SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from                      to                     

Commission file number 0-368

OTTER TAIL CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota		41-0462685
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

215 South Cascade Street, Box 496, Fergus Falls, Minnesota		56538-0496
(Address of principal executive offices)		(Zip Code)

866-410-8780

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:

 

 

OTTER TAIL CORPORATION

INDEX

		Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets – June 30, 2007 and December 31, 2006 (not audited)			2 & 3
Consolidated Statements of Income — Three and Six Months Ended June 30, 2007 and 2006 (not audited)			4
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2007 and 2006 (not audited)			5
Notes to Consolidated Financial Statements (not audited)			6-17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17-36
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37-38
Item 4. Controls and Procedures			39
Part II. Other Information
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 4. Submission of Matters to a Vote of Security Holders			40
Item 6. Exhibits			41
Signatures			41
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Otter Tail Corporation

(not audited)

		June 30,				December 31,
		2007				2006
		(Thousands of dollars)
Current assets
Cash and cash equivalents		$	—			$	6,791
Accounts receivable:
Trade—net			163,204				135,011
Other			8,671				10,265
Inventories			98,791				103,002
Deferred income taxes			8,219				8,069
Accrued utility revenues			17,793				23,931
Costs and estimated earnings in excess of billings			41,555				38,384
Other			20,858				9,611
Assets of discontinued operations			—				289
Total current assets			359,091				335,353
Investments and other assets			31,113				29,946
Goodwill—net			99,158				98,110
Other intangibles—net			20,941				20,080
Deferred debits
Unamortized debt expense and reacquisition premiums			5,824				6,133
Regulatory assets and other deferred debits			46,923				50,419
Total deferred debits			52,747				56,552
Plant
Electric plant in service			940,043				930,689
Nonelectric operations			248,983				239,269
Total plant			1,189,026				1,169,958
Less accumulated depreciation and amortization			496,841				479,557
Plant—net of accumulated depreciation and amortization			692,185				690,401
Construction work in progress			71,506				28,208
Net plant			763,691				718,609
Total		$	1,326,741			$	1,258,650

See accompanying notes to consolidated financial statements

Otter Tail Corporation
Consolidated Balance Sheets
(not audited)
-Liabilities-

		June 30,				December 31,
		2007				2006
		(Thousands of dollars)
Current liabilities
Short-term debt		$	93,956			$	38,900
Current maturities of long-term debt			3,096				3,125
Accounts payable			105,256				120,195
Accrued salaries and wages			23,950				28,653
Accrued federal and state income taxes			14,237				2,383
Other accrued taxes			8,688				11,509
Other accrued liabilities			14,167				10,495
Liabilities of discontinued operations			—				197
Total current liabilities			263,350				215,457
Pensions benefit liability			43,599				44,035
Other postretirement benefits liability			32,990				32,254
Other noncurrent liabilities			22,175				18,866
Deferred credits
Deferred income taxes			112,906				112,740
Deferred investment tax credit			7,612				8,181
Regulatory liabilities			64,155				63,875
Other			997				281
Total deferred credits			185,670				185,077
Capitalization
Long-term debt, net of current maturities			254,140				255,436
Class B stock options of subsidiary			1,255				1,255
Cumulative preferred shares authorized 1,500,000 shares without par value; outstanding 2007 and 2006 — 155,000 shares			15,500				15,500
Cumulative preference shares — authorized 1,000,000 shares without par value; outstanding — none			—				—
Common shares, par value $5 per share authorized 50,000,000 shares; outstanding 2007 — 29,759,979 and 2006 — 29,521,770			148,800				147,609
Premium on common shares			105,525				99,223
Retained earnings			253,686				245,005
Accumulated other comprehensive income (loss)			51				(1,067	)
Total common equity			508,062				490,770
Total capitalization			778,957				762,961
Total		$	1,326,741			$	1,258,650

See accompanying notes to consolidated financial statements

Otter Tail Corporation

(not audited)

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands, except share								(In thousands, except share
		and per share amounts)								and per share amounts)
Operating revenues
Electric		$	70,498			$	73,440			$	160,351			$	155,928
Nonelectric			235,346				206,464				446,614				381,783
Total operating revenues			305,844				279,904				606,965				537,711
Operating expenses
Production fuel — electric			14,077				11,456				30,502				26,262
Purchased power — electric system use			11,021				17,664				37,032				36,400
Electric operation and maintenance expenses			26,651				28,049				53,526				51,456
Cost of goods sold — nonelectric (excludes depreciation; included below)			176,973				156,363				341,632				288,757
Other nonelectric expenses			31,377				29,306				62,135				55,554
Depreciation and amortization			12,947				12,379				26,040				24,603
Property taxes — electric			2,527				2,551				5,053				5,169
Total operating expenses			275,573				257,768				555,920				488,201
Operating income			30,271				22,136				51,045				49,510
Other income			340				659				613				1,087
Interest charges			5,026				5,100				9,894				9,544
Income from continuing operations before income taxes			25,585				17,695				41,764				41,053
Income taxes — continuing operations			9,482				6,558				15,253				15,061
Net income from continuing operations			16,103				11,137				26,511				25,992
Discontinued operations
(Loss) income from discontinued operations net of taxes of $0; ($41); $0 and $28 for the respective periods			—				(79	)			—				26
Net gain on disposition of discontinued operations — net of taxes of $0; $224; $0 and $224 for the respective periods			—				336				—				336
Net income from discontinued operations			—				257				—				362
Net income			16,103				11,394				26,511				26,354
Preferred dividend requirements			184				184				368				368
Earnings available for common shares		$	15,919			$	11,210			$	26,143			$	25,986
Basic earnings per common share:
Continuing operations (net of preferred dividend requirement)		$	0.54			$	0.37			$	0.88			$	0.87
Discontinued operations		$	—			$	0.01			$	—			$	0.01
		$	0.54			$	0.38			$	0.88			$	0.88
Diluted earnings per common share:
Continuing operations (net of preferred dividend requirement)		$	0.53			$	0.37			$	0.88			$	0.86
Discontinued operations		$	—			$	0.01			$	—			$	0.01
		$	0.53			$	0.38			$	0.88			$	0.87
Average number of common shares outstanding — basic			29,685,745				29,392,963				29,594,499				29,359,474
Average number of common shares outstanding — diluted			29,940,868				29,766,040				29,843,953				29,751,718
Dividends per common share		$	0.2925			$	0.2875			$	0.5850			$	0.5750

