DPL INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

o TRANSITION REPORT PURSUANT TO SECTION` 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 1-9052

DPL INC.

(Exact name of registrant as specified in its charter)

OHIO		31-1163136
(State or other jurisdiction of incorporation or organization)		*(I.R.S. Employer Identification No.)*

1065 Woodman Drive, Dayton, Ohio		45432
*(Address of principal executive offices)*		*(Zip Code)*

Registrant’s telephone number, including area code: 937-224-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Outstanding at October 31, 2004	Name of each exchange on which registered

Common Stock, $0.01 par value and	126,501,404	New York Stock Exchange
Preferred Share Purchase Rights

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES o

NO x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES x

NO o

The aggregate market value of the common stock held by nonaffiliates of the registrant as of June 30, 2003, was approximately $2,016,432,380 based on a closing price of $15.94 on such date.

As of October 31, 2004, 126,501,404 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

DPL INC.

Index to Annual Report on Form 10-K
Fiscal Year Ended December 31, 2003

		Page No.

	Part I
Item 1	Business	3
Item 2	Properties	16
Item 3	Legal Proceedings	16
Item 4	Submission of Matters to a Vote of Security Holders	19

	Part II
Item 5	Market for Registrant’s Common Equity and Related Shareholder Matters	19
Item 6	Selected Financial Data	20
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	41
Item 8	Financial Statements and Supplementary Data	42
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	94
Item 9A	Controls and Procedures	94

	Part III
Item 10	Directors and Executive Officers of the Registrant	97
Item 11	Executive Compensation	102
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	122
Item 13	Certain Relationships and Related Transactions	124
Item 14	Principal Accountant Fees and Services	126

	Part IV
Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K	127

	Other
	Signatures	135
	Schedule II Valuation and Qualifying Accounts	138
	Subsidiaries of DPL Inc.
	Independent Auditors’ Consent
	Consent of Independent Accountants
	Certifications

Available Information
DPL Inc. (DPL or the Company) files current, annual and quarterly reports, proxy statements 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 the Company files at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC 20549, USA. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. The Company’s SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.

The Company’s public internet site is http://www.dplinc.com. The Company makes available through its internet site, its 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 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 it electronically files such material with, or furnishes it to, the SEC.

In addition, the Company’s public internet site includes other items related to corporate governance matters, including, among other things, the Company’s governance guidelines, charters of various committees of the Board of Directors and the Company’s 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.

PART I

Item 1 - Business

DPL INC.

DPL Inc. (DPL or the Company) is a diversified regional energy company organized in 1985 under the laws of Ohio. The executive offices of DPL are located at 1065 Woodman Drive, Dayton, Ohio 45432 - telephone (937) 224-6000.

DPL’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 service area is primarily generated at eight coal-fired power plants and is distributed to more than 500,000 retail customers. 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.

Other significant subsidiaries of DPL (all of which are wholly-owned) include DPL Energy, LLC (DPLE), which engages in the operation of peaking generating facilities and marketing of wholesale electric energy; MVE, Inc. (MVE), which provides financial support services to DPL and its subsidiaries and is primarily responsible for the management of the Company’s financial asset portfolio; Plaza Building, Inc., which owns all the capital stock of MVE; and Miami Valley Insurance Company (MVIC), a captive insurance company for DPL and its subsidiaries.

The principal businesses of the Company are conducted in two business segments. These segments are Electric and Financial Asset Portfolio. Refer to Note 13 in the Notes to Consolidated Financial Statements for additional information.

DPL and its subsidiaries employed 1,454 persons as of December 31, 2003, of which 1,194 were full-time employees and 260 were part-time employees.

RECENT DEVELOPMENTS

Audit Committee Investigation and Related Matters
On March 10, 2004, the Company’s controller, Daniel Thobe, sent a memorandum (the Thobe Memorandum) to W August Hillenbrand, the Chairman of the Audit Committee of the Board of Directors (the Audit Committee). The Thobe Memorandum expressed Mr. Thobe’s “concerns, perspectives and viewpoints” regarding financial reporting and governance issues within the Company. The four general categories of issues identified by Mr. Thobe were: (i) “disclosure issues” concerning agreements with Valley Partners, Inc. (a company owned by Peter H. Forster, formerly DPL’s Chairman, and Caroline E. Muhlenkamp, formerly DPL’s Group Vice President and interim Chief Financial Officer), the reporting of executive perquisite compensation in the Company’s proxy statement, segment reporting concerning the Company’s subsidiary, MVE, and disclosure of Ms. Muhlenkamp’s compensation; (ii) “internal control issues” including a lack of information regarding certain journal entries and a lack of supporting documentation for travel-related expenses of certain senior executives; (iii) “process issues,” which include the processes relating to recent amendments to the Company’s deferred compensation plans, the classification of Mr. Forster as an independent contractor, and untimely payroll processing; and (iv) “communication issues” relating to changes to the 2003 management bonus that were not communicated to the staff and “current practices and processes” that have created an unfavorable “tone at the top” environment.

On March 15, 2004, the Audit Committee retained the law firm of Taft, Stettinius & Hollister LLP (TS&H) to represent the Committee in an independent review of each of the matters raised by the Thobe Memorandum. TS&H subsequently retained an accounting firm as a forensic accountant to assist in this review. On April 27, 2004, TS&H submitted a written report of its findings to the members of the Audit Committee (the Report). A copy of the Report is filed as an exhibit to this Form 10-K. TS&H stated in its Report that no person had indicated to it, nor had it uncovered in the course of its review, any uncorrected material inaccuracies in the Company’s books and records. Further, TS&H reported that it had determined that some of Mr. Thobe’s concerns were based on incomplete information or were matters of judgment. TS&H did, however, recommend further follow-up by the Audit Committee and improvements relating to disclosures, communication, access to information, internal controls and the culture of the Company in certain areas.

Senior management was given the opportunity to review and comment on the Report. Mr. Forster, Ms. Muhlenkamp and Stephen F. Koziar, Jr., formerly DPL’s Chief Executive Officer and President, each submitted written responses disagreeing with a number of the Report’s conclusions. They also provided additional information regarding the internal control and process issues that were raised by the Thobe Memorandum and corroborated in the Report. In light of the responses by senior management, TS&H prepared a supplement to the Report, dated May 15, 2004 (the Supplement). In the Supplement, TS&H addressed the information and documentation provided by senior management and incorporated the revised findings. A copy of the Supplement is also filed as an exhibit to this Form 10-K.

The Audit Committee considered the Report and Supplement at a meeting held on May 16, 2004. After its review and consideration, the Audit Committee recommended that the full Board of Directors accept the Report and the Supplement. At a meeting held on May 16, 2004, the Board of Directors accepted the Report and Supplement, including the findings and recommendations set forth therein.

Pursuant to the recommendations set forth in the Report, the Company has disclosed in this Annual Report on Form 10-K the terms of certain agreements with Valley Partners, Inc., (the “Valley Partners Agreements”), which were terminated, as well as purported amendments to the Company’s deferred compensation plans that were made in December 2003 and the resulting distributions of deferred compensation that were made to senior management in 2003. Further, the Company evaluated the financial reporting requirements under FASB Statement of Accounting Standards No. 131 “Disclosures about Segments of an Enterprise and Related Information” and concluded it was appropriate to begin reporting its Financial Asset Portfolio as a separate business segment because of the increased executive-level attention and emphasis on financial reporting during 2003. Prior periods have been conformed to the current year’s presentation. The Company has reviewed the termination of the Valley Partners Agreements, the purported amendments to the Company’s deferred compensation plans, and the December 2003 distributions, and has initiated legal proceedings challenging the propriety of those terminations and distributions and the validity of those amendments. Notwithstanding the uncertain validity of the purported amendments to the plans, the Company has accounted for the plans as they have been administered. (See Item 3 - Legal Proceedings.)

The Audit Committee and the Company’s senior management continue to evaluate the Report and Supplement, and are considering what additional action, if any, to take in response to the findings and recommendations therein.

Auditor’s Letter
The Company’s auditors, KPMG LLP (KPMG), have delivered a management letter to the Company regarding internal control and communication issues within the Company noted during their 2003 examination. This letter and management’s response are described in Item 9A of this Form 10-K.

Governmental and Regulatory Inquiries
On or about June 24, 2004 the SEC commenced a formal investigation into issues raised by the Thobe Memorandum. The Company is cooperating with the investigation.

On April 7, 2004, the Company received notice that the staff of the Public Utilities Commission of Ohio (PUCO) is conducting an investigation into the financial condition of DP&L as a result of the issues raised by the Thobe Memorandum. On May 27, 2004, the PUCO ordered DP&L to file a plan of utility financial integrity that outlines the actions the Company has taken or will take to insulate DP&L utility operations and customers from its unregulated activities. DP&L must file this plan within 120 days of the filing of its Form 10-K with the SEC. The Company and DP&L intend to comply with this order and to cooperate with the PUCO’s continuing investigation.

On May 20, 2004, the staff of the SEC notified the Company that it was conducting an inquiry covering the exempt status of the Company under the Public Utility Holding Company Act of 1935. The staff of the SEC has requested the Company provide certain documents and information on a voluntary basis. The Company is cooperating with the inquiry. On October 8, 2004, DPL received a notice from the SEC that a question exists as to whether such exemption from the Public Utility Holding Company Act may be detrimental to the public interest or the interests of investors or consumers. Under applicable rules, DPL will lose its exemption 30 days following this notice and be required to register as a holding company under the Public Utility Holding Company Act and become subject to additional regulation thereunder. However, DPL may delay the requirement to become registered so long as it files a good faith application seeking an order of exemption from the SEC. DPL will remain exempt pending a decision from the SEC on that application. DPL believes it has a good faith basis for seeking an order of exemption and expects to make a filing seeking that order within the 30 day period. DPL cannot predict what action the Securities and Exchange Commission may take in connection with its application or whether it will be able to remain an exempt holding company.

On May 28, 2004, the U.S. Attorney’s Office for the Southern District of Ohio, assisted by the Federal Bureau of Investigation, notified the Company that it has initiated an inquiry involving subject matters covered by the Company’s internal investigation. The Company is cooperating with this investigation.

Commencing on or about June 24, 2004, the Internal Revenue Service (IRS) has issued a series of data requests to the Company regarding issues raised in the Thobe Memorandum. The staff of the IRS has requested that the Company provide certain documents, including but not limited to, matters concerning executive/director deferred compensation plans, management stock incentive plans and MVE financial statements. The Company is cooperating with these requests.

Private Placement of Notes
On March 25, 2004, the Company completed a $175 million private placement of unsecured 8% series Senior Notes due March 2009. The Senior Notes are not redeemable prior to maturity except that the Company has the right to redeem the notes for a make-whole payment at the adjusted treasury rate plus 0.25%. The proceeds from these notes were used to provide partial funding for the retirement of $500 million of the 6.82% Senior Notes due 2004. The 6.82% Senior Notes were redeemed on April 6, 2004.

Director and Management Changes
Effective May 16, 2004, the Board of Directors unanimously elected current directors Robert D. Biggs as Executive Chairman and W August Hillenbrand as Vice-Chairman. The Board of Directors also appointed DPLE President, James V. Mahoney, as President and Chief Executive Officer of the Company and DP&L and current Treasurer, Pamela Holdren, as interim Chief Financial Officer of the Company and DP&L.

The elections and appointments follow the retirement of Stephen F. Koziar, Jr., director, President and Chief Executive Officer of the Company and DP&L, and director and Secretary/Treasurer of MVE and the resignations of Peter H. Forster, Chairman of the Board, director and consultant to the Company and DP&L, and Chairman of the Board and director of MVE; and Caroline E. Muhlenkamp, director and President of MVE and Group Vice President and interim Chief Financial Officer of the Company and DP&L. In connection with Mr. Koziar’s retirement and Mr. Forster and Ms. Muhlenkamp’s resignations, each of the Company, Mr. Koziar, Mr. Forster and Ms. Muhlenkamp reserved all rights under applicable law and under any existing agreements.

On July 8, 2004, Mr. Forster and Ms. Muhlenkamp filed a complaint in the Circuit Court of the Fourth Judicial Circuit, Duval County, Florida, alleging claims against the Company, DP&L and MVE for breach of contract, conversion, promissory estoppel and declaratory judgment relating to their consulting contract and employment agreement, respectively. The defendants removed the case to the U.S. District Court for the Middle District of Florida, Jacksonville Division, on August 9, 2004. Defendants have moved to dismiss the case for lack of jurisdiction or, in the alternative, to transfer the case to the U.S. District Court for the Southern District of Ohio. On September 17, 2004, Mr. Forster and Ms. Muhlenkamp responded to defendant’s motions. (See Item 3 - Legal Proceedings, and Legal Matters under Note 16 of the Notes to Consolidated Financial Statements).

On July 21, 2004, the Company and DP&L entered into an employment agreement with Robert D. Biggs, who became Executive Chairman of the Board effective May 16, 2004. Mr. Biggs retired as a Managing Partner of PricewaterhouseCoopers LLP (PwC) in 1999 and received retirement benefits from PwC which, if continued, could have affected whether PwC qualifies as an independent auditing firm for the Company. PwC was DP&L’s and the Company’s independent auditor until March 2003 and was required to give its consent to the filing of this Form 10-K. In order for PwC to be independent, Mr. Biggs has agreed to accept his retirement benefit from PwC in the form of an annuity which provides an annual retirement benefit that is $71,000 less than the amount he previously received from PwC directly. To compensate Mr. Biggs for the resulting reduction in his PwC retirement benefits, the Company and DP&L purchased an annuity that will pay Mr. Biggs $71,000 per year for life in addition to the compensation described in Item 11 – Executive Compensation. The Company and DP&L will also provide Mr. Biggs with gross-up payments for any income taxes incurred by him in connection with the annuity such that Mr. Biggs is in the same after-tax position as if no income taxes had been imposed. On October 5, 2004, the Company, DP&L and Mr. Biggs signed a letter agreement modifying his employment agreement to clarify that the effective date for the grant of stock options to Mr. Biggs pursuant to his employment agreement was October 5, 2004 and not May 16, 2004. Upon Mr. Biggs’ death, Mr. Biggs’ spouse will receive an annual amount equal to 30% of the total annuity payable to Mr. Biggs for life. This arrangement will continue to be binding even if Mr. Biggs no longer serves as Executive Chairman.

On September 17, 2004, the Company appointed Gary Stephenson as Vice President, Commercial Operations.

On September 28, 2004, the Company and DP&L appointed Glenn E. Harder, General Lester L. Lyles, Dr. Ned J. Sifferlen and James V. Mahoney to the Board of Directors to fill vacancies created by resignations and retirement.

Restatement
On October 28, 2004, DPL’s Audit Committee determined that the Company’s previously issued financial statements for the fiscal years ended December 31, 2000, 2002, and 2003 and for the quarters ended March 31, 2002 through September 30, 2003 should be restated. The Audit Committee has discussed the issues surrounding the restatement for the periods ending on or before December 31, 2002 with the Company’s independent accountants, PricewaterhouseCoopers LLP (PwC) and for periods ending after December 31, 2002 with the Company’s independent accountants, KPMG LLP (KPMG). Both PwC and KPMG have informed the Audit Committee that they concur with the restatement decision.

As a result of the Audit Committee’s response to the Report and during the 2003 year-end financial closing process, the Company identified certain adjustments to prior period financial statements. As a result, the Company has restated its consolidated financial statements for the fiscal years ended December 31, 2001 and 2002, and for the quarters ended March 31, 2002 through September 30, 2003. The restatement also affected the average number of basic and diluted common shares outstanding by adding stock incentive units to the outstanding shares during those periods the stock incentive unit plan was considered an equity plan. This restatement increased net income by $3.8 million, or $0.03 per common share, to $91.1 million for 2002 and reduced net income by $1.1 million, or $0.04 per common share, to $196.8 million for 2001. The beginning balance in Earnings Reinvested in the Business for 2001 was reduced by $13.8 million to $800.3 million. The impact to the previously reported unaudited results of the first three quarters of 2003 increased net income by $3.1 million to $164.0 million . The Company also adjusted its unaudited consolidated financial statement information for the fiscal year ended December 31, 2003 that was previously contained in the March 16, 2004 and February 10, 2004 Current Reports on Form 8-K, reducing net income by $4.4 million, or $0.04 per common share, to $148.5 million. All applicable financial information contained in this Annual Report on Form 10-K gives effect to these restatements.

For information concerning the restatements made, see Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of the Notes to Consolidated Financial Statements included in Item 8.

COMPETITION AND REGULATION

DP&L has historically operated in a rate-regulated environment providing electric generation and energy delivery, consisting of transmission and distribution services, as a single product to its retail customers. Prior to the legislation discussed below, DP&L did not have competitors in its service territory.

In October 1999, legislation became effective in Ohio that gave electric utility customers a choice of energy providers beginning on January 1, 2001. Under this legislation, electric generation, power marketing, and power brokerage services supplied to retail customers in Ohio are deemed to be competitive and are not subject to supervision and regulation by the PUCO.

As required by this legislation, DP&L filed its transition plan (Electric Transition Plan) with the PUCO on December 20, 1999. DP&L received the PUCO approval of its plan on September 21, 2000.

The Electric Transition Plan provided for a three-year transition period, which began on January 1, 2001 and ended on December 31, 2003. The plan also provided for a 5% residential rate reduction on the generation component of the rates, which reduced annual revenue by approximately $14 million; rate certainty for the three-year period for customers that continued to purchase power from DP&L; guaranteed rates for a six-year period for transmission and delivery services; and recovery by DP&L of transition costs of approximately $600 million.

On October 28, 2002, DP&L filed with the PUCO a request for an extension of its market development period from December 31, 2003 to December 31, 2005 that, if granted, would continue DP&L’s current rate structure and provide its retail customers with rate stability. On May 28, 2003, DP&L filed with the PUCO a Stipulation and Recommendation entered into with five other parties (Ohio Consumers’ Counsel (the OCC), Industrial Energy Users-Ohio, PUCO Staff, Partners for Affordable Energy, and Community Action Partnership of the Greater Dayton Area). On September 2, 2003, the PUCO issued an Opinion and Order adopting the Stipulation with modifications (the Stipulation). The Stipulation provides the following: DP&L’s market development period will continue through December 31, 2005; retail generation rates will remain frozen at present levels; a credit issued to customers who elect competitive retail generation service will increase over two years; and a rate stabilization period from January 1, 2006 through December 31, 2008, during which DP&L’s retail generation rates in effect on January 1, 2004 will serve as market-based rates. The Stipulation also provides that beginning January 1, 2006, rates may be modified by up to 11% of generation rates to reflect increased costs associated with fuel, environmental compliance, taxes, regulatory changes, and security measures. Further, the PUCO may approve an increase to the residential generation discount commencing January 1, 2006. The PUCO denied applications for rehearing on October 22, 2003. The PUCO’s decision was appealed to the Ohio Supreme Court on December 19, 2003. That appeal was argued before the Ohio Supreme Court on October 12, 2004 and the decision is pending.

On February 20, 2003, the PUCO issued an Entry requesting comments from interested stakeholders on the proposed rules for the conduct of a competitive bidding process that will take place at the end of the market development period. DP&L submitted comments and reply comments on March 7 and March 21, 2003, respectively. The PUCO issued final rules on December 23, 2003. Under DP&L’s Stipulation discussed above, these rules will not affect DP&L until January 1, 2009.

On March 20, 2003, the PUCO issued an Entry initiating a PUCO investigation regarding the desirability, feasibility, and timing of declaring that retail ancillary metering, billing and/or collection services are competitive retail electric services that consumers may obtain from any supplier. The initiation of this investigation was based on a requirement in the 1999 Ohio deregulation legislation. The PUCO asked interested stakeholders to file comments by June 6, 2003 and reply comments by July 7, 2003. DP&L filed comments and will actively participate in this case and evaluate the potential outcome of this proceeding.

