxes   $14.6   $14.3   $40.9   $39.5   Recently Issued Accounting Standards Accounting for Fair Value Measurements In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS 157) effective for fiscal years beginning after November 15, 2007.  This StandardSFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.  The StandardSFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, the StandardSFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those standards.  The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data.  Under the Standard, SFAS 157, 13 Notes to Condensed Consolidated Financial Statements (continued) fair value measurements would be separately disclosed by level within the fair value hierarchy.  The StandardSFAS 157 does not expand the use of fair value in any new circumstances.  In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (SFAS 159) effective for fiscal years beginning after November 15, 2007.  SFAS 159 permits entities to choose to measure many financial instruments and certain warranty and insurance contracts at fair value on a contract-by-contract basis.  We are currently evaluating the impact of adopting SFAS 157 and have not yet determined the significance of this new rule to our overall results of operations, financial position or cash flows. Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R) In September 2006, the FASB issued Financial Accounting Standards No. 158,  “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)”(SFAS 158).  This Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to:  a.) recognize the funded status of a benefit plan; b.) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; c.) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position; d.) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. This Statement is effective for fiscal years ending after December 15, 2006 except for the measuring of plan assets at the employer’s fiscal year end which is effective for fiscal years ending after December 15, 2008.  We are currently evaluating the impact of SFAS 158159 and have not yet determined the significance of thisthese new rule to our overall results of operations, cash flows or financial position. Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (Topic 1N):  “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108).  The SEC believes that a registrant should quantify a current year misstatement using both the iron curtain approach and the rollover approach. If the over/understatement of current year expense is material to the current year, after all of the relevant quantitative and qualitative factors are considered, the prior year financial statements should be corrected. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended.  We are currently evaluating the impact of SAB 108 and have not yet determined the significance of this new rule to our overall results of operations, cash flows or financial position. Accounting for Planned Major Maintenance Activity In September 2006, the FASB posted Financial Statement of Position AUG AIR-1 – “Accounting for Planned Major Maintenance Activity” (FSP AUG AIR-1).   Previous guidance for planned major maintenance, such as repairing or replacing a boiler, allowed four different methods for accruing for these major repairs.  These included direct expense, built-in overhaul, deferral and accrue-in-advance.  The FASB has decided that the accrue-in-advance method is no longer valid because it allows a liability to accrue for future charges that may or may not happen.  We use the direct expense method for major planned maintenance which calls for expensing the charges as incurred.  Since we do not use the accrue-in-advance method, this FSP will have no effectrules on our overall results of operations, financial position or cash flows. 2.     Earnings per ShareDiscontinued Operations     Three months ended September 30   Nine months ended September 30   $ in millions   2006   2005   2006   2005   Reconciliation Detail:                   Investment income   $ —   $ —   $ —   $ 41.3   Investment expenses   (0.3 ) (1.6 ) (0.8 ) (9.0 ) (Loss) Income from discontinued operations   (0.3 ) (1.6 ) (0.8 ) 32.3                       Gain realized from sale   5.7   —   18.9   53.1   Broker fees and other expenses   —   (0.1 ) —   (6.9 ) Net gain (loss) on sale   5.7   (0.1 ) 18.9   46.2                       Loss on transfer of fund   —   —   —   (5.6 ) Earnings before income taxes   5.4   (1.7 ) 18.1   72.9                       Income tax expense (benefit)   2.0   (1.9 ) 7.1   29.9   Earnings from discontined operations, net   $ 3.4   $ 0.2   $ 11.0   $ 43.0     Basic EPS is based on the weighted-average number of DPL common shares outstanding during the year.  Diluted EPS is based on the weighted-average number of DPL common and common equivalent shares outstanding during the year, except in periods where the inclusion of such common equivalent shares is anti-dilutive.  Excluded from outstanding shares for this weighted-average computation are the unallocated shares held by DP&L’s Master Trust Plan for deferred compensation and unallocated shares held by DP&L’s Employee Stock Ownership Plan (ESOP). The following table represents common equivalent shares excluded from the calculation of diluted EPS because they were anti-dilutive.  These shares may be dilutive in the future.     Three Months Ended   Nine Months Ended       September 30,   September 30,   In millions   2007   2006   2007   2006                       Common equivalent shares   0.3   0.4   0.1   0.4   As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of the Notes to Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, restricted stock units (RSUs), MVE incentives, stock options and reimbursement of legal fees.  There were approximately 1.3 million RSUs and 3.6 million stock options relinquished and cancelled that were included in the dilutive share calculation through May 20, 2007.  These RSUs and stock options are no longer included in the dilutive share calculation. The following illustrates the reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income (including discontinued operations):     Three Months Ended September 30,       2007   2006   $ in millions except per share amounts   Net Income   Shares   Per Share   Net Income   Shares   Per Share   Basic EPS   $ 60.7   108.0   $ 0.56   $ 50.8   107.7   $ 0.47                               Effect of Dilutive                           Securities:                           Restricted stock units       —           1.2       Warrants       7.1           7.3       Stock options, performance and restricted shares       0.3           1.2                                           Diluted EPS   $ 60.7   115.4   $ 0.53   $ 50.8   117.4   $ 0.43   14 Notes to Condensed Consolidated Financial Statements (continued)     Nine Months Ended September 30,       2007   2006   $ in millions except per share amounts   Net Income   Shares   Per Share   Net Income   Shares   Per Share   Basic EPS   $ 175.5   107.8   $ 1.63   $ 132.3   113.9   $ 1.16                               Effect of Dilutive                           Securities:                           Restricted stock units       0.7           1.3       Warrants       8.7           6.9       Stock options, performance and restricted shares       0.9           1.2                                           Diluted EPS   $ 175.5   118.1   $ 1.49   $ 132.3   123.3   $ 1.07   3.     Discontinued Operations     Three Months Ended September 30,   Nine Months Ended September 30,   $ in millions   2007   2006   2007   2006                       Investment expenses   $ —   $ (0.3 ) $ (0.4 ) $ (0.8 ) Income from discontinued operations   —   (0.3 ) (0.4 ) (0.8 )                     Gain realized from sale   —   5.7   8.2   18.9   Net gain on sale   —   5.7   8.2   18.9                       Gain on settlement of executive litigation   —   —   8.2   —                       Earnings before income taxes   —   5.4   16.0   18.1   Income tax expense   —   (2.0 ) (6.0 ) (7.1 ) Earnings from discontinued operations, net   $ —   $ 3.4   $ 10.0   $ 11.0   On February 13, 2005, ourDPL’s subsidiaries, MVE and MVIC, entered into an agreement to sell their respective interests in forty-six private equity funds to AlpInvest/Lexington 2005, LLC, a joint venture of AlpInvest Partners and Lexington Partners, Inc.  Sales proceeds and any related gains or losses were recognized during 2005 as the sale of each fundof these funds closed.  Among other closing conditions, each fund required the transaction to be approved by the respective general partner of each fund.  During the first quarter of 2005, MVE and MVIC completed the sale of their interests in forty of those private equity funds resulting in a $28.8 million pre-tax gain ($33 million less $4.2 million professional fees) from discontinued operations and provided approximately $747 million in net proceeds, including approximately $56 million in net distributions from funds while held for sale.  As part of this pre-tax gain, we realized $30 million that was previously recorded as an unrealized gain as part of other comprehensive income.  During the second quarter of 2005, MVE and MVIC sold three and a portion of one private equity funds resulting in a $17.5 million pre-tax gain ($20.1 million less $2.6 million professional fees) from discontinued operations and provided approximately $49 million in net proceeds, including approximately $4.4 million in net cash calls from funds while held for sale. During 2005, MVE also entered into an alternative closing arrangementarrangements with AlpInvest/Lexington 2005, LLC for the remaining funds where legal title to said funds could not be transferred until a later time.  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 did not meet the criteria for recording a sale.  We are obligated to remit to AlpInvest/Lexington 2005, LLC any distributions MVE receives from these funds, and AlpInvest/Lexington 2005, LLC is obligated to provide funds to us to pay any contribution notice, capital call or other payment notice or bill for which MVE receives notice with respect to such funds.  The alternative arrangements resulted in a 2005 deferred gain of $27.1 million.  DPL recognized $18.9 million until such terms of a sale would be completed (contingent upon receipt of general partner approvals of the transfer)deferred gain in 2006 and the remaining portion of the gain, $8.2 million, was recognized in 2005 provided approximately $72the first quarter ended March 31, 2007 as all legal and economic considerations relating to the alternative closing arrangements were satisfied.  Legal title to the final fund subject to the alternative arrangement was transferred in the third quarter ended September 30, 2007. As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of the Notes to Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, RSUs, MVE incentives, stock options and reimbursement of legal fees.  The reversal of accruals related to the performance of the financial asset portfolio were recorded in discontinued operations.  Additionally, a portion of the $25 million settlement expense was allocated to discontinued operations.  These transactions resulted in a net proceeds on these funds.  Wegain of $8.2 million being recorded an impairment lossin discontinued operations related to the settlement of $5.6 millionthe executive litigation in the second quarter ending June 30, 2007. 15 Notes to Condensed Consolidated Financial Statements (continued) 4.     Supplemental Financial Information DPL Inc. $ in millions   At September 30, 2007   At December 31, 2006               Accounts receivable, net:           Retail customers   $ 81.8   $ 65.0   Partners in commonly-owned plants   68.9   51.5   Unbilled revenue   64.8   68.7   PJM   23.1   13.1   Wholesale and subsidiary customers   10.4   15.8   Other   9.5   7.1   Refundable franchise tax   5.2   5.2   Provision for uncollectible accounts   (1.6 ) (1.4 ) Total accounts receivable, net   $ 262.1   $ 225.0               Inventories, at average cost:           Fuel and emission allowances   $ 69.5   $ 52.4   Plant materials and supplies   34.6   32.6   Other   0.1   0.4   Total inventories, at average cost   $ 104.2   $ 85.4               Other current assets:           Prepayments   $ 4.6   $ 13.3   Deposits and other advances   1.0   17.8   Other   2.8   6.6   Total other current assets   $ 8.4   $ 37.7               Property, plant and equipment:           Construction work in process   $ 338.5   $ 376.0   Property, plant and equipment (a)   4,605.1   4,626.0   Total property, plant and equipment   $ 4,943.6   $ 5,002.0               Other assets:           Unamortized loss on reacquired debt   $ 19.2   $ 20.4   Unamortized debt expense   9.8   10.6   Master Trust assets   9.1   39.4   Investments   9.0   7.0   Commercial activities tax benefit   6.8   6.8   Other   0.3   0.5   Total other assets   $ 54.2   $ 84.7               Accounts payable:           Trade payables   $ 59.1   $ 75.7   Fuel accruals   49.3   37.3   Other   77.6   56.4   Total accounts payable   $ 186.0   $ 169.4               Other current liabilities:           Customer security deposits   $ 18.9   $ 19.4   Pension and retiree benefits payable   0.8   5.8   Financial transmission rights - future proceeds   —   2.7   Low income payment plan obligation   3.1   1.9   Unearned revenue   1.1   —   Other   3.5   8.5   Total other current liabilities   $ 27.4   $ 38.3               Other deferred credits:           Asset retirement obligations - regulated property   $ 90.7   $ 86.3   Pension liabilities   34.6   37.7   Retiree health and life benefits   28.2   28.5   Trust obligations   20.6   76.2   SECA net revenue subject to refund   20.4   18.7   Asset retirement obligations - generation property   11.9   11.7   Deferred gain on sale of portfolio   —   8.2   Employee benefit reserves   4.4   4.1   Litigation and claims reserves   4.5   3.4   Customer advances in aid of construction   3.4   3.0   Environmental reserves   0.1   0.1   Other   3.8   2.8   Total other deferred credits   $ 222.6   $ 280.7   (a)The sale of 2005$283.5 million of assets held for sale at December 31, 2006 was completed on April 25, 2007. 16 Notes to write down assets transferred pursuantCondensed Consolidated Financial Statements (continued) DP&L $ in millions   At September 30, 2007   At December 31, 2006               Accounts receivable, net:           Retail customers   $ 81.8   $ 65.0   Partners in commonly-owned plants   68.9   51.5   Unbilled revenue   56.6   61.0   PJM   23.1   13.9   Wholesale and subsidiary customers   5.3   8.3   Refundable franchise tax   3.1   3.1   Other   5.8   4.2   Provision for uncollectible accounts   (1.6 ) (1.4 ) Total accounts receivable, net   $ 243.0   $ 205.6               Inventories, at average cost:           Fuel and emission allowances   $ 69.5   $ 52.4   Plant materials and supplies   33.2   30.2   Other   0.1   0.4   Total inventories, at average cost   $ 102.8   $ 83.0               Other current assets:           Prepayments   $ 6.8   $ 15.8   Deposits and other advances   0.8   17.0   Other   3.2   5.4   Total other current assets   $ 10.8   $ 38.2               Property, plant and equipment:           Construction work in process   $ 337.6   $ 375.2   Property, plant and equipment   4,350.7   4,075.4   Total property, plant and equipment   $ 4,688.3   $ 4,450.6               Other assets:           Master Trust assets   $ 74.5   $ 109.0   Unamortized loss on reacquired debt   19.2   20.4   Unamortized debt expense   8.3   8.6   Investments   0.6   0.6   Other   0.4   0.5   Total other assets   $ 103.0   $ 139.1               Accounts payable:           Trade payables   $ 58.7   $ 74.7   Fuel accruals   46.2   36.7   Other   77.8   54.8   Total accounts payable   $ 182.7   $ 166.2               Other current liabilities:           Customer security deposits   $ 18.9   $ 19.4   Pension and retiree benefits payable   0.8   5.8   Financial transmission rights - future proceeds   —   2.7   Low income payment plan obligation   3.1   1.9   Unearned revenue   1.1   —   Other   3.5   5.6   Total other current liabilities   $ 27.4   $ 35.4               Other deferred credits:           Asset retirement obligations - regulated property   $ 90.7   $ 86.3   Pension liabilities   34.6   37.7   Retiree health and life benefits   28.2   28.5   Trust obligations   20.6   76.2   SECA net revenue subject to refund   20.4   18.7   Asset retirement obligations - generation property   11.9   11.7   Employee benefit reserves   4.4   4.1   Litigation and claims reserves   4.5   3.4   Customer advances in aid of construction   3.4   3.0   Environmental reserves   0.1   0.1   Other   3.8   2.8   Total other deferred credits   $ 222.6   $ 272.5   17 Notes to Condensed Consolidated Financial Statements (continued) DPL Inc.   Nine Months Ended September 30,   $ in millions   2007   2006   Cash flows - other:           Payroll taxes payable   $ —   $ (1.7 ) Employee/director stock plan   3.7   3.8   Lump sum retirement payment   (4.9 ) —   Deposits and other advances   16.2   (7.9 ) Other   3.3   (1.5 ) Total cash flows - other   $ 18.3   $ (7.3 )     Three Months Ended September 30,   Nine Months Ended September 30,       2007   2006   2007   2006   Comprehensive income:                   Net income   $ 60.7   $ 50.8   $ 175.5   $ 132.3   Net change in unrealized gains (losses) on financial instruments   0.2   0.3   (1.3 ) 1.1   Net change in deferred (losses) gains on cash flow hedges   (1.5 ) 0.1   (5.9 ) 2.9   Net change in unrealized gains (losses) on pensions and postretirement benefits   0.5   —   1.6   —   Deferred income taxes related to unrealized gains (losses)   0.3   (0.4 ) 2.2   (3.5 ) Comprehensive income   $ 60.2   $ 50.8   $ 172.1   $ 132.8   DP&L   Nine Months Ended September 30,   $ in millions   2007   2006   Cash flows - other:           Payroll taxes payable   $ —   $ (2.0 ) Deposits and other advances   15.6   (10.5 ) Lump sum retirement payment   (4.9 ) —   Other   5.8   1.0   Total cash flows - other   $ 16.5   $ (11.5 )     Three Months Ended September 30,   Nine Months Ended September 30,       2007   2006   2007   2006   Comprehensive income:                   Net income   $ 70.6   $ 64.0   $ 199.5   $ 174.9   Net change in unrealized (losses) gains on financial instruments   (5.0 ) 1.2   (5.4 ) 1.8   Net change in deferred (losses) gains on cash flow hedges   (1.5 ) 0.1   (5.9 ) 2.9   Net change in unrealized gains (losses) on pensions and postretirement benefits   0.6   —   1.7   —   Deferred income taxes related to unrealized gains (losses)   2.2   (0.8 ) 4.3   (3.2 ) Comprehensive income   $ 66.9   $ 64.5   $ 194.2   $ 176.4   18 Notes to the alternative arrangements to estimated fair value.  OwnershipCondensed Consolidated Financial Statements (continued) 5.     Asset Sales Sale of these funds transfer after the general partnersCorporate Aircraft On June 7, 2007, Miami Valley CTC, Inc. (indirect, wholly-owned subsidiary of eachDPL), sold its corporate aircraft and associated inventory and parts for $7.4 million. The net book value of the separate funds consent to the transfer. On March 31, 2006, MVE completed the sale of the remaining portion of one private equity fund, for which MVE had previously entered into an alternative closing arrangement resulting in the recognition of $13.2assets sold was approximately $1.0 million of the deferred gain.  On August 31, 2006, MVE completed the sale of a portion of one of the two remaining private equity funds resulting in recognition of $5.7 million of the deferred gain.  The transfer of the remaining funds is expected to be completed in 2007. There was no investment income from discontinued operations (pre-tax) in the first three quarters of 2006 due to the 2005 sale and the economic transfer of the funds.  Investment income from discontinued operations (pre-tax) in the first three quarters of 2005 of $32.3 million is comprised of $41.3 million of investment income less $9.0 million of associated management feesseverance and other expenses.  Thecosts of approximately $0.4 million were accrued. Miami Valley CTC, Inc. recorded a net gain on the sale of approximately $6.0 million during the portfolio (pre-tax)second quarter ending June 30, 2007, which is included in DPL’s operation and maintenance expense. Sale of Peaking Units During the nine months ended September 30, 2005fourth quarter of $46.22006, DPL recorded a $71.0 million was comprisedimpairment charge that included the fair market value write-down of $53.1 million of gains less $6.9 million of brokerthe peaking unit assets, accrued legal fees and other related expenses.costs associated with the sale. There were no material costs or adjustments to the $71.0 million impairment charge upon consummation of the sale in 2007. 3.Supplemental Financial Information Balance Sheet     At   At       September 30,   December 31,   $ in millions   2006   2005               Accounts receivable, net:           Retail customers   $ 72.6   $ 60.8   Partners in commonly-owned plants   56.6   37.7   Unbilled revenue   53.1   63.6   Wholesale and subsidiary customers   14.3   6.0   PJM including financial transmission rights   13.6   11.0   Refundable franchise tax   5.2   14.3   Other   9.3   2.5   Provision for uncollectible accounts   (1.7 ) (1.0 )             Total accounts receivable, net   $ 223.0   $ 194.9               Inventories, at average cost:           Fuel and emission allowances   $ 55.4   $ 48.6   Plant materials and supplies   32.3   31.4   Other   —   0.2               Total inventories, at average cost   $ 87.7   $ 80.2               Other current assets:           Deposits and other advances   $ 17.5   $ 9.2   Current deferred income taxes   6.1   5.5   Prepayments   4.7   5.0   Derivatives   5.0   —   Other   1.6   0.5               Total other current assets   $ 34.9   $ 20.2               Property, plant and equipment:           Construction work in process   $ 349.0   $ 168.0   Property, plant and equipment   4,564.9   4,499.7               Total property, plant and equipment   $ 4,913.9   $ 4,667.7               Other deferred assets:           Master Trust assets   $ 33.6   $ 32.0   Unamortized loss on reacquired debt   20.8   22.0   Unamoritized debt expense   10.7   10.2   Commercial activities tax benefit   6.8   —   Investments   6.6   6.8   Other   1.0   1.2               Total other deferred assets   $ 79.5   $ 72.2               Accounts payable:           Trade payables   $ 58.4   $ 26.1   Fuel accruals   40.5   39.5   Other   40.2   64.6               Total accounts payable   $ 139.1   $ 130.2               Other current liabilities:           Customer security deposits   $ 19.7   $ 19.2   Deferred revenue - financial transmission rights   4.3   —   Payroll taxes payable   0.3   2.3   Other   9.8   9.6               Total other current liabilities   $ 34.1   $ 31.1               Other deferred credits:           Asset retirement obligations - regulated property   $ 85.2   $ 81.7   Master Trust obligations   73.8   74.5   Retirees’ health and life benefits   32.4   32.9   Pension liability   28.7   23.5   SECA net revenue subject to refund   21.5   20.5   Asset retirement obligations - generation   13.2   13.2   Deferred gain on sale of portfolio   8.2   27.1   Litigation and claims pending   3.3   3.0   Environmental reserves   0.1   0.1   Other   10.7   9.8               Total other deferred credits   $ 277.1   $ 286.3     On April 25, 2007, DPLE completed the sale of its Darby and Greenville electric peaking generation facilities providing DPL with approximately $151.0 million. Darby Station was sold to Columbus Southern Power Company, a utility subsidiary of American Electric Power Company (AEP), for approximately $102.0 million. Greenville Station was sold to Buckeye Power, Inc. for approximately $49.0 million. 3.Supplemental Financial Information (continued)   Nine months ended       September 30,   $ in millions   2006   2005               Cash flows - Other:           Payroll taxes payable   $ (1.7 ) $ 0.1   Deferred management fees   —   7.9   Deposits and other advances   (9.9 ) (8.1 ) Deferred storm costs   —   (5.6 ) FERC transitional payment deferral   1.0   15.4   Other   3.3   5.6   Total cash flows - Other   $ (7.3 ) $ 15.3     Three months ended   Nine months ended       September 30,   September 30,       2006   2005   2006   2005   Comprehensive Income:                   Net income   $ 50.8   $ 25.9   $ 132.3   $ 121.5   Net change in unrealized gains (losses) on financial instruments   0.3   (19.0 ) 1.1   (15.4 ) Net change in unrealized losses on foreign currency translation adjustments   —   (0.4 ) —   (46.3 ) Net change in deferred gains (losses) on cash flow hedges   0.1   (2.0 ) 2.9   (4.8 ) Deferred income taxes related to unrealized gains and (losses)   (0.4 ) 7.4   (3.5 ) 22.2   Comprehensive income   $ 50.8   $ 11.9   $ 132.8   $ 77.2     4.              Earnings per Share Basic earnings per share (EPS) are based on the weighted-average number of common shares outstanding during the year.  Diluted earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during the year, except in periods where the inclusion of such common equivalent shares is anti-dilutive.  We adopted FAS 123R effective January 1, 2006, which changed the calculation of diluted shares as it relates to stock options.  This change resulted in diluted shares increasing from the previous methodology by 0.4 million shares for the three months ended September 30, 2006 and 0.5 million shares for the nine months ended September 30, 2006. Approximately 0.4 million stock options in the third quarter of 2006 and in the third quarter of 2005, respectively, were excluded from the computation of diluted earnings per share because they were anti-dilutive.  Approximately 0.4 million stock options for the nine months ending September 30, 2006 and 2005, respectively, were excluded from the computation of diluted earnings per share because they were anti-dilutive.  These stock options could be dilutive in the future. The following table illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for net income:     Three months ended September 30,       2006   2005               Per           Per   $ in millions except per share amounts   Income   Shares   Share   Income   Shares   Share   Basic EPS   $ 50.8   107.7   $ 0.47   $ 25.9   121.2   $ 0.21                               Effect of Dilutive Securities:                           Restricted stock units (a)       1.2           1.2       Warrants       7.3           7.3       Stock options and performance shares (a)       1.2           0.8                                   Diluted EPS   $ 50.8   117.4   $ 0.43   $ 25.9   130.5   $ 0.20       Nine months ended September 30,       2006   2005               Per           Per   $ in millions except per share amounts   Income   Shares   Share   Income   Shares   Share   Basic EPS   $ 132.3   113.9   $ 1.16   $ 121.5   120.8   $ 1.01                               Effect of Dilutive Securities:                           Restricted stock units (a)       1.3           1.2       Warrants       6.9           6.2       Stock options and performance shares (a)       1.2           0.7                                   Diluted EPS   $ 132.3   123.3   $ 1.07   $ 121.5   128.9   $ 0.94   a)We are disputing, among other things, approximately 3.6 million stock options and approximately 1.3 million restricted stock units that were outstanding at September 30, 2006 due to our ongoing litigation with certain former executives and that are included above (see Note 8 of Notes to Consolidated Financial Statements). 5.6.     Pension and Postretirement Benefits We sponsor a defined benefit plan for substantially all full-time employees. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees, the defined benefit plan is based primarily on compensation and years of service. We fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). In addition, we have a Supplemental Executive Retirement Plan (SERP) for certain active and retired key executives. Benefits under this SERP have been frozen and no additional benefits can be earned. Wealso have unfunded liabilities pertaining to retirement benefits for certain active, terminated and retired key executives that include The DPL Inc. Supplemental Executive Defined Contribution Retirement Plan (SEDCRP). These liabilities totaled approximately $0.9 million and $0.5 million at September 30, 2007 and 2006, respectively. Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits. We have funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust. 19 Notes to the Condensed Consolidated Financial Statements (continued) The net periodic benefit costcosts of the pension and postretirement benefit plans for the three months ended September 30, 2007 and 2006 and 2005 was:were: Net periodic benefit cost   Pension   Postretirement   $ in millions   2006   2005   2006   2005   Service cost   $ 1.0   $ 0.9   $ —   $ —   Interest cost   4.3   3.9   0.5   0.5   Expected return on assets   (5.5 ) (5.4 ) (0.2 ) (0.1 )                     Amortization of unrecognized:                   Actuarial (gain) loss   0.9   1.0   (0.2 ) (0.1 ) Prior service cost   0.7   0.6   —   —   Transition obligation   —   —   0.1   —   Net periodic benefit cost before adjustments   1.4   1.0   0.2   0.3                       Settlement cost (a)   2.6   —   —   —   Curtailment cost (b)   —   0.1   —   —   Net periodic benefit cost after adjustments   $ 4.0   $ 1.1   $ 0.2   $ 0.3     $ in millions   Pension   Postretirement       2007   2006   2007   2006   Service cost   $ 0.2   $ 1.0   $ —   $ —   Interest cost   4.0   4.3   0.4   0.5   Expected return on assets (a)   (5.5 ) (5.5 ) (0.1 ) (0.2 )                     Amortization of unrecognized:                   Actuarial (gain) loss   0.8   0.9   (0.2 ) (0.2 ) Prior service cost   0.6   0.7   —   —   Transition obligation   —   —   —   0.1   Net periodic benefit cost   0.1   1.4   0.1   0.2   Settlement cost (b)   —   2.6   —   —   Net periodic benefit cost after adjustments   $ 0.1   $ 4.0   $ 0.1   $ 0.2   (a) (a)The market-related value of assets is equal to the fair value of assets at implementation with subsequent asset gains and losses recognized in the market-value systematically over a three-year period. (b) The settlement cost pertains to a former officer (not related to our litigation settlement cost relates to a former officer (not related to our ongoing litigation with three former executives) who has elected to receive a lump sum distribution in January 2007 from the Supplemental Executive Retirement Plan. (b)         The curtailment cost relates to a freeze in benefits for the remaining active employee participating in the Supplemental Executive Retirement Plan. The net periodic benefit costcosts of the pension and postretirement benefit plans for the nine months ended September 30, 2007 and 2006 and 2005 was:were: Net periodic benefit cost   Pension   Postretirement   $ in millions   2006   2005   2006   2005   Service cost   $ 3.2   $ 2.9   $ —   $ —   Interest cost   12.5   11.8   1.3   1.4   Expected return on assets   (16.3 ) (16.1 ) (0.4 ) (0.4 )                     Amortization of unrecognized:                   Actuarial (gain) loss   2.9   2.9   (0.6 ) (0.6 ) Prior service cost   1.9   1.7   —   —   Transition obligation   —   —   0.2   0.1   Net periodic benefit cost before adjustments   4.2   3.2   0.5   0.5   Settlement cost (a)   2.6   —   —   —   Special termination benefit cost (b)   0.3   —   —   —   Curtailment cost (c)   —   0.1   —   —   Net periodic benefit cost after adjustments   $ 7.1   $ 3.3   $ 0.5   $ 0.5     $ in millions   Pension   Postretirement       2007   2006   2007   2006   Service cost   $ 2.4   $ 3.2   $ —   $ —   Interest cost   12.2   12.5   1.1   1.3   Expected return on assets (a)   (16.4 ) (16.3 ) (0.3 ) (0.4 )                     Amortization of unrecognized:                   Actuarial (gain) loss   2.6   2.9   (0.7 ) (0.6 ) Prior service cost   1.8   1.9   —   —   Transition obligation   —   —   0.1   0.2   Net periodic benefit cost before adjustment   2.6   4.2   0.2   0.5   Settlement cost (b)   —   2.6   —   —   Special termination benefit cost (c)   —   0.3   —   —   Net periodic benefit cost after adjustment   $ 2.6   $ 7.1   $ 0.2   $ 0.5   (a) (a)The market-related value of assets is equal to the fair value of assets at implementation with subsequent asset gains and losses recognized in the market-value systematically over a three-year period. (b) The settlement cost pertains to a former officer (not related to our litigation settlement cost relates to a former officer (not related to our ongoing litigation with three former executives) who has elected to receive a lump sum distribution in January 2007 from the Supplemental Executive Retirement Plan. (b)         In 2006, a special termination benefit cost was recognized as a result of 16 employees who participated in a voluntary early retirement program and were all retired as of April 1, 2006. (c)          The curtailment cost relates to a freeze in benefits for the remaining active employee participating in the Supplemental Executive Retirement Plan. (c) In 2006, a special termination benefit cost was recognized as a result of 16 employees who participated in a voluntary early retirement program and retired at various dates during 2006; this program was completed as of April 1, 2006. 20 Notes to the Condensed Consolidated Financial Statements (continued) The following estimated benefit payments, which reflect future and past service, are expected to be paid as follows: Estimated Future Benefit Payments $ in millions   Pension   Postretirement   2006   $ 4.9   $ 0.8   2007   $ 24.6   $ 3.1   2008   $ 19.8   $ 3.0   2009   $ 20.2   $ 3.0   2010   $ 20.7   $ 2.9   2011   $ 20.9   $ 2.7   2012 – 2016   $ 111.9   $ 10.7   $ in millions   Pension   Postretirement   2007   $ 4.8   $ 0.7   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     6.7.     Share-Based Compensation              Stock-Based Compensation We adopted SFAS 123R on January 1, 2006 using the modified prospective approach for stock options and restricted stock units (RSUs).  As a result of our adoptionthe May 21, 2007 settlement of SFAS 123R, we recognized $0.6the litigation with three former executives (see Note 10 of the Notes to the Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, RSUs, MVE incentives, stock options and reimbursement of legal fees. A portion of this settlement included the forfeitures and cancellations of RSUs and stock options of 1.3 million lessand 3.6 million, respectively. The following table summarizes share-based compensation expense:     Three Months Ended   Nine Months Ended   $ in millions   September 30,   September 30,       2007   2006   2007   2006   Stock options   $ —   $ —   $ —   $ 1.2   Restricted stock units   (0.2 ) 0.7   —   1.8   Performance shares   0.5   0.5   1.3   1.3   Restricted shares   0.1   —   0.2   —   Non-employee directors’ RSUs   0.1   —   0.2   —   Share-based compensation included in operations and maintenance expense   0.5   1.2   1.7   4.3   Income tax expense   (0.2 ) (0.5 ) (0.7 ) (1.7 ) Total share-based compensation, net of tax   $ 0.3   $ 0.7   $ 1.0   $ 2.6   Share-based awards issued in DPL’s common stock will be distributed from treasury stock. DPL believes it has sufficient treasury stock to satisfy all outstanding share-based awards. Determining Fair Value Valuation and Amortization Method — We estimate the fair value of stock options and RSUs using a Black-Scholes-Merton model; performance shares are valued using a Monte Carlo simulation; restricted shares are valued at the market price on the day of grant and the Directors’ RSUs are valued at the market price on the day prior to the grant date. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods. Expected Volatility — Our expected volatility assumptions are based on the historical volatility of DPL stock. The volatility range captures the high and low volatility values for each award granted based on its specific terms. Expected Life — The expected life assumption represents the estimated period of time from grant until exercise and reflects historical employee exercise patterns. Risk-Free Interest Rate — The risk-free interest rate for the expected term of the award is based on the corresponding yield curve in effect at the time of the valuation for U.S. Treasury bonds having the same term as the expected life of the award, i.e., a five year bond rate is used for valuing an award with a five year expected life. Expected Dividend Yield — The expected dividend yield is based on DPL’s current dividend rate, adjusted as necessary to capture anticipated dividend changes and the 12 month average DPL stock price. 21 Notes to the Condensed Consolidated Financial Statements (continued) Expected Forfeitures — The forfeiture rate used to calculate compensation expense for the nine months ended September 30, 2006,is based on DPL’s historical experience, adjusted as comparednecessary to what we would have recognized under SFAS 123.reflect special circumstances. Stock Options In 2000, ourDPL’s Board of Directors adopted, and ourDPL’s shareholders approved, The DPL Inc. Stock Option Plan. The plan provides that “no single Participant shall receive Options with respect to more than 2,500,000 shares.”  Options granted in 2000, 2001 and 2002 were fully vested as of December 31, 2005 and expire ten years from the grant date.  In 2003, 100,000 options were granted which vest equitably over five years and expire ten years from the grant date.  In 2004, 200,000 options were granted that vested over nineteen months and expire approximately 6.5 years from the grant date; 100,000 of these options vested in May of 2005 and the remaining 100,000 vested in May of 2006.  Another 20,000 options were granted in 2004 that vested in five months and expire ten years from the grant date.  In December of 2004, 30,000 options were granted that vest equitably over three years and expire ten years from the grant date.  In 2005, 350,000 options were granted that vested in June of 2006 and expire three years from the grant date.  At September 30, 2006, there were 1,528,500 options available for grant.  On April 26, 2006, ourDPL’s shareholders approved theThe DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP). With the approval of the EPIP, no furthernew awards will be madegranted under theThe DPL Inc. Stock Option Plan.Plan, but shares relating to awards that are forfeited or terminated under The DPL Inc. Stock Option Plan may be granted. There are currently 10,000 unvested stock options outstanding under The DPL Inc. Stock Option Plan that will vest as of December 21, 2007. The schedule of non-vested option activity for the nine months ended September 30, 20062007 was as follows: $ in millions   Number of Options   Weighted-Average Grant Date Fair Value   Non-vested at January 1, 2006   510,000   $ 2.2   Granted in 1st nine months 2006   —   —   Vested in 1st nine months 2006   450,000   $ 2.0   Forfeited in 1st nine months 2006   40,000   $ 0.1   Non-vested at September 30, 2006   20,000   $ 0.1           Weighted-Average       Number of   Grant Date   $ in millions (except share amounts)   Options   Fair Value   Non-vested at January 1, 2007   10,000   $ 0.05   Granted in first nine months 2007   —   —   Vested in first nine months 2007   —   —   Forfeited in first nine months 2007   —   —   Non-vested at September 30, 2007   10,000   $ 0.05     Summarized stock option activity was as follows:   Nine months ended September 30, 2006   Twelve months ended December 31, 2005   Options:           Outstanding at beginning of year (a)   5,486,500   6,165,500   Granted   0   350,000   Exercised   (10,000 ) (1,025,000 ) Forfeited   (40,000 ) (4,000 ) Outstanding at end of period   5,436,500   5,486,500   Exercisable at end of period   5,416,000   4,100,000               Weighted average exercise 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 end of period   $ 22.02   $ 21.86   Exercisable at end of period   $ 20.98   $ 20.98         Nine Months Ended       September 30       2007   2006   Options:           Outstanding at beginning of year   5,091,500   5,486,500   Granted   —   —   Exercised   (520,000 ) (10,000 ) Forfeited (a)   (3,620,000 ) (40,000 ) Outstanding at period-end   951,500   5,436,500   Exercisable at period-end   941,500   5,416,000               Weighted-average option prices per share:           Outstanding at beginning of year   $ 21.95   $ 21.86   Granted   $ —   $ —   Exercised   $ 26.83   $ 21.00   Forfeited   $ 20.38   $ 15.88   Outstanding at period-end   $ 24.08   $ 22.02   Exercisable at period-end   $ 24.07   $ 20.98   (a) As a result of the settlement of the former executive litigation on May 21, 2007, 3.6 million outstanding options shown above were forfeited in the second quarter of 2007 and another approximately one million disputed options not shown above were also forfeited. 22 (a)   In dispute with certain former executives, among other things, are approximately 1 million forfeited options not included above and 3.6 million outstanding options that are included above (see Note 8 of Notes to the Condensed Consolidated Financial Statements).Statements (continued) No stock options were granted in the first three quarters of 2006.  The weighted-average fair value of options granted was $3.80 per share in 2005.  The fair values of the options were estimated as of the dates of grant using a Black-Scholes option pricing model. In the first quarter of 2006, 10,000 stock options were exercised.  No stock options were exercised in the second or third quarter of 2006.  The market value of options that were vested at September 30, 2006 was approximately $31 million.  Shares issued upon share option exercise are issued from treasury stock.  We have sufficient treasury stock to satisfy outstanding options. The following table reflects information about stock options outstanding at September 30, 2006:2007:       Options Outstanding   Options Exercisable   Range of Exercise Prices   Outstanding   Weighted- Average Contractual Life   Weighted- Average Exercise Price   Exercisable   Weighted- Average Exercise Price                           $14.95-$21.00   4,650,000   3.7 years   $ 20.43   4,650,000   $ 20.47   $21.01-$29.63   786,500   3.0 years   $ 28.01   766,000   $ 28.08           Options Outstanding   Options Exercisable           Weighted-   Weighted-       Weighted-           Average   Average       Average   Range of Exercise       Contractual   Exercise       Exercise   Prices   Outstanding   Life   Price   Exercisable   Price   $ 14.95 - $21.00   625,000   3.3 years   $ 20.60   625,000   $ 20.60   $ 21.01 - $29.63   326,500   4.0 years   $ 28.83   316,500   $ 28.93     AsThe following table reflects information about stock option activity during the period:     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007   2006   2007   2006   Weighted-average grant date fair value of options granted during the period   $ —   $ —   $ —   $ —   Intrinsic value of options exercised during the period   $ —   $ —   $ 2.3   $ 0.1   Proceeds from stock options exercised during the period   $ —   $ —   $ 14.5   $ 0.2   Excess tax benefit from proceeds of stock options exercised   $ —   $ —   $ 0.5   $ —   Fair value of shares that vested during the period   $ —   $ —   $ —   $ 1.0   Unrecognized compensation expense   $ —   $ 0.1   $ —   $ 0.1   Weighted-average period to recognize compensation expense (in years)   0.3   1.3   0.3   1.3   The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of September 30, 2006, there was $0.1 million of total unrecognized compensation cost related tothe non-vested stock options at the time of grant: Number of non-vested shares 10,000 Date of grant December 29, 2004 Expected volatility 26.1 % Weighted-average expected volatility 26.1 % Expected life (in years) 9.9 Expected dividends 4.7 % Weighted-average expected dividends 4.7 % Risk-free interest rate 4.3 % No options were granted under the Plan.  We expect to recognize $0.1 million of this cost induring 2006 and 2007. In addition, Restricted Stock Units (RSUs) RSUs were granted to certain key employees prior to 2001. As a result of the settlement of the former executive litigation, all disputed RSUs were forfeited by the three former executives. There were 1.3 million22,976 RSUs outstanding as of September 30, 2006,2007, none of which 1.3 million werehas vested. Substantially all of the vested RSUs are in dispute 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 Financial Officer; and Stephen F. Koziar, formerly DPL’s Chief Executive Officer and President.  The remaining 0.1 million non-vested RSUs will be paid in cash upon vesting and will vest as follows: 20,097 in 2007; 14,68811,253 in 2008; 10,2057,878 in 2009;2009 and 5,0083,845 in 2010.  Vested RSUs are marked to market each quarter and any adjustment to compensation expense is recognized at that time. Non-vested RSUs are valued quarterly at fair value using the Black-ScholesBlack-Scholes-Merton model to determine the amount of compensation expense to be recognized. Non-vested RSUs do not earn dividends.         Weighted-Average       Number of   Grant Date   $ in millions (except share amounts)   RSUs   Fair Value   Non-vested at January 1, 2007   49,998   $ 1.2   Granted in first nine months 2007   —   —   Vested in first nine months 2007   (20,097 ) (0.4 ) Forfeited in first nine months 2007   (6,925 ) (0.2 ) Non-vested at September 30, 2007   22,976   $ 0.6   23 Notes to the Condensed Consolidated Financial Statements (continued) Summarized RSU activity was as follows:     Nine Months Ended       September 30,       2007   2006   RSUs:           Outstanding at beginning of year   1,334,339   1,319,399   Granted   —   —   Dividends   11,656   35,030   Exercised   (20,097 ) (22,516 ) Forfeited   (1,302,922 ) (8,978 ) Outstanding at period-end   22,976   1,322,935   Exercisable at period-end   —   —   Compensation expense is recognized each quarter based on the change in the market price of DPL common shares. As of September 30, 2007 and 2006, liabilities recorded for outstanding RSUs were $0.6 million and $35.7 million, respectively, which are included in “Other deferred credits” on the Condensed Consolidated Balance Sheet. The decrease in the liability is due to the executive litigation settlement and the forfeiture of 1.3 million RSUs (see Note 10 of the Notes to Condensed Consolidated Financial Statements). The following table shows the assumptions were used in the Black-ScholesBlack-Scholes-Merton model to calculate the fair value of the non-vested stock options and RSUs:RSUs during the respective periods: Volatility 10.3 – 29.1 % Expected life (years) 0.8 – 8.0 Dividend yield rate 3.7 – 4.8 % Risk-free interest rate 3.7 – 4.9 %     Three Months Ending   Nine Months Ending       September 30,   September 30,       2007   2006   2007   2006   Expected volatility   13.4-16.7%   10.3-20.3%   10.6-43.5%   7.3-28.6%   Weighted-average expected volatility   14.4%   17.1%   16.2%   22.0%   Expected life (in years)   1.0-3.0   1.0-4.0   1.0-3.0   1.0-4.0   Expected dividends   3.6%   3.7-3.8%   3.5-3.6%   3.7-3.8%   Weighted-average expected dividends   3.6%   3.8%   3.5%   3.8%   Risk-free interest rate   4.0-4.1%   4.6-4.9%   4.0-5.0%   4.7-5.2%     At the 2006 Annual Shareholder’s Meeting, our shareholders approved the DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP).  Shares Under the EPIP, the Board adopted a Long-Term Incentive Plan (LTIP) under which weDPL will award a targeted number of performance shares of common stock to executives. Awards under the LTIP will be awarded based on a Total Shareholder Return Relative to Peers performance. No performance shares will be earned in a performance period if the three-year Total Shareholder Return Relative to Peers is below the threshold of the 40th percentile. Further, the LTIP awards will be capped at 200% of the target number of performance shares, if the Total Shareholder Return Relative to Peers is at or above the threshold of the 90th percentile. The Total Shareholder Return Relative to Peers is considered a performancemarket condition under FAS 123R. TheThere is a three year requisite performanceservice period for each tranche of the Performance Shares is:performance shares. 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   24 Notes to the Condensed Consolidated Financial Statements (continued) The schedule of non-vested performance share activity for the nine months ended September 30, 20062007 follows: $ in millions   Number of Performance Shares   Weighted-Average Grant Date Fair Value   Non-vested at January 1, 2006     —       —     Granted in 1st nine months 2006     223,289       $ 5.9     Vested in 1st nine months 2006     —       —     Forfeited in 1st nine months 2006     (89,655 )     (2.4 )   Non-vested at September 30, 2006     133,634       $ 3.5       Nine months Twelve months ended ended September 30, 2006 December 31, 2005 Performance Shares: Outstanding at beginning of year — — Granted 223,289 — Exercised — — Forfeited (89,655 ) — Outstanding at end of period 133,634 — Exercisable at end of period — —     Number of   Weighted-Average       Performance   Grant Date   $ in millions (except share amounts)   Shares   Fair Value   Non-vested at January 1, 2007   110,723   $ 2.7   Granted in first nine months 2007   78,559   2.6   Vested in first nine months 2007   —   —   Forfeited in first nine months 2007   (34,243 ) (0.9 ) Non-vested at September 30, 2007   155,039   $ 4.4         Nine Months Ended       September 30,       2007   2006   Performance Shares:           Outstanding at beginning of year   154,768   —   Granted   78,559   223,289   Exercised   (22,462 ) —   Expired   (21,583 ) —   Forfeited   (34,243 ) (89,655 ) Outstanding at period-end   155,039   133,634   Exercisable at period-end   —   —   There are no exercise prices associated with performance shares. As of September 30, 2006, there was $1.6 million of total unrecognized compensation cost related to non-vested performance shares granted under the LTIP.  We expect to recognize $0.5 million of this cost over the remainder of 2006 and $1.1 million in 2007 and 2008.  A forfeiture rate of 20% was estimated in calculating the compensation expense. Shares issued upon achievement of the required performance condition will be issued from treasury stock.  We have sufficient treasury stock to satisfy outstanding performance shares. The following table reflects information about performance share activity during the period:     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007   2006   2007   2006   Weighted-average grant date fair value of performance shares granted during the period   $ 0.1   $ —   $ 2.6   $ 5.9   Intrinsic value of performance shares exercised during the period   $ —   $ —   $ —   $ —   Proceeds from performance shares exercised during the period   $ —   $ —   $ —   $ —   Tax benefit from proceeds of performance shares exercised   $ —   $ —   $ —   $ —   Fair value of performance shares that vested during the period   $ —   $ —   $ —   $ —   Unrecognized compensation expense   $ 2.3   $ 1.6   $ 2.3   $ 1.6   Weighted-average period to recognize compensation expense (in years)   1.3   1.0   1.3   1.0   The following table shows the assumptions were used in athe Monte Carlo simulation calculated by an actuarial consultantSimulation to estimatecalculate the fair value of the performance shares:shares granted during the period: Volatility 20.3 % Expected life (years) 3.0 Dividend yield rate 3.7 % Risk-free interest rate 4.7 %     Three Months Ended   Nine Months Ended       September 30,   September 30,       2007   2006   2007   2006                       Expected volatility   15.8%   0.0%   15.8-17.3%   20.3%   Weighted-average expected volatility   15.8%   0.0%   16.4%   20.3%   Expected life (in years)   3.0   0.0   3.0   3.0   Expected dividends   3.9%   0.0%   3.3-3.9%   3.7%   Weighted-average expected dividends   3.9%   0.0%   3.3%   3.7%   Risk-free interest rate   4.5-4.6%   0.0%   4.5-4.9%   4.7%     For25 Notes to the quarter ended September 30, 2006, total compensation expense was $0.8 million with an associated tax benefit of $0.3 million. Compensation expense forCondensed Consolidated Financial Statements (continued) Restricted Shares Under the nine months ended September 30, 2006 was $4.1 million for all share-based compensation (stock options, RSUs, and performance shares) andEPIP, the tax benefit associated with these expenses was $1.5 million.  For the quarter ended September 30, 2006, total compensation expense was $0.8 million with an associated tax benefit of $0.3 million. For the nine months ended September 30, 2006, operating income was $0.6 million higher under SFAS 123R than under SFAS 123, while the impact to net income was $0.4 million due to a decrease in the tax benefit of $0.2 million.  There was no impact on basic or diluted earnings per share. On October 2, 2006, Paul M. Barbas (President and Chief Executive Officer) wasBoard granted 19,000 shares of DPL Inc. Restricted Stock (Restricted Shares), granted under the 2006 Equity and Performance Incentive Plan.  These shares were not included in the above calculations as the shares were issued subsequentShares to September 30, 2006.various executives.  The Restricted Shares are to be registered in Mr. Barbas’the executive’s name, receive dividends as declared and paid on all DPL common stock and will vest after a specified service period. During the three months ended September 30, 2007, 6,800 restricted shares were awarded.     Number of   Weighted-Average       Restricted   Grant Date   $ in millions (except share amounts)   Shares   Fair Value   Non-vested at January 1, 2007   19,000   $ 0.5   Granted in first nine months 2007   23,200     0.7   Vested in first nine months 2007   —     —   Forfeited in first nine months 2007   —     —   Non-vested at September 30, 2007   42,200   $ 1.2                   Nine Months Ended       September 30,       2007   2006   Restricted Shares:           Outstanding at beginning of year   19,000   —   Granted   23,200   —   Exercised   —   —   Forfeited   —   —   Outstanding at period-end   42,200   —   Exercisable at period-end   —   —   The following table reflects information about restricted share activity during the period:     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007   2006   2007   2006   Weighted-average grant date fair value of restricted shares granted during the period   $ 0.2   $ —   $ 0.7   $ —   Intrinsic value of restricted shares exercised during the period   $ —   $ —   $ —   $ —   Proceeds from restricted shares exercised during the period   $ —   $ —   $ —   $ —   Tax benefit from proceeds of restricted shares exercised   $ —   $ —   $ —   $ —   Fair value of restricted shares that vested during the period   $ —   $ —   $ —   $ —   Unrecognized compensation expense   $ 1.0   $ —   $ 1.0   $ —   Weighted-average period to recognize compensation expense (in years)   2.6   —   2.6   —   Non-Employee Director Restricted Stock Units Under the EPIP, as part of their annual compensation for service to DPL and DP&L, each non-employee Director received a $54,000 retainer in two tranches.  A totalRSUs on the date of 9,000 Restricted Shares shallthe annual meeting.  The RSUs will become nonforfeitablenon-forfeitable on December 31, 2009April 15 of the following year; but if Mr. Barbas remainsthe Director resigns, dies or retires prior to the April 15 vesting date, the vested shares will be distributed on a pro rata basis.  The RSUs accrue quarterly dividends in the continuous employform of additional RSUs.  Upon vesting, the RSUs will become exercisable and will be distributed in DPL common shares, unless the Director chooses to defer receipt of the Companyshares until sucha later date.  The remaining 10,000 Restricted Shares will become nonforfeitableRSUs are valued at the closing stock price on December 31, 2011 if Mr. Barbas remains a Company employee.the day prior to the grant and the compensation expense is recognized evenly over the vesting period. 26 Notes to the Condensed Consolidated Financial Statements (continued)     Number of   Weighted-Average       Director   Grant Date   $ in millions (except for share amounts)   RSUs   Fair Value   Non-vested at January 1, 2007   —   $ —   Granted in first nine months 2007   14,920   0.5   Dividends accrued in the first nine months 2007   231   —   Vested in first nine months 2007   (6,643 ) (0.2 ) Forfeited in first nine months 2007   (1,553 ) —   Non-vested at September 30, 2007   6,955   $ 0.3       Nine Months Ended       September 30,       2007   2006   Restricted Stock Units:           Outstanding at beginning of year   —   —   Granted   14,920   —   Dividends accrued   231   —   Exercised   (142 ) —   Forfeited   (1,553 ) —   Outstanding at period-end   13,456   —   Exercisable at period-end   —   —   The following table reflects information about non-employee director RSU activity during the period:     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007   2006   2007   2006   Weighted-average grant date fair value of non-employee director RSUs granted during the period   $ —   $ —   $ 0.5   $ —   Intrinsic value of non-employee director RSUs exercised during the period   $ —   $ —   $ —   $ —   Proceeds from non-employee director RSUs exercised during the period   $ —   $ —   $ —   $ —   Tax benefit from proceeds of non-employee director RSUs exercised   $ —   $ —   $ —   $ —   Fair value of non-employee director RSUs that vested during the period   $ (0.1 ) $ —   $ (0.2 ) $ —   Unrecognized compensation expense   $ 0.2   $ —   $ 0.2   $ —   Weighted-average period to recognize compensation expense (in years)   0.5   —   0.5   —   27 Notes to the Condensed Consolidated Financial Statements (continued) 7.              Long-term8.     Long-Term Debt and Notes Payable   At   At       September 30,   December 31,   $ in millions   2006   2005   First Mortgage Bonds maturing 2013 - 5.125%   $ 470.0   $ 470.0   Pollution Control Series maturing through 2036 - 4.79% and 4.78% (a)   314.4   214.4                  784.4   684.4               Note to Capital Trust II 8.125% due 2031   195.0   195.0   Senior Notes 6.875% Series due 2011   297.4   297.4   Senior Notes 8.0% Series due 2009   175.0   175.0   Senior Notes 6.25% Series due 2008   100.0   100.0   Senior Notes 8.25% Series due 2007   —   225.0   Obligation for capital leases   2.2   3.0   Unamortized debt discount   (2.1 ) (2.7 )             Total   $ 1,551.9   $ 1,677.1   DPL   At   At       September 30,   December 31,   $ in millions   2007   2006   DP&L - First mortgage bonds maturing 2013 - 5.125%   $ 470.0   $ 470.0   DP&L - Pollution control series maturing 2036 - 4.80%   100.0   100.0   DP&L - Pollution control series maturing 2034 - 4.80%   137.8   137.8   DP&L - Pollution control series maturing 2034 - 4.80%   41.3   41.3   DP&L - Pollution control series maturing 2028 - 4.70%   35.3   35.3       784.4   784.4               DPL Inc. - Note to Capital Trust II 8.125% due 2031   195.0   195.0   DPL Inc. - Senior Notes 6.875% Series due 2011   297.4   297.4   DPL Inc. - Senior Notes 8.00% Series due 2009   175.0   175.0   DPL Inc. - Senior Notes 6.25% Series due 2008   —   100.0   DP&L - Obligations for capital leases   1.5   2.0   Unamortized debt discount (a)   (1.7 ) (2.0 ) Total   $ 1,451.6   $ 1,551.8   (a) DP&L’s unamortized debt discount was $(1.1) million and $(1.2) million for September 30, 2007 and December 31, 2006, respectively.   