See accompanying notes to consolidated financial statements

Otter Tail Corporation

(not audited)

		Six months ended
		June 30,
		2007				2006
		(Thousands of dollars)
Cash flows from operating activities
Net income		$	26,511			$	26,354
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain from sale of discontinued operations			—				(336	)
Income from discontinued operations			—				(26	)
Depreciation and amortization			26,040				24,603
Deferred investment tax credit			(568	)			(573	)
Deferred income taxes			1,016				1,134
Change in deferred debits and other assets			2,492				383
Discretionary contribution to pension plan			(2,000	)			(4,000	)
Change in noncurrent liabilities and deferred credits			6,450				2,492
Allowance for equity (other) funds used during construction			—				(391	)
Change in derivatives net of regulatory deferral			(1,620	)			1,918
Stock compensation expense			1,097				1,320
Other — net			(390	)			629
Cash (used for) provided by current assets and current liabilities:
Change in receivables			(24,558	)			(14,827	)
Change in inventories			6,323				(18,004	)
Change in other current assets			(4,136	)			(25,648	)
Change in payables and other current liabilities			(28,190	)			(7,411	)
Change in interest and income taxes payable			11,858				10,107
Net cash provided by (used in) continuing operations			20,325				(2,276	)
Net cash provided by discontinued operations			—				926
Net cash provided by (used in) operating activities			20,325				(1,350	)
Cash flows from investing activities
Capital expenditures			(66,824	)			(33,949	)
Proceeds from disposal of noncurrent assets			7,043				1,048
Acquisitions—net of cash acquired			(6,750	)			—
Increases in other investments			(5,230	)			(1,171	)
Net cash used in investing activities — continuing operations			(71,761	)			(34,072	)
Net proceeds from the sales of discontinued operations			—				1,847
Net cash used in investing activities			(71,761	)			(32,225	)
Cash flows from financing activities
Change in checks written in excess of cash			4,649				4,186
Net short-term borrowings			55,056				43,032
Proceeds from issuance of common stock, net of issuance expenses			5,805				1,017
Payments for retirement of common stock			(295	)			(463	)
Proceeds from issuance of long-term debt			124				105
Debt issuance expenses			(123	)			(293	)
Payments for retirement of long-term debt			(1,543	)			(1,691	)
Dividends paid			(17,711	)			(17,298	)
Net cash provided by financing activities — continuing operations			45,962				28,595
Net cash provided by financing activities — discontinued operations			—				—
Net cash provided by financing activities			45,962				28,595
Effect of foreign exchange rate fluctuations on cash			(1,317	)			(450	)
Net change in cash and cash equivalents			(6,791	)			(5,430	)
Cash and cash equivalents at beginning of period — continuing operations			6,791				5,430
Cash and cash equivalents at end of period — continuing operations		$	—			$	—
Supplemental cash flow information
Cash paid during the year from continuing operations for:
Interest (net of amount capitalized)		$	9,178			$	8,624
Income taxes		$	1,138			$	4,867
Cash paid during the year from discontinued operations for:
Interest		$	—			$	91
Income taxes		$	—			$	423

See accompanying notes to consolidated financial statements

OTTER TAIL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(not audited)

In the opinion of management, Otter Tail Corporation (the Company) has included all adjustments (including normal recurring accruals) necessary for a fair presentation of the consolidated results of operations for the periods presented. The consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes as of and for the years ended December 31, 2006, 2005 and 2004 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Because of seasonal and other factors, the earnings for the three-month and six-month periods ended June 30, 2007 should not be taken as an indication of earnings for all or any part of the balance of the year.

Revenue Recognition

Due to the diverse business operations of the Company, revenue recognition depends on the product produced and sold or service performed. The Company recognizes revenue when the earnings process is complete, evidenced by an agreement with the customer, there has been delivery and acceptance, and the price is fixed or determinable. In cases where significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. Provisions for sales returns and warranty costs are recorded at the time of the sale based on historical information and current trends. In the case of derivative instruments, such as the electric utility’s forward energy contracts, marked-to-market and realized gains and losses are recognized on a net basis in revenue in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Gains and losses on forward energy contracts subject to regulatory treatment, if any, are deferred and recognized on a net basis in revenue in the period realized.

For the Company’s operating companies recognizing revenue on certain products when shipped, those operating companies have no further obligation to provide services related to such product. The shipping terms used in these instances are FOB shipping point.

Some of the operating businesses enter into fixed-price construction contracts. Revenues under these contracts are recognized on a percentage-of-completion basis. The method used to determine the progress of completion is based on the ratio of labor costs incurred to total estimated labor costs at the Company’s wind tower manufacturer, square footage completed to total bid square footage for certain floating dock projects and costs incurred to total estimated costs on all other construction projects. If a loss is indicated at a point in time during a contract, a projected loss for the entire contract is estimated and recognized. The following table summarizes costs incurred and billings and estimated earnings recognized on uncompleted contracts:

		June 30,				December 31,
(in thousands)		2007				2006
Costs incurred on uncompleted contracts		$	242,540			$	257,370
Less billings to date			(261,206	)			(284,273	)
Plus estimated earnings recognized			41,387				35,955
		$	22,721			$	9,052

The following amounts are included in the Company’s consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted contracts are included in accounts payable:

		June 30,				December 31,
(in thousands)		2007				2006
Costs and estimated earnings in excess of billings on uncompleted contracts		$	41,555			$	38,384
Billings in excess of costs and estimated earnings on uncompleted contracts			(18,834	)			(29,332	)
		$	22,721			$	9,052

Inventories

Inventories consist of the following:

		June 30,				December 31,
(in thousands)		2007				2006
Finished goods		$	40,534			$	46,477
Work in process			5,350				5,663
Raw material, fuel and supplies			52,907				50,862
		$	98,791			$	103,002

Goodwill and Other Intangible Assets

Goodwill increased $1,048,000 in the second quarter of 2007 as a result of the acquisition of Pro Engineering, LLC (Pro Engineering) by BTD Manufacturing, Inc. (BTD) in May 2007.