As of December 31, 2003, two unaffiliated marketers were registered as competitive retail electric service (CRES) providers in DP&L’s service territory; to date, there has been no significant activity. DPL Energy Resources, Inc., an affiliated company, is also a registered CRES provider. In addition, several communities in DP&L’s service area have passed ordinances allowing the communities to become government aggregators for the purpose of offering alternative electric generation supplies to their citizens. To date none of these communities have aggregated. There has been a complaint filed at the PUCO concerning the pricing of DP&L’s billing services. Additionally, a complaint has been filed at the PUCO alleging that DP&L has established improper barriers to competition. On October 13, 2004, the parties reached a settlement on the pricing of DP&L’s billing services that DP&L will charge CRES providers. Additionally on October 19, 2004 DP&L entered into a settlement with Dominion Retail, Green Mountain Energy, and the Staff of the PUCO that resolves all matters in the competition barrier complaint. This settlement provides that DP&L will modify the manner in which customer partial payments are applied to billing charges and DP&L will no longer offer to purchase the receivables of CRES providers who operate in DP&L’s certified territory. Both settlements are subject to PUCO approval.

Like other utilities and energy marketers, DP&L and DPLE may sell or purchase electric generating capacity on the wholesale market. DP&L and DPLE compete with other generators, 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. In addition, from time to time, DP&L may purchase power from other suppliers. These purchases may be affected by privately and municipally owned electric utilities and rural electric cooperatives, and other alternate fuel suppliers on the basis of price and service.

DP&L provides transmission and wholesale electric service to twelve municipal customers in its service territory, which distribute electricity within their incorporated limits. DP&L also maintains an interconnection agreement with one municipality that has the capability to generate a portion of its energy requirements. Sales to these municipalities represented 1% of total electricity sales in 2003.

The Federal Energy Regulatory Commission (FERC) issued a final rule on December 20, 1999, which required all public utilities that own, operate, or control interstate transmission lines to file a proposal to join a Regional Transmission Organization (RTO) by October 15, 2000 or file a description of efforts taken to participate in an RTO, reasons for not participating in an RTO, any obstacles to participation in an RTO and any plans for further work toward participation. DP&L filed with the FERC to join the Alliance RTO. On December 19, 2001, the FERC issued an order rejecting the Alliance RTO as a stand-alone RTO. The FERC has recognized in various orders that substantial losses were incurred to establish the Alliance RTO and that it would consider proposals for rate recovery of prudently incurred costs. DP&L invested approximately $8 million in its efforts to join the Alliance RTO. On May 28, 2002, DP&L filed a notice with the FERC stating its intention to join the Pennsylvania Jersey Maryland Interconnection L.L.C. (PJM), an organization responsible for the operation and control of the bulk electric power system throughout major portions of five Mid-Atlantic states and the District of Columbia. On July 31, 2002, the FERC granted DP&L conditional approval to join PJM. In June 2003, DP&L turned over five transmission functions for PJM to operate including OASIS management, ATC calculations, scheduling, market monitoring and security coordination. As of December 31, 2003, DPL had invested a total of approximately $15.0 million in its efforts to join an RTO. On July 30, 2004, DP&L made a filing with the FERC to withdraw its transmission tariff and to become fully integrated into PJM’s tariff effective October 1, 2004. The Company was fully integrated into PJM on October 1, 2004.

Effective October 1, 2004, PJM began to access a FERC - approved administrative fee on every megawatt consumed by DP&L customers. On October 26, 2004, DP&L filed an application with the PUCO for authority to modify its accounting procedures to defer collection of this PJM administrative fee, effective October 1, 2004, plus carrying charges, until such time as DP&L has obtained the authority to adjust its rates (i.e., after January 1, 2006) pursuant to DP&L’s approved Stipulation and Recommendation. The application is pending.

The FERC’s July 31, 2002 Order also addressed the justness and reasonableness of the PJM and Midwest Independent Transmission System Operator (MISO) rates and related revenue distribution protocols. On March 31, 2003, an Initial Decision was issued finding that the PJM/MISO’s rates had not been shown to be unjust and unreasonable. On July 23, 2003, the FERC issued an Order rejecting in part the Initial Decision and found that the rates for transmission service through and out of the service territories of seven former Alliance RTO companies, including DP&L, may be unjust, unreasonable, or unduly discriminatory or preferential. On August 15, 2003, DP&L filed a submission with the FERC stating that there is no basis for the elimination of DP&L’s through and out rates prior to the date that it joined an RTO. The FERC issued an order directing that through and out rates of all former Alliance, MISO and PJM RTO companies be eliminated. Subsequently, the FERC required the parties to enter into settlement discussions. On March 19, 2004, the FERC approved a settlement agreement regarding transmission pricing that allows DP&L to continue to charge its existing transmission rate until December 1, 2004. The settlement agreement also outlines the principles and procedures to arrive at a single, long-term transmission pricing structure to be effective December 1, 2004. On September 27, 2004, the FERC instituted a proceeding under Federal Power Act Section 206 to implement a new long-term transmission pricing structure intended to eliminate seams in the PJM and MISO regions. The ultimate disposition of this case may affect the recovery of transmission revenues by DP&L. On October 1, 2004, DP&L, along with approximately sixty (60) other parties filed a long-term pricing plan at FERC. If approved, the plan will provide for continuation of DP&L’s existing transmission rate until 2008 and transitional payments of approximately $3 million.

In a November 1, 2001 Order as modified on April 14, 2004, FERC required entities with market-based rate authority to submit their triennial market-based reviews using new criteria. In DP&L’s case, this submission would have been due August 11, 2004. On July 30, 2004, DP&L requested a new compliance date sixty days after integration into PJM to enable DP&L to provide an analysis that reflects the market as it will exist in PJM. On October 14, 2004, FERC denied that request and on October 15, 2004, DP&L filed its triennial market-based review with FERC.

On March 10, 2003, American Municipal Power of Ohio, Inc., on behalf of DP&L’s municipal customers (Municipals), filed a complaint at the FERC alleging the Municipals will be faced with higher rates under their 1994 Power Services Agreement with DP&L once the Company is fully integrated into an RTO as discussed above. A settlement was filed with the FERC on October 14, 2003. The settlement provides that the power services agreements will continue to be effective. It also describes how transmission services will be provided as DP&L joins PJM and preserves the transmission rates and most ancillary services. The FERC approved the settlement on December 23, 2003.

On July 31, 2002, the FERC issued a Standard Market Design Notice of Proposed Rulemaking (SMD NOPR). The SMD NOPR established a proposed set of rules to standardize wholesale electric market design to create wholesale competition and efficient transmission systems. The effect of this proposed rulemaking on DP&L cannot be determined at this time.

On March 21, 2002, the PUCO staff proposed modifications to the Minimum Electric Service and Safety Standards, which establish performance standards for various service related functions of investor-owned electric utilities. The proposed modifications affect billing, collections, allocation of customer payments, meter reading, and distribution circuit performance. The PUCO issued final rules on September 26, 2002 and DP&L filed an application for rehearing on October 26, 2002. The PUCO issued an Entry on Rehearing on March 18, 2003. These rules were filed with the Joint Committee on Agency Rule Review on July 30, 2003 and were effective January 1, 2004. The effect of these rules is not material to the Company.

On April 7, 2004, the Company received notice that the staff of the PUCO is conducting an investigation into the financial condition of DP&L as a result of the issues raised by the Thobe Memorandum.

On May 27, 2004, the PUCO ordered DP&L to file a plan of utility financial integrity that outlines the actions the Company has taken or will take to insulate DP&L utility operations and customers from its unregulated activities. DP&L must file this plan within 120 days of the filing of its Form 10-K with the SEC. The Company and DP&L intend to comply with this order and to cooperate with the PUCO’s continuing investigation.

DP&L has requested approval from the PUCO to extend the filing of its Annual 2003 Report until after the filing of its 2003 Form 10-K. DP&L has also requested approval from the FERC to extend the filing of its FERC Form 1 and FERC Form 3-Qs until after the filing of its 2003 Form 10-K. All of these requests are pending.

On June 7, 2004, DPLE filed an Application for Determination of Status as an Exempt Wholesale Generator with FERC that was approved by FERC on July 30, 2004.

On August 2, 2004 in order to strengthen MVIC’s financial position, the Vermont Department of Banking, Insurance, Securities and Health Care Administration notified MVIC of MVIC’s requirement to reduce its intercompany receivable to a maximum no greater than MVIC’s total capital and surplus plus $250,000 minimum capital. As a result, the Company plans to transfer $27.6 million from its operating cash to its subsidiary MVIC in satisfaction of this requirement during the fourth quarter of 2004. These funds will not be available for general operating purposes.

CONSTRUCTION ADDITIONS

Construction additions were $102 million, $166 million and $339 million in 2003, 2002 and 2001, respectively, and are expected to approximate $100 million in 2004. Planned construction additions for 2004 relate to DPL’s environmental compliance program, power plant equipment, and its transmission and distribution system. During the last three years, capital expenditures have been utilized to make significant progress on DPL’s Nitrogen Oxide (NOx) compliance program, to make power plant improvements, and to complete construction on approximately 1,200 megawatts (MW) of combustion turbines. In July 2002, the final phase of the combustion turbine program came on line, adding approximately 480 MW at an investment of $179 million. DPL has not contracted for further capacity additions at this time.

Capital projects are subject to continuing 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. Over the next four years, DPL is projecting to spend $800 million in capital projects, approximately half of which is to meet changing environmental standards. DPL’s ability to complete its capital projects and the reliability of future service will be affected by its financial condition, the availability of internal and external funds at reasonable cost, and adequate and timely return on these capital investments. DPL expects to finance its construction additions over the next few years with internally-generated funds.

See ENVIRONMENTAL CONSIDERATIONS for a description of environmental control projects and regulatory proceedings that may change the level of future construction additions. The potential effect of these events on DPL’s operations cannot be estimated at this time.

ELECTRIC OPERATIONS AND FUEL SUPPLY

DPL’s present summer generating capacity is approximately 4,400 MW. Of this capacity, approximately 2,800 MW or 64% is derived from coal-fired steam generating stations and the balance of approximately 1,600 MW or 36% consists of combustion turbine and natural gas-powered peaking units. Combustion turbine output is dependent on ambient conditions and is higher in the winter than in the summer. DP&L’s all-time net peak load was 3,130 MW, occurring in 1999.

Approximately 87% of the existing steam generating capacity is provided by certain units owned as tenants in common with The Cincinnati Gas & Electric Company (CG&E) and Columbus Southern Power Company (CSP). As tenants in common, each company owns a specified undivided share of each of these units, is entitled to its share of capacity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share. DP&L’s remaining steam generating capacity (approximately 365 MW) is derived from a generating station owned solely by DP&L. Additionally, DP&L, CG&E and CSP own as tenants in common, 884 circuit miles of 345,000-volt transmission lines. DP&L has several interconnections with other companies for the purchase, sale and interchange of electricity.

In 2003, DPL generated 99% of its electric output from coal-fired units and 1% from oil or natural gas-fired units, which were used to meet peak demands.

The following table sets forth DP&L’s and DPLE’s generating stations and where indicated, those stations which DP&L owns as tenants in common.

				Approximate Summer MW Rating

Station	Ownership*	Operating Company	Location	DPL Portion	Total

Coal Units
Hutchings	W	DP&L	Miamisburg, OH	365	365
Killen	C	DP&L	Wrightsville, OH	402	600
Stuart	C	DP&L	Aberdeen, OH	820	2,340
Conesville-Unit 4	C	CSP	Conesville, OH	129	780
Beckjord-Unit 6	C	CG&E	New Richmond, OH	207	414
Miami Fort-Units 7 & 8	C	CG&E	North Bend, OH	360	1,000
East Bend-Unit 2	C	CG&E	Rabbit Hash, KY	186	600
Zimmer	C	CG&E	Moscow, OH	365	1,300
Combustion Turbines or Diesel
Hutchings	W	DP&L	Miamisburg, OH	23	23
Yankee Street	W	DP&L	Centerville, OH	107	107
Monument	W	DP&L	Dayton, OH	12	12
Tait Diesels	W	DP&L	Dayton, OH	10	10
Sidney	W	DP&L	Sidney, OH	12	12
Tait Units 1-3	W	DP&L	Moraine, OH	256	256
Killen	C	DP&L	Wrightsville, OH	12	18
Stuart	C	DP&L	Aberdeen, OH	3	10
Greenville Units 1-4	W	DPLE	Greenville, OH	200	200
Darby Station Units 1-6	W	DPLE	Darby, OH	480	480
Montpelier Units 1-4	W	DPLE	Montpelier, IN	200	200
Tait Units 4-7	W	DPLE	Moraine, OH	320	320

*W = Wholly-Owned
C = Commonly-Owned

DP&L has contracted all of its projected coal requirements for 2004 with any incremental purchases made in the spot market. The prices to be paid by DP&L under its long-term coal contracts are subject to adjustment in accordance with various indices. Each contract has features that will limit price escalations in any given year. As a result of the rising coal market, DP&L expects its 2004 coal costs to exceed its 2003 coal costs by approximately 15%.

The average cost of fuel used per kilowatt-hour (kWh) generated was 1.33¢ in 2003, 1.34¢ in 2002 and 1.37¢ in 2001. With the onset of competition in January 2001, the Electric Fuel Component was frozen under DP&L’s Electric Transition Plan and is reflected in the Standard Offer Generation rate to its customers. See RATE REGULATION AND GOVERNMENT LEGISLATION and ENVIRONMENTAL CONSIDERATIONS.

SEASONALITY

The power generation and delivery business is seasonal and weather patterns can have a material impact on operating performance. In the region served by DPL’s subsidiaries, demand for electricity is generally greater in the summer months associated with cooling and greater in the winter months associated with heating as compared to other times of the year. Historically, the power generation and delivery operations of DPL’s subsidiaries have generated less revenues and income when weather conditions are milder in the winter and cooler in the summer.

GAS OPERATIONS AND GAS SUPPLY

In October 2000, DP&L completed the sale of its natural gas retail distribution assets and certain liabilities for $468 million in cash. The transaction resulted in a pre-tax gain of $183 million ($121 million net of taxes). Proceeds from the sale were used to finance the regional generation expansion and reduce outstanding short-term debt.

RATE REGULATION AND GOVERNMENT LEGISLATION

DP&L’s sales to retail customers are subject to rate regulation by the PUCO. DP&L’s wholesale electric rates to municipal corporations and other distributors of electric energy are subject to regulation by the FERC under the Federal Power Act.

Ohio law establishes the process for determining rates charged by public utilities. Regulation of rates encompasses the timing of applications, the effective date of rate increases, the cost basis upon which the rates are based and other related matters. Ohio law also established the OCC, which has the authority to represent residential consumers in state and federal judicial and administrative rate proceedings.

Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL. The legislation extends the PUCO’s supervisory powers to a holding company system’s general condition and capitalization, among other matters, to the extent that they relate to the costs associated with the provision of public utility service. Based on existing PUCO authorization, regulatory assets and liabilities are recorded on the Consolidated Balance Sheet (see Note 4 of Notes to Consolidated Financial Statements).

Under legislation passed in 1999, the percentage of income payment plan (PIPP) for eligible low-income households was converted to a Universal Service Fund in 2001. The universal service program is administered by the Ohio Department of Development and provides for full recovery of arrearages for qualifying low-income customers.

The PUCO is composed of the following commissioners appointed to staggered five-year terms:

Name	Beginning of Term	End of Term

Chairman Alan R. Schriber	April 2004	April 2009
Donald L. Mason	April 2003	April 2008
Judith A. Jones	April 2002	April 2007
Clarence D. Rogers	February 2001	April 2006
Rhonda H. Fergus	April 2000	April 2005

See COMPETITION AND REGULATION for more detail regarding the effect of legislation.

ENVIRONMENTAL CONSIDERATIONS

The operations of DPL and DP&L, including DP&L’s commonly-owned facilities, are subject to a wide range of federal, state, and local environmental regulations and law as to air and water quality, disposal of solid waste and other environmental matters, including the location, construction and operation of new and existing electric generating facilities and most electric transmission lines. As such, existing environmental regulations may be periodically revised. In addition to revised rules, new legislation could be enacted that may affect the Company’s estimated construction expenditures. See CONSTRUCTION ADDITIONS. In the normal course of business, DP&L has ongoing programs and activities underway at these facilities to comply, or to determine compliance, with such existing, new and/or proposed regulations and legislation.

DP&L has 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 a number of sites pursuant to state and federal laws. DP&L records 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 end of the range. Because of uncertainties related to these matters, accruals are based on the best information available at the time. DP&L evaluates the potential liability related to probable losses quarterly and may revise its estimates. Such revisions in the estimates of the potential liabilities could have a material effect on the Company’s results of operations and financial position.

Air and Water Quality
In November 1999, the United States Environmental Protection Agency (USEPA) filed civil complaints and Notices of Violations (NOVs) against operators and owners of certain generation facilities for alleged violations of the Clean Air Act (CAA). Generation units operated by CG&E (Beckjord 6) and CSP (Conesville 4) and co-owned by DP&L were referenced in these actions. Numerous northeast states have filed complaints or have indicated that they will be joining the USEPA’s action against CG&E and CSP. DP&L was not identified in the NOVs, civil complaints or state actions. In December 2000, CG&E announced that it had reached an Agreement in Principle with the USEPA and other plaintiffs in an effort to settle the claims. As of December 31, 2003, discussions on the final terms of the settlement continue and the outcome of these claims or the effect, if any, on DP&L has not been determined. In June 2000, the USEPA issued a NOV to DP&L-operated J.M. Stuart Station (co-owned by DP&L, CG&E, and CSP) for alleged violations of the CAA. The NOV contained allegations consistent with NOVs and complaints that the USEPA had recently brought against numerous other coal-fired utilities in the Midwest. DP&L intends to vigorously challenge the NOV given the final routine maintenance repair and replacement rules discussed below.

On September 21, 2004 the Sierra Club filed a lawsuit against the Company 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. The Company intends to vigorously defend this matter.

On July 27, 2004, various residents of the Village of Moscow, Ohio notified CG&E, as the operator of Zimmer (co-owned by CG&E, DP&L and CSP), of their intent to sue for alleged violations of the CAA and air pollution nuisances. DP&L believes the allegations are meritless and believes CG&E on behalf of all co-owners will vigorously defend the matter.

On October 27, 2003, the USEPA published its final rules regarding the equipment replacement provision of the routine maintenance, repair and replacement (RMRR) exclusion of the CAA. Subsequently, on December 24, 2003, the U.S. Court of Appeals for the D.C. Circuit stayed the effective date of the rule pending its decision on the merits of the lawsuits filed by numerous states and environmental organizations challenging the final rules. As a result of this ruling, it is expected that the Ohio Environmental Protection Agency (Ohio EPA) will delay its previously announced intent to adopt the RMRR rule. At this time DP&L is unable to determine the timing of this adoption.

In September 1998, the USEPA issued a final rule requiring states to modify their State Implementation Plans (SIPs) under the CAA. On July 18, 2002, the Ohio EPA adopted rules that constitute Ohio’s NOx SIP, which is substantially similar to the federal CAA Section 126 rulemaking and federal NOx SIP. On August 5, 2003, USEPA published its conditional approval of Ohio’s NOx SIP, with an effective date of September 4, 2003. Ohio’s SIP requires NOx reductions at coal-fired generating units effective May 31, 2004. In order to meet these NOx requirements, DP&L’s capital expenditures for the installation of selective catalytic reduction (SCR) equipment are estimated to total approximately $175 million, of which $163 million has been invested through December 31, 2003. On May 31, 2004, DP&L began operation of its SCRs. DP&L’s NOx reduction strategy and associated expenditures to meet the federal reduction requirements should satisfy the Ohio SIP NOx reduction requirements.