DP&L   At   At       September 30,   December 31,   $ in millions   2007   2006   DP&L - First mortgage bonds maturing 2013 - 5.125%   $ 470.0   $ 470.0   DP&L - Pollution control series maturing 2036 - 4.80%   100.0   100.0   DP&L - Pollution control series maturing 2034 - 4.80%   137.8   137.8   DP&L - Pollution control series maturing 2034 - 4.80%   41.3   41.3   DP&L - Pollution control series maturing 2028 - 4.70%   35.3   35.3       784.4   784.4               DP&L - Obligations for capital leases   1.5   2.0   Unamortized debt discount   (1.1 ) (1.2 ) Total   $ 784.8   $ 785.2   (a) Weighted average interest rates for 2006 and 2005, respectively. The amountsAt September 30, 2007, DPL’s scheduled maturities of maturities and mandatory redemptions for first mortgage bonds, notes andlong-term debt, including capital leaseslease obligations, over the next five years are $0.2 million for the remainder of 2006, $225.9 million in 2007, $100.7 million in 2008, $175.7$175.8 million in 2009, $0.6 million in 2010 and $297.4 million in 2011. At September 30, 2007, DP&L’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.2 million for the remainder of 2007, $0.7 million in 2010.2008, $0.8 million in 2009, $0.6 million in 2010 and none in 2011.  Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds.  During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005 volume cap carryforward.  The financing is to be used to partially fund the ongoing flue gas desulfurization (FGD) capital projects.  On September 13, 2006, the Ohio Air Quality 28 Notes to the Condensed Consolidated Financial Statements (continued) Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036.  In turn, DP&L borrowed these funds from the OAQDA.  These funds were placed in escrow with a trustee and, as of April 3, 2007, DP&L has drawn out the entirety of the funds.  DP&L is considering issuing in conjunction with the OAQDA another series of tax-exempt bonds to finance additional qualifying solid waste disposal facility costs at Miami Fort, Killen, Stuart and the pollution control series. Conesville generating stations. On November 21, 2006, DP&L has entered into a $100new $220 million unsecured revolving credit agreement replacing its $100 million facility.  This new agreement has a five-year term that is renewable annuallyexpires November 21, 2011 and expires on May 30, 2010.  Thisprovides DP&L with the ability to increase the size of the facility may be increased up to $150 million.by an additional $50 million at any time.  The facility contains one financial covenant:  DP&L&L’s total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of September 30, 2007,DP&L had no borrowings outstanding borrowings under this credit facility at September 30, 2006.facility.  Fees associated with this credit facility are approximately $0.2 million per year.  Changes in credit ratings, however, may affect fees and the applicable interest rate for DP&L’srate.  This revolving credit agreement. On February 17, 2006, agreement also contains a $50 million letter of credit sublimit.  DP&L renewed its $10 million Master Letter of Credit Agreement for one year with a financial lending institution.  This agreement supports performance assurance needs in the ordinary course of business.  DP&L has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating related clauses allowing the counter parties to seek additional surety under certain conditions.  As of September 30, 2006, 2007, DP&L had twono outstanding letters of credit against the facility. During the second quarter ending June 30, 2007, DPL entered into a short-term loan to DP&Lfor $105 million.  DP&L paid down $15 million of this loan during the third quarter ending September 30, 2007, leaving a totalcurrent outstanding loan balance of $2.2$90 million. In March 2004, we completed a $175 million private placement of unsecured 8% series Senior Notes due March 2009.  The Senior Notes will not be redeemable prior to maturity except that we have the right to redeem the notes for a make-whole payment at the adjusted treasury rate plus 0.25%.  The 8% series Senior Notes were issued pursuant to our indenture dated as of March 1, 2000, and pursuant to authority granted in our Board resolutions dated March 25, 2004.  The notes impose a limitation on the incurrence of liens on the capital stock of any of our significant subsidiaries and require us and our subsidiaries to meet a consolidated coverage ratio of 2 to 1 prior to incurring additional indebtedness.  The limitation on the incurrence of additional indebtedness  This short-term loan does not apply to (i) indebtedness incurred to refinance existing indebtedness, (ii) subordinated indebtedness and (iii) up to $150 million of additional indebtedness.  In addition to the events of default specified in the indenture, an event of default under the notes includes a payment default or acceleration of indebtedness under any other indebtedness of ours or any ofaffect our subsidiaries which aggregates $25 million or more.  The purchasers were granted registration rights in connection with the private placement under an Exchange and Registration Rights Agreement.  Pursuant to this agreement, we were obligated to file an exchange offer registration statement by July 22, 2004, have the registration statement declared effective by September 20, 2004 and consummate the exchange offer by October 20, 2004.  We failed (1) to have a registration statement declared effective and (2) to complete the exchange offer according to this timeline.  As a result, we had been accruing additional interest at a rate of 0.5% per year for each of these two violations, up to an additional interest rate not to exceed in the aggregate 1.0% per year.  As each violation is cured, the additional interest rate decreases by 0.5% per annum.  Our exchange offer registration statement for these securities was declared effective by the SEC on June 27, 2006.  As a result, on June 27, 2006, we ceased accruing 0.5% of the additional interest.  On July 31, 2006, we ceased accruing the other 0.5% of additional interest when the exchange of registered notes for the unregistered notes was completed.  By completing the exchange, we reduced the annual interest expense by $1.8 million. During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005 volume cap carryforward.  The financing is to be used to partially fund the ongoing flue gas desulfurization (FGD) capital projects.  The PUCO approved DP&L’s application for this additional financing on July 26, 2006. On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036. In turn, DP&L borrowed these funds from the OAQDA. Payment of principal and interest on the Bonds when due is insured by an insurance policy issued by Financial Guaranty Insurance Company.  DP&L is using the proceeds from these borrowings to assist in financing its portion of the costs of acquiring, constructing and installing certain solid waste disposal facilities comprising air quality facilities at Miami Fort, Killen and Stuart Generating Stations. These facilities are currently under construction and the proceeds from the borrowing have been placed in escrow with the trustee (the Bank of New York) and are being drawn upon only as facilities are built and qualified costs incurred. In the event any of the proceeds are not drawn, DP&L would eventually be required to return the unused proceeds to bondholders.  DP&L expects to draw down all of the proceeds from this borrowing over the next year. DP&L expects to use the remaining $100 million of volume cap carryforward prior to the end of 2008. We are planning to issue in conjunction with the OAQDA another $100 million of tax-exempt bonds to finance the remaining solid waste disposal facilities at Miami Fort, Killen, Stuart and Conesville Generating Stations. debt covenants.  There are no other inter-company debt collateralizations or debt guarantees between usDPL, DP&L and ourtheir subsidiaries.  None of ourthe debt obligations of DPL or DP&L’s debt obligations&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries. 18 29 Notes to the Condensed Consolidated Financial Statements (continued) 8.9.     Commitments and Contingencies Contractual Obligations and Commercial Commitments We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations.  At September 30, 2007, these include:         Payment Year   $ in millions   Total   2007   2008-2009   2010-2011   Thereafter   DPL                                               Long-term debt   $ 1,550.0   $ —   $ 275.0   $ 297.4   $ 977.6   Interest payments   1,026.4   23.9   170.7   144.0   687.8   Pension and postretirement payments   219.1   5.5   45.2   46.5   121.9   Capital lease   2.3   0.2   1.5   0.6   —   Operating leases   0.8   0.4   0.3   0.1   —   Coal contracts (a)   925.8   104.6   578.8   242.4   —   Limestone contracts (a)   57.7   0.6   9.5   10.9   36.7   Reserve for uncertain tax provisions   41.9   41.9   —   —   —   Other contractual obligations   337.2   232.8   86.5   14.5   3.4   Total contractual obligations   $ 4,161.2   $ 409.9   $ 1,167.5   $ 756.4   $ 1,827.4                           DP&L                                               Long-term debt   $ 783.2   $ —   $ —   $ —   $ 783.2   Interest payments   542.6   9.8   78.3   78.3   376.2   Pension and postretirement payments   219.1   5.5   45.2   46.5   121.9   Capital lease   2.3   0.2   1.5   0.6   —   Operating leases   0.8   0.4   0.3   0.1   —   Coal contracts (a)   925.8   104.6   578.8   242.4   —   Limestone contracts (a)   57.7   0.6   9.5   10.9   36.7   Reserve for uncertain tax provisions   41.9   41.9   —   —   —   Other contractual obligations   337.2   232.8   86.5   14.5   3.4   Total contractual obligations   $ 2,910.6   $ 395.8   $ 800.1   $ 393.3   $ 1,321.4   (a) DP&L-operated units Long-term debt: DPL’s long-term debt as of September 30, 2007 consists of DP&L’s first mortgage bonds and tax-exempt pollution control bonds, DPL unsecured notes and includes current maturities and unamortized debt discounts. DP&L’s long-term debt as of September 30, 2007 consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount. See Note 8 of Notes to Condensed Consolidated Financial Statements. Interest payments: Interest payments associated with the long-term debt described above. Pension and postretirement payments: As of September 30, 2007, DP&L had estimated future benefit payments as outlined in Note 6 of Notes to Condensed Consolidated Financial Statements.  These estimated future benefit payments are projected through 2016. Capital lease: As of September 30, 2007, DP&L had a capital lease that expires in September 2010. 30 Notes to the Condensed Consolidated Financial Statements (continued) Operating leases: As of September 30, 2007, DPL and DP&L had several operating leases with various terms and expiration dates.  Not included in this total is approximately $88,000 per year related to right-of-way agreements that are assumed to have no definite expiration dates. Coal contracts: DP&L has entered into various long-term coal contracts to supply portions of its coal requirements for its generating plants.  Contract prices are subject to periodic adjustment and have features that limit price escalation in any given year. Limestone contract: DP&L has entered into a contract to supply limestone for its generating facilities. Reserve for uncertain tax positions: On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was no significant impact to our overall results of operations, cash flows or financial position.  The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  During 2007, we recorded an additional $1.6 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007.  None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility. Other contractual obligations: As of September 30, 2007, DPL and DP&L had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates. We enter into various commercial commitments which may affect the liquidity of our operations.  At September 30, 2007, these include: Credit facilities: In November 2006, DP&L replaced its previous $100 million revolving credit agreement with a $220 million five-year facility that expires on November 21, 2011.  DP&L has the ability to increase the size of the facility by an additional $50 million at any time.  At September 30, 2007, there were no outstanding borrowings under this facility. Guarantees: DP&L owns a 4.9% equity ownership interest in an electric generation company.  As of September 30, 2007, DP&L could be responsible for the repayment of 4.9%, or $34.1 million, of a $695 million debt obligation that matures in 2026. In two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPLE regarding the sale of the Darby Electric Peaking Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc.  In both cases, DPL has agreed to guarantee the obligations of DPLE over a multiple year period as follows: $ in millions   2007   2008   2009   2010   Darby   $ 30.6   $ 23.0   $ 15.3   $ 7.7                       Greenville   $ 14.8   $ 11.1   $ 7.4   $ 3.7   31 Notes to the Condensed Consolidated Financial Statements (continued) Contingencies In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  We believe the amounts provided in our Condensed Consolidated Financial Statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies.  (See Note 1 of Notes to Consolidated Financial Statements.)  However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, regulatory proceedings and orders, claims, tax examinations and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of those amounts provided as of September 30, 2007, cannot be reasonably determined. Employees Approximately 53% of our employees are under a collective bargaining agreement. Environmental Matters WeDPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and law.  In the normal course of business, DP&L haswe have investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations.  DP&L hasWe have been identified, either by a government agency or by a private party seeking contribution to site clean-up costs, as a potentially responsible party (PRP) at two sites pursuant to state and federal laws.  DP&L’s units 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 EPA pursuant to these provisions for 2005 and the first quarter 2006 were recorded and reported in compliance with EPA regulations.  Subsequently DP&L detected a malfunction with its emission monitoring system at one of its generation stations and ultimately determined its SO2 and NOx emissions data was under reported.  DP&L has petitioned the EPA to accept an alternative methodology for calculating actual emissions for 2005 and the first quarter 2006.  The Company has sufficient allowances in its general account to cover the understatement and is working with the EPA to resolve the matter.  Management does not believe the ultimate resolution of this matter will have a material impact on operating results or financial position.  DP&L recordsWe record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.”  To the extent a probable loss can only be estimated by reference to a range of equally probable outcomes, and no amount within the range appears to be a better estimate than any other amount, DP&L accrues for the low endContingencies” as discussed in Note 1 of the range.  Because of uncertainties relatedNotes to these matters, accruals are based on the best information available at the time.  DP&L evaluatesCondensed Consolidated Financial Statements.  We evaluate the potential liability related to probable losses quarterly and may revise itsour estimates.  Such revisions in the estimates of the potential liabilities could have a material effect on our results of operations and financial position. On November 18, 2004, the State of New York and seven other states (the States) filed suit against the American Electric Power Corporation (AEP) and its various subsidiaries, alleging various Clean Air Act (CAA) violations at a number of AEP electric generating facilities, including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern, Duke Energy’s subsidiary Cincinnati Gas & Electric, and us).  The case was subsequently consolidated with similar cases brought by the federal EPA and other plaintiffs dating back to 1999, which cases also involved AEP electric generating facilities. On October 9, 2007, AEP filed before the federal district court in Ohio a consent decree executed by AEP, the EPA, the States and the other plaintiffs.  The consent decree is a comprehensive and complex settlement of issues presented in the case.  It affects us only with respect to Conesville Unit 4, which is made subject to requirements to install Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization (FGD) units by December 31, 2010.   Because the co-owners had previously budgeted for such installation, this portion of the settlement does not materially change projected costs.  AEP will also be required to operate its power plants, including Conesville Unit 4, to meet specified annual caps across all of the power plants covered by the consent decree.  It is expected that AEP will be able to meet those annual cap requirements without materially affecting Conesville Unit 4’s operations beyond the requirements to install and operate SCR and FGD equipment.   The consent decree also requires the payment by AEP of a $15 million civil penalty and to incur costs of $60 million in environmental damage mitigation projects.  The share of such costs that may ultimately be assigned to Conesville Unit 4 and any further share assigned to us as a co-owner has not been determined but is not expected to be material. The court will provide an opportunity for public comment on the proposed consent decree.  After public comment is received, the court will review the proposed consent decree and has the power to accept or reject it.  DPL cannot predict when the court will issue a ruling or what that ruling may be. In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart Generating Station in the United States District Court for the Southern District of Ohio for alleged violations of the CAA and the Station’s operating permit.  DP&L, on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken place, expert reports have been filed by both parties and depositions of experts are expected to occur in the fourth quarter of 2007.  Dispositive motions are to be filed in January 2008.  No trial date has been set.  DP&L is unable to determine the impact of this lawsuit, if any, on its overall results of operations, financial position or cash flows. Legal Matters In February 2007, Ohio’s Regional Air Pollution Control Agency (RAPCA), issued a Notice of Violation (NOV) to DP&L with respect to an allegedly failed performance test of one boiler in November 2006 for particulate matter at DP&L’s Hutchings Generating Station.  On June 29, 2007, the normal course of business, we have been namedU.S. Environmental Protection Agency (US EPA) Region V, issued a defendantNOV to DP&L with respect to the same performance test and with respect to earlier tests for particulates conducted in various legal actions, including arbitrations, class actions1996 and other litigation. Certain of1998 for a different boiler at the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. We are also involved in other reviews, investigationssame station.  Representatives from DP&L met with officials from US EPA Region V and proceedings by governmentalRAPCA on July 24, 2007 to discuss the referenced performance tests, subsequent performance tests, and self-regulatory organizations regarding our business. Certain ofpast and planned operations at the foregoing could result in adverse judgments, settlements, fines, penalties or other relief. Because litigationStation.  DP&L is inherently unpredictable, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, we cannotunable to predict with certainty the loss or range of loss related to such matters, how such matters will be resolved, when they will be ultimately resolved, or what the eventual settlement, fine, penalty or other relief might be. Consequently, we cannot estimate losses or ranges of losses for matters where there is only a reasonable possibility that a loss may have been incurred. Although the ultimate outcome of these matters cannot be ascertained at this time it iswhat further actions, if any, will be taken by the opinion of management, thatUS EPA or RAPCA with respect to these NOVs. 32 Notes to the resolution of the foregoing matters will not have a material adverse effect on our financial condition, taken as a whole; such resolution may, however, have a material effect on the operating results in any future period, depending on the level of income for such period. We have provided reserves for such matters in accordance with SFAS 5, “Accounting for Contingencies.” The ultimate resolution may differ from the amounts reserved. Certain legal proceedings in which we are involved are discussed in Note 14 to theCondensed Consolidated Financial Statements (continued) 10. Executive Litigation On May 21, 2007, we settled the litigation with three former executives.  As part of this settlement, the three former executives relinquished and Part I, Item 3, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005;dismissed all their claims including those related to certain deferred compensation, RSUs, MVE incentives, stock options and Note 8legal fees. The RSUs and stock options relinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the Consolidated Financial Statementssettlement date, DPL had accrued obligations of approximately $64.2 million of which DP&L had accrued obligations of approximately $60.3 million.  Included in these amounts was approximately $3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million, all of these claims were settled. As a result of this settlement during the second quarter ended June 30, 2007, DPL realized a net pre-tax gain in continuing and Part II, Item 1, includeddiscontinued operations of approximately $31.0 million and $8.2 million, respectively.  The net gain is comprised of the reversal of the $64.2 million of accrued obligations less the $25 million settlement.  The obligations related to the discontinued operations were associated with the management of DPL’s financial asset portfolio, which was conducted in our Form 10-QMVE subsidiary.  The MVE operations were discontinued in 2005 with the sale of the financial asset portfolio.  The $25 million settlement expense was allocated between continuing and discontinued operations based on the proportionate share of continuing and discontinued obligations.  The following table outlines the components of DPL’s net pre-tax gain for continuing and discontinued operations: Continuing operations:       Reversal of accrued obligations   $ 50.8   Allocated settlement expense   (19.8 ) Net gain from continuing operations   $ 31.0           Discontinued operations:       Reversal of accrued obligations   $ 13.4   Allocated settlement expense   (5.2 ) Net gain from discontinued operations   $ 8.2   As a result of this settlement during the quarterly periodsecond quarter ended March 31, 2006 and June 30, 2006.2007, DP&L realized a net pre-tax gain in continuing operations of approximately $35.3 million.  Accrued obligations associated with the former executives’ litigation were recorded by DP&L since the obligations were associated with our non-qualified benefit plans.  DP&L had no ownership of DPL’s discontinued financial asset portfolio business, therefore these liabilities were reversed and DP&L’s net pre-tax gain was recorded within continuing operations.  The following discussiontable outlines the components of DP&L’s net gain: Continuing operations: Reversal of accrued obligations $60.3 Allocated settlement expense (25.0 ) Net gain from continuing operations $35.3 The $25 million settlement was funded from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation.  As part of this transaction during the second quarter ended June 30, 2007, DPL and DP&L recorded a $3.2 million realized gain which is limited to recent developments concerning our legal proceedings and should be readreflected in conjunctioninvestment income. 11.  Insurance Recovery Claim On April 30, 2007, DP&L executed a settlement agreement for $14.5 million with those earlier reports. On January 13, 2006, we filed a claim against one of our insurers, Associated Electric & Gas Insurance Services Limited (AEGIS), under a fiduciary liability policy to recoup a portion of legal fees associated with our litigation against three former executives.  An arbitration of this matterThis was held on August 4, 2006.  The arbitration panel ruled on or about September 12, 2006 that the AEGIS policy does not require an advance of defense expenses to us.  Rather, the arbitration panel stated that we are required to file a written undertakingrecorded as a condition precedentreduction to repay expenses finally established notoperation and maintenance expense during the second quarter ended June 30, 2007. On May 16, 2007, DPL and DP&L notified one of our insurers, Energy Insurance Mutual Limited, under an umbrella fiduciary liability policy, of our intent to pursue a claim for additional legal fees that DPL and DP&L incurred in defending claims made by the three former executives. 33 Notes to the Condensed Consolidated Financial Statements (continued) 12.  Regulatory Matters We apply the provisions of Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation,” (SFAS 71) to our regulated operations.  This accounting standard defines regulatory assets/liabilities as the deferral of incurred costs/benefits expected to be insured.  We have filed a written undertaking with AEGIS and will continue to pursue resolution ofreflected in future customer rates. Regulatory liabilities are reflected on the claim through mediation and arbitration in 2007. On February 13, 2006, we received correspondence from the Ohio Department of Taxation (ODT) notifying us that ODT has completed their examination and review of our Ohio Corporation Franchise Tax Returns for tax years 2002 through 2004 and that the final proposed audit adjustments result in a balance due of $90.8 million before interest and penalties.  We have reviewed the proposed audit adjustments and are vigorously contesting the ODT findings and notice of assessment through all administrative and judicial means available. On March 29, 2006, we filed petitions for reassessment with the ODT to protest each assessment as well as request corrected assessments for each tax year.  On October 12, 2006, we signed a Memorandum of Understanding with the ODT that stated if the ODT’s positions are ultimately sustained in judicial proceedings, the total additional tax liability that we would be subject to for tax years 2002 through 2004 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.  We believe we have recorded adequate tax reserves related to the proposed adjustments; however, we cannot predict the outcome, which could be material to our results of operations and cash flows. We are also under audit review by various state agencies for tax years 2002 through 2004.  We have also filed an appeal to the Ohio Board of Tax Appeals for tax years 1998 through 2001.  Depending upon the outcome of these audits and the appeal, we may be required to increase our tax provision if actual amounts ultimately determined exceed recorded reserves.  We believe we have adequate reserves in each tax jurisdiction but cannot predict the outcome of these audits. In September 2006, we became aware of unasserted claimsCondensed Consolidated Balance Sheet under the Fair Labor Standards Act concerningcaption entitled “Other Deferred Credits”.  Regulatory assets and liabilities on the calculationCondensed Consolidated Balance Sheet include: $ in millions   Type of Recovery (a)   Amortization Through   At September 30, 2007   At December 31, 2006   Regulatory Assets:                   Deferred recoverable income taxes   C/B   Ongoing   $ 51.9   $ 53.1   Pension and postretirement benefits   C   Ongoing   44.5   47.1   Electric Choice system costs   F   2010   11.0   13.5   Regional transmission organization costs   C   2014   10.3   11.4   Deferred storm costs   C   2008   2.7   5.4   PJM administrative costs   F   2009   3.4   4.6   Power plant emission fees   C   Ongoing   4.4   4.5   Rate case expenses   F   2010   0.8   1.0   Retail settlement system costs           3.1   3.1   PJM integration costs   F   2015   1.1   1.4   Other costs           3.8   3.5   Total regulatory assets           $ 137.0   $ 148.6                       Regulatory Liabilities:                   Asset retirement obligations - regulated property           $ 90.7   $ 86.3   Postretirement benefits           7.1   7.6   SECA net revenue subject to refund           20.4   18.7   Total regulatory liabilities           $ 118.2   $ 112.6   (a)F — Recovery of overtime rates for our unionized workforce.  