The following table summarizes the components of the Company’s intangible assets at June 30, 2007 and December 31, 2006:

		June 30, 2007												December 31, 2006
		Gross								Net				Gross								Net
		carrying				Accumulated				carrying				carrying				Accumulated				carrying
(in thousands)		amount				amortization				amount				amount				amortization				amount
Amortized intangible assets:
Covenants not to compete		$	2,637			$	1,984			$	653			$	2,198			$	1,813			$	385
Customer relationships			10,833				1,241				9,592				10,574				1,016				9,558
Other intangible assets including contracts			2,787				1,589				1,198				2,083				1,291				792
Total		$	16,257			$	4,814			$	11,443			$	14,855			$	4,120			$	10,735
Non-amortized intangible assets:
Brand/trade name		$	9,498			$	—			$	9,498			$	9,345			$	—			$	9,345

Intangible assets with finite lives are being amortized over average lives ranging from one to twenty-five years. The amortization expense for these intangible assets was $687,000 for the six months ended June 30, 2007 compared to $555,000 for the six months ended June 30, 2006. The estimated annual amortization expense for these intangible assets for the next five years is $1,230,000 for 2007, $900,000 for 2008, $795,000 for 2009, $621,000 for 2010 and $516,000 for 2011.

Comprehensive Income

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Net income		$	16,103			$	11,394			$	26,511			$	26,354
Other comprehensive income (net-of-tax)
Foreign currency translation gain			942				618				1,046				564
Amortization of unrecognized losses and costs related to postretirement benefit programs			44				—				88				—
Unrealized gain (loss) on available-for-sale securities			2				(4	)			(17	)			(12	)
Total other comprehensive income			988				614				1,117				552
Total comprehensive income		$	17,091			$	12,008			$	27,628			$	26,906

New Accounting Standards

FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, was issued by the Financial Accounting Standards Board (FASB) in June 2006. FIN No. 48 clarifies the accounting for uncertain tax positions in accordance with SFAS No. 109, Accounting for Income Taxes. The Company adopted FIN No. 48 on January 1, 2007 and has recognized, in its consolidated financial statements, the tax effects of all tax positions that are “more-likely-than-not” to be sustained on audit based solely on the technical merits of those positions as of June 30, 2007. The term “more-likely-than-not” means a likelihood of more than 50%. FIN No. 48 also provides guidance on new disclosure requirements, reporting and accrual of interest and penalties, accounting in interim periods and transition. Only tax positions that meet the “more-likely-than-not” threshold on the reporting date may be recognized. The cumulative effect of adoption of FIN No. 48, which is reported as an adjustment to the beginning balance of retained earnings, was $119,000. As of the date of adoption, the total amount of unrecognized tax benefits for uncertain tax positions was $1,874,000. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $575,000 as of January 1, 2007.

The amount of unrecognized tax benefits is not expected to change significantly within the next 12 months.

The Company classifies interest and penalties on tax uncertainties as components of the provision for income taxes. The total amount of interest and penalties accrued as of the date of adoption of FIN No. 48 was $351,000.

The Company and its subsidiaries file a consolidated U.S. federal income tax return and various state and foreign income tax returns. As of the date of adoption of FIN No. 48, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2003. As of June 30, 2007 the Company’s earliest open tax year in which an audit can be initiated by state taxing authorities in the Company’s major operating jurisdictions is 2003 for both Minnesota and North Dakota.

SFAS No. 157, Fair Value Measurements, was issued by the FASB in September 2006. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 will be effective for fiscal years beginning after November 15, 2007. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements where fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. The Company cannot predict what, if any, impact this new standard will have on its consolidated financial statements when the standard becomes effective in 2008.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115, was issued by the FASB in February 2007. SFAS No. 159, provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS No. 159 will report unrealized gains and losses in earnings at each subsequent reporting date on items for which the fair value option has been elected. This statement also establishes presentation and disclosure requirements to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is evaluating the impact that adoption of SFAS No. 159 could have on its consolidated financial statements.

Acquisitions

On February 19, 2007 ShoreMaster, Inc. (ShoreMaster) acquired the assets of the Aviva Sports product line for $2.0 million in cash. The Aviva Sports product line will be operated through Aviva Sports, Inc. (Aviva), a newly-formed wholly owned subsidiary of ShoreMaster. The Aviva Sports product line is sold internationally and consists of products for consumer use in the pool, lake and yard, as well as commercial use at summer camps, resorts and large public swimming pools. The acquisition of the Aviva Sports product line fits well with the other product lines of ShoreMaster, a leading manufacturer and supplier of waterfront equipment.

On May 15, 2007 BTD acquired the assets of Pro Engineering for $4.8 million in cash. Pro Engineering specializes in providing metal parts stampings to customers in the Midwest. The acquisition of Pro Engineering by BTD provides expanded growth opportunities for both companies.

Disclosure of pro forma information related to the results of operations of the acquired entities for the periods presented in this report is not required due to immateriality.

Below, are condensed balance sheets, at the dates of the respective business combinations, disclosing the preliminary allocation of the purchase price assigned to each major asset and liability category of Aviva and Pro Engineering:

						Pro
(in thousands)		Aviva				Engineering
Assets
Current assets		$	2,083			$	1,956
Goodwill			—				1,048
Other intangible assets			870				396
Fixed assets			—				1,600
Total assets		$	2,953			$	5,000
Liabilities
Current liabilities		$	988			$	215
Noncurrent liabilities			—				—
Total liabilities		$	988			$	215
Cash paid		$	1,965			$	4,785

Other intangible assets related to the Aviva acquisition include $83,000 for a nonamortizable brand name and $787,000 in intangible assets being amortized over various periods up to 15 years. Other intangible assets related to the Pro Engineering acquisition include $51,000 for a nonamortizable brand name and $345,000 in intangible assets being amortized over various periods up to 20 years.

Segment Information

The Company’s businesses have been classified into six segments based on products and services and reach customers in all 50 states and international markets. The six segments are: electric, plastics, manufacturing, health services, food ingredient processing and other business operations.