On December 17, 2003, the USEPA proposed the Interstate Air Quality Rule (IAQR) designed to reduce and permanently cap sulfur dioxide and nitrogen oxide emissions from electric utilities. The proposed IAQR focuses on states, including Ohio, whose power plant emissions are believed to be significantly contributing to fine particle and ozone pollution in other downwind states 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). Until final rules are published, DP&L cannot determine the effect of the proposed rules on DP&L’s operations.

On January 30, 2004, the USEPA published its proposal to restrict mercury and other air toxics from coal-fired and oil-fired utility plants. DP&L is reviewing the various proposed options and the impact of each option. Until final rules are published, DP&L cannot determine the effect of the proposed rules on DP&L’s operations.

Under the proposed cap and trade options for SO₂ and NOx, as well as mercury, DP&L estimates it will spend more than $424 million from 2004 through 2009 to install the necessary pollution controls. Plant specific mercury controls may result in higher costs. Due to the uncertainties associated with the proposed requirements, DP&L cannot project the final costs at this time.

On July 15, 2003, the Ohio EPA submitted to the USEPA its recommendations for eight-hour ozone nonattainment boundaries for the metropolitan areas within Ohio. On April 15, 2004, the USEPA issued its list of ozone nonattainment designations. DP&L owns and/or operates a number of facilities in counties designated as nonattainment with the ozone national ambient air quality standard. DP&L does not know at this time what future regulations may be imposed on its facilities and will closely monitor the regulatory process. Following the final designation of the nonattainment areas, the Ohio EPA will have three years to develop regulations to attain and maintain compliance with the eight-hour ozone national ambient air quality standard. The IAQR/CAIR addresses harmonization with these issues. It is expected that the Ohio EPA will revise its SIP consistent with the IAQR/CAIR when these rules are finalized.

On February 13, 2004, Ohio EPA submitted to USEPA its recommended Particulate Matter 2.5 (PM 2.5) designations. This recommendation included counties in which DP&L operates and/or owns generating facilities. USEPA notified Ohio EPA on June 29, 2004 that it intended to include additional counties as nonattainment for PM 2.5, primarily those adjacent counties with power plants. Ohio EPA commented to USEPA on August 31, 2004, opposing the expansion of the nonattainment boundaries. USEPA intends to finalize the nonattainment designations by early 2005. Following the final designation of the nonattainment areas, the Ohio EPA will have three years to develop regulations to attain and maintain compliance with the PM 2.5 national ambient air quality standard. DP&L cannot determine the effect such regulations will have on its operations.

In April 2002, the USEPA issued proposed rules governing existing facilities that have cooling water intake structures. Final rules were published in the Federal Register on July 9, 2004. DP&L anticipates that future studies may be needed at certain generating facilities. DP&L cannot predict the impact such studies may have on future operations.

On March 5, 2004, the USEPA issued final national emissions standards for hazardous air pollutants for stationary combustion turbines. The effect of the final standards on DPL’s operations is not expected to be material. On July 1, 2004, USEPA finalized, but has not yet published, rules that remove four subcategories of new combustion turbines from regulation under the hazardous air pollutant regulations.

On April 14, 2003, the USEPA issued proposed final rules for standards of performance for stationary gas turbines. On May 23, 2003, the USEPA withdrew the direct final rules. The final rules were reissued on July 8, 2004.

On May 5, 2004, the USEPA issued its proposed regional haze rule, which addresses how states should determine best available retrofit technology (BART) for sources covered under the regional haze rule. The proposal gives states three options for determining which sources should be subject to BART and provides guidelines for states on conducting the technical analysis of possible controls as BART. The proposal is being issued to respond to the D.C. Circuit’s remand of the regional haze rule in American Corn Growers Association v. USEPA, 291 F.3d 1 (D.C. Cir. 2002), in which the court told the USEPA that the BART determination has to include analysis of the degree of visibility improvement resulting from the use of control technology at each source subject to BART and that the USEPA could not mandate that states follow a collective contribution approach to determine whether sources in the state could reasonably be anticipated to contribute to visibility impairment in a Class I area. DP&L is reviewing the proposed rule to determine the impact on any of its facilities. The USEPA, in its June 10, 2004 supplemental CAIR, has proposed that BART-eligible electric generating units (EGUs) may be exempted from BART if the state complies with the CAIR requirements through the adoption of the CAIR Cap-and-trade program for SO₂ and NOx emissions. If Ohio adopts such a program, BART will not require any additional reductions.

On May 4, 2004, the Ohio EPA issued a final National Pollutant Discharge Elimination System (NPDES) permit for J.M. Stuart Station that continues the station’s 316(a) variance. During the three-year term of the draft permit, DP&L will conduct a thermal discharge study to evaluate the technical feasibility and economic reasonableness of water cooling methods other than cooling towers.

Land Use
DP&L and numerous other parties have been notified by the USEPA or the Ohio EPA that they are Potentially Responsible Parties (PRPs) for clean-up at three superfund sites in Ohio: the North Sanitary (a.k.a. Valleycrest) Landfill in Dayton, Ohio; the Tremont City Landfill in Springfield, Ohio; and the South Dayton Dump landfill site in Dayton, Ohio.

DP&L and numerous other parties received notification from the Ohio EPA on July 27, 1994 that it considers them PRPs for clean-up of hazardous substances at the North Sanitary Landfill site. DP&L has not joined the PRP group formed for the site because the available information does not demonstrate that DP&L contributed hazardous substances to the site. In addition, at this time the Ohio EPA has not provided an estimated cost of clean-up for this site. In October 2000, the PRP group brought an action against DP&L and numerous other parties alleging that they are PRPs that should be liable for a portion of clean-up costs at the site. While DP&L does not believe it disposed of any hazardous substances at this site, on August 6, 2003, DP&L entered into a settlement agreement with the PRPs for its alleged liability for the amount of $45 thousand which is now final and has been approved by the United States District Court, Western Division of the Ohio Southern District.

DP&L and numerous other parties received notification from the USEPA in January 2002 that it considers them PRPs for the Tremont City Landfill site. The information available to DP&L does not demonstrate that DP&L contributed any hazardous substances to the site. DP&L plans to vigorously challenge this action.

In September 2002, DP&L and other parties received a special notice that the USEPA considers them to be PRPs for the clean-up of hazardous substances at the South Dayton Dump landfill site. The information available to DP&L does not demonstrate that DP&L contributed hazardous substances to the site. The USEPA seeks recovery of past costs and funding for a Remedial Investigation and Feasibility Study. The USEPA has not provided an estimated clean-up cost for this site. Should the USEPA pursue such action, DP&L will vigorously challenge it.

DPL INC.
OPERATING STATISTICS
ELECTRIC OPERATIONS

	Years Ended December 31,

	2003		2002		2001

Electric Sales (millions of kWh)
Residential		5,071		5,302		4,909
Commercial		3,699		3,710		3,618
Industrial		4,330		4,472		4,568
Other retail		1,409		1,405		1,369

Total retail		14,509		14,889		14,464
Wholesale		4,836		4,358		3,591

Total		19,345		19,247		18,055

Operating Revenues ($ in thousands)
Residential	$	442,239	$	463,197	$	429,932
Commercial		264,067		264,604		257,663
Industrial		221,961		227,960		229,211
Other retail		93,478		93,316		91,011

Total retail		1,021,745		1,049,077		1,007,817
Wholesale		159,250		124,468		178,352

Total	$	1,180,995	$	1,173,545	$	1,186,169

Electric Customers at End of Period
Residential		450,958		449,153		447,066
Commercial		47,253		47,400		46,815
Industrial		1,863		1,905		1,908
Other		6,322		6,304		6,318

Total		506,396		504,762		502,107

Item 2 - Properties

Electric

Information relating to DPL’s properties is contained in Item 1 – CONSTRUCTION ADDITIONS, and ELECTRIC OPERATIONS AND FUEL SUPPLY, and Item 8 – Notes 12 and 13 of Notes to Consolidated Financial Statements.

Substantially all property and plant of DP&L is subject to the lien of the Mortgage securing DP&L’s First Mortgage Bonds.

Item 3 - Legal Proceedings

In the normal course of business, DPL is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. DPL believes the amounts provided in its consolidated financial statements, as prescribed by generally accepted accounting procedures in the United States (GAAP), 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 proceedings, claims, and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in DPL’s Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2003, cannot be reasonably determined.

On July 15, 2002, a class action and derivative complaint (the Buckeye Action) for damages was filed by The Buckeye Electric Company Retirement Plan (the Plan) on behalf of itself and other DPL shareholders, and derivatively on behalf of DPL, in the Court of Common Pleas for Montgomery County, Ohio. The defendants included DPL, selected executive officers of DPL, an officer of a DPL subsidiary, the Board of Directors of DPL and PricewaterhouseCoopers LLP (PwC), DPL’s independent accountants at that time. Defendants removed the Buckeye Action to the U. S. District Court for the Southern District of Ohio. The Second Amended Complaint alleged violations of federal securities laws, breach of fiduciary duty, breach of the duty of care, corporate waste, breach of the duty of loyalty and self-dealing, fraud, negligence and misrepresentations by defendants in connection with the establishment and management of DPL’s portfolio of financial assets, which the Plan alleged were inappropriate investments not adequately disclosed to shareholders. The Second Amended Complaint also alleged claims related to PwC and its accounting and auditing of DPL’s financial asset portfolio. The Plan and other class members sought compensatory and punitive damages of not less than $1.1 billion, compensatory damages of $200 million on behalf of DPL, and unspecified punitive damages, attorney’s fees and costs. Additional similar complaints were subsequently filed in the U.S. District Court for the Southern District of Ohio. Additional similar complaints were also filed in both the Montgomery County and Hamilton County, Ohio Courts of Common Pleas. The cases filed in the Montgomery County Court of Common Pleas were consolidated with those filed in the Court of Common Pleas, Hamilton County.

On November 6, 2003, the Company and certain of its present and former officers and directors reached an agreement in principle with plaintiffs to settle the DPL Inc. Securities Litigation, and the shareholder class and derivative actions filed against them in Federal and Ohio state courts (the Global Settlement). The Company agreed to pay $70.0 million and certain of the Company’s liability insurers (the Insurers) agreed to pay $65.5 million to settle the DPL Inc. Securities Litigation and the state shareholder class actions. The Insurers agreed to pay $4.5 million to settle the derivative actions. In addition, PwC agreed to pay $5.5 million to settle all claims against it on a global basis. The Global Settlement was subject to approval by the Courts in which the actions were pending after notice to shareholders and class members and fairness hearings before the courts. On December 22, 2003, the Global Settlement was approved in total by the Court of Common Pleas, Hamilton County, Ohio. The U.S. District Court for the Southern District of Ohio approved the Global Settlement except for the petition for plaintiffs’ attorneys’ fees. As a result of the settlement, an after-tax charge of approximately $0.39 per share was recorded in the fourth quarter of 2003. On March 8, 2004, the U.S. District Court for the Southern District of Ohio approved in part the plaintiffs’ petition for plaintiffs’ attorneys’ fees. On May 24, 2004, in accordance with the terms of the Global Settlement, the amounts owed by the Company and the amounts owed by the Company’s liability insurers pursuant to Global Settlement were paid for ultimate distribution to the class. On August 13, 2004, as to state court and August 16, 2004, as to federal court, plaintiffs filed a motion seeking court approval of the distribution of the Global Settlement funds.

Further, on July 22, 2004, the Company filed a Motion for Preliminary Injunction in the U.S. District Court to enjoin the Motion for an Order of Contempt, Disgorgement and Recission. On August 2, 2004, plaintiffs filed their opposition to defendants’ Motion to Strike and filed their opposition to the Motion for a Preliminary Injunction on August 13, 2004. On or about October 4, 2004 the U.S. District Court ruled the distribution of the federal class settlement fund to approved claimants would proceed immediately and that plaintiffs would withdraw their Motion for Contempt in state court. This withdrawal was completed on October 4, 2004 and the state court ordered the distribution of the state class settlement fund to approved claimants.

On July 9, 2004, Mr. Forster and Ms. Muhlenkamp filed a lawsuit against the Company, DP&L and MVE in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida. The complaint asserts that the Company, DP&L and MVE (i) wrongfully terminated Mr. Forster and Ms. Muhlenkamp by undermining their authority and responsibility to manage the companies and excluding them from discussions on corporate financial issues and strategic planning after the Thobe Memorandum was distributed and (ii) breached Mr. Forster’s consulting contract and Ms. Muhlenkamp’s employment agreement by denying them compensation and benefits allegedly provided by the terms of such contract and agreement upon their termination from the Company. Mr. Forster and Ms. Muhlenkamp seek damages of an undetermined amount. On August 9, 2004, the defendants removed the case to the U.S. District Court for the Middle District of Florida, Jacksonville Division. On August 16, 2004, the defendants moved to dismiss the litigation based on the Florida federal court’s lack of jurisdiction over the Company, DP&L and MVE, all of whom are companies based in Dayton, Ohio. In the alternative, the defendants requested that the court transfer the case to the U.S. District Court for the Southern District of Ohio, which has jurisdiction in Dayton, Ohio. On September 17, 2004, Mr. Forster and Ms. Muhlenkamp opposed these motions. The court has not yet ruled on the defendants’ motions.

On August 24, 2004, the Company, DPL and MVE filed a Complaint against Mr. Forster, Ms. Muhlenkamp and Mr. Koziar in the Court of Common Pleas of Montgomery County, Ohio asserting legal claims against them relating to the termination of the Valley Partners Agreements, challenging the validity of the purported amendments to the Company’s deferred compensation plans and to the employment and consulting agreements with Messrs. Forster and Koziar and Ms. Muhlenkamp, and the propriety of the distributions from the plans to Messrs. Forster and Koziar and Ms. Muhlenkamp, and alleging that Messrs. Forster and Koziar and Ms. Muhlenkamp breached their fiduciary duties and breached their consulting and employment contracts. The Company, DPL and MVE seek, among other things, damages in excess of $25,000, disgorgement of all amounts improperly withdrawn by Messrs. Forster and Koziar and Ms. Muhlenkamp from the deferred compensation plans and a court order declaring that the Company, DPL and MVE have no further obligations under the consulting and employment contracts due to those breaches. At this time, defendants Forster, Koziar and Muhlenkamp have not yet responded to the Complaint. The Company continues to evaluate all of these matters and is considering other claims against Mr. Forster, Mr. Koziar and/or Ms. Muhlenkamp that include, but are not limited to, breach of fiduciary duty or other claims relating to personal and Company investments, the calculation of benefits under the SERP and financial reporting with respect to such benefits, and, with respect to Mr. Koziar, the fulfillment of duties owed to the Company as its legal counsel.

On or about June 24, 2004, the SEC commenced a formal investigation into the issues raised by the Thobe Memorandum. The Company is cooperating with the investigation.

On April 7, 2004, the Company received notice that the staff of the PUCO is conducting an investigation into the financial condition of DP&L as a result of the issues raised by the Thobe Memorandum. On May 27, 2004, the PUCO ordered DP&L to file a plan of utility financial integrity that outlines the actions the Company has taken or will take to insulate DP&L utility operations and customers from its unregulated activities. DP&L must file this plan within 120 days of the filing of its Form 10-K with the SEC. The Company and DP&L intend to comply with this order and to cooperate with the PUCO’s continuing investigation.

On May 20, 2004, the staff of the SEC notified the Company that it was conducting an inquiry covering the exempt status of the Company under the Public Utility Holding Company Act of 1935. The staff of the SEC has requested the Company provide certain documents and information on a voluntary basis. The Company is cooperating with the inquiry. On October 8, 2004, DPL received a notice from the SEC that a question exists as to whether such exemption from the Public Utility Holding Company Act may be detrimental to the public interest or the interests of investors or consumers. Under applicable rules, DPL will lose its exemption 30 days following this notice and be required to register as a holding company under the Public Utility Holding Company Act and become subject to additional regulation thereunder. However, DPL may delay the requirement to become registered so long as it files a good faith application seeking an order of exemption from the Securities and Exchange Commission. DPL will remain exempt pending a decision from the Securities and Exchange Commission on that application. DPL believes it has a good faith basis for seeking an order of exemption and expects to make a filing seeking that order within the 30 day period. DPL cannot predict what action the Securities and Exchange Commission may take in connection with its application or whether it will be able to remain an exempt holding company.

On May 28, 2004, the U.S. Attorney’s Office for the Southern District of Ohio, assisted by the Federal Bureau of Investigation, notified the Company that it has initiated an inquiry involving the subject matters covered by the Company’s internal investigation. The Company is cooperating with this investigation.

On December 12, 2003, the Office of Federal Contract Compliance Programs (OFCCP) notified DP&L by letter alleging it had discriminated in the hiring of meter readers during 2000-2001 by utilizing credit checks to determine if applicants had paid their electric bills. On February 12, 2004, DP&L and the OFCCP entered into a Conciliation Agreement whereby DP&L agreed to distribute approximately $0.2 million in compensation to certain affected applicants. DP&L has completed these payments to the affected applicants.

In June 2002, a contractor’s employee received a verdict against DP&L for injuries he sustained while working at a DP&L power station. The Court awarded the contractor’s employee compensatory damages of approximately $0.8 million and prejudgment interest of approximately $0.6 million. On April 28, 2004, the appellate court upheld this verdict except the award for prejudgment interest. On September 1, 2004, the Ohio Supreme Court refused to hear the case, so the matter has been remanded to the trial court for a re-determination of whether prejudgment interest should be awarded. The trial court heard this matter on October 15, 2004 and the decision is pending.

Additional information relating to legal proceedings involving DPL is contained in Item 1 – COMPETITION AND REGULATION, ENVIRONMENTAL CONSIDERATIONS, and Item 8 – Note 16 of Notes to Consolidated Financial Statements.

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

There were no submissions to the security holders in the fourth quarter.

PART II

Item 5 - Market for Registrant’s Common Equity and Related Stockholder Matters

As of December 31, 2003, there were 30,366 holders of record of DPL common equity, excluding individual participants in security position listings. The following table presents the high and low per share sales prices for DPL common stock as reported by the New York Stock Exchange for each quarter of 2003 and 2002.

	2003				2002

	High		Low		High		Low

First Quarter	$	16.75	$	11.95	$	25.55	$	22.56
Second Quarter	$	16.96	$	12.68	$	27.19	$	25.13
Third Quarter	$	17.15	$	14.55	$	26.25	$	14.95
Fourth Quarter	$	21.15	$	17.40	$	17.19	$	13.75

As long as any Preferred Stock is outstanding, DP&L’s Amended Articles of Incorporation contain provisions restricting the payment of cash dividends on any of its common stock if, after giving effect to such dividend, the aggregate of all such dividends distributed subsequent to December 31, 1946 exceeds the net income of DP&L available for dividends on its Common Stock subsequent to December 31, 1946, plus $1.2 million. As of year-end, all earnings reinvested in the business of DP&L were available for Common Stock dividends.

On April 30, 2004, the Company announced that it suspended its quarterly dividend payments. With the filing of this Form 10-K, the Company intends to resume its regular quarterly dividends, including payments normally made in June and September but delayed pending the filing of the SEC reports, as and when such dividends are declared by the Board of Directors.

Additional information concerning dividends paid on DPL common stock is set forth under Selected Quarterly Information in Item 8 – Financial Statements and Supplementary Data.

Information regarding DPL’s equity compensation plans as of December 31, 2003, is disclosed in Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

On March 25, 2004, the Company completed a $175 million private placement of unsecured 8% series Senior Notes due 2009 pursuant to Rule 144A, promulgated under the Securities Act of 1933, as amended. All purchasers were “qualified institutional investors” as defined by Rule 144A.