We will vigorously oppose these claims, if asserted against us.  However, if we do not prevail, the cost to us would beincurred costs plus rate of return. C — Recovery of incurred costs only. B — Balance has an offsetting liability resulting in the range of $0-$3.5 million.no impact on rate base. Contractual Obligations and Commercial CommitmentsRegulatory Assets: We enter into various contractualevaluate our regulatory assets each period and other long-term obligations that may affect the liquiditybelieve recovery of our operations.  At September 30, 2006, these include: Contractual Obligationsassets is probable.  We have received or requested a return on certain regulatory assets for which we are currently recovering or seeking recovery through rates.           Payment Year   $ in millions   Total   Less than 1 Year   2 - 3 Years   4 - 5 Years   More than 5 Years                           Long-term debt   $ 1,774.7   $ 225.0   $ 275.0   $ 297.4   $ 977.3   Interest payments   1,129.9   103.4   175.8   149.2   701.5   Pension and postretirement payments   249.2   33.4   46.0   47.2   122.6   Capital leases   3.2   1.1   1.4   0.7   —   Operating leases   0.5   0.3   0.2   —   —   Fuel and limestone contracts (a)   586.8   86.7   315.5   97.5   87.1   Other long-term obligations   27.5   14.6   9.8   3.1   —                           Total contractual obligations   $ 3,771.8   $ 464.5   $ 823.7   $ 595.1   $ 1,888.5   (a) DP&L operated units. Long-term debt:Deferred recoverable income taxes represent deferred income tax assets recognized from the normalization of flow-through items as the result of amounts previously provided to customers.  Since currently existing temporary differences between the financial statements and the related tax basis of assets will reverse in subsequent periods, deferred recoverable income taxes are amortized. Long-term debt as of September 30, 2006, consists of DP&L’s first mortgage bonds and tax-exempt pollution control bonds, our unsecured notes and includes current maturities and unamortized debt discounts.  See Note 7 of Notes to Consolidated Financial Statements. Interest payments: Interest payments associated with the long-term debt described above. Pension and postretirement payments:benefits represent the unfunded benefit obligation related to the transmission and distribution areas of our electric business.  We have historically recorded these costs on the accrual basis, and these costs have been historically recovered through rates.  This factor, combined with the historical precedents from the Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC), makes future rate recovery of these costs probable. Electric Choice system costs represent costs incurred to modify the customer billing system for unbundled rates and electric choice bills relative to other generation suppliers and information reports provided to the state administrator of the low-income electric program.  In February 2005, the PUCO approved a stipulation allowing us to recover certain costs incurred for modifications to our billing system from all customers in our service territory.  On March 1, 2006, the PUCO issued an order that allowed us to begin collecting this rider immediately.  We expect to recover all costs over five years. Regional transmission organization costs represent costs incurred to join a Regional Transmission Organization (RTO) that controls the receipts and delivery of bulk power within the service area.  These costs are being amortized over a 10-year period that commenced in October 2004. 34 Notes to the Condensed Consolidated Financial Statements (continued) Deferred storm costs include costs incurred by us to repair damage from the December 2004 and January 2005 ice storms.  On July 12, 2006, the PUCO approved our tariff as proposed and we began recovering these deferred costs over a two-year period beginning August 1, 2006. PJM administrative costs contain the administrative fees billed to us by PJM Interconnection, L.L.C. (PJM) as a member of PJM.  Pursuant to a PUCO order issued on January 25, 2006, these deferred costs will be recovered over a three-year period from retail ratepayers beginning February 2006. Power plant emission fees represent costs paid to the State of Ohio for environmental monitoring that are or will be recovered from customers over various periods under a PUCO rate rider. Rate case expenses represent costs incurred in connection with the Rate Stabilization Surcharge that was approved by the PUCO and implemented in January 2006.  These costs are being amortized over a five-year period. Retail settlement system costs represent costs to implement a retail settlement system that reconciles the amount of energy a competitive retail electric service (CRES) supplier delivers to its customers and what its customers actually use.  Based on case precedent in other utilities’ cases, the cost of this system is recoverable through our next transmission rate case that will be filed at the FERC.  The timing of this case is uncertain at this time. PJM integration costs include infrastructure costs and other related expenses incurred by PJM and reimbursed by DP&L to integrate us into the RTO.  Pursuant to a FERC order, the costs are being recovered over a 10-year period beginning May 2005 from wholesale customers within PJM. Other costs primarily include consumer education advertising regarding electric deregulation and will be recovered over various periods. Regulatory Liabilities: Asset retirement obligations - regulated property reflect an estimate of amounts recovered in rates that are expected to be expended to remove existing transmission and distribution property from service upon retirement. Postretirement benefits reflect a regulatory liability that was recorded for the portion of the unrealized gain on our postretirement trust assets related to the transmission and distribution areas of our electric business.   We have historically recorded these transactions on an accrual basis and these costs have historically been recovered through rates.  This factor, 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 Cost Adjustment) net revenue subject to refund represents the deferral of net SECA revenue accrued in 2005 and 2006.  SECA revenue and expenses represent FERC ordered transitional payments to replace the through-and-out transmission rates that were eliminated within the PJM/Midwest Independent Transmission System Operator, Inc. (MISO) region.  A hearing was held in early 2006 to determine the amount of these transitional payments.  A hearing examiner’s recommendation of August 2006 has been appealed by multiple parties including DP&L.  To date, no ruling by the FERC has been issued.  We received and paid these transitional payments from May 2005 through March 2006. 13.Ownership of Facilities DP&L and two other Ohio utilities have undivided ownership interests in seven electric generating facilities and numerous transmission facilities.  Certain expenses, primarily fuel costs for the generating units, are allocated to the owners based on their energy usage.  The remaining expenses, as well as investments in fuel inventory, plant materials, operating supplies and capital additions, are allocated to the owners in accordance with their respective ownership interests.  As of September 30, 2006, we2007, DP&L had estimated future benefit payments as outlined$334.0 million of construction work in Note 5 of progress at such facilities. 35 Notes to the Condensed Consolidated Financial Statements.  These estimated future benefit payments are projected through 2016. Statements (continued) Capital leases: As of September 30, 2006, we had two capital leases that expire in November 2007 and September 2010. Operating leases:DP&L’s As of September 30, 2006, we had several operating leases with various terms and expiration dates.  Not included in this total is approximately $88 thousand per year related to right-of-way agreements that are assumed to have no definite expiration dates. Fuel and limestone contracts: DP&L has entered into various long-term coal contracts to supply portions of its coal requirements for its generating plants and a long-term contract to supply limestone for the operation of its flue gas desulfurization (FGD) units.  Coal contract prices are subject to periodic adjustment, and have features that limit price escalation in any given year. A new long-term barge agreement was executed for five years beginning September 2006. Other long-term obligations: As of September 30, 2006, we had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates. We enter into various commercial commitments, which may affect the liquidity of our operations.  At September 30, 2006, these include: Credit facilities: DP&L has a $100 million, 364-day unsecured credit facility that is renewable annually and expires on May 30, 2010.  At September 30, 2006, there were no borrowings outstanding under this credit agreement.  The facility may be increased up to $150 million. Guarantee: DP&L owns a 4.9% equityundivided ownership interest in an electric generation company.  As ofsuch jointly owned facilities at September 30, 2006, DP&L could be responsible for the repayment of 4.9%, or $21.8 million, of a $445 million debt obligation that matures in 2026.2007 is as follows: Other: We completed the sale of or entered into alternative closing arrangements for all private equity funds in our financial asset portfolio as of June 20, 2005.  We have an obligation to fund any cash calls or other commitments in which the purchaser of the private equity funds defaults with respect to the funds for which we entered into an alternative closing arrangement.  As of September 30, 2006, this obligation is estimated not to exceed $0.1 million.     DP&L Share   DP&L Investment       Ownership (%)   Production Capacity (MW)   Gross Plant in Service ($ in millions)   Accumulated Depreciation ($ in millions)   Construction Work in Progress ($ in millions)   Production Units:                       Beckjord Unit 6   50.0   207   63   53   7   Conesville Unit 4   16.5   129   34   27   24   East Bend Station   31.0   186   199   128   9   Killen Station   67.0   424   568   249   12   Miami Fort Units 7&8   36.0   360   270   103   70   Stuart Station   35.0   839   392   205   201   Zimmer Station   28.1   365   1,055   568   11   Transmission (at varying percentages)       90   50   0                           DPL’s and DP&L’s share of operating costs associated with the jointly-owned generating facilities are included within the corresponding line on the Condensed Consolidated Statement of Results of Operations and our share of the investment is included in the Condensed Consolidated Balance Sheet.       9.              Peaking Generating Facilities DPL has received and is evaluating purchase offers for three of its peaking generation sites. The sites represent a combined capacity of 872 megawatts and a net book value of approximately $300 million.  A decision about whether to sell these assets has not been made or approved. The Company believes that if terms could be reached with potential buyers a transaction could be taken to its Board for approval during the fourth quarter of 2006. If approved, a transaction is not expected to close until the first half of 2007. Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain statements contained in this discussionreport are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements.  Forward-looking statements are based on management’s beliefs, assumptions and expectations of our future economic performance taking into account the information currently available to management.  These statements are not statements of historical fact.fact and are typically identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions.  Such forward-looking statements are subject to risks and uncertainties, and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond ourDPL’s control, including but not limited to: abnormal or severe weather;weather and catastrophic weather-related damage; unusual maintenance or repair requirements; changes in fuel costs and purchased power, coal, environmental emissions, natural gas and other commodity prices; volatility and changes in markets for electricity and other energy-related commodities; increased competition;competition and deregulation in the electric utility industry; increased competition in the retail generation market; changes in interest rates; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, emission levels, rate structures or tax laws; changes in federal and/or state environmental laws and decisions;regulations to which DPL and its subsidiaries are subject; the development of Regional Transmission Organizations, including PJM to which DPL’s operating subsidiary (DP&L) has given control of its transmission functions; changes in DPL’s purchasing processes, pricing, delays, contractor and supplier performance and availability; significant delays associated with large construction projects; growth in DPL’s service territory and changes in demand and demographic patterns; changes in accounting rules;rules and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; financial market conditions; the outcomes of litigation and regulatory investigations, proceedings or inquiries; general economic conditions.conditions; and the risks and other factors discussed in DPL’s and DP&L’s filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of the document in which they are made.  These forward-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 any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. 36 UPDATES/BUSINESS OVERVIEW This report includes the combined filing of DPL Inc. (DPL) and The Dayton Power and Light Company(DP&L).  DP&L is the principal subsidiary of DPL providing approximately 99% of DPL’s total consolidated revenue and approximately 93% of DPL’s total consolidated asset base.  Throughout this report, the terms we, us, our and ours are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.  Historically, DPL and DP&L have filed separate SEC filings.  DPL and DP&L now file combined SEC reports on an interim and annual basis. DPL is a regional electric energy and utility company and through its principal subsidiary, DP&L, is primarily engaged in the generation, transmission and distribution of electricity in West Central Ohio. DPL and DP&L strive to achieve disciplined growth in energy margins while limiting volatility in both cash flows and earnings and to achieve stable, long-term growth through efficient operations and strong customer and regulatory relations. More specifically, DPL and DP&L’s strategy is to match energy supply with load or customer demand; to maximize profits while effectively managing exposure to movements in energy and fuel prices and to utilize the transmission and distribution assets that transfer electricity at the most efficient cost, while maintaining the highest level of customer service and reliability. We operate and manage generation assets and are exposed to a number of risks through this process. These risks include, but are not limited to, electricity wholesale price risk, fuel supply and price risk and power plant performance.  We attempt to manage these risks through various means. For instance, we operate a portfolio of wholly-owned and jointly-owned generation assets that is diversified as to fuel source, cost structure and operating characteristics. We are focused on the operating efficiency of these power plants and maintaining their availability. Like other electric utilities and energy marketers, DP&L and DPL Energy, LLC (DPLE), one of DPL’s wholly-owned subsidiaries, may sell or purchase electric products on the wholesale market.  DP&L and DPLE compete with other generators, power marketers, privately and municipally-owned electric utilities and rural electric cooperatives when selling electricity.  The ability of DP&L and DPLE to sell this electricity will depend on how DP&L’s and DPLE’s price, terms and conditions compare to those of other suppliers. Weoperate and managetransmission and distribution assets in a rate-regulated environment. Accordingly, this subjects us to regulatory risk in terms of the costs that we may recover and the investment returns that we may collect in customer rates. We are focused on delivering electricity and maintaining high standards of customer service and reliability in a cost-effective manner. We operate in a regulated and deregulated environment.  The electric utility industry has historically operated in a regulated environment.  However, in recent years, there have been a number of federal and state regulatory and legislative decisions aimed at promoting competition and providing customer choice.  Market participants have therefore created new business models to exploit opportunities.  The marketplace is now comprised of independent power producers, energy marketers and traders, energy merchants, transmission and distribution providers and retail energy suppliers.  There have also been new market entrants and activity among the traditional participants such as: mergers, acquisitions, asset sales and spin-offs of lines of business.  In addition, transmission systems are being operated by Regional Transmission Organizations (RTOs). As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities are required to join a RTO.  The role of the RTO is to administer an electric marketplace and ensure reliability of the transmission grid.  In October 2004, DP&L successfully integrated its 1,000 miles of high-voltage transmission into the PJM Interconnection, L.L.C. (PJM) RTO.  PJM ensures the reliability of the high-voltage electric power 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.  PJM coordinates and directs the operation of the region’s transmission grid; administers the world’s largest competitive wholesale electricity market; and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. 37 As a member of PJM, DP&L is subject to charges and costs associated with PJM operations as approved by the Federal Energy Regulatory Commission (FERC).  As discussed below, in connection with the recovery of such costs in retail rates, DP&L incurs significant administrative charges.  Additionally, PJM’s role in administering the regional transmission grid and planning regional transmission expansion improvements results in periodic proposals by PJM and other stakeholder members of PJM to the FERC to allocate and charge costs associated with the transmission system to PJM’s members, including DP&L.  DP&L and other interested parties have the right to intervene and offer counter-proposals. UPDATES / OTHER MATTERS Peaking Generating FacilitiesImpact of AEP Settlement DPL has receivedOn November 18, 2004, the State of New York and seven other states (the States) filed suit against the American Electric Power Corporation (AEP) and various subsidiaries, alleging various Clean Air Act (CAA) violations at a number of AEP electric generating facilities, including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern, Duke Energy’s subsidiary Cincinnati Gas & Electric, and us).  The case was subsequently consolidated with similar cases brought by the federal EPA and other plaintiffs dating back to 1999, which cases also involved AEP electric generating facilities. On October 9, 2007, AEP filed before the federal district court in Ohio a consent decree executed by AEP, the EPA, the States and the other plaintiffs.  The consent decree is evaluating purchase offersa comprehensive and complex settlement of issues presented in the case.  It affects us only with respect to Conesville Unit 4, which is made subject to requirements to install Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization (FGD) units by December 31, 2010.  Because the co-owners had previously budgeted for threesuch installation, this portion of the settlement does not materially change projected costs.  AEP will also be required to operate its peaking generation sites.power plants, including Conesville Unit 4, to meet specified annual caps across all of the power plants covered by the consent degree.  It is expected that AEP will be able to meet those annual cap requirements without materially affecting Conesville Unit 4’s operations beyond the requirements to install and operate SCR and FGD equipment. The sites representconsent decree also requires the payment by AEP of a combined capacity$15 million civil penalty and to incur costs of 872 megawatts$60 million in environmental damage mitigation projects.  The share of such costs that may ultimately be assigned to Conesville Unit 4 and any further share assigned to us as a net book value of approximately $300 million.  A decision about whether to sell these assetsco-owner has not been made or approved. The Company believes that if terms could be reached with potential buyers a transaction could be taken to its Board for approval during the fourth quarter of 2006. If approved, a transactiondetermined but is not expected to close untilbe material. The court will provide an opportunity for public comment on the first halfproposed consent decree.  After public comment is received, the court will review the proposed consent decree and has the power to accept or reject it.  DPL cannot predict when the court will issue a ruling or what that ruling may be. Depreciation Expense and Study Update In July 2007, DPL completed a depreciation rate study for non-regulated generation property based on its property, plant and equipment balances as of 2007.December 31, 2005, with adjustments for subsequent scrubber additions.  The results of the depreciation study concluded that DPL’s depreciation rates should be reduced due to asset lives being extended beyond previously estimated lives.  DPL adjusted the depreciation rates for its non-regulated generation property, effective August 1, 2007, reducing depreciation expense.  For the three months ended September 30, 2007, the reduction in depreciation expense increased income from continuing operations by $3.8 million, increased net income by approximately $2.4 million and increased earnings per share (EPS) by approximately $0.02 per share.  For the period from August 1, 2007 to December 31, 2007, the reduction in depreciation expense will increase income from continuing operations of approximately $9.5 million, increase net income by approximately $5.9 million and increase EPS by approximately $0.06 per share. Updates on Competition and Regulation On April 4, 2005, Ohio Matters Since January 2001, DP&L’s electric customers have been permitted to choose their retail electric generation supplier.DP&L filed a request at continues to have the exclusive right to provide delivery service in its state certified territory.  The Public Utilities Commission of Ohio (PUCO) to implement a new rate stabilization surcharge effective January 1, 2006 to recover cost increasesmaintains jurisdiction over DP&L’s delivery of electricity, the standard offer supply service that customers receive if they do not choose an alternative retail electricity supplier and other rates and charges associated with environmental capital and related operations and maintenance costs, and fuel expenses.  On November 3, 2005, we entered into a settlement agreement that extended DP&L’s rate stabilization period through December 31, 2010.  During this time, DP&L will continue to providethe provision of retail electric service at fixed rates with the ability to recover increased fuel and environmental costs through surcharges and riders.  Specifically, the agreement provides for:service. ·                  A rate stabilization surcharge equal to 11%As of generation rates beginning January 1, 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. ·                  A new environmental investment rider to begin January 1,September 30, 2007, equal to 5.4% of generation rates, with incremental increases equal to 5.4% each year through 2010.  Based on 2004 sales, this rider is expected to result in approximately $35 million in annual net revenues beginning January 2007, growing to approximately $140 million in annual net revenues by 2010. ·                  An increase to the residential generation discount from January 1, 2006 through December 31, 2008 which is expected to result in a revenue decrease of approximately $7 million per year for three years, based on 2004 sales.  The residential discount is accounted for in the $65 million net revenue stated above, and will expire on December 31, 2008. On December 28, 2005, the PUCO adopted the settlement with certain modifications (RSS Stipulation).  The PUCO ruled that the environmental rider will be bypassable by all customers who take service from alternate generation suppliers.  Future additional revenues are dependent upon actual sales and levels of customer switching.  Applications for rehearingfour unaffiliated marketers were denied and the case was appealed to the Ohio Supreme Court by the Ohio Consumers’ Counsel (OCC) on April 21, 2006.  On September 1, 2006, DP&L made a tariff filing to implement the environmental investment rider beginning January 1, 2007. DP&L agreed to implement a Voluntary Enrollment Process that would provide residential customers with an option to choose a competitive supplier to provide their retail generation service should switching not reach 20% in each customer class.  During 2005, approximately 51 thousand residential customers that volunteered for the program were bid out toregistered as Competitive Retail Electric Service (CRES) providers who were registered in DP&L’s service territory; however, no bids were received and the 2005 program ended.  As part of the RSS Stipulation, DP&L agreed to implement the Voluntary Enrollment Program again in 2006 and 2007.  Approximately 25 thousand residential customers have volunteered for the 2006 program.  As of October 16, 2006, all four rounds of bids were complete, which resulted in no bids being received.  The magnitude of any customer switching and the financial impact of this program in 2007 cannot be determined at this time. As of September 30, 2006, four unaffiliated marketers were registered as CRES providers in DP&L’s service territory; to date,territory.  While there has been little activity from these suppliers.some customer switching to date, it represented less than approximately 0.20 percent of sales through the third quarter ending September 30, 2007.  DPL Energy Resources, Inc. (DPLER), one of our significant subsidiaries,an affiliated company, is also a registered CRES provider and accounted for substantiallynearly all of the load servedtotal kWh supplied by CRES providers within DP&L’s service territory in 2006.2006 and 2007.  In addition, several communities in DP&L’s service area have passed ordinances allowing the communities to 38 become government aggregators for the purpose of offering alternative electric generation supplies to their citizens.  To date, none of these communities have aggregated their generation load. In early 2004, there was DP&L agreed to implement a complaintVoluntary Enrollment Program (VEP) that would provide customers with an option to choose a competitive supplier to provide their retail generation service should switching not reach 20% in each customer class.  The 20% threshold has never been reached.  Customers who elected to participate in the program have been grouped together and collectively bid out to CRES providers.  Four rounds of bidding were conducted for the 2007 program resulting in no bids being received.  DP&L has completed its obligations under this residential program. On April 4, 2005, DP&L filed a request at the PUCO concerning the pricing of our billing services.  The parties reachedto implement a new rate stabilization surcharge (RSS) effective January 1, 2006 to recover cost increases associated with environmental capital, related operations and maintenance costs and fuel expenses.  DP&L entered into a settlement on the price we charge CRES providers for performing billing services.  The PUCO issued an Order approving the settlement with minor modifications.  This Order gave agreement that extended DP&L the authority to defer costs of approximately $16 million plus carrying charges,&L’s rate stabilization period through December 31, 2010 and later request PUCO approvalallowed for recovery of those costs from all customers.certain fuel and environmental investment costs.  The PUCO denied applicationsadopted the settlement, but ruled that the environmental rider will be by-passable by all customers who take service from alternate generation suppliers.  Applications for rehearing were denied and the deferral case was appealed to the Ohio Supreme Court.Court by the Ohio Consumers’ Counsel.  On September 27, 2006, the Supreme Court issued a decision affirming the PUCO’s order in this case.  On June 17, 2005, DP&L filed a subsequent case, requesting PUCO approval for recovery of the deferred billing costs plus carrying charges.  On March 1, 2006, the PUCO approved DP&L’s recovery of this cost with one minor modification.  This new rider is expected to result in approximately $7 million in additional annual revenue beginning March 2006 through 2010.  On March 30, 2006, the OCC filed an appeal of this new rider to5, 2007, the Ohio Supreme Court.  WithinCourt affirmed the PUCO’s approval of the settlement agreement but remanded one aspect of the order, that appeal, the OCC filed a motionRSS tariff should be part of the Company’s generation tariffs instead of distribution tariffs.  