Electric includes the production, transmission, distribution and sale of electric energy in Minnesota, North Dakota and South Dakota under the name Otter Tail Power Company. In addition, the electric utility is an active wholesale participant in the Midwest Independent Transmission System Operator (MISO) markets. The electric utility operations have been the Company’s primary business since incorporation. The Company’s electric operations, including wholesale power sales, are operated as a division of Otter Tail Corporation.

All of the businesses in the following segments are owned by a wholly owned subsidiary of the Company.

Plastics consists of businesses producing polyvinyl chloride and polyethylene pipe in the Upper Midwest and Southwest regions of the United States.

Manufacturing consists of businesses in the following manufacturing activities: production of waterfront equipment, wind towers, material and handling trays and horticultural containers, contract machining, and metal parts stamping and fabrication. These businesses have manufacturing facilities in Minnesota, North Dakota, South Carolina, Missouri, California, Florida and Ontario, Canada and sell products primarily in the United States.

Health services consists of businesses involved in the sale of diagnostic medical equipment, patient monitoring equipment and related supplies and accessories. These businesses also provide equipment maintenance, diagnostic imaging services and rental of diagnostic medical imaging equipment to various medical institutions located throughout the United States.

Food ingredient processing consists of Idaho Pacific Holdings, Inc. (IPH), which owns and operates potato dehydration plants in Ririe, Idaho, Center, Colorado and Souris, Prince Edward Island, Canada. IPH produces dehydrated potato products that are sold in the United States, Canada, Europe, the Middle East, the Pacific Rim and Central America.

Other business operations consists of businesses in residential, commercial and industrial electric contracting industries, fiber optic and electric distribution systems, wastewater and HVAC systems construction, transportation and energy services, as well as the portion of corporate general and administrative expenses that are not allocated to other segments. These businesses operate primarily in the Central United States, except for the transportation company which operates in 48 states and 6 Canadian provinces.

No single external customer accounts for 10% or more of the Company’s revenues. Substantially all of the Company’s long-lived assets are within the United States except for a food ingredient processing dehydration plant in Souris, Prince Edward Island, Canada and a wind tower manufacturing plant in Ft. Erie, Ontario, Canada.

The following table presents the percent of consolidated sales revenue by country:

		Three months ended								Six months ended
		June 30,								June 30,
		2007				2006				2007				2006
United States of America			95.9	%			97.2	%			96.2	%			97.1	%
Canada			2.1	%			1.7	%			1.6	%			1.6	%
All other countries (none greater than 1%)			2.0	%			1.1	%			2.2	%			1.3	%

The Company evaluates the performance of its business segments and allocates resources to them based on earnings contribution and return on total invested capital. Information on continuing operations for the business segments for three and six months ended June 30, 2007 and 2006 and total assets by business segment as of June 30, 2007 and December 31, 2006 are presented in the following tables:

Operating Revenue

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Electric		$	70,572			$	73,518			$	160,552			$	156,102
Plastics			39,525				52,685				77,344				90,790
Manufacturing			104,786				81,631				191,011				149,888
Health services			32,452				32,833				65,415				64,909
Food ingredient processing			18,403				9,811				37,898				19,161
Other business operations			41,260				30,379				77,056				58,658
Intersegment eliminations			(1,154	)			(953	)			(2,311	)			(1,797	)
Total		$	305,844			$	279,904			$	606,965			$	537,711

Interest Expense

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Electric		$	2,388			$	2,553			$	4,891			$	5,130
Plastics			323				359				508				476
Manufacturing			2,180				1,841				3,984				3,212
Health services			255				261				460				470
Food ingredient processing			42				117				133				197
Other business operations			5,102				4,995				9,935				9,316
Intersegment eliminations			(5,264	)			(5,026	)			(10,017	)			(9,257	)
Total		$	5,026			$	5,100			$	9,894			$	9,544

Income Taxes

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Electric		$	2,679			$	1,748			$	5,905			$	6,985
Plastics			2,281				3,126				4,141				6,206
Manufacturing			3,660				2,772				5,205				4,298
Health services			528				393				1,222				660
Food ingredient processing			710				(321	)			949				(962	)
Other business operations			(376	)			(1,160	)			(2,169	)			(2,126	)
Total		$	9,482			$	6,558			$	15,253			$	15,061

Earnings Available for Common Shares from Continuing Operations

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Electric		$	4,892			$	3,349			$	10,630			$	12,623
Plastics			3,398				5,023				6,226				9,599
Manufacturing			5,335				4,160				7,874				6,405
Health services			708				520				1,656				841
Food ingredient processing			1,543				(1,416	)			1,992				(2,426	)
Other business operations*			43				(683	)			(2,235	)			(1,418	)
Total		$	15,919			$	10,953			$	26,143			$	25,624

Total Assets

		June 30,				December 31,
(in thousands)		2007				2006
Electric		$	715,912			$	689,653
Plastics			89,115				80,666
Manufacturing			262,988				219,336
Health services			66,484				66,126
Food ingredient processing			94,369				94,462
Other business operations			97,873				108,118
Discontinued operations			—				289
Total		$	1,326,741			$	1,258,650

Rate and Regulatory Matters

On April 25, 2006 the Federal Energy Regulatory Commission (FERC) issued an order requiring MISO to refund to customers, with interest, amounts related to real-time revenue sufficiency guarantee (RSG) charges that were not allocated to day-ahead virtual supply offers in accordance with MISO’s Transmission and Energy Markets Tariff (TEMT) going back to the commencement of MISO Day 2 markets in April 2005. On May 17, 2006 the FERC issued a Notice of Extension of Time, permitting MISO to delay compliance with the directives contained in its April 2006 order, including the requirement to refund to customers the amounts due, with interest, from April 1, 2005 and the requirement to submit a compliance filing. The Notice stated that the order on rehearing would provide the appropriate guidance regarding the timing of compliance filing. On October 26, 2006 the FERC issued an order on rehearing of the April 25, 2006 order, stating it would not require refunds related to real-time RSG charges that had not been allocated to day-ahead virtual supply offers in accordance with MISO’s TEMT going back to the commencement of the MISO Day 2 market in April 2005. However, the FERC ordered prospective allocation of RSG charges to virtual transactions consistent with the TEMT to prevent future inequity and directed MISO to propose a charge that assesses RSG costs to virtual supply offers based on the RSG costs that virtual supply offers cause within 60 days of the October 26, 2006 order. On December 27, 2006 the FERC issued an order granting rehearing of the October 26, 2006 order.