Item 6 - Selected Financial Data

		2003		2002			2001		2000		1999

				(as restated) (e)			(as restated) (e)		(as restated) (f)		(as restated) (f)
	For the years ended December 31,
DPL Inc.:	Earnings per share of common stock (a)	$	1.24		0.76			1.62		1.81		1.35
	Dividends paid per share	$	0.94		0.94			0.94		0.94		0.94
	Dividend payout ratio	%	75.8		123.7			58.0		51.9		69.6
	Income before extraordinary item and cumulative effect of accounting change (millions) (a)	$	131.5		91.1			195.8		277.1		203.9
	Electric revenues (millions)	$	1,181.0		1,173.5			1,186.2		1,108.0		1,056.0
	Gas revenues (millions) (b)	$	—		—			—		183.8		215.0
	Investment income (loss) (millions)	$	75.8		(102.4	)		26.7		86.6		49.2
	Total construction additions (millions)	$	102.2		165.9			338.9		343.9		166.5
	Market value per share at December 31	$	20.88		15.34			24.08		33.19		17.31

DPL Inc.:	Electric sales (millions of kWh) —
	Residential		5,071		5,302			4,909		4,816		4,725
	Commercial		3,699		3,710			3,618		3,540		3,390
	Industrial		4,330		4,472			4,568		4,851		4,876
	Other retail		1,409		1,405			1,369		1,370		1,305

	Total retail		14,509		14,889			14,464		14,577		14,296

	Wholesale		4,836		4,358			3,591		2,946		2,571

	Total		19,345		19,247			18,055		17,523		16,867
	Gas sales (thousands of MCF) (b)
	Residential		—		—			—		18,538		24,450
	Commercial		—		—			—		5,838		7,647
	Industrial		—		—			—		2,034		2,246
	Other		—		—			—		776		1,182
	Transported gas		—		—			—		16,105		20,190

	Total		—		—			—		43,291		55,715

	At December 31,
DPL Inc.:	Book value per share	$	7.52		6.89			7.13		7.52		9.59
	Total assets (millions)	$	4,444.7		4,277.7			4,370.8		4,551.8		4,409.1
	Long-term debt (millions)	$	1,954.7		2,142.3			2,150.8		1,758.5		1,336.6
	Trust preferred securities (c)	$	—		292.6			292.4		550.0		—

	At December 31,
DPL Inc.:	Senior unsecured debt bond ratings (d) —
	Fitch Ratings		BBB		BBB			A-		A-		NR
	Moody’s Investors Service		Ba1		Baa2			Baa1		Baa1		A2
	Standard & Poor’s Corporation		BB-		BBB-			BBB		BBB		A+

DP&L:	First mortgage bond ratings (d) —
	Fitch Ratings		A		A			AA		AA		AA
	Moody’s Investors Service		Baa1		A2			A2		A2		Aa3
	Standard & Poor’s Corporation		BBB-		BBB			BBB+		BBB+		AA-

	Number of Shareholders
DPL Inc.:	Common		30,366		31,856			33,729		35,903		39,399
DP&L:	Preferred		402		426			476		471		509


(a)	In 2003 the Company recorded a cumulative effect of an accounting change related to adoption of SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” and an amount for shareholder litigation. In 2002, the Company recorded an other-than-temporary writedown of certain financial assets. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(b)	On October 31, 2000, DP&L completed the sale of its natural gas retail distribution assets and certain liabilities.
(c)	Excludes current maturities of long-term debt. Upon adoption of FASB Interpretation 46R “Consolidation of Variable Interest Entities (Revised December 2003)—an interpretation of ARB No. 51”, DPL deconsolidated the DPL Capital Trust II (see Note 1 of Notes to Consolidated Financial Statements).
(d)	Credit ratings subsequent to December 31, 2003 have been lowered as reflected under Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(e)	For information on the effects of the restatement, see Note 2 of Notes to Consolidated Financial Statements.
(f)	Certain changes have been made to results in these years as discussed in Note 2 of Notes to Consolidated Financial Statements. Earnings per share previously reported as $2.23 in 2000 and $1.35 in 1999. Dividend payout ratio previously reported as 42.2% in 2000 and 69.6% in 1999. Income before extraordinary item and cumulative effect of accounting change previously reported as $284.9 million in 2000 and $204.2 million in 1999. Book value per share previously reported as $7.43 in 2000 and $ 9.65 in 1999. Total assets previously reported as $4,465.6 million in 2000 and $4,340.4 million in 1999.

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

Certain statements contained in this discussion 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 the Company’s future economic performance, taking into account the information currently available to management. These statements are not statements of historical fact. 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 the control of the Company, including but not limited to: abnormal or severe weather; unusual maintenance or repair requirements; changes in fuel costs and purchased power, coal, environmental emissions, gas and other commodity prices; increased competition; regulatory changes and decisions; changes in accounting rules; financial market conditions; foreign currency market risk; market conditions, which may increase or decrease the value of the Company’s financial assets; additional investments in certain private equity partnership interests; and general economic conditions.

Forward-looking statements speak only as of the date of the document in which they are made. The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. (See FACTORS THAT MAY AFFECT FUTURE RESULTS.)

Restatement of Financial Statements
On October 28, 2004, DPL’s Audit Committee determined that the Company’s previously issued financial statements for the fiscal years ended December 31, 2001, 2002, and 2003 and for the quarters ended March 31, 2002 through September 30, 2003 should be restated. The Audit Committee has discussed the issues surrounding the restatement for the periods ending on or before December 31, 2002 with the Company’s independent accountants, PricewaterhouseCoopers LLP (PwC) and for periods ending after December 31, 2002 with the Company’s independent accountants, KPMG LLP (KPMG). Both PwC and KPMG have informed the Audit Committee that they concur with the restatement decision.

incentive units to the outstanding shares during those periods the stock incentive unit plan was considered an equity plan. This restatement increased net income by $3.8 million, or $0.03 per common share, to $91.1 million for 2002 and reduced net income by $1.1 million, or $0.04 per common share, to $196.8 million for 2001. The beginning balance in Earnings Reinvested in the Business for 2001 was reduced by $13.8 million to $800.3 million. The impact to the previously reported unaudited results of the first three quarters of 2003 increased net income for the first three quarters of 2003 by $3.1 million to $164.0 million . The Company also adjusted its unaudited consolidated financial statement information for the fiscal year ended December 31, 2003 that was previously contained in the March 16, 2004 and February 10, 2004 Current Reports on Form 8-K, reducing net income for the fiscal year ended December 31, 2003 by $4.4 million, or $0.04 per common share, to $148.5 million. All applicable financial information contained in this Annual Report on Form 10-K gives effect to these restatements.

The following table identifies the adjustments made to previously-released consolidated financial statements:

	Net Income Increase (Decrease)

	For the years ended December 31,

($ in millions) Description of Adjustment	2003 (1)			2002			2001			Periods Prior to 2001

Stock distributions (2)	$	—		$	3.0		$	1.0		$	—
Supplemental Executive Retirement Plan (3)		4.1			3.8			(0.8	)		(19.0	)
Stock incentive units (4)		(3.4	)		0.4			—			—
Accrued expenses (5)		(2.9	)		(0.1	)		(1.0	)		(0.3	)

Sub-total pre-tax impact		(2.2	)		7.1			(0.8	)		(19.3	)

Income taxes on non-deductible costs (6)		(4.2	)		(0.4	)		(0.5	)		(1.2	)
Income tax reserve adjustment (7)		1.1			—			—			—
Income taxes (8)		0.9			(2.9	)		0.2			6.7

Total Net Income Impact (9)	$	(4.4	)	$	3.8		$	(1.1	)	$	(13.8	)

(1) As originally reported by the Company in the March 16, 2004 and February 10, 2004 Current Reports on Form 8-K.

(2) Reflects adjustment to record income for stock dividends received that had originally been recorded entirely as a return of capital.

Consolidated Statement of Results of Operations: Adjustment increased Investment Income by the amounts set forth in this table.

Consolidated Balance Sheet: At December 31, 2003 and 2002, adjustment increased Private Securities Under the Cost Method by $4.0 million and increased Accrued Taxes by approximately $1.6 million.

(3) Reflects adjustment to record a settlement of the Company’s Supplemental Executive Retirement Plan for certain executives in 1997 and 2000 which had not been previously recorded, to include in the plan an executive who had not been previously considered a plan participant, and to record the proper treatment for Company assets previously thought to be segregated and restricted solely for purposes of funding this plan. Adjustments made subsequent to 2000 reflect revisions to actuarial computations to consider impact of those settlements on future actuarial calculations for the plan.

Consolidated Statement of Results of Operations: Adjustment (increased) decreased Operation and Maintenance expense by approximately $3.9 million in 2003, $3.5 million in 2002, $(1.1) million in 2001, and $(21.5) million in prior periods. Adjustment also increased Investment Income by approximately $0.2 million in 2003, $0.3 million in 2002 and 2001, and $2.4 million in prior periods.

Consolidated Balance Sheet: At December 31, 2003, adjustment increased Deferred Credits and Other – Other by $13.5 million, Other Assets – Other by $13.3 million, Accumulated Other Comprehensive Income by $6.2 million, Accrued Taxes by $1.0 million, Deferred Taxes by $1.0 million and Other Current Assets by $0.2 million. At December 31, 2002, adjustment increased Deferred Credits and Other – Other by $19.0 million, Other Current Assets by $0.1 million, Accrued Taxes by $0.6 million, and reduced Accumulated Other Comprehensive Income by $2.3 million, Deferred Taxes by $7.3 million and Other Assets – Other by $0.6 million.

Consolidated Statement of Shareholders’ Equity: At January 1, 2001, adjustment decreased Earnings Reinvested in the Business by $12.4 million and Accumulated Other Comprehensive Income by $2.4 million.

(4) Reflects adjustment to record outstanding stock incentive units at fair value at each balance sheet date following a change in the operation of the Management Stock Incentive Plan made as of January 1, 2002, that allowed certain retirees to diversify stock incentive awards to investments other than DPL common stock.

Consolidated Statement of Results of Operations: Adjustment increased Operation and Maintenance expense by $3.4 million in 2003 and decreased Operation and Maintenance expense by $0.4 million in 2002.

Consolidated Balance Sheet: At December 31, 2003, adjustment increased Other Paid-in Capital, net of Treasury Stock by $8.8 million, Other Assets – Other by $1.1 million, and reduced Deferred Credits and Other – Other by $5.7 million, Deferred Taxes by $0.2 million and Other Current Assets by $0.1 million. At December 31, 2002, adjustment increased Other Paid-in Capital, net of Treasury Stock by $8.4 million, and reduced Deferred Credits and Other – Other by $8.8 million and Other Assets – Other by $0.1 million.

(5) Reflects adjustment to record accrued expenses in the period in which these items were incurred.

Consolidated Statement of Results of Operations: Adjustment increased Other Income by $0.8 million and Operation and Maintenance expense by $3.5 million, and reduced Investment Income by $0.3 million and General Taxes by $0.1 million for 2003; decreased Other Income by $0.1 million in 2002; and increased Operation and Maintenance expense by $0.9 million, and reduced Investment Income by $0.1 million in 2001.

Consolidated Balance Sheet: At December 31, 2003, adjustment increased Accounts Payable by $4.6 million, Accounts Receivable by $0.8 million, Current Assets - Other by $0.9 million and reduced Accrued Taxes by $0.6 million and Other Assets – Other by $0.2 million. At December 31, 2002, adjustment increased Accounts Payable by $1.2 million, and reduced Accrued Taxes by $0.4 million and Current Assets – Other by $0.1 million.

(6) Reflects adjustment to record tax expense for non-deductible costs not previously considered and provisions for estimated tax exposures.

Consolidated Statement of Results of Operations: Adjustment increased Income Tax expense by the amounts set forth in this table.

Consolidated Balance Sheet: At December 31, 2003, adjustment increased Accrued Taxes by $6.7 million. At December 31, 2002, adjustment increased Accrued Taxes by $2.4 million.

(7) Reflects tax reserve adjustment to reflect recent favorable settlement with the IRS for prior years’ audit.

Consolidated Statement of Results of Operations: Adjustment decreased Income Tax expense by the amount set forth in the table.

Consolidated Balance Sheet: At December 31, 2003, adjustment reduced Accrued Taxes by the amount set forth in the table.

(8) Reflects income taxes related to the above non-tax adjustments.

Consolidated Statement of Results of Operations: Adjustment (increased) decreased Income Tax expense by the amounts set forth in the table.

(9) Total net income cumulative amount for periods prior to 2001 are reflected as a reduction to 2001 beginning Earnings Reinvested in the Business on the Consolidated Balance Sheet.

TRENDS, OVERVIEW AND FUTURE EXPECTATIONS

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.

In 2003, DPL’s net income and cash flow from operations improved over the prior year. Overall, electric revenues of $1,181.0 million exceeded the prior year by $7.5 million resulting from increased wholesale revenue. Operating expenses of $819.1 million in 2003 exceeded the prior year by $63.3 million or 8% primarily as a result of electric production costs and corporate expenses. Investment income increased $178.2 million to $75.8 million in 2003 primarily resulting from realized gains from the financial asset portfolio and the settlement of interest rate hedges relating to a bond refinancing. Other income increased $29.8 million to $25.7 million in 2003 primarily from the settlement of the business interruption insurance coverage for deregulation. DPL also resolved its shareholder litigation and recorded a $76.7 million pre-tax charge in the fourth quarter of 2003.

In September 2003, the PUCO issued an order extending DP&L’s market development period through December 2005 and that continues DP&L’s current rate structure and provides its retail customers with rate stability through 2008. DPL believes its operations will remain strong and efficient, and expects its existing liquidity and future cash flow from operations to fully fund its dividend, capital expenditures and planned debt reductions. As a result of a rising coal market, DP&L expects its 2004 coal costs to exceed its 2003 coal costs by approximately 15%. DPL anticipates marginal revenue growth in 2004.

See Item 8 - Notes to Financial Statements and the Management’s Discussion and Analysis section “FACTORS THAT MAY AFFECT FUTURE RESULTS.”

RESULTS OF OPERATIONS

Income Statement Highlights

$ in millions	2003		2002 (as restated)		2001 (as restated)

Electric revenues	$	1,181.0	$	1,173.5	$	1,186.2
Less: Fuel		234.6		227.0		232.3
Purchased power		87.9		79.3		72.7

Net electric margins (a)	$	858.5	$	867.2	$	881.2

Other revenues, net (b)	$	10.0	$	12.9	$	15.6

Operating income	$	371.9	$	430.6	$	454.7


(a)	For purposes of discussing operating results DPL presents and discusses net electric 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 the Company’s finanical performance.

(b)	Net of gas purchases by a non-utility subsidiary of $8.7 and $155.4 million in 2002 and 2001, respectively.

Revenues
Electric revenues increased to $1,181.0 million in 2003 compared to $1,173.5 million in 2002 reflecting higher wholesale revenues, which increased $34.8 million or 28% in 2003 resulting from available generation and 15% higher average market prices over the prior year. This increase in wholesale revenues was partially offset by decreases in retail revenues of $27.3 million or 3% in 2003 primarily from mild summer weather. Cooling degree-days were down 46% to 687 for 2003 compared to 1,272 in 2002.

Electric revenues decreased in 2002 compared to 2001 primarily reflecting lower wholesale revenues, which decreased $53.9 million or 30% as a result of lower wholesale electric commodity prices. The decrease in wholesale revenues was partially offset by increases in retail residential and commercial revenues of $40.2 million or 6% resulting from warmer than normal weather in 2002. Cooling degree-days were up 41% to 1,272 for 2002 as compared to 900 in 2001.

Operating Expenses
Net electric margins of $858.5 million in 2003 decreased by $8.7 million from $867.2 million in 2002. As a percentage of total electric revenues, net electric margins decreased by 1.2% to 72.7% in 2003 from 73.9% in 2002. This decline is primarily the result of a lower volume of sales relating to retail customers and increased fuel and purchased power costs, partially offset by an increase in wholesale sales. Fuel costs increased by $7.6 million or 3% in 2003 compared to 2002 primarily related to increased generation for wholesale sales, partially offset by lower average fuel costs relating to wholesale sales. Purchased power costs increased by $8.6 million or 11% in 2003 compared to 2002, resulting from higher average market prices for both retail and wholesale sales, partially offset by lower volume of purchased power as the retail and wholesale capacity needs were met by internal generation. Fuel costs decreased $5.3 million or 2% in 2002 compared to 2001 as a result of the higher utilization of coal plants that use lower-cost fuel. Purchased power costs increased $6.6 million or 9% in 2002 compared to 2001 as a result of higher purchased power volumes, partially offset by lower average prices.

Operation and maintenance expense increased $44.2 million or 28% in 2003 compared to 2002 primarily as a result of higher corporate costs and increased electric production expenses. Corporate costs increased primarily from a $22 million increase in executive compensation, $10.5 million increase for Director and Officer liability insurance premiums, $5.8 million increase in executive incentives and $6.3 million increase in pension expense. Electric production expense increased $7.1 million primarily related to planned maintenance during scheduled outages, ash disposal and the expensing of cost of removal for retired assets as required by FASB Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” (SFAS 143). These increases were partially offset by a $3.1 million decrease in postretirement benefits and $3.8 million actuarial adjustment to the captive insurance reserves. Operation and maintenance expense decreased $12.4 million or 7% in 2002 compared to 2001 primarily as a result of lower planned outage costs, lower ash disposal costs, and cost containment efforts. These improvements were partially offset by higher insurance and claims costs.

Depreciation and amortization expense was $4.8 million or 4% higher in 2003 compared to 2002, as a result of a full year of depreciation on combustion turbines installed in 2002 and the completion of environmental compliance equipment installations at certain generation facilities. Depreciation and amortization expense increased $6.8 million or 5% in 2002 compared to 2001, as a result of the $179 million investment in 480 MW of combustion turbine capacity in the summer of 2002 and the $215 million investment in 544 MW of combustion turbine capacity in the summer of 2001.

General taxes declined $2.8 million or 3% from a lower Ohio kWh excise tax related to customer usage and reduced franchise tax. This decrease was partially offset by higher property tax expense. General taxes increased $11.8 million or 12% in 2002 compared to 2001 primarily as a result of the effect of the Ohio kWh excise tax that was first implemented in May 2001 and higher property taxes, partially offset by the elimination of the Ohio Public Utility Excise Tax at the end of 2001.

Investment Income (Loss)
Investment income increased by $178.2 million in 2003 compared to 2002. This increase includes $158.2 million from the financial asset portfolio and $21.2 million from the settlement of interest rate hedges related to the $470 million DP&L first mortgage bond refinancing, partially offset by a decrease in interest and other investment income of $1.2 million. Investment income for 2003 was comprised of $50.5 million from private securities under the cost method, realized gains and income from public securities of $9.1 million and $1.6 million from interest and other investment income and $21.2 million from the settlement of interest rate hedges. These increases were partially offset by a loss of $6.6 million from private securities under the equity method.

Investment loss in 2002 was $102.4 million, comprised of realized gains and income from public securities of $7.4 million and $2.8 million of interest and other income, offset by losses of $90.0 million from private securities under the equity method and $22.6 million from private securities under the cost method. These results reflected global market conditions at the time and included economic and political uncertainties, and currency devaluations in Latin America. Given the conditions and instability in that region in 2002, particularly Argentina, DPL evaluated future return expectations and valuations and, in the second quarter of 2002, wrote down $148.4 million of financial assets for declines in value below cost that were considered to be other than temporary.

Investment income for 2001 of $26.7 million was comprised of $31.3 million from realized gains and income from public securities, $12.3 million from private securities under the cost method and $4.2 million from interest and other investment income. These increases were partially offset by a loss of $21.1 million from private securities under the equity method.