The Company will file to stay DP&L’s recovery ofmodify its tariffs accordingly and does not believe this new rider.  The motion for stay was subsequently denied by the Court.  On October 19, 2006, the OCC filed to dismiss their appeal, but an appeal related to this matter filed by the Ohio Partners for Affordable Energy is still pending.tariff change will impact its future revenues. On September 1, 2005, DP&L filed25, 2007, Senate Bill 221 was introduced in the Ohio Legislature.  The bill codifies, in draft form, the governor’s proposed energy policy.  As currently drafted, the bill states that the standard service offer currently in effect will continue until a distribution utility files either an application requestingenergy security plan or a market-based alternative by which the retail price will be set by a periodic competitive bid process.  In order to file a market-based alternative, the utility has the burden of proof to demonstrate that there is effective competition in its service territory.  The PUCO will establish rules for filing an energy security plan which may allow for adjustments to the standard offer for environmental compliance costs, cost of fuel and purchased power, construction costs of new generating facilities or an index price.  Once a utility’s energy security plan is approved by the PUCO, grant it authoritythe utility is required to recoverfile an infrastructure improvement plan that will specify the initiatives the utility will take to rebuild, upgrade or replace its distribution infrastructure.  The proposed bill establishes a goal that by 2025, twenty-five percent of the generation used to supply standard offer generation service in the state will come from advanced energy resources which may include: renewable energy sources, clean coal technology, advanced nuclear generation, fuel cells and co-generation.  It creates a federal energy advocate that will evaluate the costs and benefits associated with storm restoration efforts for ice storms that took place in December 2004Regional Transmission Organizations on behalf of the state.  It promotes construction of advanced energy projects by providing low interest loans and January 2005.  In February 2006, DP&L filed updated schedules in support of its application.  On July 12, 2006,grants; promotes energy efficiency and advanced metering infrastructure investments and directs the PUCO approved DP&L’s filing, allowingto develop reliability performance targets.  The outcome of this proceeding and its financial impact on the Company to recover approximately $8.6 million in additional revenues over a two-year period.  The OCC filed an application for rehearing in this case that was subsequently denied by the PUCO. On August 28, 2006, the Staff of the PUCO issued a report relating to compliance with the Federal Energy Policy Act of 2005.  In that report the Staff makes recommendations to the Commission to implement new rules and procedures relating to net metering, customer generator interconnection, stand by power, time-of-use rates, and renewable energy portfolio standards.  DP&L, among others, filed comments on September 18, 2006, and reply comments on October 6, 2006.  If adopted by the Commission, these recommendations may result in new regulatory requirements for Ohio investor-owned utilities related to renewable energy standards, fuel sources, automated meter infrastructure, and time differentiated rate options for customers.  The financial implications of this matter cannot be determined at this time. Federal Matters On July 23, 2003,April 19, 2007, the Federal Energy Regulatory Commission (FERC)FERC issued an Order with regard to the allocation of costs associated with new planned transmission facilities.  FERC ordered that the ratescost of new, high-voltage facilities be socialized across the PJM region and the costs of new facilities at lower voltages be assigned to the load centers that benefit from the new facilities.  The methodology for identifying beneficiaries was set for hearing.  On September 14, 2007, DP&L, along with the majority of other stakeholders in PJM, filed a proposed settlement regarding the cost allocation methodology for the new facilities at lower voltages.  In addition, on April 19, 2007, the FERC issued an Order relating to the allocation of costs associated with existing transmission servicefacilities, upholding the existing PJM rate design.  These Orders are subject to rehearing and the appeal process.  The financial impact of seven companies, including the Order to socialize new, high-voltage facilities will be passed on as costs are incurred by utilities constructing such projects and will be reflected in PJM charges to DP&L may.  Over time, this Order is likely to increase PJM charges to DP&L.  Although the impact of cost allocation could be unjust, unreasonable, or unduly discriminatory or preferential.  A number of orders have since been issued on the subject of how best to modifymaterial, management believes these costs should be recoverable through retail rates. As a result, the FERC ordered utilities to eliminate certain charges and to implement transitional charges, known as Seams Elimination Charge Adjustment (SECA), effective December 1, 2004 through March 31, 2006, subject to refund. Through this proceeding, we are obligated to pay SECA charges to other utilities, but we receive a net benefit from these transitional payments.  Beginning May 2005, DP&L began receiving SECA payments and has received over $24.8 million, netmember of SECA charges, through September 2006.  Several parties have sought rehearing of the FERC orders which are still pending.  The hearing was held in May 2006 and an initial decision was issued on August 10, 2006 that, if upheld by the FERC, would reduce the amount of SECA charges DP&L and other parties are permitted to recover.  DP&L, among others, has taken exception to the initial decision.  A final FERC order on this issue is expected later this year.  DP&L has entered into a significant number of bi-lateral settlement agreements with certain parties to resolve the matter, which by design will be unaffected by the FERC’s decision to affirm, modify or reject the initial decision.  DP&L has recorded adequate reserves related to the proposed adjustments; however, DP&L cannot predict the outcome. On May 31, 2005, the FERC instituted a proceeding under Federal Power Act Section 206 concerning the justness and reasonableness of PJM’s transmission rate design.  This proceeding sets the rates for hearing and requests that all of PJM, members, which includes DP&L, address the justness and reasonableness of the current rate design.  On November 22, 2005, DP&L, along with ten other transmission owners, filed in support of PJM’s existing rate design.  A hearing was held in April 2006 and an initial decision was issued on July 13, 2006 recommending a rate design different than PJM’s existing rate design.  DP&L expects a final FERC order on this issue later this year.  Due to the comment and appeal process, the potential for adjustments to the initial decision and the complexity of the issues, DP&L cannot determine what effect the final outcome of this proceeding may have on its future recovery of transmission revenues. PJM has a proposal before FERC that may effect the value of ourDP&L’s generation capacity.capacity will be affected by changes in and the clearing results of the PJM capacity construct.  The proposalnew construct introduces a new Reliability Pricing Model (RPM) that would changechanges the way generation capacity is priced and planned for by PJM. On September 29, 2006,PJM held its first RPM auction during April 2007 for the 2007/2008 planning year and held its second RPM auction during July 2007 for the 2008/2009 planning year.  A third auction was held in October 2007 for the 2009/2010 planning year.  DP&L does not expect a settlement agreement executed by DP&L, along with mostmaterial impact on its results of the partiesoperations, financial position or cash flows due to the case, was filedoutcome of these three auctions. 39 ENVIRONMENTAL CONSIDERATIONS DPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and laws by federal, state and local authorities.  The environmental issues that generally retainsmay impact us include: •The CAA and state laws and regulations (including State Implementation Plans) require compliance, obtaining permits and reporting as to air emissions. •Litigation with the RPM concept as proposed by PJM, withfederal and certain modifications.  If approvedstate governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating plants required additional permitting or pollution control technology, and/or whether emissions from coal-fired generating plants cause or contribute to global climate changes. •Rules issued by the FERC,US and state EPA that require substantial reductions in SO2, mercury and NOx emissions.  DPL is installing (and has installed) emission control technology and is taking other measures to comply with required reductions. •The Federal Clean Water Act, which prohibits the economic effectsdischarge of the settlement will vary depending on future market conditions. Updates on Environmental Considerations Air and Water Quality On December 17, 2003,pollutants into waters of the United States Environmental Protection Agency (USEPA) proposedexcept pursuant to appropriate permits. In July 2004, the Interstate Air Quality Rule (IAQR) designedUS EPA adopted a new Clean Water Act rule to reduce the number of fish and permanently cap sulfur dioxide (SOother aquatic organisms killed at once-through cooled power plants. 2•)Solid and nitrogen oxide (NOx) emissionshazardous waste laws and regulations, which govern the management and disposal of certain wastes. The majority of solid waste created from electric utilities.  The proposed IAQR focused on states,the combustion of coal and fossil fuels is fly ash and other coal combustion byproducts, which the EPA has determined are not hazardous waste subject to Resource Conservation and Recovery Act (RCRA). As well as imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including Ohio, whose power plant emissions are believedfines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at these facilities to be significantly contributingcomply, or to fine particledetermine compliance, with such regulations.  We record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies” as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements.  DPL, through its captive insurance subsidiary Miami Valley Insurance Company (MVIC), has an actuarial calculated reserve for environmental matters.   Weevaluate the potential liability related to probable losses quarterly and ozone pollution in other downwind statesmay revise our estimates.  Such revisions in the eastern United States.  On June 10, 2004, the USEPA issued a supplemental proposal to the IAQR, now renamed as the Clean Air Interstate Rule (CAIR).  The final rules were signed on March 10, 2005 and were published on May 12, 2005.  On August 24, 2005, the USEPA proposed additional revisions to the CAIR and initiated reconsideration on one issue.  On March 15, 2006, the USEPA announced it had completed its reviewestimates of the requests for reconsideration and determined that it would propose no changes to CAIR and denied the requests for stay.  We have determined that CAIR requirements willpotential liabilities could have a material effect on our operations, requiring the installation of flue gas desulfurization (FGD) equipment and continual operation of the currently-installed Selective Catalytic Reduction (SCR) equipment.  As a result, DP&L is proceeding with the installation and has begun the construction of FGD equipment at various generating units. On January 30, 2004, the USEPA published its proposal to restrict mercury and other air toxins from coal-fired and oil-fired utility plants.  The final Clean Air Mercury Rule (CAM-R) was signed March 15, 2005 and was published on May 18, 2005. The final rules will have a material effect on our operations.  We anticipate that the FGDs being installed to meet the requirements of CAIR may be adequate to meet the Phase I requirements of CAM-R. We expect that additional controls will be needed to meet the Phase II requirements of CAM-R that go into effect January 1, 2018.  On March 29, 2005, nine states filed lawsuits against USEPA, opposing the regulatory approach taken by USEPA.  On March 31, 2005, various groups requested that USEPA stay implementation of CAM-R.  On August 4, 2005, the United States Court of Appeals for the District of Columbia denied the motion for stay.  On October 21, 2005, USEPA initiated reconsideration proceedings on a number of issues.  On May 31, 2006, USEPA took final action on CAM-R essentially reaffirming its original rulemaking. Under the CAIR and CAM-R cap and trade programs for SO2, NOx and mercury, we estimate we will spend more than $465 million from 2006 through 2008 to install the necessary pollution controls.  If CAM-R litigation results in plant specific mercury controls, our costs may be higher.  Due to the ongoing uncertainties associated with the litigation of the CAM-R, we cannot project the final costs at this time. RISK FACTORS A comprehensive listing of risk factors that we consider to be the most significant to your decision to invest in our stock is provided in our most recent Form 10-K and is incorporated herein by reference.  The Form 10-K may be obtained as discussed on page 2, “Available Information.”  Any updates are provided in Part II, Item 1A “Risk Factors” of this quarterly report and the quarterly reports for March 31, 2006 and June 30, 2006.  If any of these events occur, our business results of operation,operations, financial position or cash flowflows. In addition to the requirements related to emissions of sulfur dioxide, nitrogen oxides and mercury noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases, including most significantly, carbon dioxide.  This concern has led to increased interest in legislation at the federal level, actions at the state level, as well as litigation relating to greenhouse gas emissions, including a recent U.S. Supreme Court decision holding that the EPA has the authority to regulate carbon dioxide emissions from motor vehicles under the CAA.  Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations and the international community.  If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the cost to DPL and DP&L of such reductions could be materially affected.significant. OVERVIEW   Basic Earnings Per Share       Three months ended   Nine months ended       September 30,   September 30,       2006   2005   2006   2005                       Earnings from Continuing Operations   $ 0.44   $ 0.21   $ 1.06   $ 0.65   Earnings from Discontinued Operations   0.03   —   0.10   0.36   Net Income   $ 0.47   $ 0.21   $ 1.16   $ 1.01   40   2006 Compared to 2005FINANCIAL OVERVIEW Basic earnings per share As more fully discussed in later sections of $0.47this Form 10-Q, the following were the significant themes and events for the third quarterthree months and nine months ended September 30, 2007: •For the three months ended September 30, 2007, DPL’s basic and diluted EPS of 2006 was $0.26 higher compared to$0.56 and $0.53, respectively, increased over the third quarter of 2005, primarily due to a $0.23 per share increase in Earnings from Continuing Operations. This increase reflects, in large part, a higher gross margin resulting frombasic and dilutive EPS for the revenue impactsame period of the rate stabilization planprior year by $0.09 and the regulatory asset recovery riders, no early redemption charges for debt, and lower interest expense, offset partially by higher operation and maintenance expenses and lower investment income.  This increase was also attributed to a $0.03 per share rise in Earnings from Discontinued Operations, resulting from the third quarter 2006 sale completion of a portion of one of the remaining private equity funds.  $0.10, respectively. •For the nine months ended September 30, 2006, 2007, DPL’s basic earnings per shareand diluted EPS of $1.16 was $0.15 higher compared to$1.63 and $1.49, respectively, increased over the basic and dilutive EPS for the same period of the prior year.  This increase wasyear by $0.47 and $0.42, respectively. •DPL’s revenues for the three months and nine months ended September 30, 2007 increased 8% and 10%, respectively, compared to the same periods in 2006 primarily due to a $0.41 per share increase in Earnings from Continuing Operations reflecting a higher gross margin resulting from the revenue impact of the rate stabilization plan and the regulatory asset recovery riders, no early redemption charges for debt, and lower interest expense, partially offset by higher operation and maintenance expenses, lower investment income and lower other income.  This increase was largely offset by a $0.26 per share decrease in Earnings from Discontinued Operations, resulting from the sale of most of the private equity funds in 2005. RESULTS OF OPERATIONS Income Statement Highlights   Three months ended   Nine months ended       September 30,   September 30,   $ in millions   2006   2005   2006   2005                       Revenues   $ 392.5   $ 357.4   $ 1,042.6   $ 957.9   Less:    Fuel   99.5   101.4   262.3   251.1   Purchased power   61.1   37.4   123.4   103.7   Gross margin   $ 231.9   $ 218.6   $ 656.9   $ 603.1                       Gross margin as a percentage of revenues   59.1 % 61.2 % 63.0 % 63.0 %                     Operating income   $ 98.5   $ 99.6   $ 257.6   $ 243.8   Revenues Revenues increased 10% to $392.5 million in the third quarter of 2006 compared to $357.4 million in the third quarter of 2005 reflecting higher average rates for retail sales and greater wholesale sales volume.  These increases were partially offset by lowerweather driven retail sales volume, lowerincrease in average retail rates and the revenue realized from the PJM capacity auctions.  DPL’s purchased power costs for wholesale sales,the three and lower ancillarynine months ended September 30, 2007 increased$21.0 million and $94.1 million, respectively, over the same periods in 2006. •DPL’s cash flows from operations were $211.8 million and $212.4 million for the nine months ended September 30, 2007 and 2006, respectively. •DP&L’s revenues associated with participation in a Regional Transmission Organization (RTO). Retail revenuesfor the three and nine months ended September 30, 2007 increased $15.1 million in the third quarter of 20068% and 10%, respectively, compared to the third quarter of 2005same periods in 2006 primarily resulting from $23.7 million relateddue to higherweather driven retail sales volume, increase in average retail rates and the revenue realized from the PJM capacity auctions.  DP&L’s purchased power costs for the three and nine months ended September 30, 2007 increased miscellaneous revenues of $0.5$21.0 million partially offset by decreased sales volume of $9.1and $93.5 million, relating to milder weather experienced in 2006 compared to 2005.  The higher average rates were primarilyrespectively, over the result of the rate stabilization plan surcharge and regulated asset recovery riders, most of which were implemented earlysame periods in 2006.  Wholesale revenues increased $21.3 million, primarily related to a $24.3 million increase in sales volume relating to higher prescheduled sales and more generation available to sell in the wholesale market due to the reduced retail sales volume.  This increase was partially offset by a $3.0 million decrease in average market rates.  During the third quarter of 2006, RTO ancillary revenues decreased $1.6 million to $20.6 million •DP&L’s cash flows from $22.2 million in the third quarter of 2005. Cooling degree-days were down 17% to 639operations for the third quarternine months ended September 30, 2007 of 2006 compared to 772$239.6 million were 11% lower than the cash flows from operations of $270.7 million for the same period in 2005.  Heating degree-days increased2006 primarily due to 105changes in working capital. 41 RESULTS OF OPERATIONS — DPL Inc. DPL’s results of operations include the results of its subsidiaries, including the consolidated results of DP&L and all of DP&L’s consolidated subsidiaries.  DP&L provides approximately 99% of the total revenues of DPL.  All material intercompany accounts and transactions have been eliminated in consolidation.  A separate specific discussion of the results of operations for DP&L is presented elsewhere in this report. Financial Highlights — DPL     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007   2006   2007   2006                       Revenues:                   Retail   $ 326.2   $ 307.2   $ 915.7   $ 848.7   Wholesale   52.9   61.8   140.0   129.7   RTO ancillary (a)   39.9   20.6   81.4   55.7   Other revenues, net of fuel costs   3.0   2.8   8.5   8.4   Total revenues   422.0   392.4   1,145.6   1,042.5                       Less: Fuel   95.9   99.4   250.5   262.2    Purchased power (a)   82.1   61.1   217.5   123.4   Gross margins (b)   $ 244.0   $ 231.9   $ 677.6   $ 656.9                       Gross margins as a percentage of revenues   57.8 % 59.1 % 59.1 % 63.0 %                     Operating income   $ 110.8   $ 98.5   $ 283.7   $ 257.6                       Basic Earnings per share:                   Continuing operations   $ 0.56   $ 0.44   $ 1.54   $ 1.06   Discontinued operations   —   0.03   0.09   0.10   Net income   $ 0.56   $ 0.47   $ 1.63   $ 1.16   (a)RTO ancillary revenues include PJM capacity revenues of $13.3 million and $17.6 million for the third quarterthree and nine months ended September 30, 2007, respectively.  Purchased power includes PJM capacity charges of 2006 compared$12.2 million and $16.2 million for the three and nine months ended September 30, 2007, respectively.  For the same periods of the prior year, PJM capacity revenues and charges were immaterial. (b)For purposes of discussing operating results, we present and discuss gross margins. This format is useful to 23investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance. DPL — Revenues Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, DPL’s retail sales volume is impacted by the number of heating and cooling degree days occurring during a year.  Since DPL plans to utilize its internal generating capacity to supply its retail customers’ needs first, increases in retail demand will decrease the volume of internal generation available to be sold in the wholesale market and vice versa. The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impacting DPL’s wholesale sales volume each hour of the year include wholesale market prices; DPL’s retail demand; retail demand elsewhere throughout the entire wholesale market area; DPL and non-DPL plants’ availability to sell into the wholesale market and weather conditions across the multi-state region. DPL’s plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities not being utilized to meet its retail demand. 42     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007 vs. 2006   2007 vs. 2006               Retail           Rate   $ 13.1   $ 31.0   Volume   6.4   36.9   Other miscellaneous   (0.5 ) (0.9 ) Total retail change   $ 19.0   $ 67.0               Wholesale           Rate   $ 0.9   $ 10.5   Volume   (9.8 ) (0.2 ) Total wholesale change   $ (8.9 ) $ 10.3               Other           RTO services   $ 19.3   $ 25.7   Other   0.2   0.1   Total other change   $ 19.5   $ 25.8               Total revenues change   $ 29.6   $ 103.1   For the three months ended September 30, 2007, revenues increased $29.6 million, or 8%, to $422.0 million from $392.4 million for the same period in 2005. In the first nine monthsprior year.  This increase was primarily the result of 2006, revenues increased 9% to $1,042.6 million compared to $957.9 million in the first nine months of 2005 primarily reflecting higher average rates for retail and wholesale sales, as well as greater wholesale sales volume.  These increases were partially offset by lower retail sales volume relating to the milder weather in 2006 as compared to 2005. In the first nine months of 2006, retail revenues increased $44.1 million compared to the first nine months of 2005, primarily resulting from $64.7 million related to higher average rates and increased miscellaneous revenues of $0.9 million, partially offset by decreased sales volume of $21.5 million resulting from milder weather experienced in 2006 compared to 2005.  The higher average rates were primarily the result of the rate stabilization plan surcharge and regulated asset recovery riders implemented throughout 2006.  Wholesale revenues increased $39.4 million, primarily related to a $34.7 million increase from higher sales volume reflecting more generation available to sell in the wholesale market due to reduced retail sales volume and better plant availability.   A $4.7an increase in RTO ancillary revenue.  Retail revenues increased $19.0 million, or 6%, resulting from a 4% increase in average retail rates primarily relating to the environmental investment rider and a 2% increase in weather driven sales volume as total degree days increased 5%.  These increases resulted in a $13.1 million rate variance and a $6.4 million sales volume variance.   Wholesale revenues decreased $8.9 million, or 14%, primarily resulting from a 16% decrease in wholesale sales volume, partially offset by a 2% increase in average market rates.  The decrease in sales volume resulted in a $9.8 million unfavorable volume variance and increase in average market rates also contributed toresulted in a $0.9 million favorable rate variance.  For the increase in wholesale revenues.  During the first ninethree months of 2006,ended September 30, 2007, RTO ancillary revenues increased $0.5$19.3 million to $55.7primarily resulting from $13.3 million realized from $55.2the PJM capacity auction and $6.0 million of PJM transmission loss credits. RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves and capacity payments under the new RPM construct.  RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in the first nine months of 2005.  Heating degree-days were down 10% to 3,173 forpurchase power.  Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power. For the nine months ended September 30, 2006 compared2007, revenues increased $103.1 million, or 10% to 3,538$1,145.6 million from $1,042.5 million for the same period in 2005.  Cooling degree-days were down 20%the prior year.  This increase was primarily the result of higher average rates for retail and wholesale sales, higher retail sales volume and an increase in RTO ancillary revenue.  Retail revenues increased $67.0 million resulting from a 4% increase in weather driven sales volume as total degree days increased 14% and a 4% increase in average retail rates primarily relating to 845 for the firstenvironmental investment and storm recovery riders.  These increases resulted in a $36.9 million sales volume variance and a $31.0 million rate variance.  Wholesale revenues increased $10.3 million, or 8%, primarily resulting from an 8% increase in average market rates. The increase in average market rates resulted in a $10.5 million favorable rate variance.  For the nine months of 2006 compared to 1,050 for the same period in 2005. Gross Margin, Fuel and Purchased Power Gross margin in the third quarter of 2006ended September 30, 2007, RTO ancillary revenues increased $13.3$25.7 million or 6%, to $231.9 million from $218.6 million in the third quarter of 2005.   As a percentage of total revenues, however, gross margin decreased 2.1 percentage points to 59.1% from 61.2%.  Fuel costs remained relatively stable in the third quarter of 2006 compared to the same period of the prior year, decreasing only $1.9 million or 2%.  Purchased power costs, however, were $23.7 million or 63% higher in the third quarter of 2006 compared to the same period in 20052006 primarily resulting from higher purchased power volume due to less generation being available to source power sales resulting$17.6 million realized from scheduled maintenancethe PJM capacity auction, $8.7 million of PJM transmission losses and forced outages,congestion credits and $2.3 million from the sale of financial transmission rights (FTRs), partially offset by lower average market rates and loweran adjustment of $2.8 million for Seams Elimination Cost Adjustment (SECA).  RTO ancillary costs.revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves and capacity payments under the new RPM construct.  RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power.  Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power. Gross 43 DPL — Margins, Fuel and Purchased Power For the three months ended September 30, 2007, gross margin in the first nine months of 2006$244.0 million increased $53.8$12.1 million, or 9%5%, to $656.9from $231.9 million from $603.1 million induring the first nine monthssame period of 2005.2006.  As a percentage of total revenues, gross margin remained stable at 63% for both 2006decreased to 57.8% in the third quarter of 2007 compared to 59.1% in the third quarter of 2006.  This result primarily reflects the favorable impact of the increase in retail revenues and 2005.lower fuel costs, offset by increased purchased power costs.  