On March 15, 2007 the FERC issued an order on rehearing denying requests for rehearing of the RSG rehearing order dated October 27, 2006. In the March 15, 2007 order on rehearing the FERC stated that its findings in the April 25, 2006 RSG order that virtual offers should share in the allocation of RSG costs, per the terms of the currently-effective tariff, served as notice to market participants that virtual offers, for those market participants withdrawing energy, were liable for RSG charges. FERC clarified that the RSG rehearing order’s waiver of refunds applies to the period before that order, from market start-up in April 2005 until April 24, 2006. After that date, virtual supply offers are liable for RSG costs and therefore, to the extent virtual supply offers were not assessed RSG costs, refunds are due for the period starting April 25, 2006.

The Company recorded a $1.7 million ($1.0 million net-of-tax) charge to earnings in the first quarter of 2007 based on an internal estimate of the net impact of MISO reallocating RSG charges in response to the FERC order on rehearing. In May 2007, MISO informed affected market participants of the impact of reallocating charges based on its interpretation of the FERC order on rehearing. Based on MISO’s interpretation of the order on rehearing, the Company estimates the reallocation of charges will not have a significant impact on earnings previously recognized by the Company. Accordingly, the Company revised its first quarter estimated charge of $1.7 million ($1.0 million net-of-tax) to zero in the second quarter of 2007.

Regulatory Assets and Liabilities

As a regulated entity the Company and the electric utility account for the financial effects of regulation in accordance with SFAS No. 71, Accounting for the Effect of Certain Types of Regulation. This accounting standard allows for the recording of a regulatory asset or liability for costs that will be collected or refunded in the future as required under regulation.

The following table indicates the amount of regulatory assets and liabilities recorded on the Company’s consolidated balance sheet:

		June 30,				December 31,
(in thousands)		2007				2006
Regulatory assets:
Unrecognized transition obligation, prior service costs and actuarial losses on pension and other postretirement benefits		$	35,037			$	36,736
Accrued cost-of-energy revenue			6,986				10,735
Deferred income taxes			10,331				11,712
Reacquisition premiums			2,545				2,694
Deferred conservation program costs			420				1,036
MISO schedule 16 and 17 deferred administrative costs			709				541
Accumulated ARO accretion/depreciation adjustment			296				249
Plant acquisition costs			129				151
Total regulatory assets		$	56,453			$	63,854
Regulatory liabilities:
Accumulated reserve for estimated removal costs		$	59,142			$	58,496
Deferred income taxes			4,865				5,228
Gain on sale of division office building			148				151
Total regulatory liabilities		$	64,155			$	63,875
Net regulatory asset (liability) position		$	(7,702	)		$	(21	)

The regulatory asset related to the unrecognized transition obligation on postretirement medical benefits and prior service costs and actuarial losses on pension and other postretirement benefits represents benefit costs that will be subject to recovery through rates as they are expensed over the remaining service lives of active employees

included in the plans. The regulatory assets and liabilities related to deferred income taxes result from changes in statutory tax rates accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Accrued cost-of-energy revenue included in Accrued utility revenues will be recovered over the next nine months. Reacquisition premiums included in Unamortized debt expense and reacquisition premiums are being recovered from electric utility customers over the remaining original lives of the reacquired debt issues, the longest of which is 15.1 years. Deferred conservation program costs represent mandated conservation expenditures recoverable through retail electric rates over the next 1.5 years. MISO schedule 16 and 17 deferred administrative costs were excluded from recovery through the Fuel Clause Adjustment (FCA) in Minnesota in a December 2006 order issued by the Minnesota Public Utilities Commission (MPUC). The MPUC ordered the Company to refund MISO schedule 16 and 17 charges that had been recovered through the FCA since the inception of MISO Day 2 markets in April 2005, but allowed for deferral and possible recovery of those costs through rates established in the Company’s next rate case scheduled to be filed on or before October 1, 2007. The accumulated reserve for estimated removal costs is reduced for actual removal costs incurred. Plant acquisition costs will be amortized over the next 2.9 years. The remaining regulatory assets and liabilities are being recovered from, or will be paid to, electric customers over the next 30 years.

If for any reason, the Company’s regulated businesses cease to meet the criteria for application of SFAS No. 71 for all or part of their operations, the regulatory assets and liabilities that no longer meet such criteria would be removed from the consolidated balance sheet and included in the consolidated statement of income as an extraordinary expense or income item in the period in which the application of SFAS No. 71 ceases.

Common Shares and Earnings per Share

In the first six months of 2007 the Company issued 226,241 common shares for stock options exercised, 15,200 restricted common shares and 807 common shares for director’s compensation, 3,850 common shares for restricted stock unit awards that vested in April 2007 and 600 restricted common shares for employee compensation. During the same period, the Company retired 8,409 common shares for tax withholding purposes related to restricted shares that vested in March and April 2007.

Basic earnings per common share are calculated by dividing earnings available for common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options. Stock options with exercise prices greater than the market price are excluded from the calculation of diluted earnings per common share. Nonvested restricted shares granted to the Company’s directors and employees are considered dilutive for the purpose of calculating diluted earnings per share but are considered contingently returnable and not outstanding for the purpose of calculating basic earnings per share. Underlying shares related to nonvested restricted stock units granted to employees are considered dilutive for the purpose of calculating diluted earnings per share. Shares expected to be awarded for stock performance awards granted to executive officers are considered dilutive for the purpose of calculating diluted earnings per share.

Excluded from the calculation of diluted earnings per share are the following outstanding stock options which had exercise prices greater than the average market price for the three and six month periods ended June 30, 2007 and 2006:

Three months ended June 30,		Options Outstanding		Range of Exercise Prices
2007		—		N/A
2006		222,000		$28.67 — $31.34

Six months ended June 30,		Options Outstanding		Range of Exercise Prices
2007		—		N/A
2006		216,000		$29.74 — $31.34

Share-based Payments

On April 9, 2007 the Compensation Committee of the Company’s Board of Directors granted 23,450 restricted stock units to key employees under the 1999 Stock Incentive Plan, as amended (Incentive Plan), payable in common shares on April 8, 2011, the date the units vest. The grant date fair value of each restricted stock unit was $30.07 per share, as determined under a Monte Carlo valuation method.