Interest Expense
During the fourth quarter of 2003, DPL adopted FASB Interpretation 46R “Consolidation of Variable Interest Entities (revised December 2003) –an Interpretation of ARB 51” (FIN46R). Upon adoption DPL established a note payable of $300 million to the DPL Capital Trust II (see Notes 1, 9 and 10 of Notes to Consolidated Financial Statements). Interest Expense includes amounts previously disclosed as Trust preferred distributions by subsidiary.

Interest Expense increased by $2.3 million in 2003 compared to 2002 primarily as a result of lower capitalized interest in 2003 as the combustion turbine and environmental compliance equipment installations at certain generation facilities were completed in 2002. Interest expense increased $2.9 million in 2002 compared to 2001 primarily as a result of $17.8 million of higher interest expense relating to higher average long-term debt levels. This increase was partially offset by lower long-term interest rates, lower average short-term debt levels and a $14.9 million decrease in trust preferred distributions by subsidiary resulting from the refinancing of the trust preferred securities in August 2001, which reduced the principal outstanding by $250 million and the coupon rate by 0.375 percentage points.

Shareholder Litigation
In the fourth quarter 2003, the Company recorded a $76.7 million charge for the settlement of a shareholder lawsuit. (See Item 3 – Legal Proceedings and Note 16 of Notes to Consolidated Financial Statements.)

Other Income
Other income increased $29.8 million primarily as a result of an increase of $21.5 million in 2003 over 2002 from the settlement of the business interruption insurance coverage related to deregulation. (See Note 1 of Notes to Consolidated Financial Statements.)

Other income decreased $6.6 million in 2002 compared to 2001 primarily as a result of income of $18.2 million recognized in 2002 for the business interruption risk insurance policy related to deregulation, as compared to income of $29.1 million recognized for such policy in 2001. This variance was partially offset by strategic consulting fees of $4.5 million incurred in 2001.

Income Tax Expense
Income tax expense increased $29.9 million or 56% in 2003 compared to 2002 reflecting higher net income. Income tax expense decreased $58.0 million or 52% in 2002, compared to 2001, due to lower net income.

Cumulative Effect of Accounting Change
The cumulative effect of an accounting change of $17.0 million in 2003 reflects the adoption of the provisions of FASB Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). (See Note 1 of Notes to Consolidated Financial Statements.)

The cumulative effect of an accounting change of $1.0 million in 2001 reflects the adoption of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133). (See Note 1 of Notes to Consolidated Financial Statements.)

LIQUIDITY, CAPITAL RESOURCES AND REQUIREMENTS

DPL’s cash and temporary cash investments totaled $337.6 million at December 31, 2003, compared to $40.8 million at December 31, 2002. This increase was primarily attributed to cash generated from the net proceeds from the sales, purchases and realized gains on financial assets, the settlement of the interest rate hedges and from operating activities.

The Company generated net cash from operating activities of $350.3 million, $313.8 million and $310.3 million in 2003, 2002 and 2001, respectively. The net cash provided by operating activities in 2003 was primarily the result of operating profitability and working capital, specifically the timing of tax payments. Net cash provided by operating activities in 2002 and 2001 was primarily driven by operating profitability. The tariff-based revenue from DPL’s 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 provides DPL with a reasonably predictable gross cash flow.

Net cash flows provided by investing activities were $65.4 million in 2003 compared to net cash flows used for investing activities of $149.5 million and $427.4 million in 2002 and 2001, respectively. Net cash flows provided by investing activities in 2003 was primarily the result of net proceeds from sales, purchases and realized gains on financial assets and the interest rate hedges, partially offset by capital expenditures. The net cash used for investing activities in 2002 was primarily the result of $171.6 million for capital expenditures. The net cash used for investing activities in 2001 was primarily the result of $338 million for capital expenditures and $90.9 million of income taxes paid associated with the gain on the sale of DP&L’s natural gas distribution business. DPL’s capital expenditures have declined over the past three years with the completion of major construction initiatives.

Net cash flows used for financing activities were $118.9 million, $131.0 million and $7.3 million in 2003, 2002 and 2001, respectively. Net cash flows used for financing activities in 2003 primarily related to dividends paid to common stockholders and the retirement of long-term debt. These uses were partially offset by the net proceeds related to the issuance of long-term debt. Net cash used for financing activities in 2002 primarily related to dividends paid to common stockholders and the retirement of short-term and long-term debt. Net cash used for financing activities in 2001 primarily related to dividends paid to common stockholders, purchase of common stock and the retirement of long-term debt. These uses of cash were partially offset by the net proceeds related to issuance of short-term and long-term debt and the issuance and redemption of trust preferred securities.

DPL’s financial assets of $984.9 million at December 31, 2003 were comprised of both public and private debt and equity securities, and were diversified both in terms of geography and industry. Public securities comprised approximately 14% or $140.3 million of the portfolio at December 31, 2003, valued at current market price. Private securities approximated 86% of the portfolio, or $844.6 million, and are valued under either the cost or equity method. The public securities and the net distributions from the private securities are additional capital resources available to the Company.

In December 2003, DPL entered into a $150 million term loan agreement, which was to expire in 2006, with a consortium of banks. The proceeds from this loan were to be used to provide partial funding for the retirement of the 6.82% series Senior Notes due 2004, if needed. At December 31, 2003, DPL had no outstanding borrowings under this agreement and this facility was not used to provide partial funding of the retirement of the 6.82% series Senior Notes. In May 2004, the Company elected to terminate the term loan agreement.

In February 2004, DP&L entered into a $20 million Master Letter of Credit Agreement with a financial lending institution. This agreement, which expires in February 2005, 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 December 31, 2003, DP&L had no outstanding letters of credit.

On March 25, 2004, the Company 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 the Company has the right to redeem the notes for a make-whole payment at the adjusted treasury rate plus 0.25%. The proceeds from these notes were used to provide partial funding for the retirement of $500 million of the 6.82% series Senior Notes due 2004. The 6.82% series Senior Notes were redeemed on April 6, 2004.

The 8% series Senior Notes were issued pursuant to the Company’s indenture dated as of March 1, 2000, and pursuant to authority granted in Board resolutions of the Company dated March 25, 2004. The notes impose a limitation on the incurrence of liens on the capital stock of any of the Company’s significant subsidiaries and require the Company and its subsidiaries to meet a consolidated coverage ratio of 2 to 1 prior to incurring additional indebtedness. The limitation on the incurrence of additional indebtedness 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 the Company or any of its 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, the Company was 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. The Company failed to file an exchange offer registration statement and to have a registration statement declared effective according to this timeline. As a result, the Company is accruing additional interest at a rate of 0.5% per annum per violation, up to an additional interest rate not to exceed in the aggregate 1.0% per annum. As each violation is cured, the additional interest rate may decrease by 0.5%.

The terms of the private placement also required the Company to file this Form 10-K by July 30, 2004. Because the Company failed to meet this deadline, the Company was required to pay additional liquidated damages in the form of additional interest at a rate of 1.0% until the date this Form 10-K was filed with the SEC.

DP&L had $150 million available through an unsecured revolving credit agreement with a consortium of banks. The agreement, which was scheduled to expire on December 10, 2004, was terminated on June 1, 2004. The facility was to be used to support the Company’s business requirements and DP&L’s commercial paper program. The facility contained two financial covenants, including maximum debt to total capitalization and minimum earnings before interest and tax to interest coverage. Fees associated with this credit facility were approximately $0.8 million per year, but a two-step increase in DP&L’s credit rating would have reduced the facility’s interest rate by 0.38%. A lower credit rating would not have increased the applicable interest rate. DPL and DP&L had no outstanding borrowings under this credit facility and no outstanding commercial paper balances at year-end 2003 or 2002.

In June 2004, DP&L obtained a $100 million unsecured revolving credit agreement that extended and replaced DP&L’s revolving credit agreement of $150 million. The new agreement, which expires on May 31, 2005, provides credit support for DP&L’s business requirements and commercial paper program during this period and may be increased to up to $150 million. The facility contains two financial covenants including maximum debt to total capitalization, and minimum earnings before interest and taxes (EBIT) to total interest expense. These covenants are currently met. DP&L currently has no outstanding borrowings under this credit facility and no outstanding commercial paper balances. Fees associated with this credit facility are approximately $0.6 million per year. Changes in debt ratings, however, may affect the applicable interest rate for DP&L’s revolving credit agreement. A one-step increase in DP&L’s credit rating reduces the facility’s interest rate by 0.38% and a one-step decrease in credit rating increases the facility’s interest rate by 0.38%. DP&L’s ability to use this revolving credit agreement is subject to the PUCO’s annual approval which is set to expire on November 5, 2004. DP&L has filed an application to secure the PUCO’s continued authorization and that application is pending.

The delay in filing audited financial statements for the year ending December 31, 2003 constituted an event of default under both the term loan and DP&L’s previous revolving credit facility; however, the Company obtained waivers from its lenders regarding this event. The Company incurred fees of approximately $0.2 million to obtain these waivers. Subsequently, the Company elected to terminate the term loan and obtained a new revolving credit facility. The delay in filing audited financial statements also resulted in non-compliance under the Company’s other debt agreements, although the non-compliance did not result in an immediate event of default. The Company has not received any default notifications from any of its lenders. The Company’s debt agreements allow a grace period to cure a default after notification. Management, after consultation with legal counsel, believes all default conditions have been remedied.

On December 31, 2003, DPL’s cash and temporary cash investments totaled $338 million. In March 2004, the Company issued $175 million unsecured 8% series Senior Notes. The Company used $500 million of cash to retire the 6.82% series Senior Notes due April 6, 2004. On May 7, 2004, the Company paid $70.0 million in accordance with the terms of a shareholder litigation settlement. (See Item 3 - Legal Proceedings.)

Capital Requirements
Construction additions were $102 million, $166 million and $339 million in 2003, 2002 and 2001, respectively and are expected to approximate $100 million in 2004.

Planned construction additions for 2004 relate to DPL’s environmental compliance program, power plant equipment, and its transmission and distribution system. During the last three years, capital expenditures have been utilized to make significant progress on DPL’s NOx compliance program, to make power plant improvements, and to complete construction on approximately 1,200 MW of combustion turbines. In July 2002, approximately 480 MW of combustion turbine capacity at an investment of $179 million came on line. Collectively, DPL’s generating capacity now totals more than 4,400 MW, with a generation mix of 64% coal-fired and 36% combustion turbine and natural gas-fired generation. DPL has not contracted for further capacity additions.

Financial Asset Investment
Through 2008, DPL may be called upon to make additional investments in private equity funds if and as the funds make investments during their respective investment periods. At December 31, 2003, DPL could be required to invest up to an additional $319.3 million in existing limited partnership interests as compared to $399.8 million at December 31, 2002. Currently DPL is not subscribing to additional private equity funds. DPL currently funds these investments from the return of previously invested capital and gains, with the aggregate capital invested expected to remain at less than $1 billion. The certainty of future investment opportunities by the funds and investment in the funds, as well as the rate of return of invested capital and gains, if any, cannot be predicted. Investments by these investment firms are designed to be self-liquidating over time.

Debt Obligations and Maturities
At December 31, 2003, DPL’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years were $511.1 million in 2004, $13.1 million in 2005, $16.1 million in 2006, $452.3 million in 2007 and $100.7 million in 2008. Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds. Debt maturities in 2004 are expected to be financed with a combination of internal and external funds. In March 2004, DPL completed a $175 million private placement of unsecured 8% series Senior Notes due March 2009. The proceeds from these notes, combined with $202 million of internal funds provided by the financial asset portfolio and $123 million from core operations, were used to fund the retirement of $500 million of the 6.82% series Senior Notes due April 6, 2004. With this retirement in April 2004, DPL exceeded its previously announced plans to reduce its overall long-term debt levels by $300 million through 2005.

On September 29, 2003, DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125% Series due 2013. The net proceeds from the sale of the bonds, after expenses, were used on October 30, 2003, to (i) redeem $226 million principal amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075% of the principal amount plus accrued interest to the redemption date and (ii) redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% of the principal amount plus accrued interest to the redemption date. The 5.125% Series due 2013 were not registered under the Securities Act of 1933, but were offered and sold through a private placement in compliance with Rule 144A under the Securities Act of 1933. The bonds include step-up interest provisions requiring the Company to pay additional interest if the securities remain unregistered with the SEC after 180 days from issuance. The sale of the bonds was not registered and, as a result, the Company is required to pay additional interest of 0.50% until an exchange offer for these securities is registered with the SEC.

During 2001, DPL issued $400 million principal amount of 6.875% series senior unsecured notes due 2011. The issuance was part of a refinancing in which the proceeds were used to redeem $550 million of 8.5% trust preferred securities and for general corporate purposes, including retirement of short-term debt as discussed in Notes 9 and 10 of Notes to Consolidated Financial Statements.

In August 2001, DPL issued $300 million of trust preferred securities at 8.125% which have a term of 30 years. The proceeds from the sale of these securities and issuance of the senior unsecured notes were used to redeem $550 million of 8.5% trust preferred securities and for general corporate purposes including the retirement of short-term debt. In the fourth quarter of 2003, DPL adopted FIN46R and deconsolidated the DPL Capital Trust II which resulted in transferring the trust preferred securities to the DPL Capital Trust II and establishing a note to Capital Trust II for $300 million at 8.125% (see Notes 1, 9 and 10 of Notes to Consolidated Financial Statements).

Issuance of additional amounts of first mortgage bonds by DP&L is limited by the provisions of its mortgage; however, management believes that DP&L continues to have sufficient capacity to issue first mortgage bonds to satisfy its requirements in connection with its current refinancing and construction programs. The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.

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

Credit Ratings
Subsequent to the December 31, 2003 balance sheet, the Company received multiple credit rating downgrades for DPL and DP&L. Currently, DPL’s senior unsecured and DP&L’s senior secured debt credit ratings are as follows:

	DPL Inc.	DP&L	Outlook	Effective

Fitch Ratings	BB	BBB	Negative	April 2004
Moody’s Investors Service	Ba3	Baa3	Negative	April 2004
Standard & Poor’s Corp.	BB-	BBB-	Negative	March 2004

As reflected above, DPL’s unsecured debt credit ratings are considered below investment grade.

Debt Covenants
DP&L had $150 million available through an unsecured revolving credit agreement with a consortium of banks. The agreement, which was scheduled to expire on December 10, 2004, was terminated on June 1, 2004. The facility was to be used to support the Company’s business requirements and DP&L’s commercial paper program. The facility contained two financial covenants, including maximum debt to total capitalization and minimum earnings before interest and tax to interest coverage. Fees associated with this credit facility were approximately $0.8 million per year, but a two-step increase in DP&L’s credit rating would have reduced the facility’s interest rate by 0.38%. A lower credit rating would not have increased the applicable interest rate. DPL and DP&L had no outstanding borrowings under this credit facility and no outstanding commercial paper balances at year-end 2003 or 2002.

DPL’s term loan agreement contained three financial covenants and the interest rate varied depending upon DP&L’s current credit ratings. At December 31, 2003, DPL had no outstanding borrowings under this agreement. In May 2004, DPL elected to terminate the term loan agreement.

The 8% series Senior Notes were issued pursuant to the Company’s indenture date as of March 1, 2000, and pursuant to authority granted in Board resolutions of the Company dated March 25, 2004. The notes impose a limitation on the incurrence of liens on the capital stock of any of the Company’s significant subsidiaries and require the Company and its subsidiaries to meet a consolidated coverage ratio of 2 to 1 prior to incurring additional indebtedness. The limitation on the incurrence of additional indebtedness 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 the Company or any of its 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, the Company was 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. The Company failed to file an exchange offer registration statement and to have a registration statement declared effective according to this timeline. As a result, the Company is accruing additional interest at a rate of 0.5% per annum per violation, up to an additional interest rate not to exceed in the aggregate 1.0% per annum. As each violation is cured, the additional interest rate may decrease by 0.5%.

The delay in filing audited financial statements for the year ending December 31, 2003, constituted an event of default under both the term loan and DP&L’s previous revolving credit facility; however, the Company obtained waivers from its lenders regarding this event. The Company incurred fees of approximately $0.2 million to obtain these waivers. Subsequently, the Company elected to terminate the term loan and obtained a new revolving credit facility. The delay in filing audited financial statements also resulted in non-compliance under the Company’s other debt agreements although the non-compliance did not result in an immediate event of default. The Company has not received any default notifications from any of its lenders. The Company’s debt agreements allow a grace period to cure a default after notification. Management, after consultation with legal counsel, believes all defaut conditions have been remedied.

Restricted Cash
On August 2, 2004 in order to strengthen MVIC’s financial position, the Vermont Department of Banking, Insurance, Securities and Health Care Administration notified MVIC of MVIC’s requirement to reduce its intercompany receivable to a maximum no greater than MVIC’s total capital and surplus plus $250,000 minimum capital. As a result, the Company plans to transfer $27.6 million from its operating cash to its subsidiary MVIC in satisfaction of this requirement during the fourth quarter of 2004. These funds will not be available for general operating purposes.

Off-Balance Sheet Arrangements
DPL does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on DPL’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Long-term Obligations and Commercial Commitments
DPL enters into various contractual and other long-term obligations that may affect the liquidity of its operations. At December 31, 2003, these include:

	Payment Year

Long-term Obligations ($ in millions)	2004		2005 & 2006		2007 & 2008		Thereafter		Total

Long-term debt	$	510.4	$	27.8	$	551.6	$	1,371.0	$	2,460.8
Capital lease		0.7		1.4		1.4		1.5		5.0
Operating leases		0.8		0.4		—		—		1.2
Coal contracts		237.6		152.7		80.4		127.5		598.2
Other long-term obligations		10.1		14.9		1.0		—		26.0

Total long-term obligations	$	759.6	$	197.2	$	634.4	$	1,500.0	$	3,091.2

Long-term debt:

Long-term debt as of December 31, 2003, consists of first mortgage bonds, guaranteed air quality development obligations, DPL unsecured notes, mandatorily redeemable trust preferred securities and includes current maturities. (See Note 10 of Notes to Consolidated Financial Statements.)

Capital lease:

As of December 31, 2003, the Company had one capital lease that expires September 2010.

Operating leases:

As of December 31, 2003, the Company had several operating leases with various terms and 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 adjustment in accordance with various indices, and have features that will limit price escalation in any given year.

Other long-term obligations:

As of December 31, 2003, DPL had various other long-term obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

DPL enters into various commercial commitments, which may affect the liquidity of its operations. At December 31, 2003, these include:

	Expiring Year

Commercial Commitments ($ in millions)	2004		2005 & 2006		2007 & 2008		Thereafter		Total

Credit facilities	$	150.0	$	150.0	$	—	$	—	$	300.0
Guarantees		—		17.8		—		—		17.8
Other long-term commitments		60.6		149.2		109.5		__		319.3

Total commercial commitments	$	210.6	$	317.0	$	109.5	$	—	$	637.1

Credit facilities:

DP&L had $150 million available through an unsecured revolving credit agreement with a consortium of banks that was scheduled to expire on December 10, 2004. At December 31, 2003, there were no borrowings outstanding under this credit agreement. In June 2004, the Company replaced this facility with a $100 million, 364 day unsecured credit facility that expires on May 31, 2005. The new facility may be increased to up to $150 million.

DPL had a $150 million term loan agreement, which was to expire in 2006, with a consortium of banks. The proceeds from this loan were to be used to provide partial funding for the redemption of the 6.82% series Senior Notes due 2004, if needed. At December 31, 2003, DPL had no outstanding borrowings under this agreement and this facility was not used to provide partial funding of the retirement of the 6.82% series Senior Notes. In May 2004, the Company elected to terminate the term loan agreement.

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company. As of December 31, 2003, DP&L could be responsible for the repayment of 4.9%, or $14.9 million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of a separate $60 million debt obligation. Both obligations mature in 2006.