Fuel costs, increasedwhich include coal, natural gas, oil and emission allowance costs, decreased by $11.2$3.5 million, or 4%, in the first nine months ending September 30, 2006third quarter of 2007 compared to the same period in 2005 as2006 due to lower average fuel prices, partially offset by a result of higher1% increase in generation output reflecting better plant availability in addition to higher market prices.output.  Purchased power costs increased by $19.7$21.0 million or 19% in the first nine monthsthird quarter of 20062007 compared to the same period in 20052006 primarily resulting from a $19.5 million increase due to higher purchased power volume, increased average market rates and greater$12.2 million related to RTO ancillary costs. Operation and Maintenance Expense Operation and maintenance expense increased $12.4 million or 24% in the third quarter of 2006 compared to the same period in 2005 primarily resulting from increased legal costs of $4.9 million; a $3.7 million increase in employee compensation and benefit expenses, the majority of which is pension related; increased service operations costs of $2.8 million, most of which related to greater line clearance activity and electric system overhead and substation costs; a $2.6 million increase in power production costs of which $1.5 million was due to credits received in 2005 that were not received in 2006 and increased operating expenses; increased low-income assistance program costs of $1.6 million; and $1.4 million incharges for PJM administrative fees.  These increases werecapacity charges partially offset by decreased costs of $10.4 million relating to a $5.0 million22% decrease in reservespurchased power volume.  The decrease in purchased power volume was primarily the result of increased production at our generating facilities.  The RTO ancillary charges for insurance, injuries and damages. Operation and maintenance expense increased $32.8 million or 20% in the first nine months of 2006 compared to the same period in the prior year primarily resulting from a $11.0 million increase in legal costs; an $8.6 million increase in employee compensation and benefit expenses, most of which related to pension expense and incentive accruals; increased service operations costs of $4.9 million, the majority of which was related to greater line clearance activity; a $4.7 million increase in power production costs consisting of $3.0 million of credits received in 2005 that were not received in 2006 and increased operating expenses; $4.2 million in PJM administrative fees, including $2.5 million deferred in 2005 by PUCO authority until rate relief was granted in February 2006; and increased low-income assistance program costs of $3.7 million.  These increases were partiallycapacity charges are substantially offset by a $3.1 million decreaseRTO ancillary revenues for PJM capacity resulting in Directors’ and Officers’ liability insurance premiums; a $2.0 million decrease in reserves for insurance, injuries and damages; and a $1.2 million decrease in mark-to-market adjustments and forfeitures of restricted stock units.minimal impact to gross margin. Depreciation and Amortization Depreciation and amortization increased $1.5 million in the third quarter of 2006 and $3.8 million in the first nine months of 2006 compared to the same periods in 2005 primarily reflecting a higher plant base. General Taxes General taxes decreased $1.3 million in the third quarter of 2006 compared to the third quarter of 2005 primarily due to a decrease in the Ohio kWh tax related to lower retail customer sales resulting from the milder weather experienced in 2006 compared to 2005 and a 2006 adjustment to payroll taxes. General taxes decreased $0.3 million in the first nine months of 2006 as compared to the same period in 2005 primarily due to an Ohio kWh tax decrease related to lower retail customer sales resulting from the milder weather experienced in 2006 compared to 2005, and a payroll tax adjustment in 2006.  These decreases were largely offset by higher property taxes resulting from a property tax assessment related to property previously treated as abated under an Enterprise Zone agreement, as well as higher taxes from the new State of Ohio Commercial Activities Tax that began in July 2005. Amortization of Regulatory Assets For the quarter ended September 30, 2006, amortization of regulatory assets was $1.8 million higher than the same period in 2005 primarily reflecting $0.9 million for the amortization of costs incurred to modify the customer billing system for unbundled rates and electric choice bills; $0.4 million for the amortization of PJM administrative fees deferred for the period October 2004 through January 2006; and $0.4 million for the amortization of incremental costs incurred in 2004 and 2005 for severe storms. For the nine months ended September 30, 2006, amortization2007, gross margin of regulatory assets$677.6 million increased $3.7$20.7 million, or 3%, from $656.9 million during the same period of 2006.  As a percentage of total revenues, gross margin decreased to 59.1% in 2007 compared to 63.0% in 2006.  This result primarily reflects the prior year primarily reflecting $1.8favorable impact of both retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs.  Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $11.7 million, or 4%, for the amortization of costs incurred to modify the customer billing system to accommodate unbundled rates and electric choice bills; $1.0 million for the amortization of deferred PJM administrative fees; $0.4 million for the amortization of deferred severe storm costs incurred in 2004 and 2005; and $0.3 million for the amortization of costs incurred to integrate DP&L into the PJM system.  DP&L received orders from the PUCO in the first quarter of 2006 approving the recovery of the customer billing costs and PJM administrative fees through rate riders beginning March 2006 and February 2006, respectively.  In July 2006, DP&L received a PUCO order approving the recovery of the incremental storm costs through a rate rider beginning in August 2006.  The customer billing costs rate rider is expected to be in place for five years, the PJM administrative fee rate rider is expected to collect deferred costs over a three-year period, and the storm costs rate rider is expected to be in place for two years. Investment Income Investment income decreased $30.8 million during the third quarter of 2006 asnine months ended September 30, 2007 compared to the same period in 2005 resulting from2006.  This decrease was primarily due to a $23.4 million decline4% decrease in gains on investments reflecting the sale of the public equity and income funds in 2005,generation output and a $7.1 million decrease in interest income resulting from lower cash and cash equivalents. Investment income decreased $30.7average fuel prices.  Purchased power increased $94.1 million duringfor the first nine months of 2006 asended September 30, 2007 compared to the same period in 2006 reflecting $58.8 million of increased charges relating to higher purchased power volume, an $18.2 million increase due to higher average market rates and $16.2 million related to RTO ancillary charges for PJM capacity charges.  The increase in purchased power volume was primarily the result of increased sales volume and partner operated generating facilities being less available compared to the prior year reflecting a $23.8 million decrease in investment income due to planned and unplanned outages.  In addition, we purchase power when market prices are below the 2005 sale ofmarginal costs associated with our higher cost generating facilities.  The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin. DPL — Operation and Maintenance     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007 vs. 2006   2007 vs. 2006   Power production costs   $ 6.3   $ 19.7   Legal costs   (0.8 ) 3.2   Mark-to-market adjustments for deferred compensation   (0.8 ) 2.9   Service operations   0.2   2.2   Insurance claims reserves   —   (3.1 ) Pension expense   (3.8 ) (4.5 ) Gain on sale of corporate aircraft   —   (6.0 ) Insurance settlement   —   (14.5 ) Other, net   1.8   0.8   Total operation and maintenance expense   $ 2.9   $ 0.7   For the public equityquarter ended September 30, 2007, operation and income fund investments, a $4.6 million decrease in foreign currency translation gains following the 2005 liquidation of investments denominated in Euros, and a $2.5 million decrease in interest income resulting from lower cash and cash equivalents. Interest Expense Interestmaintenance expense decreased $9.2increased $2.9 million, or 27% for the third quarter of 20065%, compared to the same period in 20052006 primarily resulting from increased power production maintenance costs of $4.0 million that were largely related to boiler and turbine maintenance and other power production operating costs of $2.3 million.  These increases were offset in part by a $3.8 million decrease in pension expense resulting primarily from lower interest of $6.3a $1.1 million associated with the early redemption of a portion of our long-term debt, the refinancing of DP&L’s pollution control bonds at a lower interest rate,2007 actuarial study adjustment and the eliminationrecognition of the interest penalty on our $175$2.6 million 8% series Senior Notes that resulted from the delayed exchange offer registration of those securities.  In addition, we had greater capitalized interest of $3.6 million this year comparedin 2006 for a lump sum distribution to 2005 related to increased pollution control capital expenditures.a former officer. For the nine months ended September 30, 20062007, operation and maintenance expense remained relatively flat, increasing $0.7 million, compared to the same periodprior year.  This variance was primarily comprised of increased power production maintenance costs of $15.1 million that were mostly related to boiler and turbine maintenance and other power production operating costs of $4.6 million; increased legal costs of $3.2 million primarily related to the litigation with the three former executives; $2.9 million in 2005, interestmark-to-market adjustments related to deferred compensation assets and increased service operations costs of $2.2 million primarily related to overhead line 44 restoration activities.  These increases were nearly offset by a $14.5 million insurance settlement reimbursing us for legal fees relating to the litigation with the three former executives; a gain on the sale of the corporate aircraft of $6.0 million; and a $4.5 million decrease in pension expense declined $33.4 million or 30%resulting primarily from lower interest of $26.1a $1.1 million associated with the early redemption of a portion of our long-term debt; the refinancing of DP&L’s pollution control bonds at a lower interest rate;2007 actuarial study adjustment and the eliminationrecognition of the interest penalties on our $175$2.6 million 8% series Senior Notesin 2006 for a lump sum distribution to a former officer. DPL — Depreciation and DP&L’s $470 million 5.125% series First Mortgage Bonds that resulted from the delayed exchange offer registration of those securities, respectively.  Greater capitalized interest of $8.0 million related to increased pollution control capital expenditures also contributed to the decrease in interest expense.  See Note 7 of Notes to Consolidated Financial Statements. Charge for Early Redemption of DebtAmortization During the third quarter of 2005, we recorded a $59.1 million charge resulting from premiums paid for the early redemption of debt, including the write-off of unamortized debt expense and debt discounts.  For the three months and nine months ended September 30, 2005, the accumulated charge resulting from premiums paid for early redemption of debt, including the write-off of unamortized debt2007, depreciation and amortization expense decreased $5.2 million and debt discounts, was $61.2 million.  There was no such activity in 2006. Other Income (Deductions)$11.3 million Other income (deductions) remained relatively stable in the third quarter of 2006, respectively, compared to the thirdsame periods in 2006, primarily reflecting the absence of depreciation for the peaking units sold during the first quarter of 2005, decreasing only $0.6 million that2007 and the impact of lower depreciation rates for generation property which were put into effect on August 1, 2007, reducing expense by $3.8 million.  This decrease was comprisedpartially offset by higher costs related to increased plant balances primarily resulting from the installation of various minor items.pollution control equipment. DPL — Amortization of Regulatory Assets For the nine months ended September 30, 20062007, amortization of regulatory assets increased $3.1 million, compared to the same period in 2006, primarily for the amortization of incremental 2004/2005 othersevere storm costs that began on August 1, 2006. DPL — Net Gain on Settlement of Executive Litigation On May 21, 2007, we settled the litigation with the three former executives.  In exchange for a payment of $25 million, the three former executives relinquished and dismissed all of their claims including those related to deferred compensation, restricted stock units (RSUs), MVE incentives, stock options and legal fees.  As a result of this settlement, during the second quarter ended June 30, 2007, DPL realized a net pre-tax gain in continuing operations of approximately $31.0 million.  See Note 10 of Notes to Condensed Consolidated Financial Statements. DPL — Investment Income For the three months ended September 30, 2007, investment income (deductions) declined $11.5decreased $1.8 million primarily reflecting gains of $12.3to $1.2 million realizedfrom $3.0 million for the same period in 2005 from the sales of pollution control emission allowances.2006.  This decrease was primarily due to lower interest income relating to lower cash and short-term investment balances in 2007 compared to 2006. For the nine months ended September 30, 2007, investment income decreased $4.4 million to $9.5 million from $13.9 million for the same period in 2006.  This decrease was primarily the result of lower interest income relating to lower cash and short-term investment balances in 2007, compared to 2006, partially offset by an IRS refund of $0.7 million related to a prior year penalty, greater capitalized interest (equity portion) of $0.6 million, and $0.4$3.2 million in lower revolving credit facility fees incurred by realized gains from the sale of financial assets held in DP&L.&L’s Master Trust Plan for deferred compensation used for the settlement payment to the three former executives. Income TaxDPL — Interest Expense InFor the third quarter of 2006three months ended September 30, 2007, interest expense decreased $8.0 million, or 32%, compared to the same period in 2006 primarily from $4.6 million less interest associated with the redemption of DPL debt ($225 million, 8.25% Senior Notes) and $4.0 million of greater capitalized interest primarily related to increased pollution control capital expenditures.  These decreases were partially offset by $1.0 million of interest expense associated with DP&L’s new $100 million, 4.8% Series pollution control bonds issued September 13, 2006. For the nine months ended September 30, 2007, interest expense decreased $17.7 million, or 23%, compared to 2006 primarily from $10.8 million less interest from the redemption of DPL debt ($225 million, 8.25% Senior Notes) and $9.7 million of increased capitalized interest primarily related to increased pollution control capital expenditures.  These decreases were partially offset by $3.4 million of interest expense associated with DP&L’s new $100 million, 4.8% Series pollution control bonds issued September 2006 and $1.1 million of interest expense associated with DP&L’s short-term borrowing of $95 million from its unsecured revolving credit agreement of $220 million. DPL — Other Income (Deductions) For the three months ended September 30, 2007, other income of $2.0 million increased from $0.2 million of other deductions for the same period of the prior year income taxes increased $14.1primarily resulting from the recognition of a $2.1 million reflecting higher book income offset bydeferred credit related to a decrease in the effective tax rate on earnings from continuing operations primarily due to the phase-outlitigation settlement (which was not part of the Ohio Franchise Tax.executive litigation settlement). In the first nine months of 2006 compared to the first nine months of 2005, income taxes increased $23.4 million reflecting higher book income offset in part by a decrease in the effective tax rate on earnings from continuing operations related to the phase-out of the Ohio Franchise Tax and a decrease in the tax reserve. 28 Discontinued Operations Earnings from discontinued operations, net of tax, increased $3.2 million for the third quarter of 2006 compared to the third quarter of 2005 primarily reflecting the completion of the sale of a portion of one of the remaining private equity funds from the financial asset portfolio. For the nine months ended September 30, 2007, other income of $2.6 million increased $2.5 million from $0.1 million for the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement). 45 DPL — Income Tax Expense For the three months and nine months ended September 30, 2007, income taxes increased $7.4 million and $28.7 million, respectively, compared to the same periods in 2006, primarily reflecting an increase in pre-tax book income. DPL — Discontinued Operations For the three months ended September 30, 2007, there was no activity relating to discontinued operations resulting in a $3.4 million decrease compared to the same period in 2005,2006.  During the prior year we recognized $3.4 million of earnings from discontinued operations netwhich was comprised of tax, decreased $32.0a pre-tax gain of $5.7 million reflecting management’s decisionless associated expenses and taxes relating to sell the private equity funds inrecognition of a deferred gain associated with the financial asset portfolio.  Most sales For the nine months ended September 30, 2007, discontinued operations decreased $1.0 million compared to the same period in 2006. During the first nine months we recognized $10.0 million of earnings from discontinued operations which was comprised of the private equity funds closed in 2005; a portionnet (pre-tax) gain of two remaining funds closed in 2006.  The remainder$8.2 million realized from the settlement of the funds is expectedlitigation with the three former executives less associated income taxes and a (pre-tax) gain of $8.2 million relating to close in 2007. the recognition of deferred gains from the financial asset portfolio less associated taxes and expenses. During the prior year we recognized $11.0 million of earnings from discontinued operations which was comprised of a pre-tax gain of $18.9 million less associated expenses and taxes relating to the recognition of a deferred gain associated with the financial asset portfolio. See Note 23 and Note 10 of the Notes to Condensed Consolidated Financial Statements. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCESRESULTS OF OPERATIONS — The Dayton Power and Light Company On July 27, 2005, Financial Highlights — DP&L     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007   2006   2007   2006                       Revenues:                   Retail   $ 285.7   $ 272.2   $ 804.7   $ 748.9   Wholesale   94.0   97.5   253.0   231.5   RTO ancillary (a)   39.9   20.6   81.4   55.7   Total revenues   419.6   390.3   1,139.1   1,036.1                       Less: Fuel   87.6   90.9   240.2   251.0    Purchased power (a)   91.7   70.7   228.2   134.7   Gross margins (b)   $ 240.3   $ 228.7   $ 670.7   $ 650.4                       Gross margins as a percentage of revenues   57.3 % 58.6 % 58.9 % 62.8 %                     Operating income   $ 113.2   $ 107.1   $ 287.6   $ 295.3   (a)RTO ancillary revenues include PJM capacity revenues of $13.3 million and $17.6 million for the three and nine months ended September 30, 2007, respectively.  Purchased power includes PJM capacity charges of $12.2 million and $16.2 million for the three and nine months ended September 30, 2007, respectively.  For the same periods of the prior year, PJM capacity revenues and charges were immaterial. (b)For purposes of discussing operating results, we present and discuss gross margins. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our Board authorizedfinancial performance. 46 DP&L — Revenues Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, DP&L’s retail sales volume is impacted by the repurchasenumber of upheating and cooling degree days occurring during a year.  Since DP&L plans to $400utilize its internal generating capacity to supply its retail customers’ needs first, increases in retail demand will decrease the volume of internal generation available to be sold in the wholesale market and vice versa. The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impacting DP&L’s wholesale sales volume each hour of the year include wholesale market prices; DP&L’s retail demand, retail demand elsewhere throughout the entire wholesale market area; DP&L and non-DP&L plants’ availability to sell into the wholesale market and weather conditions across the multi-state region. DP&L’s plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities that are not being utilized to meet its retail demand.     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007 vs. 2006   2007 vs. 2006               Retail           Rate   $ 8.5   $ 24.2   Volume   5.7   32.5   Other miscellaneous   (0.7 ) (0.9 ) Total retail change   $ 13.5   $ 55.8               Wholesale           Rate   $ 12.0   $ 21.9   Volume   (15.5 ) (0.4 ) Total wholesale change   $ (3.5 ) $ 21.5               RTO ancillary           RTO services   $ 19.3   $ 25.7               Total revenues change   $ 29.3   $ 103.0   For the three months ended September 30, 2007, revenues increased $29.3 million, or 8%, to $419.6 million from $390.3 million for the same period in the prior year.  This increase was primarily the result of higher average rates for retail and wholesale sales, higher retail sales volume and an increase in RTO ancillary revenue.  Retail revenues increased $13.5 million, or 5%, resulting from a 3% increase in average retail rates primarily relating to the environmental investment rider and a 2% increase in weather driven sales volume as total degree days increased 5%. These increases resulted in an $8.5 million rate variance and a $5.7 million sales volume variance.   Wholesale revenues decreased $3.5 million, or 4%, primarily resulting from a 16% decrease in wholesale sales volume, partially offset by a 15% increase in average market rates.  The decrease in sales volume resulted in a $15.5 million unfavorable volume variance and increase in average market rates resulted in a $12.0 million favorable rate variance.  For the three months ended September 30, 2007, the RTO ancillary revenues increased $19.3 million primarily resulting from $13.3 million realized from the PJM capacity auction and $6.0 million of common stockPJM transmission loss credits. RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves and capacity payments under the new RPM construct.  RTO ancillary revenues from timethe PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power.  Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power. For the nine months ended September 30, 2007, revenues increased $103.0 million, or 10%, to time$1,139.1 million from $1,036.1 million for the same period in the openprior year.  This increase was the result of higher average rates for retail and wholesale sales, higher retail sales volume and an increase in RTO ancillary revenue.  Retail revenues increased $55.8 million resulting from a 4% increase in weather driven sales volume as total degree days increased 14% and a 3% increase in average retail rates primarily relating to the environmental investment and storm cost recovery riders.  These increases resulted in a $32.5 million sales volume variance and a $24.2 million rate variance.  Wholesale revenues increased $21.5 million, or 9%, primarily resulting from a 9% increase in average market rates. The increase in average market rates resulted in a $21.9 million favorable rate variance.  For the nine months ended September 30, 2007, the RTO ancillary revenues increased $25.7 million compared to the same period in 2006 primarily resulting from $17.6 million realized from the PJM capacity auction, $8.7 million of PJM transmission losses and congestion credits and $2.3 million from the sale of financial transmission rights (FTRs), partially offset by an adjustment of $2.8 million for Seams Elimination 47 Cost Adjustment (SECA).  RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves and capacity payments under the new RPM construct.  RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power.  Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power. DP&L — Margins, Fuel and Purchased Power For the three months ended September 30, 2007, gross margin of $240.3 million increased $11.6 million, or through private transactions.  We completed this share repurchase program on August 21,5%, from $228.7 million during the same period of 2006.  DuringAs a percentage of total revenues, gross margin decreased to 57.3% in the third quarter of 2006, we repurchased a total of 1.9 million shares at a cost of $51.8 million, including 0.4 million shares purchased in late June that were settled in July 2006 at a cost of $11.1 million.  Through August 21, 2006, we repurchased a total of 14.9 million shares at a cost of $400.0 million, including 0.4 million shares at a cost of $10.6 million that were repurchased in December and settled in January 2006.  These Board-authorized repurchase transactions resulted in 14.9 million shares being repurchased, or 11.7% of the outstanding stock at December 31, 2005 at an average price of $26.91 per share.  These shares are currently held as treasury shares. The following details the year-to-date activity in treasury shares:   Number of           Treasury   Dollar       Shares Held   Amount           ($ 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 YTD September 30, 2006   14,862,432   $ 400.0   Options exercised first quarter of 2006   (10,000 )     Net activity   14,852,432       Balance at September 30, 2006   51,050,239       Our cash and cash equivalents totaled $189.9 million at September 30, 2006,2007 compared to $595.8 million at December 31, 2005, a decrease of $405.9 million.  In addition, we had no short-term investments available for sale at September 30, 200658.6% in comparison to $125.8 million at December 31, 2005. The decrease in cash and cash equivalents and short-term investments available for sale was primarily attributed to $283.9 million in capital expenditures, $400.0 million used for the purchase of treasury shares and $85.7 million in dividends paid on common stock, partially offset by $212.4 million in cash generated from operating activities. During the third quarter of 2005, we began investing in Auction Rate Securities (ARS).  ARS are variable rate state and municipal bonds that trade at par value.  Interest rates on ARS are reset every seven, twenty-eight or thirty-five days through a modified Dutch auction.  We have2006.  This result primarily reflects the option to hold at market, re-bid or sell each ARS on the interest reset date.  Although ARS are issued and rated as long-term bonds, they are priced and traded as short-term securities available for resale becausefavorable impact of the market liquidity provided throughincrease in retail revenues and lower fuel costs, offset by increased purchased power costs.  Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $3.3 million, or 4%, in the interest rate reset mechanism.  Each ARS purchased by us is tax-exempt, AAA rated and insuredthird quarter of 2007 compared to the same period in 2006 due to lower average fuel prices, partially offset by a third-party insurance company.1% increase in generation output.  Purchased power increased $21.0 million in the third quarter of 2007, compared to the same period in 2006, primarily resulting from a $17.2 million increase due to higher average market rates and $12.2 million related to RTO ancillary charges for PJM capacity charges, partially offset by a decrease of $8.2 million related to a 14% decrease in purchased power volume.  The decrease in purchased power volume was primarily the result of increased production at our generating facilities.  The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin. For the nine months ended September 30, 2007, gross margin of $670.7 million increased $20.3 million, or 3%, from $650.4 million during the same period of 2006.  As a percentage of Junetotal revenues, gross margin decreased to 58.9% in 2007 compared to 62.8% in 2006.  This result primarily reflects the favorable impact of both retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs.  Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $10.8 million, or 4%, for the nine months ended September 30, 2007, compared to the same period in 2006, all of our ARS were sold. We generated net cash from operating activities of $212.4 millionprimarily due to a 4% decrease in generation output and $179.9a decrease in average fuel prices.  Purchased power costs increased $93.5 million for the nine months ended September 30, 2007, compared to the same period in 2006, reflecting $62.6 million of increased charges related to higher purchased power volume, a $13.8 million increase due to higher average market rates and 2005, respectively.