On April 9, 2007 the Compensation Committee of the Company’s Board of Directors granted 15,200 shares of restricted stock to the Company’s nonemployee directors under the Incentive Plan. The restricted shares vest 25% per year on April 8 of each year in the period 2008 through 2011. The grant date fair value of each share of restricted stock was $35.045 per share, the average market price on the date of grant.

The Company has six share-based payment programs. As of June 30, 2007 the total remaining unrecognized compensation expense related to stock-based compensation was approximately $3.2 million (before income taxes), which will be amortized over a weighted-average period of 2.4 years.

Amounts of compensation expense recognized under the Company’s six stock-based payment programs for the three and six months ended June 30, 2007 and 2006 are presented in the table below:

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
1999 Employee Stock Purchase Plan		$	64			$	60			$	127			$	120
Stock options granted under the Incentive Plan			22				68				90				136
Restricted stock granted to directors			96				170				247				241
Restricted stock granted to employees			208				151				412				442
Restricted stock units granted to employees			109				289				178				289
Stock performance awards granted to executive officers			221				395				441				535
Totals		$	720			$	1,133			$	1,495			$	1,763

Short-term and Long-term Borrowings

Short-term Debt— On April 13, 2007 Otter Tail Corporation, dba Otter Tail Power Company, and U.S. Bank National Association entered into a First Amendment to Credit Agreement dated as of April 13, 2007 (the Amendment), amending the Credit Agreement dated as of September 1, 2006 (the Credit Agreement). The Amendment increased the commitment under the Credit Agreement from $25 million to $50 million. The Amendment contains no other changes to the Credit Agreement. The Credit Agreement is an unsecured revolving credit facility that can be drawn on to support the working capital needs and other capital requirements of the Company’s electric operations. This line of credit expires on September 1, 2007 and is expected to be renewed. Borrowings under this line of credit bear interest at LIBOR plus 0.4%, subject to adjustment based on the ratings of the Company’s senior unsecured debt. This line of credit contains terms that are substantially the same as those under the Company’s $150 million line of credit. As of June 30, 2007, $29.4 million was borrowed under the Credit Agreement.

Long-term Debt— In February 2007, we entered into a note purchase agreement with Cascade Investment L.L.C. (Cascade) pursuant to which the Company agreed to issue to Cascade, in a private placement transaction, $50 million aggregate principal amount of the Company’s senior notes due November 30, 2017. Cascade owned approximately 8.6% of the Company’s outstanding common stock as of March 31, 2007. The notes will bear interest at a rate of 5.778% per annum, subject to adjustment in the event certain ratings assigned to the Company’s long-term senior unsecured indebtedness are downgraded below specific levels prior to the closing of the note purchase. The terms of the note purchase agreement are substantially similar to the terms of the note purchase

agreement entered into in connection with the issuance of the Company’s $90 million 6.63% senior notes due December 1, 2011. The closing is expected to occur on December 3, 2007 subject to the satisfaction of certain conditions to closing, including: (i) no event or events will have occurred since December 31, 2005 that have had or would reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole; (ii) certain senior executives will remain in their current positions; (iii) there will have been no change in control or impermissible sale of assets; (iv) the ratio of the Company’s consolidated debt to earnings before interest, taxes, depreciation and amortization as of September 30, 2007 will be less than 3.5 to 1; (v) certain waivers will have been obtained; and (vi) certain other customary conditions of closing will have been satisfied. The Company has the right to terminate the note purchase agreement by giving at least 30 days’ prior written notice to Cascade and paying a termination fee of $1 million. The proceeds of this financing will be used to redeem The Company’s $50 million 6.375% senior debentures due December 1, 2007.

Class B Stock Options of Subsidiary

As of June 30, 2007 there were 958 options for the purchase of IPH Class B common shares outstanding with a combined exercise price of $743,000, of which 200 options were “in-the-money” with a combined exercise price of $30,000. In April 2007, 100 options were forfeited as a result of a voluntary termination.

Pension Plan and Other Postretirement Benefits

Pension Plan—Components of net periodic pension benefit cost of the Company’s noncontributory funded pension plan are as follows:

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Service cost—benefit earned during the period		$	1,263			$	1,210			$	2,526			$	2,420
Interest cost on projected benefit obligation			2,733				2,544				5,466				5,088
Expected return on assets			(3,223	)			(3,065	)			(6,446	)			(6,130	)
Amortization of prior-service cost			185				186				370				372
Amortization of net actuarial loss			309				378				618				756
Net periodic pension cost		$	1,267			$	1,253			$	2,534			$	2,506

The Company made a $2.0 million discretionary contribution to its pension plan in the six months ended June 30, 2007 and expects to make an additional $2.0 million contribution later in 2007.

Executive Survivor and Supplemental Retirement Plan—Components of net periodic pension benefit cost of the Company’s unfunded, nonqualified benefit plan for executive officers and certain key management employees are as follows:

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Service cost—benefit earned during the period		$	157			$	107			$	313			$	213
Interest cost on projected benefit obligation			362				325				725				651
Amortization of prior-service cost			17				18				34				36
Recognized net actuarial loss			135				118				270				236
Net periodic pension cost		$	671			$	568			$	1,342			$	1,136

Postretirement Benefits—Components of net periodic postretirement benefit cost for health insurance and life insurance benefits for retired electric utility and corporate employees are as follows:

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2007				2006				2007				2006
Service cost—benefit earned during the period		$	315			$	334			$	630			$	668
Interest cost on projected benefit obligation			698				637				1,396				1,274
Amortization of transition obligation			187				187				374				374
Amortization of prior-service cost			(52	)			(76	)			(103	)			(152	)
Amortization of net actuarial loss			129				133				258				266
Effect of Medicare Part D expected subsidy			(410	)			(293	)			(820	)			(586	)
Net periodic postretirement benefit cost		$	867			$	922			$	1,735			$	1,844

