Thanks for all the help - this is really helping being able to discuss things.
You are both right. I have done some searching in the Thom book and on the intenet. The Thom book is not as clear as the information found on the internet. The answer is:
As it rises, unsaturated air cools at the dry adiabatic lapse rate (DALR). When it reaches the condensation level, however, the water vapor it carries begins to condense. This releases latent heat of condensation, which warms the air and reduces the rate at which its temperature decreases with height. As it rises further, the air cools at the SALR.