$16.2 million related to RTO ancillary charges for PJM capacity charges.  The net cash provided by operating activitiesincrease in both yearspurchased power volume was primarily the result of increased sales volume and partner operated generating facilities being less available compared to the prior year due to planned and unplanned outages.  In addition, we purchase power when market prices are below the marginal costs associated with our higher cost generating facilities.  The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin. DP&L — Operation and Maintenance     Three Months Ended   Nine Months Ended       September 30,   September 30,   $ in millions   2007 vs. 2006   2007 vs. 2006   Power production costs   $ 6.3   $ 19.7   Service operations   0.3   2.2   Low-income payment program   0.2   1.7   Mark-to-market adjustments for deferred compensation   (0.3 ) 1.4   Pension expense   (3.7 ) (4.3 ) Other, net   2.2   2.3   Total operation and maintenance expense   $ 5.0   $ 23.0   For the quarter ended September 30, 2007, operation and maintenance expense increased $5.0 million, or 8%, compared to the same period in 2006 primarily resulting from increased power production maintenance costs of $4.0 million that were largely related to boiler and turbine maintenance and other power production operating profitability,costs of $2.3 million.  These increases were offset in part by a $3.7 million decrease in pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution to a former officer. For the nine months ended September 30, 2007, operation and maintenance expense increased $23.0 million, or 13%, compared to the prior year.  This variance was primarily comprised of increased power production maintenance costs of $15.2 million that were mostly related to boiler and turbine maintenance, and other power production operating costs of $4.5 million; increased service operations costs of $2.2 million primarily related to overhead line restoration activities; $1.7 million of increased costs associated with the low-income payment program; and $1.4 million in mark-to-market adjustments related to deferred compensation assets.  These 48 increases were partially offset by casha $4.3 million decrease in pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution to a former officer. DP&L — Depreciation and Amortization For the three months and nine months ended September 30, 2007, depreciation and amortization expense decreased $1.6 million and $1.6 million, respectively, compared to the same periods in 2006, primarily reflecting the impact of lower depreciation rates for generation property which were put into effect on August 1, 2007, reducing expense by $3.8 million.  This decrease was partially offset by higher costs related to increased plant balances primarily resulting from the installation of pollution control equipment. DP&L — Amortization of Regulatory Assets For the nine months ended September 30, 2007, amortization of regulatory assets increased $3.1 million, compared to the same period in 2006, primarily for the amortization of incremental 2004/2005 severe storm costs that began on August 1, 2006. DP&L — Investment Income For the nine months ended September 30, 2007, investment income increased $2.7 million to $7.5 million from $4.8 million for the same period in 2006.  This increase was primarily the result of $3.2 million in realized gains from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation used for certain assetsthe settlement payment to the three former executives. DP&L — Other Income (Deductions) For the three months ended September 30, 2007, other income of $2.1 million increased from $0.2 million of other deductions for the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement). For the nine months ended September 30, 2007, other income of $2.7 increased $2.6 million from $0.1 million from the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement). DP&L — Net Gain on Settlement of Executive Litigation On May 21, 2007, we settled the litigation with the three former executives.  In exchange for a payment of $25 million, the three former executives relinquished and liabilities.  dismissed all of their claims including those related to deferred compensation, RSUs, MVE incentives, stock options and legal fees.  As a result of this settlement, during the second quarter ended June 30, 2007, DP&L realized a net pre-tax gain in continuing operations of $35.3 million.  See Note 10 of Notes to Condensed Consolidated Financial Statements. DP&L — Interest Expense For the three months ended September 30, 2007, interest expense decreased $1.6 million compared to the same period of 2006, primarily related to $4.0 million of increased capitalized interest resulting from pollution control capital expenditures at the generating plants, partially offset by increased interest of $1.0 million related to the $100 million 4.8% Series pollution control bonds issued in September 2006 and $1.6 million in interest to DPL on a short-term loan of $90 million. For the nine months ended September 30, 2007, interest expense decreased $3.4 million compared to the same period of 2006, primarily related to $9.7 million of increased capitalized interest resulting from pollution control capital expenditures at the generating plants, partially offset by increased interest of $3.4 million related to the $100 million, 4.8% Series pollution control bonds issued in September 2006; $1.6 million in interest to DPL on a short-term loan of $90 million and $1.1 million of interest related to the $95 million draw on our revolving credit facility. DP&L — Income Tax Expense For the three months and nine months ended September 30, 2007, income taxes increased $3.1 million and $11.7 million compared to the same periods in 2006, primarily reflecting an increase in pre-tax book income. 49 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS DPL’s financial condition, liquidity and capital requirements, includes the consolidated results of DP&L and all of DP&L’s consolidated subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. DPL’s Cash Position DPL’s cash and cash equivalents totaled $98.7 million at September 30, 2007, compared to $262.2 million at December 31, 2006, a decrease of $163.5 million. In addition, DPL had restricted funds held in trust at September 30, 2007 of $0.5 million in comparison to $10.1 million at December 31, 2006. The decrease in cash and cash equivalents was primarily attributed to the retirement of the $225.0 million DPL 8.25% Senior Notes, $250.1 million in capital expenditures and $83.7 million in dividends paid on common stock. The decrease was partially offset by $211.8 million generated from operating activities; $158.4 million from the sale of peaking units and the corporate aircraft; $15.0 million from the exercise of stock options, including tax effects, and $10.1 million of restricted funds drawn to fund pollution control capital expenditures. DP&L’s Cash Position DP&L’s cash and cash equivalents totaled $12.3 million at September 30, 2007, compared to $46.1 million at December 31, 2006, a decrease of $33.8 million. The decrease in cash and cash equivalents was primarily attributed to $247.8 million in capital expenditures and $125.0 million in dividends paid on common stock to our parent DPL. These cash outflows were largely offset by $239.6 million in cash generated from operating activities, $90.0 million in a net short-term loan owed to our parent DPL, and $10.1 million in restricted funds drawn to fund pollution control capital expenditures at our generating plants. Operating Activities For the nine months ended September 30, 2007 and 2006, cash flows from operations were as follows: Net Cash provided by Operating Activities $ in millions   2007   2006               DPL   $ 211.8   $ 212.4               DP&L   $ 239.6   $ 270.7   The tariff-based revenue from our energy business continues to be the principal source of cash from operating activities. Management believes that the diversified retail customer mix of residential, commercial and industrial classes, coupled with the rate relief approved by the PUCO for 2006 and beyond, provides us with a reasonably predictable cash flow from utility operations. Net DPL’s Cash provided by Operating Activities DPL generated net cash from operating activities of $211.8 million and $212.4 million for the nine months ended September 30, 2007 and 2006, respectively. The net cash provided by operating activities for the nine months ended September 30, 2007 was primarily the result of operating profitability, partially offset by cash used for working capital. The net cash provided by operating activities for the nine months ended September 30, 2006 was primarily the result of operating profitability, partially offset by cash used for working capital, specifically taxes. DP&L’s Cash provided by Operating Activities DP&L generated net cash from operating activities of $239.6 million and $270.7 million in the nine months ended September 30, 2007 and 2006, respectively. The net cash provided by operating activities for the nine months ended September 30, 2007 was primarily the result of operating profitability, partially offset by an increase in cash used for working capital. The net cash provided by operating activities for the nine months ended September 30, 2006 was primarily the result of operating profitability. 50 Investing Activities For the nine months ended September 30, 2007 and 2006, cash flows from investing activities were as follows: Net Cash used for Investing Activities $ in millions   2007   2006               DPL   $ (91.7 ) $ (155.9 )             DP&L   $ (247.8 ) $ (281.7 ) DPL’s Cash used for Investing Activities DPL’s net cash used for investing activities werewas $91.7 million and $155.9 million for the nine months ended September 30, 2007 and 2006, comparedrespectively. Net cash used for investing activities for the nine months ended September 30, 2007 was related to capital expenditures that were partially offset by proceeds from the sale of two peaking units and corporate aircraft. Net cash used for investing activities for the nine months ended September 30, 2006 was related to capital expenditures, partially offset by the net sale of short-term investments and securities. DP&L’s Cash used for Investing Activities DP&L’s net cash provided byused for investing activities of $809.1was $247.8 million and $281.7 million for the nine months ended September 30, 2005.2007 and 2006, respectively. Net cash flows used for investing activities infor both years was related to capital expenditures. Financing Activities For the nine months ended September 30, 2007 and 2006, were the result of $283.9 million of capital expenditures, partially offset by $128.0 million of net proceeds from sales and purchases of short-term investments and securities.  Net cash flows from financing activities were as follows: Net Cash (used for)/provided by investing activities for 2005 were the result of $868.4 million of funds Financing Activities $ in millions   2007   2006               DPL   $ (283.6 ) $ (462.4 )             DP&L   $ (25.6 ) $ 22.5   DPL’s Cash (used for)/provided from discontinued operations and $78.9 million of by Financing Activities DPL’s net proceeds from sales and purchases of short-term investments and securities, partially offset by capital expenditures of $138.2 million. Net cash flows used for financing activities for the nine months ended September 30, 2007 were $283.6 million compared to the same period of 2006 of $462.4 million. Net cash used for financing activities for the nine months ended September 30, 2007 was the result of cash used to redeem the $225 million 8.25% Senior Notes on March 1, 2007 and to pay dividends to stockholders of $83.7 million, partially offset by cash received from the exercise of stock options of $14.5 million and $585.0$10.1 million of restricted funds held in trust. Net cash used for financing activities for the nine months ended September 30, 2006 was the result of cash used to repurchase $400.0 million of common stock and pay dividends to common shareholders of $85.7 million, partially offset by the receipt of $23 million of restricted funds held in trust. DP&L’s Cash (used for)/provided by Financing Activities DP&L’s net cash used for financing activities for the nine months ended September 30, 2007 was $25.6 million compared to cash provided from financing activities of $22.5 million for the nine months ended September 30, 2006. Net cash used for financing activities for 2007 was the result of cash used to pay common stock dividends to our parent DPL of $125.0 million and preferred dividends to third parties of $0.7 million, partially offset by $90.0 million for a net short-term loan from our parent DPL and $10.1 million of restricted funds held in trust. Net cash provided by financing activities of $22.5 million for the nine months ended September 30, 2006 and 2005, respectively.  Net cash flows used for financing activities in 2006 werewas primarily the result of $400.0 million in common stock repurchases related to our stock buyback program and $85.7 million in dividends paid to common shareholders, partially offset by $23.1 million of draws from funds held by the trustee to finance our solid waste pollution control capital expenditures.  Net cash flows used for financing activities for 2005 were primarily the result of the retirement of long-term debt of $673.8 million, $86.3 million in dividends paid to common shareholders and $54.7 million used for premiums paid for early debt retirement,expenditures, partially offset by $0.6 million for dividends on preferred stock. 51 DPL and DP&L have obligations to make future payments for capital expenditures, debt agreements, lease agreements and other long-term purchase obligations. We also have certain contingent commitments such as guarantees. We believe our cash flows from operations, the issuance of lower interestcredit facilities (existing or future arrangements), the senior notes and other short- and long-term debt financing will be sufficient to satisfy our future working capital, capital expenditures and other financing requirements for the foreseeable future. Our ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures and other business and risk factors described in Item 1a of $211.2 millionour fiscal 2006 Form 10-K and $18.7 million receivedPart II, Item 1a, of this Form 10-Q. If we are unable to generate sufficient cash flows from operations, or otherwise comply with the exerciseterms of stock options.our credit facilities, the senior notes and other long-term debt, we may be required to refinance all or a portion of our existing debt or seek additional financing alternatives. A discussion of each of our critical liquidity commitments is outlined below. Capital Requirements Capital expendituresDPL’s construction additions were $283.9$275.4 million and $138.2$260.0 million for the first nine months ofended September 30, 2007 and 2006, and 2005, respectively, and are expected to approximate an aggregate of $365$360 million in 2006.  2007. DP&L’s construction additions were $273.5 million and $258.2 million for the nine months ended September 30, 2007 and 2006, respectively, and are expected to approximate $360 million in 2007. Planned construction additions for 2006 primarily2007 relate to ourDP&L’s environmental compliance program, power plant equipment and ourits transmission and distribution system. Capital projects are subject to continuingcontinuous review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors.standards. For the period 2006remainder of 2007, 2008 and 2009, DPL, through 2008, we areits subsidiary DP&L, is projecting to spend an estimated $830$705 million in capital projects, (previously $820 million), approximately 56%40% of which isare to meet changing environmental standards. In our Form 10-Q, as of June 30, 2007, we reported our estimated capital spending to be approximately $675 million. This increase is due primarily to increases in capital projects at DPL operated generating plants. Our ability to complete our capital projects and the reliability of future service will be affected by our financial condition, the availability of internal funds and external funds atthe reasonable cost and adequate and timely return on these capital investments.of external funds. We expect to finance our construction additions in 20062007 with a combination of cash on hand, short-term financing, tax-exempt debt and internally-generated funds.cash flows from operations. Debt and Debt Covenants At September 30,DP&L is considering issuing in conjunction with the Ohio Air Quality Development Authority (OAQDA) another series of tax-exempt bonds to finance the remaining solid waste disposal facility costs at Miami Fort, Killen, Stuart and Conesville generating stations. On November 21, 2006, our scheduled maturitiesDP&L entered into a new $220 million unsecured revolving credit agreement replacing its $100 million facility. This new agreement has a five year term that expires on November 21, 2011 and provides DP&L with the ability to increase the size of long-termthe facility by an additional $50 million at any time. The facility contains one financial covenant: DP&L’s total debt including capital lease obligations, over the next five years are $0.2 million for the remainder of 2006, $225.9 million in 2007, $100.7 million in 2008, $175.7 million in 2009 and $0.7 million in 2010.  Substantially all property of DP&Lto total capitalization ratio is subjectnot to the mortgage lien securing the first mortgage bonds and the pollution control series.  Debt maturities in 2006 are expectedexceed 0.65 to be financed with internal funds.  Certain debt agreements contain reporting and financial covenants for which we are in compliance as1.00. This covenant is currently met. As of September 30, 20062007, DP&L had no outstanding borrowings under this facility. Fees associated with this credit facility are approximately $0.2 million per year, however, changes in credit ratings may affect fees and expectthe applicable interest rate. This revolving credit agreement also contains a $50 million letter of credit sublimit. As of September 30, 2007, DP&L had no outstanding letters of credit against the facility. DP&L has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating related clauses allowing the counter parties to be in compliance during the near term.seek additional surety under certain conditions. Issuance of additional amounts of first mortgage bonds by DP&L is limited by the provisions of its mortgage; however,mortgage. However, management believes that DP&L continues to have sufficient capacity to issue first mortgage bonds to satisfy its requirements in connection with its construction programs. The amounts and timing of future financings will depend upon market and other conditions, interest rate increases, levels of electric sales and construction plans. In March 2004, we completed During the second quarter of 2007, DPL entered into a $175short-term loan to DP&L for $105 million. DP&L paid down $15 million private placement of unsecured 8% series Senior Notes due March 2009.  The Senior Notes will not be redeemable prior to maturity except that we havethis loan during the right to redeem the notes forthird quarter, leaving a make-whole payment at the adjusted treasury rate plus 0.25%.  The 8% series Senior Notes were issued pursuant to our indenture dated ascurrent outstanding loan balance of March 1, 2000, and pursuant to authority granted in our Board resolutions dated March 25, 2004.  The notes impose a limitation on the incurrence of liens on the capital stock of any of our significant subsidiaries and require us and our subsidiaries to meet a consolidated coverage ratio of 2 to 1 prior to incurring additional indebtedness.  The limitation on the incurrence of additional indebtedness$90 million. This short-term loan does not apply to (i) indebtedness incurred to refinance existing indebtedness, (ii) subordinated indebtedness and (iii) up to $150 million of additional indebtedness.  In addition to the events of default specified in the indenture, an event of default under the notes includes a payment default or acceleration of indebtedness under any other indebtedness of ours or any ofaffect our subsidiaries which aggregates $25 million or more.  The purchasers were granted registration rights in connection with the private placement under an Exchange and Registration Rights Agreement.  Pursuant to this agreement, we were obligated to file an exchange offer registration statement by July 22, 2004, have the registration statement declared effective by September 20, 2004 and consummate the exchange offer by October 20, 2004.  We failed (1) to have a registration statement declared effective and (2) to complete the exchange offer according to this timeline.  As a result, we had been accruing additional interest at a rate of 0.5% per year for each of these two violations, up to an additional interest rate not to exceed in the aggregate 1.0% per year.  As each violation is cured, the additional interest rate decreases by 0.5% per annum.  Our exchange offer registration statement for these securities was declared effective by the SEC on June 27, 2006.  As a result, on June 27, 2006, we ceased accruing 0.5% of the additional interest.  On July 31, 2006, we ceased accruing the other 0.5% of additional interest when the exchange of registered notes for the unregistered notes was completed. By completing the exchange, we reduced the annual interest expense by $1.8 million. DP&L has a $100 million unsecured revolving credit agreement that is renewable annually and expires on May 30, 2010.  This facility may be increased up to $150 million.  The facility contains one financial covenant:  DP&L total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  DP&L had no outstanding borrowings under this credit facility at September 30, 2006.  Fees associated with this credit facility are approximately $0.2 million per year.  Changes in credit ratings, however, may affect fees and the applicable interest rate for DP&L’s revolving credit agreement. During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005 volume cap carryforward.  The financing is to be used to partially fund the ongoing FGD capital projects.  The PUCO approved DP&L’s application for this additional financing on July 26, 2006. On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036. In turn, DP&L then borrowed these funds from the OAQDA. Payment of principal and interest on the Bonds when due is insured by an insurance policy issued by Financial Guaranty Insurance Company. DP&L is using the proceeds from these borrowings to assist in financing its portion of the costs of acquiring, constructing and installing certain solid waste disposal facilities comprising air quality facilities at Miami Fort, Killen and Stuart Generating Stations.  These facilities are currently under construction and the proceeds from the borrowing have been placed in escrow with the trustee (the Bank of New York) and are being drawn upon only as facilities are built and qualified costs incurred. In the event any of the proceeds are not drawn, DP&L would eventually be required to return the unused proceeds to bondholders. DP&L expects to draw down all of the proceeds from this borrowing over the next year. DP&L expects to use the remaining $100 million of volume cap carryforward prior to the end of 2008. We are planning to issue in conjunction with the OAQDA another $100 million of tax-exempt bonds to finance the remaining solid waste disposal facilities at Miami Fort, Killen, Stuart and Conesville Generating Stations. On February 17, 2006, DP&L renewed its $10 million Master Letter of Credit Agreement for one year with a financial lending institution.  This agreement supports performance assurance needs in the ordinary course of business.  DP&L has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating related clauses allowing the counter parties to seek additional surety under certain conditions.  As of September 30, 2006, DP&L had two outstanding letters of credit for a total of $2.2 million. covenants. There are no other inter-company debt collateralizations or debt guarantees between usDPL, DP&L and ourtheir subsidiaries. None of ourthe debt obligations of DPL or DP&L’s debt obligations&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries. 52 There was no change to our debt covenants as described in our Form 10-K as of December 31, 2006. Credit Ratings Currently, ourDPL’s senior unsecured and DP&L’s senior secured debt credit ratings are as follows:   DPL Inc.   DP&L   Outlook   Effective                   Fitch Ratings   BBBBBB+   AA+   Stable   April 2006 March 2007   Moody’s Investors Service   Baa3   A3   Positive   June 2006   Standard & Poor’s Corp.   BBBBB-   BBBBBB+   PositiveStable   August 2006February 2007   Off-Balance Sheet Arrangements WeDPL and DP&L do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Contractual Obligations and Commercial Commitments We enter into various contractual obligations and other long-term obligationscommercial commitments that may affect the liquidity of our operations. At September 30, 2006,2007, these include: Contractual Obligations         Payment Year   $ in millions   Total   Less than 1 Year   2 - 3 Years   4 - 5 Years   More than 5 Years                           Long-term debt   $ 1,774.7   $ 225.0   $ 275.0   $ 297.4   $ 977.3   Interest payments   1,129.9   103.4   175.8   149.2   701.5   Pension and postretirement payments   249.2   33.4   46.0   47.2   122.6   Capital leases   3.2   1.1   1.4   0.7   —   Operating leases   0.5   0.3   0.2   —   —   Fuel and limestone contracts (a)   586.8   86.7   315.5   97.5   87.1   Other long-term obligations   27.5   14.6   9.8   3.1   —                           Total contractual obligations   $ 3,771.8   $ 464.5   $ 823.7   $ 595.1   $ 1,888.5             Payment Year   $ in millions   Total   2007   2008-2009   2010-2011   Thereafter   DPL                                               Long-term debt   $ 1,550.0   $ —   $ 275.0   $ 297.4   $ 977.6   Interest payments   1,026.4   23.9   170.7   144.0   687.8   Pension and postretirement payments   219.1   5.5   45.2   46.5   121.9   Capital lease   2.3   0.2   1.5   0.6   —   Operating leases   0.8   0.4   0.3   0.1   —   Coal contracts (a)   925.8   104.6   578.8   242.4   —   Limestone contracts (a)   57.7   0.6   9.5   10.9   36.7   Reserve for uncertain tax provisions   41.9   41.9   —   —   —   Other contractual obligations   337.2   232.8   86.5   14.5   3.4   Total contractual obligations   $ 4,161.2   $ 409.9   $ 1,167.5   $ 756.4   $ 1,827.4                           DP&L   ��                                           Long-term debt   $ 783.2   $ —   $ —   $ —   $ 783.2   Interest payments   542.6   9.8   78.3   78.3   376.2   Pension and postretirement payments   219.1   5.5   45.2   46.5   121.9   Capital lease   2.3   0.2   1.5   0.6   —   Operating leases   0.8   0.4   0.3   0.1   —   Coal contracts (a)   925.8   104.6   578.8   242.4   —   Limestone contracts (a)   57.7   0.6   9.5   10.9   36.7   Reserve for uncertain tax provisions   41.9   41.9   —   —   —   Other contractual obligations   337.2   232.8   86.5   14.5   3.4   Total contractual obligations   $ 2,910.6   $ 395.8   $ 800.1   $ 393.3   $ 1,321.4   (a)  DP&L operated units.-operated units Long-term debt: Long-termDPL’s long-term debt, as of September 30, 2006,2007, consists of DP&L’s first mortgage bonds and tax-exempt pollution control bonds, ourDPL unsecured notes and includes current maturities and unamortized debt discounts. DP&L’s long-term debt, as of September 30, 2007, consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount. See Note 78 of Notes to Condensed Consolidated Financial Statements. 53 Interest payments: Interest payments associated with the long-term debt described above. Pension and postretirement payments: As of September 30, 2006, we2007, DP&L had estimated future benefit payments as outlined in Note 56 of Notes to Condensed Consolidated Financial Statements. These estimated future benefit payments are projected through 2016. Capital leases:lease: As of September 30, 2006, we2007, DP&L had twoa capital leaseslease that expireexpires in November 2007 and September 2010. Operating leases: As of September 30, 2006, we2007, DPL and DP&L had several operating leases with various terms and expiration dates. Not included in this total is approximately $88 thousand$88,000 per year related to right-of-way agreements that are assumed to have no definite expiration dates. Fuel and limestoneCoal contracts: DP&L has entered into various long-term coal contracts to supply portions of its coal requirements for its generating plants and a long-term contract to supply limestone for the operation of its flue gas desulfurization (FGD) units.  Coal contractplants. Contract prices are subject to periodic adjustment and have features that limit price escalation in any given year. A new long-term barge agreement Limestone contracts: DP&L has entered into a contract to supply limestone for its generating facilities. Reserve for uncertain tax positions: On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was executedno significant impact to our overall results of operations, cash flows or financial position.  