Discontinued Operations

In June 2006, OTESCO, the Company’s energy services company, sold its natural gas marketing operations for $0.5 million in cash. SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that OTESCO’s natural gas marketing operations be classified and reported separately as discontinued operations. The results of discontinued operations for the three and six months ended June 30, 2006 are summarized as follows:

		Three months ended				Six months ended
(in thousands)		June 30, 2006				June 30, 2006
Operating revenues		$	7,263			$	28,234
(Loss) income before income taxes			(120	)			54
Gain on Disposition — pretax			560				560
Income tax expense			183				252

At December 31, 2006 the major components of assets and liabilities of discontinued operations at estimated fair market values consisted of deferred taxes of $289,000 and warranty reserves of $197,000 from St. George Steel Fabrication, Inc., which was sold in 2005. These assets and liabilities were disposed of or settled in the second quarter of 2007.

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

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2007 and 2006

Consolidated operating revenues were $305.8 million for the three months ended June 30, 2007 compared with $279.9 million for the three months ended June 30, 2006. Operating income was $30.3 million for the three months ended June 30, 2007 compared with $22.1 million for the three months ended June 30, 2006. The Company recorded diluted earnings per share from continuing operations of $0.53 for the three months ended June 30, 2007 compared to $0.37 for the three months ended June 30, 2006 and total diluted earnings per share from continuing and discontinued operations of $0.53 for the three months ended June 30, 2007 compared to $0.38 for the three months ended June 30, 2006. Earnings from discontinued operations for the three months ended June 30, 2006 included $0.01 per share from a gain on the sale by OTESCO, the Company’s energy services company, of its natural gas marketing operations.

Following is a more detailed analysis of our operating results by business segment for the three and six month periods ended June 30, 2007 and 2006, followed by our outlook for the remainder of 2007 and a discussion of changes in our consolidated financial position during the six months ended June 30, 2007.

Amounts presented in the segment tables that follow for operating revenues, cost of goods sold and other nonelectric operating expenses for the three month periods ended June 30, 2007 and 2006 will not agree with amounts presented in the consolidated statements of income due to the elimination of intersegment transactions. The amounts of intersegment eliminations by income statement line item are listed below:

		Three months ended				Three months ended
(in thousands)		June 30, 2007				June 30, 2006
Operating revenues:
Electric		$	74			$	78
Nonelectric			1,080				875
Cost of goods sold			389				448
Other nonelectric expenses			765				505

Electric

		Three months ended
		June 30,												%
(in thousands)		2007				2006				Change				Change
Retail sales revenues		$	55,501			$	61,805			$	(6,304	)			(10.2	)
Wholesale revenues			6,674				6,638				36				0.5
Net marked-to-market gain			3,429				1,260				2,169				172.1
Other revenues			4,968				3,815				1,153				30.2
Total operating revenues		$	70,572			$	73,518			$	(2,946	)			(4.0	)
Production fuel			14,077				11,456				2,621				22.9
Purchased power – system use			11,021				17,664				(6,643	)			(37.6	)
Other operation and maintenance expenses			26,651				28,049				(1,398	)			(5.0	)
Depreciation and amortization			6,250				6,447				(197	)			(3.1	)
Property taxes			2,527				2,551				(24	)			(0.9	)
Operating income		$	10,046			$	7,351			$	2,695				36.7

The main contributor to the decrease in retail revenues was a $9.0 million decrease in Fuel Clause Adjustment (FCA) revenues. The offsetting $2.7 million increase in retail revenues was due to a 2.6% increase in retail megawatt-hour (mwh) sales resulting from a 22.4% increase in heating degree days and a 9.1% increase in cooling degree days between the quarters. Industrial mwh sales increased 5.2% between the quarters mainly due to increased consumption by pipeline customers as higher oil prices have led to an increase in the volume of product being transported from Canada and the Williston basin.

Wholesale electric revenues from company-owned generation were $3.5 million for the quarter ended June 30, 2007 compared with $6.4 million for the quarter ended June 30, 2006. The decrease in wholesale revenues from company-owned generation resulted from a 43.1% decrease in wholesale mwh sales as more company-owned generation was used to serve retail load in the second quarter of 2007 compared with the second quarter of 2006. Advance purchases of electricity in anticipation of coal supply constraints at Big Stone and Hoot Lake plants in the second quarter of 2006 freed up more generation for wholesale sales when coal supplies improved in May 2006. Net revenues from energy trading activities, including net mark-to-market gains on forward energy contracts, were $6.6 million for the quarter ended June 30, 2007 compared with $1.5 million for the quarter ended June 30, 2006. The $5.1 million

increase in revenue from energy trading activities reflects a $4.2 million increase in profits from purchased power resold and net settlements of forward energy contracts, a $2.2 million increase in net mark-to-market gains on forward energy contracts and a $0.3 million increase in net profits from virtual transactions, offset by a $1.6 million decrease in profits related to the purchase and sale of financial transmission rights. In the first quarter of 2007, net gains from energy trading activities included a $1.7 million ($1.0 million net-of-tax) charge to earnings based on the estimated impact of a March 15, 2007 Federal Energy Regulatory Commission (FERC) order related to Midwest Independent Transmission Operator (MISO) revenue sufficiency guarantee (RSG) charges on virtual supply transactions going back to April 25, 2006. In May 2007, MISO informed affected market participants of the impact of reallocating charges based on its interpretation of the FERC order. Based on MISO’s interpretation of the order, the Company estimates the reallocation of charges will not have a significant impact on earnings previously recognized by the Company. Accordingly, the Company revised its first quarter estimated charge of $1.7 million (1.0 million net-of-tax) to zero in the second quarter of 2007.

The increase in other electric operating revenues for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 was mainly due to an increase in payments for the use of the utility’s transmission facilities by other electric utility companies.

The increase in fuel costs for the three months ended June 30, 2007 compared with the three months ended June 30, 2006 reflects a 22.8% increase in mwhs generated combined with a 0.1% increase in the cost of fuel per mwh generated. Generation used for retail electric sales increased 41.1% while generation for wholesale electric sales decreased 43.1% between the quarters. The increase in mwhs generated is due to greater plant availability in the second quarter of 2007 compared with the second quarter of 2006. In the second quarter of 2006, Coyote Station was off-line for five weeks for scheduled maintenance and Big Stone Plant experienced a one-week maintenance shutdown.