Other long-term commitments:

MARKET RISK

DPL’s financial results are subject to certain market risks, including changes in electricity, coal, environmental emissions, gas and other commodity prices; the effect of weather, increased competition and economic conditions in the sales area on retail sales volume; financial market condition; foreign currency market risk and adverse economic conditions.

Approximately 13 percent of DPL’s 2003 electric revenues were from sales of excess energy and capacity in the wholesale market. Energy and capacity in excess of the needs of existing retail customers is sold in the wholesale market when DPL can identify opportunities with positive margins.

In 2003, sales of excess energy and capacity contributed $47 million in net electric margins; $37 million of which related to spot energy sales and $10 million of which related to peaking capacity. This compares to net electric margins from wholesale energy and capacity sales of $36 million in 2002 of which $19 million related to spot energy sales and $17 million related to peaking capacity. This increase in net electric margins resulted primarily from higher average market prices. Wholesale sales in 2003 and 2002 averaged $32.90 and $28.60 per megawatt hour, respectively.

Fuel and purchased power costs represented 40% of total operating costs in 2003. DPL has contracted for all of its projected coal needs for 2004, at an estimated cost per Btu increase of approximately 15% over average 2003 levels. Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of its generating capacity. DPL will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below the Company’s internal production costs. A 2% change in overall fuel and purchased power costs would result in approximately a $3.5 million change in net income.

The carrying value of DPL’s debt was $2,466 million at December 31, 2003, consisting of DP&L’s first mortgage bonds, DP&L’s guaranteed air quality development obligations, DPL’s unsecured notes and capital leases. The fair value of this debt was $2,620 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 December 31, 2003, are as follows:

	Long-term Debt

Expected Maturity Date	Amount ($ in millions)		Average Rate

2004	$	511		6.8	%
2005		13		7.5	%
2006		16		7.6	%
2007		452		8.2	%
2008		101		6.2	%
Thereafter		1,373		6.5	%

Total	$	2,466		6.9	%

Fair Value	$	2,620

At December 31, 2003, and June 30, 2004, DPL had no short-term debt outstanding. Debt maturities in 2004 are expected to be financed with a combination of internal and external funds. In March 2004, DPL completed a $175 million private placement of unsecured 8% series Senior Notes due March 2009. The proceeds from these notes, combined with $202 million of internal funds provided by the financial asset portfolio and $123 million from core operations, were used to fund the retirement of $500 million of the 6.82% Senior Notes due April 6, 2004.

In May 2003, DP&L entered into 60 day interest rate swaps designed to capture existing favorable interest rates in anticipation of future financings of $750 million first mortgage bonds. These hedges were settled in July 2003, at a fair value of $51.4 million and as a result DP&L received this amount. The ultimate effectiveness of the hedges resulted in a gain of $30.2 million and is reflected in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. This amount will be amortized to interest expense over the lives of the forecasted interest payments. The remaining market value of $21.2 million was recognized in Other Income (Deductions) on the Consolidated Statement of Results of Operations.

The fair value of financial instruments held was $1,031.6 million and $1,121.7 million at December 31, 2003, and December 31, 2002, respectively. The market risk related to these financial instruments was estimated as the potential increase/decrease in fair value of $103.0 million at December 31, 2003, resulting from a hypothetical 10% increase/decrease in the value of the underlying securities. DPL is also subject to foreign currency translation adjustments related to certain of its financial instruments. The foreign currency translation adjustments related to these financial instruments were estimated as the potential increase/decrease in fair value of $20 million at December 31, 2003, resulting from a hypothetical 10% increase/decrease in the foreign currency exchange rates.

Financial Asset Portfolio
DPL’s financial assets of $984.9 million at December 31, 2003 is comprised of both public and private debt and equity securities, and is diversified both in terms of geography and industry. DPL’s financial asset investment objective, which began in 1995, has been and continues to be first, asset preservation, and second, earning an above market rate while seeking to mitigate risk through diversification.

Public securities comprised approximately 14% of the portfolio or $140.3 million at December 31, 2003, valued at current market price. Public securities include liquid public equities, including mutual funds comprised of S&P 500 Index and shorter-term fixed income and treasury securities.

DPL used $202 million from the private and public securities in its investment portfolio to partially fund the retirement of $500 million 6.82% series Senior Notes in April 2004. On April 7, 2004, following the retirement of the Senior Notes, cash and temporary cash investments held in the financial asset portfolio was $79.4 million and public securities were valued at $70.0 million. The Company used an additional $50 million from the financial asset portfolio in May 2004 to partially fund its obligation under the terms of a shareholder litigation settlement.

Private securities are passive limited partnership interests in private equity funds managed by 27 investment firms, which in turn are managed by experienced investment professionals. DPL, along with other qualified investors, rely on the professionals managing the investment firms to make investment decisions with respect to investment of fund assets within a fund’s parameters and to manage such investments until exit.

Assets in the financial asset portfolio as of December 31, which are included in the Consolidated Balance Sheets, are as follows:

$ in millions	2003		2002

Cash and temporary cash investments	$	136.6	$	14.4

Financial assets:
Public securities		140.3		175.8
Private securities under the equity method		343.9		370.4
Private securities under the cost method		500.7		481.4

Total financial assets		984.9		1,027.6

Total Financial Asset Portfolio	$	1,121.5	$	1,042.0

Through 2008, DPL may be called upon to make additional investments in private equity funds if and as the funds make investments during their respective investment periods. At December 31, 2003, DPL could be required to invest up to an additional $319.3 million in existing limited partnership interests as compared to $399.8 million at December 31, 2002, but is not subscribing to additional private equity funds at this time. The Company currently funds these investments from the return of previously invested capital and gains, with the aggregate capital invested expected to remain at less than $1 billion. The certainty of future investment opportunities by the funds and investment in the funds, as well as the rate of return of invested capital and gains, cannot be predicted. Investments by these investment firms are designed to be self-liquidating over time.

Since inception, the financial asset portfolio (excluding investment management fees of $111 million paid to the General Partners of the funds) has had cumulative gains of $522 million and cumulative losses of $349 million, with a net gain of $173 million as of December 31, 2003.

DPL holds limited partnership interests in private equity funds which have been organized and are managed by the following experienced investment firms:

Investment Firms		Location

Accel KKR		Palo Alto, CA
American Industrial Partners		New York, NY
Argos Soditic		Geneva, Switzerland
Bridgepoint Capital		London, England
Bruckmann Rosser and Sherrill & Co. LLC		New York, NY
Canterbury Capital Partners		New York, NY
Cravey, Green and Whalen Inc.		Atlanta, GA
Charterhouse Group International		New York, NY
Compass Partners International		London, England
CVC Capital Partners		London, England
DDJ Capital Management LLC		Boston, MA
Exxel Group		Buenos Aires, Argentina
Fremont Partners		San Francisco, CA
Freeman Spogli & Co.		Los Angeles, CA
GP Investimentos		Sao Paulo, Brazil
Hicks Muse Tate and Furst		Dallas, TX
Kelso Investment Associates		New York, NY
Kohlberg Kravis & Roberts & Co.		New York, NY
Lehman Brothers		New York, NY
Newbridge Capital		San Francisco, CA
TCW/Crescent Mezzanine LLC		Los Angeles, CA
Triumph Capital		Boston, MA
Trivest		Miami, FL
The Shansby Group		San Francisco, CA
Vestar Capital Partners		New York, NY
Warburg Pincus		New York, NY
Willis Stein & Partners		Chicago, IL

The private equity funds, in turn, are currently invested in approximately 500 companies which manufacture or provide a wide array of products and services to both businesses and consumers worldwide.

Approximately half of DPL’s investments in any single private equity fund are less than 5% of the fund. Rarely is DPL’s investment in any single private equity fund more than 10% of the fund.

The Company consults with the investment professionals of each firm on a periodic basis and is provided access to information regarding each fund’s investments, subject to applicable confidentiality agreements. As an investor in the funds, DPL receives annual financial statements for each private equity fund audited by recognized U.S. or international accounting firms.

DPL’s financial assets are broadly diversified in terms of concentration of investment in particular companies, industry sector and region. The geographic allocation of the financial assets included on the Consolidated Balance Sheet at December 31, 2003, is as follows:

Geographical Region	% of DPL Portfolio Holdings

Private Securities:
United States/Canada		51%
Europe		27%
Asia/Australia		6%
Latin America		2%

Total Private Securities		86%
Public Securities:
United States		14%

Total Financial Assets		100%

The industry sector allocation of the investments in limited partnerships included on the Consolidated Balance Sheet at December 31, 2003, is as follows:

Primary Sector	% of DPL Portfolio Holdings

Manufacturing		33%
Health Care Products		10%
Services – Business/Consumer		10%
Communications		9%
Media		8%
Retail		7%
Software/IT Services		7%
Finance/Insurance		5%
Building Products/Construction		3%
Energy		3%
Business Products		2%
Agriculture		1%
Entertainment		1%
Wholesale Distribution		1%

FACTORS THAT MAY AFFECT FUTURE RESULTS

This annual report and other documents that DPL files with the Securities and Exchange Commission (SEC) and other regulatory agencies, as well as other oral or written statements the Company may make from time to time, contain information based on management’s beliefs and include forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve a number of known and unknown risks, uncertainties and assumptions. These forward-looking statements are not guarantees of future performance, and there are a number of factors including, but not limited to, those listed below, which could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements. DPL does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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.

Regulation/Competition
DPL operates in a rapidly changing industry with evolving industry standards and regulations. In recent years a number of federal and state developments aimed at promoting competition triggered industry restructuring. Regulatory factors, such as changes in the policies or procedures that set rates; changes in tax laws, tax rates, and environmental laws and regulations; changes in DPL’s ability to recover expenditures for environmental compliance, fuel and purchased power costs and investments made under traditional regulation through rates; and changes to the frequency and timing of rate increases, can affect the Company’s results of operations and financial condition. Additionally, financial or regulatory accounting principles or policies imposed by governing bodies can increase DPL’s operational and monitoring costs affecting its results of operations and financial condition.

Changes in DPL’s customer base, including municipal customer aggregation, could lead to the entrance of competitors in the Company’s marketplace affecting its results of operations and financial condition.

Economic Conditions
Economic pressures, as well as changing market conditions and other factors related to physical energy and financial trading activities, which include price, credit, liquidity, volatility, capacity, transmission, currency exchange rates and interest rates can have a significant effect on DPL’s operations and the operations of its retail, industrial and commercial customers.

Reliance on Third Parties
DPL relies on many suppliers for the purchase and delivery of inventory and components to operate its energy production and transmission functions. Unanticipated changes in DPL’s purchase processes may affect the Company’s business and operating results. In addition, the Company relies on others to provide professional services, such as, but not limited to investment management, actuarial calculations, internal audit services, payroll processing and various consulting services.

Operating Results Fluctuations
Future operating results could be affected and are subject to fluctuations based on a variety of factors, including but not limited to: unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages; unusual maintenance or repairs; changes in coal costs, gas supply costs, or availability constraints; environmental compliance, including costs of compliance with existing and future environmental requirements; and electric transmission system constraints.

A majority of DP&L’s employees are under a collective bargaining agreement. If the Company is unable to negotiate future collective bargaining agreements, the Company could experience work stoppages, which may affect its business and operating results.

Regulatory Uncertainties and Litigation
In the normal course of business, the Company is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. Additionally, the Company is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting and taxation, which are rapidly changing and subject to changes in the future. As further described in Item 3 - Legal Proceedings, the Company is also currently involved in various litigation in which the outcome is uncertain. Compliance with these rapid changes may substantially increase costs to DPL’s organizations and could affect its future operating results.

Internal Controls
As described under Item 1 - Business - Recent Developments, a review by independent counsel to the Audit Committee of the Board of Directors of the Company has identified recommendations for improvement relating to some of the concerns raised by the Company’s Controller including, among other things, internal controls. In addition, as further described under Item 9A- Controls and Procedures, during their year-end review, the Company’s independent auditors identified and reported to management and the Audit Committee of the Board of Directors two material weaknesses and certain other matters involving internal control deficiencies considered to be reportable conditions under standards established by the Public Company Accounting Oversight Board (PCAOB). The material weaknesses include conditions related to (1) the Company’s process for recognizing an adjustment to the Company’s income tax provision to reflect a deductibility limitation under Section 162(m) with respect to executive deferred compensation distributions made during 2003 and (2) a complex and manual process for accounting and reporting transactions in the Company’s financial asset portfolio that may lead to improper accounting of such transactions in accordance with generally accepted accounting principles.

The reportable conditions that are not believed to be a material weakness include conditions related to payroll processing, the quality and change control process for the preparation of SEC filings, management’s assessment of the Company’s internal controls, executive travel and entertainment expense reporting, the lack of a comprehensive controller function and segregation of duties for certain accounting transactions and activities.

The Company’s failure to timely improve any deficiencies in its internal controls and procedures could result in errors in its consolidated financial statements, adversely affect its ability to operate its business and hamper management’s ability to report on the effectiveness of its internal controls. The Company has taken steps to correct the internal control deficiencies identified and will further develop and enhance the Company’s internal control policies, procedures, systems and staff to allow it to mitigate the risk that material accounting errors might go undetected and be included in its consolidated financial statements. The Company cannot assure that any new policies or procedures that the Company implements to remedy the material weaknesses and/or reportable conditions will be successful in the near term.

The Company is currently undertaking a thorough review of its internal controls as part of the Company’s preparation for compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 and the Company is using this review to further assist in identifying and correcting any control deficiencies. As expected, this review has revealed control weaknesses, which the Company has reported to the Audit Committee. The Company has since taken steps to strengthen its internal controls in these areas including increasing segregation of duties, writing policies where necessary, adding checks at key decision points and increasing supervisor review of transactions. These actions have been successful in eliminating a large percentage of the deficiencies noted, but additional remediation activities continue. Corrected control deficiencies are being retested by management to assure that remediation efforts were successful, and the Company’s auditors will perform independent testing of the Company’s internal controls as part of their year-end review. At this time, the Company has not completed its review of the existing controls and their effectiveness. Unless the material weaknesses described above, and any identified during this review, are remedied, there can be no assurances that management will be able to assert that the Company’s internal control over financial reporting is effective in the management report required to be included in the Annual Report for the year ended December 31, 2004, pursuant to the rules adopted by the SEC under Section 404.

CRITICAL ACCOUNTING POLICIES

DPL’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). In connection with the preparation of these financial statements, DPL’s management is required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on management’s historical experience and assumptions that are believed to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. DPL’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain.

Different estimates could have a material effect on its 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 judgments include the carrying value of property, plant and equipment; the valuation of derivative instruments; the valuation of financial assets; the valuation of insurance and claims costs; valuation allowances for receivables and deferred income taxes; the valuation of reserves related to current litigation; and assets and liabilities related to employee benefits.

Long-Lived Assets: In accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets to be held and used are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. DPL determines the fair value of these assets based upon estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. In analyzing the fair value and recoverability using future cash flows, the Company makes projections based on a number of assumptions and estimates of growth rates, future economic conditions, assignment of discount rates and estimates of terminal values. An impairment loss is recognized if the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows. The measurement of impairment loss is the difference between the carrying amount and fair value of the asset. Long-lived assets to be disposed of and/or held for sale are reported at the lower of carrying amount or fair value less cost to sell. DPL determines the fair value of these assets in the same manner as described for assets held and used.

Regulatory Assets and Liabilities: DPL capitalizes incurred costs as deferred regulatory assets when there is a probable expectation that the costs incurred will be recovered in future revenues as a result of the regulatory process. Regulatory liabilities represent current recovery of expected future costs. When applicable the Company applies judgment in the use of these principles and these estimates are based on expected usage by a customer class over the designated recovery period. See Note 4 of Notes to Consolidated Financial Statements for further disclosure of regulatory amounts.

Asset Retirement Obligation: In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No.143, “Accounting for Asset Retirement Obligations” (SFAS 143), legal obligations associated with the retirement of long-lived assets are required to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. SFAS 143 also requires that components of previously recorded depreciation related to the cost of removal of assets upon retirement, whether legal asset retirement obligations or not, must be removed from a company’s accumulated depreciation reserve. DPL makes assumptions, estimates and judgments that affect the reported amounts of assets, liabilities and expenses as they relate to asset retirement obligations. These assumptions and estimates are based on historical experience and assumptions that are believed to be reasonable at the time.

Unbilled Revenues: DPL records revenue for retail and other energy sales under the accrual method. For retail customers, revenues are recognized when the services are provided on the basis of periodic cycle meter readings and include an estimated accrual for the value of electricity provided from the meter reading date to the end of the reporting period. These estimates are based on the volume of energy delivered, historical usage and growth by customer class, and the effect of weather variations on usage patterns.

Financial Instruments: DPL applies the provision of FASB Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), for its investments in debt and equity financial instruments of publicly traded entities and classifies the securities into different categories; held-to-maturity and available-for-sale. Available-for-sale securities are carried at fair value and unrealized gains and losses on those securities, net of deferred income taxes, are presented as a separate component of shareholders’ equity. Other than temporary declines in value are recognized currently in earnings. Financial instruments classified as held-to-maturity are carried at amortized cost. The valuation of public equity security investments is based upon market quotations. The cost basis for public equity security and fixed maturity investments is average cost and amortized cost, respectively.

DPL accounts for its investments in private financial instruments under either the cost or equity method of accounting. The equity method of accounting is applied to those investments in limited partnership interests when DPL’s ownership is 5% or more of the private equity fund. Under the cost method, DPL’s private investments are carried at cost unless an other-than-temporary decline in value is recognized, and income is recognized as distributed by the private equity fund. Under the equity method, private investments are carried at DPL’s share of the capital of the private equity fund, and DPL recognizes its share of the income reported by the private equity fund, which includes unrealized gains and losses. Other than temporary declines in value are recognized currently in earnings.

Insurance and Claims Costs: A wholly-owned captive insurance subsidiary of DPL provides insurance coverage solely to DPL and its subsidiaries which included through 2003, among other coverages, business interruption and specific risk coverage with respect to electric deregulation. Insurance and Claims Costs on the Consolidated Balance Sheet includes insurance reserves, which are based on actuarial methods and loss experience data. Such reserves are determined, in the aggregate, based on a reasonable estimation of probable insured events occurring. There is uncertainty associated with the loss estimates, and actual results could differ from the estimates. Modification of these loss estimates based on experience and changed circumstances are reflected in the period in which the estimate is re-evaluated.

Pension and Postretirement Benefits: DPL accounts for its pension and postretirement benefit obligations in accordance with the provisions of Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and No. 106 “Employers’ Accounting for Postretirement Benefits Other than Pensions.” These standards require the use of assumptions, such as the long-term rate of return on assets, in determining the obligations, annual cost, and funding requirements of the plans.

In 2004, DPL lowered its long-term rate of return assumptions by 25 basis points to 8.75% to reflect the effect of recent trends on its long-term view. This reduction will result in an increase in pension costs of approximately $0.6 million. Effective December 31, 2003, DPL lowered its assumed discount rate for pension and postretirement benefit obligations by 50 basis points to reflect current interest rate conditions. Changes in the rate of return assumption, the discount rate, and other components used in the determination of pension or postretirement benefit costs will result in an overall increase of approximately $4 million in pension costs in 2004 compared to 2003.

In future periods, differences in the actual return on pension plan assets and assumed return or changes in the discount rate will affect the timing of contributions to the pension plan, if any, and the determination of whether or not a minimum liability should be recorded. DPL provides postretirement healthcare benefits to employees who retired prior to 1987. A one percentage point change in the assumed healthcare trend rate would affect postretirement benefit costs by approximately $0.1 million.

Contingencies: DPL records 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, DPL accrues 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. DPL evaluates the potential liability related to probable losses quarterly and may revise its estimates. Such revisions in the estimates of the potential liabilities could have a material effect on the Company’s results of operations and financial position.