The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  During 2007, we recorded an additional $1.6 million in accrued interest resulting in a total reserve for five years beginninguncertain tax positions of $41.9 million as of September 2006.30, 2007.  None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility. Other long-termcontractual obligations: As of September 30, 2006, we2007, DPL and DP&L had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates. We enter into various commercial commitments which may affect the liquidity of our operations. At September 30, 2006,2007, these include: Credit facilities: In November 2006, DP&L has a replaced its $100 million 364-day unsecuredrevolving credit agreement with a $220 million five-year facility that is renewable annually and expires on May 30, 2010.November 21, 2011. DP&L has the ability to increase the size of the facility by an additional $50 million at any time. At September 30, 2006,2007, there were no outstanding borrowings outstanding under this credit agreement.  The facility may be increased up to $150 million.facility. Guarantee:Guarantees: DP&L owns a 4.9% equity ownership interest in an electric generation company. As of September 30, 2006, 2007, DP&L could be responsible for the repayment of 4.9%, or $21.8$34.1 million, of a $445$695 million debt obligation that matures in 2026. Other: We completedIn two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPLE, regarding the sale of or entered into alternative closing arrangements for all private equity funds in our financial asset portfolio as of June 20, 2005.  We have an obligationthe Darby Electric Peaking Station to fund any cash calls or other commitments in whichAmerican Electric Power and the purchasersale of the private equity funds defaults with respectGreenville Electric Peaking Station to Buckeye Electric Power, Inc. In both cases, DPL has agreed to guarantee the funds for which we entered into an alternative closing arrangement.  Asobligations of September 30, 2006, this obligation is estimated not to exceed $0.1 million.DPLE over a multiple year period as follows: $ in millions   2007   2008   2009   2010   Darby   $ 30.6   $ 23.0   $ 15.3   $ 7.7                       Greenville   $ 14.8   $ 11.1   $ 7.4   $ 3.7   54 MARKET RISK As a result of our operating, investing and financing activities, we are subject to certain market risks including fluctuations in interest rates and changes in commodity prices for electricity, coal, environmental emissions and gas.natural gas as well as fluctuations in interest rates. Commodity pricing exposure includes the impacts of weather, market demand, potential coal supplier contract breaches or defaults, increased competition and other economic conditions. For purposes of potential risk analysis, we use sensitivity analysesanalysis to quantify potential impacts of market rate changes on the results of operations. The sensitivity analyses representanalysis represents hypothetical changes in market values that may or may not occur in the future. Commodity Pricing Risk Approximately 12.4%12% of our year-to-date 2006DPL’s and 22% of DP&L’s electric revenues for the nine months ended September 30, 2007 were from sales of excess energy and capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customers are sold inon the wholesale market when we can identify opportunities with positive margins. As of September 30, 2006,2007, a hypothetical increase or decrease of 10% in DPL’sannual wholesale revenues could result in approximately an $11a $12 million increase or decrease to annual net income, assuming no increases or decreases in fuel and purchased power costs. As of September 30, 2007, a hypothetical increase or decrease of 10% in DP&L’s annual wholesale revenues could result in approximately a $21 million increase or decrease to annual net income, assuming no increases or decreases in fuel and purchased power costs. FuelDPL’s fuel (including coal, natural gas, oil and emission allowances) and purchased power costs were 37%as a percent of total revenuesoperating costs in the first nine months ended September 30, 2007 and 2006 were 54% and 49%, respectively. DP&L’s fuel (including coal, natural gas, oil and emission allowances) and purchased power costs as a percent of bothtotal operating costs were 55% and 52% in the nine months ended September 30, 2007 and 2006, and 2005.respectively. We have approximately 100% and 83%substantially all of the total expected coal volume needed to meet our retail and firm wholesale sales requirements for 2006 and 2007 respectively, under contract. The majority of our contracted coal is purchased at fixed prices. Some contracts provide for periodic adjustment and some are priced based on market indices. Substantially all contracts have features that limit price escalations in any given year. Our 2006consumption of SO2 allowances should decline in 2007 due to planned emission allowance (SO2 and NOx) consumption is expected to be similar to 2005.  Our holdings of SO2 and NOx allowances are approximately equal to our expected needs from 2006 through 2010.  There may be exchanges of allowances between future years to balance our 2006-2010 position.control upgrades. We do not expect to purchase SO2allowances outright for 2006.2007. The exact consumption of SO2 and NOx allowances will depend on market prices for power, and availability of our generating units.  The utilizationgeneration units, the timing of SO2 allowances will depend uponemission control equipment upgrade completion and the actual sulfur content of the coal burned.DP&L does not plan to purchase NOx allowances for 2007. Fuel costs are impacted by changes in volume and price and are driven by a number of variables including weather, reliability of coal deliveries, scheduled outages and generation plant mix. Fuel costs are forecasted to increase approximately 7% in 2006 compared to 2005 and are forecasted to increase approximately 5%be flat in 2007 compared to 2006. This forecast assumes coal prices will increase approximately 10% in 2006 compared to 2005 and increase approximately 5% in 2007 compared to 2006. Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of our generating capacity. We will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below our internal production costs. As of September 30, 2006,2007, a hypothetical increase or decrease of 10% in DPL’sannual fuel and purchased power costs excluding RTO services, could result in approximately a $29$34 million decrease or increase to annual net income, assuming no increases or decreases in sales revenues. As of September 30, 2007, a hypothetical increase or decrease of 10% in DP&L’s annual fuel and purchased power costs could result in approximately a $35 million decrease or increase to annual net income.income, assuming no increases or decreases in sales revenues. Interest Rate Risk As a result of our normal borrowing and leasing activities, our results are exposed to fluctuations in interest rates, which we manage through our regular financing activities. We maintain both cash on deposit and investments in cash equivalents that may be affected by adverse interest rate fluctuations. Our long-term debt represents publicly and privately-heldprivately held secured and unsecured notes and debentures with fixed interest rates. At September 30, 2006,2007, we had no short-term borrowings.outstanding borrowings under our revolving credit facility. The carrying value of ourDPL’s debt was $1,777.9$1,552.3 million at September 30, 2006,2007, consisting of DP&L’s first mortgage bonds, DP&L’s tax-exempt pollution control bonds, our unsecured notes and DP&L’s capital leases.lease. The fair value of this debt was $1,808.7$1,564.8 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The principal cash repayments and related weighted average interest rates by maturity date for long-term, fixed-rate debt at September 30, 20062007, are as follows:   Long-term Debt   Expected Maturity   Amount       Date   ($ in millions)   Average Rate               2006   $ 0.2   6.0 % 2007   225.9   8.2 % 2008   100.7   6.3 % 2009   175.7   8.0 % 2010   0.7   6.9 % Thereafter   1,274.7   5.5 % Total   $ 1,777.9   6.5 %             Fair Value   $ 1,808.7         55     DPL’s Long-term Debt   Expected Maturity   Amount       Date   ($ in millions)   Average Rate               2007   $                     0.2   6.5%   2008   100.7   6.3%   2009   175.8   8.0%   2010   0.6   6.9%   2011   297.4   6.9%   2012   —   —      Thereafter   977.6   5.6%   Total   $              1,552.3   6.2%               Fair Value   $              1,564.8       The carrying value of DP&L’s debt was $785.5 million at September 30, 2007, consisting of our first mortgage bonds, our tax-exempt pollution control bonds and our capital lease. The fair value of this debt was $777.0 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The principal cash repayments and related weighted average interest rates by maturity date for long-term, fixed-rate debt at September 30, 2007, are as follows:     DP&L’s Long-term Debt   Expected Maturity   Amount       Date   ($ in millions)   Average Rate               2007   $                     0.2   6.5%   2008   0.7   6.9%   2009   0.8   6.9%   2010   0.6   6.9%   2011   —   —      2012   —   —      Thereafter   783.2   5.0%   Total   $                  785.5   5.0%               Fair Value   $                  777.0       Debt maturities for DPL and DP&Lin 20062007 are expected to be financed with a combination of short-term borrowings, tax-exempt pollution control bonds and internal funds. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our DPL’s and DP&L’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inGAAP. In connection with the United States of America (GAAP). The preparation of these financial statements, in conformity with GAAP requires usour management is required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and liabilities, the related disclosure of contingent assetsliabilities. These assumptions, estimates and liabilitiesjudgments are based on our historical experience and assumptions that we believed to be reasonable at the datetime. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the financial statements and the revenue and expensesexercise of the period reported.  judgment. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain. Different estimates could have a material effect on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Significant items subject to such estimates and judgments includeinclude: the carrying value of property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims costs; valuation allowances for receivables and deferred income taxes; the valuation of reserves recorded for income tax exposures; litigation; regulatory proceedings and orders;related to current litigation and assets and liabilities related to employee benefits. Actual results may differ from those estimates. Refer to our 20052006 Annual Report filed on Form 10-K for a complete listing of our critical accounting policies and estimates. DPL INC.Recently Issued Accounting Pronouncements A discussion of recently issued accounting pronouncements is described in Note 1 of the Notes to the Condensed Consolidated Financial Statements and such discussion is incorporated by reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof. 56 OPERATING STATISTICS     Three months ended   Nine months ended       September 30,   September 30,       2006   2005   2006   2005                       Sales (millions of kWh)                                       Residential   1,432   1,546   3,939   4,182   Commercial   1,075   1,086   2,906   2,937   Industrial   1,169   1,174   3,254   3,281   Other retail   380   381   1,069   1,078   Other miscellaneous revenues   —   —   —   —   Total retail   4,056   4,187   11,168   11,478                       Wholesale   1,149   719   2,649   1,913                       Total sales   5,205   4,906   13,817   13,391                       Revenues ($ in thousands)                                       Residential   $ 137,317   $ 136,337   $ 369,412   $ 362,294   Commercial   79,651   72,655   223,950   205,947   Industrial   64,147   59,495   181,639   168,075   Other retail   22,927   20,934   65,161   60,645   Other miscellaneous revenues   3,276   2,734   8,669   7,718   Total retail   307,318   292,155   848,831   804,679                       Wholesale   61,762   40,509   129,704   90,304                       RTO ancillary revenues   20,653   22,239   55,696   55,191                       Other revenues, net of fuel costs   2,733   2,532   8,356   7,750                       Total revenues   $ 392,466   $ 357,435   $ 1,042,587   $ 957,924                       Electric customers at end of period   513,469   511,948   513,469   511,948         DPL Inc.   DP&L (a)       Three Months Ended September 30,   Nine Months Ended September 30,   Three Months Ended September 30,   Nine Months Ended September 30,       2007   2006   2007   2006   2007   2006   2007   2006   Electric sales (millions in kWh)                                   Residential   1,505   1,432   4,276   3,939   1,505   1,432   4,276   3,939   Commercial   1,101   1,075   3,038   2,906   1,101   1,075   3,038   2,906   Industrial   1,139   1,169   3,233   3,254   1,139   1,169   3,233   3,254   Other retail   397   380   1,111   1,069   397   380   1,111   1,069   Total retail   4,142   4,056   11,658   11,168   4,142   4,056   11,658   11,168                                       Wholesale   967   1,149   2,645   2,649   967   1,149   2,645   2,649                                       Total   5,109   5,205   14,303   13,817   5,109   5,205   14,303   13,817                                       Operating revenues ($ in thousands)                                   Residential   $ 148,419   $ 137,317   $ 410,736   $ 369,412   $ 148,419   $ 137,317   $ 410,736   $ 369,412   Commercial   85,619   79,651   241,381   223,950   80,085   73,672   226,960   207,192   Industrial   64,525   64,147   185,014   181,639   34,720   35,214   101,244   98,586   Other retail   25,049   22,927   70,879   65,161   19,907   22,779   57,974   65,074   Other miscellaneous revenues   2,570   3,222   7,701   8,615   2,581   3,235   7,747   8,646   Total retail   $ 326,182   $ 307,264   $ 915,711   $ 848,777   $ 285,712   $ 272,217   $ 804,661   $ 748,910                                       Wholesale   52,892   61,762   139,995   129,704   94,025   97,438   253,032   231,469                                       RTO ancillary revenues   39,833   20,652   81,389   55,695   39,833   20,652   81,389   55,695                                       Other revenues, net of fuel costs   3,052   2,733   8,545   8,356   —   —   —   —                                       Total   $ 421,959   $ 392,411   $ 1,145,640   $ 1,042,532   $ 419,570   $ 390,307   $ 1,139,082   $ 1,036,074                                       Electric customers at end of period                                   Residential   455,801   456,134   455,801   456,134   455,801   456,134   455,801   456,134   Commercial   49,665   49,158   49,665   49,158   49,665   49,158   49,665   49,158   Industrial   1,813   1,828   1,813   1,828   1,813   1,828   1,813   1,828   Other   6,425   6,349   6,425   6,349   6,425   6,349   6,425   6,349                                       Total   513,704   513,469   513,704   513,469   513,704   513,469   513,704   513,469   (a)DP&L sells power to DPLER (a subsidiary of DPL). These sales are classified as wholesale on DP&L’s financial statements and retail sales for DPL. The kWh volumes contain all volumes distributed on the DP&L system which include the retail sales by DPLER. The sales for resale volumes are omitted to avoid duplicate reporting. Item 3.  Quantitative and Qualitative Disclosures about Market Risk See the “Market Risk” section of Item 2. Item 4.  Controls and Procedures Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining our disclosure controls and procedures.  These controls and procedures were designed to ensure that material information relating to us and our subsidiaries is communicated to the CEO and CFO.  We evaluated these disclosure controls and procedures as of the end of the period covered by this report with the participation of our CEO and CFO.  Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effectiveeffective: (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  There was no change in our internal control over financial reporting during the most recently completed quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, internal control over reporting. 57 Part II. Other InformationPART II Item 1. 1 — Legal Proceedings In the normal course of business, we have been named a defendantare subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  We believe the amounts provided in our Condensed Consolidated Financial Statements, as prescribed by GAAP, for these matters are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal actions, including arbitrations, class actionsproceedings, claims and other litigation. Certainmatters discussed below, and to comply with applicable laws and regulations will not exceed the amounts reflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminatethose amounts provided as of damages. We are also involved in other reviews, investigations and proceedings by governmental and self-regulatory organizations regarding our business. Certain of the foregoing could result in adverse judgments, settlements, fines, penalties or other relief. Because litigation is inherently unpredictable, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, we cannot predict with certainty the loss or range of loss related to such matters, how such matters will be resolved, when they will be ultimately resolved, or what the eventual settlement, fine, penalty or other relief might be. Consequently, we cannot estimate losses or ranges of losses for matters where there is only a reasonable possibility that a loss may have been incurred. Although the ultimate outcome of these mattersSeptember 30, 2007, cannot be ascertained at this time, it is the opinion of management, that the resolution of the foregoing matters will not have a material adverse effect on our financial condition, taken as a whole; such resolution may, however, have a material effect on the operating results in any future period, depending on the level of income for such period.reasonably determined. We have provided reserves for such matters in accordance with SFAS 5, “Accounting for Contingencies.” The ultimate resolution may differ from the amounts reserved. Certain legal proceedings in which we are involved are discussed in Part I, Item 1—Environmental Considerations, Item 1—Competition and Regulation, Item 3 and Note 1415 to the Consolidated Financial Statements and, Part I, Item 3,included therein of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005; and Note 8 to the Consolidated Financial Statements and Part II, Item 1, included in our Form 10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006.  The following discussion is limited to recent developments concerning our legal proceedings and should be read in conjunction with thosethe earlier reports.report. On January 13, 2006, we filed a claim against one of our insurers, Associated Electric & Gas Insurance Services (AEGIS), under a fiduciary liability policy to recoup legal fees associated with our litigation against three former executives.   An arbitration of this matter was held on August 4, 2006.  The arbitration panel ruled on or about September 12, 2006 that the AEGIS policy does not require an advance of defense expenses to us.  Rather, the arbitration panel stated that we are required to file a written undertaking as a condition precedent to repay expenses finally established not to be insured.  We have filed a written undertaking with AEGIS and will continue to pursue resolution of the claim through mediation and arbitration in 2007. On February 13, 2006, we received correspondence from the Ohio Department of Taxation (ODT) notifying us that ODT has completed their examination and review of our Ohio Corporation Franchise Tax Returns for tax years 2002 through 2004 and that the final proposed audit adjustments result in a balance due of $90.8 million before interest and penalties.  We have reviewed the proposed audit adjustments and are vigorously contesting the ODT findings and notice of assessment through all administrative and judicial means available. On March 29, 2006, we filed petitions for reassessment with the ODT to protest each assessment as well as request corrected assessments for each tax year.  On October 12, 2006, we signed a Memorandum of Understanding with the ODT that stated if the ODT’s positions are ultimately sustained in judicial proceedings, the total additional tax liability that we would be subject to for tax years 2002 through 2004 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.  We believe we have recorded adequate tax reserves related to the proposed adjustments; however, we cannot predict the outcome, which could be material to our results of operations and cash flows.Environmental We are also under audit review by various state agencies for tax years 2002 through 2004.  We have also filed an appeal to the Ohio Board of Tax Appeals for tax years 1998 through 2001.  Depending upon the outcome of these audits and the appeal, we may be required to increase our tax provision if actual amounts ultimately determined exceed recorded reserves.  We believe we have adequate reserves in each tax jurisdiction but cannot predict the outcome of these audits. In September 2006, we became aware of an unasserted claim under the Fair Labor Standards Act concerning the calculation of overtime rates for our unionized workforce.  We will vigorously oppose these claims, if asserted against us.  However, if we do not prevail, the cost to the Company would be in the range of $0-$3.5 million. On September 21, 2004, the Sierra Club filed a lawsuit against us DP&L and the other owners of the Stuart Generating Station in the United States District Court for the Southern District of Ohio for alleged violations of the Clean Air Act (CAA).  On October 13, 2006, and pursuantthe Station’s operating permit.  DP&L, on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken place, expert reports have been filed by both parties and depositions of experts are expected to an approved procedural schedule,occur in the Sierra Clubfourth quarter of 2007.  Dispositive motions are to be filed an amended complaint setting forth additional actions taken by us that the Sierra Club alleges were also in violation of the CAA.  We are currently reviewing that amended complaint and will vigorously defend our actions.  The case is currently in discovery; aJanuary 2008.  No trial date has not been set.DP&L is unable to determine the impact of this lawsuit, if any, on its overall results of operations, financial position or cash flows. Item1A. Item 1a — Risk Factors A comprehensive listing of risk factors that we consider to be the most significant to your decision to invest in our stock is provided in our most recent Annual Report on Form 10-K and is incorporated herein by reference.  The Form 10-K may be obtained as discussed on page 2, ‘Available Information.in section, ‘Website Access to Reports.’  If any of thesethe listed events occur, our business, financial position or results of operation could be materially affected.  The following risk factors are additions toincluded in our 2005 Annual Report on2006 Form 10-K discussion on risk factors. Greenhouse gas (GHG) emissions, consisting primarily of carbon dioxide emissions, are presently unregulated.  Numerous billsfor year ended December 31, 2006 have been introducedupdated as follows: Reliance on Third Parties We rely on many third party suppliers and contractors in Congressour energy production, transmission and distribution functions including: the purchase and delivery of coal and other inventory; the construction of capital assets and waste disposal management associated with our production processes (such as bottom ash, fly ash and gypsum).  Unanticipated changes in our purchasing processes, supplier availability, supplier performance and pricing may affect our business and operating results.  In addition, we rely on others to regulate GHG emissions,provide professional services, such as, but not limited to, date none have passed.  Future regulation of GHG emissions is uncertain. However, such regulation would be expected to impose costs on our operations.  Such costs could include measures as advanced byactuarial calculations, internal audit services, payroll processing and various constituencies, including a carbon tax; investments in energy efficiency; installation of CO2 emissions control technology, to the extent such technology exists; purchase of emission allowances, should a trading mechanism be developed; or the use of higher-cost, lower CO2 emitting fuels.  We will continue to make prudent investments in energy efficiency that reduces our GHG emissions intensity.consulting services. Wright Patterson Air Force Base (WPAFB) represents approximately 1% Employees Approximately 53% of our annual revenues.  WPAFB has the rightemployees are under a collective bargaining agreement.  If we are unable to select another competitive retail electric supplier to meet its generating needs.  Effective August 2006, WPAFB secures its generation under the DP&L standard offer rate until such time as they choose to contract with an alternative supplier.  If this occurs, thisnegotiate future collective bargaining agreements, we could impact our results of operations. We are currently constructing flue gas desulfurization (FGD) facilities at five units located at our J. M. Stuart and Killen Electric Generating Stations.  Construction of the FGD facilities at each unit is scheduled to be completed in phases commencing mid-year 2007 through 2008.  We are also co-owners of electric generating stations operated by other investor-owned utilities, who are in various stages of constructing FGD facilities at these stations.  Significant construction delays could adverselyexperience work stoppages which may affect our ability to operate or may substantially increase our cost to operate these electric generating stations under federal environmental lawsbusiness and regulations that become effective in 2010.  For those electric generating stations where we are co-owners but do not operate, significant construction delays may substantially increase our pro rata share of the cost to operate those facilities beginning in 2010.operating results. Annually, PJM, the regional transmission organization that provides transmission services for a large portion of the Midwest United States, performs a review of the capital additions required to provide reliable electric transmission services throughout its territory.  PJM allocates the costs of constructing these facilities to the applicable entity that will benefit from the new construction.  FERC is authorized to provide rate recovery to utilities for the costs they incur to construct these transmission facilities.  To date, we have not been required to construct any new facilities nor have we been assigned any costs as a result of PJM’s annual review, but there is no guarantee that we will not be assigned some costs or be required to construct facilities in the future. Item 6. Exhibits2 — Unregistered Sale of Equity Securities and Use of Proceeds None 58 Item 3 — Defaults Upon Senior Securities None Item 4 — Submission of Matters to a Vote of Security Holders None Item 5 — Other Information None Item 6 — Exhibits 10.1DPL Inc. Form of DPL Inc. Restricted Stock Agreement (Filed as DP&L Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 8, 2006, File #1-9052) Number Exhibit Location X   X 10.2 Participation Agreement dated September 8, 2006 between DPL Inc., The Dayton Power and Light Company and Paul M. Barbas (Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 8, 2006, File #1-9052)   10.3 DPL Inc. Executive Incentive Compensation Plan and Schedule A as amended September 5, 2006 (Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 8, 2006, File #1-9052) 31(a)   10.4 Non-Employee Director Compensation Summary dated as of September 19, 2006 (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 25, 2006, File #1-9052) 10.5 DPL Inc. 2006 Deferred Compensation Plan for Executives (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 25, 2006, File #1-9052) 10.6 DPL Inc. Pension Restoration Plan (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 25, 2006, File #1-9052) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 31(a)     31.2X X 31(b) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   32 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DPL INC. (Registrant) 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) 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DPL Inc. and The Dayton Power and Light Company has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. DPL Inc. The Dayton Power and Light Company (Registrants) Date: October 31, 20062007   /s/ Paul M. Barbas       Paul M. Barbas President and Chief Executive Officer (principal executive officer)           October 31, 20062007   /s/ John J. Gillen       John J. Gillen Senior Vice President and Chief Financial Officer (principal financial officer)           October 31, 20062007   /s/ Frederick J. Boyle       Frederick J. Boyle ControllerVice President and Chief Accounting Officer       (principal accounting officer)   4060