The decrease in purchased power – system use (to serve retail customers) is due to a 46.1% decrease in mwhs purchased, partially offset by a 15.7% increase in the cost per mwh purchased. Advance purchases of electricity in anticipation of coal supply constraints at Big Stone and Hoot Lake plants and the scheduled five-week maintenance shutdown of Coyote Station in the second quarter of 2006 were the reasons for the higher level of mwh purchases for system use in the second quarter 2006 compared with the second quarter of 2007.

The decrease in other operation and maintenance expenses for the three months ended June 30, 2007 compared with the three months ended June 30, 2006 is due mainly to a reduction in contracted services and materials and supplies expenses related to the five-week scheduled maintenance shutdown at Coyote Station and the one-week maintenance shutdown of Big Stone Plant in the second quarter of 2006.

Plastics

		Three months ended
		June 30,												%
(in thousands)		2007				2006				Change				Change
Operating revenues		$	39,525			$	52,685			$	(13,160	)			(25.0	)
Cost of goods sold			31,007				41,442				(10,435	)			(25.2	)
Operating expenses			1,753				2,058				(305	)			(14.8	)
Depreciation and amortization			764				678				86				12.7
Operating income		$	6,001			$	8,507			$	(2,506	)			(29.5	)

Operating revenues for the plastics segment decreased as result of a 16.1% decrease in the price per pound of pipe sold combined with a 10.6% decrease in pounds of pipe sold between the quarters. The decrease in pipe prices and cost of goods sold reflect the effect of a 21.0% decrease in polyvinyl chloride (PVC) resin prices between the periods. The decrease in plastics segment operating expenses reflects a decrease in sales and employee incentives directly related to the decreases in sales and operating income between the quarters. The increase in depreciation and amortization expense is the result of $5.5 million in capital expenditures in 2006, mainly for production equipment.

Manufacturing

		Three months ended
		June 30,												%
(in thousands)		2007				2006				Change				Change
Operating revenues		$	104,786			$	81,631			$	23,155				28.4
Cost of goods sold			81,188				63,256				17,932				28.3
Operating expenses			9,108				6,890				2,218				32.2
Depreciation and amortization			3,283				2,710				573				21.1
Operating income		$	11,207			$	8,775			$	2,432				27.7

The increase in revenues in our manufacturing segment relates to the following:

	•		Revenues at DMI Industries, Inc. (DMI) increased $14.8 million as a result of ramped up production levels at Fort Erie compared with initial start-up levels beginning in May 2006.
	•		Revenues at ShoreMaster, Inc. (ShoreMaster) increased $5.9 million between the quarters due to increased production at the Galva Foam location and higher residential sales during the peak selling season. The Aviva Sports product line, acquired by ShoreMaster in February 2007, contributed $1.3 million to the increase in revenues.
	•		Revenues at BTD Manufacturing, Inc. (BTD) increased $2.1 million as a result of sales of higher priced products and services and the acquisition of Pro Engineering, LLC (Pro Engineering), a metal parts stamping business, in May 2007, which contributed $0.9 million in revenues in the second quarter of 2007. A 17.2% decrease in unit sales between the quarters at BTD’s other manufacturing facilities was offset by a 21.5% increase in the average price per unit sold.
	•		Revenues at T.O. Plastics, Inc. (T.O. Plastics) increased $0.3 million between the quarters as a result of a 6.5% increase in the average price per unit sold, which was mostly offset by a 4.6% decrease in the number of units sold between the quarters.

The increase in cost of goods sold in our manufacturing segment relates to the following:

	•		DMI’s cost of goods sold increased $12.0 million between the quarters, including $9.5 million in material costs increases. The increase in cost of goods sold is directly related to DMI’s increase in production and sales activity, including operations at the Ft. Erie facilities which commenced in May 2006.
	•		Cost of goods sold at ShoreMaster increased $3.5 million between the quarters as a result of increases in material and labor costs directly related to the increase in residential product sales and the acquisition of the Aviva Sports product line in February 2007.
	•		Cost of goods sold at BTD increased $1.5 million between the quarters as a result of increases in material and subcontractor costs and the acquisition of Pro Engineering in May 2007, offset by a decrease in costs at BTD’s other manufacturing facilities related to a decrease in unit sales between the quarters.
	•		Cost of goods sold at T.O. Plastics increased $0.9 million between the quarters, including $0.6 million in material cost increases and $0.3 million in increased manufacturing overhead costs.

The increase in operating expenses in our manufacturing segment is due to the following:

	•		Operating expenses at DMI increased $0.9 million as a result of increases in labor and benefit, professional services and promotional expenses mainly related to operations at the Ft. Erie facilities which commenced in May 2006.
	•		ShoreMaster’s operating expenses increased $1.1 million as a result of increases in labor, benefit and professional service expenses mainly related to the acquisition of the Aviva Sports product line in February 2007.
	•		BTD’s operating expenses increased $0.2 million between the quarters as a result of increases in labor and professional service expenses.
	•		T.O. Plastics operating expenses increased by less than $0.1 million between the quarters.

Depreciation expense increased between the periods mainly as a result of capital additions at DMI’s Ft. Erie plant in 2006.

In January 2007, DMI announced plans to expand wind tower production capacity at its Ft. Erie plant by 30%. The two-phase expansion project will also allow DMI to manufacture larger tower sections at that plant. The first phase became operational in April 2007. In May 2007, DMI announced plans to add a third wind tower manufacturing facility in Tulsa, Oklahoma. The plant is expected to be operational in 2008.

Health Services

		Three months ended
		June 30,												%
(in thousands)		2007				2006				Change				Change
Operating revenues		$	32,452			$	32,833			$	(381	)			(1.2	)
Cost of goods sold			23,849				25,225				(1,376	)			(5.5	)
Operating expenses			6,111				5,568				543				9.8
Depreciation and amortization			1,021				879				142				16.2
Operating income		$	1,471			$	1,161			$	310				26.7