LEGAL AND OTHER MATTERS

A discussion of LEGAL AND OTHER MATTERS is described in Note 16 of Notes to Consolidated Financial Statements and in Item 3 - LEGAL PROCEEDINGS. Such discussions are incorporated by reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.

Recently Issued Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 1 of Notes to 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.

Item 7A – Quantitative and Qualitative Disclosures about Market Risk

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

Item 8 – Financial Statements and Supplementary Data

D P L I n c .
C o n s o l i d a t e d S t a t e m e n t o f R e s u l t s o f O p e r a t i o n s

	For the years ended December 31,

$ in millions except per share amounts	2003			2002 (as restated)			2001 (as restated)

Revenues
Electric revenues (Note 1)	$	1,181.0		$	1,173.5		$	1,186.2
Other revenues, net of fuel costs		10.0			12.9			15.6

Total revenues		1,191.0			1,186.4			1,201.8

Operating Expenses
Fuel		234.6			227.0			232.3
Purchased power		87.9			79.3			72.7
Operation and maintenance		199.8			155.6			168.0
Depreciation and amortization (Note 1)		138.9			134.1			127.3
General taxes		108.9			111.7			99.9
Amortization of regulatory assets, net (Note 4)		49.0			48.1			46.9

Total operating expenses		819.1			755.8			747.1

Operating Income		371.9			430.6			454.7

Investment income		75.8			(102.4	)		26.7
Interest expense		(181.7	)		(179.4	)		(176.5	)
Shareholder litigation (Note 16)		(76.7	)		—			—
Other income (deductions) (Note 1)		25.7			(4.1	)		2.5

Income Before Income Taxes and Cumulative Effect of Accounting Change		215.0			144.7			307.4

Income tax expense (Note 5)		83.5			53.6			111.6

Income Before Cumulative Effect of Accounting Change		131.5			91.1			195.8

Cumulative effect of accounting change, net of tax (Note 1)		17.0			—			1.0

Net Income	$	148.5		$	91.1		$	196.8

Average Number of Common Shares
Outstanding (millions)
Basic		119.8			119.5			121.7
Diluted		121.7			124.5			129.2
Earnings Per Share of Common Stock – Basic
Income before cumulative effect of accounting change	$	1.10		$	0.76		$	1.61
Cumulative effect of accounting change		0.14			—			0.01

Total Basic	$	1.24		$	0.76		$	1.62

Earnings Per Share of Common Stock – Diluted
Income before cumulative effect of accounting change	$	1.08		$	0.73		$	1.51
Cumulative effect of accounting change		0.14			—			0.01

Total Diluted	$	1.22		$	0.73		$	1.52

Dividends Paid Per Share of Common Stock	$	0.94		$	0.94		$	0.94

See Notes to Consolidated Financial Statements.

D P L I n c .
C o n s o l i d a t e d S t a t e m e n t o f C a s h F l o w s

	For the years ended December 31,

$ in millions	2003			2002 (as restated)			2001 (as restated)

Operating Activities
Net income	$	148.5		$	91.1		$	196.8
Adjustments:
Depreciation and amortization		138.9			134.1			127.3
Shareholder litigation (Note 16)		66.6			—			—
Amortization of regulatory assets, net		49.0			48.1			46.9
Deferred income taxes		18.2			(50.5	)		9.2
Captive insurance provision (Note 1)		(46.8	)		(16.6	)		(36.4	)
Investment (income) loss		(47.7	)		113.3			(19.0	)
Income from interest rate hedges (Note 1)		(21.2	)		—			—
Cumulative effect of accounting change, net of tax		(17.0	)		—			(1.0	)
Changes in working capital:
Accounts receivable		(3.7	)		(1.3	)		71.3
Accounts payable		10.4			(12.2	)		(29.4	)
Accrued taxes payable		56.1			9.8			(40.0	)
Accrued interest payable		(9.1	)		(0.2	)		15.5
Prepayments		(7.4	)		(4.5	)		(4.7	)
Inventories		4.0			5.5			(15.5	)
Deferred compensation assets		49.0			(0.3	)		2.7
Deferred compensation obligations		(47.0	)		(2.7	)		(10.6	)
Other		9.5			0.2			(2.8	)

Net cash provided by operating activities		350.3			313.8			310.3

Investing Activities
Capital expenditures		(120.9	)		(171.6	)		(338.0	)
Purchases of fixed income and equity securities		(164.0	)		(288.3	)		(316.1	)
Sales of fixed income and equity securities		298.9			310.4			317.6
Settlement of interest rate hedge (Note 1)		51.4			—			—
Income taxes from sale of natural gas distribution assets		—			—			(90.9	)

Net cash provided by (used for) investing activities		65.4			(149.5	)		(427.4	)

Financing Activities
Issuance of long-term debt, net of issue costs (Note 10)		465.1			—			395.9
Issuance (retirement) of short-term debt, net		—			(12.0	)		12.0
Retirement of long-term debt (Note 10)		(471.9	)		(7.2	)		(6.4	)
Dividends paid on common stock		(112.1	)		(111.8	)		(112.0	)
Purchase of treasury stock (Note 8)		—			—			(35.8	)
Issuance of trust preferred securities by subsidiary, net of issue costs (Note 9)		—			—			289.0
Redemption of trust preferred securities by subsidiary (Note 9)		—			—			(550.0	)

Net cash used for financing activities		(118.9	)		(131.0	)		(7.3	)

Cash and Temporary Cash Investments
Net change		296.8			33.3			(124.4	)
Balance at beginning of year		40.8			7.5			131.9

Balance at end of year	$	337.6		$	40.8		$	7.5

Cash Paid During the Year For:
Interest and trust preferred distributions	$	184.0		$	172.9		$	155.1
Income taxes	$	15.2		$	104.0		$	193.7

See Notes to Consolidated Financial Statements.

D P L I n c .
C o n s o l i d a t e d B a l a n c e S h e e t

	At December 31,

$ in millions	2003			2002 (as restated)

Assets
Property
Property, plant and equipment	$	4,420.8		$	4,323.2
Less: Accumulated depreciation and amortization		(1,846.9	)		(1,722.3	)

Net property		2,573.9			2,600.9

Current Assets
Cash and temporary cash investments (Notes 1 and 3)		337.6			40.8
Accounts receivable, less provision for uncollectible accounts of $6.0 and $11.1, respectively (Note 1)		176.0			169.4
Inventories, at average cost (Notes 1 and 3)		52.1			56.1
Prepaid taxes		46.4			46.9
Other (Note 3)		60.1			66.2

Total current assets		672.2			379.4

Other Assets
Financial assets:
Public securities		140.3			175.8
Private securities under the equity method		343.9			370.4
Private securities under the cost method		500.7			481.4

Total financial assets (Note 14)		984.9			1,027.6

Income taxes recoverable through future revenues		43.3			34.6
Other regulatory assets		36.1			80.1
Other (Note 3)		134.3			155.1

Total other assets		1,198.6			1,297.4


Total Assets	$	4,444.7		$	4,277.7

See Notes to Consolidated Financial Statements.

D P L I n c .
C o n s o l i d a t e d B a l a n c e S h e e t

	At December 31,

$ in millions	2003			2002 (as restated)

Capitalization and Liabilities
Capitalization
Common shareholders’ equity
Common stock: par value $0.01 per share, 250,000,000 shares authorized, 126,501,404 shares issued and outstanding at December 31, 2003 and 2002, respectively	$	1.3		$	1.3
Other paid-in capital, net of treasury stock		12.0			8.4
Warrants		50.0			50.0
Common stock held by employee plans		(84.4	)		(89.6	)
Accumulated other comprehensive income		57.7			(2.2	)
Earnings reinvested in the business		865.7			856.9

Total common shareholders’ equity (Note 8)		902.3			824.8

Preferred stock (Note 9)		23.0			23.0
Company obligated mandatorily redeemable trust preferred securities of subsidiary holding solely parent debentures (Note 9)		—			292.6
Long-term debt (Note 10)		1,954.7			2,142.3

Total shares subject to mandatory redemption and long-term debt		1,954.7			2,434.9


Total capitalization		2,880.0			3,282.7

Current Liabilities
Current portion – long-term debt		511.1			9.1
Accounts payable		95.6			101.4
Shareholder litigation (Note 16)		70.0			—
Accrued taxes		148.7			99.1
Accrued interest		50.1			51.1
Other (Note 3)		51.8			25.9

Total current liabilities		927.3			286.6

Deferred Credits and Other
Deferred taxes (Note 5)		374.0			288.4
Unamortized investment tax credit		52.2			55.1
Insurance and claims costs		26.0			114.3
Other (Note 3)		185.2			250.6

Total deferred credits and other		637.4			708.4

Contingencies (Note 16)

Total Capitalization and Liabilities	$	4,444.7		$	4,277.7

See Notes to Consolidated Financial Statements.

D P L I n c .
C o n s o l i d a t e d S t a t e m e n t o f S h a r e h o l d e r s’ E q u i t y

	Common Stock (a)					Other Paid-in Capital			Warrants		Common Stock Held by Employee Plans			Accumulated Other Comprehensive Income			Earnings Reinvested In the Business			Total
	Common Stock (a)

$ in millions	Outstanding Shares			Amount

Beginning balance (as restated)		127,774,404		$	1.3	$	65.7		$	50.0	$	(100.0	)	$	105.1		$	800.3		$	922.4

2001 (as restated)
Net income																		196.8
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments															(163.0	)
Net change in unrealized gains (losses) on foreign currency translation adjustments															(23.0	)
Deferred income taxes related to unrealized gains (losses)															65.3
Minimum pension liability															0.1
Total comprehensive income																					76.2
Common stock dividends (c)																		(112.0	)		(112.0	)
Issuance of securities							(3.3	)													(3.3	)
Treasury stock (b)		(1,273,000	)				(27.1	)										(8.8	)		(35.9	)
Tax benefit on early redemption of trust preferred securities							8.5														8.5
Employee / Director stock plans							4.8					6.5									11.3
Other							0.1								—			—			0.1

Ending balance		126,501,404		$	1.3	$	48.7		$	50.0	$	(93.5	)	$	(15.5	)	$	876.3		$	867.3
2002 (as restated)
Net income																		91.1
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments															(5.2	)
Net change in unrealized gains (losses) on foreign currency translation adjustments															25.9
Deferred income taxes related to unrealized gains (losses)															(7.2	)
Minimum pension liability															(0.2	)
Total comprehensive income																					104.4
Common stock dividends (c)																		(111.8	)		(111.8	)
Issuance of securities
Employee / Director stock plans							(40.3	)				3.9						1.3			(35.1	)
Other																		—			—

Ending balance		126,501,404		$	1.3	$	8.4		$	50.0	$	(89.6	)	$	(2.2	)	$	856.9		$	824.8

2003:
Net income																		148.5
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments															10.0
Net change in unrealized gains (losses) on foreign currency translation adjustments															37.3
Net change in deferred gains on cash flow hedges															29.4
Minimum pension liability															(0.2	)
Deferred income taxes related to unrealized gains (losses)															(16.6	)
Total comprehensive income																					208.4
Common stock dividends (c)																		(140.8	)		(140.8	)
Issuance of securities
Employee / Director stock plans							0.2					5.2						1.1			6.5
Other (d)							3.4					—						—			3.4

Ending balance		126,501,404		$	1.3	$	12.0		$	50.0	$	(84.4	)	$	57.7		$	865.7		$	902.3


(a)	$0.01 par value, 250,000,000 shares authorized.
(b)	Treasury stock is recorded at cost with the excess over par value shown as a reduction to “Other paid-in capital” or to “Earnings reinvested in the business.” The total number of shares of common stock held in treasury at December 31, 2003 was 37,222,807.
(c)	Common stock dividends were $0.94 per share in 2001-2003.
(d)	Issuance costs related to Capital Trust II deconsolidation.

See Notes to Consolidated Financial Statements.

D P L I n c .
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

1 Summary of Significant Accounting Policies and Overview

Description of Business
DPL Inc. (DPL or the Company) is a diversified, regional energy company organized in 1985 under the laws of Ohio.

DPL’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 service area is generated at eight power plants and is distributed to more than 500,000 retail customers. Principal industries served include automotive, food processing, paper, plastic manufacturing and defense.

DPL is exempt from registration with the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935 because its utility business operates in a single state. On October 8, 2004, DPL received a notice from the SEC that a question exists as to whether such exemption from the Public Utility Holding Company Act may be detrimental to the public interest or the interests of investors or consumers. Under applicable rules, DPL will lose its exemption 30 days following this notice and be required to register as a holding company under the Public Utility Holding Company Act and become subject to additional regulation thereunder. However, DPL may delay the requirement to become registered so long as it files a good faith application seeking an order of exemption from the Securities and Exchange Commission. DPL will remain exempt pending a decision from the Securities and Exchange Commission on that application. DPL believes it has a good faith basis for seeking an order of exemption and expects to make to make a filing seeking that order within the 30 day period. DPL cannot predict what action the Securities and Exchange Commission may take in connection with its application or whether it will be able to remain an exempt holding company.

Basis of Consolidation
DPL prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements include the accounts of DPL and its majority-owned subsidiaries. Investments that are not majority owned are accounted for using the equity method when DPL’s investment allows it 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.

Estimates, Judgments and Reclassifications
The preparation of financial statements in conformity with GAAP requires management 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. (Significant items subject to such estimates and judgments include the carrying value of property, plant and equipment; the valuation of derivative instruments; the valuation of financial assets; the valuation of insurance and claims costs; valuation allowance for receivables and deferred income taxes; 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.

Revenues and Fuel
DP&L records revenue for services provided but not yet billed to more closely match revenues with expenses. Accounts receivable on the Consolidated Balance Sheet include unbilled revenue of $60 million and $59.3 million in 2003 and 2002, respectively. Also included in revenues are amounts charged to customers through a surcharge for recovery of uncollected amounts from certain eligible low income households. These charges were $6.3 million for 2003, $11.7 million for 2002 and $8.4 million in 2001.

Other revenues, net of fuel costs, had historically included sales by DPL’s natural gas supply management subsidiary. On June 30, 2001, DPL sold substantially all of its customer contracts at its natural gas supply management subsidiary. These revenues were recorded in the period when the gas was delivered. Fuel costs associated with these sales were $8.7 million and $155.4 million in 2002 and 2001, respectively.

Allowance for Uncollectible Accounts
DPL establishes provisions for uncollectible accounts using both historical average credit loss percentages of accounts receivable balances to project future losses and specific provisions for known credit issues.

Property, Plant and Equipment
DPL records its ownership share of its undivided interest in jointly-held plants as an asset in property, plant and equipment. Property, plant and equipment is stated at cost. For regulated plant, cost includes direct labor and material, allocable overhead costs and an allowance for funds used during construction (AFUDC). AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects. Capitalization of AFUDC ceases at either project completion or the date specified by regulators. AFUDC capitalized for borrowed funds was $0.1 million in 2003, $0.1 million in 2002 and $3.8 million in 2001. AFUDC capitalized for equity funds was $0.6 million in 2003, $0.4 million in 2002 and $0.9 million in 2001.

For unregulated plant, cost includes direct labor and material, allocable overhead costs and interest capitalized during construction. Capitalized interest was $8.3 million in 2003, $12.7 million in 2002 and $11.4 million in 2001.

For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated Depreciation and Amortization.

Property is evaluated for impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable.

Depreciation
Depreciation expense is calculated using the straight-line method, which depreciates the cost of property over its estimated useful life. For generation, transmission and distribution assets, straight-line depreciation is applied on an average annual composite basis using group rates that approximated 3.4% for 2003 and 3.3% for 2002 and 2001. Depreciation expense was $138.9 million in 2003, $134.1 million in 2002 and $127.3 million in 2001.

The following is a summary of property, plant and equipment with corresponding composite depreciation rates at December 31, 2003 and 2002:

$ in millions	2003		Composite Rate		2002		Composite Rate

Regulated:
Transmission	$	335.2		2.5%	$	335.6		2.6%
Distribution		889.1		3.7%		879.2		3.7%
General		53.7		8.0%		53.6		8.4%
Non-depreciable		54.4		0.0%		54.3		0.0%

Total regulated	$	1,332.4			$	1,322.7

Unregulated:
Production	$	2,825.8		3.3%	$	2,773.3		3.3%
Other		41.4		7.1%		39.8		7.1%
Non-depreciable		18.6		0.0%		20.3		0.0%

Total unregulated	$	2,885.8			$	2,833.4

Total property in service	$	4,218.2		3.4%	$	4,156.1		3.3%
Construction work in process		202.6		0.0%		167.1		0.0%

Total property, plant and equipment	$	4,420.8			$	4,323.2

Asset Retirement Obligations
DPL adopted the provisions of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143) during 2003. SFAS 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. SFAS 143 also requires that components of previously recorded depreciation related to the cost of removal of assets upon retirement, whether legal asset retirement obligations or not, must be removed from a company’s accumulated depreciation reserve. DPL’s legal obligations associated with the retirement of its long-lived assets consist primarily of river intake and discharge structures, coal unloading facilities, loading docks, ice breakers and ash disposal facilities. Application of SFAS 143 in 2003 resulted in an increase in net property, plant and equipment of $0.8 million, the recognition of an asset retirement obligation of $4.6 million and reduced DPL’s accumulated depreciation reserve by $32.1 million due to cost of removal related to the non-regulated generation assets to other deferred credits. If the new accounting rule had been adopted on January 1, 2002, the asset retirement obligation would have approximated $4.3 million. Beginning in January 2003, depreciation rates were reduced to reflect the discontinuation of the cost of removal accrual for applicable non-regulated generation assets. This change reduced annual depreciation and amortization expense by $1.9 million. In addition, costs for the removal of retired assets are charged to operation and maintenance when incurred. Since the generation assets are not subject to Ohio regulation, DPL recorded the net effect of adopting this standard in its Consolidated Statement of Results of Operations. The total cumulative effect of the adoption of SFAS 143 increased net income and shareholders’ equity by $28.3 million before tax.

DPL continues to record cost of removal for its regulated transmission and distribution assets through its depreciation rates and recovers those amounts in rates charged to its customers. There are no known legal asset retirement obligations associated with these assets. The Company has reclassified $72 million and $66.1 million in estimated costs of removal at December 31, 2003, and 2002, respectively, from Accumulated Depreciation and Amortization to regulatory liabilities for its transmission and distribution property. (See Note 4 of Notes to Consolidated Financial Statements.)

Regulatory Accounting
DPL applies the provisions of FASB Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71). In accordance with SFAS 71, regulatory assets and liabilities are recorded in the Consolidated Balance Sheet. Regulatory assets are the deferral of costs expected to be recovered in future customer rates and regulatory liabilities represent current recovery of expected future costs.

If DPL was required to terminate application of SFAS 71 for all of its regulated operations, the Company would have to record the amounts of all regulatory assets and liabilities in the Consolidated Statement of Results of Operations at that time. (See Note 4 of Notes to Consolidated Financial Statements.)

Inventory
Inventories, carried at average cost, include coal, oil and gas used for electric generation and material and supplies for utility operations.

Repairs and Maintenance
Costs associated with all planned work and maintenance activities, primarily power plant outages, are recognized at the time the work is performed. These costs, which include labor, materials and supplies and outside services required to maintain equipment and facilities, are either capitalized or expensed based on defined units of property as required by the Federal Energy Regulatory Commission (FERC).

Stock-Based Compensation
DPL accounts for stock options granted on or after January 1, 2003, under the fair-value method set forth in FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This standard requires the recognition of compensation expense for stock-based awards to reflect the fair value of the award on the date of grant. DPL follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Accounting Principles Board and FASB interpretations in accounting for stock-based compensation granted before January 1, 2003. If DPL had used the fair-value method of accounting for stock-based compensation granted prior to 2003, net income and earnings per share would have been reported as follows:

	Year Ended December 31,

$ in millions	2003			2002 (as restated)			2001 (as restated)

Net income, as reported	$	148.5		$	91.1		$	196.8
Add: Total stock-based compensation expense determined under APB 25, net of related tax effects		—			0.7			1.3
Deduct: Total stock-based compensation expense determined under FAS 123, net of related tax effects		(2.7	)		(2.5	)		(2.9	)

Pro-forma net income	$	145.8		$	89.3		$	195.2

Earnings per share:
Basic – as reported	$	1.24		$	0.76		$	1.62
Basic – pro-forma	$	1.22		$	0.75		$	1.60

Diluted – as reported	$	1.22		$	0.73		$	1.52
Diluted – pro-forma	$	1.20		$	0.71		$	1.51

Income Taxes
DPL applies the provisions of FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). SFAS 109 requires an asset and liability approach for financial accounting and reporting of income taxes with tax effects of differences, based on currently enacted income tax rates between the financial reporting and tax basis of accounting reported as Deferred Taxes in the Consolidated Balance Sheet. Deferred Tax Assets are recognized for deductible temporary differences. Valuation reserves are provided unless it is more likely than not that the asset will be realized.

Investment tax credits, which have been used to reduce federal income taxes payable, have been deferred for financial reporting purposes. These deferred investment tax credits are amortized over the useful lives of the property to which they are related. For rate-regulated operations, additional deferred income taxes and offsetting regulatory assets or liabilities are recorded to recognize that the income taxes will be recoverable/refundable through future revenues.

DPL files a consolidated U.S. federal income tax return in conjunction with its subsidiaries. The consolidated tax liability is allocated to each subsidiary as specified in the DPL tax allocation agreement which provides a consistent, systematic and rational approach. (See Note 5 of Notes to Consolidated Financial Statements.)

Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments are stated at cost, which approximates fair value. Investments with maturities of three months or less are considered cash equivalents. Investments with maturities of less than one year are considered short-term. Cash, cash equivalents and short-term investments were $337.6 million at December 31, 2003 and $40.8 million at December 31, 2002.

Insurance and Claims Costs
A wholly-owned captive subsidiary of DPL provides insurance coverage solely to DPL and its subsidiaries which included through 2003, among other coverages, business interruption and specific risk coverage with respect to electric deregulation and environmental law. Insurance and Claims Costs on the Consolidated Balance Sheet includes insurance reserves of approximately $26 million and $114.3 million for 2003 and 2002, respectively, based on actuarial methods and loss experience data. Such reserves are determined, in the aggregate, based on a reasonable estimation of probable insured events occurring. There is uncertainty associated with the loss estimates, and actual results may differ from the estimates. Modification of these loss estimates based on experience and changed circumstances are reflected in the period in which the estimate is re-evaluated.

During the three-year regulatory transition period ending December 31, 2003, business interruption policy payments from the captive subsidiary to DP&L or the release of the appropriate reserves occurred and were reflected in income. As of December 31, 2002, a $36.3 million receivable was recognized by DP&L for insurance claims under its business interruption insurance policy, which was included in Other Current Assets on the Consolidated Balance Sheet. Of this amount, $7.3 million and $29 million were reported as Other Income in 2002 and 2001, respectively. The captive subsidiary released $10.9 million in 2002 and $6.9 million in 2001 from the business interruption policy reserve reported as Other Income. In June 2003, the ultimate value of the business interruption risk coverage was settled between the captive insurance subsidiary and DP&L. The total settlement resulted in a $76 million reduction to insurance reserves of the captive subsidiary and a release from the business interruption policy reserve of $39.7 million, which is reported as Other Income. Additionally, during the third quarter of 2003 the captive subsidiary settled the $36.3 million receivable recognized by DP&L for insurance claims under this policy.

In 2003, DPL submitted a claim for $10 million to the captive insurance subsidiary to recover legal expenses related to the shareholder litigation. This claim was settled in December 2003.

Financial Derivatives
DPL adopted FASB Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activity” (SFAS 133), as amended as of January 1, 2001. SFAS 133 requires that all derivatives be recognized as either assets or liabilities in the Consolidated Balance Sheet and be measured at fair value, and changes in the fair value be recorded in earnings, unless they are designated as a cash flow hedge of a forecasted transaction. As a result of adopting this accounting standard, DPL recorded a cumulative effect of accounting change of $1.0 million in income, net of tax, in 2001, or $0.01 per share of common stock.

The FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including those embedded in other contracts, and for hedging activities and is effective for contracts entered into or modified after June 30, 2003. This standard did not have a material effect on the Company.

DPL uses forward contracts and options to reduce the Company’s exposure to changes in energy and commodity prices and as a hedge against the risk of changes in cash flows associated with expected electricity purchases. These purchases are required to meet full load requirements during times of peak demand or during planned and unplanned generation facility outages. DPL also holds forward sales contracts that hedge against the risk of changes in cash flows associated with power sales during periods of projected generation facility availability. Prior to July 1, 2001, DPL recorded the fair value of all these contracts as Other Assets or Other Liabilities on the Consolidated Balance Sheet with an offset to Accumulated Other Comprehensive Income, and earnings were recognized in the month of physical receipt or delivery of power. In June 2001, the FASB concluded that electric utilities could apply the normal purchases and sales exception for option-type contracts and forward contracts in electricity subject to specific criteria for the power buyers and sellers under capacity contracts. Accordingly, DPL began to apply the normal purchase and sales exception as defined in SFAS 133 as of July 1, 2001 and currently accounts for these contracts upon settlement. This change did not have a material effect on DPL’s financial position or results of operations.

In May 2003, DP&L entered into 60 day interest rate swaps designed to capture existing favorable interest rates in anticipation of future financings of $750 million first mortgage bonds. These hedges were settled in July 2003, at a fair value of $51.4 million, reflecting increasing U.S. Treasury interest rates, and as a result DP&L received this amount. During 2003, the ultimate effectiveness of the hedges resulted in a gain of $30.2 million and was recorded in Accumulated Other Comprehensive Income on the Consolidated Balance Sheet. This amount will be amortized into income as a reduction to interest expense over the ten- and fifteen-year lives of the hedges. The ineffective portion of the hedge of $21.2 million was recognized as Other Income on the Consolidated Statement of Results of Operations.

DPL also holds emission allowance options that are classified as derivatives not subject to hedge accounting. The fair value of these contracts, which are in effect through 2004, is reflected as Other Assets or Other Liabilities on the Consolidated Balance Sheet and changes in fair value are recorded as Other Income (Deductions) on the Consolidated Statement of Results of Operations. The effect on net income was immaterial during 2001 through 2003.

Financial Instruments
DPL applies the provision of FASB Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), for its investments in debt and equity financial instruments of publicly traded entities and classifies the securities into different categories; held-to-maturity and available-for-sale. Available-for-sale securities are carried at fair value and unrealized gains and losses on those securities, net of deferred income taxes, are presented as a separate component of shareholders’ equity. Other than temporary declines in value are recognized currently in earnings. Financial instruments classified as held-to-maturity are carried at amortized cost. The valuation of public equity security investments is based upon market quotations. The cost basis for public equity security and fixed maturity investments is average cost and amortized cost, respectively.

Investment Income (Loss) included in the Consolidated Financial Statements is comprised of the following:

			Private

Investment Income (Loss) ($ in millions)	Public		Equity Method			Cost Method			Other		Total

2003
Realized investment income (loss)	$	9.1	$	(28.7	)	$	50.5		$	22.8	$	53.7
Unrealized investment income (loss)		—		22.1			—			—		22.1

Total investment income (loss)	$	9.1	$	(6.6	)	$	50.5		$	22.8	$	75.8

2002 (as restated)
Realized investment income (loss)	$	7.4	$	(5.7	)	$	16.0		$	2.8	$	20.5
Unrealized investment income (loss)		—		25.5			—			—		25.5

Income/(loss) before other than temporary write-downs		7.4		19.8			16.0			2.8		46.0
Other than temporary write-downs		—		(109.8	)		(38.6	)		—		(148.4	)

Total investment income (loss)	$	7.4	$	(90.0	)	$	(22.6	)	$	2.8	$	(102.4	)

2001 (as restated)
Realized investment income (loss)	$	31.3	$	41.5		$	12.3		$	4.2	$	89.3
Unrealized investment income (loss)		—		(62.6	)		—			—		(62.6	)

Total investment income (loss)	$	31.3	$	(21.1	)	$	12.3		$	4.2	$	26.7

Investment income in 2003 is comprised of realized gains and income from public securities of $9.1 million, net losses of $6.6 million from private securities under the equity method, $50.5 million from private securities under the cost method, $21.2 million relating to the interest rate hedge and $1.6 million related to interest and other investment income.

Investment income in 2002 is comprised of realized gains and income from public securities of $7.4 million, net losses of $90.0 million from private securities under the equity method, net losses of $22.6 million from private securities under the cost method and interest and other investment income of $2.8 million. In 2002 DPL evaluated then current valuations and future return expectations of its financial assets, particularly those investments in Latin America, and wrote down $148.4 million for financial assets with declines in value below cost that were considered to be other-than-temporary.

Investment income in 2001 is comprised of realized gains and income of $31.3 million from the public securities, net losses of $21.1 million from private securities under the equity method, realized gains of $12.3 million from private securities under the cost method and $4.2 million of interest and other investment income.

Consolidated summary financial information for the private equity funds in which DPL owns a limited partnership interest and which DPL accounts for under the equity method using the most recent financial information available as of December 31, 2003, is presented below:

Consolidated Summary Financial Information (Unaudited)	As of September 30, 2003 (a)

Balance Sheet ($ in millions)
Current assets	$	168
Non-current assets		5,005
Current liabilities		(14	)
Non-current liabilities		—

Equity	$	5,159

	Twelve months ended September 30, 2003 (a)

Income Statement ($ in millions)
Income	$	52
Gains (losses)		(295	)
Expenses		(116	)

Net income (loss)	$	(359	)


(a) Most recent information available as of December 31, 2003.

Legal, Environmental and Regulatory Contingencies
DPL, in the normal course of business, is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. DPL believes the amounts provided in its consolidated financial statements, as prescribed by GAAP, adequately reflect probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, and other matters, and to comply with applicable laws and regulations, will not exceed the amounts reflected in DPL's consolidated financial statements or will not have a material adverse effect on its consolidated results of operations, financial condition or cash flows. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2003 cannot currently be reasonably determined.

Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 149
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivatives and Hedging Activities” (SFAS 149). SFAS 149 primarily reflects decisions previously made by the FASB’s Derivatives Implementation Group and other FASB projects relating to financial instruments. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including those embedded in other contracts, and for hedging activities and was effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

Statement of Financial Accounting Standards No. 150
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with the Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS 150 establishes standards for classifying and measuring certain financial instruments as liabilities that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 must be applied to instruments entered into or modified after May 31, 2003 and to all other instruments that existed as of the beginning of the first interim period after June 15, 2003. This standard, which was effective at the beginning of the third quarter of 2003, required DPL to classify its mandatorily redeemable trust preferred securities as liabilities for years prior to 2003.

Financial Interpretation No. 46 (Revised December 2003)
In January 2003, the FASB issued Financial Interpretation Number 46, “Consolidation of Variable Interest Entities” (FIN 46), which was subsequently revised in December 2003 with the issuance of FIN 46R. The objective of this interpretation is to provide guidance on how to identify variable interest entities (VIEs) and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. DPL established the Capital Trust II in August 2001 and issued $300 million of trust preferred securities to institutional investors at 8.125%. This trust is considered a VIE and required DPL to evaluate the effect of FIN 46R.

A trust preferred structure generally involves the establishment by an entity, of a limited purpose trust to issue the trust preferred securities. The trust issues preferred securities to outside investors and uses the proceeds of the issuance to purchase an equivalent amount of junior subordinated debentures or other loans having stated maturities. The debentures or other loans are the only assets of the trust. When an entity makes payments of interest on the debentures or other loans, the trust distributes the cash to the holders of the trust preferred securities. The trust preferred securities must be redeemed upon maturity of the debentures or other loans. Prior to the issuance of FIN 46R, the sponsoring enterprise consolidated the trust as a result of holding all the common equity of the trust. For financial reporting purposes, the accounts of the DPL Capital Trust II have been included in DPL's consolidated financial statements.

In accordance with the provisions of FIN 46R DPL determined that it should deconsolidate the DPL Capital Trust II. This resulted in recording an investment in the trust and amounts previously classified as shares subject to mandatory redemption to be classified as long-term debt as of December 31, 2003, by establishing a note payable to the trust. In accordance with FIN 46R, no amounts prior to adoption in the fourth quarter of 2003 will be reclassified.

Staff Position No. 106-1
In December 2003, the FASB issued Staff Position No. 106-1 (FSP 106-1), “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). The Act provides for drug benefits for retirees over the age of 65 under a new Medicare Part D program. For employers like DPL, who currently provide retiree medical programs for certain former employees over the age of 65, there are subsidies available which are inherent in the Act. The Act entitles these employers to a direct tax-exempt federal subsidy. However, since the effective date of the Act was December 2003 and because most employers have not had time to consider the accounting considerations and there is no appropriate accounting guidance for the federal subsidy, the FASB issued this FSP 106-1 to allow employers a one-time election to defer recognition of the impact of the Act in the employer’s accounting until formal guidance is issued. DPL elected to defer recognition of the provisions of this Act until further accounting guidance is issued. The issuance of formal accounting guidance may require a change to previously reported information. DPL is continuing to monitor the effect of the Act.

Staff Position No. 106-2
In May 2004, the FASB issued FASB Staff Position No. 106-2 (FSP 106-2), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, which supersedes FSP 106-1. FSP 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) for employers that sponsor postretirement health care plans that provide prescription drug benefits. It also requires certain disclosures regarding the effect of the federal subsidy provided by the Act. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. The effect is not expected to be material to the Company's results of operations, cash flow or financial position.

EITF 03-01 and EITF 02-14
In June 2004, the Emerging Issues Task Force (EITF) issued EITF 03-1, applied for periods effective beginning after June 15, 2004, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. EITF 03-1 addresses the meaning of other-than-temporary impairment and its application to debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 124 “Accounting for Certain Investments Held by Not-for-Profit Organizations” (SFAS 124), and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method of accounting. In September 2004, the EITF issued EITF 02-14, applied for periods effective beginning after June 15, 2004, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock”. EITF 02-14, addresses: (1) whether an investor should apply the equity method of accounting to investments other than common stock, (2) if the equity method should be applied to investments other than common stock, how the equity method of accounting should be applied to those investments and (3) whether investments other than common stock that have a “readily determinable fair value” under paragraph 3 of SFAS 115 should be accounted for in accordance with SFAS 115 rather than pursuant to EITF 02-14. The Company is in the process of evaluating each of these issues and has not determined the impact to its results of operations, statement of financial position or cash flows.

2. Restatement of Financial Statements

As a result of the Audit Committee’s response to a report prepared by Taft, Stettinius & Hollister LLP (see Note 18) and during the 2003 year-end financial closing process, the Company identified certain adjustments to prior period financial statements. As a result, the Company has restated its consolidated financial statements for the fiscal years ended December 31, 2001 and 2002, and for the quarters ended March 31, 2002 through September 30, 2003. The restatement also affected the average number of basic and diluted common shares outstanding by adding stock incentive units to the outstanding shares during those periods the stock incentive unit plan was considered an equity plan. This restatement increased net income by $3.8 million, or $0.03 per common share, to $91.1 million for 2002 and reduced net income by $1.1 million, or $0.04 per

common share, to $196.8 million for 2001. The beginning balance in Earnings Reinvested in the Business for 2001 was reduced by $13.8 million to $800.3 million. The impact to the previously reported unaudited results of the first three quarters of 2003 increased net income for the first three quarters of 2003 by $3.1 million to $164.0 million. The Company also adjusted its unaudited consolidated financial statement information for the fiscal year ended December 31, 2003, that was previously contained in the March 16, 2004 and February 10, 2004 Current Reports on Form 8-K, reducing net income for the fiscal year ended December 31, 2003 by $4.4 million, or $0.04 per common share, to $148.5 million.

The consolidated opening balace sheet for the earliest period presented has been restated. Earnings Reinvested in the Business was reduced by $13.8 million to reflect certain accounting adjustments primarily related to the Company’s Supplemental Executive Retirement Plan (SERP) and taxes related to non-deductible expenses. Other Paid-in Capital, Net of Treasury Stock, was increased by $46.2 million to reflect certain executive and director stock plans as equity, with a corresponding reduction in Deferred Credits and Other – Other. Accumulated Other Comprehensive Income was reduced by $2.4 million to reflect certain accounting adjustments related to the Company’s Supplemental Executive Retirement Plan.

As a result of the foregoing factors, the Company’s unaudited condensed consolidated financial statements for the first three quarters of fiscal year 2003 will be restated and its consolidated financial statements for fiscal years 2002 and 2001 have been restated from amounts previously reported. In addition, quarterly data for 2002 presented in Selected Quarterly Financial Information (Unaudited) have been restated from amounts previously reported. The accompanying consolidated financial data set forth below presents the Company’s Consolidated Statement of Results of Operations for the years ended December 31, 2002 and 2001 and Consolidated Balance Sheet as of December 31, 2002 on a comparative basis showing the amounts as originally reported and as restated.

Effects of Restatement on Net Income

The following table identifies the adjustments made to previously-released consolidated financial statements:

	Net Income Increase (Decrease)

	For the years ended December 31,

Description of Adjustment ($ in millions)	2003 (1)			2002			2001			Periods prior to 2001

Stock distributions (2)	$	—		$	3.0		$	1.0		$	—
Supplemental Executive Retirement Plan (3)		4.1			3.8			(0.8	)		(19.0	)
Stock incentive units (4)		(3.4	)		0.4			—			—
Accrued expenses (5)		(2.9	)		(0.1	)		(1.0	)		(0.3	)

Sub-total pre-tax impact		(2.2	)		7.1			(0.8	)		(19.3	)

Income taxes on non-deductible costs (6)		(4.2	)		(0.4	)		(0.5	)		(1.2	)
Income tax reserve adjustment (7)		1.1			—			—			—
Income taxes (8)		0.9			(2.9	)		0.2			6.7

Total Net Income Impact (9)	$	(4.4	)	$	3.8		$	(1.1	)	$	(13.8	)

(1) As originally reported by the Company in the March 16, 2004 and February 10, 2004 Current Reports on Form 8-K.

(2) Reflects adjustment to record income for stock dividends received that had originally been recorded entirely as a return of capital.

Consolidated Statement of Results of Operations: Adjustment increased Investment Income by the amounts set forth in this table.

Consolidated Balance Sheet: At December 31, 2003 and 2002, adjustment increased Private Securities Under the Cost Method by $4.0 million and increased Accrued Taxes by approximately $1.6 million.

(3) Reflects adjustment to record a settlement of the Company's Supplemental Executive Retirement Plan for certain executives in 1997 and 2000 which had not been previously recorded, to include in the plan an executive who had not been previously considered a plan participant, and to record the proper treatment for Company assets previously thought to be segregated and restricted solely for purposes of funding this plan. Adjustments made subsequent to 2000 reflect revisions to actuarial computations to consider impact of those settlements on future actuarial calculations for the plan.

(5) Reflects adjustment to record accrued expenses in the period in which these items were incurred.

Consolidated Balance Sheet: At December 31, 2003, adjustment increased Accounts Payable by $4.6 million, Accounts Receivable by $0.8 million, Current Assets - Other by $0.9 million, and reduced Accrued Taxes by $0.6 million and Other Assets – Other by $0.2 million. At December 31, 2002, adjustment increased Accounts Payable by $1.2 million, and reduced Accrued Taxes by $0.4 million and Current Assets – Other by $0.1 million.